Definition
The Federal Crisis Inquiry Commission (FCIC) was a ten-member panel established in 2009 by President Barack Obama. The primary purpose of the FCIC was to examine and understand the multitude of factors that contributed to the financial and economic crisis that significantly impacted the United States. The Commission’s work included holding public hearings and conducting extensive research, focusing on key issues such as complex financial derivatives, credit rating agencies, excess risk-taking, financial speculation, the shadow banking system, subprime lending practices, and securitization.
Historical Background
The FCIC’s creation was a response to the severe financial turmoil beginning in 2007, which ultimately led to the Great Recession. The Commission’s mandate was broad, covering both domestic and global influences on the crisis.
Conclusion
In its final report, the FCIC concluded that the crisis was avoidable and resulted from a combination of human actions, inactions, and misjudgments. Significant warnings and red flags were ignored, and regulatory failures played a crucial role in the crisis’s development.
Examples
Example 1: Subprime Lending Practices
The FCIC investigated subprime lending practices, where lenders provided loans to borrowers with poor credit histories. This practice significantly contributed to the housing bubble and subsequent crash.
Example 2: Securitization
The practice of bundling loans into securities and selling them to investors was another focus area for the FCIC. While securitization can distribute risk, it also led to a lack of transparency and accountability, exacerbating the financial crisis.
Example 3: Credit Rating Agencies
The FCIC analysis revealed that credit rating agencies failed to properly assess the risks of complex financial instruments, which lulled investors into a false sense of security and ultimately led to massive financial losses.
Frequently Asked Questions
What was the mission of FCIC?
The FCIC was tasked with investigating the causes of the financial and economic crisis and offering insights and recommendations to prevent future crises.
Why was the FCIC created?
The FCIC was created in response to public and governmental demand for an in-depth examination of the causes behind the financial crisis that began in 2007, leading to significant economic distress.
Who were the members of the FCIC?
The FCIC was composed of ten members selected for their expertise in various fields relevant to the financial sector and economic policy.
What were the key findings of the FCIC?
The FCIC concluded that the crisis was avoidable and that it resulted from regulatory failures, excessive risk-taking by financial institutions, and a lack of accountability and oversight.
Did the FCIC recommendations lead to changes in financial regulation?
While the FCIC report provided numerous recommendations, actual implementation of these recommendations depended on subsequent legislative and regulatory actions, such as the Dodd-Frank Act.
Related Terms
Financial Derivatives
Financial derivatives are complex financial instruments whose value is derived from the performance of underlying assets, indexes, or rates. They were notably involved in the financial crisis due to their speculative nature.
Subprime Lending
Subprime lending refers to the practice of lending to individuals with low credit scores. This practice was a significant contributor to the financial crisis due to high default rates on subprime mortgages.
Securitization
Securitization involves pooling various types of debt instruments and selling them as securities to investors. While it can spread risk, it also played a role in the opacity and risk of financial products during the crisis.
Too Big to Fail
The concept of “too big to fail” refers to financial institutions whose failure would cause systemic damage to the economy, necessitating government intervention during crises.
Online References
Suggested Books for Further Studies
- “The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States” by the Financial Crisis Inquiry Commission.
- “Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves” by Andrew Ross Sorkin.
- “The Big Short: Inside the Doomsday Machine” by Michael Lewis.
- “The Devil’s Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street…and Are Ready to Do It Again” by Nicholas Dunbar.
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