On February 26 and 27, the Financial Crisis Inquiry Commission (FCIC) met together with financial experts tasked to research the financial crisis in a forum hosted by American University Washington College of Law. The purpose of the FCIC is to examine the causes, domestic and global, of the current financial and economic crisis in the United States, per the requirements of the Fraud Enforcement and Recovery Act of 2009.
The following panelists presented their working papers to the Commissioners on Friday:
Session 1: Interconnectedness of Financial Institutions; "Too Big to Fail"
Randall Kroszner, Norman R. Bobins Professor of Economics, University of Chicago
Session 2: Macroeconomic Factors and U.S. Monetary Policy
Pierre-Olivier Gourichas, Associate Professor of Economics, University of California, Berkeley
Session 3: Risk Taking and Leverage
John Geanakoplos, James Tobin Professor of Economics, Yale University
Session 4: Household Finances and Financial Literacy
Annamaria Lusardi, Joel Z. and Susan Hyatt Professor of Economics, Dartmouth University; Research Associate, National Bureau of Economic Research
The following panelists presented their working papers to the Commissioners on Saturday:
Session 5: Mortgage Lending Practices and Securitization
Chris Mayer, Paul Milstein Professor of Real Estate, Columbia University; Visiting Scholar, Federal Reserve Bank of New York; Research Associate, National Bureau of Economic Research
Session 6: Government-Sponsored Enterprises and Housing Policy
Dwight Jaffee, Willis Booth Professor of Banking, Finance, and Real Estate, Co-Chair, Fisher Center for Real Estate and Urban Economics, University of California, Berkeley
Session 7: Derivatives and Other Complex Financial Instruments
Markus Brunnermeier, Edwards S. Sanford Professor of Economics, Princeton University
Session 8: Firm Structure and Risk Management
Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance and N. Rosett Faculty Fellow, University of Chicago
Session 9: Shadow Banking
Gary Gorton, Professor of Finance, School of Management, Yale University
The economists presented working papers to the Commissioners and engaged in discussions on the key issues and events leading up to the crisis and its underlying causes, including issues related to "too big to fail" and "too interconnected to fail." Dr. Gorinchas in particular looked beyond the proximate causes of the financial crisis and questioned the role of two macroeconomic factors he believed to play a major role in the financial crisis: (1) the conduct of U.S. monetary policies and (2) the U.S.'s increasing dependency on foreign capital. Dr. Mayer, who spoke generally about the securitization market and the housing crisis, noted that one of the factors that led to a downturn in the securitization markets was the result of third-party servicers' operating on a fee-for-service model, rather than as principals managing mortgages as if they were their own. In his studies, Dr. Mayer also noted that he found that servicers and originators that operated together were less likely to be downgraded and that the breakup of ownership and control of loans was and is a problem that made things worse. Dr. Mayer also stated that broker-originated loans did far worse than loans originated inside of an institution's lending function. While Dr. Mayer commented that securitizations have made it easier to originate risky assets and made the financial crisis worse, he emphasized that not all securitizations failed. As an example he pointed to the auto loans and credit card securitization market industry that did not disappear as a result of the crisis nor were such issuers the beneficiaries of a substantial amount of TALF and TARP funds.
Dr. Geanakopolos diagnosed the cause of the financial crisis as a failure of U.S. regulators to adjust collateral rates. In his discussion he pointed out that the Federal Reserve focused too heavily on leveraging interest rates. Dr. Kashyap stated that essentially every account of the crisis points to a failure in risk management. As a solution he suggested that regulators impose more layers of transparency upon financial institutions, including requiring banks to provide a detailed description of compensation and organizational charts outlining its risk management processes.
The forum is part of the FCIC’s ongoing efforts to hear from academic experts and economists on issues related to the crisis. Last month, the FCIC held its first set of two-day public hearings on investigating the causes of the financial crisis.