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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

COMMISSION CONCLUSIONS ON CHAPTER 11

The Commission concludes that the collapse of the housing bubble began the
chain of events that led to the financial crisis.
High leverage, inadequate capital, and short-term funding made many finan-
cial institutions extraordinarily vulnerable to the downturn in the market in .
The investment banks had leverage ratios, by one measure, of up to  to . This
means that for every  of assets, they held only  of capital. Fannie Mae and
Freddie Mac (the GSEs) had even greater leverage—with a combined  to  ratio.
Leverage or capital inadequacy at many institutions was even greater than re-
ported when one takes into account “window dressing,” off-balance-sheet expo-
sures such as those of Citigroup, and derivatives positions such as those of AIG.
The GSEs contributed to, but were not a primary cause of, the financial crisis.
Their  trillion mortgage exposure and market position were significant, and
they were without question dramatic failures. They participated in the expansion
of risky mortgage lending and declining mortgage standards, adding significant
demand for less-than-prime loans. However, they followed, rather than led, the
Wall Street firms. The delinquency rates on the loans that they purchased or guar-
anteed were significantly lower than those purchased and securitized by other fi-
nancial institutions.
The Community Reinvestment Act (CRA)—which requires regulated banks
and thrifts to lend, invest, and provide services consistent with safety and sound-
ness to the areas where they take deposits—was not a significant factor in sub-
prime lending. However, community lending commitments not required by the
CRA were clearly used by lending institutions for public relations purposes.