Today, the Financial Crisis Inquiry Commission — which was charged with examining the causes of the 2008 financial meltdown — released its final report. The Commission laid out all the excruciatingly painful details of a financial system marred by poor incentives and excessive risk, while explaining all the ignored warnings, regulators asleep at the wheel, and predatory loans which fed into a pipeline of shadowy investments that imploded the balance sheets of the country’s biggest banks. The ultimate message of the report is “this financial crisis was avoidable.”
Of the many things that contributed to the crisis, the Commission noted that derivatives — the financial instruments that brought down, among others, American International Group — “were at the center of the storm“:
The enactment of legislation in 2000 to ban the regulation by both the federal and state governments of over-the-counter (OTC) derivatives was a key turning point in the march toward the financial crisis…One type of derivative — credit default swaps (CDS) — fueled the mortgage securitization pipeline. [...]
Second, CDS were essential to the creation of synthetic CDOs. These synthetic CDOs were merely bets on the performance of real mortgage-related securities. They amplified the losses from the collapse of the housing bubble by allowing multiple bets on the same securities and helped spread them throughout the financial system. Goldman Sachs alone packaged and sold $73 billion in synthetic CDOs from July 1, 2004 to May 31, 207.
“The existence of millions of derivatives contracts of all types between systemically important financial institutions — unseen and unknown in this unregulated market — added to uncertainty and escalated panic, helping to precipitate government assistance to those institutions,” the Commission found.
Fortunately, the Dodd-Frank financial regulatory reform law passed last year included a significant upgrade in the regulation of derivatives. In fact, the derivatives title is one of the strongest parts of the law.
However, House Republicans have taken it upon themselves to undermine derivatives reform by both refusing to fund the agency charged with implementing the new rules, the Commodity Futures Trading Commission, and trying to publicly shame the CFTC into slowing down its efforts. Bloomberg reported today that House Agricultural Committee Chairman Frank Lucas (R-OK) and Rep. Michael Conway (R-TX) are accusing the CFTC of “‘prioritizing speed’ and creating an ‘irrational sequence’ of rules” as it attempts to rein in the derivatives market.
The derivatives market was essentially the Wild West of the financial world before the financial crisis: unregulated, unrestrained, and ultimately unsustainable. But with the effects of the financial meltdown and the Great Recession that followed still being felt by families across the country, the GOP is throwing up roadblocks to prevent new rules from coming online.