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446 Dissenting Statement

portion of the Glass-Steagall Act, frequently cited as an example of deregulation,
1
had no role in the fi nancial crisis. Th e repeal was accomplished through the
Gramm-Leach-Bliley Act of 1999, which allowed banks to affi liate for the fi rst time
since the New Deal with fi rms engaged in underwriting or dealing in securities.
Th ere is no evidence, however, that any bank got into trouble because of a securities
affi liate. Th e banks that suff ered losses because they held low quality mortgages or
MBS were engaged in activities—mortgage lending—always permitted by Glass-
Steagall; the investment banks that got into trouble—Bear Stearns, Lehman and
Merrill Lynch—were not affi liated with large banks, although they had small bank
affi liates that do not appear to have played any role in mortgage lending or securities
trading. Moreover, the Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) substantially increased the regulation of banks and savings and loan
institutions (S&Ls) aft er the S&L debacle in the late 1980s and early 1990s, and it is
noteworthy that FDICIA—the most stringent bank regulation since the adoption of
deposit insurance—failed to prevent the fi nancial crisis.
Th e shadow banking business. Th e large investment banks—Bear, Lehman,
Merrill, Goldman Sachs and Morgan Stanley—all encountered diffi culty in the
fi nancial crisis, and the Commission majority’s report lays much of the blame for this
at the door of the Securities and Exchange Commission (SEC) for failing adequately
to supervise them. It is true that the SEC’s supervisory process was weak, but many
banks and S&Ls—stringently regulated under FDICIA—also failed. Th is casts doubt
on the claim that if investment banks had been regulated like commercial banks—
or had been able to off er insured deposits like commercial banks—they would not
have encountered fi nancial diffi culties. Th e reality is that the business model of the
investment banks was quite diff erent from banking; it was to fi nance a short-term
trading business with short-term liabilities such as repurchase agreements (oft en
called repos). Th is made them especially vulnerable in the panic that occurred in
2008, but it is not evidence that the existence of investment banks, or the quality of
their regulation, was a cause of the fi nancial crisis.
Failures of risk management. Claims that there was a general failure of risk
management in fi nancial institutions or excessive leverage or risk-taking are part of
what might be called a “hindsight narrative.” With hindsight, it is easy to condemn
managers for failing to see the dangers of the housing bubble or the underpricing of
risk that now looks so clear. However, the FCIC interviewed hundreds of fi nancial
experts, including senior offi cials of major banks, bank regulators and investors.
It is not clear that any of them—including the redoubtable Warren Buff ett—were
suffi ciently confi dent about an impending crisis that they put real money behind
their judgment. Human beings have a tendency to believe that things will continue
to go in the direction they are going, and are good at explaining why this must
be so. Blaming the crisis on the failure to foresee it is facile and of little value for
policymakers, who cannot legislate prescience. Th e fact that virtually all participants
in the fi nancial system failed to foresee this crisis—as they failed to foresee every
other crisis—does not tell us anything about why this crisis occurred or what we
should do to prevent the next one.

1 See, e.g., Peter J. Wallison, “Deregulation and the Financial Crisis: Another Urban Myth,” Financial
Services Outlook, American Enterprise Institute, October 2009.