WASHINGTON - Recently, I joined with Sen. Tom Coburn of Oklahoma to release a bipartisan report on the causes of the financial crisis that pushed us into the recession that continues to afflict families in Michigan and across the country.
The report is the product of more than two years of work by the Senate Permanent Subcommittee on Investigations, which I chair. Last year, our subcommittee held four hearings on what we uncovered, and the 600-page report expands on what we learned from those hearings, hundreds of witness interviews and millions of pages of documents.
The financial crisis was a man-made economic assault, the product of reckless risk-taking and rampant conflict of interest on the part of some big banks, mortgage companies and credit rating agencies. The recession that followed the crisis devastated Michigan's economy; it cost more than 400,000 Michigan jobs; it cost thousands of Michiganians their homes; and it nearly decimated our domestic auto industry. That's why it's so important for Michigan and the country that we get a clear picture of the causes of the crisis, to try to make sure it never happens again.
Sen. Carl Levin
What did we learn in our investigation? Conflict of interest is the common thread that runs through this whole sordid story. Our bipartisan report pulls back the curtain on shoddy, risky and deceptive practices. We showed that major financial institutions deceived their clients and the public, aided and abetted by conflicted and deferential regulators and credit rating agencies.
Sen. Coburn, who with his staff made major contributions to our investigation, put it well: "The free market has helped make America great, but it only functions when people deal with each other honestly and transparently. At the heart of the financial crisis were unresolved, and often undisclosed, conflicts of interest."
Washington Mutual Bank, the nation's largest thrift, issued thousands of mortgages in Michigan that later failed and resulted in foreclosures that devastated neighborhoods. Executives at WaMu, as the bank was known, pursued a high-risk strategy of selling dubious and often fraudulent mortgages and pushing customers into high-risk, high-interest loans so WaMu could reap higher profits, then turning these mortgages into toxic assets that the bank used to pollute the financial system.
We showed how WaMu's main federal regulator, the Office of Thrift Supervision, knew all along about major problems with the bank's mortgages. But instead of cracking down, OTS treated WaMu with kid gloves, refusing to act on repeated warnings by its examiners and blocking efforts by other regulatory agencies to act. One problem was that fees from WaMu made up a big chunk of the agency's annual budget. In 2008, WaMu collapsed under the weight of its junk loans and is now the largest bank failure in U.S. history.
We also examined how credit rating agencies that were supposed to provide objective opinions about the quality of mortgage-related securities gave high ratings to toxic assets. The credit rating agencies knew they would lose lucrative business from investment banks if they gave lower ratings.
And we showed how investment banks such as Goldman Sachs assembled toxic securities, misled the clients they sold them to, and then profited by betting against the very same investments they had sold to their clients.
Our report, the product of two years of hard work by my subcommittee, goes into great detail in each of these areas, and I'd encourage you to go to my website, levin.senate.gov, to read the entire report.
Last year, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which addresses many of the problems our investigation identified. For example, it eliminated OTS, the regulatory office that failed so completely to rein in WaMu's reckless lending. And it included a provision that Sen. Jeff Merkley of Oregon and I fought for, limiting the ability of banks to make risky investments for their own profit, and prohibiting them from betting against the same investments that they sold to clients.
Our report includes 19 new recommendations to further curb Wall Street excesses and conflicts of interest. Those recommendations, like the Dodd-Frank Act itself, will be opposed by some members of the financial industry who want to continue their risk-taking ways. I'll do all I can to make sure that federal regulators act with forcefulness and determination to fully implement the Dodd-Frank reforms.
Michigan and the nation can't afford another crisis from Wall Street. Understanding how the last crisis happened is vital to preventing the next one, and our report is designed to contribute to that effort.
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Carl Levin is the senior U.S. senator from Michigan.