By Zachary A. Goldfarb and Brady Dennis
Washington Post Staff Writers
Thursday, December 16, 2010; 12:48 AM
Republicans on a congressionally appointed panel studying the causes of the financial crisis largely blamed federal housing policy in a brief paper Wednesday that highlighted how differently the right and the left view the origins of the crisis.
Splintering from their Democratic counterparts, the four GOP members of the Financial Crisis Inquiry Commission pointed the finger at politicians in Washington for promoting lax mortgage lending standards that allowed lower- and moderate-income people to buy homes beyond their means.
Specifically, they wrote, the Clinton and Bush administrations turned mortgage finance companies Fannie Mae and Freddie Mac, chartered by Congress to expand homeownership, into "two enormous monoline hedge funds" whose "only option available was to invest in mortgages of increasingly lower quality and higher risk to the taxpayer."
While the 10-member FCIC was originally intended to emulate the 9/11 Commission, which released a widely respected study of intelligence failures before the 2001 terrorist attacks, the panel has struggled through political tension and staff turnover, including the departure of the report's lead writer.
The Republican paper preempted a full commission report that was originally to be released Wednesday but was delayed until January because of political disagreements on the panel.
A Republican commissioner, Peter Wallison of the American Enterprise Institute, said that he thinks the panel's Democratic majority is unfairly limiting the expression of the GOP position in the final report.
Other GOP members are Vice Chairman Bill Thomas, a former representative from California, and Bush administration economic officials Keith Hennessey and Douglas Holtz-Eakin.
Republicans and Democrats have agreed that a wide range of players contributed to the financial crisis - from Wall Street banks and credit-ratings agencies in New York to politicians and regulators in Washington, as well as borrowers looking to stretch beyond their means.
One of the main fault lines for years, however, has been the degree to which federal housing policy contributed to the financial crisis. Virtually no one disputes the notion that the government promoted homeownership too aggressively and failed to rein in Fannie Mae and Freddie Mac, the biggest mortgage finance companies.
The debate is about the degree to which these mistakes with Fannie and Freddie sowed the seeds of the financial crisis. In their report, the Republican FCIC members see these policies as the preeminent cause, leading the two companies, carrying the imprimatur of taxpayer support, to buy more and more risky mortgages.
"The government subsidized and, in some cases, mandated the extension of credit to high-risk borrowers, propagating risks for financial firms, the mortgage market, taxpayers, and ultimately the financial system," the GOP commissioners wrote.
Democrats have argued that Fannie and Freddie and other government programs, while full of flaws, were latecomers to the mortgage boom. They fell into trouble only in 2007 and 2008, while the private-sector, particularly Wall Street bankers motivated by lucrative year-end bonuses, started making risky loans to unworthy borrowers much earlier.
For much of the time before the crisis, Democrats say, a deregulatory ideology prevailed in Washington, causing financial watchdogs to miss the risks that were rapidly accumulating in the financial system.
Some other analysts see the truth as somewhere in between. They argue that Fannie and Freddie did not instigate the risky practices that sparked the crisis, but, because of their massive size and implied government backing, the companies magnified those risks many times over.
Brooksley Born, a Democratic appointee to the inquiry panel and former chairman of the Commodity Futures Trading Commission, said the Republican release disappointed her.
Born said that she had "hoped very much" that commission members could settle on a consensus about the causes behind the financial crisis after their lengthy investigation, "but obviously, with the release of separate personal views of four of the commissioners, that's an indication to me that they will be dissenting on the report. . . . I think that that certainly undercuts our ability of a commission as a whole."
While the Republican and Democratic members of the FCIC might not agree on an overarching explanation, the full bounty of materials, including hundreds of interviews and subpoenaed documents, that the panel will release next month could shed light on some individual causes. Democratic members are led by the panel's chairman Phil Anglides, a former California treasurer.
"You've got a pretty significant collection of information that the commission's staff has been culling through and analyzing," said commission spokesman Tucker Warren. "What you will have is a deep look at, frankly, how our financial system evolved into what it is today and how practices in Washington and on Wall Street contributed to the events that unfolded in the latter part of this decade."