Page 26 - untitled

CONCLUSIONS OF THE FINANCIAL CRISIS INQUIRY COMMISSION xxv

, to May , . Synthetic CDOs created by Goldman referenced more than
, mortgage securities, and  of them were referenced at least twice. This is
apart from how many times these securities may have been referenced in synthetic
CDOs created by other firms.
Finally, when the housing bubble popped and crisis followed, derivatives were in
the center of the storm. AIG, which had not been required to put aside capital re-
serves as a cushion for the protection it was selling, was bailed out when it could not
meet its obligations. The government ultimately committed more than  billion
because of concerns that AIG’s collapse would trigger cascading losses throughout
the global financial system. In addition, the existence of millions of derivatives con-
tracts 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.

• We conclude the failures of credit rating agencies were essential cogs in the
wheel of financial destruction. The three credit rating agencies were key enablers of
the financial meltdown. The mortgage-related securities at the heart of the crisis
could not have been marketed and sold without their seal of approval. Investors re-
lied on them, often blindly. In some cases, they were obligated to use them, or regula-
tory capital standards were hinged on them. This crisis could not have happened
without the rating agencies. Their ratings helped the market soar and their down-
grades through 2007 and 2008 wreaked havoc across markets and firms.
In our report, you will read about the breakdowns at Moody’s, examined by the
Commission as a case study. From  to , Moody’s rated nearly ,
mortgage-related securities as triple-A. This compares with six private-sector com-
panies in the United States that carried this coveted rating in early . In 
alone, Moody’s put its triple-A stamp of approval on  mortgage-related securities
every working day. The results were disastrous:  of the mortgage securities rated
triple-A that year ultimately were downgraded.
You will also read about the forces at work behind the breakdowns at Moody’s, in-
cluding the flawed computer models, the pressure from financial firms that paid for
the ratings, the relentless drive for market share, the lack of resources to do the job
despite record profits, and the absence of meaningful public oversight. And you will
see that without the active participation of the rating agencies, the market for mort-
gage-related securities could not have been what it became.
* * *

THERE ARE MANY COMPETING VIEWS as to the causes of this crisis. In this regard, the
Commission has endeavored to address key questions posed to us. Here we discuss
three: capital availability and excess liquidity, the role of Fannie Mae and Freddie Mac
(the GSEs), and government housing policy.
First, as to the matter of excess liquidity: in our report, we outline monetary poli-
cies and capital flows during the years leading up to the crisis. Low interest rates,
widely available capital, and international investors seeking to put their money in real