Here are twenty questions I hope we can answer on the Financial Crisis Inquiry Commission (FCIC). As I said this morning in my opening statement at the commission’s first meeting, if the commission could answer these questions, I think we would significantly advance the understanding of what happened and help policymakers address the root causes of the financial and economic crisis.

I do not intend this list to be comprehensive, nor does it cover every policy area that was important to the crisis. For instance, it ignores the role of credit rating agencies, which were responsible for key information failures. This list instead focuses on what I think are the most important and difficult unresolved questions about which there is significant debate. Answers to these questions could be fit into a larger explanation of what happened.

I have preliminary views on answers to many of these questions, and perceptive readers may be able to infer my lean from some of the phrasing. I have tried to tone that down as much as possible and present these as questions that are open for legitimate debate. I hope you and my fellow commissioners find them useful. I also hope that I can develop better answers during my work on the commission.

Here then are 20 important questions about the financial and economic crisis. (Technically this is better labeled “20 topics,” since several items contain multiple sub-questions.) I invite comments, suggested additional questions (ideally framed in the same relatively open manner), and suggested answers. Please assume any input you provide is principally for my use. Commission Chairman Angelides said today his goal is to have a website and method for providing formal input to the entire commission established by the end of this month.

Credit bubble

  1. What were the relative contributions to a credit bubble in the U.S. of (a) changes in global savings; (b) changes in relative savings between the U.S. and other (especially developing) countries; and (c) low interest-rate policies of the Greenspan Fed? Was risk systematically underpriced in the US and other countries?

Housing finance

  1. To what extent did well-intentioned policies designed to encourage the expansion of homeownership contribute to a relaxation of lending standards and people buying houses they could not and would never be able to afford? If so, which specific policies contributed to this problem?
  2. Were housing finance problems a cause of the crisis, the primary cause of the crisis, or primarily the trigger that set off other problems?

Financial institutions (broad policy questions)

  1. Was this a problem of financial institutions or financial markets? To the extent that markets collapsed (like certain securitization markets), did the market mechanisms fail, or instead did the funding sources just dry up?
  2. What definitions of “too big and interconnected to fail suddenly” did policymakers and regulators use, and how did those change over time? What’s the best way to define this test, and should it be set in advance by rule or left as a judgment call based on the specific situation?
  3. Did the capital purchase program of TARP work? Was it the right decision to use taxpayer funds to provide public capital to the largest financial institutions to prevent systemic failure? In retrospect, was the decision to use TARP resources for direct equity investment rather than to buy troubled assets a wise one? Was $700 B a reasonable number given the circumstances?
  4. Why did the stress tests work? Was it because investors had a common set of benchmarks, or because market participants perceived a bank’s inclusion in the stress test as an indication that it was too big to fail? Did the stress tests create a new implied government guarantee around 19 of the largest U.S. financial institutions?
  5. The Gramm-Leach-Bliley Act allowed companies to merge commercial and investment banking activities. Did this contribute to extremely high leverage levels and place the financial system at risk? The removal of that same firewall also allowed the Fed to quickly approve Goldman Sachs’ and Morgan Stanley’s conversions into Bank Holding Companies, providing them protection during the height of the crisis. Was removal of the firewall net good or bad?

Failures and near-failures of particular financial institutions

  1. To what extent did three aspects of Fannie Mae and Freddie Mac: (a) their policy-induced dominant position in mortgage securitization; (b) their large retained portfolios of mortgage-based assets and (c) their regulatory treatment as equivalent to US government debt; cause or contribute to three resultant failures: (i) the insolvency of Fannie and Freddie; (ii) the lowering of credit standards for mortgages; and (iii) the failure or anticipated failure of other financial institutions?
  2. Was there a legally and economically viable option available to save Lehman? If so, based on what we know now, should Lehman have been saved?
  3. Did the intersection of mark-to-market accounting and relatively inflexible capital standards substantially contribute to the demise of any particular financial institution?
  4. In September and October 2008, leaders of several large financial institutions told the Administration that “the shorts” were trying to cause their apparently healthy institutions to fail. These leaders argued the SEC should reinstate the uptick rule to make this behavior more difficult. Were the shorts trying to bring down these institutions? If so, was their behavior illegal or inappropriate? And did the SEC’s reinstatement of the rule have any impact?

The regulators

  1. Several heavily regulated large financial institutions failed both because they were highly leveraged and because they made bad bets. Did regulatory examiners miss both elements? If they didn’t miss them, why did regulators allow these institutions to place themselves and the financial system at so much risk?
  2. To what extent did banking regulators’ reliance on the banks to monitor their own operations and activities contribute to the crisis?
  3. Was there specific real-time information that policymakers or regulators lacked about (a) hedge funds; (b) credit default swaps; or (c) other unregulated financial institutions and “dark markets” that would have been helpful in identifying particular problems before they occurred or changed policy reactions during the crisis?


  1. How did different definitions of Tier I capital contribute to the crisis? Did different parts of the financial system with more stringent definitions perform better?
  2. Is there an economically best summary measure of a financial institution’s leverage? How did that metric compare for the largest financial institutions in mid-2008 to historic norms? How did it compare to other countries?

Executive compensation

  1. How does one define “excessive risk-taking,” and what specific compensation structures contributed to it? Did these compensation structures cause problems across-the-board, or only in firms with other problems?

Where are we now, and where should we be?

  1. Other than the absence of one large investment bank, how are the financial system and incentives and behavior in large financial institutions today different from September 1, 2008? (h/t James Aitken)
  2. Should policymakers try to restore the levels and types of lending and funding flows that existed 13 months ago, or is there a lower and different “new normal”?

(photo credit: Oberazzi)