FDIC Chairman to Congress: Regulators failed in their responsibilities to protect investors from the 2008 financial crisis.
Urging stricter oversight, Federal Deposit Insurance Corp Chairman Sheila Bair told Congress’ Financial Crisis Inquiry Commission: “Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities,” she said. “Record profitability within the financial services industry also served to shield it from some forms of regulatory second-guessing,” Bair told the commission. Regulators were afraid “to take away the punch bowl.”
In contrast, top banking executives, who testified earlier, made no apology and provided no new explanations for the debacle that shook world markets. While acknowledging they took on too much risk in the subprime mortgage market, they defended their pay packages and the huge size of their businesses in the face of proposals to break them up.
Bair was an early critic of subprime mortgage market excesses that helped inflate a historic housing price bubble well into 2007. She made waves this week with an FDIC proposal calling for banks with risky compensation schemes to pay higher deposit insurance premiums.
In addition to Bair, the commission heard from Securities and Exchange Commission Chairman Mary Schapiro, who said a program set up by the SEC in 2004 to supervise investment banks was a failure. “We have to conclude that that program was not successful,” she said of the “Consolidated Supervised Entities program” that was supposed to oversee industry giants Goldman Sachs Morgan Stanley, Lehman Brothers, Merrill Lynch and Bear Stearns.
Why was it a failure? The program was based on voluntary regulation, was inadequately staffed, was beyond the SEC’s traditional capabilities, and unwisely let firms hold lower levels of capital, Shapiro said. It was ended in September 2008.
Schapiro said the SEC is still “seeking to determine whether investors were provided accurate, relevant and necessary information, or misled in some manner” in markets for subprime mortgage-backed securities and collateralized debt obligations in the real estate bubble.
All of this serves as clear evidence that reliance on self-regulation and the belief that financial institutions will do the right thing simply doesn’t work. We cannot rely on passive government and voluntary regulation to make Wall Street honest. Aggressive governmental regulation of the financial markets is essential. Private enforcement of legal rights through litigation by aggrieved investors and their attorneys remains equally important. Without these protections, we risk letting Wall Street become a Barbary Coast harboring securities pirates.