Two years removed from the collapse of the financial crisis in 2008, the Financial Crisis Inquiry Commission released its final 533-page report to Congress Thursday concluding that Wall Street and Washington were to blame for ignoring early problems in mortgage-lending practices that sparked the meltdown. The commission interviewed more than 700 witnesses and spent 19 days in public hearings in New York and Washington and in communities hardest hit by the crisis. “Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs,” the commission wrote in the report. “The tragedy was that they were ignored or discounted.” It was no surprise that risky subprime lending and securitization sparked an unsustainable rise in housing prices. There were widespread reports of predatory lending practices, dramatic increases in household mortgage debt, and a viral growth in financial institutions’ trading activities, unregulated derivatives and many other red flags. But the commission concluded that “little meaningful action was taken to quell the threats in a timely manner.” The prime example that the commission laid out was the Federal Reserve‘s “pivotal failure” to set prudent mortgage-lending standards and stem the flow of toxic loans. “The Federal Reserve was the one entity empowered to do so and it did not,” the commission wrote. There were other failures. Financial firms originated, sold and bought mortgage-backed securities that were never examined by their analysts or hired credit rating agencies they leaned on to do so. In some cases, these firms even knew the MBS to be “defective.” The report is replete with analogies, referring to regulators as “sentries” who “were not at their posts,” a financial system as a “highway where there were neither speed limits nor neatly painted lines,” credit rating agencies as “essential cogs in the wheel of financial destruction” and poorly written loans that “lit and spread the flame of contagion and crisis.” Of the 10 commission members, six Democrats endorsed the final report with three Republicans issuing a joint dissent, and another, Peter Wallison who submitted his own found here. Wallison is the fellow in financial policy studies at the American Enterprise Institute. In his dissent, he placed much of the blame on the housing policies of past administrations that promoted affordable housing. He also differed on the systemic risk of subprime loans. “These were not matches that lit a dry and tinder forest. These were a gasoline truck that exploded in the forest, and no forest could survive that,” Wallison told reporters in a briefing. As far as the role of the government-sponsored enterprises in the meltdown, the commission found that Fannie Mae and Freddie Mac contributed to the problems, but were not the primary cause. Their business models were flawed, the commission wrote, but ultimately these companies followed Wall Street into the subprime market rather than led. A white paper from the Treasury Department on the future of Fannie and Freddie is expected to be released in the middle of February. Phil Angelides, chairman of the commission, issued a warning to those who see the crisis as a flash moment or “an act of Mother Nature.” “Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” Angelides said. “If we accept this notion, it will happen again.” Write to Jon Prior. Follow him on Twitter: @JonAPrior

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