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Regulators fell short in identifying and addressing problems, Bernanke says

These leaders have been a driving force behind the nation's economic policies since the financial crisis of 2008.

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By Ariana Eunjung Cha
Washington Post Staff Writer
Thursday, September 2, 2010; 9:52 PM

Regulators fell short in using their powers "forcefully or effectively" to stop risky practices by banks and were slow to identify and address abuses in the U.S. financial system that led to global economic crisis, Federal Reserve Chairman Ben S. Bernanke told a panel investigating the financial crisis on Thursday.

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In a lengthy analysis delivered before the congressionally appointed committee, Bernanke said government regulators did not do enough to protect consumers in the marketplace and to force large financial institutions to curtail risky practices.

"Regulators had recognized these problems in some cases but did not press firms vigorously enough to fix them," he said.

Bernanke said the single most important lesson from the crisis was that the problem of financial institutions that are "too big to fail" must be solved

He said that the U.S. government should be prepared to close down even the nation's largest firms if they pose a broader threat to the financial system. The financial overhaul signed into law earlier this summer gives regulators that power.

Bernanke's remarks were delivered on the second day of hearings by the Financial Crisis Inquiry Commission, which is charged with writing the official account of the causes of the financial crisis and the subsequent response by U.S. regulators. The government, invoking emergency powers, has issued more than $2 trillion in loans and other assistance since 2008 to help support the financial sector.

On Wednesday, former Lehman Brothers chief executive Richard S. Fuld said that U.S. regulators had acted on "flawed information" in making their decision to deny Lehman Brothers aid and force it into bankruptcy proceedings.

Thursday's event on Capitol Hill marked the final public hearing of the commission before the panel issues its report in December.

The commission's 10 members have been critical of Wall Street's role in the crisis since beginning their inquiry in January. They continued their attack on financial firms this week, but in questioning witnesses, they also began shifting their attention to the government's responsibilities.

Following Bernanke's remarks, members of the commission repeatedly pressed the central bank chairman on two of the most vexing questions about the financial crisis. They want to know why Lehman did not receive a government bailout, and what role the Fed played in the housing market bubble.

Philip Angelides, chairman of the commission and a former California state treasurer, asked Bernanke to explain the Federal Reserve's decision-making on whether Lehman was considered too big to fail.

Bernanke said he recognized that if Lehman failed, the consequences would be catastrophic but that the Fed could not extend a lifeline without a reasonable expectation that it could get repaid.


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