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CONCLUSIONS OF THE FINANCIAL CRISIS INQUIRY COMMISSION xxi

• We conclude the government was ill prepared for the crisis, and its inconsistent
response added to the uncertainty and panic in the financial markets. As part of
our charge, it was appropriate to review government actions taken in response to the
developing crisis, not just those policies or actions that preceded it, to determine if
any of those responses contributed to or exacerbated the crisis.
As our report shows, key policy makers—the Treasury Department, the Federal
Reserve Board, and the Federal Reserve Bank of New York—who were best posi-
tioned to watch over our markets were ill prepared for the events of  and .
Other agencies were also behind the curve. They were hampered because they did
not have a clear grasp of the financial system they were charged with overseeing, par-
ticularly as it had evolved in the years leading up to the crisis. This was in no small
measure due to the lack of transparency in key markets. They thought risk had been
diversified when, in fact, it had been concentrated. Time and again, from the spring
of  on, policy makers and regulators were caught off guard as the contagion
spread, responding on an ad hoc basis with specific programs to put fingers in the
dike. There was no comprehensive and strategic plan for containment, because they
lacked a full understanding of the risks and interconnections in the financial mar-
kets. Some regulators have conceded this error. We had allowed the system to race
ahead of our ability to protect it.
While there was some awareness of, or at least a debate about, the housing bubble,
the record reflects that senior public officials did not recognize that a bursting of the
bubble could threaten the entire financial system. Throughout the summer of ,
both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paul-
son offered public assurances that the turmoil in the subprime mortgage markets
would be contained. When Bear Stearns’s hedge funds, which were heavily invested
in mortgage-related securities, imploded in June , the Federal Reserve discussed
the implications of the collapse. Despite the fact that so many other funds were ex-
posed to the same risks as those hedge funds, the Bear Stearns funds were thought to
be “relatively unique.” Days before the collapse of Bear Stearns in March , SEC
Chairman Christopher Cox expressed “comfort about the capital cushions” at the big
investment banks. It was not until August , just weeks before the government
takeover of Fannie Mae and Freddie Mac, that the Treasury Department understood
the full measure of the dire financial conditions of those two institutions. And just a
month before Lehman’s collapse, the Federal Reserve Bank of New York was still
seeking information on the exposures created by Lehman’s more than , deriv-
atives contracts.
In addition, the government’s inconsistent handling of major financial institutions
during the crisis—the decision to rescue Bear Stearns and then to place Fannie Mae
and Freddie Mac into conservatorship, followed by its decision not to save Lehman
Brothers and then to save AIG—increased uncertainty and panic in the market.
In making these observations, we deeply respect and appreciate the efforts made
by Secretary Paulson, Chairman Bernanke, and Timothy Geithner, formerly presi-
dent of the Federal Reserve Bank of New York and now treasury secretary, and so