Over the past two years we have faced the most severe financial crisis since the Great
Depression. Americans across the nation are struggling with unemployment, failing
businesses, falling home prices, and declining savings. These challenges have forced the
government to take extraordinary measures to revive our financial system so that people
can access loans to buy a car or home, pay for a child’s education, or finance a business.
The roots of this crisis go back decades. Years without a serious economic recession
bred complacency among financial intermediaries and investors. Financial challenges
such as the near-failure of Long-Term Capital Management and the Asian Financial
Crisis had minimal impact on economic growth in the U.S., which bred exaggerated
expectations about the resilience of our financial markets and firms. Rising asset prices,
particularly in housing, hid weak credit underwriting standards and masked the growing
leverage throughout the system.
At some of our most sophisticated financial firms, risk management systems did not keep
pace with the complexity of new financial products. The lack of transparency and
standards in markets for securitized loans helped to weaken underwriting standards.
Market discipline broke down as investors relied excessively on credit rating agencies.
Compensation practices throughout the financial services industry rewarded short-term
profits at the expense of long-term value.