A blog on financial markets and their regulation
Why does the US government write a financial crisis book?
February 1, 2011Posted by on
During the financial crisis, as many parts of the financial sector broke down, the government stepped in to perform the function normally performed by banks, markets or other private players. But there is no market failure at all in the business of publishing books on the financial crisis. As I noted in a blog post four months ago, this business is booming and there is no shortage of well-written books on the crisis.
But, writing a book on the financial crisis is exactly what the US government or rather the Financial Crisis Inquiry Commission (FCIC) has done in its report published last week. By sheer coincidence, when the report came out, I had just finished reading All the Devils are Here by Bethany McLean and Joe Nocera. It struck me that the FCIC report was quite similar to this book in terms of narrative, racy style, reliance on interesting anecdotes and juicy quotes.
I was looking forward to the FCIC producing an investigative report comparable to the outstanding reports produced for example by the Special Investigative Commission set up by the parliament of Iceland or the Examiner appointed by the bankruptcy court for Lehman Brothers. Unfortunately, that has not happened. Indeed, I found very little that is new in the FCIC report except for this interesting excerpt from a closed-door interview with Fed Chairman Ben Bernanke:
As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period … only one … was not at serious risk of failure. So out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two. (page 354)
Another quote from the same closed-door session suggests that the one exception was JP Morgan Chase:
[Like JP Morgan,] Goldman Sachs I would say also protected themselves quite well on the whole. They had a lot of capital, a lot of liquidity. But being in the investment banking category rather than the commercial banking category, when that huge funding crisis hit all the investment banks, even Goldman Sachs, we thought there was a real chance that they would go under. (page 362)