InfoBytes, Regulatory Restructuring Report, Issue 13, January 15, 2010
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Financial Crisis Inquiry Commission Holds First Public Hearings
On January 13 and 14, the Financial Crisis Inquiry Commission (FCIC) held its first public hearings examining the causes of the financial crisis and questioning some of the relevant actors in the crisis. Authorized by Congress as part of the Fraud Enforcement and Recovery Act of 2009, the FCIC is a bipartisan commission tasked with conducting a comprehensive examination of a number of substantive areas relevant to the financial crisis, including many of the topics that have been examined by Congress as part of its consideration of regulatory reform legislation. A report on the FCIC’s findings is due to Congress on December 15, 2010.
The first two days of hearings featured testimony from industry executives from some of the largest financial companies, and subsequently from federal and state regulators. On the first day, executives from Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Bank of America appeared before the FCIC, and faced pointed questioning not only on their views of the causes and lessons of the financial crisis, but their specific practices, financial losses, and changes made in reaction to the crisis. The remaining two panels included representatives from various financial analysts and policy shops, who generally criticized the actions and practices of the financial companies in creating the financial crisis. The witnesses included Michael Mayo from Calyon Securities, J. Kyle Bass from Hayman Advisors, and Peter Solomon from Peter J. Solomon Company, as well as from Mark Zandi from Moody’s Ecomomy.com, Dr. Kenneth Rosen from the Center for Real Estate and Urban Economics, Julia Gordon from the Center for Responsible Lending, and Rusty Cloutier from the Independent Community Bankers Association.
The second day of hearings focused on the actions taken by federal and state regulators throughout the financial crisis. Three federal regulators appeared as witnesses: Attorney General Eric Holder; Sheila Bair, Chairman of the Federal Deposit Insurance Corporation (FDIC); and Mary Schapiro, Chairman of the Securities and Exchange Commission (SEC). In written testimony, the Department of Justice (DOJ) described its efforts to fight financial fraud, especially mortgage fraud and Federal Housing Administration-related False Claims Act work. Mr. Holder also said that the DOJ is currently coordinating with the National Association of Attorneys General and the National District Attorneys Association to prosecute financial crimes. Chairman Bair offered a comprehensive history of the roots of the financial crisis and stressed the need for holistic reform that addresses risk throughout the financial system and not just in insured banks. Ms. Bair emphasized the need to strengthen market discipline, improve underwriting standards, keep investors and creditors on the hook for some amount of loss in the event of default and limit regulatory arbitrage opportunities. Ms. Bair also cautioned against reforms that simply increase regulation while pushing capital into a “shadow” banking system. Ms. Schapiro described the SEC’s enforcement efforts during the financial crisis, but also detailed various instances where regulators contributed to (or failed to mitigate) the financial crisis, including managing complex firms under the Consolidated Supervised Entity program, its regulation of broker-dealers, and oversight of and reliance on credit rating agencies. Going forward, Ms. Schapiro recommended reducing regulatory arbitrage, regulating over-the-counter derivatives, and improving the regulatory framework.
In the second panel, various state regulators, in addition to describing their views on the causes of the crisis, criticized certain actions of federal regulators that, in their view, exacerbated the problems. Lisa Madigan, Attorney General of Illinois, said state attorneys general have been bringing enforcement actions against predatory mortgage lenders long before Wall Street or the national bank regulators would acknowledge problems in the mortgage markets. She also praised states for enacting legislation to combat mortgage abuses, whereas the federal regulators have worked to shield lenders from these laws. Ms. Madigan also alleged that, in exchange for lenders registering for Office of the Comptroller of the Currency (OCC) supervision, the OCC offered lenders implicit authorization to expand subprime offerings. John Suthers, Attorney General of Colorado, highlighted the strain on regulatory resources after banks moved under federal regulators. He also observed that states were powerless to enforce laws against national banks and their lending affiliates and subsidiaries.
For copies of the witness testimony, please see http://www.fcic.gov/hearings/.