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1 1 (June 2016)

handle is hein.amenin/aeiacts0001 and id is 1 raw text is: KEY POINTS *?Te report of the Financial Crisis inquiry Comumission (IcIC) is frequently cited as the authoritative source for the causes of th 2oo8 crisis, but its key findingus are contradicted by <docwnents in its own fles that were never disclosed in its final report. By 20o8. most mortgages in th US were suibprime or otherwise weak. Qf these risky loans. *76 percent were on the books of government agencies, principally Fannie M~ae and Freddie Mlac The7 iCJC claimned that Famnie and Freddie bonuh these loans primarily because theu were projitable, and not heca use of the government s housing policies-particularlu the offordahie housing goals. * However, the IiC docunents dlicussed in this paper siow that Rannie uad Freddlie knew these loans would be unprfillable and in some cases loss-producing. * As a government study comiussion, the FCIC failed in its obligation to report fairly on all the evidence it col-- lected, not just the evidence for the story it wanted to tell. The Financial Crisis Inquiry Commission (FCIC) is often cited as the definitive source for information about the causes of the 2008 financial crisis. I was a member of the FCIC and dissented' from its majority report,2 which was issued in January 2011.3 However., in my subsequent research for a book on the financial crisis,4 I found that the principal findings and conclu- sions in the commission's report were contradicted by materials in the commission's own files ---materials that were never niade available to me or, I believe, to the FCIC's other members. Whether this was error or deception is not clear, but clearly, a major report by a publicly funded commission appointed by Congress did not adequately inform the American people or their representatives. The Fundamental Question Everyone agrees that the precipitating event of the financial crisis was a mortgage meltdown-.that is, defaults aniong a large number of subprime and other risky mortgages5 that were in the US financial sys- tem in 2007 and 2008. The nieltdown caused a sharp decline in mortgage and housing values, weakening the financial condition of many banks and other financial firms that held these assets and leading eventually---- after Lehman Brothers' bankruptcy----to the 2008 financial crisis. The fundamental question for the commission, there- fore, was why there were so many subprime and other risky mortgages in the US financial system in 2007 and 2008. In my dissent, which was based on the research of my AEl colleague Edward Pinto,6 I argued that gov- ernment housing policies-principally the affordable housing goals'-were responsible for this phenomenon. I had not seen much of the data in this paper until I had begun work on my book. In 1992, Congress adopted the affordable housing goals, which required the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac to meet certain quotas when they acquired mortgages AMERICAN ENTERPRISE INSTITUTE 1

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