Markets

FCIC Findings Guarantee Next Crisis

By Allan Roth

Updated on: January 27, 2011 / 6:14 PM EST / MoneyWatch

The Financial Crisis Inquiry Commission just announced that the financial crisis was avoidable and could happen again.

The Commission concluded that this crisis was avoidable-the result of human actions, inactions, and misjudgments. Warnings were ignored. "The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done. If we accept this notion, it will happen again."

Knock me over with a feather, but are they saying we should have known that lending money to people who had no prayer of paying it back was problematic? Should we have known that packaging these loans into sexy expensive derivatives merely transferred the risk to others?

My take
Greed is part of human nature and we can predict it with a high degree of accuracy. Whenever someone makes a ton of money without having skin in the game, the outcome will surely be bad.

Regulators failed us miserably. I wrote about the Federal Reserve Bank openly allowing its Truth in Lending Law (Reg Z) to be violated. I even billed Alan Greenspan for my family's share of the bailout, though it remains unpaid.

My disagreement with the FCIC is in the wording of the quote above. It should read, "because nothing has changed, a new crisis will definitely occur."

There should be no "if's" about it. SEC Chair Mary Schapiro is beating the drum on Fiduciary Duty and Disclosure. The SEC's response to my open letter to the SEC Chair is to learn:

Fiduciary doesn't really mean putting someone else's interests first.
Disclosure doesn't really mean giving critical information to the investors.

The SEC responded to my specific example of fiduciary and disclosure shortfalls by defending such practices.

Regulators are still too cozy with Wall Street, and greed is still alive and well. This probe did end with a whimper. Behavioral finance shows that we humans are not efficient learners, and this crisis proves it.

When you see the next big thing offering a great return without risk, you can bet it's time to fasten your seat belts for the bumpy ride of the next crisis. Don't ever bite on any promise of a great low risk return.

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Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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