The US Financial Crisis Inquiry Commission’s 2011 report on the Great Recession concluded the recession was avoidable!
Did we learn and are we prepared for the next one?
A decade has passed since the US economy plunged into the Great Recession and almost took down the entire global financial system. To better understand and prepare for economic turmoil in the future, the US Government set up the US Financial Crisis Inquiry Commission to study what had happened and issue a findings report. The Commission concluded in its’ report that the recession was avoidable. It listed as one of the major causes of the recession “widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide of toxic mortgages”. The finding helped lead Congress to pass and implement the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. A multitude of agency’s were created under the new law, each tasked with regulating different aspects of the financial markets.
The Consumer Financial Protection Bureau was created and tasked with implementing and monitoring a few key issues that had led to the last financial meltdown. Under its duties, the CFPB would track lenders who engaged in wrong doing or deceptive lending practices. The CFPB quickly had new regulations drafted dealing with the derivatives market which played a major role in pricing and risk management of the mortgage backed pools. The CFPB implemented changes concerning credit reports, executive compensation and how its derived, who controls the ordering and payment for retail mortgage appraisals, and general corporate governance.
The Financial Stability Oversight Council (FSOC) was also created under the act. The council’s primary responsibility would be to monitor large firms whose failure could possibly have a large impact on the US economy. It also was tasked with making sure the Volcker Rule was being enforced and ensuring that financial institutions keep their investments and commercial business lines separate from each other.
The act created the Treasury’s independent Office of Financial Research. The office was tasked with researching economic data and flashing a red warning sign at the first view of any upcoming financial crisis before the US is already in the crisis. A crisis management group of sorts.
In the few years the CFPB has been operating, it has recovered nearly $12 billion dollars in funds that was refunded to 29 million average American consumers. The CFPB levied over $600 million dollars in civil fines and penalties against financial institutions.
The US Justice Department and the US Treasury Department have fined banks over $300 billion dollars for multiple regulatory infractions. Many were fined for fraud as lenders were not assessing the true credit risk and credit grade of the mortgage backed securities being sold to outside investors. Bank of America with $76.1 billion in fines, JP Morgan Chase with $43.7 billion in fines, and rounding out the top 3 is Citigroup with $19 billion in fines. Of course, a few investigations are still ongoing, Wells Fargo has been fined recently and may still be under investigation. The final tally and positions may change as time goes on.
Whether or not the law accomplished its primary goal will be studied for years to come. It has for now helped stabilize the financial markets and limit the corporate greed that helped propel us almost over the cliff.