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  • Print publication year: 2012
  • Online publication date: February 2013

Chapter Three - The Gathering Storm

from Part Two - Wall Street Business Model, Regulation, and Values in Transition


Still, if you will not fight for the right when you can easily win without bloodshed, if you will not fight when your victory will be sure and not so costly, you may come to the moment when you will have to fight with all the odds against you and only a precarious chance for survival.

Sir Winston Churchill, The Gathering Storm (1948)

We do not accept the view that regulators lacked the power to protect the financial system. They had ample power in many arenas and they chose not to use it. To give just three examples: the Securities and Exchange Commission could have required more capital and halted risky practices at the big investment banks. It did not. The Federal Reserve Bank of New York and other regulators could have clamped down on Citigroup’s excesses in the run-up to the crisis. They did not. Policy makers and regulators could have stopped the runaway mortgage securitization train. They did not. In case after case after case, regulators continued to rate the institutions they oversaw as safe and sound even in the face of mounting troubles, often downgrading them just before their collapse. And where regulators lacked authority, they could have sought it. Too often, they lacked the political will – in a political and ideological environment that constrained it – as well as the fortitude to critically challenge the institutions and the entire system they were entrusted to oversee.

The Financial Crisis Inquiry Commission Report (2011)

Introduction: Ideology Overwhelms Experience

The financial crisis sprang from two mutually reinforcing institutional transformations – one on Wall Street and another in Washington. Fueled by an explosive mix of megamergers, massive capital formation, increased leverage, and runaway technical wizardry, the Wall Street business model evolved from providing a diversified mix of financial services for valued clients to one dominated by the investment of a firm’s own capital in increasingly complex and risky securities, often at the expense of a firm’s customers who came to be viewed as counterparties. The most telltale sign of Wall Street’s transformation was the exponential growth and increasing importance of precisely the kind of proprietary trading, particularly of CMOs, at the center of the financial crisis. Facilitating all this was a parallel retreat in Washington’s oversight of the financial industry.