The report from the Financial Crisis Inquiry Commission has been assailed as a confusing mishmash -- poorly organized, unclear about what's new and weakened by conclusions that are at once obvious and unsatisfying. The problems of the commission were evident from the start: its mandate was too broad, its timetable too short, its budget too small and its commissioners too partisan.
Those criticisms are true, but overdone.
The report is full of fascinating information, rich detail and fine documentary evidence. The commission should be celebrated for putting more than 1,100 documents online for anyone to search.
For me, the report's biggest failing is its timidity in engaging the most important question looming over the crash: What did Wall Street know and when did it know it?
The commission was right to devote a great deal of space in the report to collateralized debt obligations, the bundles of mortgage-backed securities that were at the heart of the financial crisis. CDOs brought down the Bear Stearns hedge funds that precipitated the emergency. CDO positions brought Merrill Lynch and Citigroup to the brink.
One of the most pernicious aspects of that business was "cross-buying" — CDOs buying pieces of other CDOs. That rendered them more related to each other and more prone to failure. As Jake Bernstein and I reported for ProPublica, banks were engaged in self-dealing, pushing pieces of CDOs that they were having trouble selling into others and then retaining most of the new CDO.
The report sheds new light on this practice, particularly at Merrill Lynch. But it's also maddeningly elliptical. According to the report, the Securities and Exchange Commission says that "heading into 2007, there was a Streetwide gentleman's agreement: You buy my BBB tranches and I'll buy yours."
Quid pro quos like this could help sell otherwise unsalable pieces, in order to complete deals and generate fees. Such arrangements could also be made to preserve the value of assets that were otherwise collapsing. Such behavior could run afoul of securities manipulation laws.
But the report doesn't elaborate or offer internal bank evidence showing how banks struck these deals.
A letter to the Financial Crisis Inquiry Commission from Brad Karp, a lawyer representing Citigroup, suggests that the commission has more documents on Citigroup's CDO business, including a chart "that details the amount and percentage of Citi-structured CDO securities in Citi-structured CDO transactions."
In other words, the chart shows how much of its own product Citigroup stuffed into new CDOs. The report identifies why the bank might do that: Citigroup "reported these tranches at values for which they could not be sold, raising questions about their accuracy and, therefore, the accuracy of reported earnings."
But the commission hasn't yet made the chart public. And it doesn't provide enough new information to fully understand on how the bank justified its valuations. The S.E.C. accused Citigroup and two executives of failing to disclose its positions, but the subsequent settlement was a mere slap on the wrist.
Citigroup declined to comment, but added that it was "a fundamentally different company today than it was before the crisis."
Then there is the question of credit rating agencies' culpability in the asset-backed securities debacle. One of the central questions of the CDO business: How were the banks able to create tens of billions of CDOs in the spring of 2007, after the market was already falling apart?
One troubling document from March 2007 suggests that Moody's knew the games that were being played. Yuri Yoshizawa, who was then in charge of CDOs, e-mailed Raymond W. McDaniel Jr., the chief executive of Moody's, to say that banks like Merrill, Citi and UBS are "still furiously doing transactions to clear out" their balance sheets but that a well-placed banker "doesn't believe that they are selling much of the CDO paper." She wrote that other bankers had told her that the "banks feel that the mark-to-market is less volatile in CDO paper."
In plain English, that suggests that Moody's executives, including the chief executive, knew banks were making new CDOs to create the illusion there were buyers for assets they wanted to avoid taking losses on. Yet Moody's didn't stop rating new CDOs -- and didn't downgrade CDOs for months. But the report doesn't push this line of inquiry.
A Moody's spokesman said, "Throughout this period, Moody's was communicating to the market about what we were observing, including the likelihood of increased defaults in CDOs, though neither we nor other market observers fully anticipated the distress that this market would ultimately experience."
Finally, there's the issue of how complicit bankers were in creating CDOs that were built to fail. The commission considered this topic at length, but didn't add much to the story that hasn't been reported elsewhere.
"No lawyer worth his salt can't fight a subpoena for a year." Josh Rosner, of the independent research firm Graham-Fisher & Company, said to me about the commission's subpoena power at the beginning of the investigation.
Sure enough, the Financial Crisis Inquiry Commission, constrained by this weakness, mostly just requested documents rather than demanding them by using subpoenas. Banks sometimes complied, but didn't have to.
In one important instance, Bank of America "failed to produce documents" requested by the commission, the report says. The documents might have further illuminated what bankers at Merrill Lynch, taken over by Bank of America at the height of the panic, knew about a hedge fund's influence on CDOs that it was betting against, a topic we also wrote about last year. Bank of America played hardball on request, and the commission's staff was unlikely to get enough votes from commissioners to subpoena the bank, according to a person knowledgeable about the matter.
Bank of America said that it produced more than a million pages of documents to the commission and that it had provided these particular documents to other regulators on a confidential basis, but it was unable to reach a confidentiality agreement with the inquiry commission.
There is hope. The commission is expected to continue releasing documents, including transcripts of interviews with bankers. Reporters are likely to find stories for months in the trove of documents, and historians will make use of the report for decades to come.