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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
Over the next several months Bank of America worked with its regulators to iden-
tify the assets that would be included in the asset pool. Then, on May , Bank of
America asked to exit the ring fence deal, explaining that the company had deter-
mined that losses would not exceed the billion that Bank of America was required
to cover in its first-loss position. Although the company was eventually allowed to ter-
minate the deal, it was compelled to compensate the government for the benefits it
had received from the market’s perception that the government would insure its as-
sets. On September , Bank of America agreed to pay a million termination fee:
million to Treasury, million to the Fed, and million to the FDIC.
COMMISSION CONCLUSIONS ON CHAPTER 20
The Commission concludes that, as massive losses spread throughout the finan-
cial system in the fall of , many institutions failed, or would have failed but
for government bailouts. As panic gripped the market, credit markets seized up,
trading ground to a halt, and the stock market plunged. Lack of transparency
contributed greatly to the crisis: the exposures of financial institutions to risky
mortgage assets and other potential losses were unknown to market participants,
and indeed many firms did not know their own exposures.
The scale and nature of the over-the-counter (OTC) derivatives market cre-
ated significant systemic risk throughout the financial system and helped fuel the
panic in the fall of : millions of contracts in this opaque and deregulated
market created interconnections among a vast web of financial institutions
through counterparty credit risk, thus exposing the system to a contagion of
spreading losses and defaults. Enormous positions concentrated in the hands of
systemically significant institutions that were major OTC derivatives dealers
added to uncertainty in the market. The “bank runs” on these institutions in-
cluded runs on their derivatives operations through novations, collateral de-
mands, and refusals to act as counterparties.
A series of actions, inactions, and misjudgments left the country with stark
and painful alternatives—either risk the total collapse of our financial system or
spend trillions of taxpayer dollars to stabilize the system and prevent catastrophic
damage to the economy. In the process, the government rescued a number of fi-
nancial institutions deemed “too big to fail”—so large and interconnected with
other financial institutions or so important in one or more financial markets that
their failure would have caused losses and failures to spread to other institutions.
The government also provided substantial financial assistance to nonfinancial
corporations. As a result of the rescues and consolidation of financial institutions
through failures and mergers during the crisis, the U.S. financial sector is now
more concentrated than ever in the hands of a few very large, systemically signifi-
cant institutions. This concentration places greater responsibility on regulators
for effective oversight of these institutions.
