“We have learned that voluntary regulation does not work,” said Christopher Cox, chairman of the Securities and Exchange Commission, in testimony on Thursday at the House Oversight and Government Reform Committee. “It was a fateful mistake” that no one was given the authority “to regulate investment bank holding companies other than on a voluntary basis.”
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, because both sides of the trade will police the other.
But, Greenspan 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.”
See commentary on Greenspan’s disbelief.Self-interest was at the root of the crisis, said Rep. Henry Waxman, D-Calif., chairman of the oversight committee. “Corporate excess and greed enriched company executives at enormous cost to shareholders and our economy,” Waxman said.
Greenspan said now he favors strengthening the regulatory structure. “As much as I would prefer it otherwise, in this financial environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue,” Greenspan said.
Cox urged Congress to create a select committee made up of the ranking members of the several committees that have jurisdiction over financial institutions and markets to come up with “a new, overarching statutory scheme” to eliminate gaps in the regulations. Turf battles in Congress have led to the hodge-podge regulatory system, he said, speaking from experience as a 17-year veteran of the House.
The financial system exists to raise and direct the capital the economy needs to grow and “should not be an end in itself – a baroque cathedral of complexity dedicated to limitless compensation for itself in the short-term, paid for with long-term risk capable of threatening the entire nation’s sustenance and growth,” Cox said.
Rep. John Mica, R-Fla., tried to turn the hearing into an examination of the role that Fannie Mae and Freddie Mac played in creating the subprime mortgage market, but Waxman told him that the committee would examine Fannie and Freddie later.
Former Treasury Secretary John Snow said he warned early and often about the risks posed by Fannie and Freddie’s implicit backing by the government. “I regret I wasn’t more effective in trying to persuade Congress of the need for action to deal with the risks that I saw as the largest and — and most visible systemic risk at the time,” Snow said.
Republican leaders have said that risky lending by Fannie and Freddie, with the support of the Democrats in Congress, were the major causes of the subprime crisis.
“This is a political argument, not a factual one,” Waxman said. To argue that Fannie and Freddie caused the problem “makes as much sense as saying offshore drilling will solve our energy problems,” he said.
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