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Abuses could have been prevented if federal regulators had paid more attention and intervened with responsible regulations, Chairman of Waxman said in his introductory remarks.
“For too long, the prevailing attitude in
The three invited current and former financial regulators told Congress that they made fateful mistakes that helped drive the global financial system to the brink of disaster, and urged Congress to fill the regulatory gaps.
Former Federal Reserve Chairman Alan Greenspan testified that he still believes the "self-interest" of banks and other financial firms is the best protection against malfeasance. But he said he and others are in "a state of shocked disbelief" that counterparty surveillance failed.
I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms," Greenspan said.
The "solid edifice" of his de-regulatory philosophy "did break down," he said. "And I think that, as I said, shocked me. I still do not fully understand why it happened."
The financial landscape that will greet the end of the crisis will be far different from the one that entered it little more than a year ago, Greenspan said. “Structured investment vehicles, Alt-A mortgages, and a myriad of other exotic financial instruments are not now, and are unlikely to ever find willing investors. Regrettably, also on that list are subprime mortgages, the market for which has virtually disappeared.”
SEC Chairman Christopher Cox sent a sweeping blow to Congress when he said that “we have learned that voluntary regulation does not work.”
He complained that Congress prohibited the Commission from regulating swaps in very precise language. “Indeed, enacting this loophole eight years ago was a course urged upon us in Congress by no less than the SEC Chairman and the President's Working Group at the time. We now know full well the damage that this regulatory black hole has caused.”
“Experience has taught that regulation must be mandatory, and it must be backed by statutory authority”, Cox continued. Neither the SEC nor any regulator was given the statutory authority to regulate investment bank holding companies other than on a voluntary basis, he complained.
“The holding company in the case of Lehman Brothers, for example, consisted of over 200 significant subsidiaries. The SEC was not the statutory regulator for 193 of them. There were over-the-counter derivatives businesses, trust companies, mortgage companies, and offshore banks, broker-dealers, and re-insurance companies. Each of these examples I have just described falls far outside of the SEC's regulatory jurisdiction. What Congress did give the SEC authority to regulate was the broker-dealers, investment companies, and investment adviser subsidiaries within these conglomerates.”
Cox recommended to eliminate the current regulatory gap in which there is no statutory regulator for investment bank holding companies.
“The current regulatory system is a hodge-podge of divided responsibility and regulatory seams”, he said which makes the co-ordination among regulators enormously difficult. “Today’s balkanized regulatory system undermines the objectives of getting results and ensuring accountability”, he said.
“Perhaps the most important change to the marketplace in recent years, from the standpoint of investor protection, is the enormous growth in financial products that exist wholly outside the regulatory system”, he finally stated. “We simply cannot leave unregulated such products as credit default swaps, which can be used as synthetic substitutes for regulated securities, and which can have profound and even manipulative effects on regulated markets. The risk is too great.”
Former Secretary of the Treasury John Snow called to go beyond ‘too big to fail’ assumption. “We should create a permanent mechanism for the dissolution of financial institutions, not just depository institutions”, he said and recommended to make sure that the institutions themselves bear the costs of failure.
Snow also called for a more co-ordinated and less fragmented approach to financial regulation. “We need one strong national regulator with the field of vision to spot excessive leverage, no matter what or where the institution is located”, he said.
Video streaming of the hearing