Hearing
Committee Holds Hearing on “The Financial Crisis and the Role of Federal Regulators”
October 23, 2008
Statement of Rep. Tom Davis
Ranking Republican Member
Committee on Oversight and Government Reform
"The Financial Crisis and the Role of Federal Regulators"
Thank you, Mr. Chairman. Of all the hearings we’ve had so far on the causes and effects of the economic crisis, today’s testimony and discussion give us the opportunity to talk for the first time about the systems and structures meant to maintain stability and root out abusive practices in financial markets. I hope this distinguished panel will help us cut to the core of the financial problems we’ve encountered. At that core lies Fannie Mae and Freddie Mac: government sponsored enterprises that dominated the mortgage finance marketplace and gave quasi-official sanction to the opaque, high-risk investments still radiating global toxic shockwaves from the epicenter of their sub-prime sinkhole.
Our earlier hearings have focused on important but, to be honest, somewhat tangential issues – a unique-case bailout, a bankruptcy, flawed credit ratings, executive compensation and the cost of corporate retreats. No one is minimizing or defending corporate malfeasance, and we share the outrage most Americans feel at the greed that blinded Wall Street to its civic duty to protect Main Street. But this Committee can take a broader view of the patchwork of federal financial regulators built by accretion after each cyclical crisis, and artificially subdivided behind Congress’ jurisdictional walls. No single agency, by action or omission, caused this crisis and no existing agency alone can repair the damage or prevent the next, some believe inevitable, boom and bust. It wasn’t deregulation that allowed this crisis. It was the mish-mash of regulations and regulators, each with too narrow a view of increasingly integrated national and global markets.
The words “regulation” and “deregulation” are not absolute goods and evils, nor are they meaningful policy prescriptions. The dynamic nature of our markets has made creating an enduring regulatory system a perennial and bipartisan challenge. After the 1933 commercial bank failures, the Glass-Steagall Act separated investment and commercial banking activities and established the Federal Deposit Insurance Corporation, restoring public confidence in the banking system. But by 1999, the marketplace had outgrown those post-Depression rules. The increasingly global market led a Republican Congress and a Democratic President to adopt the Gramm-Leach-Bliley Act, repealing Glass-Steagall and allowing commercial banks to diversify and underwrite and trade in securities.
That was not deregulation for deregulation’s sake. These activities were seen by many as actually reducing risk for banks through diversification, and allowed banks to compete in a rapidly globalizing marketplace. When Enron and other scandals erupted earlier this decade, Congress responded with Sarbanes-Oxley, putting new regulations on public companies. The bipartisan band-aid approach to oversight and regulation continued.
In the past few years, the market, as it tends to do, changed again. New securities were created and traded, and once again, analogue government was out of sync with a digital world. While regulators pushed paper, the “quants” pushed electrons, moving money around the globe at the speed of light. Free markets are constantly evolving and innovating. Regulators, by law, bureaucratic custom or bad habit, tend to remain static. Modernization of federal regulatory structures has to take account of the new, global dynamics to restore the transparency, confidence and critical checks and balances necessary to sustain us as a great economic power.
All of our witnesses today voiced some level of alarm about dangers to the total financial system posed by hyperactive sub-prime lending and its high-yield, high-risk progeny: collateralized debt obligations, derivatives and other exotic and unregulated mortgage-backed instruments. Some of those were intentionally designed to slip between existing regulatory definitions. Is a credit default swap an investment vehicle or an insurance agreement? Should they be considered futures contracts, regulated by the Commodities Futures Trading Commission, or securities under the purview of the SEC? Today’s testimony should help us begin to answer these questions and describe the shape and scope of a modern, flexible, digital regulatory structure for the future.
We need smart regulation that aligns the incentives of consumers, lenders, and borrowers to achieve stable and healthy markets based on transparency and good faith. Mr. Greenspan, Mr. Snow, Mr. Cox, I hope you will give us your thoughts on the core issues that led to this crisis, and more importantly, your ideas on a framework for the lean but supple regulatory approach that can detect, and hopefully prevent, the irrational exuberance, over-the-top risk taking, and consequent collapse that inflict such damage to our economic life.
In this political season, the search for villains is understandable and in some respects, healthy. While we’re at it, we might ask ourselves why this Committee didn’t convene these hearings last March, when market turbulence first turned toxic. There’s plenty of blame to go around as we try to unravel the wildly complex tangle of people, private companies, government agencies, and market forces that is choking modern capitalism. We’ve all played a part in this crisis, and we’ve all learned invaluable lessons.
But retribution needs to be tempered by wisdom. There’s an apocryphal tale about the great American industrialist Andrew Carnegie that I think explains why. It seems one of his lawyers made a mistake in drafting a contract and it cost Carnegie ten thousand dollars. When asked why he didn’t fire the attorney, Carnegie answered, “Because I just spent ten grand on his education!”
We’re learning some expensive lessons, and we should put them to good use.
