Leaders of SEC and FDIC say agencies' failings contributed to financial crisis
Friday, January 15, 2010
Two top federal regulators said Thursday that their agencies had fallen short in the run-up to the financial crisis, in part because thriving mortgage markets and soaring Wall Street profits created a false sense of security.
The heads of the Securities and Exchange Commission and the Federal Deposit Insurance Corp. said that shortcomings in their agencies, coupled with flaws in the larger regulatory system, contributed to the period of great boom and even greater bust.
"Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities," FDIC Chairman Sheila C. Bair said in written testimony to members of the bipartisan Financial Crisis Inquiry Commission, which is investigating the causes of the financial meltdown. "Record profitability within the financial services industry also served to shield it from some forms of regulatory second-guessing."
Bair told commissioners that with firms raking in monumental profits, it was difficult for regulators "to take away the punch bowl." Bair asserted that the "stovepiped financial regulatory framework" prevented any individual regulator from recognizing risks that had begun to pervade the entire financial system, but she said that even with the information available, "none of us, I think, did as good a job as we might have in analyzing it."
Bair and SEC Chairman Mary Schapiro spoke strongly Thursday in favor of a broad range of regulatory reforms, including transparency in the shadowy market for financial derivatives, elimination of the designation of firms as "too big to fail," tougher consumer-protection measures, more oversight of credit-ratings agencies, and changes in executive compensation structures to discourage excessive risk-taking. Bair said that as lawmakers consider overhauling financial regulation, their approach "must be holistic and give regulators the tools to address risks through[out] the system."
Schapiro also acknowledged regulatory lapses at the SEC and encouraged strong new reforms.
"No one should hesitate to admit mistakes, learn from them, and make the changes needed to address and identify shortcomings," Schapiro, who took over the agency a year ago, told commissioners. She said that in recent months, "the SEC has worked to review its policies, improve its operations, and address the legal and regulatory gaps that the crisis has laid bare" and that the agency also is "investigating a significant number of matters growing out of the financial crisis."
Appearing before Bair and Schapiro testified, Attorney General Eric H. Holder Jr. told the panel that authorities are using "every tool at our disposal" to root out financial crimes that contributed to the meltdown and to deter similar conduct in the future.
Holder said the FBI is investigating more than 2,800 cases of mortgage fraud, in addition to federal probes involving securities fraud and corporate malfeasance. He said this year's federal budget will allow the hiring of 50 new FBI agents and more than 150 new lawyers to focus on such cases.
Later in the day, commission members heard from state and local authorities, including Illinois Attorney General Lisa Madigan. She argued that state officials are often the "first responders" to abuses in the marketplace and should retain authority to investigate and prosecute harmful financial practices.
"In the years preceding the crisis, federal regulators often showed no interest in exercising their regulatory authority or, worse, actively hampered state authority," Madigan said.
The 10-member commission, consisting of six Democrats and four Republicans appointed by congressional leaders, was allocated $8 million for its work. Members have until Dec. 15 to produce a final report. The panel's Democratic chairman, former California treasurer Philip Angelides, has said he hopes the commission can act as a "proxy for the American people" in answering fundamental questions about the causes of the financial crisis.
On Wednesday, the commission held its initial public hearing, in which members pressed four of the nation's most powerful bankers -- Lloyd C. Blankfein of Goldman Sachs, Jamie Dimon of J.P. Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America -- about the role their firms played in the near-collapse of the global financial system.