Global Financial Crisis inquiry

Global Financial Crisis inquiry
Name	Global Financial Crisis inquiry
Date	2007–2009
Jurisdiction	International

Global Financial Crisis inquiry The Global Financial Crisis inquiry was a comprehensive examination undertaken after the 2007–2009 financial turmoil to determine causes, responsibilities, and remedies. It brought together investigators from diverse institutions to analyze failures across markets, institutions, and regulatory frameworks. The inquiry influenced policy debates in capitals and international organizations and produced findings cited by scholars, judges, and policymakers.

Background and Origins

The inquiry arose from the collapse of major financial institutions such as Lehman Brothers, Bear Stearns, AIG (American International Group), Northern Rock, Citigroup, and Royal Bank of Scotland and from crises in markets like the subprime mortgage crisis, mortgage-backed securities, collateralized debt obligation, credit default swap market, and repo market. Public outcry, parliamentary inquiries including United States House Committee on Financial Services, House Financial Services Committee (United States), and commissions such as the Financial Crisis Inquiry Commission and panels convened by the Bank of England, European Commission, International Monetary Fund, and Bank for International Settlements led to formal inquiries. Academic stakeholders including scholars from Harvard University, London School of Economics, Massachusetts Institute of Technology, and University of Chicago contributed testimony alongside industry representatives from Goldman Sachs, JPMorgan Chase, Morgan Stanley, Deutsche Bank, UBS, and Barclays.

Formation and Mandate of the Inquiry

Mandates combined statutory and executive directives from entities such as the United States Congress, Parliament of the United Kingdom, European Parliament, and finance ministers coordinating through the G7 and G20. Investigatory teams included members from Securities and Exchange Commission, Federal Reserve System, Office of the Comptroller of the Currency, Financial Services Authority (UK), European Central Bank, and the International Monetary Fund. Leading figures appearing before or overseeing inquiries included Ben Bernanke, Henry Paulson, Timothy Geithner, Mervyn King, Gordon Brown, Barack Obama, George W. Bush, Jean-Claude Trichet, and Mario Draghi. The mandate typically required examination of securitization, rating agencies such as Moody's Investors Service, Standard & Poor's, and Fitch Ratings, wholesale funding, capital adequacy, market liquidity, and supervisory lapses.

Key Findings and Conclusions

Reports emphasized systemic risk, failures of risk management at firms like Lehman Brothers and AIG (American International Group), and conflicts of interest at Goldman Sachs and Bear Stearns. Findings cited the role of shadow banking entities including investment banks and special purpose vehicle structures, and dysfunction in interbank lending and commercial paper markets. The inquiry highlighted inadequate oversight by Securities and Exchange Commission and Financial Services Authority (UK), flawed models from Moody's Investors Service and Standard & Poor's, and policy errors by central banks including the Federal Reserve System and European Central Bank. Conclusions assigned blame to lax capital regulation under regimes like Basel II, excessive leverage at Lehman Brothers and Bear Stearns, and the proliferation of opaque instruments such as collateralized debt obligations and credit default swaps.

Causes and Contributing Factors

Causal analysis pointed to the housing bubble in markets like the United States housing bubble, United Kingdom housing bubble, and speculative practices in Spain, Ireland, and Iceland. Contributing factors included low interest rates influenced by central banks such as the Federal Reserve System and European Central Bank, global imbalances involving China and United States balance of payments, and securitization chains that connected Fannie Mae and Freddie Mac to private markets. The collapse of confidence was accelerated by runs on institutions like Northern Rock and failures in wholesale funding for Lehman Brothers and Bear Stearns, while sovereign stress manifested later in the European sovereign debt crisis affecting Greece, Ireland, and Portugal.

Regulatory and Policy Failures

Investigations documented shortcomings in prudential frameworks including Basel II implementation, capital and liquidity supervision by Office of the Comptroller of the Currency, and macroprudential oversight by the Financial Stability Board. Rating agencies Moody's Investors Service, Standard & Poor's, and Fitch Ratings were criticized for conflicts of interest and inaccurate assessments. Regulatory arbitrage allowed institutions such as Lehman Brothers and AIG (American International Group) to exploit differences across jurisdictions including the United States, United Kingdom, Luxembourg, and Cayman Islands. Crisis management failures involved coordination among the Federal Reserve System, Treasury (United States Department of the Treasury), European Central Bank, and national treasuries, with policy debates invoking figures like Timothy Geithner and Henry Paulson.

Recommendations and Reforms

Recommendations informed adoption of reforms such as Dodd–Frank Wall Street Reform and Consumer Protection Act, establishment of the Financial Stability Oversight Council, stronger rules on banks under Basel III, enhanced supervision by entities like the Financial Conduct Authority, resolution regimes including the Orderly Liquidation Authority, and reforms to credit rating agency oversight. International coordination advanced through the Financial Stability Board, G20 commitments, and revisions to International Monetary Fund surveillance. Reforms targeted derivatives via centralized clearinghouses such as LCH (clearing house) and platforms enabling trade reporting, and recommended higher capital buffers for institutions like JPMorgan Chase and Bank of America.

Responses and Political Impact

Political responses ranged from legislation like Dodd–Frank Wall Street Reform and Consumer Protection Act in the United States to nationalization and recapitalization of banks including Royal Bank of Scotland and EDB (Eesti Pank) actions in Iceland. Public backlash fueled movements such as Occupy Wall Street and influenced elections involving leaders like Barack Obama, Gordon Brown, and David Cameron. International summits at the G20 and policy coordination among central banks including the Federal Reserve System and European Central Bank shaped bailouts, quantitative easing pursued by Federal Reserve System and Bank of England, and sovereign interventions tied to the European Central Bank and International Monetary Fund programs for Greece and Ireland.

Category:Financial crises