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CONCLUSIONS OF THE FINANCIAL CRISIS INQUIRY COMMISSION xvii

financial markets have become increasingly globalized. Technology has transformed
the efficiency, speed, and complexity of financial instruments and transactions. There
is broader access to and lower costs of financing than ever before. And the financial
sector itself has become a much more dominant force in our economy.
From  to , the amount of debt held by the financial sector soared from
 trillion to  trillion, more than doubling as a share of gross domestic product.
The very nature of many Wall Street firms changed—from relatively staid private
partnerships to publicly traded corporations taking greater and more diverse kinds of
risks. By , the  largest U.S. commercial banks held  of the industry’s assets,
more than double the level held in . On the eve of the crisis in , financial
sector profits constituted  of all corporate profits in the United States, up from
 in . Understanding this transformation has been critical to the Commis-
sion’s analysis.
Now to our major findings and conclusions, which are based on the facts con-
tained in this report: they are offered with the hope that lessons may be learned to
help avoid future catastrophe.

• We conclude this financial crisis was avoidable. The crisis was the result of human
action and inaction, not of Mother Nature or computer models gone haywire. The
captains of finance and the public stewards of our financial system ignored warnings
and failed to question, understand, and manage evolving risks within a system essen-
tial to the well-being of the American public. Theirs was a big miss, not a stumble.
While the business cycle cannot be repealed, a crisis of this magnitude need not have
occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.
Despite the expressed view of many on Wall Street and in Washington that the
crisis could not have been foreseen or avoided, there were warning signs. The tragedy
was that they were ignored or discounted. There was an explosion in risky subprime
lending and securitization, an unsustainable rise in housing prices, widespread re-
ports of egregious and predatory lending practices, dramatic increases in household
mortgage debt, and exponential growth in financial firms’ trading activities, unregu-
lated derivatives, and short-term “repo” lending markets, among many other red
flags. Yet there was pervasive permissiveness; little meaningful action was taken to
quell the threats in a timely manner.
The prime example is the Federal Reserve’s pivotal failure to stem the flow of toxic
mortgages, which it could have done by setting prudent mortgage-lending standards.
The Federal Reserve was the one entity empowered to do so and it did not. The
record of our examination is replete with evidence of other failures: financial institu-
tions made, bought, and sold mortgage securities they never examined, did not care
to examine, or knew to be defective; firms depended on tens of billions of dollars of
borrowing that had to be renewed each and every night, secured by subprime mort-
gage securities; and major firms and investors blindly relied on credit rating agencies
as their arbiters of risk. What else could one expect on a highway where there were
neither speed limits nor neatly painted lines?