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xviii FINANCIAL CRISIS INQUIRY COMMISSION REPORT

• We conclude widespread failures in financial regulation and supervision
proved devastating to the stability of the nation’s financial markets. The sentries
were not at their posts, in no small part due to the widely accepted faith in the self-
correcting nature of the markets and the ability of financial institutions to effectively
police themselves. More than 30 years of deregulation and reliance on self-regulation
by financial institutions, championed by former Federal Reserve chairman Alan
Greenspan and others, supported by successive administrations and Congresses, and
actively pushed by the powerful financial industry at every turn, had stripped away
key safeguards, which could have helped avoid catastrophe. This approach had
opened up gaps in oversight of critical areas with trillions of dollars at risk, such as
the shadow banking system and over-the-counter derivatives markets. In addition,
the government permitted financial firms to pick their preferred regulators in what
became a race to the weakest supervisor.
Yet we do not accept the view that regulators lacked the power to protect the fi-
nancial system. They had ample power in many arenas and they chose not to use it.
To give just three examples: the Securities and Exchange Commission could have re-
quired more capital and halted risky practices at the big investment banks. It did not.
The Federal Reserve Bank of New York and other regulators could have clamped
down on Citigroup’s excesses in the run-up to the crisis. They did not. Policy makers
and regulators could have stopped the runaway mortgage securitization train. They
did not. In case after case after case, regulators continued to rate the institutions they
oversaw as safe and sound even in the face of mounting troubles, often downgrading
them just before their collapse. And where regulators lacked authority, they could
have sought it. Too often, they lacked the political will—in a political and ideological
environment that constrained it—as well as the fortitude to critically challenge the
institutions and the entire system they were entrusted to oversee.
Changes in the regulatory system occurred in many instances as financial mar-
kets evolved. But as the report will show, the financial industry itself played a key
role in weakening regulatory constraints on institutions, markets, and products. It
did not surprise the Commission that an industry of such wealth and power would
exert pressure on policy makers and regulators. From  to , the financial
sector expended . billion in reported federal lobbying expenses; individuals and
political action committees in the sector made more than  billion in campaign
contributions. What troubled us was the extent to which the nation was deprived of
the necessary strength and independence of the oversight necessary to safeguard
financial stability.

• We conclude dramatic failures of corporate governance and risk management
at many systemically important financial institutions were a key cause of this cri-
sis. There was a view that instincts for self-preservation inside major financial firms
would shield them from fatal risk-taking without the need for a steady regulatory
hand, which, the firms argued, would stifle innovation. Too many of these institu-
tions acted recklessly, taking on too much risk, with too little capital, and with too
much dependence on short-term funding. In many respects, this reflected a funda-