Financial Crisis Inquiry Commission to Begin Investigations Next Month

September 17, 2009

The Gibson, Dunn & Crutcher Financial Markets Crisis Group is closely tracking government responses to the turmoil that has catalyzed a dramatic and rapid reshaping of our capital and credit markets.

We are providing updates on key regulatory and legislative issues, as well as information on legal and oversight issues that we believe could prove useful as firms and other entities navigate these challenging times.

This update focuses on the launching of the Financial Crisis Inquiry Commission (“FCIC” or “Commission”), which was created by Congress as section 5 of the Fraud Enforcement and Recovery Act, which became law on May 20, 2009. The bipartisan Commission is charged with examining the domestic and global causes of the current U.S. financial and economic crisis. In addition to discussing the Commission’s first meeting, which took place today, this alert summarizes the Commission’s broad investigatory mandate, its subpoena and other coercive powers, and its charge to gather information from private and public entities.

FCIC Holds First Meeting; Sets Course for Rigorous Investigations

The FCIC held its first public meeting today in order to outline for the public its mission and approach.  The majority of the meeting consisted of prepared statements by the Commissioners and concluded with a timeline for the investigation.  The Commissioners highlighted the importance of the FCIC’s work and their commitment to the daunting task of determining the causes of the economic crisis.  While the remarks were mostly broad in nature, the Commissioners repeatedly pointed to failures on the part of both the financial system and government regulators as contributing to the crisis.

Chairman Phil Angelides 

Chairman Angelides related that while this is the FCIC’s first public meeting, it has held several working sessions.  The Commission has adopted rules and procedures and, most notably, has created whistleblower protections for those who convey information to the Commission.

Angelides introduced Thomas Greene as the newly-appointed Executive Director the Commission.  Greene previously served as Chief Assistant Attorney General of the Public Rights Division in the Office of the Attorney General of California.

Angelides noted that the purpose of the Commission is to determine the causes of the crisis, not to offer “prescriptions for the future,” although the Commission is permitted to do so.  He compared the FCIC to the 9/11 Commission, which conducted over 1200 interviews, reviewed 2.5 million pages of documents, and held 12 days of public hearings.  Angelides expressed the view that the FCIC should be “similarly thorough” and should “leave no financial stone unturned.”  He also compared the FCIC’s work to the Pecora hearings in the 1930s in terms of its aspired impact.

He noted that the Commission’s final report is due in 15 months.  To carry out its mission, the Commission will seek records from government agencies and financial institutions, and hold hearings.  Angelides mentioned that the FCIC will use its subpoena power if necessary.

Vice Chairman Bill Thomas

Vice Chairman Thomas distinguished the FCIC from congressional committees which are also working on similar issues by stating that the Commission need not respect any boundaries.  Rather, its real constraint is time.

Commissioner Brooksley Born

Commissioner Born expressed her hope that the work of the Commission will lead to significant financial reform and remind future generations of the importance of a robustly regulated financial system.  However, she urged Congress and the Administration to act now to address the known causes of the financial crisis, rather than waiting until the Commission has completed all of its work.  She cautioned that once the economy seems to recover, the urgency of serious reform will diminish.

In particular, Born discussed the importance of regulating the OTC derivatives market, over which no federal or state agency currently has regulatory authority.  Born referred to self-regulation over this “enormous, opaque market” as a “siren song.”

Commissioner Keith Hennessey

Commissioner Hennessey cautioned that if the Commission waits 15 months to release any findings, its work will be less relevant to the Administration and legislators.  Rather, he recommended that the Commission produce information over the course of its work.  Hennessey also favored the Commission issuing recommendations along with determining the causes of the crisis.

He expressed the view that the FCIC should not be a “march on Wall Street,” but should also explore the systemic political pressures which played a role in the crisis.  In this vein, Hennessey cited the role of the bipartisan push to increase homeownership as a central factor.

Hennessey has prepared a list of twenty questions that the Commission should answer, six of which he shared at the meeting:

1)  How did decreased savings rates and low interest rates contribute to the bubble?

2)  Did policies encouraging home ownership lead to relaxed standards which contributed to the crisis?

3)  Did the TARP program work?

4)  Was there a legally and economically viable option to save Lehman Brothers?  If so, should Lehman have been saved?

5)  How did the regulatory examiners miss the high leverage and bad bets placed by large financial institutions?

6)  How did Fannie Mae and Freddie Mac’s engagement in the mortgage-backed securities market and the treatment of their debt as government-guaranteed contribute to the crisis?

Commissioner Byron Georgiou

Commissioner Georgiou highlighted the importance of untangling the “too big to fail” phenomenon.  He also emphasized that the Commission should probe the role played by financial instruments and policies which allowed the creators of securities to abandon responsibility for the ultimate performance or failure of assets.

Commissioner Sen. Bob Graham

Senator Graham stated that the guiding principle of the Commission should be to “do no harm.”  He urged the Commission to contribute to the advisement of legislation rather than serving as a means for procrastination on reform.  He also noted the division of functions between the FCIC and Congress.  The FCIC is charged with making a diagnosis, while Congress will make responsive policy decisions.  Senator Graham highlighted the need for synchronization with the work of the congressional committees.  Specifically, he mentioned the House Financial Services Committee’s upcoming hearings on creating a consumer financial protection agency and noted that the Commission should address this issue in its work as well.

Commissioner Heather Murren

Commissioner Murren urged the FCIC to be “rigorous, unbiased and fearless” in its work.  She took the view that the Commission’s most important responsibility was to produce a complete factual record of the causes of the financial crisis.

Commissioner Douglas Holtz-Eakin

Commissioner Holtz-Eakin noted the importance of engaging in a bipartisan pursuit of facts in order to produce a nonpartisan final report.  He highlighted the need to investigate the macroeconomic features of the market which led to the crisis, including the legal and regulatory regime, the role of “too big to fail” institutions and government-sponsored enterprises, and the wide availability of credit.  Along with investigating the housing bubble, he also recommended that the FCIC consider as contributing factors:  incentives for regulatory arbitrage, accounting practices, institutional practices such as corporate governance, capital requirements, and regulatory failures in allowing the financial crisis to spread.  He noted in closing that it was unlikely that the FCIC would conclude that the financial crisis was caused by the greed or illicit activity of a few individuals.

Commissioner John Thompson

Commissioner Thompson noted that all financial crises stem from over-leverage and questioned why we are repeatedly unable to recognize this recurrent problem.  He suggested four key questions for the Commission to address:

1)  How much did the housing bubble contribute to the financial crisis?  What changes in legislative policy or Federal Reserve monetary policy may have triggered the crisis?

2)  Were visible signals of impending crisis ignored by government agencies or financial institutions?

3)  Did regulators understand and appropriately regulate the derivatives market?

4)  How significant was greed as a factor in the accumulation of unnecessary and unwarranted risk?

Commissioner Peter Wallison

Commissioner Wallison highlighted the importance of the FCIC diagnosing the problems which led to the financial crisis so that Congress can address the actual causes in future legislation and have a factual basis on which to act.  He noted that there are an unprecedented number of weak mortgages (subprime and Alt-A loans) on the balance sheets of banks.  In questioning why this was the case, Wallison pointed to government policies and the financial system as sources of the problem.

Timeline of FCIC’s Investigation

By the end of October, the Commission plans to send document retention letters to government agencies and financial institutions.  By that time, the Commission will also finish selecting its staff and release a more detailed timeline.

By the end of November, the Commission will be interviewing financial executives and agency officials.  The Commission will also have conducted a review of the relevant literature and a survey of other pending investigations.  The Commission will also engage with the public through a website.

By the end of this year, the Commission plans to begin holding public hearings.

Backgrounds of Commissioners

On July 15, 2009, House and Senate Leaders announced the Financial Crisis Inquiry Commission’s membership.

  • Phil Angelides, jointly appointed by House Speaker Pelosi and Senate Majority Leader Harry Reid, will chair the Commission. Mr. Angelides served formerly as California’s State Treasurer from 1999 to 2007.
  • Bill Thomas, jointly appointed by House Minority Leader John Boehner and Senate Minority Leader Mitch McConnell will serve as the Commission’s vice-chair. Mr. Thomas is a former House Ways & Means Committee Chairman.

House and Senate Democratic Leaders also appointed the following individuals:

  • Brooksley Born, former Chair of the Commodities Futures Trading Commission during the Clinton administration.
  • Byron Georgiou, Las Vegas-based businessman and attorney who serves on the advisory board of the Harvard Law School Program on Corporate Governance. He is an experienced plaintiffs’ lawyer, particularly in the field of securities class actions.
  • Senator Bob Graham, former U.S. Senator and Chair of the Senate Intelligence Committee and former Governor of Florida.
  • Heather Murren, retired Managing Director for Global Securities Research and Economics at Merrill Lynch.
  • John Thompson, Chairman of the Board of Directors of Symantec Corporation.

House and Senate Republican Leaders also appointed the following individuals:

  • Doug Holtz-Eakin, former Director of the Congressional Budget Office and former Chief Economist of the President’s Council of Economic Advisers.
  • Keith Hennessey, former Director of the National Economic Council during the George W. Bush administration.
  • Peter Wallison, Co-Director for Financial Policy Studies at the American Enterprise Institute and former Counsel to President Ronald Reagan.    Mr. Wallison is a retired former partner of Gibson, Dunn & Crutcher.

Financial Crisis Inquiry Commission Key Provisions

Functions of the Commission. The statute directs the Commission to examine twenty-two enumerated possible causes of the current financial and economic crisis in the United States. The list includes:

  • Fraud and abuse in the financial sector;
  • Federal and State financial regulators, including the extent to which they enforced or failed to enforce statutory, regulatory, or supervisory requirements.
  • Accounting practices, including mark-to-market and fair value rules and treatment of off-balance sheet vehicles.
  • Tax treatment of financial products and investments.
  • Capital requirements and regulations on leverage and liquidity, including the capital structures of regulated and non-regulated financial entities.
  • Credit rating agencies in the financial system, including reliance on credit ratings by financial institutions and Federal financial regulators, the use of credit ratings in financial regulation, and the use of credit ratings in the securitization markets.
  • Lending practices and securitization, including the originate-to-distribute model for extending credit and transferring risk.
  • Affiliations between insured depository institutions and securities, insurance, and other types of non-banking companies.
  • The concept that certain institutions are “too-big-to-fail” and its impact on market expectations.
  • Corporate governance, including the impact of company conversions from partnerships to corporations.
  • Compensation structures.
  • The legal and regulatory structure of the United States housing market.
  • Derivatives and unregulated financial products and practices, including credit default swaps.
  • Short selling.
  • The quality of due diligence undertaken by financial institutions.

The statute further requires that the Commission examine the causes of the collapse of each major financial institution that failed (including institutions that were acquired to prevent their failure) or was likely to have failed if not for the receipt of exceptional Government assistance from the Department of Treasury during the period beginning in August 2007 through April 2009.

The statute instructs the Commission to refer to the Attorney General of the United States and any appropriate State attorney general any person that the Commission finds may have violated the laws of the United States in relation to the financial crisis.


This list of twenty-two enumerated areas for investigation is unusually broad and unusually detailed for a Congressional investigatory commission. The various areas for investigation listed fall generally into two groups: those more focused on informing the development of a new regulatory regime and those more likely to lead to institutional and individual liability. The Commission’s investigations into due diligence, risk management, fraud and abuse toward consumers, mortgage securitization, and accounting practices could pose particular risks of subsequent Executive Branch investigations through referrals from or information made public by the Commission.

The statute’s prescriptive language about what types of companies and government and other entities are to be investigated suggests that Congress had particular entities in mind in enumerating the Commission’s responsibilities.  Indeed, one focus appears to be institutions that have received the most government assistance.  According to Senate Committee on Banking, Housing, and Urban Affairs staff, the statute’s drafters had twelve to fourteen specific institutions in mind.

The criminal referral provision distinguishes this commission from the 9/11 Commission, which did not provide for referrals explicitly. The Financial Crisis Inquiry Commission would have had referral power even without an explicit provision. By including the provision, however, Congress created an expectation that the Commission will make referrals in appropriate cases. Besides increasing the potential for criminal liability, the Commission’s work could well create fact trails leading to civil enforcement and other regulatory and supervisory sanctions.

Powers of the Commission. Like most Congressional committees, the Commission has the power to hold hearings, take testimony, receive evidence, and administer oaths. The Commission can also issue subpoenas and has two distinct procedures for enforcing them. The general enforcement procedure involves a district court ordering the subpoenaed person to appear or produce evidence. Failure to obey may be punished as a contempt of that district court. The Commission can also enforce a subpoena through Congress’s criminal contempt statute. Under the statute, failure to obey a subpoena can lead to a fine of up to $100,000 and up to one year imprisonment. The Commission cannot issue subpoenas on a purely partisan basis. The affirmative vote of at least one Republican appointee is required.  Importantly, the statute likely also provides for staff deposition authority.


The Commission has two particularized processes for enforcing subpoenas. Responding to either of them requires expertise in dealing with not just subpoenas, but with Congressional subpoenas specifically. Although the general subpoena enforcement procedure is similar to the procedure for enforcing SEC investigation subpoenas, it is an unusual and judicially untested procedure in the context of Congressional investigations. Defenses to subpoena enforcement actions under Congress’s criminal contempt statute do exist, but courts rarely give them much weight. Private individuals or entities must, in most instances, respond to a Congressional subpoena if they do not invoke Fifth Amendment rights. In practice, formal subpoena enforcement actions occur rarely. Instead, Congress often enforces subpoenas through public pressure generated through a variety of means that generally involve negative press attention.

The Commission has a choice in how it will launch its investigations.  It can either issue letter requests first and back them up with subpoenas if necessary, or it can simply issue subpoenas at the outset.  The need for bipartisan support to issue subpoenas would suggest that letters may be issued initially.  But the Commission’s short life span might lead it to use its coercive powers earlier in the process.

The staff deposition authority is uncommon among Congressional committees. Without this authority, commissioners themselves would have to convene in order to take testimony from a witness. With staff deposition authority, however, a single staff member or group of staff members could take testimony from a witness without the commissioners needing to meet. The ability of staff to take depositions thus not only provides the Commission with more flexibility, but also expands the potential number of witnesses who could be questioned in the time available.

Information gathering. The statute provides that the Commission “should seek” testimony and information from principals and other representatives of government agencies and private entities that were significant participants in the financial and housing markets during the crisis. The Commission can also secure “any information related to any inquiry of the Commission,” including confidential information, from any federal agency.


By charging the Commission with gathering information directly from private entities, Congress virtually assured that the Commission will hold public hearings and call officers and possibly directors of financial institutions to testify.  The Pecora Commission, an inquiry conducted in the 1930s about the causes of the Great Depression, employed aggressive information gathering tactics. As one historical account describes, the staff of the Pecora inquiry would “descend upon a banker or broker and go through his records, file drawer after file drawer, page by page, selecting and photostating documents. Staff lawyers and accountants would assemble this material to reconstruct the motivations, discrepancies, delinquencies, and frauds involved.”  While there is no reason to believe that the Financial Crisis Inquiry Commission will be similarly aggressive, it is sobering to recall how similar authorities have been, and could be, used.

Any information or documents provided to the Commission will be subject to disclosure at the Commission’s discretion.  Generally, absent an agreement with the Commission to the contrary, institutions should assume that information provided to the Commission will become public. Information could be made public through hearings, reports, leaks to the press, and other means.

Information and documents provided could also impact existing litigation and existing SEC or other regulatory investigations. Institutions should be thinking ahead about how to handle a possible inquiry from Commission staff. They should be prepared to have their current or even former officers and directors called to testify or provide information through interviews or depositions. For public companies, contact with the Commission could, in certain circumstances, constitute a disclosable event.

Besides acquiring information from private parties directly, federal agencies must provide the Commission with any information it requests. This potentially means that Commission staff could request auditor reports from the SEC, exposing institutional weaknesses that exist but normally do not have to be publicly disclosed. The Commission may also be able to compel information from the SEC and DOJ about investigations that are not yet concluded and still in the confidential stage.  Taxpayer information might also be obtainable.

Regardless of how the Commission obtains information, its investigations will likely produce embarrassing fact patterns, even for institutions that consider themselves best-in-class. Revelations about the interactions of those responsible for corporate governance with those responsible for risk management may be particularly damaging for many institutions. Questions are likely to arise about whether institutional leaders listened to risk managers and the reasons for choosing to follow or not to follow their advice. Questions associated with securitizations are likely to focus on what institutions knew about risk in this area and when they knew it.

Reporting. On December 15, 2010, the Commission will submit a report to the President and Congress “containing the findings and conclusions of the Commission on the causes of the current financial and economic crisis in the United States.” The statute also authorizes the Commission, at the chairperson’s discretion, to report specific findings on financial institutions that the Commission investigates.


The statute does not discuss the possibility of interim reports, but such reports may be issued depending on the progress and needs of the regulatory reform debate in Congress. While the Commission is not charged with making recommendations to Congress, its existence and resources provides Congress with an opportunity to discover facts that may shape regulatory reform, and Congress may try to employ the Commission to produce facts that would better inform the discussion.

Funding. The statute creating the Commission authorizes appropriations to the Treasury Secretary “such sums as are necessary to cover the costs of the Commission.”


Congress already has appropriated $8 million to the Commission to conduct its fifteen-month investigation of the financial markets crisis.  This is roughly equivalent to the yearly budget of a major Congressional committee.  If the Commission runs short on funds, it could seek additional appropriations from Congress.

Concluding Observations

Institutions with any ties to the financial and economic crisis should be concerned about the Commission’s broad and detailed mandate for investigation. Much of the Commission’s work will likely focus on discovering the causes of the financial crisis, uncovering details about the institutions and individuals associated with the crisis, and creating a record of events leading up to it.

In terms of timing, it is possible that a comprehensive regulatory reform bill will be enacted before the Commission’s final report comes due in December of 2010. The Commission’s precise effects on regulatory reform will depend largely on how the investigation and any relevant legislation move forward. The existence of the Commission means that, if legislation is enacted before it reports, there is likely to be a second round that responds to the final report.

Moreover, we understand that the Commission has been reaching out to key members of Congress to establish relationships and open channels of communication.  Such actions increase the likelihood that the Commission’s work will affect regulatory reform legislation.

Going forward, institutions should recognize the Financial Crisis Inquiry Commission’s unique set of functions and powers. The Commission will not proceed from the same authorities and motivations as the executive agencies with which most institutions are used to working. Institutions should start planning ahead to prepare themselves should they be contacted or investigated by the Commission.

Gibson Dunn has assembled a team of experts who are prepared to meet client needs as they arise in conjunction with the issues discussed above.  Please contact Michael Bopp (202-955-8256, [email protected]) in the firm’s Washington, D.C. office or any of the following members of the Financial Markets Crisis Group:

Public Policy Expertise
Mel Levine – Century City (310-557-8098, [email protected])
John F. Olson – Washington, D.C. (202-955-8522, [email protected])
Amy L. Goodman – Washington, D.C. (202-955-8653, [email protected])
Alan Platt – Washington, D.C. (202- 887-3660, [email protected])
Michael Bopp
– Washington, D.C. (202-955-8256, [email protected])

Securities Law and Corporate Governance Expertise
Ronald O. Mueller – Washington, D.C. (202-955-8671, [email protected])
K. Susan Grafton – Washington, D.C. (202- 887-3554, [email protected])
Brian Lane – Washington, D.C. (202-887-3646, [email protected])
Lewis Ferguson – Washington, D.C. (202- 955-8249, [email protected])
Barry Goldsmith – Washington, D.C. (202- 955-8580, [email protected])
John H. Sturc
– Washington, D.C. (202-955-8243, [email protected])
Dorothee Fischer-Appelt – London (+44 20 7071 4224, [email protected])
Alan Bannister – New York (212-351-2310, [email protected])
Adam H. Offenhartz – New York (212-351-3808, [email protected])
Mark K. Schonfeld – New York (212-351-2433, [email protected])

Financial Institutions Law Expertise
Chuck Muckenfuss – Washington, D.C. (202- 955-8514, [email protected])
Christopher Bellini – Washington, D.C. (202- 887-3693, [email protected])
Amy Rudnick – Washington, D.C. (202-955-8210, [email protected])
Dhiya El-Saden – Los Angeles (213-229-7196, [email protected])
Kimble C. Cannon – Los Angeles (213-229-7084, [email protected])
Rachel Couter – London (+44 20 7071 4217, [email protected])

Corporate Expertise
Howard Adler – Washington, D.C. (202- 955-8589, [email protected])
Richard Russo – Denver (303- 298-5715, [email protected])
Dennis Friedman – New York (212- 351-3900, [email protected])
Stephanie Tsacoumis – Washington, D.C. (202-955-8277, [email protected])
Robert Cunningham – New York (212-351-2308, [email protected])
Joerg Esdorn – New York (212-351-3851, [email protected])
Wayne P.J. McArdle – London (+44 20 7071 4237, [email protected])
Stewart McDowell – San Francisco (415-393-8322, [email protected])
C. William Thomas, Jr. – Washington, D.C. (202-887-3735, [email protected])

Private Equity Expertise
E. Michael Greaney – New York (212-351-4065, [email protected])

Private Investment Funds Expertise
Edward Sopher – New York (212-351-3918, [email protected])
Jennifer Bellah Maguire – Los Angeles (213-229-7986, [email protected])

Real Estate Expertise
Jesse Sharf – Century City (310-552-8512, [email protected])
Alan Samson – London (+44 20 7071 4222, [email protected])
Andrew Levy – New York (212-351-4037, [email protected])
Fred Pillon – San Francisco (415-393-8241, [email protected])
Dennis Arnold – Los Angeles (213-229-7864, [email protected])
Michael F. Sfregola – Los Angeles (213-229-7558, [email protected])
Andrew Lance – New York (212-351-3871, [email protected])
Eric M. Feuerstein – New York (212-351-2323, [email protected])
David J. Furman – New York (212-351-3992, [email protected])

Crisis Management Expertise
Theodore J. Boutrous, Jr. – Los Angeles (213-229-7804, [email protected])

Bankruptcy Law Expertise
Michael Rosenthal – New York (212-351-3969, [email protected])
David M. Feldman – New York (212-351-2366, [email protected])
Oscar Garza – Orange County (949-451-3849, [email protected])
Craig H. Millet – Orange County (949-451-3986, [email protected])
Thomas M. Budd – London (+44 20 7071 4234, [email protected])
Gregory A. Campbell – London (+44 20 7071 4236, [email protected])
Janet M. Weiss – New York (212-351-3988, [email protected])
Matthew J. Williams – New York (212-351-2322, [email protected])
J. Eric Wise – New York (212-351-2620, [email protected])

Tax Law Expertise
Arthur D. Pasternak – Washington, D.C. (202-955-8582, [email protected])
Paul Issler – Los Angeles (213-229-7763, [email protected])

Executive and Incentive Compensation Expertise
Stephen W. Fackler – Palo Alto (650-849-5385, [email protected])
Charles F. Feldman – New York (212-351-3908, [email protected])
Michael J. Collins – Washington, D.C. (202-887-3551, [email protected])
Sean C. Feller – Los Angeles (213-229-7579, [email protected])
Amber Busuttil Mullen – Los Angeles (213-229-7023, [email protected])

© 2009 Gibson, Dunn & Crutcher LLP

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