Brooksley Born (FCIC photo)

In a sometimes contentious call, Financial Crisis Inquiry Commission representatives Phil Angelides and Brooksley Born acknowledged that we might still be in a financial crisis, and that their report should not be seen as the last word on an event that still has the capacity to significantly damage the global economy.

Brooksley Born, who as head of the Commodity Futures Trading Commission under Bill Clinton urged more regulation of the derivatives markets, responded to a question from FDL News on whether we’ve seen the end of the financial crisis. “I do think we are still in somewhat of an economic crisis,” she said. “We may well be in a financial crisis, we don’t know that yet. We don’t know how solvent a number of institutions are.”

Both Born and Phil Angelides, the chair of the commission, described the report as part of an ongoing process of discovery. They had 18 months and around $10 million dollars to come up with a report, one which is sure to be buffered by future litigation, regulatory agency reports and Congressional investigations. They hoped their report would guide future actions, particularly on the hundreds of rules being promulgated by the regulatory apparatus under Dodd-Frank. But Angelides said, “I hope our report is not the last word on this crisis,” particularly because he acknowledged that little, if anything, has changed in the years since the real bubbling up of the crisis at the end of 2008.

Angelides also understood the serious complications that could still arise from MERS and the true ownership of mortgages, and the impact that could have on the system. The FCIC report, on pages 407-408, does go over various aspects of foreclosure fraud and additional lawsuits, including Countrywide v. Kemp, which easily could pose a systemic risk to the financial system. Needless to say, the foreclosure crisis, and its potential for 13 million families to lose their homes before it’s all over, remains a giant sore thumb as well. “Who would have known a system so efficient at creating mortgages would be so hard to unwind,” Angelides said.

Angelides added that, as of September of last year, the regulator of Fannie Mae and Freddie Mac demanded $35 billion in repurchases of 167,000 defective mortgages, where the underwriting standards were lax or not as represented. So far, the banks have paid up on $20.9 billion. And Fannie and Freddie have only sampled a small percentage of loans so far, finding almost 1 in 3 to be ineligible. Obviously, this is why Bank of America decided to settle with Fannie and Freddie, but the other big banks have resisted that to this point. Fannie and Freddie own or guarantee $1.5 trillion in loans. This isn’t going away.

Here is the commission conclusion on this aspect of the going-forward crisis:

The Commission concludes the unchecked increase in the complexity of mortgages and securitization has made it more difficult to solve problems in the mortgage market. This complexity has created powerful competing interests, including those of the holders of first and second mortgages and of mortgage servicers; has reduced transparency for policy makers, regulators, financial institutions, and homeowners; and has impeded mortgage modifications. The resulting disputes and inaction have caused pain largely borne by individual homeowners and created further uncertainty about the health of the housing market and financial institutions.

What that conclusion doesn’t come out and state is the evidence shows clear criminal fraud on the part of major banks and loan servicers. They have little problem agreeing to the incidences of mortgage fraud – which became such a large industry that losses on fraudulent mortgages reached $112 billion between 2005 and 2007. But that’s a well-known problem which does not take in the accounting fraud of major banks which many, like Bill Black, say drove the crisis. When asked on the call if they agreed that criminal fraud was responsible for the crisis, they fell back on mortgage fraud, a common technique. Angelides countered that you’ll see numerous places in the report where fraud and crime are referred to. And that’s generally correct. But their official statements fall much more along the lines of “imprudent” or “misjugded,” the kind of words not normally used in court.

Born added that the commissioners, acting under a statutory mandate, did issue criminal referrals. She said “We were not a judicial body making decisions about the intent of the actors. We reported on a lot of behavior which may or may not have been criminal or civil violations. We’re leaving that to prosecutors and civil authorities to decide.”

The Justice Department has not yet responded to my inquiry about the FCIC referrals, where they will go, who will handle them, and when we can expect information about them.

As Robert Borosage of the Campaign for America’s Future said in a statement, “This report shines the spotlight on the policies and financial malpractices that drove our economy off a cliff.” But that shouldn’t be in the past tense. And malpractices isn’t nearly as strong as “crimes.”

David Dayen

David Dayen