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The bipartisan panel created to investigate the roots of the financial crisis voted Wednesday to delay the Dec. 15 publication of their report despite Republican opposition, foreshadowing disagreements that are sure to arise when the commission attempts to reach a consensus on the causes of the worst financial crisis since the Great Depression.
The Financial Crisis Inquiry Commission’s 6-to-3 vote came after the panel’s four Republicans argued privately against the decision to ignore the statutory deadline set by Congress. One of the Republicans, former Congressional Budget Office Director Douglas Holtz-Eakin, was unable to participate in the vote, though he made his dissent known. The report will now be released in January.
The move comes on the heels of revelations that the nation’s biggest mortgage companies employed possibly-fraudulent tactics in trying to foreclose on distressed homeowners. The recent disclosures by the likes of Bank of America, JPMorgan Chase and Ally Financial that they used flawed documentation practices sparked inquiries by all 50 state attorneys general, as well as federal prosecutors and federal regulators, among others. Those investigations are ongoing.
The crisis commission is also looking into the matter, said Phil Angelides, the panel’s Democratic chairman. The Republicans on the panel are resisting further inquiries, according to people familiar with the matter. Angelides said in an interview that “there are very powerful interests” seeking to undermine the panel’s investigation.
“People who have trillions of dollars at stake who have been watching our efforts closely,” Angelides said. “There have been efforts throughout the year to undermine me and my fellow commissioners.”
Among other things, Angelides’ panel is probing the documentation practices that federal watchdogs say may be emblematic of the entire mortgage securitization chain, in which lenders may have used bogus documents when originating mortgages and passed them through to other entities before they were sold to investors, ignoring basic due diligence along the way. The discovery of the use of “robo-signers” — employees whose sole job was to rubber-stamp documents without actually reading them or verifying their contents — “may have concealed much deeper problems in the mortgage market,” the Congressional Oversight Panel reported Tuesday.
Large lenders and Wall Street banks may be on the hook for hundreds of billions of dollars in unexpected losses, threatening to undermine “the very financial stability that the Troubled Asset Relief Program was designed to protect,” the COP report noted.
The information the crisis commission has gathered from its numerous public hearings has added fuel to that fire.
During an April hearing, the panel heard from Richard Bowen, former chief underwriter for Citigroup’s consumer-lending unit, who said he discovered in mid-2006 that more than 60 percent of mortgages the bank bought from other firms and sold to investors were “defective.” Investors were not informed, however.
In September, the former president of the nation’s leading home-loan due-diligence firm testified that as many as 28 percent of mortgages given to borrowers with poor credit that the firm examined for Wall Street banks failed to meet basic underwriting standards, and that nearly half of them were likely sold to investors anyway. Keith Johnson, formerly of Clayton Holdings, said he was unaware of any disclosure to unwitting investors by the banks.
Together, the testimony and accompanying data could bolster pension funds and other investors in their pursuit to force Wall Street banks to buy back the bogus mortgages they peddled. Investors are trying to use the rights prescribed in the agreements from their initial purchases of the mortgage-linked securities.
Analysts from Compass Point Research and Trading LLC pegged potential losses for 11 global banks to reach $179.2 billion, the Washington-based firm said in an Aug. 17 report.
The crisis panel, though, was expected to be wrapping up its report on the crisis. The law that created the commission says: “On December 15, 2010, the commission shall submit to the President and to the Congress a report containing the findings and conclusions of the commission on the causes of the current financial and economic crisis in the United States.”
In a statement, the four Republicans on the panel — Holtz-Eakin, Vice Chairman Bill Thomas, Keith Hennessey and Peter Wallison — said that the commission is “statutorily required to deliver the report on December 15.” They added that the panel “has had over a year to complete the report” and that the delay was due to a need to “accommodate the publication of a book-length document.”
The FCIC hopes to publish a book on its findings, similar to the national best-seller that came from the work of the 9/11 Commission. The crisis panel recently switched publishers.
The law allows the panel an additional 60 days “for the purpose of concluding the activities of the commission … and disseminating the final report.” It’s under that additional 60-day authority that Angelides and his fellow Democrats are using to justify their delay by up to six weeks. The panel’s authority formally ends Feb. 13.
To date, the commission has interviewed more than 700 people, examined hundreds of thousands of documents and held 19 days of public hearings, Angelides wrote in a Wednesday letter to President Barack Obama.
In an interview, Angelides said his team of investigators continue to pursue leads in their “ongoing investigation.” He added that they’re also interviewing new witnesses, in addition to circling back to old ones, indicating that the panel continues to push its investigation further.
Congress tasked the panel to deliver its findings on 22 distinct areas, ranging from monetary policy to accounting rules and international capital flows. They also include the role of “fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector”; “lending practices and securitization”; and “the quality of due diligence undertaken by financial institutions.”
All three of those areas would seem to include the current mortgage and foreclosure documentation issues roiling big banks and the financial sector.
However, there may be complications in trying to advance its investigation. Because the law says that the commission’s findings must be sent to the President by Dec. 15, there are open questions regarding the validity of further investigative actions beyond that date, including issuing subpoenas, people familiar with the crisis panel’s efforts said. For example, a firm may have grounds to resist the subpoena, these people said.
Hennessey wrote that a vote to delay the report “would violate the law, or at a minimum would be inconsistent with the law,” according to a post on his blog. “The FCIC is a creation of a law, and we must be governed by that law whether we commissioners like it or not,” he wrote.
The crisis panel isn’t the first to unilaterally delay the release of its congressionally-mandated report. The Commission on the Prevention of Weapons of Mass Destruction Proliferation and Terrorism blew past its deadline, as did the National Bipartisan Commission on the Future of Medicare and the Commission on Affordable Housing and Health Care Facility Needs in the 21st Century.
Those panels, however, didn’t have subpoena authority. And their reports were largely advisory. The FCIC can make criminal referrals to the Department of Justice.
Like the FCIC, the 9/11 Commission also had substantial powers, and it, too, extended its own deadline. However, the 9/11 panel got its extension from an act of Congress.
Angelides said the extra time will be critical for the panel’s investigation and subsequent report.
In a statement, the spokesman for Senate Banking Committee Chairman Christopher Dodd said the Connecticut Democrat supports the panel’s investigation, and was not opposed to the report’s delay.
Dodd indicated that a “brief delay to allow the commission to finalize and prepare a more thorough report was not unreasonable,” spokesman Sean Oblack wrote in an email.