Welcome to Politics Bites, where every afternoon at It's A Free Country, we bring you the unmissable quotes from the morning's political conversations on WNYC. Today on the Brian Lehrer Show, in the first of a four part series, Financial Crisis Inquiry Commission chairman Phil Angelides discusses his group's findings on the reasons behind the economic meltdown.

Phil Angelides tells a scary story. In the FCIC report, released last week, he described how beginning in the 1970s, a shadow banking system grew alongside the country's official banking system, and ultimately overpowered it.

In essence, what the shadow banking system was, was a whole range of bank-like activities—I might add a lot of them were mortgage originators—Ameriquest, New Century, a lot of the sub-prime lenders, they weren't banks, they didn't fund themselves with deposits. This parallel banking system or shadow banking system—called that because it wasn't very well regulated, in fact was very lightly regulated—grew enormously and by the beginning of 2008 it has $13 trillion of assets while our regular banking system has $11 trillion.

This shadow banking system includes investment banks like Goldman Sachs and JP Morgan—in Angelides' definition it encompases all financial entities with little regulation. It was this dark shadow that led to the recession and financial meltdown in 2008, Angelides, and his fellow Democrats on the inquiry commission claim (though the Republicans on the commission wrote dissents).

And as the shadow banking system grew more powerful, it started to compete with the regular banking system (that's the free market, ain't it) which led to deregulation of the official sector.

As these unregulated institutions or lightly regulated institutions grow more and more, the banks and thrifts start screaming, 'What about us!' So it also sets off a loosening of regulation in the banking sector, in a sense a competition to be able to participate in the least regulated parts of the market.

That's when we saw the repeal of the Glass-Steagall Act, a piece of regulation which had been instituted in the aftermath of the Great Depression to prevent financial catastrophies. Walls started to come down and banks started to be able to do lot of things they'd been previously prohibited from doing.

Angelides conceded that some of the catastrophe was the outcome of well intentioned mistakes, but he doesn't shy away from blaming the financial industry from malpractice. "Even though there might have been light regulation, that does not excuse a lot of these companies for having taken enormous risks in the marketplace that of course we all paid for," he said.

He also harshly critiques regulators, the Federal Reserve in particular, which he said "didn't have the backbone to stand up into the industry." When the crisis happened, the key policy makers were side-swiped, out of their own negligence.

They don' t have their finger on the pulse because they have allowed a financial system to evolve without asking the questions, without getting the information they need to control this burgeoning disaster.

Ouch.

They had a plethora of information from the 1990s on about how to control aggregious predatory lending and they sat on their hands. They never adopted real rules until July 2008 when the ballgame was well over.

Mama.

The nightmare Angelides described is shocking, but where are we now? Have we fixed the leaks in the plumbing? Not quite, said the FCIC chairman. Thousands of lobbyists worked to neutralize the Dodd-Frank bill so much, that despite the Congressional battle, we don't even know if it will make any substantial changes.

They were trying to kill it, water it down, slow it up, weaken it. The law passed, Congress passed it, the President signed it, but now to make it real, different regulators have to adopt 243 rules, conduct 67 studies, so really we don't know yet if we're going to come out with strong tough rules. The battle and the debate is just beginning. We hope our report is a guidebook to show people what went wrong so we have the right kind of rules.

Angelides says he was shocked and awed by the hidden story, and he does make it sound like a gripping read.

I had spent a lot of my life in the private sector, in finance, and I was stunned by what I learned this year, I was shocked. The extent to which our financial system went from being a system to support the real economy—companies, job creation, wealth creation in this country—to a system that was money making money. Financial engineering alone to the great detriment of the country.

Depressing, check. Angelides hopes people will read the report, but as of last week, it didn't seem like it would hit the Amazon bestseller list. Maybe people just don't want to know.