This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

The Financial Crisis Report's Wakeup Call

NEW YORK (TheStreet) -- There's been a lot going on lately. Between the shootings in Tucson, massive winter storms across the U.S., and protests in Egypt that threaten to destabilize the entire Middle East, we've had a great many crises to engage our attention.

That may be why last week's release of the long-awaited report of the Financial Crisis Inquiry Commission has received relatively little coverage. (After all, what's more compelling -- riots in the streets, or a report that's almost 700 single-spaced pages long?) However, the commission's report deserves more attention than it's been getting, because it pinpoints some critical flaws in our financial system that must be corrected if we're going to avoid another major financial meltdown like the one that rocked the world economy only two years ago.

The commission very kindly provided a 14-page summary of the majority's conclusions for readers who lack the interest or stamina to read the full report. For those of us who've been actively following analysis of the meltdown, the conclusions are hardly surprising.

In a nutshell, the commission found that the financial crisis was avoidable, had the "captains of finance" and regulators recognized and heeded the warning signs. The commission observed that the Federal Reserve Bank of New York, the Securities and Exchange Commission Office of the Comptroller of the Currency and Office of Thrift Supervision all failed adequately to oversee and regulate their respective sectors of the nation's financial system, creating a laissez-faire foundation for questionable financial industry practices.

The commission blasted investment banks and bank holding companies for failures of governance and ethics. It observed that the firms focused increasingly on risky trading activities, especially those involving subprime mortgages, in order to pursue hefty profits. Some of the firms reportedly grew too quickly to be effectively managed. Compensation systems were designed to reward risk-taking rather than prudent investment. Both financial institutions and credit rating agencies relied on computerized mathematical models, rather than professional judgment, to predict risk; according to the commission, "risk management became risk justification."

The commission further concluded that risky investments, excessive borrowing both in financial institutions and private households, and lack of transparency drove the financial system into crisis. In particular, the commission focused on leverage, often hidden in derivatives positions, off-the-balance-sheet entities and "window dressing" of financial reports available to investors eroded the stability of the financial system.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,982.59 +22.02 0.13%
S&P 500 1,978.91 +0.57 0.03%
NASDAQ 4,444.9090 -4.6550 -0.10%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs