The financial crisis could have been avoided and was the result of poor decision making both in Washington and at top financial firms that fostered a culture of excessive risk taking, according to a draft report written by Democrats on a panel that investigated the meltdown and obtained by Reuters.

The Democratic majority of the 10-member Financial Crisis Inquiry Commission spreads the blame widely to regulators, politicians, financial firms and credit rating agencies.

We conclude this financial crisis was avoidable, the report said.

It said regulators failed to adequately police financial markets, that financial firms had poor risk management and corporate governance practices, and that government was ill-prepared to handle the fallout from excessive borrowing when loans soured.

The crisis was the result of human action and inaction, not Mother Nature or computer models gone haywire, the draft report reads. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public.

The report will be officially released on Thursday but it has been endorsed only by the congressionally appointed panel's six Democratic commissioners. Three Republican members will release a separate minority report and a fourth Republican plans to unveil a report of his own that will focus on government housing policies.

Reuters obtained a draft of the final report that was circulated in December before it was fully edited and sent to the printer. On Tuesday the New York Times first reported the contents of the majority's report on its website.

Tucker Warren, a spokesman for the panel, did not respond to a phone call or email seeking comment.

Among regulators the report singles out former Federal Reserve Chairman Alan Greenspan and his successor Ben Bernanke. The report faults Greenspan and his allies for pushing the idea that financial institutions could police themselves.

Bernanke and former Treasury Secretary Henry Paulson were criticized for not seeing the problems in the subprime mortgage markets earlier.

Clinton administration officials were rebuked for pushing to shield over-the-counter derivatives from regulation.

As for the corporate chieftains at the large financial firms that were either toppled or brought to their knees by the crisis, the panel says its examination found stunning instances of governance breakdowns and irresponsibility.

Among those singled out are American International Group, mortgage giant Fannie Mae and Merrill Lynch.

The report faults investment banks Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch and Morgan Stanley for operating with extraordinarily thin capital in 2007.

Less than a 3 percent drop in asset values could wipe out a firm, according to the report.

The report criticized credit rating agencies such as Moody's Corp, McGraw-Hill Cos' Standard & Poor's and Fimalac SA's Fitch Ratings for giving their seal of approval to securities that proved to be far more risky than advertised because they were backed by mortgages provided to borrowers who were unable to make payments on their loans.

The report also discussed the role played by shadow banking, or unregulated financial firms, the securitization of private mortgage debt and over the counter derivatives.

The 10-member FCIC was set up by Congress in May 2009. It was assigned the task of explaining the causes of the worst financial crisis in generations.

In July, President Barack Obama signed into law legislation written as a response to the crisis. Given that the Dodd-Frank law has been enacted, it is uncertain how much of an impact the commission's report will have.

Republicans on the panel already have criticized the Democrats' assessment as too broad to be a credible analysis.

The report could become fodder for the heated debate this year over the government's role in the housing market.

Congressional Republicans have called for the government to retreat from its role in promoting home ownership and have advocated getting rid of or scaling back Fannie and Freddie Mac which are now controlled by the government.

For their part, the Democrats on the crisis commission argue that the mortgage giants contributed to the crisis, but were not a primary cause.

(Reporting by Dave Clarke, Editing by Carol Bishopric)

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