| 00:01:18 | >> | IN EACH CASE CORPORATE EXCESS AND GREED AND RICH COMPANY EXECUTIVES AT ENORMOUS COST TO SHAREHOLDERS AND OUR ECONOMY. IN EACH CASE THE ABUSES COULD HAVE BEEN PREVENTED IF FEDERAL REGULATORS HAD PAID MORE ATTENTION AND INTERVENED WITH RESPONSIBLE REGULATIONS. THIS BRINGS US TO TODAY AES'S HEARING. OUR FOCUS TODAY IS THE ACTIONS AND INACTION OF FEDERAL REGULATORS. FOR TOO LONG THE PREVAILING ATTITUDE IN WASHINGTON HAS BEEN THAT THE MARKET ALWAYS KNOWS BEST BEST. THE FEDERAL RESERVE HAD THE AUTHORITY TO STOP THE IRRESPONSIBLE LENDING PRACTICES THAT FUELED THE SUBPRIME MARKET BUT ITS LONGTIME CHAIRMAN ALAN GREENSPAN REJECTED PLEAS THAT HE INTERVENE. THE S.E.C. HAD AUTHORITY TO INSIST ON TIGHTER STANDARDS FOR CREDIT RATING AGENCIES, BUT IT DID NOTHING DESPITE URGINGS FROM CONGRESS. THE TREASURY DEPARTMENT COULD HAVE LED THE CHARGE FOR RESPONSIBLE OVERSIGHT OF FINANCIAL DERIVATIVES. INSTEAD, IT JOINED THE OPPOSITION. THE LIST OF REGULATORY MISTAKES AND MISJUDGMENTS IS LONG AND THE COST TO TAXPAYERS AND OUR ECONOMY IS STAGGERING. THE S.E.C. RELAXED LEVERAGE STANDARDS ON WALL STREET. THE OFFICES OF THRIFT SUPERVISION AND CONTROLLER OF THE CURRENCY PREEMPTED STATE EFFORTS TO PROTECT HOME BUYERS FROM PREDATORY LENDING. AND THE JUSTICE DEPARTMENT SLASHED ITS EFFORTS TO PROSECUTE WHITE COLLAR FRAUD. CONGRESS IS NOT EXEMPT FROM RESPONSIBILITY. WE PASSED LEGISLATION IN 2000 THAT EXEMPTED FINANCIAL DIFFICULT DERIVATIVES FROM REGULATION AND TOO LONG TOOK TOOK TO GO TO PASS LEGISLATION STRENGTHENING OVERSIGHT OF FANNIE MAE AND FREDDIE MAC. OVER AND OVER AGAIN IDEOLOGY TRUMPED GOVERNANCE. OUR REGULATE FORCEORS BECAME ENABLERS RATHER THAN ENFORCERS. THEIR TRUST IN THE WISDOM OF THE MARKET WAS INFINITE. THE MANTRA BECAME GOVERNMENT REGULATION IS WRONG, THE MARKET IS INFALLIBLE. OUR FOCUS TODAY IS FINANCIAL REGULATION REGULATION, BUT THIS DEREGULATORY PHILOSOPHY SPREADS ACROSS GOVERNMENT. IT EXPLAINS WHY LEAD GOT INTO OUR CHILDREN'S TOYS AND WHY EVACUEES FROM HURRICANE KATRINA WERE HOUSED IN TRAILERS FILLED WITH FORMALDEHYDE. TODAY WE WILL ASK OUR WITNESSES HARD QUESTIONS ABOUT THE REGULATORY DECISIONS THEY MADE AND FAILED TO MAKE. BUT I WANT THEM TO KNOW I VALUE THEIR PUBLIC SERVICE AND THEIR COOPERATION WITH THE COMMITTEE. OUR COMMITTEE HAS STAYED BUSY IN RECENT WEEKS AS WE HAVE HELD HEARINGS ON THE FINANCIAL CRISIS AND I PT TOWANT TO HAVE ALL THE MEMBERS TO KNOW HOW I APPRECIATE THEIR INVOLVEMENT IN THESE HEARINGS. IT IS NOT EASY TO TRAVEL TO WASHINGTON WHEN CONGRESS IS OUT OF SESSION, ESPECIALLY WITH AN ELECTION LOOMING. BUT THE ISSUES WE ARE EXAMINING ARE OF IMMENSE IMPORTANCE TO OUR NATION AND I'M PROUD OF THE WORK WE ARE DOING AND ESPECIALLY THE CONTRIBUTION OF MEMBERS OF THE COMMITTEE. MR. DAVIS, I WANT TO RECOGNIZE YOU. |
| 00:04:49 | Davis, Thomas | THANK YOU, MR. CHAIRMAN. YESTERDAY I AGREED WITH YOUR OPENING STATEMENT AND ASSOCIATED MYSELF WITH IT. TODAY I'M IN DISAGREEMENT WITH MUCH OF WHAT YOU HAVE TO SAY. OF ALL THE HEARINGS WE HAVE HAD SO FAR ON THE CAUSES AN EFFECTS OF THE ECONOMIC CRISIS I THINK TODAY'S TESTIMONY AND DISCUSSION GIVE US THE OPPORTUNITY TO TALK FOR THE FIRST TIME ABOUT THE SYSTEMS AN SYSTEMS AND STRUCTURES MEANT TO MAINTAIN STABILITY AN ROOT OUT ABUSIVE PRACTICES. I HOPE IT PANEL WILL HELP US CUT TO THE CORE OF THE FINANCIAL PROBLEMS WE HAVE 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. BY THE WAY, THESE WERE AREAS WHERE WE DID TRY TO REGULATE IN ON OUR SIDE AND WERE STOPPED ON THE OTHER SIDE OF THE AISLE FROM BRINGING IN REGULATION EARLIER. THE EARLIER HEARINGS FOCUSED ON IMPORTANT BUT TANGENTIAL ISSUES. EXECUTIVE COMPENSATION, FLAWED CREDIT RATE ARES AND COST OF CORPORATE RETREATS. NO ONE IS MINIMIZING IT AND WE SHARE THE OUTRAGE OF MOST AMERICANS AT THE GREED THAT BRIANED WALL STREET TO ITS CIVIC DUTY TO PROTECT MAIN STREET BUT WE CAN TAKE A BROADER LOOK AT PATCH WORK OF FEDERAL REGULATORS AFTER EACH CRISIS AND ARTIFICIALLY SUBDIVIDED BEHIND CONGRESS'S WALLS. NO SINGLE AGENCY BY ACTION OR OMISSION CAUSED THIS CHRISTRISIS AND NO AGENCY CAN PREPARE THE NEXT. IT WAS NOT DEREGULATION IT WAS THE MISHMASH OF REGULATION AND REGULATORS EACH WITH TOO NARROW A VIEW OF NATIONAL AND GLOBAL MARKETS. THE WORDS REGULATION AND DEREGULATION ARE NOT ABSOLUTE GOODS AND EVILS NOR ARE THEY MEANINGFUL POLICY PRESCRIPTIONS. THE STRUCTURE OF THE MARKETS HAS MADE CREATING A SYSTEM A PERENNIAL AND BIPARTISAN CHALLENGE. AFTER THE 1933 COMMERCIAL BANK FAILURES THE ACT SEPARATED INVESTMENT AND COMMERCIAL BANKING ACTIVITIES AND ESTABLISHED THE FDIC RESTORING PUBLIC CONFIDENCE IN THE BANKING SYSTEM. BY 1999 THE MARKETPLACE HAD OUTGROWN THE RULES AND LED THE CONGRESS AND DEMOCRATIC PRESIDENT TO ADOPT THE ACT REPEALING THE 1933 ACT ALLOWING BANKS TO DIVERSIFY. THAT WAS NOT DEREGULATION FOR DEREGULATION'S SAKE. THE ACTIVITIES WERE SEEP BY MANY AS REDUCING RISK FOR BANKS THROUGH DIVERSIFICATION AND ALLOWING THEM TO COMPETE IN A RAPIDLY GLOBALIZING MARKETPLACE. WHEN ENRON AND OTHER SCANDALS ERUPTED CONGRESS RESPONDED WITH SARBANES-OXLEY PUTTING NEW REGULATIONS ON PUBLIC COMPANIES. THE BIPARTISAN BAND-AID APPROACH CONTINUED. IN THE PAST FEW YEARS THE MARKET CHANGED AGAIN. NEW SECURITIES WERE CREATED AND TRADED AND ANALOG GOVERNMENT WAS OUT OF SYNC WITH THE DIGITAL WORLD. WHILE REGULATORS PUSHED PAPER THEY MOVED MONEY AROUND THE GLOBE AT THE SPEED OF LIGHT. FREE MARKETS ARE CONSTANTLY EVOLVING. REGULATORS BY LAW BUREACRATIC CUSTOM OR JUST BAD HABIT TEND TO REMAIN STAT TK. MODERNIZATION OF 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 VOICE SOME LEVEL OF ALARM ABOUT DANGERS TO THE TOTAL FINANCIAL SYSTEM POSED BY HYPERACTIVE SUBPRIME LENDING AND ITS HIGH YIELD PROJECT ANY. DERIVATIVES AND OTHER EXOTIC AND UNREGULATED MORTGAGE-BACKED INSTRUMENTS. SOME OF THEM WERE DESIGNED TO SLIP BETWEEN EXISTING REGULATORY DEFINITIONS. IS A CREDIT DEFAULT SWAP AN INVESTMENT VEHICLE OR INSURANCE AGREEMENT? SHOULD THEY BE CONSIDERED FUTURES CONTRACTS OR SECURITIES UNDER THE PURVIEW OF THE S.E.C.? TODAY EAST 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 CONSENTS OFINCENTIVES BASED ON TRANSPARENCY AND GOOD FAITH. MR. GREENSPAN, MR. SNOW, MR. COX, I HOPE YOU WILL US YOUR THOUGHTS ON THE CORE ISSUES THAT LED TO THE CRISIS AND MORE IMPORTANTLY YOUR IDEAS ON A FRAMEWORK FOR THE LEAN BUT SUPPLE REGULATORY APPROACH THAT CAN DETECT AND PROTECT THE IRRATIONAL EXUBERANCE OVER THE TOP RISK TAKING AND CONSEQUENT COLLAPSE THAT INFLICTS SUCH DAMAGE TO OUR ECONOMIC LIFE. IN THIS POLITICAL SEASON THE SEARCH FOR VILLAINS IS UNDERSTANDABLE AND IN SOME RESPECTS HEALTHIMENT WE MIGHT ASK OURSELVES WHY THE CONGRESS DIDN'T CONVENE THE HARGS LAST MARCH MARCH. THERE IS PLENTY OF BLAME TO GO AROUND ADD OF AS WE TRY TO UNWIND THE PEOPLE, PRIVATE COMPANIES, GOVERNMENT AGENCIES AND MARKET FORCES THAT IS CHOKING MODERN CAPITALISM. WE HAVE ALL PLAYED A PART IN THIS CRISIS AND HOPEFULLY WE HAVE ALL LEARNED INVALUABLE LESSONS. RETRIBUTION NEEDS TO BE TEMPERED BY WISDOM. THERE IS THE TAIL ABOUT ANDREW AR NEGLECT GUARANTY. ONE OF HIS LAWYERS MADE A MAKE DRAFTING A CONTRACT THAT COST HIM $100,000. WHEN HE WAS ASKED WHY HE DIDN'T FIRE THE ATTORNEY, HE SAID WELL, I JUST SPENT $100,000 TRAINING HIM. WE ARE LEARNING EXPENSIVE LESSONS AND HOPEFULLY WE WILL |
| 00:10:48 | Mica, John | PUT THEM TO GOOD USE. |
| 00:10:49 | >> | MR. CHAIRMAN. |
| 00:10:52 | Mica, John | I HAVE A UNANIMOUS CONSENT REQUEST. MR. CHAIRMAN, I WOULD LIKE TO SUBMIT FOR THE RECORD AND ALSO DISTRIBUTE TO THE MEMBERS A COPY OF A LETTER WHICH IS SIGNED BY MYSELF IN FACT ALL MEMBERS THAT ARE HERE TODAY ON OUR SIDE OF THE AISLE AND OTHER LEADERS IN CONGRESS REQUESTING THE ATTORNEY GENERAL OF THE UNITED STATES APPOINT A GENERAL COUNSEL, A SPECIAL PROSECUTOR, AS YOU WILL -- |
| 00:11:24 | >> | UNANIMOUS CONSENT IS TO PUT THE DOCUMENT IN THE RECORD IS THERE ANY OBJECTION -- IS THERE ANY OBJECTION? BECAUSE YOU ARE NOT RECOGNIZED FOR A SPEECH. |
| 00:11:34 | Mica, John | I JUST WANT TO EXPLAIN THAT |
| 00:11:39 | >> | THIS HEARING IS BEING HIJACKED -- I BELIEVE THERE IS OBJECTION AND THE GENTLEMAN IS NO LONGER RECOGNIZED. WE HAVE BEFORE US NOW -- |
| 00:11:46 | Mica, John | A DISCUSSION OF FANNIE MAE AND FREDDIE MAC. |
| 00:11:49 | >> | THE GENTLEMAN WILL HAVE TO CEASE THE COMMENT SO WE CAN GO |
| 00:11:53 | Mica, John | FORWARD WITH OUR -- THANK YOU FOR SUCCESSFULLY PUTTING THAT OFF. |
| 00:11:57 | >> | WE ARE PLEASED TO WELCOME FOR OUR HEARING TODAY THREE VERY DISTINGUISHED WITNESSES. ALAN GREENSPAN FORMER CHAIRMAN OF THE FEDERAL RESERVE BOARD. DR. GREENSPAN SERVED AS CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOR 18 YEARS UNDER PRESIDENT FORD. DR. GREENSPAN WAS THE CHAIRMAN OF THE PRESIDENT'S COUNCIL OF ECONOMIC ADVISORS. HE ALSO SERVED AS CHAIRMAN OF THE NATIONAL COMMISSION ON SOCIAL SECURITY REFORM AND THE ECONOMIC POLICY ADVISORY BOARD UNDER PRESIDENT REAGAN. HE CURRENTLY SERVES AS PRESIDENT OF GREENSPAN ASSOCIATES LLC. CHRISTOPHER COX CHAIRMAN OF THE SECURITIES SECURITIES AND EXCHANGE COMMISSION. HE IS CURRENTLY THE CHAIRMAN OF THE S.E.C. HE WAS SWORN IN ON AUGUST 3, 2005. MR. COX WAS A MEMBER OF CONGRESS FOR 17 YEARS SERVING IN THE MAJORITY LEADERSHIP OF THE U.S. HOUSE OF REPRESENTATIVES UNDER PRESIDENT REAGAN SERVING AS A SENIOR ASSOCIATE COUNSEL IN THE WHITE HOUSE. JOHN SNOW FORMER SECRETARY OF THE TREASURY. MR. SNOW IS THE FORMER SECRETARY OF THE TREASURY UNDER PRESIDENT BUSH. MR. SNOW SERVED FOR THREE YEARS IN THAT POSITION AND WORKED CLOSELY WITH THE WHITE HOUSE ON A BROAD PORTFOLIO OF ECONOMIC POLICY ISSUES. PRIOR TO BECOMING TREASURY SECRETARY MR. SNOW SERVED AS CHAIRMAN AND C.E.O. OF C.S.X. CORPORATION. MR. SNOW ALSO SERVED AS A DEPARTMENT OF TRANSPORTATION -- SERVED AT THE DEPARTMENT OF TRANSPORTATION DURING BOTH THE NIXON AND FORD ADMINISTRATIONS. WE ARE PLEASED TO WELCOME THE THREE OF YOU TODAY. YOUR TESTIMONY WILL BE IN THE RECORD IN ITS ENTIRETY. IT IS THE PRACTICE OF THIS COMMITTEE THAT ALL WITNESSES TESTIFY BEFORE US DO SO UNDER OATH TOSO I WOULD LIKE TO ASK YOU TO STAND AND RAISE YOUR RIGHT HANDS. DO YOU SOLEMNLY SWEAR THE TESTIMONY YOU WILL GIVE BEFORE THE COMMITTEE WILL BE THE TRUTH, THE WHOLE TRUTH AND NOTHING BUT THE TRUTH. THE RECORD WILL INDICATE THAT EACH OF THE WITNESSES ANSWERED IN THE AFFIRMATIVE. WE ARE HERE TODAY IN THIS HEARING TO HEAR FROM YOU AND TO BE ABLE TO QUESTION YOU. AND I PTWANT TO THANK EACH OF YOU FOR COMING BECAUSE YOU HAVE AN ENORMOUS AMOUNT TO CONTRIBUTE TO OUR UNDERSTANDING OF THE FINANCIAL MESS THAT WE ARE IN NOW AND TO GIVE US IDEAS OF WHERE WE GO FOR THE FUTURE. AS I SAID, YOUR PREPARED STATEMENTS WILL BE IN THE RECORD IN FULL. I'M GOING TO RECOGNIZE EACH OF YOU. WE ORDINARILY ASK THAT ORAL PRESENTATIONS BE NO MORE THAN FIVE MINUTES. WE WILL KEEP A CLOCK BUT WE WILL NOT ENFORCE THAT FIVE MINUTES RIGOROUSLY. BUT WE DO WANT THAT CLOCK TO BE THERE TO INFORM YOU THAT THE GREEN LIGHT IS ON FOR FOUR MINUTES, THE ORANGE LIGHT MEANS THERE'S ONE MINUTE, WHEN THE RED LIGHT IS ON THE FIVE MINUTES HAS EXPIRED. AND IF YOU ARE MINDFUL OF THAT FACT YOU MIGHT THEN CONTEMPLATE WINDING DOWN. BUT WE WILL NOT INTERRUPT ANY OF THE WITNESSES' PRESENTATIONS BECAUSE WHAT YOU HAVE TO SAY IS SO VERY IMPORTANT AND YOU ARE THE ONLY THREE WITNESSES WE HAVE FOR TODAY'S HEARING. DR. GREENSPAN, WE WANT TO START WITH YOU. THERE IS A BUTTON ON THE BASE@@@@ & @@ |
| 00:15:30 | Greenspan, Alan | |
| 00:15:32 | >> | |
| 00:15:37 | Greenspan, Alan | |
| 00:15:59 | Shays, Christopher | LITTLE CLOSER, MR. GREENSPAN? THANK YOU. |
| 00:16:03 | Greenspan, Alan | THANK YOU FOR THIS OPPORTUNITY TO TESTIFY BEFORE YOU THIS MORNING. WE ARE IN THE MIDST OF A ONCE IN A CENTURY CREDIT TSUNAMI. CENTRAL BANKS AND GOVERNMENTS ARE BEING REQUIRED TO TAKE UNPRECEDENTED MEASURES. YOU, IMPORTANTLY, REPRESENT THOSE ON WHOSE BEHALF ECONOMIC POLICY IS MADE. THOSE WHO ARE FEELING THE BRUNT OF THE CRISIS IN THEIR WORKPLACES AN HOMES. I HOPE TO ADDRESS THEIR CONCERNS TODAY. THIS MORNING I WOULD LIKE TO PROVIDE MY VIEWS ON THE SOURCES OF THE CRISIS, WHAT POLICIES CAN BEST ADDRESS THE FINANCIAL CRISIS GOING FORWARD, AND HOW I EXPECT THE ECONOMY TO PERFORM IN THE NEAR AND LONGER TERM. I ALSO WANT TO DISCUSS HOW MY THINKING HAS EVOLVED AND WHAT I HAVE LEARNED THIS PAST YEAR. IN 2005, I RAISED CONCERNS THAT THE PROTRACTED PERIOD OF UNDERPRICING OF RISK, IF HISTORY WAS ANY GUIDE, WOULD HAVE DIRE CONSEQUENCES. THE CRISIS, HOWEVER, HAS TURNED OUT TO BE MUCH BROADER THAN ANYTHING I COULD HAVE IMAGINED. IT HAS MORPHED FROM ONE GRIPPED BY LIQUID ITYITY RESTRAINTS TO ONE OF FEARS OF SOLVENCY ARE PARAMOUNT. GIVEN THE FINANCIAL DAMAGE TO DATE, I CANNOT SEE HOW WE CAN AVOID A SIGNIFICANT RISE IN LAYOFFS AND EMPLOYMENT. FEARFUL AMERICAN HOUSEHOLDS ARE ATTEMPTING TO ADJUST AS BEST THEY CAN TO A RAPID CONTRACTION IN CREDIT AVAILABILITY. THREATS TO RETIREMENT FUNDS AND INCREASE JOB INSECURITY. ALL OF THIS IMPLIES A MARKED RETRENCHMENT OF CONSUMER SPENDING AS HOUSEHOLDS TRY TO DIVERT AN INCREASING PART OF THEIR INCOMES TO REEPLENISH DEPLETED ASSETS NOT ONLY IN 401-K'S BUT IN THE VALUE OF THEIR HOMES. A NECESSARY CONDITION FOR THIS CRISIS TO END IS THE STABILIZATION OF HOME PRICES IN THE UNITED STATES. THEY WILL STABILIZE AND CLARIFY THE LEVEL OF EQUITY IN U.S. HOMES HOMES, THE ULTIMATE COLLATERAL SUPPORT FOR THE VALUE OF MUCH OF THE WORLD'S MORTGAGE-BACKED SECURITIES. AT A MINIMUM, STABILIZATION OF HOME PRICES IS STILL MANY MONTHS IN THE FUTURE. WHEN IT ARRIVES THE MARKET FREEZE SHOULD BEGIN TO MEASURABLY THAW AND FRIGHTENED INVESTORS WILL TAKE STEPS TOWARD RE REENGAGEMENT IN RISK. BROKEN MARKET TIES AMONG BANKS, PENSION AND HEDGE FUNDS AND ALL TYPES OF NONFINANCIAL BUSINESSES WILL BECOME RE ESTABLISHEDESTABLISHED AND OUR COMPLEX GLOBAL ECONOMY WILL MOVE FORWARD. BETWEEN THEN AND NOW, HOWEVER, TO AVOID SEVERE RETRENCHMENT BANKS AND OTHER FINANCIAL INTERMEDIARIES WILL NEED THE SUPPORT THAT ONLY THE SUBSTITUTION OF SOVEREIGN CREDIT FOR PRIVATE CREDIT CAN BESTOW. THE $700 BILLION TROUBLED ASSETS RELIEF PROGRAM IS ADEQUATE TO SERVE THAT NEED. INDEED, THE IMPACT IS ALREADY BEING FELT. YIELD SPREADS ARE NARROWING. AS I WROTE LAST MARCH THOSE OF US WHO HAVE LOOKED TO THE SELF-INTEREST OF LENDING INSTITUTIONS TO PROTECT SHAREHOLDER EQUITY, MYSELF ESPECIALLY, ARE IN A STATE OF SHOCKED DISBELIEF. SUCH COUNTERPARTY SURVEILLANCE IS A CENTRAL PILLAR OF OUR FINANCIAL MARKET'S STATE OF BALANCE. IF IT FAILS AS OCCURRED THIS YEAR, MARKET STABILITY IS UNDERMINED. WHAT WENT WRONG WITH GLOBAL ECONOMIC POLICIES THAT HAD WORKED SO EFFECTIVELY FOR NEARLY FOUR DECADES? THE BREAKDOWN HAS BEEN MOST APPARENT IN THE SECURITIZATION OF HOME MORTGAGES. THE EVIDENCE STRONGLY SUGGESTS THAT WITHOUT THE EXCESS DEMAND FROM SECURITIZERS SUBPRIME MORTGAGE ORIGINATIONS UNDENIABLY THE ORIGINAL SOURCE OF THE CRISIS WOULD HAVE BEEN FAR SMALLER AND DEFAULTS FAR FEWER. BUT SUBPRIME MORTGAGES POOLED AND SOLD AS SECURITIES BECAME SUBJECT TO EXPLOSIVE DEMAND FROM INVESTORS AROUND THE WORLD. THESE MORTGAGE-BACKED SECURITIES BEING SUBPRIME WERE ORIGINALLY OFFERED AT WHAT APPEARED TO BE EXCEPTIONALLY HIGH RISK ADJUSTED MARKET INTEREST RATES. BUT WITH THE U.S. HOME PRICES STILL RISING, DELINQUENCY AND FORECLOSURE RATES WERE DECEPTIVELY MODEST. LOSSES WERE MINIMAL. TO THE MOST SOPHISTICATED INVESTORS IN THE WORLD THEY WERE WRONGLY VIEWED AS A STEAL. THE CONSEQUENT SURGE IN GLOBAL DEMAND FOR U.S. SUBPRIME SECURITIES BY BANKS, HEDGE AND PENSION FUNDS SUPPORTED BY UNREALISTICALLY POSITIVE RATING DESIGNATIONS BY CREDIT AGENCIES WAS IN MY JUDGMENT THE CORE OF THE PROBLEM. DEMAND BECAME SO AGGRESSIVE THAT TOO MANY SECURITIZERS AND LENDERS BELIEVED THEY WERE ABLE TO CREATE AND SELL MORTGAGE-BACKED SECURITIES SO QUICKLY THAT THEY NEVER PUT THEIR SHAREHOLDERS' CAPITAL AT RISK. HENCE, DID NOT HAVE THE INCENTIVE TO EVALUATE THE CREDIT QUALITY OF WHAT THEY WERE SELLING. PRESSURES ON LENDERS TO SUPPLY MORE PAPER COLLAPSED SUBPRIME UNDERWRITING STANDARDS FROM 2005 FORWARD. UNCRITICAL ACCEPTANCE OF CREDIT RATINGS BY PURCHASERS OF THESE TOXIC ASSETS HAS LED TO HUGE LOSSES. TFRLS THE FAILURE TO PROPERLY PRICE SUCH RISKY ASSETS THAT PRECIPITATED THE CRISIS. IN RECENT DECADES A VASS RISK MANAGEMENT AND PRICING SYSTEM HAS EVOLVED COMBINING THE BEST INSIGHTS OF MATHEMATICIANS BE A FINANCE EXPERTS SUPPORTED BY MAJOR ADVANCES IN COMPUTER AND COMMUNICATIONS TECHNOLOGY. A NOBEL PRIZE WAS AWARDED FOR THE DISCOVERY OF THE PRICING MODEL THAT UNDERPINS MUCH OF THE ADVANCE IN DERIVATIVES MARKETS. THIS MODERN RISK MANAGEMENT PARADIGM HELD SWAY FOR DECADES. THE WHOLE INTELLECTUAL EDIT PHYSICAL HOWEVER COLLAPSED IN THE SUMMER OF LAST YEAR BECAUSE THE DATA INPUTTED INTO THE RISK MANAGEMENT MODELS GENERALLY COVERED ONLY THE PAST TWO DECADES, A PERIOD OF EUPHORIA. HAD THE MODELS BEEN FITTED MORE APPROPRIATELY TO HISTORIC PERIODS OF STRESS CAPITAL REQUIREMENTS WOULD HAVE BEEN MUCH HIGHER AND THE FINANCIAL WORLD WOULD BE IN FAR BETTER SHAPE TODAY IN MY JUDGMENT. WHEN IN AUGUST OF 2007 MARKETS EVENTUALLY CRASHED THE CREDIT AGENCIES RATINGS A BLANKET OF UNCERTAINTY DESCENDED ON THE INVESTMENT COMMUNITY. DOUBT WAS INDISCRIMINATELY CAST ON THE PRICING OF SECURITIES THAT HAD ANY TAINT OF SUBPRIME BACKING. 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 ISSUED. THIS WILL ADJUST SET IN PART MARKET DEFICIENCIES STEMMING FROM THE FAILURES OF COUNTER COUNTERPARTY SURVEILLANCE. THERE ARE ADDITIONAL REGULATORY CHANGES AT BREAKDOWN OF THE CENTRAL PILLAR OF MARKETS REQUIRES IN ORDER TO RETURN TO STABILITY STABILITY, PARTICULARLY IN THE AREAS OF FRAUD, SETTLEMENT AND SECURITIZATION. IT IS IMPORTANT TO REMEMBER, HOWEVER, THAT WHATEVER REGULATORY CHANGES ARE MADE, THEY WILL PALE IN COMPARISON TO THE CHANGE ALREADY EVIDENT IN TODAY'S MARKETS. THOSE MARKETS WERE AN INDEFINITE FUTURE WILL BE FAR MORE RESTRAINED THAN WHAT ANY CURRENTLY CONTEMPLATED NEW REGULATORY REGIME. THE FINANCIAL LANDSCAPE THAT WILL GREET THE END OF THE CRISIS WILL BE FAR DIFFERENT FROM THE ONE THAT ENTERED IT LITTLE MORE THAN A YEAR AGO. INVESTORS WILL BE EXCEPTIONALLY CAUTIOUS. STRUCTURED INVESTMENT VEHICLES AND A MYRIAD OF OTHER EXOTIC INSTRUMENTSES ARE NOT NOW AND ARE UNLIKELY TO EVER FIND WILLING BUYERS. REGRETTABLY, ALSO ON THAT LIST ARE SUBPRIME MORTGAGES. THE MARKET FOR WHICH HAS VIRTUALLY DISAPPEARED. HOME AND MALL BUSINESS OWNERSHIP ARE VITAL COMMITMENTS TO A COMMUNITY -- SMALL BUSINESS OWNERSHIP ARE VITAL COMMITMENTS TO A COMMUNITY AND WE SHOULD SEEK WAYS TO REESTABLISH A MORE SUSTAINABLE SUBPRIME MORTGAGE MARKET. THIS CRISIS WILL PASS AND AMERICA WILL REEMERGE WITH A FAR SOUNDER FINANCIAL SYSTEM. THANK YOU, MR. CHAIRMAN. |
| 00:25:27 | >> | THANK YOU VERY MUCH, DR. GREENSPAN. MR. COX? |
| 00:25:33 | COX, C. "C." CHRISTOPHER | THANK YOU, MR. CHAIRMAN, RANKING MEMBER DAVIS AND MEMBERS OF THE COMMITTEE FOR INVITING ME TO DISCUSS THE LESSONS FROM THE CREDIT CRISIS AND LESSONS FOR THE FUTURE OF FEDERAL REGULATION. I'M PLEASED TO JOIN WITH FORMER CHAIRMAN GREENSPAN AND WITH FORMER SECRETARY SNOW, WHO TOGETHER HAVE GIVEN MORE THAN 30 YEARS OF SERVICE TO THEIR COUNTRY. THE S.E.C.'S PLACE IN THE REGULATORY STRUCTURE IS DIFFERENT THAN THE FEDERAL RESERVE AND TREASURY. THE S.E.C. SETS THE RULES FOR DISCLOSURE OF MATERIAL INFORMATION BY PUBLIC COMPANIES. WE SET THE RULES FOR SECURITIES EXCHANGES AND BROKER/DEALERS WHO TRADE ON THE EXCHANGES AND ABOVE ALL THE S.E.C. IS A LAW ENFORCEMENT AGENCY. THE LESSONS OF THE CREDIT CRISIS ALL POINT TO THE FOR A STRONG S.E.C. S.E.C., WHICH IS UNIQUE IN ITS ARM'S LENGTH RELATIONSHIP TO WALL STREET. THE GENESIS OF THE CURRENT CRISIS AS THIS COMMITTEE HAS HIGHLIGHTED IN RECENT HEARINGS WAS THE DETERIORATION OF MORTGAGE ORIGINATION STANDARDS. AS THE S.E.C.'S FORMER CHIEF ACCOUNTANT TESTIFIED, IF HONEST LENDING PRACTICES HAD BEEN FOLLOWED MUCH OF THIS CRISIS WOULD NOT HAVE OCCURRED. THE PACKAGING OF RISKY MORTGAGES INTO COMPLEX STRUCTURED SECURITIES WITH TRIPLE A RATINGS SPREAD THE RISK IN THE SECURITIES MARKETS AND WHAT SIGNIFICANTLY AMPLIFIED THIS CRISIS AROUND THE GLOBE WAS THE PARALLEL MARKET IN CREDIT DEFAULT SWAPS WHICH IS COMPLETELY UNREGULATED. CREDIT DEFAULT SWAPS MULTIPLIED THE RISK FROM THE FAILURE OF BAD MORTGAGES BY ORDERS OF MAGNITUDE AND ENSURED THAT WHEN HOUSING PRICES COLLAPSED THE EFFECTS CASCADED THROUGHOUT THE FINANCIAL SYSTEM. LIKE EACH OF YOU I HAVE ASKED MYSELF WHAT I WOULD DO DIFFERENTLY WITH THE BENEFIT OF HINDSIGHT. THERE ARE SEVERAL THINGS. FIRST, I THINK THAT EVERY REGULATOR WISHES HE OR SHE HAD BEEN ABLE TO PREDICT THE UNPRECEDENTED MELTDOWN OF THE ENTIRE U.S. MORTGAGE MARKET WHICH OF THE FUNDAMENTAL CAUSE OF THE CRISIS. SECOND ALTHOUGH HE WAS NOT AT THE S.E.C. IN 2004 WHEN THE VOLUNTARY CONSOLIDATED SUPERVISED ENTITIES PROGRAM WAS UNANIMOUSLY ADOPTED BY THE COMMISSION KNOWING WHAT I KNOW NOW I WOULD HAVE WANTED TO QUESTION EVERYONE OF THE PROGRAMS' ASSUMPTIONS FROM THE START. IN PARTICULAR I WOULD WANT TO QUESTION ITS RELIANCE ON THE WIDELY USED BASTL STANDARDS FOR COMMERCIAL BANKS AND FEDERAL RESERVE'S 10% WELL CAPITAL IESZED STANDARD FOR BANK HOLDING COMPANIES. THOSE STANDARD PROVED INSUFFICIENT FOR COMMERCIAL BANKS AS WELL. THIRD, KNOWING WHAT I KNOW NOW I WOULD HAVE URGED CONGRESS TO PASS LEGISLATION TO REPEAL THE CREDIT DEFAULT SWAP LOOPHOLE IN THE COMMODITY FUTURES MODERNIZATION ACT. LAST MONTH I FORMALLY ASKED CONGRESS TO FILL THIS REGULATORY GAP AND I URGE THIS COMMITTEE TO JOIN IN THIS EFFORT WHICH CANNOT WAIT UNTIL NEXT YEAR. FOURTH, I WOULD HAVE BEEN EVEN MORE AGGRESSIVE IN URGING LEGISLATION TO REQUIRE STRONGER DISCLOSURES TO INVESTORS IN MUNICIPAL SECURITIES. INDIVIDUAL INVESTORS ACCOUNTOR NEARLY TWO-THIRDS OF THIS MARKET AND YET NEITHER THE S.E.C. NOR ANY FEDERAL REGULATOR HAS THE AUTHORITY TO INSIST ON FULL DISCLOSURE. MOST IMPORTANTLY, WE HAVE LEARNED THAT VOLUNTARY REGULATION OF FINANCIAL CONGLOMERATES DOESN'T WORK. NEITHER THE S.E.C. NOR ANY REGULATOR HAS THE STATUTORY AUTHORITY TO REGULATE INVESTMENT BANK HOLDING COMPANIES EXCEPT ON A VOLUNTARY BASIS. THAT MUST BE FIXED. THE CURRENT CRISIS HAS ALSO HIGHLIGHTED WHAT DOES WORK. IN PARTICULAR THE S.E.C.'S REGULATION OF BROKER/DEALERS AND ITS PROTECTION OF THEIR CUSTOMERS. SO, IN STRENGTHENING THE ROLE OF THE S.E.C. CONGRESS SHOULD BUILD ON THAT 74-YEAR TRADITION AND THE AGENCY'S STRONG LAW ENFORCEMENT AND PUBLIC COMPANY DISCLOSURE REGIME THAT PROVIDES TRANSPARENCY FOR INVESTORS. FINALLY, WE HAVE LEARNED THAT FOR REGULATORS TO MAKE ACCURATE PREDICTIONS REQUIRES A COMPREHENSIVE PICTURE OF CAPITAL FLOWS, LIQUIDITY AND RISK THROUGHOUT THE SYSTEM. BUT COORDINATION AMONG REGULATORS IS ENORMOUSLY DIFFICULT IN THE CURRENT SYSTEM. HERE THE ORGANIZATION OF CONGRESS ITSELF IS PART OF THE PROBLEM. LEGISLATIVE JURISDICTION IS SPLIT SO BANKING, INSURANCE AND SECURITIES FALL WITHIN THE PROVINCE OF THE HOUSE FINANCIAL SERVICES COMMITTEE AND THE SENATE BANKING COMMITTEE WHILE FUTURES FALL UNDER THE AGRICULTURE COMMITTEES IN BOTH THE HOUSE AN SENATE. THIS LONG RUNNING TURF BATTLE ONE REASON CREDIT DEFAULT SWAPS ARE NOT REGULATED. THE CONGRESS HAS OVERCOME THESE JURISDICTIONAL DIVIDES BEFORE IN DIFFERENT CIRCUMSTANCES WITH THE APPOINTMENT OF A SELECT COMMITTEE. AS SOON AS POSSIBLE CONGRESS SHOULD APPOINT A SELECT # @ RATING AGENCY REFORM ACT TO STRENGTHEN THE RATINGS PROCESS. WE HAVE WORKED WITH THE FINANCIAL ACCOUNTING STANDARDS BOARD ON OFF BALANCE SHEET LIABILITIES, FAIR VALUE STANDARD AND BANK SUPPORT FOR MONEY MARKET FUNDS. WE HAVE REQUIRED DISCLOSURES OF SHORT POSITIONS TO THE S.E.C. AND STRENGTHENED INVESTOR PROTECTIONS AGAINST NAKED SHORT SELLING. WE ARE WORKING TO ESTABLISH ONE OR MORE CENTRAL COUNTERPARTIES FOR CREDIT DEFAULT SWAPS. OUR ENDIVORCEMENT -- OUR ENFORCEMENT DIVISION HAS INVESTIGATIONSENED WAY AND WE HAVE MOUNTED A NATIONWIDE INVESTIGATION OF POTENTIAL FRAUD AND SECURITIES OF SOME OF THE LARGEST FINANCIAL INSTITUTIONS. THIS PAST YEAR THE S.E.C. BROUGHT THE LARGEST NUMBER OF INSIDER TRADING CASES IN HISTORY AND THE SECOND HIGHEST NUMBER OF OF CASES OVERALL. OUR RECENTLY ANNOUNCED PRELIMINARY SETTLEMENTS WITH SOME OF THE LARGEST FINANCIAL INSTITUTIONS ON WALL STREET WILL RETURN $50 BILLION TO INVESTORS IN AUCTION RATE SECURITIES BY FAR THE LARGEST SETTLEMENTS IN THE S.E.C.'S HISTORY. MR. CHAIRMAN, THE ROLE OF THE S.E.C. HAS NEVER BEEN MORE IMPORTANT. I'M HUMBLED TO WORK SIDE BY SIDE WITH THE DEDICATED MEN AND WOMEN WHO FIGHT EACH DAY FOR THE FOR EXAMPLE OF AMERICA'S INVESTORS. THANK YOU FOR THE OPPORTUNITY TO DISCUSS THE ROLE OF THE S.E.C. AND LESSONS FROM THE CURRENT CRISIS. I WILL BE HAPPY TO TAKE YOUR |
| 00:32:18 | >> | QUESTIONS. THANK YOU VERY MUCH. WE WILL HAVE QUESTIONS FOR YOU, ALL THREE OF YOU, AFTER ALL OF YOU HAVE TESTIFIED. MR. SNOW. IS YOUR MICROPHONE ON? |
| 00:32:31 | Snow, John W. | THANK YOU VERY MUCH, MRFRM, RANKING MEMBER DAVIS, MEMBERS OF THE COMMITTEE. IT IS AN HONOR AND PRIVILEGE TO BE WITH YOU TODAY TO TALK ABOUT THIS ISSUE OF EXTRAORDINARY IMPORTANCE TO THE AMERICAN PEOPLE PEOPLE. MILLIONS OF AMERICANS NOW REALIZE THAT THE HEALTH OF THE FINANCIAL SYSTEM ISN'T SOME ABSTRACTION. IT IS THE STUFF OF REAL DAY-TO-DAY LIFE FOR THEM. WE MEET IN AN EXTRAORDINARY TIME TIME. NOWHERE THAT I CAN RECALL DURING MY ADULT LIFETIME HAS THE FINANCIAL SYSTEM BEEN SO DEEPLY TROUBLED, SO FRACTURED, FROZEN. THE CONSEQUENCES OF THE FROZEN FINANCIAL SYSTEM OF COURSE ARE SPILLING OVER TO THE REAL ECONOMY. WE NOW SEEM TO BE ON A CLEAR PATH TO MUCH SLOWER GROWTH RATES, PROBABLY GOING NEGATIVE IF THEY ARE NOT NEGATIVE ALREADY ALREADY, WITH SIGNIFICANT CONSEQUENCES FOR THE LIVES OF OUR CITIZENS, WITH MANY JOBS PUT IN JEOPARDY AND THE PROSPERITY OF THE AMERICAN PEOPLE PUT IN JEOPARDY. BUT THIS IS A GLOBAL PROBLEM, NOT JUST A U.S. PROBLEM AS THE LEADERS OF THE WORLD NOW RECOGNIZE. I SERVED AND WAS HONORED TO SERVE AT THE TREASURY DEPARTMENT EARLY 2003 UNTIL THE MIDDLE FOF 2006. TREASURY DOESN'T HAVE DIRECT REGULATORY AUTHORITY AS YOU KNOW. BUT IT DOES HAVE BROAD POLICY RESPONSIBILITIES. ONE OF THE KEY RESPONSIBILITIES OF TREASURY IS TO TRY TO IDENTIFY RISKS. THE RISKS THAT THREATEN THE HEALTH AND PROSPERITY OF THE AMERICAN PEOPLE, THE RISKS, THE SYSTEMIC RISKS THAT COULD PRODUCE FAR-REACHING CONTAGION IN THE FINANCIAL SYSTEM AND SPILL OVER INTO THE GLOBAL ECONOMY AND U.S. ECONOMY. I TRIED WHEN WAS TREASURY SECRETARY TO KEEP MY EYE ON WHAT THOSE RISKS WERE, TO FOCUS ON THEM. WHERE WE SAW CLEAR VISIBLE RISKS RISKS, SOME OF YOU SAW THEM AS WELL, THINKING HERE OF CONGRESSMAN SHAYS WHERE WE SAW CLEAR VISIBLE RISKS IN THE CASE OF THE G.S.E.'S WE ACTED. I TESTIFIED BEFORE THE CONGRESS IN 2003. I TESTIFIED AGAIN IN 2005. I GAVE COUNTLESS SPEECHES, HAD COUNTLESS MEETINGS WITH MEMBERS OF CONGRESS POINTING OUT THAT THE G.S.E.'S REPRESENTED A HUGE SYSTEMIC RISK, A RISK THAT UNFORTUNATELY GREW DURING THAT PERIOD AS THEY CONTINUED TO BROADEN OUT IN EXTRAORDINARY BLOWOUT GROWTH OF THEIR OWN INVESTMENT PORTFOLIOS. I CALLED FOR A STRONG REGULATOR. WE CALLED FOR DISCLOSURE. WE CALLED FOR APPLICATION OF THE SECURITIES LAWS. WE CALLED FOR A REGULATOR WHO WOULD HAVE AUTHORITY OVER CAPITAL STANDARDS. WE CALLED FOR A REGULATOR WHO COULD LIMIT THE GROWTH OF THEIR PORTFOLIOS. WE CALLED FOR A REGULATOR WHO COULD LIMIT THE LINES OF BUSINESS THEY COULD GET INTO. AND MOST IMPORTANTLY TO DEAL WITH THE IMPLIED GUARANTEE, WHICH WAS AT THE HEART OF THE PROBLEM, IN FACT THEIR PAPER TRADED LIKE U.S. GOVERNMENT PAPER. WE CALLED FOR A REGULATOR WITH THE ABILITY TO HAVE A RESTRUCTURING THROUGH LIQUIDATION AND BANKRUPTCY OF THOSE ENTITIES SENDING A CLEAR MESSAGE TO THE MARKETS THAT THEY WEREN'T, QUOTE, TOO BIG TO FAIL. I THINK IF WE HAD ACTED THEN, MR. CHAIRMAN, THERE MAY NOT HAVE BEEN THE NEED FOR THIS HEARING TODAY. 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 MOST VISIBLE SYSTEMIC RISK AT THE TIME. BEYOND FANNIE MAE AND FREDDIE MAC WE WERE ALSO CONTINUOUSLY ON THE LOOKOUT FOR PROBLEMS THAT COULD EMERGE. AS I THOUGHT ABOUT THE PROBLEMS THAT COULD EMERGE IN 2003 AND 2004. IT BECAME CLEAR TO ME A WE NEEDED A NEW REGULATORY SYSTEM. WE NEEDED TO CHANGE IT. WE HAVE A FRACTURED REGULATORY SYSTEM. ONE IN WHICH NO SINGLE REGULATOR HAS A CLEAR VUIEW A 360-DEGREE VIEW OF THE RISKS INHERENT IN THE SYSTEM. WE NEED TO CHANGE THAT. WE NEED TO MOVE TO A 360-DEGREE VIEW REGULATORY SYSTEM. DURING MY TIME AT TREASURY I COMMISSION ADD BLUEPRINT TO PUT THAT IN PLACE. I'M PLEASED TO SEE A VERSION OF THAT BLUEPRINT IS BEFORE YOU AND I HOPE I WILL ACT ON IT. SO, BASICALLY, MR. CHAIRMAN, WHERE WE SAW AT TREASURY IN OUR POLICY ROLE VISIBLE RISKS AS WITH THE G.S.E.'S WE ACTED. WE CALLED FOR THE STRONG REGULATOR. WHERE THE RISKS WERE INCHOATE, WHERE THEY WERE NOT YET CLEARLY VISIBLE, WE RECOGNIZED THAT A MUCH STRONGER, MORE EFFECTIVE REGULATORY SYSTEM SHOULD BE PUT IN PLACE. |
| 00:38:23 | >> | I LOOK EACH HAVING THE RIGHT TO RESERVE TIME FOR LATER USE. I WILL START THE QUESTIONING. DR. GREENSPAN, I WANT TO START WITH YOU. YOU WERE THE LODGEST SERVING CHAIRMAN -- LONGEST SERVING CHAIRMAN OF THE FEDERAL RESERVE IN HISTORY AND DURING THIS PERIOD OF TIME WERE PERHAPS THE LEADING PROPONENT OF DEREGULATION OF OUR FINANCIAL MARKET S MARKETS. CERTAINLY YOU WERE THE MOST INFLUENTIAL VOICE FOR DE DEREGULATION. YOU HAVE BEEN A STAUNCH ADVOCATE FOR LETTING MARKETS REGULATE THEMSELVES. LET ME GIVE YOU A FEW OF YOUR PAST STATEMENTS. IN 1994, YOU TESTIFIED AT A CONGRESSIONAL HEARING ON REGULATION OF FINANCIAL DIFFICULT ACTIVIST. YOU SAID THERE'S NOTHING INVOLVED IN FEDERAL REGULATION WHICH MAKES IT SUPERIOR TO MARKET REGULATION. IT 1997 YOU SAID THERE APPEARS TO BE NO NEED FOR GOVERNMENT REGULATION OF OFF EXCHANGED DERIVATIVE TRANSACTIONS IN 2002 WHEN THE COLLAPSE OF ENRON LED TO RENEWED CONGRESSIONAL EFFORTS TO REGULATE DERIVATIVES, YOU WROTE THE SENATE WE DO NOT BELIEVE A PUBLIC POLICY CASE EXISTS TO JUSTIFY THIS GOVERNMENT INTERVENTION. EARLIER THIS YEAR YOU WROTE IN THE FINANCIAL TIMES BANK LOAN OFFICERS IN MY EXPERIENCE KNOW FAR MORE ABOUT THE RISKS AND WORKINGS OF THEIR COUNTERPARTIES THAN DO BANK REGULATORS. MY QUESTION FOR YOU IS SIMPLE. WERE YOU WRONG? |
| 00:40:19 | Greenspan, Alan | PARTIALLY. BUT LET'S SEPARATE THIS PROBLEM INTO ITS COMPONENT PARTS. I TOOK A VERY STRONG POSITION ON THE ISSUE OF DERIVATIVES AND THE EFFICACY OF WHAT THEY WERE DOING FOR THE ECONOMY AS A WHOLE, WHICH IN EFFECT IS ESSENTIALLY TO TRANSFER RISK FROM THOSE WHO HAVE VERYGREAT DIFFICULTY ABSORBING IT TO THOSE THAT HAVE THE CAPITAL TO ABSORB LOSSES IF AND WHEN THEY OCCUR. THESE DERIVATIVES ARE WORKING WELL. LET ME PUT IT TO YOU VERY |
| 00:40:56 | >> | SPECIFICALLY. SO YOU DON'T THINK YOU WERE WRONG IN NOT WANTING TO REGULATE THE DERIVATIVES? |
| 00:41:01 | Greenspan, Alan | IT DEPENDS WHICH DERIVATIVES WE ARE TALKING ABOUT. CREDIT DEFAULT SWAPS I THINK HAVE SERIOUS PROBLEMS ASSOCIATED WITH THEM. BUT THE BULK OF DIFFICULT ACTIVIST AND INDEED -- DERIVATIVES AND THE ONLY DERIVATIVES THAT EXISTED WHEN THE MAJOR DISCUSSION STARTED IN 1999 WERE THOSE OF, FOR INTEREST RATE RISK AND FOREIGN EXCHANGE |
| 00:41:27 | >> | RISK. LET ME INTERRUPT YOU BECAUSE WE HAVE A LIMITED AMOUNT OF TIME. YOU SAID IN YOUR STATEMENT THAT YOU DELIVERED THE WHOLE INTELLECTUAL EDIT PHYSICAL OF MODERN RISK MANAGEMENT COLLAPSED. YOU ALSO SAID THOSE OF US WHO HAVE LOOKED AT THE SELF-INTEREST OF LENDING INSTITUTIONS TO PROTECT SHAREHOLDER EQUITY, MYSELF ESPECIALLY ARE IN A STATE OF SHOCK AND DISBELIEF. THAT SOUNDS TO ME LIKE YOU ARE SAYING THAT THOSE WHO TRUSTED THE MARKET TO REGULATE ITSELF, YOURSELF INCLUDED, MADE A SERIOUS MISTAKE. |
| 00:41:58 | Greenspan, Alan | WELL, I THINK THAT IS TRUE OF SOME PRODUCTS BUT NOT ALL. I THINK THAT IS THE REASON WHY IT IS IMPORTANT TO DISTINGUISH THE SIZE OF THIS PROBLEM AND ITS NATURE. AND WHAT I WANTED TO POINT OUT WAS THAT EXCLUDING CREDIT DEFAULT SWAPS, DERIVATIVES MARKETS ARE WORKING WELL. |
| 00:42:22 | >> | WHERE DO YOU THINK YOU MADE A MISTAKE THEN? |
| 00:42:25 | Greenspan, Alan | I MADE A MAKE IN PRESUMING THAT THE SELF-INTEREST OF ORGANIZATIONS, SPECIFICALLY BANKS AND OTHERS, WAS SUCH AS THEY WERE BEST CAPABLE OF PROTECTING THEIR OWN SHAREHOLDER AND THE EQUITY THE FIRMS. AND IT HAS BEEN MY EXPERIENCE, HAVING WORKED BOTH AS A REGULATOR FOR 18 YEARS AND SIMILAR QUANTITIES IN THE PRIVATE SECTOR, ESPECIALLY 10 YEARS AT A MAJOR INTERNATIONAL BANK, THAT THE LOAN OFFICERS OF THOSE INSTITUTIONS KNEW FAR MORE ABOUT THE RISKS INVOLVED AND THE PEOPLE TO WHOM THEY LENT MONEY THAN I SAW EVEN OUR BEST REGULATORS AT THE FED CAPABLE OF DOING. SO, THE PROBLEM HERE SIS SOMETHING WHICH LOOKED TO BE A VERY SOLID EDIT PHYSICAL AND INDEED A CORRECTLY PILLAR TO MARKET COMPETITION AND FREE MARKETS DID BREAK DOWN AND I THINK THAT EDITSHOCKED ME. I STILL DO NOT FULLY UNDERSTAND WHY IT HAPPENED AND TO THE EXTEND THAT I FIGURE OUT WHERE IT HAPPENED AND WHY I WILL CHANGE MY VIEWS. |
| 00:43:46 | >> | PAUL KRUGMAN THE PRINCETON PROFESSOR OF ECONOMICS WHO JUST ONE A NOBEL PRIZE WROTE COLUMN IN 2006 AS A SUBPRIME MORTGAGE CRISIS STARTED TO EMERGE AND HE SAID IF ANYONE IS TO BLAME FOR THE CURRENT SITUATION IS MR. GREENSPAN WHO POOH-POOHED WARNINGS ABOUT AN EMERGING BUBBLE AND DID NOTHING TO CRACK DOWN ON IRRESPONSIBLE LENDING. HE OBVIOUSLY BELIEVES YOU DESERVE SOME OF THE BLAME FOR OUR CURRENT CONDITIONS. I WOULD LIKE YOUR PERSPECTIVE. DO YOU HAVE ANY PERSONAL RESPONSIBILITY FOR THE FINANCIAL CRISIS? |
| 00:44:22 | Greenspan, Alan | LET ME GIVE YOU A LITTLE HISTORY, MR. CHAIRMAN. THERE'S BEEN A CONSIDERABLE AMOUNT OF DISCUSSION ABOUT MY VIEWS ON SUBPRIME MARKETS IN THE YEAR 2000. AND, INDEED, ONE OF OUR MOST DISTINGUISH THE GOVERNORS AT THE TIME TIME, GOVERNOR GRAMWORK WHO IS REGRETTABLY DECEASED BUT WAS ONE OF THE BEST GOVERNORS I EVER HAD TO DEAL WITH. CAME TO MY OFFICE AND SAID THAT HE WAS HAVING DIFFICULTIES WITH A PROBLEM OF WHAT REALLY TURNED OUT TO BE FAIRLY MAJOR PROBLEMS IN PREDATORY LENDING. |
| 00:45:11 | >> | HE URGED YOU TO MOVE WITH THE POWER THAT YOU HAD AS THE CHAIRMAN OF THE FED, AS BOTH TREASURY DEPARTMENT AND HUD SUGGESTED, THAT YOU PUT IN PLACE REGULATIONS THAT WOULD CURB THE EMERGING ABUSES IN SUBPRIME LENDING. BUT YOU DIDN'T LISTEN TO THE TREASURY DEPARTMENT OR |
| 00:45:36 | Greenspan, Alan | MR. @@@@@@@@@@ @ @ gRR) R AND AN OUTSIDE COUNSEL OF EXPERT PROFESSIONALS TO ADVISE ON REGULATORY MATTERS. AND WHAT THE SYSTEM ACTUALLY DID WAS TO TRY TO CORRESPONDAL ALL OF THIS TO -- |
| 00:46:36 | >> | I'M GOING TO INTERRUPT YOU. THE QUESTION I HAVE FOR YOU IS, YOU HAD AN IDEOLOGY. YOU HAD A BELIEF THAT FREE COMPETITIVE -- THIS IS YOUR STATEMENT. I DO HAVE AN IDEOLOGY. MY JUDGMENT IS THAT FREE COMPETITIVE MARKETS ARE BY FAR THE UNRIVALED WAY TO ORGANIZE THE ECONOMIES. WE HAVE TRIED REGULATION. NONE MEANINGFULLY WORKED. THAT WAS YOUR QUOTE. YOU HAD THE AUTHORITY TO PREVENT IRRESPONSIBLE LENDING PRACTICES THAT LED TO THE SUBPRIME MORTGAGE CRISIS. YOU WERE ADVISED TO DO SO BY MANY OTHERS. AND NOW OUR WHOLE ECONOMY IS PAYING ITS PRICE. DO YOU FEEL THAT YOUR IDEOLOGY PUSHED YOU TO MAKE DECISIONS THAT YOU WISH YOU HAD NOT MADE? |
| 00:47:21 | Greenspan, Alan | WELL, REMEMBER, WHAT AN IDEOLOGY IS IS A CONCEPTUAL FRAMEWORK WITH THE WAY PEOPLE DEAL WITH REALITY. EVERYONE HAS ONE. YOU HAVE TO. TO EXIST YOU NEED AN IDEOLOGY. THE QUESTION IS WHETHER IT IS ACCURATE OR NOT. AND WHAT I'M SAYING TO YOU IS, YES, I FOUND A FLAW -- I KNOW HOW SIGNIFICANT OR PERMANENT IT IS. BUT I HAVE BEEN VERY DISTRESSED BY THAT FACT. BUT MAY I FINISH THE ANSWER TO THE QUESTION? |
| 00:47:50 | >> | YOU FOUND A FLAW IN THE REALITY -- |
| 00:47:53 | Greenspan, Alan | FLAW IN THE MODEL THAT I PERCEIVED AS THE CRITICAL FUNCTIONING STRUCTURE THAT DEFINES HOW THE WORLD WORKS. |
| 00:48:00 | >> | IN OTHER WORDS, YOU FOUND THAT YOUR VIEW, YOUR IDEOLOGY, WAS NOT RIGHT, WAS NOT WORKING? |
| 00:48:07 | Greenspan, Alan | WAS NOT RIGHT, WAS NOT WORKING? PRECISELY. THAT PRECISELY THE REASON I WAS SHOCKED, BECAUSE I HAD BEEN GOING FOR 40 YEARS OR MORE WITH VERY CONSIDERABLE EVIDENCE THAT IT WAS WORKING EXCEPTIONALLY WELL. BUT LET ME IF I MAY -- |
| 00:48:20 | >> | THE PROBLEM IS THE TIME HAS ALREADY EXPIRED AND AS YOU CAN SEE THERE ARE -- |
| 00:48:24 | Davis, Thomas | HE WANTS TO ANSWER. |
| 00:48:26 | >> | IF YOU HAVE BRIEFLY ANSWER BECAUSE EFFICIENT MANY MEMBERS. |
| 00:48:32 | Greenspan, Alan | THE REASON BASICALLY IS THAT GOVERNOR GRAMLICH SAID TO ME THAT HE HAD PROBLEMS. INDEED, I HAD HEARD VERY MUCH THE SAME THING. I FRANKLY THOUGHT THAT WHEN OUR MEETING ENDED THAT THE SUBCOMMITTEE OF THE BOARD WHICH SUPERVISES ALL OF THE VARIOUS ASPECTS OF CONSUMER AND COMMUNITY AFFAIRS WITHIN THE BOARD OF GOVERNORS IN THE FEDERAL RESERVE SYSTEM WOULD MOVE FORWARD AND PRESENT TO THE BOARD AS A WHOLE RECOMMENDATIONS TO BE MADE. THAT WAS NOT MADE AND I PRESUMED AT THE TIME THAT ESSENTIALLY THE SUBCOMMITTEE DIDN'T THINK IT ROSE TO THE HIGHER LEVEL. BUT, JUST QUICKLY TO SAY THAT THE OVERALL VIEW THAT I TAKE OF REGULATION IS THAT I TOOK A PLEDGE -- I TOOK AN OATH OF OFFICE WHEN BECAME FEDERAL RESERVE CHAIRMAN. AND I RECOGNIZED THAT YOU DO WITH THAT -- WHAT I DID IS I SAID THAT I'M HERE TO UPHOLD LAWS OF THE LAND PASSED BY THE CONGRESS, NOT MY OWN PREDILECTIONS AND I THINK YOU WILL FIND THAT MY HISTORY IS THAT I VOTED FOR VIRTUALLY EVERY REGULATORY ACTION THAT THE FEDERAL RESERVE BOARD MOVED FORWARD ON. INDEED, I VOTED WITH THE MAJORITY AT ALL TIMES AND I WAS DOING SO BECAUSE I PERCEIVED THAT THAT WAS THE WILL OF THE CONGRESS CONGRESS. AND, IN FACT, IF YOU GO BACK AND LOOK AT THE RECORD, I FELT REQUIRED BY MY OATH OF OFFICE TO ADHERE TO WHAT I'M SUPPOSED TO DO, NOT WHAT I WOULD LIKE TO DO. AND THAT IS MY HISTORY AND I |
| 00:50:34 | >> | THINK THE EVIDENCE ISVERY STRONGLY SUPPORTS THAT. I APPRECIATE THAT. ON THE OTHER HAND YOU DIDN'T GET TO VOTE ON REGULATIONS THAT YOU DIDN'T PUT BEFORE THE FEDERAL RESERVE BOARD EVEN THOUGH YOU HAD THE LEGAL AUTHORITY FOR THOSE REGULATIONS. THAT MORE NOT A QUESTION BUT A COMMENT. |
| 00:50:51 | Davis, Thomas | I YIELD A MINUTE [INAUDIBLE]. |
| 00:50:53 | Issa, Darrell | I WAS JUST GOING TO ASK IF YOU NEEDED MORE THAN THE 12 MINUTES BECAUSE YOU RAP OVER BUT THAT IS OK. |
| 00:51:13 | Davis, Thomas | THANK YOU. LET ME START WITH ALL OF YOU, BUT DR. GREENSPAN, I WILL START WITH YOU. I THINK WHAT WE SEE IS LAYING A PREDICATE FOR WHAT I FEAR HAPPENS WHEN THERE IS A CRISIS IS CONGRESS OVERREACTS TO THE SITUATION. IT SEEMS TO ME THAT IT WASN'T JUST DEREGULATION THAT ALLOWED THIS CRISIS. IT WAS THE MICH OF REGULATIONS AND REGULATORS WITH TOO NARROW A VIEW OF THE INTEGRATED NATIONAL AND GLOBAL MARKETS. BUT I WOULD LIKE TO GET ALL OF YOUR REACTION TO THE FOLLOWING. IN TERMS OF LEGISLATION PASSED BY THE CONGRESS, WHAT EFFECTS IF ANY AND WERE THEY RIGHT OR WRONG IN GRAHAM, LEACH, BLYLEY, COMMODITIES FUTURES MODERNIZATION AND FAILURE TO REGULATE FANNIE AND FREDDIE. AS YOU LOOK AT THOSE TO WHAT EFFECT IF ANY DID THEY HAVE ON THIS CRISIS? AND IF WILL IS ANY SUGGESTION YOU WOULD MAKE IN THE FUTURE IN TERMS OF HOW WE PROCEED. |
| 00:52:11 | Greenspan, Alan | I HAVE TALKED AT GREAT LENGTH. |
| 00:52:14 | Davis, Thomas | MR. COX, LET ME START WITH YOU. |
| 00:52:17 | COX, C. "C." CHRISTOPHER | THANK YOU, MR. CHAIRMAN. REGULATORY GAPS HAVE BEEN THE DEVILLING SOLUTION DURING THE LAST YEAR. IT HAS BEEN ONE YEAR SINCE WE HAD THE ALL-TIEMME STOCK MARKET HIGH. REGULATORS HAVE BEEN COOPERATING AT THE INTERNATIONAL LEFTVEL AND FEDERAL AND STATE MORE CLOSELY BUT WHAT WE ARE SEEING IS DIFFERENT PARTS OF THE ELEPHANT AND WE ARE TRYING TO INTEGRATE THAT AS CLOSELY AS WE CAN. THE COORDINATION IS COMPLICATED BY THE FACT THAT FIRST THE AGENCIES THEMSELVES ADMINISTERED DIFFERENT LAWS AND GOVERNED ECONOMICALLY SIMILAR PRODUCTS IN DIFFERENT WAYS. SECOND, THEIR JURISDICTION COMES TO AN ABRUPT STOP AND SOMETIMES THE NEXT REGULATORY AGENCY DOESN'T PICK UP WHERE THAT LEAVES OFF. ONE OF THE MOST SIGNIFICANT GAPS IS ONE YOU HAVE ALLUDED TO, THE GAP IN THE 2000 QFMA THAT LEFT UNREGULATE AND LEAVES OPEN TODAY AS WE MEET THE $58 TRILLION MARKET IN CREDIT DEFAULT SWAPS. THE REASON THAT HAS TURNED OUT TO BE SO IMPORTANT IS NOT SIMPLY THE DOLLAR AMOUNT OF RISK INVOLVED BUT THE FACT THAT IT IS OPAQUE. THE FACT THAT PARTIES AND COUNTERPARTIES DON'T KNOW WHERE THE EXPOSURES ARE. IT MAKES IT VERY DIFFICULT TO PRICE RISK THROUGHOUT THE SYSTEM. THAT IS WHY I THINK IT IS SO URGENT WE ADDRESS THAT GAP, WE ADDRESS THE GAP -- JERKS CHAIRMAN COX, THAT PARTICULAR ASPECT OF THE ACT WHERE WE FAILED TO ADDRESS THAT WAS A MISTAKE IN RETROSPECT? BASICALLY LEGALIZED GAMBLE ING? I THINK IT IMPORTANT TO NOTE AS CHAIRMAN GREENSPAN DOES HOW MUCH HAS CHANGED SINCE THIS WAS FIRST LOOKED AT DURING THE CLINTON ADMINISTRATION IN 1999. BECAUSE BACK THEN AS CHAIRMAN GREPS POINTS OUT THE CREDIT DEFAULT SWAPS MARKET HAD BARELY EMERGED. AS A SHARE OF THE TOTAL DERIVATIVESES MARKET IT WAS TOO MALL TO BE NOTICED. IT HAS DOUBLED IN THE LAST IT YEARS. SO, IT IS ABSOLUTELY URGENT NOW THAT WE KNOW HOW IMPORTANT IT IS IN THE CONTEXT OF THE CURRENT CRISIS AND DIFFICULTY AT THAT TIME MARKETS AND INVESTORS ARE HAVING PRICING RISK WE BRING CLOSURE TO THIS AND LET THE MARKET SEE WHERE THE RISK IS AND PRICE ACCORDINGLY. |
| 00:54:38 | Davis, Thomas | THANK YOU. ALSO ON THE FREDDIE AND FANNIE ISSUE. |
| 00:54:48 | Snow, John W. | THANK, CONGRESSMAN DAVIS. IT SEEMS TO ME THE ROOT ISSUE WHEN YOU GET DOWN TO IT SIS RISK AND LEVERAGE. AND TO WHERE IN OUR FINANCIAL REGULATORY SYSTEM IS THERE ANYONE WITH FULL ACCOUNTABILITY AND FULL 360-DEGREE VIEW ON THAT PROPOSITION, RISK AND LEVERAGE. I SAW THAT IN MY DAYS AT THE TREASURY DEPARTMENT. I REMEMBER IN 2005 SENSING THAT THERE WERE DEVELOPMENTS IN THE DEBT MARKETS, THE SUBPRIME AND MORTGAGE MARKETS THAT NEEDED TO BE BETTER UNDERSTOOD. I TOOK WHAT WAS DEEMED TO BE A FAIRLY EXTRAORDINARY STEP AND CALLED IN ALL OF THE SUBSTANTIVE REGULATORS OF THE MORTGAGE MARKET MARKET. AND I ASKED THEM TO GIVE THEIR CONSIDERED VIEWS ON WHETHER OR NOT UNDUE RISK WAS BEING CREATED. WE DIDN'T YET HAVE A HOUSING CRISIS. WE DIDN'T YET HAVE A SUBPRIME CRISIS. BUT I WANTED TO GET THEIR VIEW THAT DID EVENTUALLY LEAD TO NEW GUIDANCE TO THE REGULATORS. BUT IT WAS CLEAR THAT NO ONE OF THEM HAD THAT VIEW. THEY HAD PIECES OF THE PUZZLE. IT IS LIKE THE BLIND MAN AND ELEPHANT. THEY ARE ALL TOUCHING A PIECE OF IT BUT AT THE DON'T KNOW WHAT THE BIG PICTURE IS. THAT IS WHY I DID COMMISSION THE EFFORT TO PRODUCE A BLUEPRINT FOR A NEW REGULATORY SYSTEM. AS YOU KNOW, THE TREASURY SET UP A NEW BLUEPRINT TO CREATE SOME AGENCY WITH THE THE 360-DEGREE VIEW. WITH THE G.S.E.'S I THINK WE ALL MADE A MISTAKE NOT ACTING MUCH, MUCH EARLIER. IF IF A STRONG REGULATOR WAS PUT IN PLACE IN A TIMELY WAY, IF THE MARKET HAD HAD MORE VISIBILITY -- |
| 00:56:58 | Davis, Thomas | LET ME ASK THIS. HAD A STRONG REGULATOR BEEN PUT IN EARLIER WOULD THAT HAVE REALLY AVERTED THIS CRISIS? |
| 00:57:07 | Snow, John W. | NOBODY KNOWS FOR SURE WHETHER IT WOULD HAVE AVERTED IT, BUT I'M CONFIDENT THAT IT WOULD HAVE BEEN A MUCH DIFFERENT KIND OF CRISIS CRISIS. BECAUSE THE G.S.E.'S WERE THE SOURCE OF SUCH AN EXTRAORDINARY AMOUNT OF RISK IN THE SYSTEM. RISK THAT WASN'T REALLY VISIBLE. THAT WASN'T REALLY SEEN TO MOST OF THE PARTICIPANTS. |
| 00:57:29 | Davis, Thomas | AND THEY HAD THE APPEARANCE OF GOVERNMENT BACKING IT |
| 00:57:32 | Snow, John W. | IT ABSOLUTELY HAD THE APPEARANCE OF GOVERNMENT BACKING, WHICH WAS AT THE CENTER OF THE RISK CREATION PROCESS. BECAUSE IF YOU CAN BORROW AT GOVERNMENT RATES YOU CAN MAKE MONEY ON ANY OTHER INSTRUMENTS, ANY OTHER FINANCIAL INSTRUMENTS. SO IT CREATED AN INCENTIVE TO BORROW AT AN EXTRAORDINARY RATE AND BUY ALL THE PAPER YOU COULD GET HOLD OF. THAT IS WHY WE SEE THE EXPLOSION, IT IS NOT AN EXAGGERATION, IN THEIR FOR-PROFIT ACTIVITIES, THEIR OWN HELD PORTFOLIO THAT WENT WAY BEYOND ANYTHING THAT WAS NEEDED TO CARRY ON THEIR PUBLIC POLICY MISSION OF MAKING THE SECONDARY MARKET. |
| 00:58:15 | Davis, Thomas | DR. GREENSPAN, THE COMMODITIES FUTURES MODERNIZATION ACT WHICH PASSED CONGRESS BY AN OVERWHELMING MARGIN, PASSED THE HOUSE ON SUSPENSION SUSPENSION, I THINK ONLY A HANDFUL OF DISSENTING VOTES, SIGNED BY PRESIDENT CLINTON. IN RETROSPECT, AS WE LOOK AT THAT, WAS THIS A QUESTION OF REGULATION REGULATION/DEREGULATION OR JUST GAPS IN REGULATION WHERE YOU HAD SO MANY STOVE PIPES NO ONE COULD SEE THE TOTAL LANDSCAPE AND THINGS STARTED TO OCCUR UNDERNEATH IT AND WE WERE NOT ABLE TO REACT? AND ALSO I WILL ASK YOU ABOUT FREDDIE AND FANNIE AND THEIR |
| 00:58:56 | Greenspan, Alan | ROLES IN THIS. IT IS IMPORTANT WHEN TALKING ABOUT REGULATION NOT TO TALK IN BLANKET TERMS BUT TO FOCUS ON SPECIFIC ISSUES. FOR EXAMPLE, AS I MENTIONED BEFORE, THE DISCUSSION THAT CAME OUT OF THE ORIGINAL 2000 ACT RELEVANT TO DERIVATIVES HAS WORKED REASONABLY WELL WITH THE EXCEPTION OF A MAJOR CHANGE WHICH IS CREDIT DEFAULT SWAPS. IN THE YEAR 2005, THE FEDERAL RESERVE BASIC OF NEW YORK BECAME QUITE CONCERNED ABOUT THE ISSUE OF THE SETTLEMENT PROCESS ON CREDIT DEFAULT SWAPS AND STARTED TO TRY TO GET A VERY SIGNIFICANT IMPROVEMENT IN THE TECHNOLOGIES WHICH THEY WERE INVOLVED WITH. AND THAT EFFORT HAS CONTINUED CONSIDERABLY. AND THE REASON WHY THERE IS A BIG PROBLEM THERE IS PARTLY BECAUSE OF THE HUGE SURGE, AS CHAIRMAN COX SAYS, WAS NEGLIGIBLE IN 2000 AND THEY JUST JUST, FROM 2% OF THE TOTAL MARKET THEY ARE UP OVER 10% NOW IN A VERY FEW YEARS. THE PROBLEM BASICALLY IS@@@@@"Ik) @ @ @ @ @ @ @ @ @ @ @ @ BaT @ RESOLVED BECAUSE AT SOME POINT THE VOLUNTARY AGREEMENT PROCESS IS GOING TO BREAK DOWN AND YOU WILL HAVE A VERY SERIOUS PROBLEM. SO, WHERE I THINK CRITICAL REGULATORY ISSUES HAVE GOT TO OCCUR IS ON THE LEGAL QUESTION OF DEFINING THE PROCESS BY WHICH THE RESOLUTION OCCURS. . |
| 01:01:53 | Maloney, Carolyn | DR. GREENSPAN, PRIOR TO THE BANKRUPTCY OF LEHMAN BROTHERS LAST MONTH, ONE OF THE LARGEST IN OUR HISTORY, AS WAS THE COLLAPSE OF ENRON. I WANT TO ASK YOU ABOUT AND ON AND THE USE OF DERIVATIVES. AFTER AN ON'S COLLAPSE, INVESTIGATIONS BY THE STATE OF CALIFORNIA AND OTHER STATES SHOWED WIDESPREAD MARKETS BY ENRON AND OTHER COMPANIES USING SCHEMES LIKE FAT BOY, DEATH STAR. THEY BYPASSED REGULATORY PROTECTIONS AND DROVE ENERGY PRICES SKY-HIGH. AT THAT TIME, THERE WAS NO REGULATION OF AND ON'S TRADING FOR ENERGY AND DERIVATIVES. THERE WERE NO PUBLIC DISCLOSURE REQUIREMENTS FOR RECORD-KEEPING REQUIREMENTS. THERE WERE NO ANTI-FRAUD PROVISIONS. BASICALLY, THERE WAS NO OVERSIGHT WHATSOEVER. WHAT WAS THERE WAS REMOVED. WHAT HAPPENED IS THAT ENRON AND OTHER COMPANIES TOOK ADVANTAGE OF THIS LACK OF OVERSIGHT. IN 2004, I TRIED TO CLOSE THIS LOOPHOLE. I OFFERED AN AMENDMENT AT THE BANKING COMMITTEE WHICH WOULD HAVE REQUIRED REGULATION OF DERIVATIVES. UNFORTUNATELY, BIPARTISAN SUPPORT, THE AMENDMENT FAILED. OTHER MEMBERS OF CONGRESS TRY TO CLOSE THIS LOOPHOLE, MOST NOTABLY A SENATOR WHO INTRODUCED TRADING DERIVATIVES. SHE TRIED TO DO THIS THROUGH FREESTANDING BILLS AND ADDITIONAL AMENDMENTS TO OTHER PIECES OF LEGISLATION. DR. GREENSPAN, YOU ADAMANTLY OPPOSED THESE EFFORTS. I WOULD LIKE TO SHOW YOU A LETTER THAT YOU SENT IN SEPTEMBER 2002. IN THIS LETTER, HE STATED," PUBLIC DISCLOSURE OF PRICING DATA WOULD NOT IMPROVE THE OVERALL PRICE DISCOVERY PROCESS." YOU ARGUED THAT, IN THESE LETTERS, DISCLOSURE WOULD INCREASE THE VULNERABILITY OF OUR ECONOMY TO POTENTIAL FUTURE STRESSES. DESPITE AND RON'S ABUSES, HE SAID, "WHICH DO NOT BELIEVE THAT A PUBLIC POLICY CASE EXISTS TO JUSTIFY THIS GOVERNMENT INTERVENTION." I SINCERELY BELIEVE THAT EFFORTS SUCH AS MUCH EFFORT IN THE BANKING COMMITTEE WOULD HAVE PASSED WITHOUT YOUR OPPOSITION. DR. GREENSPAN, IN RETROSPECT, DO YOU THINK THAT YOU WERE RIGHT TO OPPOSE THESE EFFORTS TO REGULATE ENERGY DERIVATIVES? |
| 01:04:56 | Greenspan, Alan | THE SENATOR SAID AT THE SAME THING TO ME. SHE IS A LONGTIME FRIEND AND WE HAVE DEBATED THIS ISSUE CONSIDERABLY. FIRST OF ALL, A MAJOR PROBLEM THAT I WAS HAVING WITH THE ENERGY DERIVATIVE ISSUE WAS THAT IT WAS AN ELECTRIC POWER PROBLEM. THE ELECTRIC POWER, AS YOU KNOW, CANNOT BE STORED. AS A RESULT -- |
| 01:05:25 | Maloney, Carolyn | EXCUSE ME. MY AMENDMENT AND MY EFFORT WAS THAT IT BE LISTED ON THE COMMODITIES FUTURES EXCHANGE. THERE WAS AN EFFORT TO REMOVE IT FROM LISTING, SO THERE WAS ABSOLUTELY NO KNOWLEDGE OF WHAT WAS HAPPENING IN ENERGY |
| 01:05:43 | Greenspan, Alan | DERIVATIVES. I UNDERSTAND. |
| 01:05:47 | Maloney, Carolyn | MINE WAS A BROADER ONE. BASICALLY, IT WAS REGULATION OF ENERGY DERIVATIVES. |
| 01:05:53 | Greenspan, Alan | I GENERALLY REMEMBERED THAT ISSUE, I WOULD HAVE TO GO BACK AND REFRESH MY MEMORY. IF I MAY, LET ME LOOK AT IT AS |
| 01:06:04 | Maloney, Carolyn | SOON AS I CAN. THANK YOU. I WOULD APPRECIATE THAT. IN LIGHT OF WHAT HAS HAPPENED IN THE MARKETS, TO YOU BELIEVE THAT THERE SHOULD BE SOME OVERSIGHT AND REGULATION OF DERIVATIVES IN GENERAL? |
| 01:06:21 | Greenspan, Alan | I HAVE JUST CITED ONE WITH THE CREDIT DEFAULT SWAPS. |
| 01:06:25 | Maloney, Carolyn | ONLY IN THAT AREA, THANK YOU. MR. SNOW, YOU ALSO OPPOSED THIS EFFORT, JOINING DR. GREENSPAN. THIS IS WHAT YOU WROTE. "IN OUR JUDGMENT, THE ABILITY OF COUNTERPARTY SURVEILLANCE TO REGULATE THESE MARKETS CAN BE UNDERMINED BY APPROPRIATE EXTENSIONS OF GOVERNMENT REGULATION." WHAT WAS IT INAPPROPRIATE TO PROVIDE TRANSPARENCY AND DISCLOSURE FOR ENERGY TO RELATIVES? -- FOR ENERGY DERIVATIVES? |
| 01:06:59 | >> | TURN ON YOUR MICROPHONE. |
| 01:07:01 | Snow, John W. | THANK YOU FOR THE QUESTION. AS WAS THE CASE WITH THE CHAIRMAN, I DO NOT REMEMBER THAT SINCE FOR THE ALPS AND THE DEBATE AROUND IT. -- A DO NOT REMEMBER THE DETAILS. GENERALLY, THAT MEET RESPOND THIS WAY. -- LET ME RESPOND THIS WAY. THERE IS A BALANCE WHEN IT COMES TO MARKETS AND REGULATION. IT IS NOT IN MY VIEW ONE OR THE OTHER, IT IS FINDING THE RIGHT BALANCE. ONE OF THE ARGUMENTS THAT WAS ALWAYS IN THE BACK OF MY MIND WHEN SOMEONE PROPOSED MORE REGULATION, WOULD THIS MAKE THE MARKET BETTER OR GET IN THE WAKE OF THE WAY MARKETS WORK? IT IS WHAT ECONOMISTS CALL A MORAL HAZARD ISSUE WITH REGULATION, WHERE THE MARKET ITSELF BEGINS TO LOOK TO THE REGULATION TO SAY THAT THAT IS THE GOVERNMENT'S GOOD HOUSEKEEPING SEAL OF APPROVAL ON THESE ACTIVITIES. WHEN THERE IS A PERCEPTION OF A GOOD HOUSEKEEPING SEAL OF APPROVAL, SOME OF THE INCENTIVES OF THE DUE DILIGENCE GETS UNDERMINED. THAT WAS PROBABLY, I DO NOT RECALL, THAT WAS PROBABLY WHAT I WAS REFERRING TO. |
| 01:08:31 | >> | WE WILL BE PLEASED TO HOLD THE RECORD OPEN TO GET ANY ADDITIONAL COMMENTS. |
| 01:08:38 | Maloney, Carolyn | MR. WAXMAN, MAY I REQUEST AN ADDITIONAL 30 SECONDS TO ASK MY QUESTION? |
| 01:08:46 | >> | 30 QUESTIONS TO ASK THE QUESTION AND THEN WHO KNOWS HOW LONG TO ANSWER THE QUESTION. |
| 01:08:52 | Maloney, Carolyn | I WILL SEND IT TO YOU IN WRITING. |
| 01:08:57 | >> | ON THE REPUBLICAN SIDE, -- |
| 01:09:01 | Shays, Christopher | MR. CHAIRMAN, MAY I MAKE A UNANIMOUS CONSENT MOTION? |
| 01:09:06 | >> | THE GENTLEMAN WISHES TO BE RECOGNIZED FOR UNANIMOUS CONSENT. |
| 01:09:10 | Shays, Christopher | BECAUSE OF THE QUESTION THAT YOU ALLOCATED TO RANKING MEMBERS, YOU HAD TO CONSUME 11 MINUTES AND OUR RANKING MEMBER 10 MINUTES, AND I WOULD LIKE TO MAKE A CONSENT THAT BOTH SIDES GETS AN ADDITIONAL 10 MINUTES. THE CHAIRMAN AND RANKING MEMBER GETS ADDITIONAL TIME. |
| 01:09:36 | >> | ANY OBJECTION TO THAT REQUEST? IF NOT, THAT WOULD BE THE ORDER. |
| 01:09:41 | Mica, John | THANK YOU. AS I SAID AT THE BEGINNING, I TRIED TO ENUNCIATE ALONG WITH MY REQUEST FOR UNANIMOUS CONSENT TO PUT IN A LETTER TO REQUEST A SPECIAL PROSECUTOR TO BE ANOINTED -- TO BE APPOINTED. I AM DISAPPOINTED THAT THESE HEARINGS WERE PUT OFF. NOVEMBER 20 IS THE DATE THAT HAS BEEN CHOSEN FOR THE PEOPLE TO KNOW WHO THE REAL CULPRITS WERE PERMIT THAT ME PUT THIS OUT HERE. I HAVE A QUESTION FOR ALL OF THE PANELISTS. TO YOU KNOW WHAT COMES BEFORE NOVEMBER 20? |
| 01:10:31 | COX, C. "C." CHRISTOPHER | THE 19TH. [LAUGHTER] |
| 01:10:39 | Mica, John | CHRIS, YOU MIGHT RECALL. IT IS A LITTLE THING CALLED AN ELECTION. WE DON'T WANT A TRAIL TO LEAD TO PEOPLE THAT'S -- THAT DID NOT DO THE WRONG THING. WHAT WE HAVE BEEN DOING, WE ARE TIPTOEING AROUND THE TULIPS WHEN SOMEBODY DROVE A BULLDOZER THROUGH A FINANCIAL GARDEN. I HAVE QUESTIONS -- CHRIS, YOU WERE NOT AROUND, EXCUSE ME, MR. COX. THREE PRESIDENTS, HOW MANY YEARS |
| 01:11:18 | Greenspan, Alan | A TOTAL? 18 AND A HALF. |
| 01:11:21 | Snow, John W. | [INAUDIBLE] |
| 01:11:33 | Mica, John | YOU TESTIFIED A FEW MINUTES AGO THAT YOU TRIED TO REGULATE, RIGHT? YOU TRIED TO BRING SOME NEW REGULATION INTO THIS PROCESS. DID YOU KNOW $178 MILLION WAS SPENT IN 10 YEARS BY FANNIE MAE AND FREDDIE MAC TO LOBBY AND STOP WHAT YOU WERE DOING? DID YOU KNOW THAT? |
| 01:11:55 | Snow, John W. | I DID NOT KNOW THE NUMBER, CONGRESSMAN, BUT I KNEW THERE WAS AN OPPOSITION. |
| 01:12:00 | Mica, John | WHAT DOES THAT -- WHO IS THE BIGGEST SUBPRIME PRODUCER IN THE U.S.? COUNTRYWIDE. DID ANY OF YOU KNOW THAT COUNTRYWIDE WAS GIVEN PREFERENTIAL DISCOUNTS TO PUBLIC OFFICIALS AND HEADS TO THE GOVERNMENT SPONSORED MORTGAGE SECURITY AGENCY? DID YOU KNOW THAT WHEN YOU WERE IN CHARGE? |
| 01:12:28 | Greenspan, Alan | |
| 01:12:29 | Snow, John W. | I DID NOT. |
| 01:12:33 | Mica, John | YOU CAME ALONG LATER, CHRIS. DID YOU EVER GET ONE? DO YOU KNOW WHO THE LARGEST RECIPIENT OF CAMPAIGN CONTRIBUTION IS IN 20 YEARS FOR FANNIE MAE AND FREDDIE MAC? |
| 01:12:55 | Greenspan, Alan | DO YOU KNOW? I DO NOT. |
| 01:12:58 | Mica, John | I SAID IN 20 YEARS. I SEE YOU THINKING MAYBE IT WAS SENATOR DODD. DO YOU KNOW WHO IT WAS? SENATOR OBAMA IN LESS THAN FOUR YEARS. NOBODY WANTS TO GET TO THE BOTTOM OF THIS. NOBODY WANTS TO STOP THE POLITICAL MONEY TRAIL. I WILL ASK IN A MINUTE TO PUT IN THE RECORD EXHIBIT SAY THAT IT IS FOLLOW THE MONEY TRAIL. FOR THOSE OF YOU THAT HAVE DIFFICULTY IN DISTINGUISHING WHO PARTICIPATED, I HAVE PICTURES, PHOTOGRAPHS OF THE INDIVIDUALS INVOLVED. YOU'VE TESTIFIED IN 2003 AND CAME BACK ASKING FOR REGULATION. DID YOU EVER SEE THE PROCEEDINGS OF OCTOBER 6, 2004, OF ONE OF THE SUBCOMMITTEES OF FINANCIAL SERVICES AND HERE THE NOW CHAIRMAN MR. FRANK AND WHAT HE SAID ABOUT RISKS THAT WERE SPECULATED? DID YOU EVER SEE THAT? |
| 01:14:07 | Snow, John W. | I DID NOT. |
| 01:14:09 | Mica, John | I RECOMMEND THAT YOU ALL GO ON YOUTUBE TO SEE THAT. MR. FRANK SAID THAT THERE IS NO RISK. MR. FRANK SAID THAT WE OUGHT TO ROLL THE DICE. DID YOU HEAR WHAT SHE SAID? IF IT AIN'T BROKE, DON'T FIX IT. DID YOU HEAR THAT, MR. BERNANKE? |
| 01:14:32 | Greenspan, Alan | NO I DID NOT. |
| 01:14:36 | Mica, John | YOU OUGHT TO SEE THAT. YOU OUGHT TO SEE THE LANGUAGE THAT ONE OF THE MEMBERS OF THE COMMITTEE USED ABOUT HOW HE WAS MAD BECAUSE PEOPLE WERE OPPOSING LEGISLATION. THE LANGUAGE THAT HE USED WAS THE LANGUAGE THAT PEOPLE ARE USING OUT THERE THAT WANT FOLKS ACCOUNTABLE. THIS IS A NICE DOG AND PONY SHOW, MAYBE IT IS THEATER. PEOPLE WANT SOMEONE ACCOUNTABLE. THEY WANT PEOPLE TO GO TO JAIL THAT BROUGHT DOWN OUR FINANCIAL MARKETS. DO YOU AGREE THAT WE SHOULD HAVE SOME MEANS TO HAVE THOSE FOLKS TO PAY? |
| 01:15:14 | Greenspan, Alan | THAT IS NOT THE TYPE OF THING -- @@@ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ |
| 01:15:20 | >> | |
| 01:15:43 | COX, C. "C." CHRISTOPHER | WE ARE BUSY ON THAT RIGHT NOW. |
| 01:15:56 | Snow, John W. | ANY CRIMINAL BEHAVIOR, FRAUDULENT BEHAVIOR, SHOULD BE INVESTIGATED AND ACTED UPON PROPERLY BY THE APPROPRIATE AUTHORITIES. |
| 01:16:05 | Mica, John | THANK YOU, MR. CHAIRMAN. |
| 01:16:13 | >> | TO SAY THAT WE HAVE HELD FOUR HEARINGS, WE HAVE GOT TWO MORE SCHEDULED. WE HAVE THEM SCHEDULED AFTER THE ELECTION. THIS IS AN ISSUE THAT WILL NOT GO AWAY, WHEN THAT WEEK SEARS THE NEED TO EXAMINE. WE HAVE SENT A REQUEST FOR FURTHER DOCUMENTS FROM FANNIE MAE AND FREDDIE MAC AND WE ARE GOING TO HOLD A HEARING ON THEM AND THE ROLE THAT THEY PLAYED IN THIS CURRENT CRISIS, AS WELL AS HEDGE FUNDS. I THINK THAT WHAT WE HAVE HEARD IS A POLITICAL STATEMENT, NOT ONE LOOKING INTO THE REAL ISSUES. IT IS A POLITICAL STATEMENT. IN TO PUT THE FACTS IN PERSPECTIVE, THE EXPLOSION IN SUBPRIME LENDING WAS DRIVEN BY WALL STREET AND THE MAJORITY OF THOSE LOANS WERE ORIGINATED BY UNREGULATED MORTGAGE BROKERS. ACCORDING TO THE HOME MORTGAGE DISCLOSURE ACT DATA IN 2006, DURING THE HEIGHT OF THE SUBPRIME BOOM, FANNIE MAE PURCHASED 2.5% SUBPRIME LOANS. COMBINED, THEY PURCHASED A TOTAL OF 2.9% OF THE SUBPRIME LOANS. IN 2007, FANNIE MAE INCREASED THIS PURCHASE OF SUBPRIME LOANS TO 11.2% WHILE FREDDIE MAC INCREASED IT TO 2.5%. THE COMBINED WENT TO 13.7% OF SUBPRIME LOANS. THESE ARE HARDLY MARKET DRIVING NUMBERS. BOTH COMPANIES ALSO INVESTED IN SUBPRIME SECURITIES CREATED BY WALL STREET. THERE WERE NOT THE DOMINANT FACTOR OF WALL STREET. INTO THAT AND 6, THEIR SHARE WAS LESS THAN 25% OF THE SECONDARY MARKET. I POINT THIS FAX OUT, NOT IN ANY WAY TO EXCUSE THEM, AND THE RESPONSIBILITY THEY HAVE, BUT WE ARE GOING TO LOOK AT THE RESPONSIBILITY. THEY WERE NOT THE CAUSE OF THE FINANCIAL CRISIS. I WOULD BE INTERESTED TO KNOW IF ANY OF THE THREE WITNESSES BELIEVE THAT FANNIE MAE AND FREDDIE MAC WAS THE CAUSE OF THE FINANCIAL CRISIS. THIS CERTAINLY PLAYED A ROLE. DO ANY OF YOU BELIEVE THAT THEY WERE THE CAUSE OF THIS CRISIS? |
| 01:18:35 | Greenspan, Alan | I THINK IT WAS A SIGNIFICANT FACTOR, BUT NOT THE PRIMARY CAUSE. |
| 01:18:39 | COX, C. "C." CHRISTOPHER | I WOULD AGREE WITH THAT. THERE IS NO QUESTION THAT THE GSE'S FANNIE MAE AND FREDDIE MAC PLAYED A ROLE. WE COULD NOT HEAR YOU. I THINK THERE IS NO QUESTION THAT THE GSE'S PLAYED A SIGNIFICANT ROLE IN THE SUBPRIME CRISIS AND IN FACT OF THE CREATION OF THE STRUCTURED SECURITIES. |
| 01:19:03 | >> | MR. SNOW? |
| 01:19:05 | Snow, John W. | I AGREE WITH THAT. THERE IS NO SINGLE CAUSE OF THIS. MANY THINGS CONTRIBUTED TO IT. ONE OF THE PRIMARY CONTRIBUTORS WAS THE ROLE OF FANNIE AND FREDDIE. |
| 01:19:17 | >> | I AGREE WITH THE THREE OF YOU AND THAT IS WHY WE ARE GOING TO LOOK AT THOSE ISSUES. IT DOES NOT MAKE A DIFFERENCE THAT WE ARE LOOKING AT IT AFTER OR BEFORE THE ELECTION. WE ARE GOING TO LOOK AT HEDGE FUNDS AFTER THE ELECTION AND WE HAVE A PROBLEM THAT WE ARE GOING TO DO WITH THAT IS NOT CONNECTED WITH THIS ELECTION CALENDAR. |
| 01:19:43 | Davis, Thomas | MR. CHAIRMAN? MORTGAGE BROKERS WORK REGULATED, BUT NOT ON THE STATE LEVEL. THE REGULATION WAS AT THE STATE, AND ONE OF THE PROBLEMS WAS THAT THESE WERE STOVEPIPES. NO ONE HAD A VIEW OF WHAT PEOPLE WERE DOING. NO ONE HAD A VIEW OF WHAT WAS GOING ON NATIONALLY. I ASKED SECRETARIES NO PRIOR IF FANNIE AND FREDDIE HAD BEEN BROUGHT UNDER CONTROL. THERE IS NO QUESTION THAT THIS CRISIS WOULD NOT HAVE BENT TO |
| 01:20:18 | Snow, John W. | THE DIMENSIONS IT WAS. I AGREE WITH THAT. |
| 01:20:21 | Mica, John | FIRST OF ALL, DID YOU ALL KNOW THAT FANNIE MAE WAS COOKING THE BOOKS AND INCREASING THE MORTGAGES THAT THEY WERE PUTTING OUT, THE SUBPRIME, SO THAT THEY COULD GET BONUSES AND WALK AWAY WITH TENS OF MILLIONS OF DOLLARS IN COMPENSATION? DID YOU KNOW THAT, MR. SNOW? |
| 01:20:45 | Snow, John W. | I KNOW THAT THERE WAS AN INVESTIGATION OF THE REGULATOR. |
| 01:20:49 | Mica, John | I HAVE A COPY OF THAT. |
| 01:20:54 | Snow, John W. | I FOUND SOME IRREGULARITIES AND THAT ACCOUNTING PRACTICES. |
| 01:20:59 | Mica, John | FANNIE MAE WAS PUMPING OUT THESE SUBPRIME SPIT FANNIE MAE WAS A GOVERNMENT SPONSORED MORTGAGE SECURITY OPERATION. COMPETING WITH THEM WITH FOLKS LIKE LEHMAN BROTHERS. YOU HAD THEM DISCOUNTING THE AMOUNT OF CAPITAL AS A RESERVE. YOU HAD THEM AT DISCOUNT THE RESERVE FROM 10 TO 2.5, AND YOU HAD BEEN PUMPING OUT THEIR NO DOCK, NO DOWN PAYMENT SUBPRIME LOANS. IS THAT NOT THE CASE? WHO FOLLOWS? WALL STREET, BECAUSE THEY ARE TRYING TO MAKE A BUCK. |
| 01:21:45 | COX, C. "C." CHRISTOPHER | IN RESPECT TO COOKING THE BOOKS, THE SEC SUED FANNIE MAE FOR FRAUD WITH ONE OF THE LARGEST SETTLEMENTS IN THE SEC. |
| 01:21:56 | >> | YOUR TIME HAS EXPIRED. |
| 01:22:01 | Mica, John | I HAVE A UNANIMOUS CONSENT REQUEST. I MENTION THIS -- |
| 01:22:05 | >> | STATE YOUR REQUEST. |
| 01:22:12 | Mica, John | I GUESS WE COULD DO SANS THE PICTURES. |
| 01:22:16 | >> | WITHOUT OBJECTION, YOU SEEK TO SUBMIT THE PARTICLE CALLED, "FOLLOW THE MONEY. " IT WILL BE CALLED EXHIBIT 8. MR. CUMMINGS? |
| 01:22:28 | Cummings, Elijah | MR. CUMMINGS? THANK YOU. I WANT TO ASK QUESTIONS THAT MY CONSTITUENTS WOULD ASK. ALL OF THOSE THAT HAVE BEEN REDUCING THEIR INVESTMENTS, UNABLE TO GET STUDENT LOANS, BUSINESSES GOING OUT OF BUSINESS, PEOPLE LOSING THEIR JOBS. I WANT TO ASK SOME QUESTIONS ON BEHALF OF THEM. I WILL DIRECT MY QUESTIONS TO YOU, MR. COX. ON REGULATING DERIVATIVES, ESPECIALLY CREDIT DEFAULT SWAPS, WHICH NOW AMOUNTS TO THE WORLD POSSIBLE ECONOMIC OUTPUT WEIGHING IN AT $54 TRILLION IN SEPTEMBER. YOU HAVE GIVEN THE COMMITTEE STRONG TESTIMONY URGING REGULATION IN THIS AREA. I AGREE WITH YOU. OUR HEARING DEMONSTRATED THAT A LACK OF A DEMONSTRATION HAS CREATED CHAOS IN THE FINANCIAL MARKETS ALL AROUND THE WORLD. MY QUESTION IS, WHERE HAVE YOU BEEN ALL OF THESE YEARS? MR. COX, LAST MONTH YOU ANNOUNCED THAT THE SEC WILL BEGIN REQUIRING HEDGE FUND MANAGERS, BROKER-DEALERS, AND INSTITUTIONAL INVESTORS TO DISCLOSE THEIR CREDIT DEFAULT SWAP HOLDINGS. THAT IS REALLY NICE. BUT YOU TOOK THAT STEP AFTER SENATOR MCCAIN SAID, "HE HAS BETRAYED THE PUBLIC TRUST." AFTER THE HEAD OF THE FORMER HEAD OF HEWLETT-PACKARD SAID THAT YOU WERE, "YOU WERE ASLEEP AT THE SWITCH." I WANT TO KNOW -- THE THEN, IT WAS AFTER YOU MADE THESE DECISIONS, AFTER SENATOR MCCAIN SAYING THAT THE FIRST THING HE WOULD DO AS PRESIDENT WAS TO FIRE YOU. YOU BECAME SEC CHAIRMAN OVER THREE YEARS AGO. WHY DID YOU NOT ACT SOONER? |
| 01:24:32 | COX, C. "C." CHRISTOPHER | THANK YOU. AS YOU KNOW, I HAVE BEEN IN THE VANGUARD OF REGULATORS. I DO NOT BELIEVE I AM THE FIRST FEDERAL REGULATOR INCUMBENT TO CALL FOR THIS LEGISLATION. WE WOULD HAVE LIKED TO HAVE KNOWN WHAT WE KNOW NOW YEARS AGO. WHERE WAS I? I WAS HERE WITH YOU. I WAS THE VICE CHAIRMAN OF THIS COMMITTEE. WHEN CONGRESS HAD THE OPPORTUNITY TO DO WHAT I AM ASKING CONGRESS TO DO NOW, WHICH IS TO CLOSE THIS REGULATORY HOLD. |
| 01:25:10 | Cummings, Elijah | I AM TALKING ABOUT THE THREE YEARS THAT YOU WERE THERE. WE WERE PAYING YOUR SALARY FOR THREE YEARS. I KNOW WHAT HE SAID. HE SAID THAT HE WAS GOING TO EXCUSE YOU. I AM TALKING ABOUT THE TIMES THAT YOU WERE THERE. |
| 01:25:26 | COX, C. "C." CHRISTOPHER | DURING MY TIME AS CHAIRMAN, WE HAVE SEEN A MARKET THAT WAS COMPLETELY UNREGULATED OUTSIDE OF THE JURISDICTION OF THE SEC. I HAVE TO LIVE WITHIN THE AUTHORITIES THAT CONGRESS GIVES ME THAT THIS MARKET HAS GROWN SUBSTANTIALLY, CREATED RISK THAT IS DIFFICULT FOR MARKETS TO APPRAISE, AND THAT IS THE REASON -- MY REQUEST TO CONGRESS, ALL I CAN DO IS TELL YOU WHAT I SEE AS CHAIRMAN IS WHAT WE DON'T HAVE THE AUTHORITY TO DO. WE DO NOT HAVE THE AUTHORITY TO REGULATE CREDIT DEFAULT SWAPS BECAUSE CONGRESS DID NOT GIVE THAT AUTHORITY. |
| 01:26:08 | Cummings, Elijah | MR. COX, THAT WE ASK YOU ABOUT WHAT YOU COULD DO. YOUR PREDECESSOR, BEFORE HE LEFT, SET UP A TASK FORCE TO LOOK INTO THE PROBLEM OF FINANCIAL DERIVATIVES SUCH AS CREDIT DEFAULT SWAPS. IN MARCH 2005, MONTHS BEFORE YOU BECAME THE CHAIRMAN, THE FINANCIAL NEWS REPORTED THAT THE SEC ASSEMBLED PEOPLE FROM EACH DIVISION. CORPORATION FINANCE, ENFORCEMENT, MARKET REGULATION, AND INVESTMENT MANAGEMENT. TO LOOK AT ISSUES RELATING TO THE DERIVATIVES MARKET. THE IMPLICATION OF THE GROWTH OF DERIVATIVES. WHAT HAPPENED TO THAT TASK FORCE? |
| 01:26:51 | COX, C. "C." CHRISTOPHER | WHICH HAVE INCREASED THE NUMBER OF PEOPLE THAT ARE FOCUSED ON RISK. |
| 01:26:57 | Cummings, Elijah | WHAT HAPPENED TO THE TASK FORCE? |
| 01:27:01 | COX, C. "C." CHRISTOPHER | THE NUMBER OF PEOPLE FOCUSED ON RISK, CONGRESSMAN, HAVE INCREASED UNDER MY CHAIRMANSHIP. |
| 01:27:12 | Cummings, Elijah | LET ME TELL YOU WHAT THEY SAID. WE HAVE BEEN TOLD BY FORMER SEC STAFF THAT YOU FAILED TO SUPPORT THE WORK OF THE TASK FORCE. YOU DEFUNDED THE RISK ASSESSMENT THAT HAD BEEN ASSEMBLED FOR THE TASK FORCE. IN JULY 2006, HE TESTIFIED TO THE BANKING HEARING THAT YOU TOOK A COMPLETELY DIFFERENT POSITION. HE SAID THAT THERE SHOULD BE NO INTERFERENCE WITH THE INVESTMENT STRATEGIES OF HEDGE FUNDS, INCLUDING THE USE OF DERIVATIVE TRADING, LEVERAGE, AND SHORT- SELLING. ARE YOU NOW TELLING US THAT YOU WERE MISTAKEN TWO YEARS AGO WHEN YOU EXPECTED OPPOSITION OF REGULATION? |
| 01:27:57 | COX, C. "C." CHRISTOPHER | I DO NOT THINK THAT IS AN ACCURATE REPRESENTATION OF MY POSITION. THE OFFICE OF RISK ASSESSMENT WAS NOT RESPONSIBLE FOR SPECIFICALLY LOOKING AT DERIVATIVES. THE OFFICE HAD SEVEN PEOPLE, AND IT HAS SEVEN PEOPLE NOW. WE HAVE INCREASED THROUGHOUT THE AGENCY THE NUMBER OF PEOPLE THAT ARE FOCUSED ON RISK ASSESSMENT. WE HAVE DONE THAT IN THE DIVISIONS. IT IS A VITALLY IMPORTANT FUNCTION AND IS ONE THAT THE AGENCY AND I ARE STRONGLY COMMITTED TO. THERE ARE MORE PEOPLE DOING THIS NOW THAN EVER BEFORE. WITH RESPECT TO HEDGE FUND REGULATION, I STRONGLY SUPPORTED TO GET AT THIS EVEN THOUGH WE HAD INADEQUATE LEGAL AUTHORITY. WE PUT OUT RULES THAT GOT TO THE MARGIN OF OUR AUTHORITY THAT REGULATED HEDGE FUND ADVISERS. IN ORDER TO DO THIS, THOSE RULES WERE STRUCK DOWN BY THE COURT. AS A RESULT TO STAND UP TO THOSE RULES. WE HAD THE ADVISERS REGISTERED. |
| 01:29:03 | Cummings, Elijah | I WISH I HAD MORE TIME. |
| 01:29:06 | >> | THE GENTLEMAN'S TIME HAS EXPIRED. RECOGNIZED FOR FIVE MINUTES. |
| 01:29:15 | Souder, Mark Edward | THANK YOU, MR. CHAIRMAN. ONE OF THE HUGE CHALLENGES, YOU REFERRED TO THE MORAL HAZARDS OF RISK. THE FRUSTRATION THAT YOU ARE HEARING HERE AND ACROSS AMERICA IS THAT RESPONSIBILITY AND GREED OF PEOPLE IN WALL STREET AND OTHER PEOPLE THAT WORK RISK TAKERS HAVE ENDANGERED THE LIVES, THE JOBS, THE SAVINGS OF MILLIONS OF AMERICANS. I HAVE A LETTER FROM MANY OF THE THOUSANDS OF E-MAILS FROM PEOPLE THAT I GREW UP WITH. SHE SAID THAT SHE TURNED DOWN A BIGGER HOUSE. WE HAVE LIVED SO CAUTIOUSLY, AND NOW WE ARE ASKING TO TAKE THE MORAL HAZARD. I TOOK TWO TOUGH VOTES FOR THIS RESCUE BILL AND VOTED "YES." I DID IT BECAUSE I WAS WORRIED ABOUT THE PEOPLE IN MY DISTRICT. THEY ARE LEGITIMATELY ANGRY THAT PEOPLE SEEM TO SIT HERE, HEARING AFTER HEARING, AND SAYING THAT IT WAS@@@@@@@R @ @ @ @ @ Pu:ZZ@ @ @ Y@ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ A)@ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ ZZ@ @ @ @ @ H@ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ @ |
| 01:30:58 | COX, C. "C." CHRISTOPHER | NATIONAL HEADQUARTERS. WE HAVE OVER 50 SUBPRIME INVESTIGATIONS UNDERWAY. WE HAVE A COORDINATED NATIONAL EFFORT WITH CRIMINAL AUTHORITIES AND OTHER CIVIL LAW ENFORCEMENT AUTHORITIES IN THE STATES TO LOOK AT MANIPULATION AND FRAUD IN THE SECURITIES OF THE NATION'S LARGEST FINANCIAL INSTITUTIONS. THIS CRISIS HAS RESET THE FINANCIAL SECTOR. THE VOLATILITY IN THE MARKET HAS BEEN VISITED UPON BY THE FINANCIAL SECTOR. THE CRISIS IN BANKING, THE CREDIT CRISIS, THAT WE ARE LIVING THROUGH IS A MORTAL DANGER. DETERMINING THE EXTENT TO WHICH THE VIOLATIONS OF THE LAW MAY HAVE CONTRIBUTED TO THIS IS OF VITAL IMPORTANCE. |
| 01:31:58 | Souder, Mark Edward | WILLARD YESTERDAY IN DEBT RATINGS AUTHORITIES, AS WE SAW, AIG THAT IN JULY, THEY WERE PAYING BONUSES. IN SEPTEMBER, THEY WERE GETTING BAILED OUT. IT IS INCONCEIVABLE TO ME WITH A BUSINESS BACKGROUND AND KNOWING THAT THEY WERE EXPOSED THAT THERE WAS NO KNOWLEDGE IN THE RATINGS SERVICES THAT THE NUMBER OF LOANS DOUBLED IN A SHORT PERIOD OF TIME. THE INTEREST RATES WENT UP, AND ANYBODY WITH A SLIGHT INVESTIGATION WOULD HAVE KNOWN THAT THEY WERE BUNDLING, DOING THINGS THAT WERE PROBABLY ILLEGAL IN A SENSE OF TAKING FEES FOR HIGH-INTEREST LOANS, PACKING THEM HIGHER THAN THE VALUE OF THE HOUSE. IT IS A CULPABILITY OF THE PEOPLE THAT KNEW WHAT THEY WERE BUYING, TO SEE NO EVIL, HEAR NO EVIL, IT REPORT NO EVIL. MANY OF THEM ARE CRIMINAL IN MY VIEW. WE TALKED ABOUT A LOT OF DIFFERENT THINGS. ONE OF THE HUGE QUESTIONS IS, WHERE ARE THE CORPORATE BOARDS? THOSE OF US WHO BELIEVE IN THE PRIVATE SECTOR, WE BELIEVE THAT THERE SHOULD BE SOME KIND OF CORPORATE CHECK ON THE STOCKHOLDERS. DO ANY OF YOU HAVE SUGGESTIONS OF WHAT WE MIGHT BE LOOKING AT HERE? CLEARLY, THEY WERE ASLEEP AT THE WHEEL. FAULT FIRINGS ON MERRILL LYNCH AND OTHERS, IF THEY COMMITTED A CRIME, AND WE SEEM TO HAVE LOCKED IN A CORPORATE STRUCTURE OF HEDGE FUNDS AND THAT YOU WIN WHEN YOU DO WELL AND WIN IF YOU LOSE. WE HAVE TO HAVE TOUGHER ACCOUNTABILITY IN SOME WAY. I WONDER IF ANY OF YOU HAVE ANY SUGGESTIONS. THIS IS CRITICAL ABOUT HOW THE GOVERNMENT -- ABOUT WHAT THE GOVERNMENT IS GOING TO DO ABOUT THIS. IF THE PRIVATE SECTOR TOWARDS ANY TYPE OF THING AND THE MORAL HAZARD GOES TO THE TAXPAYERS, WHICH HAVE A PROBLEM. DO ANY OF YOU HAVE SUGGESTIONS? |
| 01:34:07 | Greenspan, Alan | IF I MAY, CONGRESSMAN, THE MARKETS HAVE ALREADY PUNISHED THE PEOPLE WHOM YOU ARE REFERRING TO. A LOT OF THESE PRODUCTS HAVE DISAPPEARED AND WILL PROBABLY NEVER RETURN. SOME OF THE FEES THAT WERE CHARGED AND PAID WHEN THE EUPHORIA LEAD TO SIGNIFICANT GREED SHOWED UP, THEY ARE GONE. I SUSPECT THAT WE ARE GOING TO FIND THAT THIS IS A VERY CHASING MARKET AND THAT MANY OF THE PROBLEMS WE HAVE OBSERVED THROUGH THE EUPHORIA STAGE OF THE EXPANSION WILL NOT BE BACK, IF AT ANY TIME, IF EVER. |
| 01:35:05 | Kucinich, Dennis | I THANK THE -- I THINK MR. GREENSPAN'S COMMENTS. OUR CONSTITUENTS ARE GETTING PUNISHED. THEY ARE LOSING THEIR HOMES. MR. GREENSPAN, YOU HAVE ACQUITTED YOURSELF AS A SPECTATOR, BUT I AM NOT SURE THAT YOU HAVE DONE THAT AS A PARTICIPANT BRITT. THERE ARE ABOUT 10 MILLION HOMES IN JEOPARDY. IN YOUR TESTIMONY, HE BLAMED SECURITIZE THERE'S, BANKS, CREDIT AGENCIES, WHAT ABOUT YOUR ROLE AS HEAD OF THE FED? IN YOUR TESTIMONY, HE SPOKE OF THE STRUCTURE OF THE FED STRUCTURE HAVING THE BEST ATTORNEYS, OUTSIDE COUNSEL. ACCORDING TO THEIR WEBSITE, THEY HAVE ONE OF THE FINEST RESEARCH STAFFS. 450, HALF OF THEM PH.D.'S. AS HEAD OF THE FED, PUBLIC DEBT EXPLODED TO $43 TRILLION. AS DOCUMENTED IN THIS BOOK CALLED, "YEAH RIGHT," YOU SAID THAT IN FEBRUARY 2 DOZEN FOR, PREDICT FEBRUARY 2004, AMERICANS WOULD BENEFIT. THE TRADITIONAL FIXED RATE MORTGAGE MIGHT BE AN EXPENSIVE METHOD OF FINANCING A HOME. IN JUNE TELL THAT -- IN JUNE 2005, HE SAID THAT YOU COULD NOT RULE OUT HOME PRICE DECLINE IN LOCAL MARKETS. THESE DECLINES WOULD NOT HAVE SUBSTANTIAL MACRO ECONOMIC IMPLICATIONS. IN SEPTEMBER 2005, HE STATED THAT THE VAST MAJORITY OF HOMEOWNERS HAVE A SIZABLE CUSHION TO -- TWO OF SORT A DECLINE IN HOUSING PRICES. THE NEXT YEAR IN MAY 2006, YOU SAID THAT WE ARE NOT ABOUT TO GO INTO A SITUATION WHERE PRICES WILL GO DOWN. SPEAKING ABOUT HOUSING, THERE ARE NO EVIDENCE THAT HOME PRICES WILL COLLAPSE. BY MID 2006, THERE WAS EVIDENCE THAT THE HOUSING MARKET HAD TROUBLE. HE SAID IN OCTOBER 2006, THE WORST MAY BE OVER. HE SAID THAT WE SUSPECT THAT WE WOULD BE COMING TO THE END OF THIS DOWNTREND. ONE MONTH LATER, USED SAID THAT THE WORST WAS BEHIND US. THE GLOBAL ECONOMY WAS IN EXTRAORDINARILY GOOD SHAPE. THINGS DO NOT LOOK SO BAD. MR. GREENSPAN, BEFORE THE COLLAPSE OF THE HOUSE AND BAUBLE, IT DID YOU NOT ALSO SAY THAT THE U.S. HAS NOT EXPERIENCED HOUSING SLUMP TO JUSTIFY YOUR POLICY THAT THERE WOULD BE NO BUBBLE? COULD YOU TELL THIS COMMITTEE WHEN IT OCCURRED TO YOU THAT THERE WAS A HOUSING BUBBLE? |
| 01:38:12 | Greenspan, Alan | FIRST, LET ME CORRECT SEVERAL ISSUES, WHICH I REGRET HAVE BEEN CARRIED ON FOR QUITE A SIGNIFICANT PERIOD OF TIME. |
| 01:38:23 | Kucinich, Dennis | |
| 01:38:24 | Greenspan, Alan | COULD YOU SPEAK CLOSER TO THE MICROPHONE? |
| 01:39:24 | Kucinich, Dennis | WITH ALL DUE RESPECT, DID YOU |
| 01:39:27 | Greenspan, Alan | RETRACT WHAT YOU SAID? I DID. |
| 01:39:37 | Kucinich, Dennis | FROM ""USA TODAY," YOU SAID THAT "5 REPRODUCED THAT SPEECH, WORD FOR WORD TODAY. |
| 01:39:48 | Greenspan, Alan | THE ISSUE IS THAT THAT SPEECH, TAKEN LITERALLY, IS AN UNEXCEPTIONAL SPEECH. IT SAID THAT IF YOU HAD INTEREST RATES RISING SIGNIFICANTLY, THEN YOU WOULD BASICALLY RUN INTO -- |
| 01:40:07 | Kucinich, Dennis | HERE ARE YOUR WORDS. YOU SAID THAT THERE WAS NO CONNECTION. YOU SAID THAT YOU WOULD REPRODUCED THAT SPEECH. WHEN DID YOU KNOW THAT THERE WAS A HOUSING BUBBLE? |
| 01:40:24 | Maloney, Carolyn | THE GENTLEMAN'S TIME HAS EXPIRED. |
| 01:40:27 | Kucinich, Dennis | WHEN DID YOU TELL THE PUBLIC ABOUT IT? |
| 01:40:31 | Greenspan, Alan | I MAY RESPOND, THAT SPEECH WAS A REPORT ON A STAFF STUDY, WHICH IF YOU READ IT TODAY, IT WAS EXCEPTIONAL. THE PROBLEM WITH RESPECT TO MY ARGUING FOR ADJUSTABLE RATE MORTGAGES IS FALSE. I WENT BEFORE THIS ECONOMIC CLUB IN NEW YORK. JUST DAYS LATER, I'D VERY SIGNIFICANTLY POINTED OUT THAT THE 30-YEAR MORTGAGE WAS THE MOST IMPORTANT MORTGAGE THAT WE HAD. WHENEVER I TOOK OUT A MORTGAGE, I DID NOT TAKE OUT AN ADJUSTABLE MORTGAGE BECAUSE I THOUGHT IT WAS TOO RISKY. |
| 01:41:12 | Kucinich, Dennis | WITH ALL DUE RESPECT, HE DID NOT ACTUALLY RESPOND TO THE QUESTION ABOUT WHEN HE KNEW THERE WAS A HOUSING BAUBLE. |
| 01:41:22 | Greenspan, Alan | THE HOUSING BUBBLE BECAME CLEAR TO MEET SOMETIME IN EARLY 2006, IN RETROSPECT. I DID NOT FORECAST A SIGNIFICANT DECLINE BECAUSE WE HAVE NEVER HAD A SIGNIFICANT DECLINE IN PRICES. IT IS ONLY AS THE PROCESS BEGAN TO EMERGE THAT WE WERE ABOUT TO |
| 01:41:47 | >> | HAVE A GLOBAL DECLINE IN HOME PRICES. THANK YOU. |
| 01:41:51 | Sali, Bill | THANK YOU, MR. CHAIRMAN. GENTLEMEN, I HOPE YOU KEEP IN MIND THAT FIVE MINUTES IS A SHORT TIME. I WOULD LIKE TO GET THROUGH A COUPLE OF ITEMS QUICKLY. IT WAS MENTIONED EARLIER THAT THERE IS A GREAT LEVEL OF EXPERTISE AND YORK AGENCIES. YOU WOULD -- IN YOUR AGENCIES. THAT IS A -- IS THAT CORRECT? YOU ARE ALL SAYING YES? I JUST BATTLED OFF A LIST OF WHAT MOST PEOPLE WILL CONSIDER IMPORTANT THINGS. EACH OF YOU SAID THAT YOU KNEW NOTHING ABOUT IT. WOULD YOU AGREE THAT THAT WAS IN SPITE OF ALL OF THAT EXPERTISE? SOME SORT OF FAILURE WITH THE AGENCIES THAT YOU WERE INVOLVED WITH? |
| 01:42:47 | Snow, John W. | LET ME START THIS TIME. I DO NOT THINK I COULD HAVE BEEN CLEARER. SOME OF YOU KNOW ABOUT THE HUGE THREAT TO THE FINANCIAL SYSTEM POSED BY THE GSE'S. I WAS UP HERE TESTIFYING A NUMBER OF TIMES, GAVE SPEECHES ON IT, CALL FOR ACTION OVER AND OVER AGAIN. I DO NOT THINK I COULD HAVE BEEN CLEARER. |
| 01:43:15 | COX, C. "C." CHRISTOPHER | IF I MAY RESPOND TO THE GSE'S, IN BOTH OF THE 108TH AND 109TH CONGRESS IS, AS A MEMBER OF THE JURISDICTION, I JOINED IN A CO-SPONSOR OF LEGISLATION WITH REP BAKER WHICH WAS DESIGNED TO GIVE THE GSE'S A STRONG REGULATOR. WE SAW THE IMPORTANCE OF A STRONG REGULATOR. THAT LEGISLATION WAS MAKING ITS WAY THROUGH THE CONGRESS AS EARLY AS 2003 WHEN I'D ORIGINALLY SPONSORED THE BILL. I GOT A CHANCE TO VOTE FOR IT IN 2005. I NOTED THAT IT PASSED THE HOUSE ON A BIPARTISAN BASIS IN OCTOBER 2005 RIGHT AFTER I LEFT AND BECAME CHAIRMAN OF THE SEC. I READ IT IN THE NEWSPAPER THE SAD TALE ABOUT HOW IT WAS PREVENTED, OR AT LEAST THAT INFLUENCED THAT IT BROUGHT TO BEAR THAT THE LEGISLATION DID NOT OCCUR. VERY EARLY ON, I SAW THAT IMPORTANT TASK. I AM SURE CHAIRMAN GREENSPAN, TOO. THE ROLE OF THE GSE'S IS ABUNDANTLY CLEAR. THE FEDERAL GOVERNMENT HAD TO BAIL THEM OUT. |
| 01:44:51 | Sali, Bill | MR. COX, LOOKING AT IDAHO'S MOM AND POP INVESTORS WHO LOST THEIR SAVINGS, THE RETIREMENT FUNDS, SOME OF THE CORPORATE CEO'S HAVE RECEIVED GOLDEN PARACHUTES. WHAT DO YOU SAY TO THE PEOPLE IN IDAHO? IS SOMEBODY GOING TO GO TO JAIL? |
| 01:45:15 | COX, C. "C." CHRISTOPHER | THERE IS NO QUESTION TH SOMEWHERE@@@@@@@@@@ d@ @ @ @ b)@ @ @ @ @ @ @ @ @ @ COORDINATION WITH OTHER LAW ENFORCEMENT AUTHORITIES. CLEANING UP THE MESS THROUGH LAW ENFORCEMENT, AFTER THE FACT, WHILE IMPORTANT, IT IS NOT IDEAL. THE BEST THING THAT WE CAN DO, OF COURSE, IS TO INFER LESSONS TO WHAT HAPPENED AND TO PREVENT ANYTHING LIKE THIS FROM HAPPENING AGAIN. |
| 01:46:24 | Sali, Bill | THE CHAIRMAN IS TAKING US INTO A DIRECTION THAT HE THINKS WE NEED MORE REGULATION. PERHAPS WE NEED MORE PEOPLE OUT THERE REGULATING WITH MORE AUTHORITY. I GUESS I WOULD CHALLENGE EACH OF YOU, IN THE THREE AGENCIES THAT YOU HAVE REPRESENTATIVE, I THINK YOU HAVE SUFFICIENT AUTHORITY -- YOU HAD SUFFICIENT AUTHORITY TO AVOID MOST OF THE TROUBLES THAT WE HAVE SEEN. I GUESS WHAT THE CHAIRMAN HAS SUGGESTED BEGS THE QUESTION, IF WE DID NOT GET THE JOB DONE WITH ENOUGH AUTHORITY TO GET IT DONE, HOW IS GIVING MORE REGULATORS MORE POWER TO ANYTHING DIFFERENT, WHEN EACH OF YOU SAID THAT YOU WERE NOT AWARE OF THE THINGS THAT WERE A TREMENDOUS PROBLEM? HOW DO YOU RESPOND TO THAT? |
| 01:47:16 | Snow, John W. | LET ME TAKE A CRACK AT IT. AS I SAID, IT BECAME CLEAR TO ME THAT NO SINGLE REGULATOR HAD A CLEAR VIEW, A 360 DEGREE VIEW OF THE PROBLEM. WHEN I INVITED THE VARIOUS MORTGAGE MARKET REGULATORS TO COME TALK TO ME ABOUT WHAT THEY SAW IN THE SUBPRIME OF MARKETS WITH RESPECT TO THESE NEW INSTRUMENTS, THAT INTEREST-ONLY AND MORTGAGE AMORTIZATION AND SO ON, NO ONE HAD A CLEAR VIEW OF THAT. THEY HAD DIFFERENT VIEWS OF IT. MY SUGGESTION IS THAT NOBODY SEES THE WHOLE PICTURE. WE WANT TO PUT IN PLACE SOMEBODY, SOME INSTITUTION OF OUR GOVERNMENT, THAT HAS A CLEAR VIEW AND A TRANSPARENT VIEW OF RISK OF LEVERAGE OF THE SYSTEM. THIS IS ABOUT EXCESS OF RISK AND EXCESS OF LEVERAGE. NO ONE SAW THIS BECAUSE NO ONE HAD THE FULL FIELD OF VIEW. |
| 01:48:26 | Greenspan, Alan | IF I MAY ADD A WORD OR TWO, I THINK IT IS INTERESTING TO OBSERVE THAT WE FIND FAILURES OF REGULATION ALL OF THE TIME. DIRECT DIRECTIVE . OF REGULATION AND THE ECONOMIC AREA IS BASED ON A FORECAST. TO KNOW IN ADVANCE WHETHER OR NOT PARTICULAR PRODUCTS WILL GO BAD OR IF THE CYCLE WILL TURN. IF WE ARE RIGHT 60% OF THE TIME IN FORECASTING, WE ARE DOING EXCEPTIONALLY WELL, THAT MEANS WE ARE BOND 40% OF THE TIME. IF YOU OBSERVE THE BROUGHT FAILURE, THE DIFFICULTY IS THAT NO ONE CAN FORECAST. IF YOU TRY TO TAKE A LOOK AT WHAT THE PRIVATE SECTOR DOES, IT IS PRECISELY THE SAME THING THAT GOES ON IN GOVERNMENT. WHEAT AT THE FEDERAL RESERVE HAD A MUCH BETTER RECORD FORECASTING EVENT THE PRIVATE SECTOR, BUT WE WERE WRONG QUITE A BIT DEAL OF THE TIME. THAT WAS REFLECTED OF HOW ONE VIEWS APPROPRIATE REGULATORY AUTHORITIES ARE. UNLESS YOU CAN ANTICIPATE THE TYPES OF PROBLEMS THAT ARE GOING TO HAPPEN, IT IS DIFFICULT TO KNOW WHAT TO DO. I THINK THAT IS THE PROBLEM THAT THIS KIND OF THING CONFRONTS. I DO NOT SEE ANY WAY THAT THIS WILL BE FUNDAMENTALLY CHANGED. WE CAN TRY TO DO BETTER, BUT FORECASTING NEVER GETS TO THE POINT WHERE IT IS 100% ACCURATE. |
| 01:50:04 | >> | THE GENTLEMAN'S TIME HAS EXPIRED. |
| 01:50:08 | COX, C. "C." CHRISTOPHER | MAY I ANSWER ON BEHALF OF THE SEC? THE TIME FOR ASKING QUESTIONS HAS EXPIRED, BUT PEOPLE ALLOW TIME FOR QUESTIONS PIK I WILL DISAGREE WITH THE PREMISE OF THE QUESTION, THAT THERE WAS ADEQUATE AUTHORITY IN OUR SYSTEM FOR REGULATORS TO DEAL WITH THE PROBLEMS. THERE WERE SIGNIFICANT REGULATORY HOLES AND GAPS. WE HAVE SEEN THEM, IN EXAMPLE, WITH RESPECT TO THAT THERE IS NO STATUTORY REGULATOR IN BANK HOLDING COMPANIES. WE SAW IT IN RESPECT TO CREDIT DEFAULT SWAPS WITH NO REGULATOR. THE MORTGAGE BROKERAGE MARKET, THERE IS NO ADEQUATE REGULATION. IN RESPECT TO THE MULTI TRILLION DOLLAR MARKET IN SECURITIES, THE SEC AND NO ONE HAS AUTHORITY OR DISCLOSURE TO INVESTORS ABOUT WHAT THEY ARE GETTING. IT IS NOT A SIMPLE QUESTION OF MORE OR LESS REGULATION, BUT ONCE YOU HAVE A REGULATED INDUSTRY AND CREATE THESE BIG POCKETS OF A WHOLE UNIVERSE OF ACTIVITY, IT BECOMES DISTORTED. YOU HAVE TO HAVE A SYSTEM THAT HANGS TOGETHER AND MAKE SENSE. YOU CAN'T REGULATE FUTURES IN ONE WAY AND THEN HAVE DIFFERENT MARGIN RULES AND SO WANT AND EXPECT IT NOT TO PRODUCE DISRUPTIONS IN THE MARKETS. THERE IS AN ENORMOUS OPPORTUNITY TO FIX THIS PROBLEM IN CONGRESS. |
| 01:51:48 | Mica, John | QUICKLY, I HAVE A UNANIMOUS CONSENT. |
| 01:51:51 | >> | YOU WILL HAVE TO HOLD OFF ON THAT. |
| 01:51:54 | Mica, John | THANK YOU, MR. CHAIRMAN. |
| 01:51:58 | >> | THERE WAS A REPRESENTATION MADE ABOUT MY VIEW OF REGULATION, AND THE GENTLEMAN FROM IDAHO ONCE MORE REGULATION. I WANT SMART REGULATION. I WANT TO POINT OUT, THAT WHAT I AM HEARING FROM MY WITNESSES, THAT THEY DID NOT KNOW. THEY COULD NOT MAKE PROJECTIONS ABOUT WHAT THE FUTURE WAS, OR THAT THEY WERE NOT ALWAYS RIGHT. THE TRUTH OF THE MATTER IS IS THAT THERE WERE LARGE WARNING SIGNS. THE FEDERAL RESERVE HAS ONE OF THE FINEST ECONOMIC RESEARCH STAFFS IN THE UNITED STATES, INCLUDING A STAFF OF 450 WHO ARE PH.D. ECONOMISTS. THE REASON WE SET UP YOUR AGENCIES AND GAVE YOU BUDGET AUTHORITY TO HIRE PEOPLE IS SO THAT YOU SEE PROBLEMS DEVELOPING BEFORE THEY BECOME A FINANCIAL CRISIS. TO TELL US AFTERWARDS WHEN WE ARE NOW FACED WITH THE DISASTER THAT WE ARE SEEING, THAT YOU COULD NOT HAVE FORESEEN IT, IT DOES NOT SATISFY ME. MR. COX HAS COME IN WITH A WHOLE LIST OF REGULATIONS AND THEY MAKE SENSE TO ME. I CANNOT IMAGINE THAT ARTHUR LEVITT WOULD OF HAD A DIFFERENCE IN OPINION OF THE PROPOSALS THAT YOU HAVE MADE. THE REALITY IS, MR. COX, YOU WERE NOT DOING THE JOB. YOU DID NOT ANTICIPATE THE PROBLEM FOR YOU DID NOT AGREE WITH THE PHILOSOPHY THAT WE DO NOT NEED REGULATION, THAT THE MARKET COULD CORRECT THEMSELVES. I WANT TO SUGGEST, AND I AM NOT ASKING A QUESTION, I WANT TO SUGGEST TO MY COLLEAGUES FOR THEM TO SAY THAT THERE IS NO WAY THAT YOU COULD HAVE KNOWN WHAT WAS GOING ON, NO WAY TO ACT. THERE WAS A LONG LIST OF WARNING SIGNS AND ECONOMIST SAYING THINGS SHOULD HAVE BEEN DONE AND THIS PROBLEM WAS GOING TO GET OUT OF HAND, YET THE FEDERAL RESERVE, THE SEC, AND THE DEPARTMENT OF TREASURY DID NOT ACT. TO SAY NOW THAT WE NEED REGULATION, IS HELPFUL. ANOTHER THING I WANT TO SAY ABOUT THE GSE'S. GSE'S STARTED THIS WHOLE CRISIS, IS ABOUT AS ACCURATE AS SAYING THAT OFFSHORE DRILLING WILL SOLVE OUR ENERGY CRISIS. IT IS A POLITICAL ARGUMENT, NOT A FACTUAL ONE. I WOULD LIKE US TO GO INTO THE FACTS. BY LOOKING AT THE FACTS, WE CAN LEARN ABOUT WHAT HAPPENED. WE HAVE SUGGESTED THAT THERE IS A TASK FORCE TO BRING EVERYONE TOGETHER TO REDO OUR REGULATORY SYSTEM. THAT MAKES SENSE BUT IT IS CERTAINLY DEALING WITH CLOSING THE BARN DOOR AFTER, WOULD AVERT THE METAPHOR IS -- WE ARE ALREADY IN THE MESS. WE HAVE TO FIGURE OUT HOW TO GET OUT OF IT. |
| 01:55:13 | Davis, Thomas | MR. CHAIRMAN? CAN I YIELD MYSELF TWO MINUTES? WE ARE SAYING CULPABILITY. WHAT WAS CONGRESS DOING ALL OF THIS TIME? AT THIS POINT, WE HAD A WARNING SIGNALS THAT EVERYONE ELSE DID. TO MOVE ON FANNIE AND FREDDIE WITHOUT WARNINGS CAME FROM THE ADMINISTRATION DOWN CONSTANTLY, WARNINGS FROM THE NEWSPAPERS AND ECONOMISTS, WE HAD A PARTY LINE VOTES IN THE SENATE STILL NOT MOVE FORWARD TO REGULATE THAT ASPECT -- |
| 01:55:48 | >> | GENTLEMEN, YIELD. A LOT BEING PROPOSED WAS ADOPTED BY A BIPARTISAN VOTE. IN THE SENATE, IT WAS BIPARTISAN TO THOSE THAT OPPOSED IT. WE COULD NOT GET THOSE THAT SUPPORTED LEGISLATION TO STOP THE FILIBUSTER BECAUSE OF DEMOCRATS AND REPUBLICANS. |
| 01:56:09 | Davis, Thomas | THAT MEET RECLAIM MY TIME. IT WAS THE CHAIRMAN OF THE -- WE HAVE BEEN THROUGH ALL OF THIS. IT LIES ALL AROUND. I CAME IN THE ROOM WHEN YOU WERE LECTURING MR. COX ABOUT CULPABILITY. I THINK WE ALL AGREED THAT THERE IS A LOT OF BLAME TO GO AROUND HERE. THIS WAS GLOBAL IN ITS NATURE, EVEN FOR THE MORTGAGE BROKERS, IT GOES BACK TO STATE REGULATION. WHAT WERE THEY DOING DURING THIS TIME. ? WHAT WE NEED TO FOCUS ON WHAT WE WILL DO FROM HERE ON OUT. WE HAVE BEEN HEARING RHETORIC. THE FACT OF THE MATTER IS THAT WE ARE DEALING WITH SO MANY SILOS IS THAT NO ONE IS GETTING THE PICTURE. IT REMINDS ME OF 9/11. AS WE HAVE LISTENED TO PEOPLE THAT HAVE BEEN INVOLVED, THAT SEEMS TO BE -- I WILL GIVE MY REMAINING TIME UP. |
| 01:57:13 | Sali, Bill | FOR THE THREE OF YOU, THE BEST THAT WE CAN HOPE FOR HERE, BECAUSE YOU LIVE ON -- BECAUSE YOU WILL LIVE ON PROJECTIONS, AND I HOPE WE WILL BE SMART ABOUT IT AND NOT OVER-HANDED, THE BEST WE CAN EXPECT IS REGULATION THAT WILL HAVE A 40% CHANCE OF BEING WRONG THE MATTER WHAT HAPPENS? DO YOU THREE AGREE WITH THAT PREMISE? |
| 01:57:48 | >> | THE GENTLEMAN'S TIME HAS EXPIRED BUT PEOPLE THAT THE WITNESSES ANSWER. |
| 01:57:53 | Greenspan, Alan | I AGREE WITH IT BECAUSE I MADE THE STATEMENT. |
| 01:57:56 | >> | MR. COX? THAT IS MORE QUANTITATIVE THEN I FEEL COMFORTABLE WITH. THE POINT THAT IT IS A FALLIBLE HUMAN PROCESS HAS TO HUMBLE ANYONE IN CONGRESS OR IN REGULATION. NONETHELESS, WHEN WE LOOK AT IT STRUCTURALLY, IT IS CLEAR THAT WE CAN DO A BETTER, RATIONAL JOB. WE HAVE TO TAKE A LOOK AT THAT THE SYSTEM OF REGULATION WAS DESIGNED IN THE 30'S AND '40'S. THE MARKETS HAVE CHANGED. IT IS A -- IT IS TIME TO HAVE A THOROUGH CHANGING OF THE REGULATORY GAPS. THANK YOU, MR. CHAIRMAN. I THINK REGULATORS NEED MORE TRANSPARENCY ON THE RISKS AND DELEVERAGE IN THE FINANCIAL SYSTEM. I THINK THAT SOME REGULATORS SHOULD BE GIVEN RESPONSIBILITY TO ASSESS BROAD SYSTEMIC RISKS AND THE ABILITY TO STEP IN WHERE THEY SEE THE RISK MANAGEMENT FUNCTION BEING ABUSED. TOO MUCH LEVERAGE BEING CREATED IN SOME ASPECT OF BUSINESSES' BEHAVIOR, TO STEP IN AND STOP IT. THAT IS WHAT WE WOULD LIKE TO DO. MR. CHAIRMAN? I HAVE MY UNANIMOUS CONSENT REQUEST. THE GENTLEMAN WILL HAVE TO HOLD. AFTER EACH TIME? WHY DON'T YOU WAIT UNTIL -- I WANT TO PUT IN THIS PAGE FROM "THE WALL STREET JOURNAL." WITHOUT OBJECTION, YOUR ONE PAGE WILL BE PART OF THE RECORD. THE CHAIR WILL COMMENT THAT EVERYONE HAS RESPONSIBILITY MEANS THAT NO ONE HAS RESPONSIBILITY. IT IS LIKE A CRIMINAL ACTED BECAUSE A SOCIETY CAUSED ALL OF THE PROBLEMS TO MAKE THAT PERSON ACT THAT WAY. THE REPUBLICANS CONTROLLED THE CONGRESS FOR 12 YEARS. IT IS ONLY THE LAST TWO YEARS THAT THE REPUBLICANS -- THAT THE DEMOCRATS HAVE BEEN IN POWER. I CAN SEE WHY YOU DO NOT WANT TO HOLD A PARTY RESPONSIBLE, BUT |
| 01:58:01 | COX, C. "C." CHRISTOPHER | THAT IS MORE QUANTITATIVE THEN I FEEL COMFORTABLE WITH. THE POINT THAT IT IS A FALLIBLE HUMAN PROCESS HAS TO HUMBLE ANYONE IN CONGRESS OR IN REGULATION. NONETHELESS, WHEN WE LOOK AT IT STRUCTURALLY, IT IS CLEAR THAT WE CAN DO A BETTER, RATIONAL JOB. WE HAVE TO TAKE A LOOK AT THAT THE SYSTEM OF REGULATION WAS DESIGNED IN THE 30'S AND '40'S. THE MARKETS HAVE CHANGED. IT IS A -- IT IS TIME TO HAVE A THOROUGH CHANGING OF THE REGULATORY GAPS. |
| 01:58:38 | Snow, John W. | THANK YOU, MR. CHAIRMAN. I THINK REGULATORS NEED MORE TRANSPARENCY ON THE RISKS AND DELEVERAGE IN THE FINANCIAL SYSTEM. I THINK THAT SOME REGULATORS SHOULD BE GIVEN RESPONSIBILITY TO ASSESS BROAD SYSTEMIC RISKS AND THE ABILITY TO STEP IN WHERE THEY SEE THE RISK MANAGEMENT FUNCTION BEING ABUSED. TOO MUCH LEVERAGE BEING CREATED IN SOME ASPECT OF BUSINESSES' BEHAVIOR, TO STEP IN AND STOP IT. THAT IS WHAT WE WOULD LIKE TO DO. |
| 01:59:17 | Mica, John | MR. CHAIRMAN? I HAVE MY UNANIMOUS CONSENT REQUEST. |
| 01:59:25 | >> | THE GENTLEMAN WILL HAVE TO HOLD. |
| 01:59:28 | Mica, John | AFTER EACH TIME? |
| 01:59:30 | >> | WHY DON'T YOU WAIT UNTIL -- |
| 01:59:34 | Mica, John | I WANT TO PUT IN THIS PAGE FROM "THE WALL STREET JOURNAL." |
| 01:59:41 | >> | WITHOUT OBJECTION, YOUR ONE PAGE WILL BE PART OF THE RECORD. THE CHAIR WILL COMMENT THAT EVERYONE HAS RESPONSIBILITY MEANS THAT NO ONE HAS RESPONSIBILITY. IT IS LIKE A CRIMINAL ACTED BECAUSE A SOCIETY CAUSED ALL OF THE PROBLEMS TO MAKE THAT PERSON ACT THAT WAY. THE REPUBLICANS CONTROLLED THE CONGRESS FOR 12 YEARS. IT IS ONLY THE LAST TWO YEARS THAT THE REPUBLICANS -- THAT THE DEMOCRATS HAVE BEEN IN POWER. I CAN SEE WHY YOU DO NOT WANT TO HOLD A PARTY RESPONSIBLE, BUT THAT THINK THAT FACT SHOULD BE OUTH#i@@@s2 @ @ @ @ @ @ @ @ ) |
| 02:00:19 | Davis, Thomas | DEMOCRATS BY THE WAY CONTROLLED THE SENATE THE FIRST TWO YEARS OF THE BUSH ADMINISTRATION AND LET'S NOT GET INTO PARTISANSHIP. I'M RESPONDING TO WHAT THE CHAIRMAN IS SAYING. I TRIED TO STAY AWAY FROM THAT TODAY. I THINK WE NEED TO FOCUS ON THIS. THAT IS WHAT THE PUBLIC IS INTERESTED IN. THEY ARE TIRED OF THIS PARTISAN |
| 02:00:46 | >> | HARPING. |
| 02:00:48 | Tierney, John | WE WILL GO TO MR. TIERNEY FOR HIS QUESTIONS. |
| 02:01:14 | Greenspan, Alan | YES. |
| 02:01:17 | Tierney, John | CREDIT MARKET CRISIS BEGAN WITH A DETERIORATION OF MORTGAGE ORIENTATION STANDARDS. MR. SNOW CITED LAX LENDING PRACTICES. ACKS. IN RESPONSE TO IN RESPONSE TO THE QUESTION OF WHY YOU HAD NOT USED THE REGULATORY AUTHORITY CONGRESS GAVE BUT 1994 TO REIN IN THE IRRESPONSIBLE PRIME LENDING YOU SAID I TOOK AN OATH I'M HERE TO UPHOLD THE LAW OF THE LAND. BUT YOU HAD A CLEAR DETECTIVE TO ACT. THE LAW OF THE LAND AS OF 1994 TITLE 15, U.S. CHAPTER 41, SUN CHAPTER 1, PART B, SECTION 1639, SAYS THIS, THAT THE BOARD, MEANING YOUR BOARD BY REGULATION OR ORDER SHALL NOT MAY BUT SHALL PROHIBIT ACTS OR PRACTICES IN CONNECTION WITH REFINANCING OF MORTGAGE LOANS THAT THE BOARD FINDS TO BE ASSOCIATED WITH ABUSIVE LENDING PRACTICES OR OTHERWISE NOT IN THE INTEREST OF THE BORROWER. NOW, YOU SAID MR. GRAMLICH CAME IN INTO THE CONVERSATION AND REQUESTED YOU SEND BANK EXAMINERS OUT ON THIS. YOU DIDN'T DO THAT BUT YOU SAID TO MR. WAXMAN YOU SPOKE OF SENDING OUT ON THE COMMITTEE AND YOU VOTED FOR REGULATIONS. BUT UNFORTUNATELY THE REGULATIONS ON WHICH YOU VOTED IN 2001 DEALT ONLY WITH HIGH COST MORTGAGES. THAT LEAVES LIKE 99% OF SUBPRIME MORTGAGES OFF THE TABLE. YOU DIDN'T DEAL WITH DECEPTIVE TEASE RATES OR BALLOON PAYMENT LOANS, PREPAYMENT PENALTIES FOR HOMEOWNERS WHO WANTED TO REFINANCE BEFORE THEIR RATE GOES UP. RATE GOES UP. -- BALLOON LOANS. YOU HAD THE HOUSING OF URBAN DEVELOPMENT ASKING YOU TO USE THE AUTHORITY CONGRESS GAVE U.S. MANDATE, NOT A WISH, BUT A MANDATE. CAN YOU STILL SAY YOU THOUGHT YOU WERE CARRYING OUT A LOT OF THE LAND AND THE WILL OF CONGRESS AS OPPOSED TO HAVING YOUR OWN IDEOLOGY INFLUENCES NOT HAVING STRONG ENOUGH REGULATION THAT SHE DID NOT BRING TO THE BOARD OR PRESS FOR STRONGER REGULATION OF THE UNSAVORY SUBPRIME LOANS. |
| 02:03:36 | Greenspan, Alan | LET'S TAKE THE ISSUE OF UNFAIR AND DECEPTIVE PRACTICES, WHICH IS A FUNDAMENTAL CONCEPT TO THE WHOLE PREDATORY LENDING ISSUE. THE STAFF OF THE FEDERAL RESERVE, THE BEST IN THE BUSINESS AS FAR AS I'M CONCERNED, LOOKS AT THAT STATEMENT AND SAYS HOW DETERMINE AS A REGULATORY GROUP WHAT IS UNFAIR AND DECEPTIVE. THE PROBLEM WERE CONCLUDING AND WERE THEREFORE RAISING WITH THE STAFF OF CONGRESS, WAS THE ISSUE OF MAYBE 10% OR SO, OR SELF EVIDENTLY, UNFAIR OR DECEPTIVE. THE VAST MAJORITY WOULD REQUIRE A JURY TRIAL OF OTHER MEANS TO DEAL WITH IT. |
| 02:04:31 | Tierney, John | LET ME INTERRUPT YOU A SECOND. THE LAW PASSED. THE DEBATE BETWEEN YOUR OFFICE AND CONGRESS WAS OVER IN 1994. CONGRESS PASSED A LAW TELLING YOUR BOARD AND YOU TO ACTUALLY DO SOMETHING ABOUT IT AND IT WAS NOT DONE. THE EVIDENCE OF THAT IS -- WHEN WE HAD THE SITUATION I DON'T WANT TO SHOW A DESIRE NOT TO GET POLITICAL ABOUT THIS, BUT OTHER PEOPLE WENT OFF ON THIS GSE THING. A DEMOCRATIC CONGRESS INSTRUCTED YOU TO DO THAT AND IT WAS NOT DONE. 1995-2006, REPUBLICANS DID NOT PRESSURE YOU TO DO IT AND NOTHING GOT DONE. THE CORE PART OF THIS PROBLEM, THE RESPONSE WILL SUBPRIME LENDING, IN 2007, WHEN DEMOCRATS TAKE CONTROL, A BIPARTISAN GROUP PASSES BY A SIGNIFICANT MARGIN A DIRECTIVE. THEY WRITE YOUR REGULATION FOR YOU -- AND BY THAT TIME YOU ARE GONE -- BUT THEY TELL THE BOARD WHAT IT SHOULD DO WHEN DEALING WITH SUBPRIME MORTGAGES. IT PASSES BY A HUGE BIPARTISAN VOTE, TO 91-227. IT DOES NOT GOING OR IN THE SENATE BECAUSE THE BUSH ADMINISTRATION OPPOSES THAT AND KILLS IT. THEY DO NOT DEAL WITH IT. IN 2005, WHEN REPUBLICANS WERE IN CHARGE, MR. OXLEY MADE A GROUP TO DO SOMETHING ABOUT SUBPRIME BECAUSE THE FED BOARD WAS NOT DOING IT. IN HIS LANGUAGE, THE WHITE HOUSE GAVE HIM THE ONE FINGER SALUTE ON THAT. THEY WOULD NOT DEAL WITH IT. IT STILL PASSED THE HOUSE BY 331-90. SO THERE WAS A BIPARTISAN GROUP IN THE HOUSE THAT WANTED TO DEAL WITH IT. IF YOU WANT TO TALK ABOUT DEALING WITH, THERE WAS SOME POINT, SOMEONE WANTED TO REGULATE, BUT A GROUP AND THE HOUSE DID. |
| 02:06:18 | >> | THE GENTLEMAN'S TIME HAS EXPIRED. |
| 02:06:22 | >> | THANK YOU, ITS CHAIRMAN. I APPRECIATE YOU POINTING OUT THAT EVEN THOUGH IT MAY LOOK SMALL, THE ICEBERGS WE CALL IT TOXIC TWINS, FOR THE MAY AND -- FROM MAC AND FANNIE MAE, HAVE A MUCH MORE SUBSTANTIAL IMPACT THAN APPEARANCES WOULD FIRST LEAD ONE TO BELIEVE. THE SCUTTLING OF THE GOOD SHIP ECONOMY CAN BE TRACED BACK TO AN INCIDENT THAT CAN BE RELATED TO THOSE TOXIC TWINS -- THAT ICEBERG OF FREDDIE MAC AND FANNIE MAE. EVEN WITH THAT DAMAGE DONE, THAT SEVERE DAMAGE DONE BY A SMALL PROFILE THING CALLED THE ICEBERG, THERE WERE OTHER THINGS THAT COULD HAVE HELPED TO MITIGATE THIS IMPACT. THE QUALITY CONTROL, THE SAFETY INSPECTIONS, TO MAKE SURE THE GOOD SHIP WAS ABLE TO TAKE THIS KIND OF HIT DOES NOT APPEAR TO HAVE BEEN THERE TO THE LEVEL WE WANT. MR. COX, I BELIEVE -- I REALIZE THE SEC HAS BEEN GRANTED THE AUTHORITY TO REGULATE THE CREDIT RATING AGENCIES, THE ONES WHO ARE SUPPOSED TO BE INSPECTING THE CRAFT AND TELLING US IS SAFE TO USE. IN THE TESTIMONY WE HEARD YESTERDAY, IT WAS CLEAR THE CREDIT RATING AGENCIES ARE NOT SIGNIFICANTLY REGULATED AND THERE WERE MAJOR ABUSES OF THE INDEPENDENT CREDIT RATERS. CONSIDERING THE LEVEL OF FEDERAL REGULATIONS TO THESE INDEPENDENT -- SO CALLED INDEPENDENT ASSESSMENTS, AND HOW IMPORTANT THAT IS, DO YOU THINK YOU HAVE SIGNIFICANT AUTHORITY NOW TO REGULATE THEM? DO YOU THINK THERE IS ENOUGH TRANSPARENCY FOR NOT ONLY REGULATORS, BUT ALSO INVESTORS TO KNOW EXACTLY WHAT THEY ARE BUYING AND DO YOU HAVE THE ABILITY TO REGULATE THEM APPROPRIATELY NOW OR THE NEED MORE REGULATION AND AUTHORITY TO BE ABLE TO CREATE MORE TRANSPARENCY? |
| 02:08:34 | COX, C. "C." CHRISTOPHER | WE DO HAVE THE AUTHORITY WE NEED IN THIS AREA. ONE OF -- ONE OF THE FIRST THINGS I DID WHEN I BECAME CHAIRMAN IS WORK WITH CONGRESS AND URGE THE PASSAGE OF THIS LEGISLATION. THERE WAS A MOVE AFOOT IN THE INDUSTRY TO DEVELOP A VOLUNTARY CODE OF CONDUCT AS A WAY TO STOP THE LEGISLATION AND I PUT THE SEC STRONGLY ON RECORD IN SUPPORT OF THE CHAIRMAN OF THE AUTHORIZING COMMITTEES IN THE HOUSE AND SENATE AND THAT LEGISLATION WAS SIGNED IN MY SECOND YEAR AS CHAIRMAN. WE IMMEDIATELY WENT TO WORK USING THE AUTHORITY TO REGISTER THE CREDIT RATING AGENCIES WITH US AND IT DID IN FACT BEAT THE DEADLINE BY ONE MONTH TO PUT OUT THE FIRST RULES UNDER THE STATUTE. THE BIG THREE IN THIS INDUSTRY -- IT REPRODUCED THIS REPORT WHICH WAS THE BASIS FOR MUCH OF THE QUESTIONS YESTERDAY. WE LOOK THROUGH 2 MILLION E- MAIL'S, SOME OF WHICH WE PROVIDED TO THE COMMITTEE TO DISCOVER WHAT WAS GOING ON IN THIS INDUSTRY. THEN, TO PROPOSE A MORE THOROUGHGOING NEW RULES THAT GOVERN MANY OF THE PROBLEMS WE HAVE SEEN HERE, WITHOUT EVEN WAITING FOR THE NOTICE AND COMMENT. AND IMPLEMENTATION OF THE RULES -- NOTICE AND COMMENT TIME AND IMPLEMENTATION OF THE RULES. THIS IS A MUCH CHASTENED INDUSTRY BECAUSE OF WHAT HAS GONE ON. THE IMPACT OF THE MARKETS AND INVESTORS. |
| 02:10:02 | >> | WE WERE TALKING ABOUT ONE OF THE PROBLEMS WITH REGULATIONS IS NOT HOW MUCH WE HAVE, BUT THE ABILITY TO RESPOND. IF YOU SQUEEZE OFF ONE PART OF THE PRIVATE SECTOR WITH REGULATION HERE, THEY TEND TO FIND ANOTHER PLACE WHERE IT STARTS BLOSSOMING, PLUMBING AND GROWING OUT OF CONTROL. THE CREDIT DEFAULTS SWAPS WERE A GOOD EXAMPLE. DO WE NOW HAVE THE FLEXIBILITY FOR REGULATORS TO MOVE LATERALLY TO RESPOND TO THESE KIND OF BAUBLES AS THEY ARE CREATED BY REGULATION BEING IN ONE LOCATION OR THE NEED MORE FLEXIBILITY TO RESPOND TO THIS? -- TO RESPOND TO THESE KIND OF BAUBLES. |
| 02:10:50 | COX, C. "C." CHRISTOPHER | I DON'T THINK THE CURRENT REGULATION -- CURRENT REGULATORY SYSTEM WORKS WHEN IT COMES TO THE SHARING OF THE INFORMATION. THE SEC, EVEN BEFORE WE HAD THE AVALANCHE OF PROBLEMS IN 2008 IN THE INDUSTRIES THAT WE REGULATED AND THE FEDERAL RESERVE REGULATES BEGAN WORK WITH THE FED ON A MEMORANDUM OF UNDERSTANDING TO SHARE WORK BECAUSE AS SOMEONE ALLUDED TO EARLIER, IT WAS TOO MUCH LIKE THE BLIND MAN AND THE ELEPHANT. EVERYONE HAD A GOOD VIEW OF THEIR PART OF THE PROBLEM, BUT BY LAW THAT WERE FOCUSED ONLY ON THE PART AND NOT ON THE TOTAL PICTURE. IN ADDITION TO HAVING THE REGULATORY GAPS FILLED WHICH IS OF VITAL IMPORTANCE, THERE ALSO HAS TO BE A MUCH MORE SEAMLESS INTEGRATION. |
| 02:11:38 | >> | SO A LOT PARALLELED WITH 9/11 WHERE INTELLIGENCE PEOPLE ARE NOT SHARING IN FORMATION AND NO ONE GROUP HAD ALL THE AFFIRMATION. WE ARE RUNNING INTO THE SAME THING HERE. THERE IS A PROPOSAL TO HAVE A BIPARTISAN COMMISSION, LIKE THE 9/11 COMMISSION, TO NOT ONLY LOOK AT WHAT HAS HAPPENED IN THE PAST AND DO A REPORT THAT WITHIN THAT ONE YEAR BUT ALSO TO STAY IN FORCE FOR FIVE YEARS TO AVOID THIS. DO YOU HAVE ANY COMMENT ABOUT AS APPROACHING THIS WITH A GENERAL BIPARTISAN VIEW SO WE CAN AVOID BICKERING WE'VE SEEN APPEAR TODAY? |
| 02:12:08 | >> | THE GENTLEMAN'S TIME HAS EXPIRED BUT WE WOULD LIKE TO HEAR ANSWERS. |
| 02:12:11 | Greenspan, Alan | I DON'T HAVE ANY RESPONSE TO THAT. |
| 02:12:16 | COX, C. "C." CHRISTOPHER | I THINK IT IS VITALLY IMPORTANT AS THIS HEARING IS DOING TODAY AND YOUR OTHER HEARINGS HAVE DONE, AS YOU HAVE PROPOSED AND CONGRESSMAN ISSA HAS PROPOSED, TO UNDERSTAND IT IS VERY COMPLEX HOW THESE THINGS HAPPEN AROUND THE WORLD. HISTORY IS GOING TO TELL US EVENTUALLY ALL OF MORE THAN WE KNOW EVEN TODAY. IT IS ALSO IMPORTANT TO DO THE OTHER PIECE OF WHICH YOU HAVE DESCRIBED WHICH IS TO CONFRONT IT IN AN EMPIRICAL WAY. THAT IS WHAT BI-PARTISAN IN THIS CONTEXT MEANS. WE HAVE TO MAKE SURE THAT WE ARE AFTER THE FACT AND WILLING TO AND FOR THE TOUGH LESSONS FROM THIS TAX. FINALLY, I WOULD SAY MAKE SURE YOU HAVE A FOUR-LOOKING APPROACH -- A FORWARD-LOOKING APPROACH. IF ALL WE DO IS LOOK BACKWARD AND SAY THAT IS WHO SHOT JOHN AND WE DON'T PROTECT THE ECONOMY, INVESTORS, KIDS AND GRANDKIDS WHOSE DEBT IS GETTING RUN UP RIGHT NOW, THAT WOULD BE A NEW FAILURE ON TOP OF ALL THAT HAS HAPPENED. |
| 02:13:23 | >> | NOTHING TO THAT? THANK YOU. THE GENTLEMAN'S TIME HAS EXPIRED. |
| 02:13:29 | Yarmuth, John | THANK YOU, MR. CHAIRMAN. WITH ALL APOLOGIES TO MY NEW ENGLAND COLLEAGUES, I FEEL LIKE I AM LOOKING OUT THERE AT 3 BILL BUCKNER'S -- THE FIRST BASEMAN OF THE RED SOX BUT THE BALL GO THROUGH HIS LEGS AND COST HIS TEAM THE CHAMPIONSHIP. YOU ALL THE BALL GO THROUGH YOUR LEGS AND DID NOT -- HE DIDN'T WANT TO LOOK OF ALL OF YOUR LEGS, EVEN TRY TO, BUT IT DID. IT IS IMPORTANT WE DO TRY TO FIND OUT WHY A GUY THROUGH, WHETHER IT TOOK A BAD BOUNCE OR WHETHER THERE WAS SOMETHING FUNDAMENTALLY WRONG WITH THE WAY YOU AND OTHERS PLAYED THE BALL. SOME OF THESE THINGS I UNDERSTAND ARE UNFORESEEABLE. BUT SOME OF THEM WERE VERY FORESEEABLE. I WANT TO REFER TO THE CREDIT RATING AGENCIES BECAUSE WE KNEW BEGINNING AT LEAST IN 2001, WHEN ENRON WAS GIVEN A SUPERIOR RATING FOR DAYS BEFORE IT COLLAPSED AND WE KNEW FROM SUBSEQUENT EVENTS -- AND 2002, THE FCC PUBLISHED ITS OWN REPORT WHICH FOUND SERIOUS PROBLEMS -- AND STAR, 2003. BEFORE THAT, A COMMITTEE IN THE SENATE ISSUED A REPORT ON THESE PROBLEMS. THE SEC WAS ACTUALLY MOVING, IT SEEMS LIKE WITH GOOD INTENTIONS AND WITH INTELLIGENCE TO CREATE SOME AUTHORITY TO REGULATE THE CREDIT RATING AGENCIES. IN 2005, THEY ISSUED A PROPOSED RULE THAT WAS MR. COX, WHY WAS THAT NOT ACTED ON? |
| 02:15:14 | COX, C. "C." CHRISTOPHER | THE S.E.C. CAN'T CREATE FOR YOURSELF AUTHORITY OVER CREDIT RATING AGENCIES. THE PROPOSED RULE WAS DESIGNATION OF NRSRO'S BUT IT WASN'T LEGISLATIVE AUTHORITY TO REGULATE WHAT UNTIL THE FALL OF LAST YEAR WAS AN UNREGULATED INDUSTRY. LEGISLATION WAS NEEDED TO DO THAT. AS A MEMBER OF CONGRESS I SUPPORTED THAT LEGISLATION BEFORE ENRON BECAUSE I SAW WHAT HAPPENED IN ORANGE COUNTY WITH THE LARGEST MUNICIPAL BANKRUPTCY IN AMERICAN HISTORY. THERE, JUST AS WITH ENRON, UP UNTIL THE EVENT ITSELF THE DEBT WAS RATED TOP GRADE, TRIPLE A. AND THESE PROBLEMS HAVE BEEN RECURRENT. WHAT WAS ABSOLUTELY NECESSARY AND WHAT I TOOK ON FULL TILT WHEN I BECAME CHAIRMAN WAS GETTING AUTHORITY IT MAKE THAT A REGULATED INDUSTRY. I APPRECIATE THAT AND I THINK |
| 02:16:09 | Yarmuth, John | I AGREE THE STEPS YOU ARE TAKING ARE COMMENDABLE AND MAKE SENSE. BUT YOUR PREDECESSOR, WILLIAM DONALDSON AT THE S.E.C., HESAID HE HAD AMPLE AUTHORITY TO REGULATE CREDIT AGENCIES BECAUSE HE COULD DECERTIFY THEM SO YOU DID HAVE AUTHORITY. MAYBE NOT SPECIFIC LEGISLATIVE AUTHORITY BUT YOU HAD AUTHORITY TO USE THE CERTIFICATION PROCESS, DIDN'T YOU? PRODUCT -- PROCESS, DIDN'T YOU? |
| 02:16:37 | COX, C. "C." CHRISTOPHER | THE CERTIFICATION PROCESS -- REMEMBER IN THAT TIME, THERE WERE ESSENTIALLY THREE MAIN RATING AGENCIES. THEY WERE ALREADY THERE, SO RUBBER-STAMP THEM AS CERT WAS RATHER TALK LOGICAL. WHAT WAS UNDER DEVELOPMENT WAS A PROGRAM OF VOLUNTARY COMPLIANCE, A CODE OF CONDUCT. THIS WAS IN FACT BEING DEVELOPED ON AN INTERNATIONAL BASIS. EVEN THOUGH I AM CURRENTLY THE TECHNICAL -- THE CHAIRMAN OF THE TECHNICAL AGENCY AND HAVE A DEEP RESPECT FOR THEM, I SAW IMMEDIATELY THAT A VOLUNTARY CODE OF CONDUCT WAS GOING TO BE AS NOTHING AGAINST WHAT THIS INDUSTRY NEEDED, WHICH WAS ACTUAL REGULATION. I AM VERY PLEASED THAT CONGRESS GAVE THE SEC THAT AUTHORITY WHICH IT NEVER HAD BEFORE. MAKE NO MISTAKE, CREDIT RATING AGENCIES DID NOT HAVE A REGULATOR, WERE NOT REGULATED, ALL THE WOOD IT WAS VOLUNTARY REGULATION. THAT DOES NOT WORK AS WE HAVE SEEN OVER AGAIN. |
| 02:17:46 | Yarmuth, John | I AGREE WITH THAT, BUT I DON'T UNDERSTAND YOUR POINT THAT YOU COULD NOT DECERTIFY THE AGENCY'S. IF YOU SAY THE CERTIFICATION WAS RUBBER-STAMP, WHAT IF HE TOOK A RUBBER STAMP AWAY? |
| 02:18:03 | COX, C. "C." CHRISTOPHER | THE RULE CONCERNING NRSROS WAS LIMITED TO THAT. HE HAVE TO CREDIT THE AGENCY FOR TRYING TO MOVE INTO THAT SPACE, BUT WHAT HAPPENED IN 2005, WHEN WE FINALLY GOT LEGISLATION MOVING, THAT CLEARLY MADE MORE SENSE THAN TRYING TO DO SOMETHING WITHOUT AUTHORITY. |
| 02:18:22 | Yarmuth, John | |
| 02:18:23 | COX, C. "C." CHRISTOPHER | SO THAT IS WHY YOU DROP THE |
| 02:18:37 | >> | THANK YOU. |
| 02:18:42 | Platts, Todd | THANK YOU, MR. CHAIRMAN, I APPRECIATE YOU AND THE RANKING MEMBERS EFFORTS ON INVESTIGATING THIS COUNTRY AND I APPRECIATE ALL THREE OF OUR WITNESSES. THERE HAS BEEN A LOT OF DISCUSSION ABOUT FANNIE MAE AND FREDDIE MAC AND A LACK OF SUFFICIENT REGULATORY AUTHORITY AND HOW THAT HAS PLAYED INTO HELPING TO CREATE THIS CRISIS. I WOULD LIKE TO ADDRESS A SIMILAR ISSUE ABOUT REGULATORY AUTHORITY, MAY BE OVER- AGGRESSIVE EFFORTS, HOW THEY CREATED IT AND SPECIFICALLY GET YOUR INPUT ON THE COMMUNITY REINVESTMENT ACT. MR. COX, YOU SHARED IN YOUR TESTIMONY THAT IS HONEST LENDING PRACTICES HAD CONTINUED AND WE HAVE NOT GOT TO THERE WAS ALMOST LOWE'S AND -- NO LENDING PRACTICES, NO DOCUMENTATION -- THAT PLAYED A HUGE ROLE AND MORE ARE TODAY. BACK HOME, I HAVE HAD NUMEROUS BANKING OFFICIALS, BANK BOARD MEMBERS, AND ADDRESSED WITH THE COMMUNITY REINVESTMENT ACT THAT IN ESSENCE, THEY ARE BEING FORCED BY THE BANK REGULATORS TO ENGAGE IN MAKING LOANS TO HAVE A SPECIFIC PART OF THEIR PORTFOLIO TOO RISKY APPLICANTS. THEY ARE IN ESSENCE BEING FORCED BY REGULATORS TO MAKE LOANS THAT WOULD NOT OTHERWISE MAKE AND NO ARE IN GREAT RISK OF DEFAULTING. I WOULD BE INTERESTED IN YOUR OPINION ON THAT ROLE IN THIS CRISIS, BIG OR SMALL, AND IS IT SOMETHING WE SHOULD BE LOOKING AT PERFORMING, THE WAY THE ACT IS BEING REFORMED -- BEING ENFORCED BY REGULATORS. |
| 02:20:33 | Greenspan, Alan | IT IS INSTRUCTIVE TO GO BACK TO THE EARLY STAGES OF THE SUBPRIME MARKET, WHICH IS -- WHICH ESSENTIALLY EMERGED OUT OF THE CRA. THE EVIDENCE NOW SUGGESTS, BUT ONLY IN RETROSPECT, THAT THIS MARKET INVOLVED IN A MANNER, WHICH IF THERE WERE NO SECURITIZATION, IT WOULD HAVE BEEN A MUCH SMALLER PROBLEM AND INDEED VERY UNLIKELY TO HAVE TAKEN ON THE DIMENSIONS IT DID. IT WAS NOT UNTIL THE SECURITIZATION CAME A SIGNIFICANT FACTOR WHICH DOES NOT OCCUR UNTIL 2005, THAT YOU HAVE THIS HUGE INCREASE OF DEMAND FOR SUBPRIME ONCE BECAUSE, REMEMBER, WITHOUT SECURITIZATION, THERE WOULD NOT HAVE BEEN A SINGLE SUBPRIME MORTGAGE HELD OUTSIDE THE UNITED STATES. IT IS THE OPENING UP OF THIS MARKET WHICH CREATED A HUGE DEMAND FROM ABROAD FOR SUBPRIME MORTGAGES AS EMBODIED IN MORTGAGE-BACKED SECURITIES. WE DID NOT KNOW THE DETERIORATION IN STANDARDS WAS OCCURRING UNTIL 2005. BECAUSE, IF YOU LOOK NOW AT THE OUTSTANDING SUBPRIME MORTGAGES, IT IS VERY OBVIOUS THAT THOSE THAT WERE MADE IN 2004 AND EARLIER HAVE NOT TURNED OUT TO BE AN INCREDIBLY DIFFICULT ISSUE. IN OTHER WORDS, THE REAL TOXIC MORTGAGES OCCUR WITH THE HUGE INCREASE IN SECURITIZATION AND LARGELY THE DEMAND FROM ABROAD, AND TO WHATEVER EXTENT FANNIE MAE AND FREDDIE MAC OR INVOLVED, FROM THEM AS WELL. SO IT STRIKES ME THAT IF YOU GO BACK AND ASK YOURSELVES, HOW IN THE EARLY YEARS AND HE COULD REALISTICALLY MAKE A JUDGMENT AS TO WHAT WAS ALTERNATELY GOING TO HAPPEN TO SUBPRIME, I THINK YOU ARE ASKING MORE THAN ANYONE IS CAPABLE OF JUDGING. WE HAVE THIS EXTRAORDINARY COMPLEX GLOBAL ECONOMY WHICH EVERYONE NOW REALIZES IS VERY DIFFICULT TO FORECAST AND ANY CONSIDERABLE DETAIL. MR. CHAIRMAN, I AGREE WITH YOU IN THE FACT THERE WERE A LOT OF PEOPLE WHO RAISED ISSUES ABOUT PROBLEMS EMERGING. BUT, THERE ARE ALWAYS A LOT OF PEOPLE RAISING ISSUES AND HALF THE TIME THEY ARE WRONG. THE QUESTION IS, WHAT YOU DO? YOU POINT OUT QUITE CORRECTLY THE FEDERAL RESERVE HAD AS GOOD AN ECONOMIC ORGANIZATION AS EXISTS AND I WOULD SAY IN THE WORLD. IF ALL THOSE EXTRAORDINARILY CAPABLE PEOPLE WERE UNABLE TO FORESEE THE DEVELOPMENT OF THIS CRITICAL PROBLEM, WHICH UNDOUBTEDLY WAS THE CAUSE OF THE WORLD PROBLEM WITH RESPECT TO MORTGAGE BACKED SECURITIES, I THINK WE HAVE TO ASK OURSELVES, WHY IS THAT? THE ANSWER IS WE ARE NOT SMART ENOUGH AS PEOPLE. WE JUST CANNOT SEE EVENTS THAT FAR IN ADVANCE, AND UNLESS WE CAN, IT'S VERY DIFFICULT TO LOOK BACK AND SAY WHY DIDN'T WE CATCH SOMETHING? I THINK IT'S A VERY DIFFICULT PROBLEM WITH RESPECT TO SUPERVISION AND REGULATION. WE CANNOT EXPECT PERFECTION IN ANY AREA WHERE FORECASTING IS REQUIRED. I THINK WE HAVE TO DO OUR BEST, BUT NOT IN SPEC -- NOT EXPECT IN FALLIBILITY OR OMNISCIENCE. |
| 02:24:27 | Platts, Todd | COULD BE OTHER MEMBERS ANSWER THAT QUESTION? |
| 02:24:31 | >> | IF YOU WISH TO RESPOND TO THE QUESTION THAT IS OUTSTANDING? |
| 02:24:35 | COX, C. "C." CHRISTOPHER | COULD YOU RESTATE THE QUESTION? |
| 02:24:40 | Platts, Todd | ON SPECIFICALLY CRA, AND GOING FORWARD, AND I'M NOT ASKING WHETHER WE COULD HAVE PREDICTED IT, AND GOING FORWARD, SHOULD WE BE LOOKING AT REFORMS TO THE COMMUNITY REINVESTMENT AND WHAT MY LOCAL BANKERS ARE SAYING, THEY FEEL PRESSURED BY REGULATORS TO MAKE LOANS THEY KNOW ARE NOT GOOD LOANS AND RISKY LOANS AND LIKELY TO BE DEFAULTED OR HAVE BEEN IN THE PAST. |
| 02:25:04 | COX, C. "C." CHRISTOPHER | I WILL JUST POINT OUT THE OBVIOUS WHICH IS THAT THE SEC DOES NOT REGULATE LENDING OR CREDIT OR MORTGAGES. ON A MORE GENERAL POINT OF WHETHER OR NOT LEGISLATION NEEDS TO BE CAREFULLY DRAFTED AND CAREFULLY CONCEIVED SO THAT IT DOES NOT CREATE RISK AND THE SYSTEM, I HAVE ABUNDANT AGREEMENT. AS THE INVESTORS ADVOCATE, OBVIOUSLY WHEN THAT KIND OF LEGISLATION OR THOSE KINDS OF REGULATORY POLICIES LEAD TO THE CREATION OF NEW RISKS THAT OTHERWISE WOULD NOT EXIST, |
| 02:25:41 | Platts, Todd | THANK YOU. |
| 02:25:45 | Snow, John W. | I ACTUALLY THINK IT IS A MUCH BROADER PHENOMENON AND IN THE RISK OF BEING CONTROVERSY ALL, WE HAVE HAD A POLICY IN THE UNITED STATES TO PROMOTE HOMEOWNERSHIP FOR A LONG TIME AND THAT IS A GOOD THING. ADMINISTRATIONS OF BOTH STRIPES, AND CONGRESS'S OF BOTH STRIPES, HAVE CONTINUED TO PUSH FOR POLICIES THAT WOULD ENCOURAGE HOME OWNERSHIP. YOU SEE THAT IN THE TAX CODE. WE SAW THAT AND A NUMBER OF WAYS. I THINK A LARGER EUROPE -- THE LARGER PROBLEM HERE IS WE HAVE PROBABLY OVERDONE THAT WITHOUT REFERENCE TO THE CONSEQUENCES THAT COMMITMENT TO HOUSING HAS CREATED FOR THE COUNTRY AS A WHOLE. WE HAVE TO RETHINK THAT BALANCE. HOW DO WE PROMOTE HOUSING APPROPRIATELY WHILE AT THE SAME TIME ENCOURAGING SAVINGS RATES AND PRUDENT BORROWING PRACTICES AND I COULD GO ON AND ON. THANK YOU. |
| 02:26:55 | >> | THE GENTLEMAN'S TIME HAS EXPIRED. |
| 02:27:00 | Davis, Thomas | DR. GREENSPAN, YOU MADE AN INTERESTING COMMENT, THE FEDERAL RESERVE HAS THE BEST ECONOMIC ORGANIZATION AND THE WORLD, YET YOU COULD NOT REACH ANY AGREEMENT ON SEEING IS COMING IN AND PREDICTING IT. LET ME ASK THIS QUESTION TO ALL THREE OF YOU, BECAUSE AS I HAVE GONE THROUGH THE TESTIMONY, IT LOOKS LIKE THE REGULATORY REGIME, IT WAS NOT A QUESTION OF DEREGULATION OR OVERREGULATION -- THE REGULATORY REGIMES THAT WERE SET UP APPEAR TO BE TOO FRAGMENTED, TO STOVEPIPE AND TWO NON COMMUNICATIVE SO THAT NO ONE COULD SEE THE PROBLEMS ARE ARISING IN TOTAL. EVERYONE SAW A PIECE OF IT UNTIL IT WAS TOO LATE. IS THAT FAIR STATEMENT? |
| 02:27:41 | Greenspan, Alan | I'M NOT SURE. I THINK WE ALL HAVE AS MUCH INFORMATION AS PROBABLY WAS AVAILABLE. SO I'M NOT CLEAR, BY ANY MEANS, THAT IF YOU COMBINE THE LEVEL OF IGNORANCE YOU SOMEHOW ENHANCE IN SIGHT. FOR EXAMPLE, AS I MENTIONED, WE NOW KNOW THAT SUBPRIME MORTGAGES THAT WERE ORIGINATED IN 2004 AND EARLIER ARE NOT OUR PROBLEM. THESE ARE DATA THAT ARE AVAILABLE ONLY NOW. WE DID NOT KNOW THAT AT THE TIME. I'M NOT SURE THAT MERELY CONGLOMERATING EVERYBODY'S INSIGHTS, AND AS I SAID, I HAVE DEALT WITH MANY DIFFERENT ORGANIZATIONS AND GIVE THE FEDERAL RESERVE, AT THE LEVEL -- THE LEVEL OF TECHNICAL CAPABILITY IS NOT CAPABLE -- NOT CAPABLE OF CONFRONTING THIS KIND OF PROBLEM, IT TELLS US SOMETHING ABOUT THE NATURE OF THE PROBLEM, WHICH ITSELF IS INCAPABLE OF BEING HANDLED IN A WAY WE ALL WOULD LIKE. |
| 02:29:06 | Davis, Thomas | MR. COX? |
| 02:29:09 | COX, C. "C." CHRISTOPHER | I'M GOING TO ANSWER THE QUESTION FROM A SLIGHTLY DIFFERENT ANGLE SO AS NOT TO DISAGREE ANY MORE THAN I HAVE TO WHAT THE ANSWER DR. GREENSPAN HAS JUST GIVEN. I THINK IT STANDS ON ITS FOUR CORNERS AND THERE IS A LOGIC TO IT, BUT I SEE MORE IN YOUR QUESTION. IN THE LAST FEW MONTHS, AND THE CAULDRON OF THESE CRISES, AND THEN HAVE BEEN MOVING NOT JUST ON A DAY-TO-DAY BASIS BUT AN HOUR TO HOUR BASIS. THE COORDINATION AND DEMANDS THAT HAS PLACED ON REGULATORS IS VERY HIGH. SO, WHEN YOU ARE LOOKING AT THE SAFETY AND SOUNDNESS OF BANKS AS THE FED DOES, WHEN YOU ARE LOOKING AT WHAT IS GOING ON INSIDE A BROKER/DEALER AS THE S.E.C. DOES, YOU ARE CONCERNED WITH NOW THE FACT THAT THINGS CAN CHANGE IN A MATTER OF HOURS. EVERYTHING THAT WAS THERE THIS MORNING COULD BE GONE BY THE EVENING. YOU NEED TO KNOW WHAT THE LIQUIDITY ISSUES ARE, WHAT THE FUNDING POSITION IS FOR A FIRM. AND WHEN THE FED HAS SOME OF THOSE FIRMS AND THE S.E.C. HAS OTHER OF THE FIRMS WE DON'T GET THE SAME CLEAR PICTURE OF WHAT IS GOING ON IN THE MARKET IN REAL TIME THAT WE NEED. SO IT IS FINE THAT THESE STATISTICS ARE PUBLISHED AND WE CAN UNDERSTAND IT EVENTUALLY BUT YOU HAVE TO DO THIS IN REALTIME. A PRESIDENT'S WORKING GROUP THAT WAS FORMED TO DEAL WITH THIS HAS BEEN AN ONGOING MEETING OF THE PRESIDENT'S WORKING GROUP FOR SEVERAL MONTHS NOW. WE HAVE BEEN WORKING 20 HOURS A DAY, SEVEN DAYS A WEEK SINCE MARCH. SO WE NEED ALL THE TOOLS WE CAN |
| 02:30:49 | Snow, John W. | GET TO COORDINATE BETTER. I AGREE WITH YOU, CONGRESSMAN DAVIS. I THINK WE HAVE TOO MANY STOVE PIPES IN THE FINANCIAL MARKET, REGULATORY SYSTEM WITH THE LEFT HAND NOT KNOWING WHAT THE RIGHT HAND KNOWS. AND I AGREE WITH CHAIRMAN GREENSPAN ABOUT THE COMPLEXITY OF REGULATION. I USED TO BE A REGULATOR. AN AGENCY, YOU KNOW WELL, MR. CHAIRMAN, NHTSA. AND I HAVE AN APPRECIATION OF THE BURDENS AND COMPLEXITIES OF REGULATION. BUT IT DOES SEEM TO ME THAT WE HAVE REGULATORS -- I THINK CHAIRMAN COX MENTIONED THIS EARLIER -- REGULATING UNDER DIFFERENT JURISDICTIONS AND WITH DIFFERENT BODIES OF LAW THE SAME THING THING. EQUIVALENT THINGS OUGHT TO BE REGULATED ON AN EQUIVALENT BASIS. BASIS. WE ALSO HAVE THE TURF BATTLES. THIS WAS CLEAR LAST WEEK IN AN ARTICLE IN THE "WASHINGTON POST" ON THE SUBJECT OF THE CREDIT DEFAULTS SWAPS MARKET AND WHO WOULD REGULATE THAT. WE HAD THE THREE AGENCIES, ACCORDING TO THIS ARTICLE, AND SERIOUS CONFLICT ABOUT WHO SHOULD HAVE JURISDICTION. I THINK IT IS TIME TO OVERHAUL THE REGULATORY SYSTEM. |
| 02:32:06 | >> | THANK YOU VERY MUCH. AS I UNDERSTAND -- YOU HAVEN'T UNANIMOUS CONSENT REQUEST? |
| 02:32:15 | Yarmuth, John | I ASK UNANIMOUS CONSENT THAT THE PLACE IN THE RECORD THE REPORT OF THE SENATE COMMITTEE ON GOVERNMENT AFFAIRS FROM OCTOBER 8, 2002, WHICH RELATES TO THE COMMITTEE'S REQUEST THAT THE S.E.C. IMPLEMENT RULES TO REGULATE THE CREDIT RATING AGENCIES. MR. COX, HE SAID THE MOVE IN AND EXPEDITIOUS WAY, BUT THE SEC WAS ASKED TO DO THAT IN 2002. |
| 02:32:43 | >> | WITHOUT OBJECTION, THE DOCUMENT WILL BE MADE PART OF THE RECORD. |
| 02:32:48 | Norton, Eleanor Holmes | THIS IS A QUESTION FOR ALL THREE OF YOU. I'M USING LANGUAGE FROM DR. GREENSPAN, BUT THIS IS FOR ALL THREE. I AGREE THAT ALL LAWS ARE OFTEN NOT SMART ENOUGH. I DON'T AGREE THAT BECAUSE OF THE STOVEPIPE QUALITY OF REGULATION THERE WAS NO WAY IN WHICH THIS COULD HAVE BEEN SEEN. MY QUESTION GOES TO REMEDY AND PARTICULARLY TO REMEDY AS EVENTS UNFOLD. DR. GREENSPAN, YOU HAVE SAID REGULATION BY ITS NATURE IS INEFFECTIVE BECAUSE THEY CANNOT ACCURATELY PREDICT PROBLEMS AND YOU HAVE INDICATED THE PERCENTAGE OF PREDICTABILITY AND I THINK THAT'S PRETTY GOOD TOO. I AM INTERESTED IN WHAT HAPPENS AS EVENTS OCCUR AND NOTHING HAPPENS. FOR EXAMPLE, 14 YEARS AGO, IN 1994, THE GAO PUBLISHED A TWO- YEAR STUDY, 200 PAGES, AN EXHAUSTIVE STUDY ENTITLED " THE FINANCIAL DERIVATIVES -- ACTIONS NEEDED TO PROTECT THE FINANCIAL SYSTEM." I AM INTERESTED IN THE FINANCIAL SYSTEM. WE HAVE SEEN THE COLLAPSE OF THE FINANCIAL SYSTEM. WE ARE COMING BACK FOR A LAME- DUCK SESSION, AND OF A PRESIDENT'S TERM BECAUSE WE THINK WE ARE SEEING PERHAPS THE COLLAPSE OF THE ECONOMY ITSELF. I AM REALLY INTO REMEDY AT THIS POINT. THE GAO -- I WANT TO QUOTE IT. THE DERIVATIVES ARE RAPIDLY EXPANDING -- THIS IS 1994 -- AN INCREASINGLY AFFECTED BY GLOBAL AND FINANCIAL MARKETS. THE SUDDEN FAILURE OR ABRUPT WITHDRAWAL FROM TRADING -- TRADING OF ANY OF THESE LARGE DEALERS COULD LIQUIFY THE PROBLEMS IN THE MARKETS AND COULD ALSO POSE RISKS TO OTHERS, INCLUDING THE FINANCIAL SYSTEM AS A WHOLE. THE FEDERAL GOVERNMENT WOULD BE LIKELY TO INTERVENE TO KEEP THE FINANCIAL SYSTEM FUNCTIONING IN CASES OF SEVERE FINANCIAL STRESS, INTERVENTION COULD RESULT IN A FINANCIAL BAILOUT PAID FOR BY THE TAXPAYERS. THAT IS THE ONLY REMEDY WE HAVE NOW. HUGE INTERVENTION INTO THE MARKET SYSTEM OF THE KIND OF US WOULD HAVE DESIRED. THE GAO OF COURSE WAS NOT ALONE IN WARNING. THERE WAS A HEARING, REP OXLEY, A REPUBLICAN FROM OHIO, ASKED THE QUESTION THEN ABOUT BAILOUT. THE ONLY REMEDY WE NOW HAVE. HOW REALISTIC IS THE THREAT OF A TAXPAYER BAILOUT. YOU, DR. GREENSPAN, SAID NEGLIGIBLE. THOSE ARE YOUR WORDS. SHORT OF VIRTUALLY INCONCEIVABLE SITUATIONS, ONE CANNOT ENVISION MORE TAXPAYER FUNDS WOULD SHOW -- FOR YEARS AGO WE SAW THE COLLAPSE OF LONG TERM CAPITAL MANAGEMENT AND ENRON AND NOW AIG $440 MILLION WORTH OF BAILOUT. I'M GOING TO ASK YOU, AND LIGHT OF THE FACT THESE ARE NEW INSTRUMENTS THAT PEOPLE SAY NONE OF US UNDERSTAND BECAUSE PEOPLE OUTSIDE OF YOUR THEATER MADE THEM UP. COULD YOU REGULATE NOW? AT ONE POINT, SHOULD SOME FORM OF REGULATION TAKEN PLACE? COULD YOU REGULATE NOW? DO YOU UNDERSTAND ENOUGH OF WHAT HAPPENED TO REGULATE NOW? I WOULD APPRECIATE YOUR INSIGHT INTO WHAT FORM YOU THINK REGULATION SHOULD BEGIN TO TAKE. WHAT SHOULD WE DO NOW THAT WE ARE FACED WITH BAILOUT AS THE ONLY REMEDY THE FEDERAL GOVERNMENT HAS? |
| 02:36:51 | Greenspan, Alan | FIRST OF ALL, ON DERIVATIVES, REMEMBER IN 1994, AND INDEED PRETTY MUCH THROUGHOUT 2004, EVEN 2005, THE MAJOR PART OF DERIVATIVES OR INTEREST RATES AND FOREIGN EXCHANGE DERIVATIVES AND THEY ARE STILL FUNCTIONING RATHER WELL. IN OTHER WORDS, THE PROBLEM THAT HAS EMERGED -- |
| 02:37:15 | Norton, Eleanor Holmes | THE G.A.O. TALKED ABOUT -- THIS IS 1994. |
| 02:37:18 | Greenspan, Alan | I THINK THEY WERE MISTAKEN. THAT WAS ONE OF THE FORECASTS THAT DID NOT GO RIGHT. IN OTHER WORDS, THE TYPES -- |
| 02:37:28 | Norton, Eleanor Holmes | WHAT DID IT GO RIGHT IS THEY SAID YOU COULD SEE A BAILOUT OF THE FINANCIAL SYSTEM. IT WAS PREDICTED AND IT HAPPENED. |
| 02:37:36 | Greenspan, Alan | THE POINT I AM TRYING TO MAKE IS THAT THE ONLY AREAS WHERE WE ARE RUNNING INTO SOME PROBLEMS, WHICH ARE CURABLE, FRANKLY, BY RESOLVING CERTAIN STRUCTURAL PROBLEMS WHICH THE FEDERAL RESERVE IS WORKING ON -- |
| 02:37:52 | Norton, Eleanor Holmes | HOW WOULD YOU ADVISE THE COMMITTEE, THIS CONGRESS, TO BEGIN TO DO THE APPROPRIATE, INTELLIGENT, REGULATION OR REMEDY SEEKING, WHATEVER YOU CALL IT. YOU SEEM TO WISH TO ANSWER THAT QUESTION, MR. SNOW? |
| 02:38:11 | Snow, John W. | I THINK THERE ARE A NUMBER OF THINGS THAT CAN BE DONE AND SHOULD BE DONE. SECURITIZATION MARKET IS A GOOD MARKET. IT SHOULD NOT BE THIS ESTABLISHED IN ANY WAY. -- SHOULD NOT BE DISESTABLISHED ANYWAY. IT WOULD WORK BETTER IF THE ORIGINAL LOAN PEOPLE, THE ONE TO MAKE THE LOANS ORIGINALLY, -- |
| 02:38:34 | Norton, Eleanor Holmes | WHAT ABOUT THEM? |
| 02:38:37 | Snow, John W. | KEPT SOME SKIN IN THE GAME. WE USED TO HAVE SOMETHING TO FUNCTION WELL IN THIS COUNTRY CALLED BANK CREDIT COMMITTEES, WHERE THE QUESTION WOULD BE ASKED, CAN THE BAR OR REPAY THE LOAN? WHAT IS THE COLLATERAL. -- CANDY BAR OR REPAID THE LOAN? ONE OF THE -- CAN THE BAR OR REPAY THE LOAN? THAT FUNCTION IS NOT BEING CARRIED OUT EFFECTIVELY AS IT ONCE DID. A SUGGESTION FOR YOU WOULD BE WHEN SOMETHING -- WHEN SOMEBODY ORIGINATES ALONE AND SENDS IT OFF TO THE SECURITIES MARKET, KEEP A PERCENTAGE OF THE ONE. SOMETHING ELSE -- KEEP A PERCENTAGE OF THE LOAN. SOMETHING ELSE THAT SHOULD BE DONE IN THE NAME OF TRANSPARENCY AND TO GET THE MARKETS WORKING BETTER, WHEN INVESTMENT BANKS AND BANKS ARE SELLING THESE PRODUCTS INTO THE MARKET, AND ALSO HEDGING THIS PRODUCT BY GOING ON THE OTHER SIDE, THERE OUGHT TO BE TRANSPARENCY. THEY OUGHT TO BE TELLING THE MARKETPLACE, WE ARE SELLING THESE THINGS, BUT WE ARE ALSO HEDGING. THAT WOULD PROVIDE USEFUL INFORMATION TO WOULD-BE BUYERS OF THOSE INSTRUMENTS. I HAVE A LOT OF SUGGESTIONS FOR YOU. I CAN GIVE YOU AN FOR THE RECORD. |
| 02:39:56 | Norton, Eleanor Holmes | MR. COX DID NOT GET A CHANCE |
| 02:39:58 | >> | TO ANSWER. IF YOU HAVE SOMETHING YOU WOULD LIKE TO ADD BRIEFLY? |
| 02:40:04 | COX, C. "C." CHRISTOPHER | I STRONGLY AGREE WITH FORMER SECRETARY SNOW THAT THE MOVEMENT FROM THE ORIGINATE TO HOLD MODEL TO THE ORIGINATE TO SECURITIZED MODEL CONTRIBUTED TO THE BREAKDOWN IN MARKET DISCIPLINE. AS HE VERY STRAIGHTFORWARDLY PUT IT, IF YOU DO NOT HAVE SKIN IN THE GAME AND ARE JUST PASSING THE REST TO SOMEONE ELSE, THEN YOU ARE INCLINED TO TAKE MORE RISK AND THAT THE BILL PRESSED INTO THE SYSTEM AND WE'VE SEEN THAT HAS BEEN DANGEROUS. SECOND, I THINK IT'S VERY IMPORTANT FOR US TO BUILD FUTURE WAYS TO UNDERSTAND COMPLEX SECURITIES FROM THE INVESTOR'S STANDPOINT. RIGHT NOW, ANALYSTS ARE UNABLE TO TRACK WITH COMPLEX STRUCTURED SECURITIES THE UNDERLYING ASSETS AND RISKS IN THEM. THERE IS NO TRACKING RIGHT NOW ON A LOAN BY LOAN BASIS WHETHER THE LOAN AMOUNT IS MORE OR LESS THAN THE PROPERTY VALUE OR WHETHER ITS CURRENT. THIS COULD BE ACCUMULATED AND SECURITIES VALUED BY ANALYSTS, SO THE MARKET COULD BE PRICING RISK INTO A STRUCTURED SECURITIES. |
| 02:41:06 | Norton, Eleanor Holmes | CAN I PUT INTO THE RECORD THE DOCUMENT FROM WHICH I QUOTED FROM THE GAO FROM 1994, FINANCIAL DERIVATIVES, ACTION NEEDED TO HELP THE FINANCIAL SYSTEM. |
| 02:41:19 | Watson, Diane | A MATTER OF PERSONAL PRIVILEGE, PLEASE. |
| 02:41:22 | >> | I AND YES. |
| 02:41:23 | Watson, Diane | I NOTICE THERE IS A BANNER ON THE OTHER SIDE. I REMEMBER BEING ASKED TO TAKE A BANNER DOWN THAT I HAD. WHAT IS YOUR PROCEDURE FOR A BANNER PUT UP BY MEMBERS? I WOULD LIKE THE CHAIRMAN TO RESPOND. CAN ANYONE DO THAT FROM TIME TO TIME? |
| 02:41:49 | >> | IF YOU WILL YIELD, I WAS NOT AWARE OF IT AND I DON'T KNOW IF WE HAVE A STANDARD, BUT I HEAR THE POINT YOU ARE MAKING IN THE BANNER HAS BEEN TAKEN DOWN. IT IS NOW CHAIRS OPPORTUNITY TO RECOGNIZE MR. COOPER. I CONSIDER THAT A GREAT OPPORTUNITY. SO I DO RECOGNIZE MR. COOPER. |
| 02:42:07 | >> | THANK YOU, MR. CHAIRMAN. AS IMPORTANT AS IT IS TO LEARN FROM MISTAKES OF THE PAST, I THINK PEOPLE ARE EVEN MORE CONCERNED ABOUT TRYING TO PREVENT OR AVOID CRISES IN THE FUTURE. THE CRISIS I AM WORRIED ABOUT COULD BE EVEN BIGGER THAN THE SUBPRIME MORTGAGE AND FINANCIAL CRISIS WE ARE FACING TODAY. THE CRISIS I AM WORRIED ABOUT IS PUBLIC BEST BESET -- EXEMPLIFIED BY THIS OFFICIAL U.S. TREASURY DOCUMENT COMES OUT EVERY YEAR, BUT VERY FEW AMERICANS AND VERY FEW MEMBERS OF CONGRESS HAVE EVER SEEN OR HEARD ABOUT THIS DOCUMENT. IT IS CALLED THE FINANCIAL REPORT OF THE UNITED STATES GOVERNMENT AND IS AVAILABLE FOR FREE FROM THE TREASURY OR GAO WEBSITE TRADE YET IT SEEMS TO BE A DEEP, DARK SECRET IN WASHINGTON, DESPITE THE FACT IS THE ONLY OFFICIAL U.S. GOVERNMENT DOCUMENT THAT ACTUALLY USES REAL ACCOUNTING, CROLL ACCOUNTING TO -- ACCRUAL ACCOUNTING TO DESCRIBE THEM AND CONTAINS REAL NUMBERS. ALL THE REST OF THE BUDGET DOCUMENTS DO NOT MEET THE STANDARDS. WHY IS THIS DOCUMENT SUCH A DEEP, DARK SECRET? IT'S NOT CLASSIFIED. IT IS HIDDEN IN THE PUBLIC DOMAIN. PERHAPS IF IT WERE CLASSIFIED, SOME SPY WOULD TRY TO STEAL IT AND IT WOULD GET MORE PUBLICITY. WHY IS THE DOCUMENT HIDDEN? BECAUSE IT CONTAINS SUCH BAD NEWS. THIS DOCUMENT GOES OUT UNDER THE SIGNATURE OF THE SECRETARY OF THE TREASURY. THIS PARTICULAR ONE WAS SIGNED BY FORMER SECRETARY SNOW. THE DEFICIT ALL POLITICIANS TALK ABOUT THAT YEAR WAS $316 BILLION. THE DEFICIT CONTAINED IN THIS DOCUMENT WAS $760 BILLION. OVER TWICE AS LARGE. THE DEBT IS ALSO MUCH WORSE. THAT YEAR, THE DEBT WAS SOMETHING LIKE EIGHT TRILLION DOLLARS. IN HERE, THE FISCAL GAP IS 46 TRILLION DOLLARS. MY QUESTION IS, FOR EACH OF THE PANELISTS, SECRETARIES KNOW, YOUR PREDECESSOR LOST HIS JOB IN PART BECAUSE HE CARED SO MUCH ABOUT BUDGET DEFICITS. ON YOUR WATCH, DID YOU DO ANYTHING TO PUBLICIZE THIS REPORT TO MAKE SURE EVERYBODY IN AMERICA KNEW THE REAL STORY ABOUT THE REAL NUMBERS FOR AMERICA? |
| 02:44:36 | Watson, Diane | YOUR MICROPHONE, PLEASE. |
| 02:44:37 | Snow, John W. | THANK YOU FOR THAT. THANK YOU FOR CALLING ATTENTION TO THE REPORT. ONE THING I DID WAS TO SEND IT TO YOU, AS I RECALL. TO CALL YOUR ATTENTION TO IT, BACK THEN IN 2005 OR 2006. IT IS A SERIOUS SUBJECT. IT IS A DEEPLY SERIOUS SUBJECT. BECAUSE THE SYSTEMIC RISKS ASSOCIATED WITH THE UNFUNDED LIABILITIES, AND THAT IS WHAT THE REPORT DEALS WITH PRIMARILY, UNFUNDED LIABILITIES, THE PROMISES WE HAVE MADE TO THE |
| 02:45:16 | >> | FUTURE THAT WE HAVE@@@@@@@RR WAS IT WASN'T IT THE FIRST FLANK IN THE CONTRACT WITH AMERICA TO STOP THESE FEDERAL GOVERNMENT EXEMPTIONS FROM THE LAWS THAT APPLY TO REGULAR AMERICANS? SO HERE WE ARE WITH THIS SITUATION WHERE THE FEDERAL GOVERNMENT IS THE ONLY LARGE ENTITY, GOVERNMENT OR NONGOVERNMENT THAT HAS SUCCESSFULLY EXEMPTED ITSELF FROM REAL ACCOUNTING STANDARDS. HAVE YOU DONE ANYTHING IN YOUR TENURE AT THE S.E.C. TO HIGHLIGHT THE REAL NUMBERS FOR AMERICA? |
| 02:46:21 | COX, C. "C." CHRISTOPHER | INDEED, JUST ON THE POINT THAT YOU MADE ABOUT THE CONTRACT WITH AMERICA SPECIFICALLY THAT WAS ABOUT MAKING SURE CONGRESS DIDN'T EXEMPT ITSELF FROM THE RULES THAT APPLY TO EVERYBODY ELSE. BUT I STRONGLY AGREE THAT FOR THE ENTIRE TIME I SERVED IN CONGRESS I MAILED THAT REPORT IN THE FORM OF AN ANNUAL REPORT OF THE UNITED STATES GOVERNMENT TO MY CONSTITUENTS EVERY YEAR. I ALSO MADE IT AVAILABLE TO EVERY MEMBER OF CONGRESS SO THEY COULD DO THE SAME WITH THEIR CONSTITUENTS. NOW, BECAUSE THE S.E.C. DOESN'T HAVE AUTHORITY TO OVERSEE THE BOOKS OF THE FEDERAL GOVERNMENT, THIS IS A TREASURY REPORT, SO IT IS NOT THE S.E.C.'S PROBLEMS. BUT AS A MEMBER OF CONGRESS EVERY SIM YEAR I SENT THAT OUT TO MY CONSTITUENTS INSTEAD OF PROMOTIONAL MAILINGS THAT PEOPLE GET, THEY VERY MUCH WANT TO SEE THAT. I COULDN'T AGREE WITH YOU MORE. AGREE WITH YOU MORE. |
| 02:47:12 | >> | IF YOU ARE SO INFORMED ABOUT THE NUMBERS, WHAT IS THE CURRENT FISCAL GAP FOR THE UNITED STATES OF AMERICA? |
| 02:47:17 | COX, C. "C." CHRISTOPHER | IT IS CHANGING RATHER RAPIDLY. |
| 02:47:21 | >> | GIVE ME A BALLPARK NUMBER. |
| 02:47:26 | COX, C. "C." CHRISTOPHER | I JUST MET WITH THE DIRECTOR AND TALK WITH HIM ABOUT WHAT WOULD BE THE IMPACT -- |
| 02:47:30 | >> | BALL PARK IS FINE. GIVE ME A NUMBER. |
| 02:47:36 | COX, C. "C." CHRISTOPHER | THE SCORING OF THE $700 BILLION THAT CONGRESS JUST APPROVED WILL HAVE SUCH A MATERIAL IMPACT ON THIS THAT THE BALL PARK IS RATHER THAN LARGE. |
| 02:47:44 | >> | SO YOU DO NOT KNOW? AT THE LAST REPORT -- IT SAID 54 TRILLION DOLLARS. CHAIRMAN GREENSPAN, YOU ARE THE LONGEST SERVING CHAIRMAN OF THE FEDERAL RESERVE IN OUR HISTORY. YOU ARE WELL KNOWN AS A FINANCIAL EXPERT. WHAT DID YOU DO IN YOUR TENURE TO HELP AMERICANS AND HELP CONGRESS UNDERSTAND THE REAL NUMBERS FOR AMERICA? |
| 02:48:07 | Greenspan, Alan | CONGRESSMAN, I TOOK A VERSION OF THAT, WHICH IS ESSENTIALLY -- YOU ARE TALKING ABOUT THE ACCRUAL SYSTEM, AND THAT THEN GETS REFLECTED IN THE CASH SYSTEM IN THE FORECASTING STRUCTURE. WHAT I HAVE ARGUED FOR FOR A SIGNIFICANT TIME IS THAT WE HAVE UNDERFUNDED FOR MEDICARE, WHICH IS A VERY SIGNIFICANT PART OF THE NUMBERS YOU ARE CONCERNED ABOUT A HALF. IN OTHER WORDS, IN ORDER TO ACTUALLY HONOR ALL THE PROMISES BEING MADE TO THE NEXT GENERATION, THE BABY BOOM GENERATION WHO ARE RETIRING, WE WOULD HAVE TO EITHER CUT BENEFITS BY 50%, RAISE TAXES TO A POINT WHERE IT'S PROBABLY -- IT CANNOT FUNDAMENTALLY BE SUSTAINED, AND THEREFORE WE ARE LOOKING AT THE UNDERLYING MEANING OF THESE TYPES OF REPORTS. WE ESSENTIALLY PROMISED TO THE AMERICAN PEOPLE FAR MORE THAN WE CAN DELIVER. I'M VERY FEARFUL THAT UNLESS AND UNTIL WE SOLVE THIS PROBLEM BEFORE EVERYONE RETIRES, THE LARGE NUMBERS OF PEOPLE WHO WILL NOT BE ABLE TO GET WHAT THEY ARE FUNDAMENTALLY PROMISED STILL HAVE TIME TO MAKE ADJUSTMENTS IN THEIR RETIREMENTS. BUT IF WE WAIT UNTIL THE HAMMER FALLS ON US WITH THE EXORABLE GRIND OF THE NUMBERS, I THINK WE'RE DOING A GREAT DISSERVICE |
| 02:49:52 | >> | TO THE AMERICAN PEOPLE. THE GENTLEMAN'S TIME HAS EXPIRED. |
| 02:49:56 | Issa, Darrell | THANK YOU, MR. CHAIRMAN. AND TO THE GENERAL WANT -- TELL ONE FROM TENNESSEE. IT WOULD BE INTERESTING UNDER GATT ACCOUNTING ON THE BALANCE SHEET WHAT WE WOULD DO WITH HOUSE, SENATE, AND THE OTHER BUILDINGS HERE IN WASHINGTON TRADE ARE THEY ON THE ASSETS SIDE OR THE LIABILITIES SIDE? CHAIRMAN GREENSPAN, THANK YOU FOR MANY YEARS OF SERVICE. TODAY, PEOPLE SEEM TO WANT TO THINK YOU WERE SOMEHOW A PARTISAN FOR THE BUSH ADMINISTRATION. I'M NEVER SURE WHICH BUSH ADMINISTRATION THEY'RE TALKING ABOUT WHEN THEY SOMEHOW THINK YOUR MANY YEARS OF GREAT SERVICE SHOULD BE CLOUDED BY YORK AND ABILITY, ALONG WITH THE REST OF US, TO PROPERLY PREDICT THIS CRISIS. MY QUESTIONS TODAY ARE MOSTLY GOING TO BE LIMITED TO THE FUTURE. FIRST OF ALL, AS WAS SAID ALLOW AGO, I AM CALLING FOR AND HAVE A DRAFT BILL WHICH IS BEING CIRCULATED WITH ALL MEMBERS HERE TODAY SAYING THIS -- AND I THINK EVIDENCE HERE TODAY -- IS NOT SOMETHING CONGRESS WILL DEAL WELL WITH. THERE ARE TOO MANY INTERESTS LIKE FREDDIE MAC AND FANNIE MAE, SUCH AS ALL THE OTHER PARTS OF THIS MOVING TARGET, THAT I THINK WE NEED TO RISE ABOVE CONGRESS AND SUGGESTIONS FOR HOW MUCH WE REGULATE AND FOR HOW MUCH TRANSPARENCY WE HAVE. I WOULD HOPE THAT EACH OF YOU WOULD COMMENT ON WHETHER OR NOT YOU SUPPORT TAKING IT OUT OF THE HANDS BOTH OF THE NEXT ADMINISTRATION AND CONGRESS, AT LEAST IN PART, IN ORDER TO DO THE AFTER ACTION AS WE DID WITH 9/11. WHAT I WOULD LIKE TO SPECIFICALLY ASK, AND THIS IS ALSO FOR CHAIRMAN COX, THIS -- THERE ARE A NUMBER OF MODELING SYSTEMS AT YOUR DISPOSAL TODAY AND MORE YOU ARE LOOKING AT. CHAIRMAN COX, I BELIEVE THE XBRL SYSTEM IS ONE YOU ARE FAMILIAR WITH THAT IS BEING DEVELOPED. SHOULD THE CONGRESS AND BRING TO BEAR ADDITIONAL RESOURCES FOR EACH OF YOU AND FOR OTHER AGENCIES SO THEY YOUR PREDICTIVE MODELING AND YOUR DOOMSDAY SCENARIOS -- AND I AM SPECIFICALLY SAYING THIS TO YOU, MR. GREENSPAN, THE DOOMSDAY SCENARIOS WE LIVE WITH OBVIOUSLY COULD HAVE BEEN MODELED, BUT IT WAS NOT PREDICTABLY MODELED BY THE AGENCIES OF GOVERNMENT AND DELIVERED TO CONGRESS. SHOULD WE BE INVESTING IN THAT KIND OF MODELING? IN OTHER WORDS MICRO MODELING OF EVERYONE'S PRODUCT AND DERIVATIVE PRODUCT. IF IN FACT, THERE IS A PICKUP OF 6% IN THE CALIFORNIA MARKET FOR HOMES AND RIPPLES THROUGHOUT THE U.S., THEN WHAT COULD OR WHAT HAPPENED? IF THAT MODELING IS AVAILABLE TODAY, PLEASE TELL ME. THE YOU THINK WE SHOULD BE INVESTING IN IT? |
| 02:52:44 | Greenspan, Alan | IS NOT AVAILABLE, AND INDEED , EARLIER THIS YEAR, I RAISED THE QUESTION ABOUT MODELING PROCEDURES FOR THE ECONOMY. THE ECONOMETRIC WORK BEING DONE IS -- HAS ESSENTIALLY BEEN RESTRICTED TO TAKING THE WHOLE HISTORY AND ASSUMING IT IS, A GENIUS AND THEREFORE YOU CAN GET SOME INSIGHT. WHAT IS VERY EVIDENT TO ME, AND I THINK INCREASINGLY TO OTHERS, IS THAT THE WAY THE ECONOMY FUNCTIONS IN A TIME OF EXPANSION IS REALLY QUITE DIFFERENT FROM WHAT HAPPENS ON THE WAY DOWN. I SHOULD THINK WE WILL FIND THAT WE COULD MODEL THE EUPHORIA STAGES, AS I LIKE TO PUT IT, AND THE FEAR STAGE, AND THEY ARE REALLY QUITE DIFFERENT. I THINK WE WOULD FIND WE WOULD LEARN A GREAT DEAL ABOUT SPECIFICALLY THE FEAR STAGE BECAUSE WE DO HAVE MEMBERS OF THAT -- NUMBERS OF EPISODES IN THE PAST. THE MAJOR PROBLEM IS WE DO NOT HAVE A THIRD MODEL WHICH TELLS US WHICH OF THOSE TWO ARE ABOUT TO HAPPEN. THE REASON IS, A FINANCIAL CRISIS MUST OF NECESSITY BE UNANTICIPATED. BECAUSE, IT IS ANTICIPATED, IT WILL BE ARBITRAGED AWAY. IF A FINANCIAL CRISIS BY DEFINITION IS A DISCONTINUITIES AND ASSET PRICES, THAT MEANS FROM ONE DAY TO THE NEXT, PEOPLE WERE SURPRISED. SOMETHING FUNDAMENTALLY DIFFERENT HAPPENED. I THINK THAT AND I HAVE ARGUED THIS -- I AM NOT SAYING WHETHER GOVERNMENT RESOURCES ARE RELATIVE, I THINK THE ACADEMIC COMMUNITY TO DO IT SURELY AS WELL. WHAT WE DO HAVE TO UNDERSTAND, IS THAT OUR VIEW OF THE WAY AND ECONOMY FUNCTIONS IS NOT PROPERLY MODEL BY WHAT WE NOW HAVE. I JUST WANT TO SAY QUICKLY THAT THE FEDERAL RESERVE HAS CUT A SOPHISTICATED MODELING STRUCTURE AND CAPABLE PEOPLE AS ANY ORGANIZATION IN THE WORLD. IT DID NOT FORECAST OF WHAT IS HAPPENING. |
| 02:55:06 | Issa, Darrell | AND AS A PILOT, BY THE WAY, I KNOW A LANDING IS NOT JUST A TAKEOFF AND REVERSE. |
| 02:55:11 | Greenspan, Alan | THAT IS A GOOD ANALOGY. |
| 02:55:13 | Issa, Darrell | MR. COX? |
| 02:55:20 | COX, C. "C." CHRISTOPHER | WHEN YOU ALLUDED TO XBRL -- I JUST WANT TO POINT OUT THAT IS NOT A MODELING SYSTEM, BUT IT COULD CONTRIBUTE VERY MUCH TO THE CONSTRUCTION OF A USEFUL MODEL. THE SEC IS FOCUS ON MOVING THIS FROM THEIR BONES DISCLOSURE WE HAVE NOW WHICH IS JUST PAPER DATA, AND TAGGING EACH ELEMENT OF A FINANCIAL STATEMENT SO THAT COMPUTERS CAN DO WORK ON BEHALF OF PEOPLE THAT THE PEOPLE DON'T EVEN HAVE TO MIND. IT WILL DELIVER RESULTS. IT WILL PERMIT YOU, INSTEAD OF LOOKING AT FINANCIAL STATEMENTS OF ONE COMPANY OR FINANCIAL REPORTS ABOUT ANOTHER SECURITY, TO INSTANTLY DO COMPARATIVE ANALYSIS. IT WILL VASTLY IMPROVE AS A RESULT, RISK ANALYSIS IN THE MARKET AND BY REGULATORS AND WE ARE FOCUSED ON A FOR THAT REASON. WITH RESPECT TO BOTTLING -- WITH RESPECT TO THE MODELING, ALL THE REST IN THE SYSTEM, I SUPPOSE AT SOME POINT YOU RUN UP AGAINST THE PROBLEM OF TRYING TO CREATE SUCH A LEVEL OF EXACTITUDE THAT YOU REBUILD THE ENTIRE WORLD AND ALL ITS COMPLEXITY. THAT IS PROBABLY AN ASPIRATION WE OUGHT NOT TO HAVE. THEREFORE, WE HAVE TO RECOGNIZE A COMPUTER MODELING IS GOING TO ALWAYS HAVE ITS WEAKNESSES AND WE HAVE CERTAINLY SEEN THAT IN THE LAST YEAR. WE HAVE SEEMED A LOT OF THE RISK MODELS PEOPLE RELIED ON. WE SOUGHT IN LONG-TERM CAPITAL MANAGEMENT, WE HAVE SEEN IT MANY TIMES OVER. MANY OF THOSE THINGS REQUIRED MORE HUMAN INPUT. |
| 02:56:55 | >> | ANY COMMENTS BEFORE WE MOVE ON? WHAT? IF YOU FORGET TO TURN ON YOUR BIKE, YOU MIGHT FORGET TO LOOK AT THE MODEL. [LAUGHTER] |
| 02:57:13 | Snow, John W. | I SHARE YOUR BASIC -- THE THRUST OF YOUR QUESTION HERE WHICH IS CAN WE DO BETTER? CAN WE FIND WAYS TO DO BETTER? IT SEEMS TO ME AND THIS IS RETROSPECTIVE, THE QUESTION IS LEVERAGE IN THE SYSTEM, WHEN LOANS AND DEBT GETS TO BE SOME FRACTION OF GDP, IT PROBABLY OUGHT TO SEND OFF SOME SIGNALS, BECAUSE GDP WRECK -- REPRESENTS THE EARNING POWER AND THAT REPORT -- DID THAT REPRESENTS THE OBLIGATIONS. CONGRESSMAN Q -- CONGRESSMAN COOPER TALKED ABOUT FUTURE OBLIGATIONS THAT RISE AND A SIGNIFICANT RATE RELATIVE TO GDP OF THE UNITED STATES. THAT SORT OF THING, AND ROUGH AND READY TERMS, WE SHOULD BE ABLE TO MODEL AND HAVE SIGNALS GO OFF. BUT NO MODEL I THINK IS VERY -- I DON'T THINK IT COULD EVER BE CLOSE TO PERFECTION AT FIGURING OUT WHERE THE MARKET IS GOING TO GO. THE PROBLEM RIGHT NOW IN THE FINANCIAL MARKETS IS THE BANKS AND FINANCIAL INSTITUTIONS HOLD ALL THIS PAPER. THE MARKET IS SAYING THE PAPER IS RISKIER THAN YOU, THE BANKS, THOUGHT IT WAS. SO THE MARKET IS -- THE MARKET HAS DRIVEN DOWN THE VALUE OF THAT PAPER. AS LONG AS HOUSING PROBLEMS CONTINUE, IT CONTINUES TO DRIVE DOWN THE VALUE OF THE PAPER. NOBODY REALLY KNOWS WHERE THE BOTTOM IS. ONLY THE MARKET WILL HAVE THE CAPACITY TO FIGURE THAT OUT. I DO NOT THINK YOU CAN REALLY MODEL ANYWHERE NEAR PERFECTION, AS HAS BEEN SAID. BUT YOU ALWAYS OUGHT TO LOOK AT THE ASSUMPTIONS. THE ASSUMPTIONS IN THE MODELS, MANY OF OUR BANKING INSTITUTIONS, THAT HOUSING PRICES WOULD KEEP RISING AND RISING AND RISING, PROBABLY SHOULD HAVE BEEN SEEN AS A MISTAKE. |
| 02:59:08 | >> | YOUR TIME HAS EXPIRED. |
| 02:59:11 | Van Hollen, Christopher | THANK YOU, MR. CHAIRMAN. THANK YOU TO ALL THE GIN AND FOR YOUR -- THANK YOU TO ALL OF YOU GENTLEMEN FOR YOUR TESTIMONY. FOR TRYING TO FIGURE OUT WHAT WENT WRONG AND FOR TRYING TO HOLD INDIVIDUALS AND INSTITUTIONS ACCOUNTABLE. MOST IMPORTANTLY, TO TRY TO FIGURE OUT HOW WE CAN LEARN FROM THE MISTAKES THAT WERE MR. COX, I HAD SOME QUESTIONS FOR YOU WITH RESPECT TO THE CAPITAL REQUIREMENTS AND LEVERAGE RULES THAT WERE IN PLACE FOR INVESTMENT BANKS. I'M SURE YOU SAW THE QUOTE IN MARCH OF 2008 WHERE YOU SAID WE HAVE A GOOD DEAL OF COMFORT ABOUT THE CAPITAL CUSHIONS AT THESE FIRMS REFERRING TO INVESTMENT BANKS AT THE MOMENT. THREE DAYS LATER AS YOU KNOW, BEAR STEARNS WAS DRAINED OF MOST OF ITS CASH, THEY HAD TO ENTER INTO THIS QUICK MARRIAGE WITH J.P. MORGAN CHASE ALONG WITH ABOUT $29 BILLION OF TAXPAYER DOLLARS INFUSED AS PART OF THE DEAL. WITH THAT IN MIND I WANT TO ASK YOU ABOUT THE RULE CHANGES, THE LEVERAGE RULE CHANGES THAT WERE MADE BY THE S.E.C. IN 2004 WHERE YOU LOOSENED LEVERAGE REQUIREMENTS ALLOWING THESE BANKS TO BORROW BIG, BIG AMOUNTS OF DOLLARS AND TAKE EVEN BIGGER, BIGGER RISKS WITH THOSE DOLLARS. FROM WHERE YOU SIT NOW, DO YOU BELIEVE THAT THAT DECISION IN 2004 WAS A MISTAKE? |
| 03:00:35 | COX, C. "C." CHRISTOPHER | I REPEALED THE PROGRAM. WE DID AWAY WITH THE PROGRAM BECAUSE, BASED ON EXPERIENCE, THE PROGRAM HAD TWO FLAWS. THE FIRST WAS REALLY BAKED INTO THE STATUTORY SCHEME. THE S.E.C. DIDN'T HAVE THE STATUTORY AUTHORITY TO DO MOST OF WHAT IT WAS DOING ON A MANDATORY BASIS. SECOND, THE METRICS -- |
| 03:00:55 | Van Hollen, Christopher | I'M ASKING A SLIGHTLY DIFFERENT QUESTION. THERE WERE TWO PIECES TO THAT DEAL. ONE WAS CHANGING THE NET CAPITAL RULE TO ALLOW MORE BORROWING AND AS PART OF THAT IT WAS SUPPOSED TO BE BALANCED BY MORE S.E.C. OVERSIGHT OVERSIGHT. ON THE FIRST PART, YOU WERE NOT THERE AT THE TIME, WAS IT WISE OF THE S.E.C. TO CHANGE THE CAPITAL REQUIREMENT RULES AND ALLOW MUCH MORE LEVERAGE. WAS THAT WISE? YOU ARE CORRECT THAT I WAS NOT THERE AT THE TIME SO I HAVE TO ASCRIBE TO THE COMMISSION WHICH VOTED UNANIMOUSLY TO DO THIS IN 2004 THE BEST MOTIVES. IT WAS VERY CLEAR -- I'M ASKING YOU BASED ON WHAT YOU KNOW TODAY WAS THAT A MISTAKE OR NOT? |
| 03:01:36 | COX, C. "C." CHRISTOPHER | YES, I HAVE SAID THAT THE PROGRAM WAS FUNDAMENTALLY FLAWED. WE KNOW THIS IN HINDSIGHT BECAUSE WE SAW AS YOU MENTIONED BEAR STEARNS MET, THE CAPITAL REQUIREMENTS MET THE LIQUIDITY REQUIREMENTS. IT USED THE INTERNATIONALLY ACCEPTED BASTL STANDARDS THAT OTHER BANKS HAVE RELIED UPON AND THOSE METRICS DID NOT HELP US IN THE WEEK OF MARCH 10 WHEN THE LIQUIDITY OF BEAR TURNS IN TWO DAYS WENT FROM $12 BILLION TO $#2 |
| 03:02:11 | Van Hollen, Christopher | BILLION. I UNDERSTAND AND AGREE A VOLUNTARY PROGRAM DOESN'T GIVE YOU THE LEVERAGE YOU WANT IN TERMS OF OVERSIGHT. BUT IT WAS THE ONLY OVERSIGHT THAT WAS PART OF THAT DEAL. IN OTHER WORDS, BASED ON WHAT YOU JUST SAID, IT WAS A MISTAKE TO LOOSEN THE CAPITAL REQUIREMENTS AND ALLOW ALL OF THIS BORROWING. WHAT WAS AGREED AT THE TIME WAS THAT THE SEC WOULD TAKE ON GREATER OVERSIGHT RESPONSIBILITIES. IT WAS A VOLUNTARY PROGRAM. I JUST WANT TO READ TO YOU FROM THE "NEW YORK TIMES" OCTOBER 3 ARTICLE FROM THIS MONTH. THE SUPERVISORY PROGRAM UNDER MR. COX WAS A LOW PRIORITY. THE OFFICE HAD NOT COMPLETED A SAMPLE INSPECTION SINCE IT WAS RESHUFFLED BY MR. COX MORE THAN A YEAR AND HALF AGO. THEY GO ON TO SAY THAT DESPITE THE FACT THAT IT AT THE WEAKNESSES YOU TALKED ABOUT, FORMER OFFICIALS AS WELL AS THE INSPECTOR GENERAL'S REPORT THAT WASN'T -- THAT WAS RELEASED IN CONNECTION WITH THEIR STEARNS SUGGEST A MAJOR REASON FOR FAILURE WAS ONE OF THE FORMER SEC COMMISSIONER SAYING, THE 2004 RULEMAKING GAVE US THE ABILITY TO GET INFORMATION THAT WITHIN CRITICAL TO SENSIBLE MONITORING AND YET THE SEC DID NOT OVERSEE WELL ENOUGH. THAT WAS THE QUOTE FROM A FORMER SEC COMMISSIONER WHO SAID THAT GIVEN THE FACT THAT THOSE WERE THE TOOLS THAT YOU DID AT YOUR DISPOSAL, YOU JUST DID NOT USE THEM ADEQUATELY TO PROTECT INVESTORS. I WOULD LIKE FOR YOU TO RESPOND TO THAT. |
| 03:03:51 | COX, C. "C." CHRISTOPHER | I HAVE HAD THE CASE -- I HAD THE ABILITY TO TALK TO COMMISSIONER COACH MET. WHILE HE VOTED TO CREATED AND WHILE HE UNDERSTOOD THERE WERE PROBLEMS WITH THE VOLUNTARY PROGRAM AND SO ON, HE ALSO RECOGNIZES WHAT REALLY IS NEEDED RIGHT NOW. I ALSO WANT TO CORRECT SOMETHING THAT HAS BEEN SAID SEVERAL TIMES THAT IS A FACTUAL MATTER THAT EVERYONE NEEDS TO UNDERSTAND. THE 2004 RULE CHANGE. I WAS NOT AT THE COMMISSION IN 2004 WHEN THIS CHANGE OCCURRED. IT IS JUST THE FACT. IT DID NOT LUCENT LEVERAGE REQUIREMENTS ON INVESTMENT BANKS. -- HE DID NOT LOOSEN LEVERAGE REQUIREMENTS ON INVESTMENT BANKER. THEY HAD NO REGULATION AT THAT TIME. BY STATUTE, THEY HAVE NO REGULATOR. UP UNTIL 2004, WHEN DOES VOLUNTARY PROGRAM WAS CREATED, THERE WAS ABSOLUTELY NOTHING FOR IT WAS CREATED IN 2004 WAS AT LEAST MORE THAN EXISTED BEFORE. IIL THAT HAS BEEN AMPLY ILLUSTRATED. IN TERMS OF RESHUFFLING THE PROGRAM OR DISMANTLING IT, I THINK THAT MUST REFER TOTHE CONSOLIDATED SUPERVISORS INTO THE PROGRAMS DURING MY CHAIRMAN WAS INCREASED IN TERMS OF ITS STAFFING BY OVER 30%. WE FOCUSED EVEN MORE RESOURCES ON THIS, RECOGNIZING ITS IMPORTANCE. |
| 03:05:25 | Tierney, John | YOU ARE RECOGNIZED FOR FIVE MINUTES. THANK YOU, MR. CHAIRMAN. DR. GREENSPAN, DURING YOUR TENURE AT THE FED, WE WENT FROM RATIONAL AND EXUBERANCE TO AN UNREGULATED SUBPRIME LENDING. WALL STREET DOLL WHILE -- WALL STREET GONE WILD. AND HERE WE ARE. YOU SAID IN YOUR EXCELLENT BOOK THAT YOU HAD A LIBERTARIAN OPPOSITION TO MOST REGULATION. NOW YOU SAID THAT ON PAGE 373. BY THE TIME WE GET TO THE EPILOGUE, YOU SEEM TO HAVE CHANGED THAT VIEW SOMEWHAT IN TODAY, WE TALKED ABOUT INFALLIBILITY, THE INABILITY TO PREDICT RISK BECAUSE WE ARE FALLIBLE HUMAN BEINGS. AND ALSO IN YOUR APOLOGUE, YOU SAID MODERN POLITICAL REALITY REQUIRES ELECTED OFFICIALS TO RESPOND TO VIRTUALLY EVERY ECONOMIC SITUATION WITH A GOVERNMENT PROGRAM. WE ARE IN THE MIDST OF AN UNPRECEDENTED ECONOMIC CRISIS. WE HAVE JUST PASSED A BAILOUT WHICH I OPPOSED. YOU SUPPORTED. AN UNPRECEDENTED COMING THEOLOGICAL, UPSIDE DOWN TURN OF EVENTS -- AN UNPRECEDENTED, UPSIDE-DOWN TURN OF EVENTS, FOLLOWING BILL LINCOLN PLAZA -- PHILOSOPHY, THE PURPOSE OF GOVERNMENT IS THERE TO DO WITH |
| 03:05:29 | Hodes, Paul | THANK YOU, MR. CHAIRMAN. DR. GREENSPAN, DURING YOUR TENURE AT THE FED, WE WENT FROM RATIONAL AND EXUBERANCE TO AN UNREGULATED SUBPRIME LENDING. WALL STREET DOLL WHILE -- WALL STREET GONE WILD. AND HERE WE ARE. YOU SAID IN YOUR EXCELLENT BOOK THAT YOU HAD A LIBERTARIAN OPPOSITION TO MOST REGULATION. NOW YOU SAID THAT ON PAGE 373. BY THE TIME WE GET TO THE EPILOGUE, YOU SEEM TO HAVE CHANGED THAT VIEW SOMEWHAT IN TODAY, WE TALKED ABOUT INFALLIBILITY, THE INABILITY TO PREDICT RISK BECAUSE WE ARE FALLIBLE HUMAN BEINGS. AND ALSO IN YOUR APOLOGUE, YOU SAID MODERN POLITICAL REALITY REQUIRES ELECTED OFFICIALS TO RESPOND TO VIRTUALLY EVERY ECONOMIC SITUATION WITH A GOVERNMENT PROGRAM. WE ARE IN THE MIDST OF AN UNPRECEDENTED ECONOMIC CRISIS. WE HAVE JUST PASSED A BAILOUT WHICH I OPPOSED. YOU SUPPORTED. AN UNPRECEDENTED COMING THEOLOGICAL, UPSIDE DOWN TURN OF EVENTS -- AN UNPRECEDENTED, UPSIDE-DOWN TURN OF EVENTS, FOLLOWING BILL LINCOLN PLAZA -- PHILOSOPHY, THE PURPOSE OF GOVERNMENT IS THERE TO DO WITH THE FREE MARKET CANNOT DO OR WILL NOT DO TO HELP THEMSELVES. IT STILL IS RAGING IN THIS COUNTRY. ALL OVER THE COUNTRY, THOUGH SUBPRIME IS THAT YOU TALKED ABOUT ARE STILL BEING FORECLOSED ON. IT HAS LOPPED OVER INTO THE AAA IS IN THE PRIME MORTGAGES. WE HAVE SEEN RECORD JOB LOSSES. IT STRIKES ME THAT UNTIL WE DEAL WITH THE MORTGAGE FORECLOSURE CRISIS, WE'RE NOT GOING TO GET A HANDLE ON THIS. BACK IN DECEMBER YOU SAID THAT YOU FAVORED SPENDING GOVERNMENT MONEY TO ASSIST AMERICAN STRUGGLING TO MAKE MORTGAGE PAYMENTS WITHOUT FUNDAMENTALLY CHANGING MARKET STRUCTURE. YOU SAID YOU DID NOT KNOW WHAT IT WOULD WORK BUT IT WOULD CERTAINLY HELP PEOPLE. IT WOULD HELP THEIR INCOMES AND PERSONAL STATES WITHOUT AFFECTING THE WAY THAT MARKETS ARE BEHAVING IN THE WAY THE ADJUSTMENT PROCESS IS GOING ON. WITH ALL OF THAT AS BACKGROUND, WHAT WE THINK WE NEED TO DO NOW TO GET TO THE ROUTE TO, BECAUSE OF THE MORTGAGE FORECLOSURE CRISIS, AND YOU AGREE THAT WE NEED TO DO THAT, NOT JUST DEAL WITH THE INSTITUTIONAL HELP WE PROVIDED, BUT DEAL WITH THAT CRISIS IN ORDER TO SOLIDIFY THINGS? [INAUDIBLE] IS THE BUTTON PRESSED? |
| 03:08:33 | Greenspan, Alan | SORRY ABOUT THAT. THE FORECLOSURE CRISIS IS BASICALLY THE RESULT OF THE DECLINE IN PRICES OF HOMES, BECAUSE CLEARLY IT IMPACTS ON THE AMOUNT OF EQUITY IN THE HOMES, AND OBVIOUSLY, AS PRICES FALL GENERALLY, WE ARE SEEING AN EVER INCREASING NUMBER OF AMERICAN HOUSEHOLDS WHOSE MORTGAGES EXCEEDED THE VALUE OF THEIR HOMES. THAT WILL STOP ONLY AS PRICES STABILIZE, AND IT WILL. BUT PRIOR TO THAT, WE STILL HAVE A RISE IN FORECLOSURES, AND WE WILL. IT STRIKES ME THAT ANYTHING THAT CAN BE DONE TO CONFRONT THAT ISSUE IS VALUABLE NOT ONLY TO THE HOMEOWNER, OBVIOUSLY, BUT ALSO TO THE LENDER. NOBODY GAINS FROM FORECLOSURE. I RECALL BEFORE WE HAD ALL OF THIS, WHEN FOR EXAMPLE, MOST LOANS WERE MADE BY SAVINGS AND LOANS. WHEN THE BOARD GOT INTO TROUBLE -- THE BORROWER GOT INTO TROUBLE, THE HOLDER OF THE MORTGAGE RECOGNIZE THAT IT FORECLOSURE OCCURRED, THAT HE WOULD LOSE AS WELL. THEY GOT TOGETHER AND ESSENTIALLY RESOLVED WHAT A NEW MORTGAGE WOULD LOOK LIKE. ANYTHING THAT CAN BE DONE IN THE AREA OF BRINGING PEOPLE TOGETHER WHICH IS FAR MORE DIFFICULT, WHICH I THINK AS SECRETARY SNOW WAS SAYING, YOU HAVE SERVICERS WHO ARE TOO FAR REMOVED FROM THE BOTTLE WAR -- THE PARLOR. WE NEED TO FIND WAYS TO CUT THROUGH THAT ISSUE TO RESOLVE THIS. THERE IS NOTHING LIKE THE STABILIZATION OF HOME PRICES TO RESOLVE THIS ISSUE. UNTIL THAT HAPPENS, WE WILL HAVE MORE DIFFICULTIES. WE'RE CLEARLY IN A POSITION WHERE, AS I MENTIONED IN MY PREMIER -- ARE PREPARED MARCH, WE HAVE SEVERAL MORE MONTHS TO GO AT LEAST. AS I SAID EARLIER, AS YOU POINTED OUT, ULTIMATELY WHAT YOU DO NOT WANT TO DO IS RESTRUCTURED THE MARKET. IF YOU ALTER THE MORTGAGE CONTRACT, IT WILL COST FUTURE BORROWERS MUCH HIGHER INTEREST RATES. MY VIEW IS IF WE JUST GIVE TRANSFER PAYMENTS TO PEOPLE WHO ARE IN DIFFICULTIES, THAT WOULD BE A WAY TO CARRY OVER THE DIFFICULTY OF TRANSITION DURING THIS PERIOD WHEN PRICES ARE STILL DECLINING. I WOULD SAY IT IS A SHORT-TERM PROBLEM, NOT LONG-TERM PROBLEMS. THERE ARE A NUMBER OF SCENARIOS WHICH ARE BASICALLY SAYING THAT IF THE RATE OF MORTGAGE FORECLOSURES SLOWS DOWN, EVEN THOUGH IT IS STILL INCREASING, WHAT HAPPENS IS THAT THE NUMBERS OF HOMEOWNERS WHO FALL INTO FORECLOSURE START TO DECLINE. WE ARE NOT THERE YET BUT WE'RE GETTING CLOSE. |
| 03:11:59 | Tierney, John | THANK YOU VERY MUCH. MR. MURPHY, YOU ARE RECOGNIZED FOR FIVE MINUTES. |
| 03:12:05 | Murphy, Christopher S. | MR. CHAIRMAN, I WANT AS ONE RETRO -- ONE RETROSPECTIVE QUESTION. MY CONSTITUENTS ARE CERTAINLY INTERESTED IN HOW WE GOT INTO THE SITUATION BUT MUCH MORE INTERESTED ON HOW WE MOVE FORWARD FROM HERE. I WANT TO MOVE BACK TO THIS ISSUE, MR. COX, OF THE SEC PROGRAM. I UNDERSTAND IT TERMINATED THE PROGRAM DUE TO CERTAIN SYSTEMIC FAILURES IN THE INABILITY TO DO THE JOB IF IT SET OUT TO DO. THE REPORT FROM THE INSPECTOR GENERAL'S OFFICE IS SPECIFIC TO THE OVERSIGHT THAT WAS DONE ON BEAR STEARNS. IT IS TROUBLING NOT FOR THE SYSTEMIC FAILURES BUT THE PRACTICAL FAILURES THAT OCCURRED IN YOUR OFFICE'S EFFORTS TO TRY TO FIGURE OUT WHAT WAS HAPPENING AT BEAR STEARNS. THE INSPECTOR GENERAL SAYS THAT THE SEC IGNORED NUMEROUS POTENTIAL RED FLAGS. AND ALLOW BEAR STEARNS TO DO SOME OF THE AUDITS THEMSELVES RATHER THAN BEING DONE BY THE SEC, THAT THE SEC DID NOT PERFORM REVIEWS IN A TIMELY FASHION, AND I CERTAINLY UNDERSTAND YOUR PROBLEM THAT EVEN WITH THAT INFORMATION THE SEC DOES NOT HAVE ALL THE TOOLS NECESSARY TO MAKE THE CHANGES THAT YOU MIGHT WANT TO MAKE. AT THE VERY LEAST, THE INSPECTOR GENERAL NOTES THAT LACK OF INFORMATION THAT THE SEC GOT THROUGH IT, SPECIFICALLY WITH BEAR STEARNS, HAD THE RESULT OF PROVIDING INVESTORS WITH MATERIAL INFORMATION THAT THEY COULD HAVE USED TO MAKE WELL- INFORMED INVESTMENT DECISIONS. BUILDING ON UNREPRESENTATIVE BEEN HOLLINS QUESTIONS, WHAT YOU MAKE OF THE INSPECTOR GENERAL'S SPECIFIC FINDINGS ON A LACK OF OVERSIGHT AT BEAR STEARNS, TO MARK DID YOU KNOW ABOUT THOSE RED LIGHTS AND HOW TROUBLING IS IT TO YOU, THOUGH SPECIFIC FINDINGS, AS TO WELL, WITH THE EXCEPTION OF |
| 03:13:59 | COX, C. "C." CHRISTOPHER | THE LAST ONE THAT YOU REFERRED TO WITH RESPECT TO THE ANNUAL REVIEW OF THE 10-K'S, AS YOU WILL NOTE FROM THE FOOTNOTES TO THOSE PARTICULAR ITEMS IN THE REPORT, THEY OCCURRED BEFORE I BECAME CHAIRMAN. THIS WAS A NEW PROGRAM. IT WAS PUT IN PLACE IN 2004. IT FSWAS MEANT, AS I MENTIONED A MOMENT AGO, TO PROVIDE A WINDOW INTO WHAT WAS GOING ON AT THE HOLDING COMPANY LEVEL. FIRST YOU ASKED WHAT I THINK OF THE INSPECTOR GENERAL'S RECOMMENDATIONS AND REPORT. WE HAVE EITHER ALREADY IMPLEMENTED OR ARE IMPLEMENTING ALL THE RECOMMENDATIONS -- DO YOU THINK THERE WAS A |
| 03:14:42 | Murphy, Christopher S. | SPECIFIC FAILURE -- PUTTING ASIDE THE PROBLEMS OF THE PROGRAM ITSELF, WAS THERE A SPECIFIC PROBLEM WITH RESPECT TO THE OVERSIGHT THAT YOU COULD HAVE DONE WITH RESPECT TO BEAR STEARNS THAT WOULD HAVE GIVEN INFORMATION TO AT LEAST OUTSIDE INVESTORS THAT WOULD HAVE BEEN USEFUL? |
| 03:15:01 | COX, C. "C." CHRISTOPHER | I THINK THE THINGS THAT YOU ARE DESCRIBING FALL INTO TWO CATEGORIES. THERE WERE SORT OF PROCEDURAL AND PAPERWORK ISSUES THAT NEEDED TO BE CORRECTED AND THOSE ARE OPERATIONAL AND PROBABLY NOT ULTIMATELY MATERIAL. THEN THERE ARE THOSE THINGS THAT GO TO WHETHER OR NOT THE RISK ASSESSMENT FUNCTION IS BEING PROPERLY PERFORMED. THERE, THE FUNDAMENTAL QUESTION WAS COULD THE S.E.C. HAVE BETTER FORESEEN THE MORTGAGE MELTDOWN THAT OTHER REGULATEORS DIDN'T SEE AND COULD WE HAVE USED DIFFERENT METRICS OR SCENARIOS FOR STRESSING THE PORTFOLIOS, TAKING A LOOK AT WHAT WAS GOING ON INSIDE THE FIRM. I WISH THAT WE HAD BEEN ABLE TO PREDICT THE MORTGAGE MARKET MELTDOWN, BUT FAILING THAT, I DON'T THINK THAT THE PROGRAM ITSELF WOULD HAVE HAD A DIFFERENT OUTCOME UNLESS YOU CAN GO IN AS A REGULARTOR AND REGULATE THE INVESTMENT BANK HOLDING COMPANY ALL THAT WAS BEING DONE IS REVIEW THE PROGRAM METRICS AND S.E.C. RATHER AGGRESSIVELY MANAGED AGAINST THOSE METRICS AND THE INSPECTOR GENERAL FOUND THAT AT ALL TIMES ALL OF THE S.E.C. FIRMS WERE WELL ABOVE THE CAPITAL REQUIREMENTS AND LIQUIDITY REQUIREMENTS OF THE PROGRAM. |
| 03:16:27 | Murphy, Christopher S. | UNDERSTANDING THAT OUR INABILITY TO MANAGE RISK AND LEVERAGE ALLOWED SOME OF THESE FIRMS TO GET SO LARGE THAT THEY BECAME PART OF THE NEW CATEGORY CALLED TOO BIG TO FAIL -- AND THIS IS A QUESTION FOR THE PANEL -- WHAT DO WE DO GOING FORWARD TO ADDRESS THIS ISSUE OF FIRMS THAT ARE TOO BIG TO FAIL? AND HOW DO I ANSWER MY CONSTITUENTS' CONCERNS WHO SAY AREN'T WE JUST NOW SETTING A PRECEDENT WHICH ALLOWS THESE MAJOR FIRMS IN THE FUTURE TO MAKE THE SAME RISKS THAT GOT THEMSELVES INTO THIS POSITION BECAUSE WE HAVE SET UP A PRECEDENT THAT WE ARE GOING TO RESCUE THEM? |
| 03:17:08 | Greenspan, Alan | I THINK THAT IS A VERY IMPORTANT QUESTION. IF INDEED THERE ARE FIRMS IN THIS COUNTRY WHICH ARE TOO BIG TO FAIL, IT NECESSARILY MEANS THAT INVESTORS WILL GIVE THEM MONEYS AT LOWER INTEREST RATES BECAUSE THEY ARE PERCEIVED TO BE GUARANTEED BY THE FEDERAL GOVERNMENT GOVERNMENT. THE RESULT OF THAT IS THAT THEY HAVE A COMPETITIVE ADVANTAGE OVER SMALLER FIRMS, AND THAT CREATES HUGE DISTORTIONS IN THE SYSTEM. SO, THE QUESTION IS, IS IT FEASIBLE TO ELIMINATE TOO BIG TO FAIL. ONCE YOU HAVE GONE DOWN THIS ROAD EVERYONE IS NOT GOING TO BELIEVE YOU. BUT REMEMBER THAT WE USED TO ARGUE STRENUOUSLY THAT FANNIE AND FREDDIE WERE NOT BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT BECAUSE THAT'S WHAT THE LAW SAID. THE MARKETS DIDN'T BELIEVE THAT. |
| 03:18:12 | Murphy, Christopher S. | BIG TO FAIL, WHAT WOULD BE THE STEPS WE WOULD TAKE IN I THINK THE FIRST THING YOU HAVE TO SAY AS A MINIMUM YOU |
| 03:18:18 | Greenspan, Alan | HAVE TO ELIMINATE THE LARGER INSTITUTIONS INSTITUTIONS' SUBSIDY EFFECTIVELY AND ONE IS TO RAISE CAPITAL CHARGES OR RAISE FEES. BUT YOU CANNOT ALLOW IT TO GO ON WITHOUT SERIOUS CONSEQUENCES. AT THE END OF THE DAY LAYERS GOT TO BE SOMETHING WHICH PENALIZES THOSE FIRMS WHICH MOVE ABOVE THE LEVEL WHERE THEY BECOME TOO BIG TO FAIL. THAT IS -- THAT RAISES VERY |
| 03:18:58 | >> | WHICH IS CRISIS, MR. MURPHY. MR. SARBANES. |
| 03:19:04 | Sarbanes, John P. | WE HAVE BEEN TALKING ABOUT THIS METAPHOR, A BLIND MAN AND THE ELEPHANT. I DO NOT REALLY BUY THAT. I THINK -- I CERTAINLY DON'T BUY IT AS AN EXPLANATION FOR WHAT HAPPENED. I THINK IT IS BEING USED AS KIND OF AN EXCUSE. TO PASS THE BUCK AND SAYING, NOBODY COULD SEE THE WHOLE PICTURE. SO WE REAP EACH -- WE WERE EACH COMPROMISED IN OUR ABILITY TO TAKE ACTION THAT WOULD HAVE MATTERED IN THE DIFFERENCE. THE HEARING -- HEARING TESTIMONY TODAY JUST CONFIRMS TO ME THAT IN EACH PART OF THE WORLD THAT YOU EACH HAD A CLEAR PERSPECTIVE ON, YOU HAD TOOLS THAT YOU COULD HAVE USED, WHICH IF YOU HAD USED THEM, MIGHT HAVE AVERTED THE SITUATION. OR CERTAINLY LESS AND IT -- LESSENED ITS IMPACT. WE KEPT PUTTING OFF ON NOT HAVING A MODEL THAT WORKED. WE HAVE TO DEVELOP NEW MODELS AND THEY COULD NOT BE DEVELOPED AS QUICKLY AS NEEDED, AND SO FORTH. DR. GREENSPAN, YOU TALK ABOUT HOW -- I THINK HE SAID WE'RE NOT SMART ENOUGH AS PEOPLE TO PREDICT WHERE THESE THINGS ARE GOING, AND SO FORTH. WELL, THAT MAY BE TRUE WHEN IT COMES TO UNDERSTANDING THE FULL EXTENT OF THE SECURITIZATION OF THE SUBPRIME MORTGAGES, HOW THINGS WOULD KIND OF SPIN FROM THEIRRE. BUT CERTAINLY WE ARE SMART ENOUGH AS PEOPLE TO HAVE PUT BASIC UNDERWRITING STANDARDS IN PLACE, OR TO PRESERVE BASIC UNDERWRITING STANDARDS. THAT IS NOT TATE -- THAT DOES NOT TAKE A LOT OF SMARTS, REALLY. AND WE ARE CERTAINLY THAT'S SMART. BUT YOU DID NOT DO THAT. WHEN PEOPLE WERE COMING TO YOU THAT YOU RESPECT, AND WERE SAYING, WE'VE GOT TO TAKE SOME STEPS HERE TO MAKE SURE THAT THESE SUBPRIME MORTGAGES ARE BEING JUDGED ACCURATELY IN TERMS OF THEIR DANGER, AND SO -- YOU HAVE RESPONDED A FEW TIMES TO THAT, BUT RESPOND TO ME. I DO NOT UNDERSTAND IF YOU HAD TAKEN ACTION WITH TOOLS THAT YOU HAD AVAILABLE TO YOU, THAT IT WOULD HAVE ACTED TO PUSH BACK AGAINST THE SECURITIZATIONS DEMAND OR APPETITE THAT YOU HAVE DESCRIBED. YOU SAID, WHAT HAPPENED WAS, IF YOU HAD THIS HUGE APPETITE FROM THE SECURITIZED OURSRS TO PACKAGE THESE THINGS UP AND MAKE BETTER USE, THAT HE CAN IN 2005 AND 2006 AND 2007 AND THAT OVERWHELM THE SYSTEM. BUT IN 2004 AND 2004 AND 2005, IN THOSE PERIODS WHEN YOU'RE ASKED TO EXERCISE A MORE AGGRESSIVELY USE OF THESE TOOLS, IF THAT HAD BEEN DONE, THAT WOULD HAVE ACTED AS A FIRE WALL AGAINST THIS PRESSURE THAT WAS COMING FROM THE SECURITIZERS AND MIGHT HAVE MADE A DIFFERENCE. IF YOU COULD SPEAK TO THAT, I WOULD APPRECIATE IT. |
| 03:22:50 | Greenspan, Alan | REMEMBER, WE DID NOT KNOW THE SIZE OF THE SUBPRIME MARKET. PROBABLY UNTIL LATE 2005, WE DID THAT HAVE ANY DATA THAT WAS WORTHWHILE IN THE PUBLIC SECTOR. WE HAD DATA ON MORTGAGES THAT WE WERE FAMILIAR WITH. WE HAD NO INDICATION THAT THE SUBPRIME MARKET HAD SOARED TO LEVELS THAT IT DID UNTIL VERY LATE IN 2005. IN RETROSPECT, WE NOW KNOW WITH THE DATA THE WE HAVE THE SUBPRIME MORTGAGES CONSTITUTED ABOUT 7% OF TOTAL ORIGINATIONS FOR MORTGAGES IN THE UNITED STATES. BY 2005, IT HAD GOTTEN UP TO 20%. WE DID NOT KNOW THAT AT THE TIME. |
| 03:23:38 | Sarbanes, John P. | I APPRECIATE THAT. MY TIME IS GOING TO RUN UP. LET ME FOLLOW UP. CERTAINLY YOU ARE NOT SUGGESTING THAT IT IS ONLY WHEN A PROBLEM IS TO BE OF A CERTAIN -- IN OTHER WORDS, IF YOU SEE THE FACT THAT EVEN IN A HANDFUL OF CIRCUMSTANCES, A BASIC, TRADITIONAL PRINCIPLES OF HONEST UNDERWRITING AND LENDING STANDARDS ARE BEING COMPROMISED, IT SHOULD NOT BE THAT THE FACT THAT THE SIZE OF THAT PROBLEM, THOUGH VOLUME OF IT HAS NOT REACHED A CERTAIN THRESHOLD THAT SATISFIES THEY YOU SHOULD NOT BE TAKING ACTION. YOU SHOULD BE TAKING ACTION BASED ON WHAT IS HAPPENING HERE, WHICH IF IT DID HAPPEN, WHICH HAD BEGUN A PROCESS OF OVERSIGHT AND VIGILANCE THAT MIGHT HAVE PREVENTED THIS THING, WHEN IT GOT TO A CERTAIN SIZE, FROM HAVING A PARTICULAR IMPACT. I AM ABOUT TO RUN OUT OF TIME. LET ME JUST CLOSE WITH THIS OBSERVATION, MR. TRADE -- MR. CHAIRMAN, IF YOU WILL INDULGE ME. WHAT CONCERNS ME, AND I HAVE READ SOME OF YOUR WRITINGS, IS THAT YOU HAVE CONCEDED THAT THERE WAS A FLAW IN YOUR IDEOLOGY EARLIER TODAY WITH RESPECT TO THE SITUATION OF BAD ACTORS, RIGHT? BUT WHAT YOU HAVE NOT CONCEDED IS UP ON THE IDEOLOGY THAT SUGGEST THAT THE MARKET WILL ALWAYS PUNISH THE BAD ACTORS, OR AT LEAST NOT ALLOW FOR THE FACT THAT YOU PUT A DRIVER IN THE CAR AND DRIVE RECKLESSLY AND MAYBE THEY HAVE A CAR CRASH, IT IS GOING TO PUNISH THEM AND MAYBE THEY WILL LEARN THEIR LESSON. BUT IN THE MEANTIME, A LOT OF INNOCENT BYSTANDERS CAN GET RUN OVER. I THINK THAT IS WHAT HAS HAPPENED. THERE ARE A LOT OF AMERICANS PEOPLE OUT THERE WHO FEEL LIKE INNOCENT BYSTANDERS AND THEY HAVE BEEN HURT. |
| 03:25:34 | Snow, John W. | SINCE CONGRESSMAN SARBANES MENTIONED THE TREASURY IN HIS OPENING COMMENTS, SUGGESTING THAT WE WERE ALSO NOT ON THE WATCH, LET ME GO BACK TO THE POINT I HAVE MADE OVER AND OVER AGAIN. WE WERE ON THE WATCH. WHEN WE SAW A LARGE SYSTEMIC RISK, WE CALL THE TO THE ATTENTION OF THE CONGRESS. WE COULD NOT HAVE BEEN CLEARER. I COULD NOT HAVE BEEN CLEARER ABOUT THE RISK POSED BY THE GSES. I CALLED IT TO THE ATTENTION OF CONGRESS IN A NUMBER OF TESTIMONIES. WE DID NOT DUCK OUR RESPONSIBILITIES. WE ASSUMED TO THEM. WE PUT A LOT OF EFFORT -- I AM GLAD TO SEE THAT EVENTUALLY RESULTED IN CONGRESS ENACTING THE STRONG LEAD TO STUDY -- LEGISLATION. IT WOULD'VE BEEN BETTER IF IT HAD BEEN IN ACTED SOONER. |
| 03:26:23 | >> | MISS WATSON. |
| 03:26:27 | Watson, Diane | THANK YOU SO MUCH. I WOULD LIKE TO THINK THE THREE GENTLEMEN -- THINK THE THREE GENTLEMEN FOR THEIR ABILITY TO WITHSTAND THIS EFFORT -- CURRENT BROUGHT TO A QUESTION IN YOUR RESPONSES. MR. COX, A WILL TO START WITH YOU. I WOULD LIKE THE OTHER GENTLEMAN TO RESPOND, TOO. SINCE THE BEGINNING OF THE CURRENT ECONOMIC CRISIS, IF YOU HAVE COME UP WITH A NUMBER OF SECTIONS -- SUGGESTIONS IN ORDER TO PROPERLY OVERSEE THE AMERICAN FINANCIAL MARKETS. IT WITH ALL CLARITY CAN RESPOND TO THIS, AND I WOULD LIKE THE OTHERS COME AT YOU BELIEVE -- WHAT ROLE SHOULD THE FEDERAL GOVERNMENT PLAY IN THE U.S. ECONOMY, IN LIGHT OF OUR CURRENT ECONOMIC CRISIS? |
| 03:27:23 | COX, C. "C." CHRISTOPHER | THANK YOU, CONGRESSWOMAN. FIRST, THE ANSWER IS YES, AND STRONGLY. I BELIEVE IN REGULATION AND THE FINANCIAL MARKETS. THAT IS WHY I HAVE SERVED AS THE CHAIRMAN OF THE SECURITIES AND EXCHANGE COMMISSION. IMBEDDED WITHIN THE DESCRIPTION OF REGULATION OF FINANCIAL MARKETS IS REGULATION AND MARKETS. BOTH ARE GOOD. CONGRESS SARBANES ANALOGIZE TO DRIVING, THE RULES OF THE ROAD. IT IS VITALLY IMPORTANT FOR MARKETS THAT THERE ARE RULES OF THE ROAD. THAT THERE -- IT WOULD BE DIFFICULT TO GET PEOPLE TO PART WITH THEIR MONEY UNLESS THEY WERE CONFIDENT THAT THEY COULD PUT -- |
| 03:28:06 | Watson, Diane | WHO SHOULD BE INVOLVED IN FORMULATING THOSE RULES? |
| 03:28:12 | COX, C. "C." CHRISTOPHER | CLEARLY, THE CONGRESS, FIRST AND FOREMOST, NEEDS TO DESCRIBE THE ARCHITECTURE, AND RULEMAKING HAS BEEN DEVISED AT CONGRESS'S WAY -- THAT IS THE SOUND SYSTEM. WITH RESPECT TO THE SECOND PART OF YOUR QUESTION, THE ROLE OF THE GOVERNMENT IN THE ECONOMY, THAT IS THE MARKET'S PART. IT IS VITALLY IMPORTANT THAT WE NEVER FAIL TO APPRECIATE HOW POWERFUL A MEANS OF WISDOM MARKETS CAN BE IN ALLOCATING SCARCE RESOURCES IN A NATION OF 300 MILLION PEOPLE AND A WORLD OF 6 BILLION PEOPLE. MARKETS ARE GOING TO GIVE US THE WISDOM OF CROWDS, MAKE DECISIONS THAT A CENTRAL GOVERNMENT CANNOT, WE HAVE BEEN -- SEEN THE |
| 03:29:05 | Watson, Diane | WHAT ADDITIONAL AUTHORITIES WOULD YOU AS SECRETARY NEED OR WHOEVER FOLLOWS YOU, NEED TO DO THE JOB SMARTLY? |
| 03:29:20 | COX, C. "C." CHRISTOPHER | FIRST AND FOREMOST CLOSE THE REGULATORY GAPS WITH RESPECT TO INVESTMENT BANK HOLDING COMPANIES, MUNICIPAL SECURITIES, WITH RESPECT TO CREDIT DEFAULT SWAPS. HARMONIZE THE REGULATION OF ECONOMICALLY COMPETITIVE PRODUCTS THAT ARE CURRENTLY RECKED BY THE CFTC AND S.E.C. IF WE FILL THOSE GAPS. WOULD YOU THEN PUT IN WRITING TO THE COMMITTEE THOSE SPECIFIC ITEMS THAT YOU JUST ITEMIZED. YES. |
| 03:29:57 | Watson, Diane | THANK YOU. LET ME GO TO MR. SNOW. |
| 03:30:05 | >> | LET ME GO TO MR. SNOW. |
| 03:30:09 | Snow, John W. | I AGREE WITH THE COMMENTS AN ASSOCIATE MYSELF WITH THE COMMENTS OF CHAIRMAN COX. IT IS NOT A MATTER OF NO REGULATION OR SOME REGULATION. WE KNOW WE HAVE TO REGULATE FINANCIAL MARKETS. I THINK AS THE CHAIRMAN SAID IT IS THE MATTER OF GETTING SMART REGULATION, TARGETED. I THINK THE ECONOMY IS IN TOUGH SHAPE. I THINK IT IS GOING DOWN A BAD, BAD PATH AND I THINK THAT THE STIMULUS PACKAGE THAT IS BEING TARGETED, WELL SHAPED, WELL FORMED STIMULUS PACKAGE WOULD MAKE GOOD SINCE AT THIS TIME. |
| 03:30:45 | Watson, Diane | |
| 03:30:48 | Greenspan, Alan | MR. GREENSPAN, PLEASE. WE HAVE TO RECOGNIZE THIS IS ALMOST SURELY A ONCE IN A CENTURY PHENOMENON, AND IN THAT REGARD TO REALIZE THAT THE TYPES OF REGULATION THAT WOULD PREVENT THIS FROM HAPPENING IN THE FUTURE ARE SO ONEROUS AS TO BASICALLY SUPPRESS THE GROWTH RATE IN THE ECONOMY AND I THINK THE STANDARDS OF LIVING OF THE AMERICAN PEOPLE. THIS IS THE REALLY MAJOR TRADEOFF PROBLEM THAT GOVERNMENTS HAVE IN THE SENSE THAT WE DO KNOW ON THE BASIS OF HISTORY THAT FREE MARKETS GROW FAR FASTER AND CREATE GREATER WEALTH THAN, SAY, CENTRALLY PLANNED ECONOMIES. |
| 03:31:33 | Watson, Diane | WE KNOW THAT AND I'M SURE YOU ARE VERY EXPERIENCED EXPLAINING THAT. BUT WHO SHOULD THEN FORMULATE THE REGULATIONS? WHERE WOULD THAT LIE? |
| 03:31:46 | Greenspan, Alan | I THINK IT HAS TO LIE WITH THE CONGRESS. |
| 03:31:58 | Watson, Diane | WE HAVE A PERSONAL PROBLEM IN CALIFORNIA, IN LOS ANGELES, MR. COX. YOU MIGHT BE AWARE OF IT. IT IS WITH THE LOS ANGELES COUNTY METROPOLITAN TRANSIT AUTHORITY, M.T.A. AND THE SOUTHLANDS COMMUTER RAIL AGENCY SOLD MOST OF ITS TRAIN CARS AND LOCOMOTIVES IN FOUR LEASEBACK DEALS THREE OF WHICH INVOLVED A.I.G. METROLINK AND THE M.T.A. HAVE TO LOOK FOR ANOTHER FIRM TO REPLACE A.I. GCHLT A.I.G. WHICH PROVIDED $1 BILLION IN LOANS TO FINANCE THE LEASEBACK TRANSACTION. AND THIS IS A DAUNTING TASK CONCERNING THE CURRENT ECONOMIC STATUS. OUTSIDE OF THE FINANCIAL SERVICES INDUSTRY, DO YOU GENTLEMEN FORESEE A WIDE VARIETY OF BANKRUPTCIES THAT INVOLVE SMALL BUSINESSES AND OTHER CORPORATIONS AS A RESULT OF THIS FINANCIAL CRISIS? THANK YOU FOR ALLOWING ME TO FINISH MY QUESTION? |
| 03:32:59 | >> | YOU CAN ANSWER VERY BRIEFLY. IN FACT, YOU CAN SAY YES, NO, OR MAYBE. |
| 03:33:02 | Snow, John W. | IN FACT, YOU CAN SAY YES, NO, OR MAYBE. |
| 03:33:03 | Greenspan, Alan | UNFORTUNATELY, YES. |
| 03:33:11 | COX, C. "C." CHRISTOPHER | I HAVE NO REASON TO DISAGREE WITH WHAT HAS BEEN SAID THUS FAR FAR. |
| 03:33:21 | >> | ANSWERS, BUT WE APPRECIATE THAT YOU GAVE US AN ANSWER. MRS. MCCULLOUGH. LUM. |
| 03:33:28 | McCollum, Betty | A FREE MARKET IS NOT THE SAME THING AS AN UNREGULATED MARKET. THE PRIVATE SECTOR AND THE GOVERNMENT PLAY TWO DIFFERENT BUT VERY CENTRAL GOALS AND OUR ECONOMY. THERE IS A HEALTHY TENSION BETWEEN THE PRIVATE AND PUBLIC INTEREST. THAT IS THE BALANCE THAT YOU WERE REFERRING TO, MR. SNOW. BUT WHEN FINANCIAL REGULATORS TO LET -- DECIDE TO LET THE PRIVATE MARKETS RUN FREE, PUBLIC INTEREST IS LESS -- LEFT DEFENSELESS TO THE GREED OF WALL STREET. MR. SNOW, YOU TALK ABOUT THE IMPORTANCE OF REGULATIONS. YOU GAVE THE LIST OF REGULATORY QUESTIONS YOU WHICH CONGRESS HAD ACTED OUT. I CAN SHOW YOU A PHOTOGRAPH TAKEN IN 2003 OF WHAT YOU WERE IN CHARGE OF THE TREASURY DEPARTMENT. IT INCLUDES SOME OF TREASURIES TOP OFFICIALS, INCLUDING THE DIRECTOR OF THE OFFICE OF BREAST SUPERVISION, THE COMPTROLLER OF CURRENCY, AND IT ALSO INCLUDES REPRESENTATIVES OF THE BANKING INDUSTRY. THIS TOTAL WAS TAKING AT A PRESS CONFERENCE TO ANNOUNCE A NEW INITIATIVE TO LIMIT REGULATIONS ON BANKS. THERE THEY ARE, STANDING HAPPILY, DESTROYING A STALL -- A TALL STACK OF FEDERAL RULES. I THINK IT'S TELLING THAT YOU'RE NOT USING A SISTER OR EVEN IN IRAN PAPER SHREDDER, THEY ARE USING A CHAIN SAW. NOT MUCH NEW ONCE THERE, MR. SNOW. -- NOT MUCH NUANCE, MR. SNOW. IT WAS A CLEAR MESSAGE TO THE MARKET. WHAT MESSAGE DOES THIS PHOTOGRAPH CONVEY ABOUT REGULATION AND THE TREASURY DEPARTMENT WHEN YOU WERE THE HEAD OF THAT? HOW DO YOU INTERPRET THE SPOTO? -- PHOTO? |
| 03:35:21 | Snow, John W. | I DON'T SEE MYSELF IN THAT PHOTOGRAPH. MAYBE I AM IN THERE OR MAYBE MY EYESIGHT HAS FAILED ME. |
| 03:35:28 | McCollum, Betty | I DID NOT SAY THAT YOU WERE IN THE CODA. YOU'RE THE HEAD OF TREASURY. THESE ARE PEOPLE WHO ARE HIGHLY PRAISED TREASURY OFFICIALS. I HAVE NO KNOWLEDGE OF WHAT THAT THE SHOW IS ABOUT OR WHAT THOSE SMILING PEOPLE CELEBRATING. AT THE TIME THAT YOU WERE IN CHARGE OF THE TREASURY DEPARTMENT, YOU WERE UNAWARE OF THIS MASSIVE DEREGULATION. REGULATE REGULATE I'M UNAWARE OF ANY MASSIVE DE REGULATION CUTTING THE BANKING INDUSTRY. TAKING A CHAINSAW TO THE BANKING REGULATIONS WAS JUST BEGINNING. TWO MONTHS AFTER THIS PRESS CONFERENCE THE OFFICER OF COMPTROLLER ISSUED A RULE THAT PREVENTED STATES FROM BANNING PREDATORY LENDING. YOUR TREASURY DEPARTMENT DIDN'T AGENT TO PREVENT THIS CRISIS. IN FACT YOUR DEPARTMENT BLOCKED THE STATES FROM PROTECTING THEIR CITIZENS. IS THAT CORRECT, YES OR NO. I THINK THAT IS FALSE. SO, YOUR DEPARTMENT DID ABSOLUTELY NO LOBBY INGING TO STOP STATES FROM BEING ABLE TO REGULATE PREDATORY LENDING? I DON'T THINK THE TREASURY DEPARTMENT LOBBIED ON THAT MATTER. THIS WAS AN ACTION, AS I RECALL IT, TAKEN BY THE O.C.C. AND UNDER LAWS ESTABLISHED BY THE CONGRESS THE O.C.C. ON REGULATORY MATTERS IS ENTIRELY INDEPENDENT OF THE TREASURY DEPARTMENT. DO YOU THINK THAT A LAW SHOULD HAVE BEEN PUT IN PLACE THAT WOULD HAVE ALLOWED STATES WHO WANTED TO PROTECT THEIR CITIZENS FROM PREDATORY LENDING, DO YOU THINK THAT LAW SHOULD HAVE BEEN ALLOWED TO MOVE FORWARD FOR STATES TO HAVE CONTROL OVER THAT? I THINK AN AWFUL LOT DEPENDS ON THE CIRCUMSTANCES AND PARTICULARS -- I'M A FORMER STATE REPRESENTATIVE. YES OR NO. I WOULD HAVE TO SEE THE LAW. I'M NOT GOING TO GIVE A BLANKET ANSWER UNLESS I KNOW WHAT THE PROPOSAL S. CHAIRMAN COX I HAVE TO AGREE YOUR STATEMENT. YOU SAID IT MADE IT CLEAR VOLUNTARY REGULATION DOESN'T WORK AND I HAVE HEARD DR. GREENSPAN REFER TO THE FACT THAT WHAT HE THOUGHT THE MARKET WOULD REGULATE TO PROTECT INVESTORS DIDN'T REGULATE. I'M PARAPHRASING FROM YOUR EARLIER STATEMENT. ONE OF THE LESSONS FROM THIS FINANCIAL CRISIS IS THAT OVER THE LONG TERM VOLUNTARY REGULATION IS REALLY TO REGULATION AT ALL. WE SAW THAT AT LEHMAN BROTHERS, A.I.G. AND THE CREDIT RATING AGENCIES THAT TESTIFIED YESTERDAY. UNREGULATED MARKETS AND VOLUNTARY REGULATION WAS A FAILED ENVIRONMENT. IT IS AN IDEOLOGICAL APPROACH TO GOVERNMENT THAT IS ERASING HARD EARNED RETIREMENT SAVINGS OF MILLIONS OF AMERICANS. IF WE NEED AN IDENTIFY |
| 03:35:40 | Snow, John W. | I HAVE NO KNOWLEDGE OF WHAT THAT THE SHOW IS ABOUT OR WHAT THOSE SMILING PEOPLE CELEBRATING. |
| 03:35:46 | McCollum, Betty | AT THE TIME THAT YOU WERE IN CHARGE OF THE TREASURY DEPARTMENT, YOU WERE UNAWARE OF THIS MASSIVE DEREGULATION. REGULATE REGULATE |
| 03:35:57 | Snow, John W. | I'M UNAWARE OF ANY MASSIVE DE REGULATION CUTTING THE BANKING INDUSTRY. |
| 03:36:03 | McCollum, Betty | TAKING A CHAINSAW TO THE BANKING REGULATIONS WAS JUST BEGINNING. TWO MONTHS AFTER THIS PRESS CONFERENCE THE OFFICER OF COMPTROLLER ISSUED A RULE THAT PREVENTED STATES FROM BANNING PREDATORY LENDING. YOUR TREASURY DEPARTMENT DIDN'T AGENT TO PREVENT THIS CRISIS. IN FACT YOUR DEPARTMENT BLOCKED THE STATES FROM PROTECTING THEIR CITIZENS. IS THAT CORRECT, YES OR NO. |
| 03:36:24 | Snow, John W. | I THINK THAT IS FALSE. |
| 03:36:28 | McCollum, Betty | SO, YOUR DEPARTMENT DID ABSOLUTELY NO LOBBY INGING TO STOP STATES FROM BEING ABLE TO REGULATE PREDATORY LENDING? |
| 03:36:39 | Snow, John W. | I DON'T THINK THE TREASURY DEPARTMENT LOBBIED ON THAT MATTER. THIS WAS AN ACTION, AS I RECALL IT, TAKEN BY THE O.C.C. AND UNDER LAWS ESTABLISHED BY THE CONGRESS THE O.C.C. ON REGULATORY MATTERS IS ENTIRELY INDEPENDENT OF THE TREASURY DEPARTMENT. DO YOU THINK THAT A LAW SHOULD HAVE BEEN PUT IN PLACE |
| 03:37:03 | McCollum, Betty | THAT WOULD HAVE ALLOWED STATES WHO WANTED TO PROTECT THEIR CITIZENS FROM PREDATORY LENDING, DO YOU THINK THAT LAW SHOULD HAVE BEEN ALLOWED TO MOVE FORWARD FOR STATES TO HAVE CONTROL OVER THAT? I THINK AN AWFUL LOT DEPENDS |
| 03:37:17 | Snow, John W. | ON THE CIRCUMSTANCES AND PARTICULARS -- I'M A FORMER STATE |
| 03:37:20 | McCollum, Betty | REPRESENTATIVE. YES OR NO. I WOULD HAVE TO SEE THE LAW. I'M NOT GOING TO GIVE A BLANKET ANSWER UNLESS I KNOW WHAT THE PROPOSAL S. CHAIRMAN COX I HAVE TO AGREE |
| 03:37:23 | Snow, John W. | I'M NOT GOING TO GIVE A BLANKET ANSWER UNLESS I KNOW WHAT THE PROPOSAL S. |
| 03:37:29 | McCollum, Betty | CHAIRMAN COX I HAVE TO AGREE YOUR STATEMENT. YOU SAID IT MADE IT CLEAR VOLUNTARY REGULATION DOESN'T WORK AND I HAVE HEARD DR. GREENSPAN REFER TO THE FACT THAT WHAT HE THOUGHT THE MARKET WOULD REGULATE TO PROTECT INVESTORS DIDN'T REGULATE. I'M PARAPHRASING FROM YOUR EARLIER STATEMENT. ONE OF THE LESSONS FROM THIS FINANCIAL CRISIS IS THAT OVER THE LONG TERM VOLUNTARY REGULATION IS REALLY TO REGULATION AT ALL. WE SAW THAT AT LEHMAN BROTHERS, A.I.G. AND THE CREDIT RATING AGENCIES THAT TESTIFIED YESTERDAY. UNREGULATED MARKETS AND VOLUNTARY REGULATION WAS A FAILED ENVIRONMENT. IT IS AN IDEOLOGICAL APPROACH TO GOVERNMENT THAT IS ERASING HARD EARNED RETIREMENT SAVINGS OF MILLIONS OF AMERICANS. IF WE NEED AN IDENTIFY IDEOLOGICAL, A PHILOSOPHY TO GOVERN AS MR. GREENSPAN SUGGESTED I WOULD SUGGEST WE GIVE PRAGMATISM A TRY AND GIVE COMMON SENSE A TRY. THANK YOU, MR. CHAIRMAN. |
| 03:38:39 | >> | WE HAVE TWO MEMBERS THAT HAVE NOT ASKED QUESTIONS. MR. SCHAYES AND MR. LYNCH. AND I THINK THAT WILL CLOSE OUT THE HEARING. MR. SCHAYES. |
| 03:38:48 | Shays, Christopher | THANK YOU, MR. CHAIRMAN. THANK YOU FOR HOLDING THESE HEARINGS. THEY HAVE REALLY BEEN AMAZING AND I HAVE LEARNED A LOT AND I HAVE MET THE ENEMY AND IT IS ALL OF US. I DO WANT TO SAY THAT I THINK THIS MRS. MCCOLLUM'S QUESTIONS WERE MISINTERPRETING. WHAT WAS HAPPENING IS BANKS WERE BEING TOLD THEY NEEDED TO LEND TO PEOPLE WHO DIDN'T HAVE THE INCOME AND HAD BAD CREDIT AND WE WERE FORCING BANKS TO MOVE IN THAT DIRECTION. I AM STRUCK BY THE FACT THAT WE HAVE FREEDOM OF INFORMATION FOR THE EXECUTIVE BRANCH BUT NOT FOR US. THANK GOD, HUH? BUT THE FREEDOM OF INFORMATION WHEN WE HAD THE HEARING ON THE REGULATE ORS REGULATORS -- EXCUSE ME, THOSE WHO APPRAISED THE VALUE OF COMPANIES AND TRANSACTIONS -- ONE OF THEM SAID WE JUST LOST A HUGE RMBS DEAL TO MOODY'S DUE TO A HUGE DIFFERENCE IN THE REQUIRED CREDIT SUPPORT. THEN THEY SAID I THINK THE ONLY WAY TO COMPETE IS TO HAVE A PARADIGM SHIFT IN THINKING ESPECIALLY WITH THE INTEREST RATE RISK BECAUSE THEY WERE RATING THEM HIGHER, THEY HAD TO HAVE GREATER SET-ASIDE. ANOTHER MEMO WAS WE DON'T HAVE SUFFICIENT STAFF WITH THE APPROPRIATE EXPERTISE TO RESEARCH AND CRITERIA TO ENGAGE IN DIALOGUE WITH OUR CLIENTS AND BE RESPONSIVE. THERE WERE ALL OF THESE INSTRUMENTS AND WE THINK THE RATING AGENCIES DIDN'T UNDERSTAND THEM. AND THIS IS THE ONE THAT GETS ME. THEY SAID RATING AGENCIES CONTINUE TO CREATE AN EVEN BIGGER MONSTER THE C.D.O. MARKET. LET'S HOPE WE ARE ALL WEALTHY AND RETIRED BY THE TIME THIS HOUSE OF CARDS FALTERS. THAT IS IS THE KIND OF TESTIMONY WE GET. OR THE KIND OF TESTIMONY WHERE WE LEARN THAT AFTER WE BAIL OUT A.I.G. JUST DAYS AFTERWARDS THEY HAD HAD, WENT TO A SWANK YY REOR THE FOR A WEEK OF WINING AND DINING TOP SALES PEOPLE. CONGRESSIONAL INVESTIGATORS RELEASED THE FACT THAT THEY PAID MORE THAN $440,000 FOR THE EVENT INCLUDING $200,000OR ROOMS, $150,000 FOR MEALS, $23,000 IN SPA CHARGES. THIS IS AFTER THE $85 BILLION BAILOUT. BUT WHAT I WANT TO DO IS HAVE YOU COMMENT ON THIS. WE HAD A SAVINGS AND LOAN BUST IN THE 1980'S, THEN THE COMMERCIAL BANKS AND LATE 1990'S AND EARLY 1990'S. THEN THE DOT-COM BUBBLE BUST, NOW THIS SUBPRIME MELTDOWN. SOMEWHERE IN WEAKEN THERE WAS ENRON. AND SARBANES-OXLEY AND A BILL I VOTED. WAS SARBANES-OXLEY INTENDED TO PREVENT ANY OF WHAT WE SEE HERE? AND IF SO, DID IT? I'M NOT LOOKING FOR A LONG ANSWER. I WILL START WITH YOU, MR. GREENSPAN. |
| 03:41:45 | Greenspan, Alan | WELL, IT DID ONE THING THAT I THOUGHT WAS IMPORTANT, NAMELY TO PUT THE RESPONSIBILITY FOR THE ACCOUNTING SYSTEM ON -- MAKE IT RESPONSIBLE FOR THE CHIEF EXECUTIVE OFFICER. BECAUSE AS WE HAVE ALL LEARNED IN -- THAT IS THE FIRST ONE. |
| 03:42:03 | Shays, Christopher | ANY OTHER BENEFIT? I'M HARD-PRESSED TO FIND ANY |
| 03:42:08 | Greenspan, Alan | OTHER ONES. |
| 03:42:11 | Shays, Christopher | WHEN WE PASSED SARBANES-OXLEY WE LEARNED THAT THE FANNIE MAE AND FREDDIE MAC, THESE HUGE GIANTS, WERE NOT UNDER IT. THEY WERE NOT UNDER IT BECAUSE THEY ARE NOT UNDER THE 1933 OR 1934 ACT. THAT IS THE S.E.C. THEY WERE NOT UNDER YOU, MR. COX, WERE THEY? JERKS NO, THEY HAD THEIR OWN REGULATOR. |
| 03:42:25 | COX, C. "C." CHRISTOPHER | JERKS NO, THEY HAD THEIR OWN REGULATOR. |
| 03:42:29 | Shays, Christopher | THEY WERE NOT UNDER THE S.E.C. WE FORCED THEM BY INTRODUCING LEGISLATION IN 2002 AND 2003 TO PUT THEM UNDER BOTH THEY ARROGANTLY VOLUNTARILY AGREED TO BE UNDER THE 1934 ACT. THAT JUST MADE US UNDERSTAND THEIR MACRO NUMBERS. THE 1933 ACT WOULD HAVE BEEN ALL THE DIFFERENT INSTRUMENT. S WHY IS FANNIE MAE ADD FREDDIE MAC NOT UNDER THE 1933 ACT? |
| 03:42:52 | COX, C. "C." CHRISTOPHER | THERE IS NO GOOD REASON FOR |
| 03:42:54 | Shays, Christopher | THAT. |
| 03:42:57 | COX, C. "C." CHRISTOPHER | I HAVE CONSISTENTLY URGED -- THE REASON IT IS NOT |
| 03:43:00 | Shays, Christopher | HAPPENING IS CONGRESS DO NOT WANT TO PUT THEM UNDER IN. THAT IS THE CHALLENGE THAT WE HAVE. NOW, WE ALSO, MR. SNOW, YOU ADVOCATED THAT THEY BE, HAVE A STRONGER REGULATOR. WE HAVE FINALLY DONE IT BUT YOU WENT DAY IN AND DAY OUT, MR. COX YOU DID AND MR. GREENSPAN YOU KITTED THEY HAVE A BETTER REGULATOR. AND MY UNDERSTANDING IS THAT THE HOUSING MARKET, THE SUBPRIME, GOT US INTO THIS MELTDOWN. NOW, THE CRITICISM OF YOU, MR. GREENSPAN AND I WOULD LOVE TO HEAR YOUR COMMENT IS, THAT WHEN WE HAD THE DOT COM CRASH YOU FELT WE NEEDED EASY MONEY TO GET OUT AND YOU KEPT EASY MONEY AFTER WE WERE OUT OF IT. AND SOME OF MY CONSTITUENTS SAID THAT LED TO DUMB LENDING AND DUMB BORROWING. AND THEY SAID IT WAS NOT JUST DUMB LENDING TO INDIVIDUALS BUYING HOMES, PEOPLE BUYING HOMES THEY COULD NOT AFFORD, BUT IT WAS THE BIG FINANCIAL HOUSES, LEHMAN, BEAR STEARNS, MORGAN STANLEY, MERRILL LYNCH, GOLDMAN SACHS, ALL MAKING THESE BIG DEALS WITH HUGE LEVERAGING, GETTING PEOPLE TO BUY BUSINESSES THAT THEY FRANKLY WERE HAVING EXTRAORDINARY DEBT. AND I'M JUST WONDERING WITH HINDSIGHT IF YOU WOULD HAVE MAYBE PUSHED THE RATES UP A LITTLE HIGHER A LITTLE SOONER. |
| 03:44:30 | Greenspan, Alan | IT IS VERY EVIDENT FROM ALL THE DATA THAT WHAT WE BEGAN TO CONFRONT IN THE LAST 10 YEARS IS A MAJOR CHANGE IN THE GLOBAL STRUCTURE OF THE WORLD BASICALLY THE RESULT OF HUGE INCREASES IN MARKETS DEVELOPED IN CHINA AND ELSEWHERE ELSEWHERE. WITHOUT GETTING INTO THE DETAILS DETAILS, THIS CREATED A MAJOR DECLINE IN REAL LONG-TERM INTEREST RATES GLOBALLY. IT STARTED TO FALL IN EARLY 2000 AND IT SHOWS UP BY THE YEAR 2006 WHERE FOR THE FIRST TIME IN HISTORY WE HAD NOT ONLY INFLATION RATES BUT LONG-TERM INTEREST RATES IN SINGLE DIGITS AROUND THE WORLD. WHAT THAT MEANT WAS FOR ANY CENTRAL BANK WHICH TRIED TO RAISE INTEREST RATES FOR MORTGAGES OR ANYTHING WITH MATURITIES MORE THAN, SAY, FIVE OR SIX YEARS, FOUND ITSELF RUNNING INTO TROUBLE. WE, FOR EXAMPLE, EVERY TIME WE RAISED RATES IN THE POST-WORLD WAR II PERIOD AND WHAT WE WOULD RAISE OF COURSE IS THE SHORT-TERM RATE, LONG-TERM RATES WOULD GO AUTOPSY WELL. IN 2004, HOWEVER, WHEN WE STARTED TO EMBARK UPON A MAJOR INCREASE IN RATES, WE FOUND THAT LONG-TERM RATES DID NOT MOVE AT ALL. THAT WE HAD LOST CONTROL OF THE MARKETS IN THE LONGER END OF THE MARKET AS WE LIKE TO SAY. THAT IS TRUE OF THE EUROPEAN CENTRAL BANK, THE BANK OF ENGLAND ENGLAND, ALL CENTRAL BANKS OF BEING DRIVEN TO THE POINT WHERE FOR LONGER-TERM ISSUES THEY BASICALLY ARE CONFRONTED WITH THIS GLOBAL SITUATION. |
| 03:46:26 | Davis, Thomas | MR. CHAIRMAN, I WOULD ASK TO YIELD FOR ONE ADDITIONAL MINUTE, PLEASE. |
| 03:46:32 | >> | MR. COX, I WOULD LIKE YOU TO |
| 03:46:34 | Shays, Christopher | HAVE THE OPPORTUNITY TO RESPOND TO CRITICISM THAT SAID IN 2004 THE S.E.C. ALLOWED LEHMAN BROTHERS, BEAR STEARNS, MORGAN STANLEY, MERRILL LYNCH, GOLDMAN SACHS TO LEVERAGE AT 30-IS1 AND EVEN HIGHER FROM THE PRACTICE OF 12-1 TO 15-1. I WOULD LOVE TO HEAR YOUR ANSWER. |
| 03:46:55 | COX, C. "C." CHRISTOPHER | FIRST, THE 2004 RULE CHANGE OCCURRED WHILE I WAS A MEMBER OF CONGRESS. BUT WHAT THE S.E.C. DID IN 2004 WAS NOT TO LIFT LEVERAGE REQUIREMENTS ON INVESTMENT BANK HOLDING COMPANIES OR REPEAL A 12-1 LEVERAGE RULE. FIRST, THERE WAS NO 12-1 LEVERAGE RULE. SECOND, THERE WAS NO RULE WHATSOEVER FOR INVESTMENT BANK HOLDING COMPANIES MUCH THE S.E.C. NEVER PURPORTED TO REGULATE THEM. THEY HAD NO STATUTORY AUTHORITY TO DO SO. SO, UNTIL 2004 THERE WERE NO RULES AT ALL. IT HAPPENED THAT POST THOSE RULES LEVERAGE INCREASED BUT IT DID NOT INCREASE BECAUSE OF THE RULES. AND THE RULES AT LEAST GAVE AN OPPORTUNITY TO SEE AT THE HOLDING COMPANY LEVEL WHAT WAS GOING ON AND TO MANAGE BETTER THAN THE S.E.C. OTHERWISE COULD HAVE. NONETHELESS, AS I HAVE POINTED OUT THAT WAS A FUNDAMENTALLY FLAWED SYSTEM OF VOLUNTARY REGULATION ARE METRICS THAT DIDN'T WORK ANY BETTER IN THE INVESTMENT BANKS THAN THEY DID FOR WAMU OR INDY MAC OR COMMERCIAL BANKS IN THIS COUNTRY AND WORNLD THE WORLD THAT WERE USING THE BASIL STANDARDS. |
| 03:48:11 | >> | MR. LYNCH. MR. CHAIRMAN, IN THE INTEREST |
| 03:48:15 | Lynch, Stephen F. | TIME I WOULD ASK UNANIMOUS CONSENT THAT I SUBMIT FOR THE RECORD THIS IS A SPEECH ACTUALLY AN ARTICLE BY HARVEY PITT FORMER S.E.C. CHAIRMAN IN COMPLIANCE WEEK FROM JUNE 24, 2008 AND ALSO ANOTHER ARTICLE A PIECE A REPORT BY MARK JIKKLING FOR CONGRESS ENTITLED "AVERTING FINANCIAL CRISIS CRISIS" DATED OCTOBER 8, 2008. |
| 03:48:40 | >> | WITHOUT OBJECTION. |
| 03:48:42 | Lynch, Stephen F. | THANK YOU, MR. CHAIRMAN. I TOO WANT TO THANK THE PANELISTS FOR THEIR WILLINGNESS TO HELP US. THIS CONGRESS AND NEXT CONGRESS WILL BE CHARGED WITH THE RESPONSIBILITY OF TRYING TO RE RECONFIGURE OUR REGULATORY FRAMEWORK TO DEAL WITH THE PROBLEMS THAT HAVE BECOME EVIDENT. WHILE EACH OF YOU HAS SAID DURING TODAY'S TESTIMONY THERE IS PROBABLY NOT ONE CAUSE OF THIS, I THINK THAT THERE IS ONE WAY TO DESCRIBE THE CURRENT PROBLEM WE HAVE NOW WHICH IS VALUATION RISK AND THE INABILITY OF MARKET PARTICIPANTS TO REALLY VALUE PRODUCTS AND TO ASCERTAIN WHERE THEY STAND AND WHERE SOME OF THEIR COUNTERPARTIES STAND. AND ACCURATE INFORMATION FOR THE MARKETS IS REALLY ITS LIFE'S BLOOD. IF WE DON'T HAVE THAT WE WILL NEVER GAIN BACK THE TRUST WE NEED IN THESE MARKETS. WE HAD A COUPLE OF GLARING EXAMPLES FEELS WE HAD A FINANCIAL REPORT BY BEAR STEARNS ON THE WAY DOWN JUST AS THEY WERE ABOUT TO BE FORCED INTO A SALE WHERE IN THEIR REPORT THEY SAID -- I HAVE A QUOTE HERE -- THEY WERE TALKING ABOUT THEIR BALANCE SHEET SAND SAID WE CURRENTLY HAVE $19 BILLION IN COMPLEX DERIVATIVES THE VALUE OF WHICH IS NOT READILY OBSERVABLE. THE INSTRUMENTS THEY HAD ARE JUST TOO COMPLEX AND THE MARKET HAD BASICALLY GONE AWAY FOR THOSE INSTRUMENTS. AS WELL YOU HAD EAST STANLEY O'NEAL C.E.O. OF MERCHANTRIL SAID WE HAD LOSSES OF $4 BILLION. A WEEK LATER SAID WE HAVE LOSSES OF $7 BILLION. THREE WEEKS LATER SAID WE HAVE LOSSES OF $11 BILLION. CLEARLY THESE FOLKS HAD NO IDEA WHAT WAS REALLY GOING ON. AND IT IS A FUNCTION OF THE COMPLEXITY OF SOME OF THESE INSTRUMENTS. AND I THINK THE COMPLEXITY AMPLIFIED SOME OF THE PROBLEMS WE HAD. SO, DR. GREENSPAN, -- AND THIS HAPPENS IN A NUMBER OF WAYS. NOT ONLY THE COMPLEXITY OF THE INSTRUMENTS BUT SOME OF THEM ARE OFF THE BALANCE SHEETS SO WE DON'T KNOW ABOUT THEM AND AS YOU MENTIONED BEFORE, THESE CREDIT DEFAULT SWAPS ARE COMPLETELY UNREGULATED SO WE DON'T GET TO SEE THOSE. BUT THE LACK OF TRANSPARENCY IS WHAT I'M GETTING AT. AND I WAS A LITTLE SURPRISED, DR. GREENSPAN AT YOUR EARLIER COMMENTS ALTHOUGH YOU MAY HAVE STARTED TO CLARIFY THEM A LITTLE BIT, THAT THERE IS NOTHING WRONG OR THAT MOST OF THE DERIVATIVES ARE WORKING PROPERLY. BECAUSE THE COMPLEXITY OF SOME OF THOSE -- IF YOU ARE TALKING ABOUT THE STANDARD VERY COMMON DERIVATIVES THAT ARE USED IN INTEREST RATE CALCULATION AND THE EARLY PAYMENT OF MORTGAGES, PREPAYMENT PENALTIES, THOSE ARE VERY COMMON. BUT WE HAVE SOME VERY COMPLEX DERIVATIVES THAT ARE GUMMING UP THE SYSTEM AND IT HAS CAUSED DISTRUST BETWEEN LENDERS BECAUSE ONE PARTY DOESN'T WANT TO LEND TO THE OTHER BECAUSE OF THE OPAQUENESS OR OWE PASPACITY OF THE DERIVATIVES AND SOME OF THEIR HOLDINGS. SO, IS WHAT YOU ARE SAYING MOST OF THE DERIVATIVES ARE WORKING, IS THAT AN IMPLICATION THAT WE SHOULD NOT DO SOMETHING IN TERMS OF REGULATORY ACTION WITH RESPECT TO SOME COMPLEX DERIVATIVES? |
| 03:52:12 | Greenspan, Alan | THOSE COMPLEX DIFSERIVATIVES ARE GONE NEVER TO BE SEEN AGAIN. |
| 03:52:18 | Lynch, Stephen F. | I WISH I COULD BELIEVE THAT. BUT WE HAVE SHORT MEMORIES AROUND HERE. AND AS SOON AS THE CRISIS IS OVER THERE IS GOOD MONEY BEING MADE ON THOSE AND SO THERE'S AN INCENTIVE THERE TO PUSH THEM OUT INTO THE MARKET. SO I WISH I COULD BELIEVE THAT YOU ARE RIGHT THAT THESE THINGS WON'T COME BACK, BUT I WANT TO MAKE SURE. BECAUSE IT WILL BE TO THE CONGRESS'S DETRIMENT AS WELL AS THE FINANCIAL INDUSTRY IF THESE THINGS DO COME BACK OR WE HAVE ANOTHER FAILURE LIKE RIGHT NOW. WELL, I CERTAINLY HAVE NO OBJECTION TO REGULATING THOSE INSTRUMENTS INSTRUMENTS. STRUCTURED INVESTMENT VEHICLES, FOR EXAMPLE, MY PUZZLEMENT IS WHO WAS BUYING THOSE THINGS. AND IF YOU ARE GOING TO TELL ME THAT THERE ARE A LOT OF INSTRUMENTS OUT THERE WHICH MAKE NO SENSE, I AGREE WITH YOU. INTERESTINGLY ENOUGH, 72% WERE HELD BY HEMDGE FUNDS, THE SMARTEST PEOPLE IN THE ROOM. THAT IS WHAT I FIND MOST DISTURBING. WE ARE NOT DEALING WITH PEOPLE WHO ARE DUMB. WE ARE DEALING WITH BY FAR THE MOST SOPHISTICATED, THOUGHTFUL PEOPLE ABOUT THE WAY MARKETS WORK WHO CREATED THE MAJOR PROBLEMS. MR. CHAIRMAN, COULD I GIVE THE OTHER TWO WITNESSES A CRACK AT THAT? CERTAINLY, IF THEY WISH TO. FIRST AN OBSERVATION ABOUT WHAT WE CAN DO IN REAL TIME TO -- AN OBSERVATION ABOUT WHAT WE CAN DO TO REAL TIME TO ADDRESS SOME OF THE PROBLEMS YOU |
| 03:52:52 | Greenspan, Alan | OBJECTION TO REGULATING THOSE INSTRUMENTS INSTRUMENTS. STRUCTURED INVESTMENT VEHICLES, FOR EXAMPLE, MY PUZZLEMENT IS WHO WAS BUYING THOSE THINGS. AND IF YOU ARE GOING TO TELL ME THAT THERE ARE A LOT OF INSTRUMENTS OUT THERE WHICH MAKE NO SENSE, I AGREE WITH YOU. INTERESTINGLY ENOUGH, 72% |
| 03:53:18 | Lynch, Stephen F. | WERE HELD BY HEMDGE FUNDS, THE SMARTEST PEOPLE IN THE ROOM. THAT IS WHAT I FIND MOST |
| 03:53:23 | Greenspan, Alan | DISTURBING. WE ARE NOT DEALING WITH PEOPLE WHO ARE DUMB. WE ARE DEALING WITH BY FAR THE MOST SOPHISTICATED, THOUGHTFUL PEOPLE ABOUT THE WAY MARKETS WORK WHO CREATED THE MAJOR PROBLEMS. MR. CHAIRMAN, COULD I GIVE |
| 03:53:39 | Lynch, Stephen F. | THE OTHER TWO WITNESSES A CRACK AT THAT? |
| 03:53:42 | >> | CERTAINLY, IF THEY WISH TO. FIRST AN OBSERVATION ABOUT WHAT WE CAN DO IN REAL TIME TO |
| 03:53:47 | COX, C. "C." CHRISTOPHER | FIRST AN OBSERVATION ABOUT WHAT WE CAN DO IN REAL TIME TO -- AN OBSERVATION ABOUT WHAT WE CAN DO TO REAL TIME TO ADDRESS SOME OF THE PROBLEMS YOU DESCRIBED WITH RESPECT TO CREDIT DEFAULT SWAPS THE CREATION OF A CENTRAL COUNTERPARTY AND EXCHANGE TRADING FOR THESE CAN START TO BRING THEM INTO THE SUNLIGHT. BEYOND THAT, IF WE GET REGULATION OF THEM TO HAVE DISCLOSURE THAT WILL HELP. BEYOND THAT, A MORE GENERAL POINT, THE FINANCIAL SYSTEM THAT IS ADMINISTERED BY WALL STREET INSTITUTIONS EXISTS FOR A PURPOSE. IT EXISTS TO RAISE MONEY FOR PRODUCTIVE ENTERPRISES. IT SUPPORTS A LOT OF JOBS. IT IS WHAT THE REAL ECONOMY NEEDS TO OPERATE ON. IT SHOULDN'T BE AN END IN ITSELF. IT SHOULDN'T BECOME A BROKE CATHEDRAL OF COMPLEXITY THAT PAYS ITSELF RICHLY WHILE EXPOSE BEING THE REST OF US TO EXTRAORDINARY RISK THAT CAN THREATEN THE NATION ITSELF. I THINK THAT WE NEED TO UNDERSTAND THAT COMPLEXITY IN AND OF ITSELF CAN FRUSTRATE INVESTORS INVESTORS' UNDERSTANDING OF WHAT IS IN THE MARKET, CAN MAKE IT DIFFICULT FOR MARKETS TO WORK. AND ALL-OUT WAR ON COMPLEXITY IS ABSOLUTELY IMPORTANT. IT IS NEEDED IN ACCOUNTING. WE HAVE BEEN DOING IT WITH THE FINANCIAL ACCOUNTING STANDARDS BOARD TO MAKE SURE WE SIM ANY PHI SIMPLIFY GAAP BUT THE WAYS WE HAVE BEEN WORK ING TOING TO SIMPLIFY IN AND LACK OF TRANSPARENCY ALL OF THAT I THINK YOU ARE RIGHT CON PIERS CONSPIRES TO LET RISK GROW IN THE DARKNESS. |
| 03:55:39 | Snow, John W. | A VERY COHERENT AND LUCID DESCRIPTION OF THE PROBLEM IN THE BANKING SYSTEM TODAY. IT IS GUMMED UP. I THINK THAFRMGS YOUR WORD. WITH ALL OF THIS PAPER THAT IS HARD TO GET PRICE DISCOVERY ON. YOU CAN'T FIND OUT WHAT THE DARN STUFF IS WORTH BECAUSE IT IS SO OPAQUE AND THE BANKS DON'T TRUST EACH OTHER'S BALANCE SHEETS. AND YOU CAN PUT LIQUIDITY AND CAPITAL IN WHICH HAS BEEN DOINGNE, BUT UNLESS YOU CLEAR UP THIS COMPLEXITY AND UNLESS PEOPLE TRUST EACH OTHER'S BALANCE SHEETS AND THE PAPER ON THEM THEY ARE PRETTY DARN DISINCLINED. IT CALLED RISK AVERSION. THEY ARE RISK AVERSE WITH YOUR COUNTERPARTY. I THINK AS LONG AS THIS CONTINUES AND UNTIL WE GET THE PRICE DISCOVERY, OVERCOME THE RISK AVERSION WE ARE GOING TO HAVE THE FROZEN CREDIT MARKETS WHICH IS WHY I HAVE BEEN ARGUING WE TAKE A PAGE FROM THE BOOK OF THE BRITS WHO HAVE NOT ONLY DONE LIQUIDITY AND CAPITAL BUT PUT IN PLACE INTERBANK LENDING GUARANTEES SO THE BANKS WILL START LENDING TO EACH OTHER. NOW, DO IT FOR SOME PERIOD OF TIME BUT WE HAVE TO UNFREEZE THIS FROZEN MASS OF BAD PAPER IN THE SYSTEM AND GET IT DISGORGED AND OUT OF THE SYSTEM. BUT IN THE INTERIM, WHILE THE DISGORGING AND PRICE DISCOVERY GOES ON IT SEEMS IT WOULD MAKE SENSE FOR US TO MOVE TOWARD INTER BANK INTERBANK GUARANTEES SO THE BANKS WILL START LENDING AGAIN AND OVERCOME THE RISK AVERSION THAT THEY SEE IN ALL OF THEIR COUNTERPARTIES. |
| 03:57:16 | Lynch, Stephen F. | |
| 03:57:19 | >> | THANK UYOU. WHEN I TALKED TO DR. GREENSPAN ABOUT COMING TO TESTIFY HE TOLD ME THAT HEARING COULD LAST FOUR HOURS. YOU WERE ABSOLUTELY ON THE MARK. THIS HEARING HAS LASTED FOUR HOURS. IT HAS BEEN A VERY HELPFUL FOUR-HOUR PERIOD FOR US TO HAVE THE THREE OF YOU HERE TO GIVE US YOUR VIEWS OF THESE ISSUES OF WHERE WE HAVE BEEN AND WHERE WE CAN GO AND WHAT REFORMS WE OUGHT TO LOOK TO FOR THE FUTURE. I WANT TO THANK YOU ON BEHALF OF THE COMMITTEE FOR YOUR GENEROSITY OF YOUR TIME AND WILLINGNESS TO ANSWER OUR QUESTIONS FOR SUCH A LENGTHY PERIOD OF TIME. WE STAND ADJOURNED IN TERMS OF THE HEARING AND THOSE WHO ARE HEARING FOR THE HEARING, CERTAINLY COULD LEAVE AND I THANK YOU FOR THAT. SO WE ADJOURN FOR THE HEARING BUT WE HAVE A BUSINESS MEETING FOR TWO REPORTS THAT WE ARE GOING TO AGREE TO. ONE IS COMMUNITY REPORT TO TO BUSH ADMINISTRATION ABUSE OF POWER IN RESPONSE TO COMMUNITY SUBPOENAS SEASON JOHNSON AND WIRE ADMINISTRATOR SUPERVISOR DUDLEY. AND THE SECOND IS THE COMMITTEE REPORT ON ACTIVITIES OF THE WHITE HOUSE OFFICE OF POLITICAL AFFAIRS. WITHOUT OBJECTION BOTH REPORTS WILL BE CONSIDERED EN BLOCK AND CONSIDERED AS READ. HEARING NO OBJECTION THE VOTE NOW OCCURS -- |
| 03:58:44 | Davis, Thomas | MR. CHAIRMAN LET ME NOTE FOR THE REPORT MY DISSENT BUT WE HAVE MINORITY VIEWS ON BOTH OF THESE. WE DO HAVE A SPLIT ON THIS ISSUE BUT US WANTED TO BE RECORDED THAT WE DO NOT ASK FOR ROLL. |
| 03:58:58 | >> | REPORTING THE TWO REPORTS VOTING TO ACCEPT THE TWO REPORTS WILL YEA. OPPOSED. NO. THE AYES HAVE IT AND THE REPORTS ARE AGREED TO. THAT CONCLUDES THE BUSINESS MEETING AS WELL. [CAPTIONS COPYRIGHT NATIONAL CABLE SATELLITE CORP. 2008] [CAPTIONING PERFORMED BY NATIONAL CAPTIONING INSTITUTE] . |
| 02:00:24 | Cooper, Jim "James" H. | DEMOCRATS BY THE WAY CONTROLLED THE SENATE THE FIRST TWO YEARS OF THE BUSH ADMINISTRATION AND LET'S NOT GET INTO PARTISANSHIP. I'M RESPONDING TO WHAT THE CHAIRMAN IS SAYING. I TRIED TO STAY AWAY FROM THAT TODAY. I THINK WE NEED TO FOCUS ON THIS. THAT IS WHAT THE PUBLIC IS INTERESTED IN. THEY ARE TIRED OF THIS PARTISAN HARPING. |
| 02:00:50 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN. |
| 02:00:59 | Cooper, Jim "James" H. | I WANT 20 GO BACK TO THE IRRESPONSIBLE PRIME LENDING BECAUSE I THINK MANY THINK THAT IS THE ROOT CAUSE OF THE CRISIS. WHEN I LOOKED AT YOUR TESTIMONY YOU SAID SUBPRIME MORTGAGE ORGANIZATIONSEN DENIABLY THE ORIGINAL SOURCE OF THE CRISIS. I ASSUME YOU AGREE. |
| 02:01:16 | Cooper, Jim "James" H. | MR. COX SAID THE CURRENT CREDIT MARKET CRISIS BEGAN WITH A DETERIORATION OF MORTGAGE ORIENTATION STANDARDS. MR. SNOW CITED LAX LENDING PRACTICES. ACKS. IN RESPONSE TO IN RESPONSE TO THE QUESTION OF WHY YOU HAD NOT USED THE REGULATORY AUTHORITY CONGRESS GAVE BUT 1994 TO REIN IN THE IRRESPONSIBLE PRIME LENDING YOU SAID I TOOK AN OATH I'M HERE TO UPHOLD THE LAW OF THE LAND. BUT YOU HAD A CLEAR DETECTIVE TO ACT. THE LAW OF THE LAND AS OF 1994 TITLE 15, U.S. CHAPTER 41, SUN CHAPTER 1, PART B, SECTION 1639, SAYS THIS, THAT THE BOARD, MEANING YOUR BOARD BY REGULATION OR ORDER SHALL NOT MAY BUT SHALL PROHIBIT ACTS OR PRACTICES IN CONNECTION WITH REFINANCING OF MORTGAGE LOANS THAT THE BOARD FINDS TO BE ASSOCIATED WITH ABUSIVE LENDING PRACTICES OR OTHERWISE NOT IN THE INTEREST OF THE BORROWER. NOW, YOU SAID MR. GRAMLICH CAME IN INTO THE CONVERSATION AND REQUESTED YOU SEND BANK EXAMINERS OUT ON THIS. YOU DIDN'T DO THAT BUT YOU SAID TO MR. WAXMAN YOU SPOKE OF SENDING OUT ON THE COMMITTEE AND YOU VOTED FOR REGULATIONS. BUT UNFORTUNATELY THE REGULATIONS ON WHICH YOU VOTED IN 2001 DEALT ONLY WITH HIGH COST MORTGAGES. THAT LEAVES LIKE 99% OF SUBPRIME MORTGAGES OFF THE TABLE. YOU DIDN'T DEAL WITH DECEPTIVE TEASE RATES OR BALLOON PAYMENT LOANS, PREPAYMENT PENALTIES FOR HOMEOWNERS WHO WANTED TO REFINANCE BEFORE THEIR RATE GOES UP. RATE GOES UP. -- BALLOON LOANS. YOU HAD THE HOUSING OF URBAN DEVELOPMENT ASKING YOU TO USE THE AUTHORITY CONGRESS GAVE U.S. MANDATE, NOT A WISH, BUT A MANDATE. CAN YOU STILL SAY YOU THOUGHT YOU WERE CARRYING OUT A LOT OF THE LAND AND THE WILL OF CONGRESS AS OPPOSED TO HAVING YOUR OWN IDEOLOGY INFLUENCES NOT HAVING STRONG ENOUGH REGULATION THAT SHE DID NOT BRING TO THE BOARD OR PRESS FOR STRONGER REGULATION OF THE UNSAVORY SUBPRIME LOANS. |
| 02:03:37 | Cooper, Jim "James" H. | LET'S TAKE THE ISSUE OF UNFAIR AND DECEPTIVE PRACTICES, WHICH IS A FUNDAMENTAL CONCEPT TO THE WHOLE PREDATORY LENDING ISSUE. THE STAFF OF THE FEDERAL RESERVE, THE BEST IN THE BUSINESS AS FAR AS I'M CONCERNED, LOOKS AT THAT STATEMENT AND SAYS HOW DETERMINE AS A REGULATORY GROUP WHAT IS UNFAIR AND DECEPTIVE. THE PROBLEM WERE CONCLUDING AND WERE THEREFORE RAISING WITH THE STAFF OF CONGRESS, WAS THE ISSUE OF MAYBE 10% OR SO, OR SELF EVIDENTLY, UNFAIR OR DECEPTIVE. THE VAST MAJORITY WOULD REQUIRE A JURY TRIAL OF OTHER MEANS TO DEAL WITH IT. |
| 02:04:32 | Cooper, Jim "James" H. | LET ME INTERRUPT YOU A SECOND. THE LAW PASSED. THE DEBATE BETWEEN YOUR OFFICE AND CONGRESS WAS OVER IN 1994. CONGRESS PASSED A LAW TELLING YOUR BOARD AND YOU TO ACTUALLY DO SOMETHING ABOUT IT AND IT WAS NOT DONE. THE EVIDENCE OF THAT IS -- WHEN WE HAD THE SITUATION I DON'T WANT TO SHOW A DESIRE NOT TO GET POLITICAL ABOUT THIS, BUT OTHER PEOPLE WENT OFF ON THIS GSE THING. A DEMOCRATIC CONGRESS INSTRUCTED YOU TO DO THAT AND IT WAS NOT DONE. 1995-2006, REPUBLICANS DID NOT PRESSURE YOU TO DO IT AND NOTHING GOT DONE. THE CORE PART OF THIS PROBLEM, THE RESPONSE WILL SUBPRIME LENDING, IN 2007, WHEN DEMOCRATS TAKE CONTROL, A BIPARTISAN GROUP PASSES BY A SIGNIFICANT MARGIN A DIRECTIVE. THEY WRITE YOUR REGULATION FOR YOU -- AND BY THAT TIME YOU ARE GONE -- BUT THEY TELL THE BOARD WHAT IT SHOULD DO WHEN DEALING WITH SUBPRIME MORTGAGES. IT PASSES BY A HUGE BIPARTISAN VOTE, TO 91-227. IT DOES NOT GOING OR IN THE SENATE BECAUSE THE BUSH ADMINISTRATION OPPOSES THAT AND KILLS IT. THEY DO NOT DEAL WITH IT. IN 2005, WHEN REPUBLICANS WERE IN CHARGE, MR. OXLEY MADE A GROUP TO DO SOMETHING ABOUT SUBPRIME BECAUSE THE FED BOARD WAS NOT DOING IT. IN HIS LANGUAGE, THE WHITE HOUSE GAVE HIM THE ONE FINGER SALUTE ON THAT. THEY WOULD NOT DEAL WITH IT. IT STILL PASSED THE HOUSE BY 331-90. SO THERE WAS A BIPARTISAN GROUP IN THE HOUSE THAT WANTED TO DEAL WITH IT. IF YOU WANT TO TALK ABOUT DEALING WITH, THERE WAS SOME POINT, SOMEONE WANTED TO REGULATE, BUT A GROUP AND THE HOUSE DID. |
| 02:06:23 | Cooper, Jim "James" H. | THANK YOU, ITS CHAIRMAN. I APPRECIATE YOU POINTING OUT THAT EVEN THOUGH IT MAY LOOK SMALL, THE ICEBERGS WE CALL IT TOXIC TWINS, FOR THE MAY AND -- FROM MAC AND FANNIE MAE, HAVE A MUCH MORE SUBSTANTIAL IMPACT THAN APPEARANCES WOULD FIRST LEAD ONE TO BELIEVE. THE SCUTTLING OF THE GOOD SHIP ECONOMY CAN BE TRACED BACK TO AN INCIDENT THAT CAN BE RELATED TO THOSE TOXIC TWINS -- THAT ICEBERG OF FREDDIE MAC AND FANNIE MAE. EVEN WITH THAT DAMAGE DONE, THAT SEVERE DAMAGE DONE BY A SMALL PROFILE THING CALLED THE ICEBERG, THERE WERE OTHER THINGS THAT COULD HAVE HELPED TO MITIGATE THIS IMPACT. THE QUALITY CONTROL, THE SAFETY INSPECTIONS, TO MAKE SURE THE GOOD SHIP WAS ABLE TO TAKE THIS KIND OF HIT DOES NOT APPEAR TO HAVE BEEN THERE TO THE LEVEL WE WANT. MR. COX, I BELIEVE -- I REALIZE THE SEC HAS BEEN GRANTED THE AUTHORITY TO REGULATE THE CREDIT RATING AGENCIES, THE ONES WHO ARE SUPPOSED TO BE INSPECTING THE CRAFT AND TELLING US IS SAFE TO USE. IN THE TESTIMONY WE HEARD YESTERDAY, IT WAS CLEAR THE CREDIT RATING AGENCIES ARE NOT SIGNIFICANTLY REGULATED AND THERE WERE MAJOR ABUSES OF THE INDEPENDENT CREDIT RATERS. CONSIDERING THE LEVEL OF FEDERAL REGULATIONS TO THESE INDEPENDENT -- SO CALLED INDEPENDENT ASSESSMENTS, AND HOW IMPORTANT THAT IS, DO YOU THINK YOU HAVE SIGNIFICANT AUTHORITY NOW TO REGULATE THEM? DO YOU THINK THERE IS ENOUGH TRANSPARENCY FOR NOT ONLY REGULATORS, BUT ALSO INVESTORS TO KNOW EXACTLY WHAT THEY ARE BUYING AND DO YOU HAVE THE ABILITY TO REGULATE THEM APPROPRIATELY NOW OR THE NEED MORE REGULATION AND AUTHORITY TO BE ABLE TO CREATE MORE TRANSPARENCY? |
| 02:08:35 | Cooper, Jim "James" H. | WE DO HAVE THE AUTHORITY WE NEED IN THIS AREA. ONE OF -- ONE OF THE FIRST THINGS I DID WHEN I BECAME CHAIRMAN IS WORK WITH CONGRESS AND URGE THE PASSAGE OF THIS LEGISLATION. THERE WAS A MOVE AFOOT IN THE INDUSTRY TO DEVELOP A VOLUNTARY CODE OF CONDUCT AS A WAY TO STOP THE LEGISLATION AND I PUT THE SEC STRONGLY ON RECORD IN SUPPORT OF THE CHAIRMAN OF THE AUTHORIZING COMMITTEES IN THE HOUSE AND SENATE AND THAT LEGISLATION WAS SIGNED IN MY SECOND YEAR AS CHAIRMAN. WE IMMEDIATELY WENT TO WORK USING THE AUTHORITY TO REGISTER THE CREDIT RATING AGENCIES WITH US AND IT DID IN FACT BEAT THE DEADLINE BY ONE MONTH TO PUT OUT THE FIRST RULES UNDER THE STATUTE. THE BIG THREE IN THIS INDUSTRY -- IT REPRODUCED THIS REPORT WHICH WAS THE BASIS FOR MUCH OF THE QUESTIONS YESTERDAY. WE LOOK THROUGH 2 MILLION E- MAIL'S, SOME OF WHICH WE PROVIDED TO THE COMMITTEE TO DISCOVER WHAT WAS GOING ON IN THIS INDUSTRY. THEN, TO PROPOSE A MORE THOROUGHGOING NEW RULES THAT GOVERN MANY OF THE PROBLEMS WE HAVE SEEN HERE, WITHOUT EVEN WAITING FOR THE NOTICE AND COMMENT. AND IMPLEMENTATION OF THE RULES -- NOTICE AND COMMENT TIME AND IMPLEMENTATION OF THE RULES. THIS IS A MUCH CHASTENED INDUSTRY BECAUSE OF WHAT HAS GONE ON. THE IMPACT OF THE MARKETS AND INVESTORS. |
| 02:10:03 | Cooper, Jim "James" H. | WE WERE TALKING ABOUT ONE OF THE PROBLEMS WITH REGULATIONS IS NOT HOW MUCH WE HAVE, BUT THE ABILITY TO RESPOND. IF YOU SQUEEZE OFF ONE PART OF THE PRIVATE SECTOR WITH REGULATION HERE, THEY TEND TO FIND ANOTHER PLACE WHERE IT STARTS BLOSSOMING, PLUMBING AND GROWING OUT OF CONTROL. THE CREDIT DEFAULTS SWAPS WERE A GOOD EXAMPLE. DO WE NOW HAVE THE FLEXIBILITY FOR REGULATORS TO MOVE LATERALLY TO RESPOND TO THESE KIND OF BAUBLES AS THEY ARE CREATED BY REGULATION BEING IN ONE LOCATION OR THE NEED MORE FLEXIBILITY TO RESPOND TO THIS? -- TO RESPOND TO THESE KIND OF BAUBLES. |
| 02:10:51 | Cooper, Jim "James" H. | I DON'T THINK THE CURRENT REGULATION -- CURRENT REGULATORY SYSTEM WORKS WHEN IT COMES TO THE SHARING OF THE INFORMATION. THE SEC, EVEN BEFORE WE HAD THE AVALANCHE OF PROBLEMS IN 2008 IN THE INDUSTRIES THAT WE REGULATED AND THE FEDERAL RESERVE REGULATES BEGAN WORK WITH THE FED ON A MEMORANDUM OF UNDERSTANDING TO SHARE WORK BECAUSE AS SOMEONE ALLUDED TO EARLIER, IT WAS TOO MUCH LIKE THE BLIND MAN AND THE ELEPHANT. EVERYONE HAD A GOOD VIEW OF THEIR PART OF THE PROBLEM, BUT BY LAW THAT WERE FOCUSED ONLY ON THE PART AND NOT ON THE TOTAL PICTURE. IN ADDITION TO HAVING THE REGULATORY GAPS FILLED WHICH IS OF VITAL IMPORTANCE, THERE ALSO HAS TO BE A MUCH MORE SEAMLESS INTEGRATION. |
| 02:11:39 | Cooper, Jim "James" H. | SO A LOT PARALLELED WITH 9/11 WHERE INTELLIGENCE PEOPLE ARE NOT SHARING IN FORMATION AND NO ONE GROUP HAD ALL THE AFFIRMATION. WE ARE RUNNING INTO THE SAME THING HERE. THERE IS A PROPOSAL TO HAVE A BIPARTISAN COMMISSION, LIKE THE 9/11 COMMISSION, TO NOT ONLY LOOK AT WHAT HAS HAPPENED IN THE PAST AND DO A REPORT THAT WITHIN THAT ONE YEAR BUT ALSO TO STAY IN FORCE FOR FIVE YEARS TO AVOID THIS. DO YOU HAVE ANY COMMENT ABOUT AS APPROACHING THIS WITH A GENERAL BIPARTISAN VIEW SO WE CAN AVOID BICKERING WE'VE SEEN APPEAR TODAY? |
| 02:12:09 | Cooper, Jim "James" H. | THE GENTLEMAN'S TIME HAS EXPIRED BUT WE WOULD LIKE TO HEAR ANSWERS. |
| 02:12:12 | Cooper, Jim "James" H. | I DON'T HAVE ANY RESPONSE TO THAT. |
| 02:12:17 | Cooper, Jim "James" H. | I THINK IT IS VITALLY IMPORTANT AS THIS HEARING IS DOING TODAY AND YOUR OTHER HEARINGS HAVE DONE, AS YOU HAVE PROPOSED AND CONGRESSMAN ISSA HAS PROPOSED, TO UNDERSTAND IT IS VERY COMPLEX HOW THESE THINGS HAPPEN AROUND THE WORLD. HISTORY IS GOING TO TELL US EVENTUALLY ALL OF MORE THAN WE KNOW EVEN TODAY. IT IS ALSO IMPORTANT TO DO THE OTHER PIECE OF WHICH YOU HAVE DESCRIBED WHICH IS TO CONFRONT IT IN AN EMPIRICAL WAY. THAT IS WHAT BI-PARTISAN IN THIS CONTEXT MEANS. WE HAVE TO MAKE SURE THAT WE ARE AFTER THE FACT AND WILLING TO AND FOR THE TOUGH LESSONS FROM THIS TAX. FINALLY, I WOULD SAY MAKE SURE YOU HAVE A FOUR-LOOKING APPROACH -- A FORWARD-LOOKING APPROACH. IF ALL WE DO IS LOOK BACKWARD AND SAY THAT IS WHO SHOT JOHN AND WE DON'T PROTECT THE ECONOMY, INVESTORS, KIDS AND GRANDKIDS WHOSE DEBT IS GETTING RUN UP RIGHT NOW, THAT WOULD BE A NEW FAILURE ON TOP OF ALL THAT HAS HAPPENED. |
| 02:13:24 | Cooper, Jim "James" H. | NOTHING TO THAT? THANK YOU. THE GENTLEMAN'S TIME HAS EXPIRED. |
| 02:13:30 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN. WITH ALL APOLOGIES TO MY NEW ENGLAND COLLEAGUES, I FEEL LIKE I AM LOOKING OUT THERE AT 3 BILL BUCKNER'S -- THE FIRST BASEMAN OF THE RED SOX BUT THE BALL GO THROUGH HIS LEGS AND COST HIS TEAM THE CHAMPIONSHIP. YOU ALL THE BALL GO THROUGH YOUR LEGS AND DID NOT -- HE DIDN'T WANT TO LOOK OF ALL OF YOUR LEGS, EVEN TRY TO, BUT IT DID. IT IS IMPORTANT WE DO TRY TO FIND OUT WHY A GUY THROUGH, WHETHER IT TOOK A BAD BOUNCE OR WHETHER THERE WAS SOMETHING FUNDAMENTALLY WRONG WITH THE WAY YOU AND OTHERS PLAYED THE BALL. SOME OF THESE THINGS I UNDERSTAND ARE UNFORESEEABLE. BUT SOME OF THEM WERE VERY FORESEEABLE. I WANT TO REFER TO THE CREDIT RATING AGENCIES BECAUSE WE KNEW BEGINNING AT LEAST IN 2001, WHEN ENRON WAS GIVEN A SUPERIOR RATING FOR DAYS BEFORE IT COLLAPSED AND WE KNEW FROM SUBSEQUENT EVENTS -- AND 2002, THE FCC PUBLISHED ITS OWN REPORT WHICH FOUND SERIOUS PROBLEMS -- AND STAR, 2003. BEFORE THAT, A COMMITTEE IN THE SENATE ISSUED A REPORT ON THESE PROBLEMS. THE SEC WAS ACTUALLY MOVING, IT SEEMS LIKE WITH GOOD INTENTIONS AND WITH INTELLIGENCE TO CREATE SOME AUTHORITY TO REGULATE THE CREDIT RATING AGENCIES. IN 2005, THEY ISSUED A PROPOSED RULE THAT WAS |
| 02:15:11 | Cooper, Jim "James" H. | MR. COX, WHY WAS THAT NOT ACTED ON? |
| 02:15:15 | Cooper, Jim "James" H. | THE S.E.C. CAN'T CREATE FOR YOURSELF AUTHORITY OVER CREDIT RATING AGENCIES. THE PROPOSED RULE WAS DESIGNATION OF NRSRO'S BUT IT WASN'T LEGISLATIVE AUTHORITY TO REGULATE WHAT UNTIL THE FALL OF LAST YEAR WAS AN UNREGULATED INDUSTRY. LEGISLATION WAS NEEDED TO DO THAT. AS A MEMBER OF CONGRESS I SUPPORTED THAT LEGISLATION BEFORE ENRON BECAUSE I SAW WHAT HAPPENED IN ORANGE COUNTY WITH THE LARGEST MUNICIPAL BANKRUPTCY IN AMERICAN HISTORY. THERE, JUST AS WITH ENRON, UP UNTIL THE EVENT ITSELF THE DEBT WAS RATED TOP GRADE, TRIPLE A. AND THESE PROBLEMS HAVE BEEN RECURRENT. WHAT WAS ABSOLUTELY NECESSARY AND WHAT I TOOK ON FULL TILT WHEN I BECAME CHAIRMAN WAS GETTING AUTHORITY IT MAKE THAT A REGULATED INDUSTRY. |
| 02:16:07 | Cooper, Jim "James" H. | I APPRECIATE THAT AND I THINK I AGREE THE STEPS YOU ARE TAKING ARE COMMENDABLE AND MAKE SENSE. BUT YOUR PREDECESSOR, WILLIAM DONALDSON AT THE S.E.C., HESAID HE HAD AMPLE AUTHORITY TO REGULATE CREDIT AGENCIES BECAUSE HE COULD DECERTIFY THEM SO YOU DID HAVE AUTHORITY. MAYBE NOT SPECIFIC LEGISLATIVE AUTHORITY BUT YOU HAD AUTHORITY TO USE THE CERTIFICATION PROCESS, DIDN'T YOU? PRODUCT -- PROCESS, DIDN'T YOU? |
| 02:16:38 | Cooper, Jim "James" H. | THE CERTIFICATION PROCESS -- REMEMBER IN THAT TIME, THERE WERE ESSENTIALLY THREE MAIN RATING AGENCIES. THEY WERE ALREADY THERE, SO RUBBER-STAMP THEM AS CERT WAS RATHER TALK LOGICAL. WHAT WAS UNDER DEVELOPMENT WAS A PROGRAM OF VOLUNTARY COMPLIANCE, A CODE OF CONDUCT. THIS WAS IN FACT BEING DEVELOPED ON AN INTERNATIONAL BASIS. EVEN THOUGH I AM CURRENTLY THE TECHNICAL -- THE CHAIRMAN OF THE TECHNICAL AGENCY AND HAVE A DEEP RESPECT FOR THEM, I SAW IMMEDIATELY THAT A VOLUNTARY CODE OF CONDUCT WAS GOING TO BE AS NOTHING AGAINST WHAT THIS INDUSTRY NEEDED, WHICH WAS ACTUAL REGULATION. I AM VERY PLEASED THAT CONGRESS GAVE THE SEC THAT AUTHORITY WHICH IT NEVER HAD BEFORE. MAKE NO MISTAKE, CREDIT RATING AGENCIES DID NOT HAVE A REGULATOR, WERE NOT REGULATED, ALL THE WOOD IT WAS VOLUNTARY REGULATION. THAT DOES NOT WORK AS WE HAVE SEEN OVER AGAIN. |
| 02:17:47 | Cooper, Jim "James" H. | I AGREE WITH THAT, BUT I DON'T UNDERSTAND YOUR POINT THAT YOU COULD NOT DECERTIFY THE AGENCY'S. IF YOU SAY THE CERTIFICATION WAS RUBBER-STAMP, WHAT IF HE TOOK A RUBBER STAMP AWAY? |
| 02:18:04 | Cooper, Jim "James" H. | THE RULE CONCERNING NRSROS WAS LIMITED TO THAT. HE HAVE TO CREDIT THE AGENCY FOR TRYING TO MOVE INTO THAT SPACE, BUT WHAT HAPPENED IN 2005, WHEN WE FINALLY GOT LEGISLATION MOVING, THAT CLEARLY MADE MORE SENSE THAN TRYING TO DO SOMETHING WITHOUT AUTHORITY. |
| 02:18:24 | Cooper, Jim "James" H. | YES. THE FOCUS WAS ON GETTING THE LEGISLATION PASSED WHICH HAPPENED VERY QUICKLY. WE BEAT THE DEADLINE OF THE STATUTE -- WE MOVE VERY QUICKLY. |
| 02:18:38 | Cooper, Jim "James" H. | THANK YOU. |
| 02:18:43 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN, I APPRECIATE YOU AND THE RANKING MEMBERS EFFORTS ON INVESTIGATING THIS COUNTRY AND I APPRECIATE ALL THREE OF OUR WITNESSES. THERE HAS BEEN A LOT OF DISCUSSION ABOUT FANNIE MAE AND FREDDIE MAC AND A LACK OF SUFFICIENT REGULATORY AUTHORITY AND HOW THAT HAS PLAYED INTO HELPING TO CREATE THIS CRISIS. I WOULD LIKE TO ADDRESS A SIMILAR ISSUE ABOUT REGULATORY AUTHORITY, MAY BE OVER- AGGRESSIVE EFFORTS, HOW THEY CREATED IT AND SPECIFICALLY GET YOUR INPUT ON THE COMMUNITY REINVESTMENT ACT. MR. COX, YOU SHARED IN YOUR TESTIMONY THAT IS HONEST LENDING PRACTICES HAD CONTINUED AND WE HAVE NOT GOT TO THERE WAS ALMOST LOWE'S AND -- NO LENDING PRACTICES, NO DOCUMENTATION -- THAT PLAYED A HUGE ROLE AND MORE ARE TODAY. BACK HOME, I HAVE HAD NUMEROUS BANKING OFFICIALS, BANK BOARD MEMBERS, AND ADDRESSED WITH THE COMMUNITY REINVESTMENT ACT THAT IN ESSENCE, THEY ARE BEING FORCED BY THE BANK REGULATORS TO ENGAGE IN MAKING LOANS TO HAVE A SPECIFIC PART OF THEIR PORTFOLIO TOO RISKY APPLICANTS. THEY ARE IN ESSENCE BEING FORCED BY REGULATORS TO MAKE LOANS THAT WOULD NOT OTHERWISE MAKE AND NO ARE IN GREAT RISK OF DEFAULTING. I WOULD BE INTERESTED IN YOUR OPINION ON THAT ROLE IN THIS CRISIS, BIG OR SMALL, AND IS IT SOMETHING WE SHOULD BE LOOKING AT PERFORMING, THE WAY THE ACT IS BEING REFORMED -- BEING ENFORCED BY REGULATORS. |
| 02:20:34 | Cooper, Jim "James" H. | IT IS INSTRUCTIVE TO GO BACK TO THE EARLY STAGES OF THE SUBPRIME MARKET, WHICH IS -- WHICH ESSENTIALLY EMERGED OUT OF THE CRA. THE EVIDENCE NOW SUGGESTS, BUT ONLY IN RETROSPECT, THAT THIS MARKET INVOLVED IN A MANNER, WHICH IF THERE WERE NO SECURITIZATION, IT WOULD HAVE BEEN A MUCH SMALLER PROBLEM AND INDEED VERY UNLIKELY TO HAVE TAKEN ON THE DIMENSIONS IT DID. IT WAS NOT UNTIL THE SECURITIZATION CAME A SIGNIFICANT FACTOR WHICH DOES NOT OCCUR UNTIL 2005, THAT YOU HAVE THIS HUGE INCREASE OF DEMAND FOR SUBPRIME ONCE BECAUSE, REMEMBER, WITHOUT SECURITIZATION, THERE WOULD NOT HAVE BEEN A SINGLE SUBPRIME MORTGAGE HELD OUTSIDE THE UNITED STATES. IT IS THE OPENING UP OF THIS MARKET WHICH CREATED A HUGE DEMAND FROM ABROAD FOR SUBPRIME MORTGAGES AS EMBODIED IN MORTGAGE-BACKED SECURITIES. WE DID NOT KNOW THE DETERIORATION IN STANDARDS WAS OCCURRING UNTIL 2005. BECAUSE, IF YOU LOOK NOW AT THE OUTSTANDING SUBPRIME MORTGAGES, IT IS VERY OBVIOUS THAT THOSE THAT WERE MADE IN 2004 AND EARLIER HAVE NOT TURNED OUT TO BE AN INCREDIBLY DIFFICULT ISSUE. IN OTHER WORDS, THE REAL TOXIC MORTGAGES OCCUR WITH THE HUGE INCREASE IN SECURITIZATION AND LARGELY THE DEMAND FROM ABROAD, AND TO WHATEVER EXTENT FANNIE MAE AND FREDDIE MAC OR INVOLVED, FROM THEM AS WELL. SO IT STRIKES ME THAT IF YOU GO BACK AND ASK YOURSELVES, HOW IN THE EARLY YEARS AND HE COULD REALISTICALLY MAKE A JUDGMENT AS TO WHAT WAS ALTERNATELY GOING TO HAPPEN TO SUBPRIME, I THINK YOU ARE ASKING MORE THAN ANYONE IS CAPABLE OF JUDGING. WE HAVE THIS EXTRAORDINARY COMPLEX GLOBAL ECONOMY WHICH EVERYONE NOW REALIZES IS VERY DIFFICULT TO FORECAST AND ANY CONSIDERABLE DETAIL. MR. CHAIRMAN, I AGREE WITH YOU IN THE FACT THERE WERE A LOT OF PEOPLE WHO RAISED ISSUES ABOUT PROBLEMS EMERGING. BUT, THERE ARE ALWAYS A LOT OF PEOPLE RAISING ISSUES AND HALF THE TIME THEY ARE WRONG. THE QUESTION IS, WHAT YOU DO? YOU POINT OUT QUITE CORRECTLY THE FEDERAL RESERVE HAD AS GOOD AN ECONOMIC ORGANIZATION AS EXISTS AND I WOULD SAY IN THE WORLD. IF ALL THOSE EXTRAORDINARILY CAPABLE PEOPLE WERE UNABLE TO FORESEE THE DEVELOPMENT OF THIS CRITICAL PROBLEM, WHICH UNDOUBTEDLY WAS THE CAUSE OF THE WORLD PROBLEM WITH RESPECT TO MORTGAGE BACKED SECURITIES, I THINK WE HAVE TO ASK OURSELVES, WHY IS THAT? THE ANSWER IS WE ARE NOT SMART ENOUGH AS PEOPLE. WE JUST CANNOT SEE EVENTS THAT FAR IN ADVANCE, AND UNLESS WE CAN, IT'S VERY DIFFICULT TO LOOK BACK AND SAY WHY DIDN'T WE CATCH SOMETHING? I THINK IT'S A VERY DIFFICULT PROBLEM WITH RESPECT TO SUPERVISION AND REGULATION. WE CANNOT EXPECT PERFECTION IN ANY AREA WHERE FORECASTING IS REQUIRED. I THINK WE HAVE TO DO OUR BEST, BUT NOT IN SPEC -- NOT EXPECT IN FALLIBILITY OR OMNISCIENCE. |
| 02:24:28 | Cooper, Jim "James" H. | COULD BE OTHER MEMBERS ANSWER THAT QUESTION? |
| 02:24:32 | Cooper, Jim "James" H. | IF YOU WISH TO RESPOND TO THE QUESTION THAT IS OUTSTANDING? |
| 02:24:36 | Cooper, Jim "James" H. | COULD YOU RESTATE THE QUESTION? |
| 02:24:41 | Cooper, Jim "James" H. | ON SPECIFICALLY CRA, AND GOING FORWARD, AND I'M NOT ASKING WHETHER WE COULD HAVE PREDICTED IT, AND GOING FORWARD, SHOULD WE BE LOOKING AT REFORMS TO THE COMMUNITY REINVESTMENT AND WHAT MY LOCAL BANKERS ARE SAYING, THEY FEEL PRESSURED BY REGULATORS TO MAKE LOANS THEY KNOW ARE NOT GOOD LOANS AND RISKY LOANS AND LIKELY TO BE DEFAULTED OR HAVE BEEN IN THE PAST. |
| 02:25:05 | Cooper, Jim "James" H. | I WILL JUST POINT OUT THE OBVIOUS WHICH IS THAT THE SEC DOES NOT REGULATE LENDING OR CREDIT OR MORTGAGES. ON A MORE GENERAL POINT OF WHETHER OR NOT LEGISLATION NEEDS TO BE CAREFULLY DRAFTED AND CAREFULLY CONCEIVED SO THAT IT DOES NOT CREATE RISK AND THE SYSTEM, I HAVE ABUNDANT AGREEMENT. AS THE INVESTORS ADVOCATE, OBVIOUSLY WHEN THAT KIND OF LEGISLATION OR THOSE KINDS OF REGULATORY POLICIES LEAD TO THE CREATION OF NEW RISKS THAT OTHERWISE WOULD NOT EXIST, |
| 02:25:42 | Cooper, Jim "James" H. | THANK YOU. |
| 02:25:46 | Cooper, Jim "James" H. | I ACTUALLY THINK IT IS A MUCH BROADER PHENOMENON AND IN THE RISK OF BEING CONTROVERSY ALL, WE HAVE HAD A POLICY IN THE UNITED STATES TO PROMOTE HOMEOWNERSHIP FOR A LONG TIME AND THAT IS A GOOD THING. ADMINISTRATIONS OF BOTH STRIPES, AND CONGRESS'S OF BOTH STRIPES, HAVE CONTINUED TO PUSH FOR POLICIES THAT WOULD ENCOURAGE HOME OWNERSHIP. YOU SEE THAT IN THE TAX CODE. WE SAW THAT AND A NUMBER OF WAYS. I THINK A LARGER EUROPE -- THE LARGER PROBLEM HERE IS WE HAVE PROBABLY OVERDONE THAT WITHOUT REFERENCE TO THE CONSEQUENCES THAT COMMITMENT TO HOUSING HAS CREATED FOR THE COUNTRY AS A WHOLE. WE HAVE TO RETHINK THAT BALANCE. HOW DO WE PROMOTE HOUSING APPROPRIATELY WHILE AT THE SAME TIME ENCOURAGING SAVINGS RATES AND PRUDENT BORROWING PRACTICES AND I COULD GO ON AND ON. THANK YOU. |
| 02:26:56 | Cooper, Jim "James" H. | THE GENTLEMAN'S TIME HAS EXPIRED. |
| 02:27:01 | Cooper, Jim "James" H. | DR. GREENSPAN, YOU MADE AN INTERESTING COMMENT, THE FEDERAL RESERVE HAS THE BEST ECONOMIC ORGANIZATION AND THE WORLD, YET YOU COULD NOT REACH ANY AGREEMENT ON SEEING IS COMING IN AND PREDICTING IT. LET ME ASK THIS QUESTION TO ALL THREE OF YOU, BECAUSE AS I HAVE GONE THROUGH THE TESTIMONY, IT LOOKS LIKE THE REGULATORY REGIME, IT WAS NOT A QUESTION OF DEREGULATION OR OVERREGULATION -- THE REGULATORY REGIMES THAT WERE SET UP APPEAR TO BE TOO FRAGMENTED, TO STOVEPIPE AND TWO NON COMMUNICATIVE SO THAT NO ONE COULD SEE THE PROBLEMS ARE ARISING IN TOTAL. EVERYONE SAW A PIECE OF IT UNTIL IT WAS TOO LATE. IS THAT FAIR STATEMENT? |
| 02:27:42 | Cooper, Jim "James" H. | I'M NOT SURE. I THINK WE ALL HAVE AS MUCH INFORMATION AS PROBABLY WAS AVAILABLE. SO I'M NOT CLEAR, BY ANY MEANS, THAT IF YOU COMBINE THE LEVEL OF IGNORANCE YOU SOMEHOW ENHANCE IN SIGHT. FOR EXAMPLE, AS I MENTIONED, WE NOW KNOW THAT SUBPRIME MORTGAGES THAT WERE ORIGINATED IN 2004 AND EARLIER ARE NOT OUR PROBLEM. THESE ARE DATA THAT ARE AVAILABLE ONLY NOW. WE DID NOT KNOW THAT AT THE TIME. I'M NOT SURE THAT MERELY CONGLOMERATING EVERYBODY'S INSIGHTS, AND AS I SAID, I HAVE DEALT WITH MANY DIFFERENT ORGANIZATIONS AND GIVE THE FEDERAL RESERVE, AT THE LEVEL -- THE LEVEL OF TECHNICAL CAPABILITY IS NOT CAPABLE -- NOT CAPABLE OF CONFRONTING THIS KIND OF PROBLEM, IT TELLS US SOMETHING ABOUT THE NATURE OF THE PROBLEM, WHICH ITSELF IS INCAPABLE OF BEING HANDLED IN A WAY WE ALL WOULD LIKE. |
| 02:29:07 | Cooper, Jim "James" H. | MR. COX? |
| 02:29:10 | Cooper, Jim "James" H. | I'M GOING TO ANSWER THE QUESTION FROM A SLIGHTLY DIFFERENT ANGLE SO AS NOT TO DISAGREE ANY MORE THAN I HAVE TO WHAT THE ANSWER DR. GREENSPAN HAS JUST GIVEN. I THINK IT STANDS ON ITS FOUR CORNERS AND THERE IS A LOGIC TO IT, BUT I SEE MORE IN YOUR QUESTION. IN THE LAST FEW MONTHS, AND THE CAULDRON OF THESE CRISES, AND THEN HAVE BEEN MOVING NOT JUST ON A DAY-TO-DAY BASIS BUT AN HOUR TO HOUR BASIS. THE COORDINATION AND DEMANDS THAT HAS PLACED ON REGULATORS IS VERY HIGH. SO, WHEN YOU ARE LOOKING AT THE SAFETY AND SOUNDNESS OF BANKS AS THE FED DOES, WHEN YOU ARE LOOKING AT WHAT IS GOING ON INSIDE A BROKER/DEALER AS THE S.E.C. DOES, YOU ARE CONCERNED WITH NOW THE FACT THAT THINGS CAN CHANGE IN A MATTER OF HOURS. EVERYTHING THAT WAS THERE THIS MORNING COULD BE GONE BY THE EVENING. YOU NEED TO KNOW WHAT THE LIQUIDITY ISSUES ARE, WHAT THE FUNDING POSITION IS FOR A FIRM. AND WHEN THE FED HAS SOME OF THOSE FIRMS AND THE S.E.C. HAS OTHER OF THE FIRMS WE DON'T GET THE SAME CLEAR PICTURE OF WHAT IS GOING ON IN THE MARKET IN REAL TIME THAT WE NEED. SO IT IS FINE THAT THESE STATISTICS ARE PUBLISHED AND WE CAN UNDERSTAND IT EVENTUALLY BUT YOU HAVE TO DO THIS IN REALTIME. A PRESIDENT'S WORKING GROUP THAT WAS FORMED TO DEAL WITH THIS HAS BEEN AN ONGOING MEETING OF THE PRESIDENT'S WORKING GROUP FOR SEVERAL MONTHS NOW. WE HAVE BEEN WORKING 20 HOURS A DAY, SEVEN DAYS A WEEK SINCE MARCH. SO WE NEED ALL THE TOOLS WE CAN GET TO COORDINATE BETTER. |
| 02:30:52 | Cooper, Jim "James" H. | I AGREE WITH YOU, CONGRESSMAN DAVIS. I THINK WE HAVE TOO MANY STOVE PIPES IN THE FINANCIAL MARKET, REGULATORY SYSTEM WITH THE LEFT HAND NOT KNOWING WHAT THE RIGHT HAND KNOWS. AND I AGREE WITH CHAIRMAN GREENSPAN ABOUT THE COMPLEXITY OF REGULATION. I USED TO BE A REGULATOR. AN AGENCY, YOU KNOW WELL, MR. CHAIRMAN, NHTSA. AND I HAVE AN APPRECIATION OF THE BURDENS AND COMPLEXITIES OF REGULATION. BUT IT DOES SEEM TO ME THAT WE HAVE REGULATORS -- I THINK CHAIRMAN COX MENTIONED THIS EARLIER -- REGULATING UNDER DIFFERENT JURISDICTIONS AND WITH DIFFERENT BODIES OF LAW THE SAME THING THING. EQUIVALENT THINGS OUGHT TO BE REGULATED ON AN EQUIVALENT BASIS. BASIS. WE ALSO HAVE THE TURF BATTLES. THIS WAS CLEAR LAST WEEK IN AN ARTICLE IN THE "WASHINGTON POST" ON THE SUBJECT OF THE CREDIT DEFAULTS SWAPS MARKET AND WHO WOULD REGULATE THAT. WE HAD THE THREE AGENCIES, ACCORDING TO THIS ARTICLE, AND SERIOUS CONFLICT ABOUT WHO SHOULD HAVE JURISDICTION. I THINK IT IS TIME TO OVERHAUL THE REGULATORY SYSTEM. |
| 02:32:16 | Cooper, Jim "James" H. | I ASK UNANIMOUS CONSENT THAT THE PLACE IN THE RECORD THE REPORT OF THE SENATE COMMITTEE ON GOVERNMENT AFFAIRS FROM OCTOBER 8, 2002, WHICH RELATES TO THE COMMITTEE'S REQUEST THAT THE S.E.C. IMPLEMENT RULES TO REGULATE THE CREDIT RATING AGENCIES. MR. COX, HE SAID THE MOVE IN AND EXPEDITIOUS WAY, BUT THE SEC WAS ASKED TO DO THAT IN 2002. |
| 02:32:44 | Cooper, Jim "James" H. | WITHOUT OBJECTION, THE DOCUMENT WILL BE MADE PART OF THE RECORD. |
| 02:32:49 | Cooper, Jim "James" H. | THIS IS A QUESTION FOR ALL THREE OF YOU. I'M USING LANGUAGE FROM DR. GREENSPAN, BUT THIS IS FOR ALL THREE. I AGREE THAT ALL LAWS ARE OFTEN NOT SMART ENOUGH. I DON'T AGREE THAT BECAUSE OF THE STOVEPIPE QUALITY OF REGULATION THERE WAS NO WAY IN WHICH THIS COULD HAVE BEEN SEEN. MY QUESTION GOES TO REMEDY AND PARTICULARLY TO REMEDY AS EVENTS UNFOLD. DR. GREENSPAN, YOU HAVE SAID REGULATION BY ITS NATURE IS INEFFECTIVE BECAUSE THEY CANNOT ACCURATELY PREDICT PROBLEMS AND YOU HAVE INDICATED THE PERCENTAGE OF PREDICTABILITY AND I THINK THAT'S PRETTY GOOD TOO. I AM INTERESTED IN WHAT HAPPENS AS EVENTS OCCUR AND NOTHING HAPPENS. FOR EXAMPLE, 14 YEARS AGO, IN 1994, THE GAO PUBLISHED A TWO- YEAR STUDY, 200 PAGES, AN EXHAUSTIVE STUDY ENTITLED " THE FINANCIAL DERIVATIVES -- ACTIONS NEEDED TO PROTECT THE FINANCIAL SYSTEM." I AM INTERESTED IN THE FINANCIAL SYSTEM. WE HAVE SEEN THE COLLAPSE OF THE FINANCIAL SYSTEM. WE ARE COMING BACK FOR A LAME- DUCK SESSION, AND OF A PRESIDENT'S TERM BECAUSE WE THINK WE ARE SEEING PERHAPS THE COLLAPSE OF THE ECONOMY ITSELF. I AM REALLY INTO REMEDY AT THIS POINT. THE GAO -- I WANT TO QUOTE IT. THE DERIVATIVES ARE RAPIDLY EXPANDING -- THIS IS 1994 -- AN INCREASINGLY AFFECTED BY GLOBAL AND FINANCIAL MARKETS. THE SUDDEN FAILURE OR ABRUPT WITHDRAWAL FROM TRADING -- TRADING OF ANY OF THESE LARGE DEALERS COULD LIQUIFY THE PROBLEMS IN THE MARKETS AND COULD ALSO POSE RISKS TO OTHERS, INCLUDING THE FINANCIAL SYSTEM AS A WHOLE. THE FEDERAL GOVERNMENT WOULD BE LIKELY TO INTERVENE TO KEEP THE FINANCIAL SYSTEM FUNCTIONING IN CASES OF SEVERE FINANCIAL STRESS, INTERVENTION COULD RESULT IN A FINANCIAL BAILOUT PAID FOR BY THE TAXPAYERS. THAT IS THE ONLY REMEDY WE HAVE NOW. HUGE INTERVENTION INTO THE MARKET SYSTEM OF THE KIND OF US WOULD HAVE DESIRED. THE GAO OF COURSE WAS NOT ALONE IN WARNING. THERE WAS A HEARING, REP OXLEY, A REPUBLICAN FROM OHIO, ASKED THE QUESTION THEN ABOUT BAILOUT. THE ONLY REMEDY WE NOW HAVE. HOW REALISTIC IS THE THREAT OF A TAXPAYER BAILOUT. YOU, DR. GREENSPAN, SAID NEGLIGIBLE. THOSE ARE YOUR WORDS. SHORT OF VIRTUALLY INCONCEIVABLE SITUATIONS, ONE CANNOT ENVISION MORE TAXPAYER FUNDS WOULD SHOW -- FOR YEARS AGO WE SAW THE COLLAPSE OF LONG TERM CAPITAL MANAGEMENT AND ENRON AND NOW AIG $440 MILLION WORTH OF BAILOUT. I'M GOING TO ASK YOU, AND LIGHT OF THE FACT THESE ARE NEW INSTRUMENTS THAT PEOPLE SAY NONE OF US UNDERSTAND BECAUSE PEOPLE OUTSIDE OF YOUR THEATER MADE THEM UP. COULD YOU REGULATE NOW? AT ONE POINT, SHOULD SOME FORM OF REGULATION TAKEN PLACE? COULD YOU REGULATE NOW? DO YOU UNDERSTAND ENOUGH OF WHAT HAPPENED TO REGULATE NOW? I WOULD APPRECIATE YOUR INSIGHT INTO WHAT FORM YOU THINK REGULATION SHOULD BEGIN TO TAKE. WHAT SHOULD WE DO NOW THAT WE ARE FACED WITH BAILOUT AS THE ONLY REMEDY THE FEDERAL GOVERNMENT HAS? |
| 02:36:52 | Cooper, Jim "James" H. | FIRST OF ALL, ON DERIVATIVES, REMEMBER IN 1994, AND INDEED PRETTY MUCH THROUGHOUT 2004, EVEN 2005, THE MAJOR PART OF DERIVATIVES OR INTEREST RATES AND FOREIGN EXCHANGE DERIVATIVES AND THEY ARE STILL FUNCTIONING RATHER WELL. IN OTHER WORDS, THE PROBLEM THAT HAS EMERGED -- |
| 02:37:16 | Cooper, Jim "James" H. | THE G.A.O. TALKED ABOUT -- THIS IS 1994. |
| 02:37:19 | Cooper, Jim "James" H. | I THINK THEY WERE MISTAKEN. THAT WAS ONE OF THE FORECASTS THAT DID NOT GO RIGHT. IN OTHER WORDS, THE TYPES -- |
| 02:37:29 | Cooper, Jim "James" H. | WHAT DID IT GO RIGHT IS THEY SAID YOU COULD SEE A BAILOUT OF THE FINANCIAL SYSTEM. IT WAS PREDICTED AND IT HAPPENED. |
| 02:37:37 | Cooper, Jim "James" H. | THE POINT I AM TRYING TO MAKE IS THAT THE ONLY AREAS WHERE WE ARE RUNNING INTO SOME PROBLEMS, WHICH ARE CURABLE, FRANKLY, BY RESOLVING CERTAIN STRUCTURAL PROBLEMS WHICH THE FEDERAL RESERVE IS WORKING ON -- |
| 02:37:53 | Cooper, Jim "James" H. | HOW WOULD YOU ADVISE THE COMMITTEE, THIS CONGRESS, TO BEGIN TO DO THE APPROPRIATE, INTELLIGENT, REGULATION OR REMEDY SEEKING, WHATEVER YOU CALL IT. YOU SEEM TO WISH TO ANSWER THAT QUESTION, MR. SNOW? |
| 02:38:12 | Cooper, Jim "James" H. | I THINK THERE ARE A NUMBER OF THINGS THAT CAN BE DONE AND SHOULD BE DONE. SECURITIZATION MARKET IS A GOOD MARKET. IT SHOULD NOT BE THIS ESTABLISHED IN ANY WAY. -- SHOULD NOT BE DISESTABLISHED ANYWAY. IT WOULD WORK BETTER IF THE ORIGINAL LOAN PEOPLE, THE ONE TO MAKE THE LOANS ORIGINALLY, -- |
| 02:38:35 | Cooper, Jim "James" H. | WHAT ABOUT THEM? |
| 02:38:38 | Cooper, Jim "James" H. | KEPT SOME SKIN IN THE GAME. WE USED TO HAVE SOMETHING TO FUNCTION WELL IN THIS COUNTRY CALLED BANK CREDIT COMMITTEES, WHERE THE QUESTION WOULD BE ASKED, CAN THE BAR OR REPAY THE LOAN? WHAT IS THE COLLATERAL. -- CANDY BAR OR REPAID THE LOAN? ONE OF THE -- CAN THE BAR OR REPAY THE LOAN? THAT FUNCTION IS NOT BEING CARRIED OUT EFFECTIVELY AS IT ONCE DID. A SUGGESTION FOR YOU WOULD BE WHEN SOMETHING -- WHEN SOMEBODY ORIGINATES ALONE AND SENDS IT OFF TO THE SECURITIES MARKET, KEEP A PERCENTAGE OF THE ONE. SOMETHING ELSE -- KEEP A PERCENTAGE OF THE LOAN. SOMETHING ELSE THAT SHOULD BE DONE IN THE NAME OF TRANSPARENCY AND TO GET THE MARKETS WORKING BETTER, WHEN INVESTMENT BANKS AND BANKS ARE SELLING THESE PRODUCTS INTO THE MARKET, AND ALSO HEDGING THIS PRODUCT BY GOING ON THE OTHER SIDE, THERE OUGHT TO BE TRANSPARENCY. THEY OUGHT TO BE TELLING THE MARKETPLACE, WE ARE SELLING THESE THINGS, BUT WE ARE ALSO HEDGING. THAT WOULD PROVIDE USEFUL INFORMATION TO WOULD-BE BUYERS OF THOSE INSTRUMENTS. I HAVE A LOT OF SUGGESTIONS FOR YOU. I CAN GIVE YOU AN FOR THE RECORD. |
| 02:39:57 | Cooper, Jim "James" H. | MR. COX DID NOT GET A CHANCE TO ANSWER. |
| 02:39:59 | Cooper, Jim "James" H. | IF YOU HAVE SOMETHING YOU WOULD LIKE TO ADD BRIEFLY? |
| 02:40:05 | Cooper, Jim "James" H. | I STRONGLY AGREE WITH FORMER SECRETARY SNOW THAT THE MOVEMENT FROM THE ORIGINATE TO HOLD MODEL TO THE ORIGINATE TO SECURITIZED MODEL CONTRIBUTED TO THE BREAKDOWN IN MARKET DISCIPLINE. AS HE VERY STRAIGHTFORWARDLY PUT IT, IF YOU DO NOT HAVE SKIN IN THE GAME AND ARE JUST PASSING THE REST TO SOMEONE ELSE, THEN YOU ARE INCLINED TO TAKE MORE RISK AND THAT THE BILL PRESSED INTO THE SYSTEM AND WE'VE SEEN THAT HAS BEEN DANGEROUS. SECOND, I THINK IT'S VERY IMPORTANT FOR US TO BUILD FUTURE WAYS TO UNDERSTAND COMPLEX SECURITIES FROM THE INVESTOR'S STANDPOINT. RIGHT NOW, ANALYSTS ARE UNABLE TO TRACK WITH COMPLEX STRUCTURED SECURITIES THE UNDERLYING ASSETS AND RISKS IN THEM. THERE IS NO TRACKING RIGHT NOW ON A LOAN BY LOAN BASIS WHETHER THE LOAN AMOUNT IS MORE OR LESS THAN THE PROPERTY VALUE OR WHETHER ITS CURRENT. THIS COULD BE ACCUMULATED AND SECURITIES VALUED BY ANALYSTS, SO THE MARKET COULD BE PRICING RISK INTO A STRUCTURED SECURITIES. |
| 02:41:20 | Cooper, Jim "James" H. | A MATTER OF PERSONAL PRIVILEGE, PLEASE. |
| 02:41:24 | Cooper, Jim "James" H. | I NOTICE THERE IS A BANNER ON THE OTHER SIDE. I REMEMBER BEING ASKED TO TAKE A BANNER DOWN THAT I HAD. WHAT IS YOUR PROCEDURE FOR A BANNER PUT UP BY MEMBERS? I WOULD LIKE THE CHAIRMAN TO RESPOND. CAN ANYONE DO THAT FROM TIME TO TIME? |
| 02:41:50 | Cooper, Jim "James" H. | IF YOU WILL YIELD, I WAS NOT AWARE OF IT AND I DON'T KNOW IF WE HAVE A STANDARD, BUT I HEAR THE POINT YOU ARE MAKING IN THE BANNER HAS BEEN TAKEN DOWN. IT IS NOW CHAIRS OPPORTUNITY TO RECOGNIZE MR. COOPER. I CONSIDER THAT A GREAT OPPORTUNITY. SO I DO RECOGNIZE MR. COOPER. |
| 02:42:08 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN. AS IMPORTANT AS IT IS TO LEARN FROM MISTAKES OF THE PAST, I THINK PEOPLE ARE EVEN MORE CONCERNED ABOUT TRYING TO PREVENT OR AVOID CRISES IN THE FUTURE. THE CRISIS I AM WORRIED ABOUT COULD BE EVEN BIGGER THAN THE SUBPRIME MORTGAGE AND FINANCIAL CRISIS WE ARE FACING TODAY. THE CRISIS I AM WORRIED ABOUT IS PUBLIC BEST BESET -- EXEMPLIFIED BY THIS OFFICIAL U.S. TREASURY DOCUMENT COMES OUT EVERY YEAR, BUT VERY FEW AMERICANS AND VERY FEW MEMBERS OF CONGRESS HAVE EVER SEEN OR HEARD ABOUT THIS DOCUMENT. IT IS CALLED THE FINANCIAL REPORT OF THE UNITED STATES GOVERNMENT AND IS AVAILABLE FOR FREE FROM THE TREASURY OR GAO WEBSITE TRADE YET IT SEEMS TO BE A DEEP, DARK SECRET IN WASHINGTON, DESPITE THE FACT IS THE ONLY OFFICIAL U.S. GOVERNMENT DOCUMENT THAT ACTUALLY USES REAL ACCOUNTING, CROLL ACCOUNTING TO -- ACCRUAL ACCOUNTING TO DESCRIBE THEM AND CONTAINS REAL NUMBERS. ALL THE REST OF THE BUDGET DOCUMENTS DO NOT MEET THE STANDARDS. WHY IS THIS DOCUMENT SUCH A DEEP, DARK SECRET? IT'S NOT CLASSIFIED. IT IS HIDDEN IN THE PUBLIC DOMAIN. PERHAPS IF IT WERE CLASSIFIED, SOME SPY WOULD TRY TO STEAL IT AND IT WOULD GET MORE PUBLICITY. WHY IS THE DOCUMENT HIDDEN? BECAUSE IT CONTAINS SUCH BAD NEWS. THIS DOCUMENT GOES OUT UNDER THE SIGNATURE OF THE SECRETARY OF THE TREASURY. THIS PARTICULAR ONE WAS SIGNED BY FORMER SECRETARY SNOW. THE DEFICIT ALL POLITICIANS TALK ABOUT THAT YEAR WAS $316 BILLION. THE DEFICIT CONTAINED IN THIS DOCUMENT WAS $760 BILLION. OVER TWICE AS LARGE. THE DEBT IS ALSO MUCH WORSE. THAT YEAR, THE DEBT WAS SOMETHING LIKE EIGHT TRILLION DOLLARS. IN HERE, THE FISCAL GAP IS 46 TRILLION DOLLARS. MY QUESTION IS, FOR EACH OF THE PANELISTS, SECRETARIES KNOW, YOUR PREDECESSOR LOST HIS JOB IN PART BECAUSE HE CARED SO MUCH ABOUT BUDGET DEFICITS. ON YOUR WATCH, DID YOU DO ANYTHING TO PUBLICIZE THIS REPORT TO MAKE SURE EVERYBODY IN AMERICA KNEW THE REAL STORY ABOUT THE REAL NUMBERS FOR AMERICA? |
| 02:44:38 | Cooper, Jim "James" H. | THANK YOU FOR THAT. THANK YOU FOR CALLING ATTENTION TO THE REPORT. ONE THING I DID WAS TO SEND IT TO YOU, AS I RECALL. TO CALL YOUR ATTENTION TO IT, BACK THEN IN 2005 OR 2006. IT IS A SERIOUS SUBJECT. IT IS A DEEPLY SERIOUS SUBJECT. BECAUSE THE SYSTEMIC RISKS ASSOCIATED WITH THE UNFUNDED LIABILITIES, AND THAT IS WHAT THE REPORT DEALS WITH PRIMARILY, UNFUNDED LIABILITIES, THE PROMISES WE HAVE MADE TO THE FUTURE THAT WE HAVE@@@@@@@RR WAS IT WASN'T IT THE FIRST FLANK IN THE CONTRACT WITH AMERICA TO STOP THESE FEDERAL GOVERNMENT EXEMPTIONS FROM THE LAWS THAT APPLY TO REGULAR AMERICANS? SO HERE WE ARE WITH THIS SITUATION WHERE THE FEDERAL GOVERNMENT IS THE ONLY LARGE ENTITY, GOVERNMENT OR NONGOVERNMENT THAT HAS SUCCESSFULLY EXEMPTED ITSELF FROM REAL ACCOUNTING STANDARDS. HAVE YOU DONE ANYTHING IN YOUR TENURE AT THE S.E.C. TO HIGHLIGHT THE REAL NUMBERS FOR AMERICA? |
| 02:46:22 | Cooper, Jim "James" H. | INDEED, JUST ON THE POINT THAT YOU MADE ABOUT THE CONTRACT WITH AMERICA SPECIFICALLY THAT WAS ABOUT MAKING SURE CONGRESS DIDN'T EXEMPT ITSELF FROM THE RULES THAT APPLY TO EVERYBODY ELSE. BUT I STRONGLY AGREE THAT FOR THE ENTIRE TIME I SERVED IN CONGRESS I MAILED THAT REPORT IN THE FORM OF AN ANNUAL REPORT OF THE UNITED STATES GOVERNMENT TO MY CONSTITUENTS EVERY YEAR. I ALSO MADE IT AVAILABLE TO EVERY MEMBER OF CONGRESS SO THEY COULD DO THE SAME WITH THEIR CONSTITUENTS. NOW, BECAUSE THE S.E.C. DOESN'T HAVE AUTHORITY TO OVERSEE THE BOOKS OF THE FEDERAL GOVERNMENT, THIS IS A TREASURY REPORT, SO IT IS NOT THE S.E.C.'S PROBLEMS. BUT AS A MEMBER OF CONGRESS EVERY SIM YEAR I SENT THAT OUT TO MY CONSTITUENTS INSTEAD OF PROMOTIONAL MAILINGS THAT PEOPLE GET, THEY VERY MUCH WANT TO SEE THAT. I COULDN'T AGREE WITH YOU MORE. AGREE WITH YOU MORE. |
| 02:47:13 | Cooper, Jim "James" H. | IF YOU ARE SO INFORMED ABOUT THE NUMBERS, WHAT IS THE CURRENT FISCAL GAP FOR THE UNITED STATES OF AMERICA? |
| 02:47:18 | Cooper, Jim "James" H. | IT IS CHANGING RATHER RAPIDLY. |
| 02:47:31 | Cooper, Jim "James" H. | BALL PARK IS FINE. GIVE ME A NUMBER. |
| 02:48:08 | Cooper, Jim "James" H. | CONGRESSMAN, I TOOK A VERSION OF THAT, WHICH IS ESSENTIALLY -- YOU ARE TALKING ABOUT THE ACCRUAL SYSTEM, AND THAT THEN GETS REFLECTED IN THE CASH SYSTEM IN THE FORECASTING STRUCTURE. WHAT I HAVE ARGUED FOR FOR A SIGNIFICANT TIME IS THAT WE HAVE UNDERFUNDED FOR MEDICARE, WHICH IS A VERY SIGNIFICANT PART OF THE NUMBERS YOU ARE CONCERNED ABOUT A HALF. IN OTHER WORDS, IN ORDER TO ACTUALLY HONOR ALL THE PROMISES BEING MADE TO THE NEXT GENERATION, THE BABY BOOM GENERATION WHO ARE RETIRING, WE WOULD HAVE TO EITHER CUT BENEFITS BY 50%, RAISE TAXES TO A POINT WHERE IT'S PROBABLY -- IT CANNOT FUNDAMENTALLY BE SUSTAINED, AND THEREFORE WE ARE LOOKING AT THE UNDERLYING MEANING OF THESE TYPES OF REPORTS. WE ESSENTIALLY PROMISED TO THE AMERICAN PEOPLE FAR MORE THAN WE CAN DELIVER. I'M VERY FEARFUL THAT UNLESS AND UNTIL WE SOLVE THIS PROBLEM BEFORE EVERYONE RETIRES, THE LARGE NUMBERS OF PEOPLE WHO WILL NOT BE ABLE TO GET WHAT THEY ARE FUNDAMENTALLY PROMISED STILL HAVE TIME TO MAKE ADJUSTMENTS IN THEIR RETIREMENTS. BUT IF WE WAIT UNTIL THE HAMMER FALLS ON US WITH THE EXORABLE GRIND OF THE NUMBERS, I THINK WE'RE DOING A GREAT DISSERVICE TO THE AMERICAN PEOPLE. |
| 02:49:53 | Cooper, Jim "James" H. | THE GENTLEMAN'S TIME HAS EXPIRED. |
| 02:49:57 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN. AND TO THE GENERAL WANT -- TELL ONE FROM TENNESSEE. IT WOULD BE INTERESTING UNDER GATT ACCOUNTING ON THE BALANCE SHEET WHAT WE WOULD DO WITH HOUSE, SENATE, AND THE OTHER BUILDINGS HERE IN WASHINGTON TRADE ARE THEY ON THE ASSETS SIDE OR THE LIABILITIES SIDE? CHAIRMAN GREENSPAN, THANK YOU FOR MANY YEARS OF SERVICE. TODAY, PEOPLE SEEM TO WANT TO THINK YOU WERE SOMEHOW A PARTISAN FOR THE BUSH ADMINISTRATION. I'M NEVER SURE WHICH BUSH ADMINISTRATION THEY'RE TALKING ABOUT WHEN THEY SOMEHOW THINK YOUR MANY YEARS OF GREAT SERVICE SHOULD BE CLOUDED BY YORK AND ABILITY, ALONG WITH THE REST OF US, TO PROPERLY PREDICT THIS CRISIS. MY QUESTIONS TODAY ARE MOSTLY GOING TO BE LIMITED TO THE FUTURE. FIRST OF ALL, AS WAS SAID ALLOW AGO, I AM CALLING FOR AND HAVE A DRAFT BILL WHICH IS BEING CIRCULATED WITH ALL MEMBERS HERE TODAY SAYING THIS -- AND I THINK EVIDENCE HERE TODAY -- IS NOT SOMETHING CONGRESS WILL DEAL WELL WITH. THERE ARE TOO MANY INTERESTS LIKE FREDDIE MAC AND FANNIE MAE, SUCH AS ALL THE OTHER PARTS OF THIS MOVING TARGET, THAT I THINK WE NEED TO RISE ABOVE CONGRESS AND SUGGESTIONS FOR HOW MUCH WE REGULATE AND FOR HOW MUCH TRANSPARENCY WE HAVE. I WOULD HOPE THAT EACH OF YOU WOULD COMMENT ON WHETHER OR NOT YOU SUPPORT TAKING IT OUT OF THE HANDS BOTH OF THE NEXT ADMINISTRATION AND CONGRESS, AT LEAST IN PART, IN ORDER TO DO THE AFTER ACTION AS WE DID WITH 9/11. WHAT I WOULD LIKE TO SPECIFICALLY ASK, AND THIS IS ALSO FOR CHAIRMAN COX, THIS -- THERE ARE A NUMBER OF MODELING SYSTEMS AT YOUR DISPOSAL TODAY AND MORE YOU ARE LOOKING AT. CHAIRMAN COX, I BELIEVE THE XBRL SYSTEM IS ONE YOU ARE FAMILIAR WITH THAT IS BEING DEVELOPED. SHOULD THE CONGRESS AND BRING TO BEAR ADDITIONAL RESOURCES FOR EACH OF YOU AND FOR OTHER AGENCIES SO THEY YOUR PREDICTIVE MODELING AND YOUR DOOMSDAY SCENARIOS -- AND I AM SPECIFICALLY SAYING THIS TO YOU, MR. GREENSPAN, THE DOOMSDAY SCENARIOS WE LIVE WITH OBVIOUSLY COULD HAVE BEEN MODELED, BUT IT WAS NOT PREDICTABLY MODELED BY THE AGENCIES OF GOVERNMENT AND DELIVERED TO CONGRESS. SHOULD WE BE INVESTING IN THAT KIND OF MODELING? IN OTHER WORDS MICRO MODELING OF EVERYONE'S PRODUCT AND DERIVATIVE PRODUCT. IF IN FACT, THERE IS A PICKUP OF 6% IN THE CALIFORNIA MARKET FOR HOMES AND RIPPLES THROUGHOUT THE U.S., THEN WHAT COULD OR WHAT HAPPENED? IF THAT MODELING IS AVAILABLE TODAY, PLEASE TELL ME. THE YOU THINK WE SHOULD BE INVESTING IN IT? |
| 02:52:45 | Cooper, Jim "James" H. | IS NOT AVAILABLE, AND INDEED , EARLIER THIS YEAR, I RAISED THE QUESTION ABOUT MODELING PROCEDURES FOR THE ECONOMY. THE ECONOMETRIC WORK BEING DONE IS -- HAS ESSENTIALLY BEEN RESTRICTED TO TAKING THE WHOLE HISTORY AND ASSUMING IT IS, A GENIUS AND THEREFORE YOU CAN GET SOME INSIGHT. WHAT IS VERY EVIDENT TO ME, AND I THINK INCREASINGLY TO OTHERS, IS THAT THE WAY THE ECONOMY FUNCTIONS IN A TIME OF EXPANSION IS REALLY QUITE DIFFERENT FROM WHAT HAPPENS ON THE WAY DOWN. I SHOULD THINK WE WILL FIND THAT WE COULD MODEL THE EUPHORIA STAGES, AS I LIKE TO PUT IT, AND THE FEAR STAGE, AND THEY ARE REALLY QUITE DIFFERENT. I THINK WE WOULD FIND WE WOULD LEARN A GREAT DEAL ABOUT SPECIFICALLY THE FEAR STAGE BECAUSE WE DO HAVE MEMBERS OF THAT -- NUMBERS OF EPISODES IN THE PAST. THE MAJOR PROBLEM IS WE DO NOT HAVE A THIRD MODEL WHICH TELLS US WHICH OF THOSE TWO ARE ABOUT TO HAPPEN. THE REASON IS, A FINANCIAL CRISIS MUST OF NECESSITY BE UNANTICIPATED. BECAUSE, IT IS ANTICIPATED, IT WILL BE ARBITRAGED AWAY. IF A FINANCIAL CRISIS BY DEFINITION IS A DISCONTINUITIES AND ASSET PRICES, THAT MEANS FROM ONE DAY TO THE NEXT, PEOPLE WERE SURPRISED. SOMETHING FUNDAMENTALLY DIFFERENT HAPPENED. I THINK THAT AND I HAVE ARGUED THIS -- I AM NOT SAYING WHETHER GOVERNMENT RESOURCES ARE RELATIVE, I THINK THE ACADEMIC COMMUNITY TO DO IT SURELY AS WELL. WHAT WE DO HAVE TO UNDERSTAND, IS THAT OUR VIEW OF THE WAY AND ECONOMY FUNCTIONS IS NOT PROPERLY MODEL BY WHAT WE NOW HAVE. I JUST WANT TO SAY QUICKLY THAT THE FEDERAL RESERVE HAS CUT A SOPHISTICATED MODELING STRUCTURE AND CAPABLE PEOPLE AS ANY ORGANIZATION IN THE WORLD. IT DID NOT FORECAST OF WHAT IS HAPPENING. |
| 02:55:07 | Cooper, Jim "James" H. | AND AS A PILOT, BY THE WAY, I KNOW A LANDING IS NOT JUST A TAKEOFF AND REVERSE. |
| 02:55:12 | Cooper, Jim "James" H. | THAT IS A GOOD ANALOGY. |
| 02:55:14 | Cooper, Jim "James" H. | MR. COX? |
| 02:55:21 | Cooper, Jim "James" H. | WHEN YOU ALLUDED TO XBRL -- I JUST WANT TO POINT OUT THAT IS NOT A MODELING SYSTEM, BUT IT COULD CONTRIBUTE VERY MUCH TO THE CONSTRUCTION OF A USEFUL MODEL. THE SEC IS FOCUS ON MOVING THIS FROM THEIR BONES DISCLOSURE WE HAVE NOW WHICH IS JUST PAPER DATA, AND TAGGING EACH ELEMENT OF A FINANCIAL STATEMENT SO THAT COMPUTERS CAN DO WORK ON BEHALF OF PEOPLE THAT THE PEOPLE DON'T EVEN HAVE TO MIND. IT WILL DELIVER RESULTS. IT WILL PERMIT YOU, INSTEAD OF LOOKING AT FINANCIAL STATEMENTS OF ONE COMPANY OR FINANCIAL REPORTS ABOUT ANOTHER SECURITY, TO INSTANTLY DO COMPARATIVE ANALYSIS. IT WILL VASTLY IMPROVE AS A RESULT, RISK ANALYSIS IN THE MARKET AND BY REGULATORS AND WE ARE FOCUSED ON A FOR THAT REASON. WITH RESPECT TO BOTTLING -- WITH RESPECT TO THE MODELING, ALL THE REST IN THE SYSTEM, I SUPPOSE AT SOME POINT YOU RUN UP AGAINST THE PROBLEM OF TRYING TO CREATE SUCH A LEVEL OF EXACTITUDE THAT YOU REBUILD THE ENTIRE WORLD AND ALL ITS COMPLEXITY. THAT IS PROBABLY AN ASPIRATION WE OUGHT NOT TO HAVE. THEREFORE, WE HAVE TO RECOGNIZE A COMPUTER MODELING IS GOING TO ALWAYS HAVE ITS WEAKNESSES AND WE HAVE CERTAINLY SEEN THAT IN THE LAST YEAR. WE HAVE SEEMED A LOT OF THE RISK MODELS PEOPLE RELIED ON. WE SOUGHT IN LONG-TERM CAPITAL MANAGEMENT, WE HAVE SEEN IT MANY TIMES OVER. MANY OF THOSE THINGS REQUIRED MORE HUMAN INPUT. |
| 02:56:56 | Cooper, Jim "James" H. | ANY COMMENTS BEFORE WE MOVE ON? |
| 02:57:04 | Cooper, Jim "James" H. | WHAT? |
| 02:57:06 | Cooper, Jim "James" H. | IF YOU FORGET TO TURN ON YOUR BIKE, YOU MIGHT FORGET TO LOOK AT THE MODEL. [LAUGHTER] |
| 02:57:14 | Cooper, Jim "James" H. | I SHARE YOUR BASIC -- THE THRUST OF YOUR QUESTION HERE WHICH IS CAN WE DO BETTER? CAN WE FIND WAYS TO DO BETTER? IT SEEMS TO ME AND THIS IS RETROSPECTIVE, THE QUESTION IS LEVERAGE IN THE SYSTEM, WHEN LOANS AND DEBT GETS TO BE SOME FRACTION OF GDP, IT PROBABLY OUGHT TO SEND OFF SOME SIGNALS, BECAUSE GDP WRECK -- REPRESENTS THE EARNING POWER AND THAT REPORT -- DID THAT REPRESENTS THE OBLIGATIONS. CONGRESSMAN Q -- CONGRESSMAN COOPER TALKED ABOUT FUTURE OBLIGATIONS THAT RISE AND A SIGNIFICANT RATE RELATIVE TO GDP OF THE UNITED STATES. THAT SORT OF THING, AND ROUGH AND READY TERMS, WE SHOULD BE ABLE TO MODEL AND HAVE SIGNALS GO OFF. BUT NO MODEL I THINK IS VERY -- I DON'T THINK IT COULD EVER BE CLOSE TO PERFECTION AT FIGURING OUT WHERE THE MARKET IS GOING TO GO. THE PROBLEM RIGHT NOW IN THE FINANCIAL MARKETS IS THE BANKS AND FINANCIAL INSTITUTIONS HOLD ALL THIS PAPER. THE MARKET IS SAYING THE PAPER IS RISKIER THAN YOU, THE BANKS, THOUGHT IT WAS. SO THE MARKET IS -- THE MARKET HAS DRIVEN DOWN THE VALUE OF THAT PAPER. AS LONG AS HOUSING PROBLEMS CONTINUE, IT CONTINUES TO DRIVE DOWN THE VALUE OF THE PAPER. NOBODY REALLY KNOWS WHERE THE BOTTOM IS. ONLY THE MARKET WILL HAVE THE CAPACITY TO FIGURE THAT OUT. I DO NOT THINK YOU CAN REALLY MODEL ANYWHERE NEAR PERFECTION, AS HAS BEEN SAID. BUT YOU ALWAYS OUGHT TO LOOK AT THE ASSUMPTIONS. THE ASSUMPTIONS IN THE MODELS, MANY OF OUR BANKING INSTITUTIONS, THAT HOUSING PRICES WOULD KEEP RISING AND RISING AND RISING, PROBABLY SHOULD HAVE BEEN SEEN AS A MISTAKE. |
| 02:59:09 | Cooper, Jim "James" H. | YOUR TIME HAS EXPIRED. |
| 02:59:12 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN. THANK YOU TO ALL THE GIN AND FOR YOUR -- THANK YOU TO ALL OF YOU GENTLEMEN FOR YOUR TESTIMONY. FOR TRYING TO FIGURE OUT WHAT WENT WRONG AND FOR TRYING TO HOLD INDIVIDUALS AND INSTITUTIONS ACCOUNTABLE. MOST IMPORTANTLY, TO TRY TO FIGURE OUT HOW WE CAN LEARN FROM THE MISTAKES THAT WERE |
| 02:59:31 | Cooper, Jim "James" H. | MR. COX, I HAD SOME QUESTIONS FOR YOU WITH RESPECT TO THE CAPITAL REQUIREMENTS AND LEVERAGE RULES THAT WERE IN PLACE FOR INVESTMENT BANKS. I'M SURE YOU SAW THE QUOTE IN MARCH OF 2008 WHERE YOU SAID WE HAVE A GOOD DEAL OF COMFORT ABOUT THE CAPITAL CUSHIONS AT THESE FIRMS REFERRING TO INVESTMENT BANKS AT THE MOMENT. THREE DAYS LATER AS YOU KNOW, BEAR STEARNS WAS DRAINED OF MOST OF ITS CASH, THEY HAD TO ENTER INTO THIS QUICK MARRIAGE WITH J.P. MORGAN CHASE ALONG WITH ABOUT $29 BILLION OF TAXPAYER DOLLARS INFUSED AS PART OF THE DEAL. WITH THAT IN MIND I WANT TO ASK YOU ABOUT THE RULE CHANGES, THE LEVERAGE RULE CHANGES THAT WERE MADE BY THE S.E.C. IN 2004 WHERE YOU LOOSENED LEVERAGE REQUIREMENTS ALLOWING THESE BANKS TO BORROW BIG, BIG AMOUNTS OF DOLLARS AND TAKE EVEN BIGGER, BIGGER RISKS WITH THOSE DOLLARS. FROM WHERE YOU SIT NOW, DO YOU BELIEVE THAT THAT DECISION IN 2004 WAS A MISTAKE? |
| 03:00:36 | Cooper, Jim "James" H. | I REPEALED THE PROGRAM. WE DID AWAY WITH THE PROGRAM BECAUSE, BASED ON EXPERIENCE, THE PROGRAM HAD TWO FLAWS. THE FIRST WAS REALLY BAKED INTO THE STATUTORY SCHEME. THE S.E.C. DIDN'T HAVE THE STATUTORY AUTHORITY TO DO MOST OF WHAT IT WAS DOING ON A MANDATORY BASIS. SECOND, THE METRICS -- |
| 03:00:56 | Cooper, Jim "James" H. | I'M ASKING A SLIGHTLY DIFFERENT QUESTION. THERE WERE TWO PIECES TO THAT DEAL. ONE WAS CHANGING THE NET CAPITAL RULE TO ALLOW MORE BORROWING AND AS PART OF THAT IT WAS SUPPOSED TO BE BALANCED BY MORE S.E.C. OVERSIGHT OVERSIGHT. ON THE FIRST PART, YOU WERE NOT THERE AT THE TIME, WAS IT WISE OF THE S.E.C. TO CHANGE THE CAPITAL REQUIREMENT RULES AND ALLOW MUCH MORE LEVERAGE. WAS THAT WISE? |
| 03:01:21 | Cooper, Jim "James" H. | YOU ARE CORRECT THAT I WAS NOT THERE AT THE TIME SO I HAVE TO ASCRIBE TO THE COMMISSION WHICH VOTED UNANIMOUSLY TO DO THIS IN 2004 THE BEST MOTIVES. IT WAS VERY CLEAR -- |
| 03:01:32 | Cooper, Jim "James" H. | I'M ASKING YOU BASED ON WHAT YOU KNOW TODAY WAS THAT A MISTAKE OR NOT? |
| 03:01:37 | Cooper, Jim "James" H. | YES, I HAVE SAID THAT THE PROGRAM WAS FUNDAMENTALLY FLAWED. WE KNOW THIS IN HINDSIGHT BECAUSE WE SAW AS YOU MENTIONED BEAR STEARNS MET, THE CAPITAL REQUIREMENTS MET THE LIQUIDITY REQUIREMENTS. IT USED THE INTERNATIONALLY ACCEPTED BASTL STANDARDS THAT OTHER BANKS HAVE RELIED UPON AND THOSE METRICS DID NOT HELP US IN THE WEEK OF MARCH 10 WHEN THE LIQUIDITY OF BEAR TURNS IN TWO DAYS WENT FROM $12 BILLION TO $#2 BILLION. |
| 03:02:14 | Cooper, Jim "James" H. | I UNDERSTAND AND AGREE A VOLUNTARY PROGRAM DOESN'T GIVE YOU THE LEVERAGE YOU WANT IN TERMS OF OVERSIGHT. BUT IT WAS THE ONLY OVERSIGHT THAT WAS PART OF THAT DEAL. IN OTHER WORDS, BASED ON WHAT YOU JUST SAID, IT WAS A MISTAKE TO LOOSEN THE CAPITAL REQUIREMENTS AND ALLOW ALL OF THIS BORROWING. WHAT WAS AGREED AT THE TIME WAS THAT THE SEC WOULD TAKE ON GREATER OVERSIGHT RESPONSIBILITIES. IT WAS A VOLUNTARY PROGRAM. I JUST WANT TO READ TO YOU FROM THE "NEW YORK TIMES" OCTOBER 3 ARTICLE FROM THIS MONTH. THE SUPERVISORY PROGRAM UNDER MR. COX WAS A LOW PRIORITY. THE OFFICE HAD NOT COMPLETED A SAMPLE INSPECTION SINCE IT WAS RESHUFFLED BY MR. COX MORE THAN A YEAR AND HALF AGO. THEY GO ON TO SAY THAT DESPITE THE FACT THAT IT AT THE WEAKNESSES YOU TALKED ABOUT, FORMER OFFICIALS AS WELL AS THE INSPECTOR GENERAL'S REPORT THAT WASN'T -- THAT WAS RELEASED IN CONNECTION WITH THEIR STEARNS SUGGEST A MAJOR REASON FOR FAILURE WAS ONE OF THE FORMER SEC COMMISSIONER SAYING, THE 2004 RULEMAKING GAVE US THE ABILITY TO GET INFORMATION THAT WITHIN CRITICAL TO SENSIBLE MONITORING AND YET THE SEC DID NOT OVERSEE WELL ENOUGH. THAT WAS THE QUOTE FROM A FORMER SEC COMMISSIONER WHO SAID THAT GIVEN THE FACT THAT THOSE WERE THE TOOLS THAT YOU DID AT YOUR DISPOSAL, YOU JUST DID NOT USE THEM ADEQUATELY TO PROTECT INVESTORS. I WOULD LIKE FOR YOU TO RESPOND TO THAT. |
| 03:03:52 | Cooper, Jim "James" H. | I HAVE HAD THE CASE -- I HAD THE ABILITY TO TALK TO COMMISSIONER COACH MET. WHILE HE VOTED TO CREATED AND WHILE HE UNDERSTOOD THERE WERE PROBLEMS WITH THE VOLUNTARY PROGRAM AND SO ON, HE ALSO RECOGNIZES WHAT REALLY IS NEEDED RIGHT NOW. I ALSO WANT TO CORRECT SOMETHING THAT HAS BEEN SAID SEVERAL TIMES THAT IS A FACTUAL MATTER THAT EVERYONE NEEDS TO UNDERSTAND. THE 2004 RULE CHANGE. I WAS NOT AT THE COMMISSION IN 2004 WHEN THIS CHANGE OCCURRED. IT IS JUST THE FACT. IT DID NOT LUCENT LEVERAGE REQUIREMENTS ON INVESTMENT BANKS. -- HE DID NOT LOOSEN LEVERAGE REQUIREMENTS ON INVESTMENT BANKER. THEY HAD NO REGULATION AT THAT TIME. BY STATUTE, THEY HAVE NO REGULATOR. UP UNTIL 2004, WHEN DOES VOLUNTARY PROGRAM WAS CREATED, THERE WAS ABSOLUTELY NOTHING FOR IT WAS CREATED IN 2004 WAS AT LEAST MORE THAN EXISTED BEFORE. IIL THAT HAS BEEN AMPLY ILLUSTRATED. IN TERMS OF RESHUFFLING THE PROGRAM OR DISMANTLING IT, I THINK THAT MUST REFER TOTHE CONSOLIDATED SUPERVISORS INTO THE PROGRAMS DURING MY CHAIRMAN WAS INCREASED IN TERMS OF ITS STAFFING BY OVER 30%. WE FOCUSED EVEN MORE RESOURCES ON THIS, RECOGNIZING ITS IMPORTANCE. |
| 03:05:26 | Cooper, Jim "James" H. | YOU ARE RECOGNIZED FOR FIVE MINUTES. |
| 03:05:30 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN. DR. GREENSPAN, DURING YOUR TENURE AT THE FED, WE WENT FROM RATIONAL AND EXUBERANCE TO AN UNREGULATED SUBPRIME LENDING. WALL STREET DOLL WHILE -- WALL STREET GONE WILD. AND HERE WE ARE. YOU SAID IN YOUR EXCELLENT BOOK THAT YOU HAD A LIBERTARIAN OPPOSITION TO MOST REGULATION. NOW YOU SAID THAT ON PAGE 373. BY THE TIME WE GET TO THE EPILOGUE, YOU SEEM TO HAVE CHANGED THAT VIEW SOMEWHAT IN TODAY, WE TALKED ABOUT INFALLIBILITY, THE INABILITY TO PREDICT RISK BECAUSE WE ARE FALLIBLE HUMAN BEINGS. AND ALSO IN YOUR APOLOGUE, YOU SAID MODERN POLITICAL REALITY REQUIRES ELECTED OFFICIALS TO RESPOND TO VIRTUALLY EVERY ECONOMIC SITUATION WITH A GOVERNMENT PROGRAM. WE ARE IN THE MIDST OF AN UNPRECEDENTED ECONOMIC CRISIS. WE HAVE JUST PASSED A BAILOUT WHICH I OPPOSED. YOU SUPPORTED. AN UNPRECEDENTED COMING THEOLOGICAL, UPSIDE DOWN TURN OF EVENTS -- AN UNPRECEDENTED, UPSIDE-DOWN TURN OF EVENTS, FOLLOWING BILL LINCOLN PLAZA -- PHILOSOPHY, THE PURPOSE OF GOVERNMENT IS THERE TO DO WITH THE FREE MARKET CANNOT DO OR WILL NOT DO TO HELP THEMSELVES. IT STILL IS RAGING IN THIS COUNTRY. ALL OVER THE COUNTRY, THOUGH SUBPRIME IS THAT YOU TALKED ABOUT ARE STILL BEING FORECLOSED ON. IT HAS LOPPED OVER INTO THE AAA IS IN THE PRIME MORTGAGES. WE HAVE SEEN RECORD JOB LOSSES. IT STRIKES ME THAT UNTIL WE DEAL WITH THE MORTGAGE FORECLOSURE CRISIS, WE'RE NOT GOING TO GET A HANDLE ON THIS. BACK IN DECEMBER YOU SAID THAT YOU FAVORED SPENDING GOVERNMENT MONEY TO ASSIST AMERICAN STRUGGLING TO MAKE MORTGAGE PAYMENTS WITHOUT FUNDAMENTALLY CHANGING MARKET STRUCTURE. YOU SAID YOU DID NOT KNOW WHAT IT WOULD WORK BUT IT WOULD CERTAINLY HELP PEOPLE. IT WOULD HELP THEIR INCOMES AND PERSONAL STATES WITHOUT AFFECTING THE WAY THAT MARKETS ARE BEHAVING IN THE WAY THE ADJUSTMENT PROCESS IS GOING ON. WITH ALL OF THAT AS BACKGROUND, WHAT WE THINK WE NEED TO DO NOW TO GET TO THE ROUTE TO, BECAUSE OF THE MORTGAGE FORECLOSURE CRISIS, AND YOU AGREE THAT WE NEED TO DO THAT, NOT JUST DEAL WITH THE INSTITUTIONAL HELP WE PROVIDED, BUT DEAL WITH THAT CRISIS IN ORDER TO SOLIDIFY THINGS? [INAUDIBLE] IS THE BUTTON PRESSED? |
| 03:12:00 | Cooper, Jim "James" H. | THANK YOU VERY MUCH. MR. MURPHY, YOU ARE RECOGNIZED FOR FIVE MINUTES. |
| 03:12:06 | Cooper, Jim "James" H. | MR. CHAIRMAN, I WANT AS ONE RETRO -- ONE RETROSPECTIVE QUESTION. MY CONSTITUENTS ARE CERTAINLY INTERESTED IN HOW WE GOT INTO THE SITUATION BUT MUCH MORE INTERESTED ON HOW WE MOVE FORWARD FROM HERE. I WANT TO MOVE BACK TO THIS ISSUE, MR. COX, OF THE SEC PROGRAM. I UNDERSTAND IT TERMINATED THE PROGRAM DUE TO CERTAIN SYSTEMIC FAILURES IN THE INABILITY TO DO THE JOB IF IT SET OUT TO DO. THE REPORT FROM THE INSPECTOR GENERAL'S OFFICE IS SPECIFIC TO THE OVERSIGHT THAT WAS DONE ON BEAR STEARNS. IT IS TROUBLING NOT FOR THE SYSTEMIC FAILURES BUT THE PRACTICAL FAILURES THAT OCCURRED IN YOUR OFFICE'S EFFORTS TO TRY TO FIGURE OUT WHAT WAS HAPPENING AT BEAR STEARNS. THE INSPECTOR GENERAL SAYS THAT THE SEC IGNORED NUMEROUS POTENTIAL RED FLAGS. AND ALLOW BEAR STEARNS TO DO SOME OF THE AUDITS THEMSELVES RATHER THAN BEING DONE BY THE SEC, THAT THE SEC DID NOT PERFORM REVIEWS IN A TIMELY FASHION, AND I CERTAINLY UNDERSTAND YOUR PROBLEM THAT EVEN WITH THAT INFORMATION THE SEC DOES NOT HAVE ALL THE TOOLS NECESSARY TO MAKE THE CHANGES THAT YOU MIGHT WANT TO MAKE. AT THE VERY LEAST, THE INSPECTOR GENERAL NOTES THAT LACK OF INFORMATION THAT THE SEC GOT THROUGH IT, SPECIFICALLY WITH BEAR STEARNS, HAD THE RESULT OF PROVIDING INVESTORS WITH MATERIAL INFORMATION THAT THEY COULD HAVE USED TO MAKE WELL- INFORMED INVESTMENT DECISIONS. BUILDING ON UNREPRESENTATIVE BEEN HOLLINS QUESTIONS, WHAT YOU MAKE OF THE INSPECTOR GENERAL'S SPECIFIC FINDINGS ON A LACK OF OVERSIGHT AT BEAR STEARNS, TO MARK DID YOU KNOW ABOUT THOSE RED LIGHTS AND HOW TROUBLING IS IT TO YOU, THOUGH SPECIFIC FINDINGS, AS TO |
| 03:13:58 | Cooper, Jim "James" H. | WELL, WITH THE EXCEPTION OF THE LAST ONE THAT YOU REFERRED TO WITH RESPECT TO THE ANNUAL REVIEW OF THE 10-K'S, AS YOU WILL NOTE FROM THE FOOTNOTES TO THOSE PARTICULAR ITEMS IN THE REPORT, THEY OCCURRED BEFORE I BECAME CHAIRMAN. THIS WAS A NEW PROGRAM. IT WAS PUT IN PLACE IN 2004. IT FSWAS MEANT, AS I MENTIONED A MOMENT AGO, TO PROVIDE A WINDOW INTO WHAT WAS GOING ON AT THE HOLDING COMPANY LEVEL. FIRST YOU ASKED WHAT I THINK OF THE INSPECTOR GENERAL'S RECOMMENDATIONS AND REPORT. WE HAVE EITHER ALREADY IMPLEMENTED OR ARE IMPLEMENTING ALL THE RECOMMENDATIONS -- |
| 03:14:41 | Cooper, Jim "James" H. | DO YOU THINK THERE WAS A SPECIFIC FAILURE -- PUTTING ASIDE THE PROBLEMS OF THE PROGRAM ITSELF, WAS THERE A SPECIFIC PROBLEM WITH RESPECT TO THE OVERSIGHT THAT YOU COULD HAVE DONE WITH RESPECT TO BEAR STEARNS THAT WOULD HAVE GIVEN INFORMATION TO AT LEAST OUTSIDE INVESTORS THAT WOULD HAVE BEEN USEFUL? |
| 03:16:28 | Cooper, Jim "James" H. | UNDERSTANDING THAT OUR INABILITY TO MANAGE RISK AND LEVERAGE ALLOWED SOME OF THESE FIRMS TO GET SO LARGE THAT THEY BECAME PART OF THE NEW CATEGORY CALLED TOO BIG TO FAIL -- AND THIS IS A QUESTION FOR THE PANEL -- WHAT DO WE DO GOING FORWARD TO ADDRESS THIS ISSUE OF FIRMS THAT ARE TOO BIG TO FAIL? AND HOW DO I ANSWER MY CONSTITUENTS' CONCERNS WHO SAY AREN'T WE JUST NOW SETTING A PRECEDENT WHICH ALLOWS THESE MAJOR FIRMS IN THE FUTURE TO MAKE THE SAME RISKS THAT GOT THEMSELVES INTO THIS POSITION BECAUSE WE HAVE SET UP A PRECEDENT THAT WE ARE GOING TO RESCUE THEM? |
| 03:18:11 | Cooper, Jim "James" H. | IF WE WANTED TO ELIMINATE TOO BIG TO FAIL, WHAT WOULD BE THE STEPS WE WOULD TAKE IN |
| 03:18:15 | Cooper, Jim "James" H. | I THINK THE FIRST THING YOU HAVE TO SAY AS A MINIMUM YOU HAVE TO ELIMINATE THE LARGER INSTITUTIONS INSTITUTIONS' SUBSIDY EFFECTIVELY AND ONE IS TO RAISE CAPITAL CHARGES OR RAISE FEES. BUT YOU CANNOT ALLOW IT TO GO ON WITHOUT SERIOUS CONSEQUENCES. AT THE END OF THE DAY LAYERS GOT TO BE SOMETHING WHICH PENALIZES THOSE FIRMS WHICH MOVE ABOVE THE LEVEL WHERE THEY BECOME TOO BIG TO FAIL. THAT IS -- THAT RAISES VERY |
| 03:18:52 | Cooper, Jim "James" H. | WHICH IS CRISIS, MR. MURPHY. MR. SARBANES. |
| 03:19:05 | Cooper, Jim "James" H. | WE HAVE BEEN TALKING ABOUT THIS METAPHOR, A BLIND MAN AND THE ELEPHANT. I DO NOT REALLY BUY THAT. I THINK -- I CERTAINLY DON'T BUY IT AS AN EXPLANATION FOR WHAT HAPPENED. I THINK IT IS BEING USED AS KIND OF AN EXCUSE. TO PASS THE BUCK AND SAYING, NOBODY COULD SEE THE WHOLE PICTURE. SO WE REAP EACH -- WE WERE EACH COMPROMISED IN OUR ABILITY TO TAKE ACTION THAT WOULD HAVE MATTERED IN THE DIFFERENCE. THE HEARING -- HEARING TESTIMONY TODAY JUST CONFIRMS TO ME THAT IN EACH PART OF THE WORLD THAT YOU EACH HAD A CLEAR PERSPECTIVE ON, YOU HAD TOOLS THAT YOU COULD HAVE USED, WHICH IF YOU HAD USED THEM, MIGHT HAVE AVERTED THE SITUATION. OR CERTAINLY LESS AND IT -- LESSENED ITS IMPACT. WE KEPT PUTTING OFF ON NOT HAVING A MODEL THAT WORKED. WE HAVE TO DEVELOP NEW MODELS AND THEY COULD NOT BE DEVELOPED AS QUICKLY AS NEEDED, AND SO FORTH. DR. GREENSPAN, YOU TALK ABOUT HOW -- I THINK HE SAID WE'RE NOT SMART ENOUGH AS PEOPLE TO PREDICT WHERE THESE THINGS ARE GOING, AND SO FORTH. WELL, THAT MAY BE TRUE WHEN IT COMES TO UNDERSTANDING THE FULL EXTENT OF THE SECURITIZATION OF THE SUBPRIME MORTGAGES, HOW THINGS WOULD KIND OF SPIN FROM THEIRRE. BUT CERTAINLY WE ARE SMART ENOUGH AS PEOPLE TO HAVE PUT BASIC UNDERWRITING STANDARDS IN PLACE, OR TO PRESERVE BASIC UNDERWRITING STANDARDS. THAT IS NOT TATE -- THAT DOES NOT TAKE A LOT OF SMARTS, REALLY. AND WE ARE CERTAINLY THAT'S SMART. BUT YOU DID NOT DO THAT. WHEN PEOPLE WERE COMING TO YOU THAT YOU RESPECT, AND WERE SAYING, WE'VE GOT TO TAKE SOME STEPS HERE TO MAKE SURE THAT THESE SUBPRIME MORTGAGES ARE BEING JUDGED ACCURATELY IN TERMS OF THEIR DANGER, AND SO -- YOU HAVE RESPONDED A FEW TIMES TO THAT, BUT RESPOND TO ME. I DO NOT UNDERSTAND IF YOU HAD TAKEN ACTION WITH TOOLS THAT YOU HAD AVAILABLE TO YOU, THAT IT WOULD HAVE ACTED TO PUSH BACK AGAINST THE SECURITIZATIONS DEMAND OR APPETITE THAT YOU HAVE DESCRIBED. YOU SAID, WHAT HAPPENED WAS, IF YOU HAD THIS HUGE APPETITE FROM THE SECURITIZED OURSRS TO PACKAGE THESE THINGS UP AND MAKE BETTER USE, THAT HE CAN IN 2005 AND 2006 AND 2007 AND THAT OVERWHELM THE SYSTEM. BUT IN 2004 AND 2004 AND 2005, IN THOSE PERIODS WHEN YOU'RE ASKED TO EXERCISE A MORE AGGRESSIVELY USE OF THESE TOOLS, IF THAT HAD BEEN DONE, THAT WOULD HAVE ACTED AS A FIRE WALL AGAINST THIS PRESSURE THAT WAS COMING FROM THE SECURITIZERS AND MIGHT HAVE MADE A DIFFERENCE. IF YOU COULD SPEAK TO THAT, I WOULD APPRECIATE IT. |
| 03:22:51 | Cooper, Jim "James" H. | REMEMBER, WE DID NOT KNOW THE SIZE OF THE SUBPRIME MARKET. PROBABLY UNTIL LATE 2005, WE DID THAT HAVE ANY DATA THAT WAS WORTHWHILE IN THE PUBLIC SECTOR. WE HAD DATA ON MORTGAGES THAT WE WERE FAMILIAR WITH. WE HAD NO INDICATION THAT THE SUBPRIME MARKET HAD SOARED TO LEVELS THAT IT DID UNTIL VERY LATE IN 2005. IN RETROSPECT, WE NOW KNOW WITH THE DATA THE WE HAVE THE SUBPRIME MORTGAGES CONSTITUTED ABOUT 7% OF TOTAL ORIGINATIONS FOR MORTGAGES IN THE UNITED STATES. BY 2005, IT HAD GOTTEN UP TO 20%. WE DID NOT KNOW THAT AT THE TIME. |
| 03:23:39 | Cooper, Jim "James" H. | I APPRECIATE THAT. MY TIME IS GOING TO RUN UP. LET ME FOLLOW UP. CERTAINLY YOU ARE NOT SUGGESTING THAT IT IS ONLY WHEN A PROBLEM IS TO BE OF A CERTAIN -- IN OTHER WORDS, IF YOU SEE THE FACT THAT EVEN IN A HANDFUL OF CIRCUMSTANCES, A BASIC, TRADITIONAL PRINCIPLES OF HONEST UNDERWRITING AND LENDING STANDARDS ARE BEING COMPROMISED, IT SHOULD NOT BE THAT THE FACT THAT THE SIZE OF THAT PROBLEM, THOUGH VOLUME OF IT HAS NOT REACHED A CERTAIN THRESHOLD THAT SATISFIES THEY YOU SHOULD NOT BE TAKING ACTION. YOU SHOULD BE TAKING ACTION BASED ON WHAT IS HAPPENING HERE, WHICH IF IT DID HAPPEN, WHICH HAD BEGUN A PROCESS OF OVERSIGHT AND VIGILANCE THAT MIGHT HAVE PREVENTED THIS THING, WHEN IT GOT TO A CERTAIN SIZE, FROM HAVING A PARTICULAR IMPACT. I AM ABOUT TO RUN OUT OF TIME. LET ME JUST CLOSE WITH THIS OBSERVATION, MR. TRADE -- MR. CHAIRMAN, IF YOU WILL INDULGE ME. WHAT CONCERNS ME, AND I HAVE READ SOME OF YOUR WRITINGS, IS THAT YOU HAVE CONCEDED THAT THERE WAS A FLAW IN YOUR IDEOLOGY EARLIER TODAY WITH RESPECT TO THE SITUATION OF BAD ACTORS, RIGHT? BUT WHAT YOU HAVE NOT CONCEDED IS UP ON THE IDEOLOGY THAT SUGGEST THAT THE MARKET WILL ALWAYS PUNISH THE BAD ACTORS, OR AT LEAST NOT ALLOW FOR THE FACT THAT YOU PUT A DRIVER IN THE CAR AND DRIVE RECKLESSLY AND MAYBE THEY HAVE A CAR CRASH, IT IS GOING TO PUNISH THEM AND MAYBE THEY WILL LEARN THEIR LESSON. BUT IN THE MEANTIME, A LOT OF INNOCENT BYSTANDERS CAN GET RUN OVER. I THINK THAT IS WHAT HAS HAPPENED. THERE ARE A LOT OF AMERICANS PEOPLE OUT THERE WHO FEEL LIKE INNOCENT BYSTANDERS AND THEY HAVE BEEN HURT. |
| 03:25:35 | Cooper, Jim "James" H. | SINCE CONGRESSMAN SARBANES MENTIONED THE TREASURY IN HIS OPENING COMMENTS, SUGGESTING THAT WE WERE ALSO NOT ON THE WATCH, LET ME GO BACK TO THE POINT I HAVE MADE OVER AND OVER AGAIN. WE WERE ON THE WATCH. WHEN WE SAW A LARGE SYSTEMIC RISK, WE CALL THE TO THE ATTENTION OF THE CONGRESS. WE COULD NOT HAVE BEEN CLEARER. I COULD NOT HAVE BEEN CLEARER ABOUT THE RISK POSED BY THE GSES. I CALLED IT TO THE ATTENTION OF CONGRESS IN A NUMBER OF TESTIMONIES. WE DID NOT DUCK OUR RESPONSIBILITIES. WE ASSUMED TO THEM. WE PUT A LOT OF EFFORT -- I AM GLAD TO SEE THAT EVENTUALLY RESULTED IN CONGRESS ENACTING THE STRONG LEAD TO STUDY -- LEGISLATION. IT WOULD'VE BEEN BETTER IF IT HAD BEEN IN ACTED SOONER. |
| 03:26:24 | Cooper, Jim "James" H. | MISS WATSON. |
| 03:26:28 | Cooper, Jim "James" H. | THANK YOU SO MUCH. I WOULD LIKE TO THINK THE THREE GENTLEMEN -- THINK THE THREE GENTLEMEN FOR THEIR ABILITY TO WITHSTAND THIS EFFORT -- CURRENT BROUGHT TO A QUESTION IN YOUR RESPONSES. MR. COX, A WILL TO START WITH YOU. I WOULD LIKE THE OTHER GENTLEMAN TO RESPOND, TOO. SINCE THE BEGINNING OF THE CURRENT ECONOMIC CRISIS, IF YOU HAVE COME UP WITH A NUMBER OF SECTIONS -- SUGGESTIONS IN ORDER TO PROPERLY OVERSEE THE AMERICAN FINANCIAL MARKETS. IT WITH ALL CLARITY CAN RESPOND TO THIS, AND I WOULD LIKE THE OTHERS COME AT YOU BELIEVE -- WHAT ROLE SHOULD THE FEDERAL GOVERNMENT PLAY IN THE U.S. ECONOMY, IN LIGHT OF OUR CURRENT ECONOMIC CRISIS? |
| 03:27:24 | Cooper, Jim "James" H. | THANK YOU, CONGRESSWOMAN. FIRST, THE ANSWER IS YES, AND STRONGLY. I BELIEVE IN REGULATION AND THE FINANCIAL MARKETS. THAT IS WHY I HAVE SERVED AS THE CHAIRMAN OF THE SECURITIES AND EXCHANGE COMMISSION. IMBEDDED WITHIN THE DESCRIPTION OF REGULATION OF FINANCIAL MARKETS IS REGULATION AND MARKETS. BOTH ARE GOOD. CONGRESS SARBANES ANALOGIZE TO DRIVING, THE RULES OF THE ROAD. IT IS VITALLY IMPORTANT FOR MARKETS THAT THERE ARE RULES OF THE ROAD. THAT THERE -- IT WOULD BE DIFFICULT TO GET PEOPLE TO PART WITH THEIR MONEY UNLESS THEY WERE CONFIDENT THAT THEY COULD PUT -- |
| 03:28:07 | Cooper, Jim "James" H. | WHO SHOULD BE INVOLVED IN FORMULATING THOSE RULES? |
| 03:28:13 | Cooper, Jim "James" H. | CLEARLY, THE CONGRESS, FIRST AND FOREMOST, NEEDS TO DESCRIBE THE ARCHITECTURE, AND RULEMAKING HAS BEEN DEVISED AT CONGRESS'S WAY -- THAT IS THE SOUND SYSTEM. WITH RESPECT TO THE SECOND PART OF YOUR QUESTION, THE ROLE OF THE GOVERNMENT IN THE ECONOMY, THAT IS THE MARKET'S PART. IT IS VITALLY IMPORTANT THAT WE NEVER FAIL TO APPRECIATE HOW POWERFUL A MEANS OF WISDOM MARKETS CAN BE IN ALLOCATING SCARCE RESOURCES IN A NATION OF 300 MILLION PEOPLE AND A WORLD OF 6 BILLION PEOPLE. MARKETS ARE GOING TO GIVE US THE WISDOM OF CROWDS, MAKE DECISIONS THAT A CENTRAL GOVERNMENT CANNOT, WE HAVE BEEN -- SEEN THE |
| 03:29:08 | Cooper, Jim "James" H. | WHAT ADDITIONAL AUTHORITIES WOULD YOU AS SECRETARY NEED OR WHOEVER FOLLOWS YOU, NEED TO DO THE JOB SMARTLY? |
| 03:29:21 | Cooper, Jim "James" H. | FIRST AND FOREMOST CLOSE THE REGULATORY GAPS WITH RESPECT TO INVESTMENT BANK HOLDING COMPANIES, MUNICIPAL SECURITIES, WITH RESPECT TO CREDIT DEFAULT SWAPS. HARMONIZE THE REGULATION OF ECONOMICALLY COMPETITIVE PRODUCTS THAT ARE CURRENTLY RECKED BY THE CFTC AND S.E.C. IF WE FILL THOSE GAPS. |
| 03:29:48 | Cooper, Jim "James" H. | WOULD YOU THEN PUT IN WRITING TO THE COMMITTEE THOSE SPECIFIC ITEMS THAT YOU JUST ITEMIZED. |
| 03:29:56 | Cooper, Jim "James" H. | YES. |
| 03:30:49 | Cooper, Jim "James" H. | MR. GREENSPAN, PLEASE. WE HAVE TO RECOGNIZE THIS IS ALMOST SURELY A ONCE IN A CENTURY PHENOMENON, AND IN THAT REGARD TO REALIZE THAT THE TYPES OF REGULATION THAT WOULD PREVENT THIS FROM HAPPENING IN THE FUTURE ARE SO ONEROUS AS TO BASICALLY SUPPRESS THE GROWTH RATE IN THE ECONOMY AND I THINK THE STANDARDS OF LIVING OF THE AMERICAN PEOPLE. THIS IS THE REALLY MAJOR TRADEOFF PROBLEM THAT GOVERNMENTS HAVE IN THE SENSE THAT WE DO KNOW ON THE BASIS OF HISTORY THAT FREE MARKETS GROW FAR FASTER AND CREATE GREATER WEALTH THAN, SAY, CENTRALLY PLANNED ECONOMIES. |
| 03:31:35 | Cooper, Jim "James" H. | WE KNOW THAT AND I'M SURE YOU ARE VERY EXPERIENCED EXPLAINING THAT. BUT WHO SHOULD THEN FORMULATE THE REGULATIONS? WHERE WOULD THAT LIE? |
| 03:31:51 | Cooper, Jim "James" H. | I HAVE ONE QUESTION. I JUST ASK THAT THEY CAN RESPOND RESPOND. WE HAVE A PERSONAL PROBLEM IN CALIFORNIA, IN LOS ANGELES, MR. COX. YOU MIGHT BE AWARE OF IT. IT IS WITH THE LOS ANGELES COUNTY METROPOLITAN TRANSIT AUTHORITY, M.T.A. AND THE SOUTHLANDS COMMUTER RAIL AGENCY SOLD MOST OF ITS TRAIN CARS AND LOCOMOTIVES IN FOUR LEASEBACK DEALS THREE OF WHICH INVOLVED A.I.G. METROLINK AND THE M.T.A. HAVE TO LOOK FOR ANOTHER FIRM TO REPLACE A.I. GCHLT A.I.G. WHICH PROVIDED $1 BILLION IN LOANS TO FINANCE THE LEASEBACK TRANSACTION. AND THIS IS A DAUNTING TASK CONCERNING THE CURRENT ECONOMIC STATUS. OUTSIDE OF THE FINANCIAL SERVICES INDUSTRY, DO YOU GENTLEMEN FORESEE A WIDE VARIETY OF BANKRUPTCIES THAT INVOLVE SMALL BUSINESSES AND OTHER CORPORATIONS AS A RESULT OF THIS FINANCIAL CRISIS? THANK YOU FOR ALLOWING ME TO FINISH MY QUESTION? |
| 03:33:06 | Cooper, Jim "James" H. | I SECOND THAT STATEMENT. |
| 03:33:19 | Cooper, Jim "James" H. | WE ARE SORRY TO HEAR YOUR ANSWERS, BUT WE APPRECIATE THAT YOU GAVE US AN ANSWER. MRS. MCCULLOUGH. LUM. |
| 03:33:29 | Cooper, Jim "James" H. | A FREE MARKET IS NOT THE SAME THING AS AN UNREGULATED MARKET. THE PRIVATE SECTOR AND THE GOVERNMENT PLAY TWO DIFFERENT BUT VERY CENTRAL GOALS AND OUR ECONOMY. THERE IS A HEALTHY TENSION BETWEEN THE PRIVATE AND PUBLIC INTEREST. THAT IS THE BALANCE THAT YOU WERE REFERRING TO, MR. SNOW. BUT WHEN FINANCIAL REGULATORS TO LET -- DECIDE TO LET THE PRIVATE MARKETS RUN FREE, PUBLIC INTEREST IS LESS -- LEFT DEFENSELESS TO THE GREED OF WALL STREET. MR. SNOW, YOU TALK ABOUT THE IMPORTANCE OF REGULATIONS. YOU GAVE THE LIST OF REGULATORY QUESTIONS YOU WHICH CONGRESS HAD ACTED OUT. I CAN SHOW YOU A PHOTOGRAPH TAKEN IN 2003 OF WHAT YOU WERE IN CHARGE OF THE TREASURY DEPARTMENT. IT INCLUDES SOME OF TREASURIES TOP OFFICIALS, INCLUDING THE DIRECTOR OF THE OFFICE OF BREAST SUPERVISION, THE COMPTROLLER OF CURRENCY, AND IT ALSO INCLUDES REPRESENTATIVES OF THE BANKING INDUSTRY. THIS TOTAL WAS TAKING AT A PRESS CONFERENCE TO ANNOUNCE A NEW INITIATIVE TO LIMIT REGULATIONS ON BANKS. THERE THEY ARE, STANDING HAPPILY, DESTROYING A STALL -- A TALL STACK OF FEDERAL RULES. I THINK IT'S TELLING THAT YOU'RE NOT USING A SISTER OR EVEN IN IRAN PAPER SHREDDER, THEY ARE USING A CHAIN SAW. NOT MUCH NEW ONCE THERE, MR. SNOW. -- NOT MUCH NUANCE, MR. SNOW. IT WAS A CLEAR MESSAGE TO THE MARKET. WHAT MESSAGE DOES THIS PHOTOGRAPH CONVEY ABOUT REGULATION AND THE TREASURY DEPARTMENT WHEN YOU WERE THE HEAD OF THAT? HOW DO YOU INTERPRET THE SPOTO? -- PHOTO? |
| 03:35:22 | Cooper, Jim "James" H. | I DON'T SEE MYSELF IN THAT PHOTOGRAPH. MAYBE I AM IN THERE OR MAYBE MY EYESIGHT HAS FAILED ME. |
| 03:35:29 | Cooper, Jim "James" H. | I DID NOT SAY THAT YOU WERE IN THE CODA. YOU'RE THE HEAD OF TREASURY. THESE ARE PEOPLE WHO ARE HIGHLY PRAISED TREASURY OFFICIALS. |
| 03:35:41 | Cooper, Jim "James" H. | I HAVE NO KNOWLEDGE OF WHAT THAT THE SHOW IS ABOUT OR WHAT THOSE SMILING PEOPLE CELEBRATING. |
| 03:35:47 | Cooper, Jim "James" H. | AT THE TIME THAT YOU WERE IN CHARGE OF THE TREASURY DEPARTMENT, YOU WERE UNAWARE OF THIS MASSIVE DEREGULATION. REGULATE REGULATE |
| 03:35:58 | Cooper, Jim "James" H. | I'M UNAWARE OF ANY MASSIVE DE REGULATION CUTTING THE BANKING INDUSTRY. |
| 03:36:04 | Cooper, Jim "James" H. | TAKING A CHAINSAW TO THE BANKING REGULATIONS WAS JUST BEGINNING. TWO MONTHS AFTER THIS PRESS CONFERENCE THE OFFICER OF COMPTROLLER ISSUED A RULE THAT PREVENTED STATES FROM BANNING PREDATORY LENDING. YOUR TREASURY DEPARTMENT DIDN'T AGENT TO PREVENT THIS CRISIS. IN FACT YOUR DEPARTMENT BLOCKED THE STATES FROM PROTECTING THEIR CITIZENS. IS THAT CORRECT, YES OR NO. |
| 03:36:25 | Cooper, Jim "James" H. | I THINK THAT IS FALSE. |
| 03:36:40 | Cooper, Jim "James" H. | I DON'T THINK THE TREASURY DEPARTMENT LOBBIED ON THAT MATTER. THIS WAS AN ACTION, AS I RECALL IT, TAKEN BY THE O.C.C. AND UNDER LAWS ESTABLISHED BY THE CONGRESS THE O.C.C. ON REGULATORY MATTERS IS ENTIRELY INDEPENDENT OF THE TREASURY DEPARTMENT. |
| 03:37:00 | Cooper, Jim "James" H. | DO YOU THINK THAT A LAW SHOULD HAVE BEEN PUT IN PLACE THAT WOULD HAVE ALLOWED STATES WHO WANTED TO PROTECT THEIR CITIZENS FROM PREDATORY LENDING, DO YOU THINK THAT LAW SHOULD HAVE BEEN ALLOWED TO MOVE FORWARD FOR STATES TO HAVE CONTROL OVER THAT? |
| 03:37:15 | Cooper, Jim "James" H. | I THINK AN AWFUL LOT DEPENDS ON THE CIRCUMSTANCES AND PARTICULARS -- |
| 03:37:19 | Cooper, Jim "James" H. | I'M A FORMER STATE REPRESENTATIVE. YES OR NO. |
| 03:37:22 | Cooper, Jim "James" H. | I WOULD HAVE TO SEE THE LAW. I'M NOT GOING TO GIVE A BLANKET ANSWER UNLESS I KNOW WHAT THE PROPOSAL S. |
| 03:37:30 | Cooper, Jim "James" H. | CHAIRMAN COX I HAVE TO AGREE YOUR STATEMENT. YOU SAID IT MADE IT CLEAR VOLUNTARY REGULATION DOESN'T WORK AND I HAVE HEARD DR. GREENSPAN REFER TO THE FACT THAT WHAT HE THOUGHT THE MARKET WOULD REGULATE TO PROTECT INVESTORS DIDN'T REGULATE. I'M PARAPHRASING FROM YOUR EARLIER STATEMENT. ONE OF THE LESSONS FROM THIS FINANCIAL CRISIS IS THAT OVER THE LONG TERM VOLUNTARY REGULATION IS REALLY TO REGULATION AT ALL. WE SAW THAT AT LEHMAN BROTHERS, A.I.G. AND THE CREDIT RATING AGENCIES THAT TESTIFIED YESTERDAY. UNREGULATED MARKETS AND VOLUNTARY REGULATION WAS A FAILED ENVIRONMENT. IT IS AN IDEOLOGICAL APPROACH TO GOVERNMENT THAT IS ERASING HARD EARNED RETIREMENT SAVINGS OF MILLIONS OF AMERICANS. IF WE NEED AN IDENTIFY IDEOLOGICAL, A PHILOSOPHY TO GOVERN AS MR. GREENSPAN SUGGESTED I WOULD SUGGEST WE GIVE PRAGMATISM A TRY AND GIVE COMMON SENSE A TRY. THANK YOU, MR. CHAIRMAN. |
| 03:41:46 | Cooper, Jim "James" H. | WELL, IT DID ONE THING THAT I THOUGHT WAS IMPORTANT, NAMELY TO PUT THE RESPONSIBILITY FOR THE ACCOUNTING SYSTEM ON -- MAKE IT RESPONSIBLE FOR THE CHIEF EXECUTIVE OFFICER. BECAUSE AS WE HAVE ALL LEARNED IN -- |
| 03:42:02 | Cooper, Jim "James" H. | THAT IS THE FIRST ONE. ANY OTHER BENEFIT? |
| 03:42:07 | Cooper, Jim "James" H. | I'M HARD-PRESSED TO FIND ANY OTHER ONES. |
| 03:42:53 | Cooper, Jim "James" H. | THERE IS NO GOOD REASON FOR THAT. I HAVE CONSISTENTLY URGED -- |
| 03:42:59 | Cooper, Jim "James" H. | THE REASON IT IS NOT HAPPENING IS CONGRESS DO NOT WANT TO PUT THEM UNDER IN. THAT IS THE CHALLENGE THAT WE HAVE. NOW, WE ALSO, MR. SNOW, YOU ADVOCATED THAT THEY BE, HAVE A STRONGER REGULATOR. WE HAVE FINALLY DONE IT BUT YOU WENT DAY IN AND DAY OUT, MR. COX YOU DID AND MR. GREENSPAN YOU KITTED THEY HAVE A BETTER REGULATOR. AND MY UNDERSTANDING IS THAT THE HOUSING MARKET, THE SUBPRIME, GOT US INTO THIS MELTDOWN. NOW, THE CRITICISM OF YOU, MR. GREENSPAN AND I WOULD LOVE TO HEAR YOUR COMMENT IS, THAT WHEN WE HAD THE DOT COM CRASH YOU FELT WE NEEDED EASY MONEY TO GET OUT AND YOU KEPT EASY MONEY AFTER WE WERE OUT OF IT. AND SOME OF MY CONSTITUENTS SAID THAT LED TO DUMB LENDING AND DUMB BORROWING. AND THEY SAID IT WAS NOT JUST DUMB LENDING TO INDIVIDUALS BUYING HOMES, PEOPLE BUYING HOMES THEY COULD NOT AFFORD, BUT IT WAS THE BIG FINANCIAL HOUSES, LEHMAN, BEAR STEARNS, MORGAN STANLEY, MERRILL LYNCH, GOLDMAN SACHS, ALL MAKING THESE BIG DEALS WITH HUGE LEVERAGING, GETTING PEOPLE TO BUY BUSINESSES THAT THEY FRANKLY WERE HAVING EXTRAORDINARY DEBT. AND I'M JUST WONDERING WITH HINDSIGHT IF YOU WOULD HAVE MAYBE PUSHED THE RATES UP A LITTLE HIGHER A LITTLE SOONER. |
| 03:46:30 | Cooper, Jim "James" H. | THANK YOU. MR. COX, I WOULD LIKE YOU TO HAVE THE OPPORTUNITY TO RESPOND TO CRITICISM THAT SAID IN 2004 THE S.E.C. ALLOWED LEHMAN BROTHERS, BEAR STEARNS, MORGAN STANLEY, MERRILL LYNCH, GOLDMAN SACHS TO LEVERAGE AT 30-IS1 AND EVEN HIGHER FROM THE PRACTICE OF 12-1 TO 15-1. I WOULD LOVE TO HEAR YOUR ANSWER. |
| 03:48:12 | Cooper, Jim "James" H. | MR. LYNCH. |
| 03:48:14 | Cooper, Jim "James" H. | MR. CHAIRMAN, IN THE INTEREST TIME I WOULD ASK UNANIMOUS CONSENT THAT I SUBMIT FOR THE RECORD THIS IS A SPEECH ACTUALLY AN ARTICLE BY HARVEY PITT FORMER S.E.C. CHAIRMAN IN COMPLIANCE WEEK FROM JUNE 24, 2008 AND ALSO ANOTHER ARTICLE A PIECE A REPORT BY MARK JIKKLING FOR CONGRESS ENTITLED "AVERTING FINANCIAL CRISIS CRISIS" DATED OCTOBER 8, 2008. |
| 03:52:09 | Cooper, Jim "James" H. | I THINK YOU ARE GOING TO FIND, CONGRESSMAN, THAT MANY OF THOSE COMPLEX DIFSERIVATIVES ARE GONE NEVER TO BE SEEN AGAIN. |
| 03:52:21 | Cooper, Jim "James" H. | I WISH I COULD BELIEVE THAT. BUT WE HAVE SHORT MEMORIES AROUND HERE. AND AS SOON AS THE CRISIS IS OVER THERE IS GOOD MONEY BEING MADE ON THOSE AND SO THERE'S AN INCENTIVE THERE TO PUSH THEM OUT INTO THE MARKET. SO I WISH I COULD BELIEVE THAT YOU ARE RIGHT THAT THESE THINGS WON'T COME BACK, BUT I WANT TO MAKE SURE. BECAUSE IT WILL BE TO THE CONGRESS'S DETRIMENT AS WELL AS THE FINANCIAL INDUSTRY IF THESE THINGS DO COME BACK OR WE HAVE ANOTHER FAILURE LIKE RIGHT NOW. |
| 03:52:50 | Cooper, Jim "James" H. | WELL, I CERTAINLY HAVE NO OBJECTION TO REGULATING THOSE INSTRUMENTS INSTRUMENTS. STRUCTURED INVESTMENT VEHICLES, FOR EXAMPLE, MY PUZZLEMENT IS WHO WAS BUYING THOSE THINGS. AND IF YOU ARE GOING TO TELL ME THAT THERE ARE A LOT OF INSTRUMENTS OUT THERE WHICH MAKE NO SENSE, I AGREE WITH YOU. |
| 03:53:14 | Cooper, Jim "James" H. | INTERESTINGLY ENOUGH, 72% WERE HELD BY HEMDGE FUNDS, THE SMARTEST PEOPLE IN THE ROOM. |
| 03:53:22 | Cooper, Jim "James" H. | THAT IS WHAT I FIND MOST DISTURBING. WE ARE NOT DEALING WITH PEOPLE WHO ARE DUMB. WE ARE DEALING WITH BY FAR THE MOST SOPHISTICATED, THOUGHTFUL PEOPLE ABOUT THE WAY MARKETS WORK WHO CREATED THE MAJOR PROBLEMS. |
| 03:53:37 | Cooper, Jim "James" H. | MR. CHAIRMAN, COULD I GIVE THE OTHER TWO WITNESSES A CRACK AT THAT? |
| 03:53:46 | Cooper, Jim "James" H. | CERTAINLY, IF THEY WISH TO. |
| 03:55:38 | Cooper, Jim "James" H. | I THOUGHT YOUR STATEMENT WAS A VERY COHERENT AND LUCID DESCRIPTION OF THE PROBLEM IN THE BANKING SYSTEM TODAY. IT IS GUMMED UP. I THINK THAFRMGS YOUR WORD. WITH ALL OF THIS PAPER THAT IS HARD TO GET PRICE DISCOVERY ON. YOU CAN'T FIND OUT WHAT THE DARN STUFF IS WORTH BECAUSE IT IS SO OPAQUE AND THE BANKS DON'T TRUST EACH OTHER'S BALANCE SHEETS. AND YOU CAN PUT LIQUIDITY AND CAPITAL IN WHICH HAS BEEN DOINGNE, BUT UNLESS YOU CLEAR UP THIS COMPLEXITY AND UNLESS PEOPLE TRUST EACH OTHER'S BALANCE SHEETS AND THE PAPER ON THEM THEY ARE PRETTY DARN DISINCLINED. IT CALLED RISK AVERSION. THEY ARE RISK AVERSE WITH YOUR COUNTERPARTY. I THINK AS LONG AS THIS CONTINUES AND UNTIL WE GET THE PRICE DISCOVERY, OVERCOME THE RISK AVERSION WE ARE GOING TO HAVE THE FROZEN CREDIT MARKETS WHICH IS WHY I HAVE BEEN ARGUING WE TAKE A PAGE FROM THE BOOK OF THE BRITS WHO HAVE NOT ONLY DONE LIQUIDITY AND CAPITAL BUT PUT IN PLACE INTERBANK LENDING GUARANTEES SO THE BANKS WILL START LENDING TO EACH OTHER. NOW, DO IT FOR SOME PERIOD OF TIME BUT WE HAVE TO UNFREEZE THIS FROZEN MASS OF BAD PAPER IN THE SYSTEM AND GET IT DISGORGED AND OUT OF THE SYSTEM. BUT IN THE INTERIM, WHILE THE DISGORGING AND PRICE DISCOVERY GOES ON IT SEEMS IT WOULD MAKE SENSE FOR US TO MOVE TOWARD INTER BANK INTERBANK GUARANTEES SO THE BANKS WILL START LENDING AGAIN AND OVERCOME THE RISK AVERSION THAT THEY SEE IN ALL OF THEIR COUNTERPARTIES. |
| 03:58:56 | Cooper, Jim "James" H. | ALL THOSE IN FAVOR OF REPORTING THE TWO REPORTS VOTING TO ACCEPT THE TWO REPORTS WILL |
| 03:59:00 | Cooper, Jim "James" H. | YEA. |
| 03:59:01 | Cooper, Jim "James" H. | OPPOSED. |
| 03:59:02 | Cooper, Jim "James" H. | NO. |
| 03:59:04 | Cooper, Jim "James" H. | THE AYES HAVE IT AND THE REPORTS ARE AGREED TO. THAT CONCLUDES THE BUSINESS MEETING AS WELL. [CAPTIONS COPYRIGHT NATIONAL CABLE SATELLITE CORP. 2008] [CAPTIONING PERFORMED BY NATIONAL CAPTIONING INSTITUTE] . |
| 00:00:06 | Cooper, Jim "James" H. | YESTERDAY, THE HOUSE OVERSIGHT COMMITTEE HELD A PUBLIC HEARING ON THE ECONOMY AND HEARD TESTIMONY FROM ALAN GREENSPAN, CHRIS COX, AND JOHN SNOW. HENRY WAXMAN OF CALIFORNIA CHAIRS THIS FOUR HOUR HEARING. |
| 00:00:10 | Cooper, Jim "James" H. | COMMITTEE WILL PLEASE COME TO ORDER. TODAY IS OUR FOURTH HEARING INTO THE ONGOING FINANCIAL CRISIS. OUR PREVIOUS THREE HEARINGS FOCUSED ON THE PRIVATE SECTOR. OUR FIRST HEARING TO EXAMINE THE BANKRUPTCY OF LEHMAN BROTHERS. WE LEARNED THAT THIS INVESTMENT BANK FAILED AFTER IT MADE HIGHLY LEVERAGED INVESTMENTS THAT PLUMMETED IN VALUE. SHELL AL |
| 00:01:19 | Cooper, Jim "James" H. | IN EACH CASE CORPORATE EXCESS AND GREED AND RICH COMPANY EXECUTIVES AT ENORMOUS COST TO SHAREHOLDERS AND OUR ECONOMY. IN EACH CASE THE ABUSES COULD HAVE BEEN PREVENTED IF FEDERAL REGULATORS HAD PAID MORE ATTENTION AND INTERVENED WITH RESPONSIBLE REGULATIONS. THIS BRINGS US TO TODAY AES'S HEARING. OUR FOCUS TODAY IS THE ACTIONS AND INACTION OF FEDERAL REGULATORS. FOR TOO LONG THE PREVAILING ATTITUDE IN WASHINGTON HAS BEEN THAT THE MARKET ALWAYS KNOWS BEST BEST. THE FEDERAL RESERVE HAD THE AUTHORITY TO STOP THE IRRESPONSIBLE LENDING PRACTICES THAT FUELED THE SUBPRIME MARKET BUT ITS LONGTIME CHAIRMAN ALAN GREENSPAN REJECTED PLEAS THAT HE INTERVENE. THE S.E.C. HAD AUTHORITY TO INSIST ON TIGHTER STANDARDS FOR CREDIT RATING AGENCIES, BUT IT DID NOTHING DESPITE URGINGS FROM CONGRESS. THE TREASURY DEPARTMENT COULD HAVE LED THE CHARGE FOR RESPONSIBLE OVERSIGHT OF FINANCIAL DERIVATIVES. INSTEAD, IT JOINED THE OPPOSITION. THE LIST OF REGULATORY MISTAKES AND MISJUDGMENTS IS LONG AND THE COST TO TAXPAYERS AND OUR ECONOMY IS STAGGERING. THE S.E.C. RELAXED LEVERAGE STANDARDS ON WALL STREET. THE OFFICES OF THRIFT SUPERVISION AND CONTROLLER OF THE CURRENCY PREEMPTED STATE EFFORTS TO PROTECT HOME BUYERS FROM PREDATORY LENDING. AND THE JUSTICE DEPARTMENT SLASHED ITS EFFORTS TO PROSECUTE WHITE COLLAR FRAUD. CONGRESS IS NOT EXEMPT FROM RESPONSIBILITY. WE PASSED LEGISLATION IN 2000 THAT EXEMPTED FINANCIAL DIFFICULT DERIVATIVES FROM REGULATION AND TOO LONG TOOK TOOK TO GO TO PASS LEGISLATION STRENGTHENING OVERSIGHT OF FANNIE MAE AND FREDDIE MAC. OVER AND OVER AGAIN IDEOLOGY TRUMPED GOVERNANCE. OUR REGULATE FORCEORS BECAME ENABLERS RATHER THAN ENFORCERS. THEIR TRUST IN THE WISDOM OF THE MARKET WAS INFINITE. THE MANTRA BECAME GOVERNMENT REGULATION IS WRONG, THE MARKET IS INFALLIBLE. OUR FOCUS TODAY IS FINANCIAL REGULATION REGULATION, BUT THIS DEREGULATORY PHILOSOPHY SPREADS ACROSS GOVERNMENT. IT EXPLAINS WHY LEAD GOT INTO OUR CHILDREN'S TOYS AND WHY EVACUEES FROM HURRICANE KATRINA WERE HOUSED IN TRAILERS FILLED WITH FORMALDEHYDE. TODAY WE WILL ASK OUR WITNESSES HARD QUESTIONS ABOUT THE REGULATORY DECISIONS THEY MADE AND FAILED TO MAKE. BUT I WANT THEM TO KNOW I VALUE THEIR PUBLIC SERVICE AND THEIR COOPERATION WITH THE COMMITTEE. OUR COMMITTEE HAS STAYED BUSY IN RECENT WEEKS AS WE HAVE HELD HEARINGS ON THE FINANCIAL CRISIS AND I PT TOWANT TO HAVE ALL THE MEMBERS TO KNOW HOW I APPRECIATE THEIR INVOLVEMENT IN THESE HEARINGS. IT IS NOT EASY TO TRAVEL TO WASHINGTON WHEN CONGRESS IS OUT OF SESSION, ESPECIALLY WITH AN ELECTION LOOMING. BUT THE ISSUES WE ARE EXAMINING ARE OF IMMENSE IMPORTANCE TO OUR NATION AND I'M PROUD OF THE WORK WE ARE DOING AND ESPECIALLY THE CONTRIBUTION OF MEMBERS OF THE COMMITTEE. MR. DAVIS, I WANT TO RECOGNIZE YOU. |
| 00:04:50 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN. YESTERDAY I AGREED WITH YOUR OPENING STATEMENT AND ASSOCIATED MYSELF WITH IT. TODAY I'M IN DISAGREEMENT WITH MUCH OF WHAT YOU HAVE TO SAY. OF ALL THE HEARINGS WE HAVE HAD SO FAR ON THE CAUSES AN EFFECTS OF THE ECONOMIC CRISIS I THINK TODAY'S TESTIMONY AND DISCUSSION GIVE US THE OPPORTUNITY TO TALK FOR THE FIRST TIME ABOUT THE SYSTEMS AN SYSTEMS AND STRUCTURES MEANT TO MAINTAIN STABILITY AN ROOT OUT ABUSIVE PRACTICES. I HOPE IT PANEL WILL HELP US CUT TO THE CORE OF THE FINANCIAL PROBLEMS WE HAVE 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. BY THE WAY, THESE WERE AREAS WHERE WE DID TRY TO REGULATE IN ON OUR SIDE AND WERE STOPPED ON THE OTHER SIDE OF THE AISLE FROM BRINGING IN REGULATION EARLIER. THE EARLIER HEARINGS FOCUSED ON IMPORTANT BUT TANGENTIAL ISSUES. EXECUTIVE COMPENSATION, FLAWED CREDIT RATE ARES AND COST OF CORPORATE RETREATS. NO ONE IS MINIMIZING IT AND WE SHARE THE OUTRAGE OF MOST AMERICANS AT THE GREED THAT BRIANED WALL STREET TO ITS CIVIC DUTY TO PROTECT MAIN STREET BUT WE CAN TAKE A BROADER LOOK AT PATCH WORK OF FEDERAL REGULATORS AFTER EACH CRISIS AND ARTIFICIALLY SUBDIVIDED BEHIND CONGRESS'S WALLS. NO SINGLE AGENCY BY ACTION OR OMISSION CAUSED THIS CHRISTRISIS AND NO AGENCY CAN PREPARE THE NEXT. |
| 00:06:39 | Cooper, Jim "James" H. | IT WAS NOT DEREGULATION IT WAS THE MISHMASH OF REGULATION AND REGULATORS EACH WITH TOO NARROW A VIEW OF NATIONAL AND GLOBAL MARKETS. THE WORDS REGULATION AND DEREGULATION ARE NOT ABSOLUTE GOODS AND EVILS NOR ARE THEY MEANINGFUL POLICY PRESCRIPTIONS. THE STRUCTURE OF THE MARKETS HAS MADE CREATING A SYSTEM A PERENNIAL AND BIPARTISAN CHALLENGE. AFTER THE 1933 COMMERCIAL BANK FAILURES THE ACT SEPARATED INVESTMENT AND COMMERCIAL BANKING ACTIVITIES AND ESTABLISHED THE FDIC RESTORING PUBLIC CONFIDENCE IN THE BANKING SYSTEM. BY 1999 THE MARKETPLACE HAD OUTGROWN THE RULES AND LED THE CONGRESS AND DEMOCRATIC PRESIDENT TO ADOPT THE ACT REPEALING THE 1933 ACT ALLOWING BANKS TO DIVERSIFY. THAT WAS NOT DEREGULATION FOR DEREGULATION'S SAKE. THE ACTIVITIES WERE SEEP BY MANY AS REDUCING RISK FOR BANKS THROUGH DIVERSIFICATION AND ALLOWING THEM TO COMPETE IN A RAPIDLY GLOBALIZING MARKETPLACE. WHEN ENRON AND OTHER SCANDALS ERUPTED CONGRESS RESPONDED WITH SARBANES-OXLEY PUTTING NEW REGULATIONS ON PUBLIC COMPANIES. THE BIPARTISAN BAND-AID APPROACH CONTINUED. IN THE PAST FEW YEARS THE MARKET CHANGED AGAIN. NEW SECURITIES WERE CREATED AND TRADED AND ANALOG GOVERNMENT WAS OUT OF SYNC WITH THE DIGITAL WORLD. WHILE REGULATORS PUSHED PAPER THEY MOVED MONEY AROUND THE GLOBE AT THE SPEED OF LIGHT. FREE MARKETS ARE CONSTANTLY EVOLVING. REGULATORS BY LAW BUREACRATIC CUSTOM OR JUST BAD HABIT TEND TO REMAIN STAT TK. MODERNIZATION OF 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 VOICE SOME LEVEL OF ALARM ABOUT DANGERS TO THE TOTAL FINANCIAL SYSTEM POSED BY HYPERACTIVE SUBPRIME LENDING AND ITS HIGH YIELD PROJECT ANY. DERIVATIVES AND OTHER EXOTIC AND UNREGULATED MORTGAGE-BACKED INSTRUMENTS. SOME OF THEM WERE DESIGNED TO SLIP BETWEEN EXISTING REGULATORY DEFINITIONS. IS A CREDIT DEFAULT SWAP AN INVESTMENT VEHICLE OR INSURANCE AGREEMENT? SHOULD THEY BE CONSIDERED FUTURES CONTRACTS OR SECURITIES UNDER THE PURVIEW OF THE S.E.C.? TODAY EAST 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 CONSENTS OFINCENTIVES BASED ON TRANSPARENCY AND GOOD FAITH. MR. GREENSPAN, MR. SNOW, MR. COX, I HOPE YOU WILL US YOUR THOUGHTS ON THE CORE ISSUES THAT LED TO THE CRISIS AND MORE IMPORTANTLY YOUR IDEAS ON A FRAMEWORK FOR THE LEAN BUT SUPPLE REGULATORY APPROACH THAT CAN DETECT AND PROTECT THE IRRATIONAL EXUBERANCE OVER THE TOP RISK TAKING AND CONSEQUENT COLLAPSE THAT INFLICTS SUCH DAMAGE TO OUR ECONOMIC LIFE. IN THIS POLITICAL SEASON THE SEARCH FOR VILLAINS IS UNDERSTANDABLE AND IN SOME RESPECTS HEALTHIMENT WE MIGHT ASK OURSELVES WHY THE CONGRESS DIDN'T CONVENE THE HARGS LAST MARCH MARCH. THERE IS PLENTY OF BLAME TO GO AROUND ADD OF AS WE TRY TO UNWIND THE PEOPLE, PRIVATE COMPANIES, GOVERNMENT AGENCIES AND MARKET FORCES THAT IS CHOKING MODERN CAPITALISM. WE HAVE ALL PLAYED A PART IN THIS CRISIS AND HOPEFULLY WE HAVE ALL LEARNED INVALUABLE LESSONS. RETRIBUTION NEEDS TO BE TEMPERED BY WISDOM. THERE IS THE TAIL ABOUT ANDREW AR NEGLECT GUARANTY. ONE OF HIS LAWYERS MADE A MAKE DRAFTING A CONTRACT THAT COST HIM $100,000. WHEN HE WAS ASKED WHY HE DIDN'T FIRE THE ATTORNEY, HE SAID WELL, I JUST SPENT $100,000 TRAINING HIM. WE ARE LEARNING EXPENSIVE LESSONS AND HOPEFULLY WE WILL PUT THEM TO GOOD USE. |
| 00:10:50 | Cooper, Jim "James" H. | WHAT REASON DOES -- |
| 00:10:53 | Cooper, Jim "James" H. | I HAVE A UNANIMOUS CONSENT REQUEST. MR. CHAIRMAN, I WOULD LIKE TO SUBMIT FOR THE RECORD AND ALSO DISTRIBUTE TO THE MEMBERS A COPY OF A LETTER WHICH IS SIGNED BY MYSELF IN FACT ALL MEMBERS THAT ARE HERE TODAY ON OUR SIDE OF THE AISLE AND OTHER LEADERS IN CONGRESS REQUESTING THE ATTORNEY GENERAL OF THE UNITED STATES APPOINT A GENERAL COUNSEL, A SPECIAL PROSECUTOR, AS YOU WILL -- |
| 00:11:25 | Cooper, Jim "James" H. | UNANIMOUS CONSENT IS TO PUT THE DOCUMENT IN THE RECORD IS THERE ANY OBJECTION -- IS THERE ANY OBJECTION? BECAUSE YOU ARE NOT RECOGNIZED FOR A SPEECH. |
| 00:11:35 | Cooper, Jim "James" H. | I JUST WANT TO EXPLAIN THAT THIS HEARING IS BEING HIJACKED -- |
| 00:11:40 | Cooper, Jim "James" H. | I BELIEVE THERE IS OBJECTION AND THE GENTLEMAN IS NO LONGER RECOGNIZED. WE HAVE BEFORE US NOW -- |
| 00:11:47 | Cooper, Jim "James" H. | A DISCUSSION OF FANNIE MAE AND FREDDIE MAC. |
| 00:11:50 | Cooper, Jim "James" H. | THE GENTLEMAN WILL HAVE TO CEASE THE COMMENT SO WE CAN GO FORWARD WITH OUR -- |
| 00:11:54 | Cooper, Jim "James" H. | THANK YOU FOR SUCCESSFULLY PUTTING THAT OFF. |
| 00:11:58 | Cooper, Jim "James" H. | WE ARE PLEASED TO WELCOME FOR OUR HEARING TODAY THREE VERY DISTINGUISHED WITNESSES. ALAN GREENSPAN FORMER CHAIRMAN OF THE FEDERAL RESERVE BOARD. DR. GREENSPAN SERVED AS CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM FOR 18 YEARS UNDER PRESIDENT FORD. DR. GREENSPAN WAS THE CHAIRMAN OF THE PRESIDENT'S COUNCIL OF ECONOMIC ADVISORS. HE ALSO SERVED AS CHAIRMAN OF THE NATIONAL COMMISSION ON SOCIAL SECURITY REFORM AND THE ECONOMIC POLICY ADVISORY BOARD UNDER PRESIDENT REAGAN. HE CURRENTLY SERVES AS PRESIDENT OF GREENSPAN ASSOCIATES LLC. CHRISTOPHER COX CHAIRMAN OF THE SECURITIES SECURITIES AND EXCHANGE COMMISSION. HE IS CURRENTLY THE CHAIRMAN OF THE S.E.C. HE WAS SWORN IN ON AUGUST 3, 2005. MR. COX WAS A MEMBER OF CONGRESS FOR 17 YEARS SERVING IN THE MAJORITY LEADERSHIP OF THE U.S. HOUSE OF REPRESENTATIVES UNDER PRESIDENT REAGAN SERVING AS A SENIOR ASSOCIATE COUNSEL IN THE WHITE HOUSE. JOHN SNOW FORMER SECRETARY OF THE TREASURY. MR. SNOW IS THE FORMER SECRETARY OF THE TREASURY UNDER PRESIDENT BUSH. MR. SNOW SERVED FOR THREE YEARS IN THAT POSITION AND WORKED CLOSELY WITH THE WHITE HOUSE ON A BROAD PORTFOLIO OF ECONOMIC POLICY ISSUES. PRIOR TO BECOMING TREASURY SECRETARY MR. SNOW SERVED AS CHAIRMAN AND C.E.O. OF C.S.X. CORPORATION. MR. SNOW ALSO SERVED AS A DEPARTMENT OF TRANSPORTATION -- SERVED AT THE DEPARTMENT OF TRANSPORTATION DURING BOTH THE NIXON AND FORD ADMINISTRATIONS. WE ARE PLEASED TO WELCOME THE THREE OF YOU TODAY. YOUR TESTIMONY WILL BE IN THE RECORD IN ITS ENTIRETY. IT IS THE PRACTICE OF THIS COMMITTEE THAT ALL WITNESSES TESTIFY BEFORE US DO SO UNDER OATH TOSO I WOULD LIKE TO ASK YOU TO STAND AND RAISE YOUR RIGHT HANDS. DO YOU SOLEMNLY SWEAR THE TESTIMONY YOU WILL GIVE BEFORE THE COMMITTEE WILL BE THE TRUTH, THE WHOLE TRUTH AND NOTHING BUT THE TRUTH. THE RECORD WILL INDICATE THAT EACH OF THE WITNESSES ANSWERED IN THE AFFIRMATIVE. WE ARE HERE TODAY IN THIS HEARING TO HEAR FROM YOU AND TO BE ABLE TO QUESTION YOU. AND I PTWANT TO THANK EACH OF YOU FOR COMING BECAUSE YOU HAVE AN ENORMOUS AMOUNT TO CONTRIBUTE TO OUR UNDERSTANDING OF THE FINANCIAL MESS THAT WE ARE IN NOW AND TO GIVE US IDEAS OF WHERE WE GO FOR THE FUTURE. AS I SAID, YOUR PREPARED STATEMENTS WILL BE IN THE RECORD IN FULL. I'M GOING TO RECOGNIZE EACH OF YOU. WE ORDINARILY ASK THAT ORAL PRESENTATIONS BE NO MORE THAN FIVE MINUTES. WE WILL KEEP A CLOCK BUT WE WILL NOT ENFORCE THAT FIVE MINUTES RIGOROUSLY. BUT WE DO WANT THAT CLOCK TO BE THERE TO INFORM YOU THAT THE GREEN LIGHT IS ON FOR FOUR MINUTES, THE ORANGE LIGHT MEANS THERE'S ONE MINUTE, WHEN THE RED LIGHT IS ON THE FIVE MINUTES HAS EXPIRED. AND IF YOU ARE MINDFUL OF THAT FACT YOU MIGHT THEN CONTEMPLATE WINDING DOWN. BUT WE WILL NOT INTERRUPT ANY OF THE WITNESSES' PRESENTATIONS BECAUSE WHAT YOU HAVE TO SAY IS SO VERY IMPORTANT AND YOU ARE THE ONLY THREE WITNESSES WE HAVE FOR TODAY'S HEARING. DR. GREENSPAN, WE WANT TO START WITH YOU. THERE IS A BUTTON ON THE BASE@@@@ & @@ LITTLE CLOSER, MR. GREENSPAN? THANK YOU. |
| 00:16:04 | Cooper, Jim "James" H. | THANK YOU FOR THIS OPPORTUNITY TO TESTIFY BEFORE YOU THIS MORNING. WE ARE IN THE MIDST OF A ONCE IN A CENTURY CREDIT TSUNAMI. CENTRAL BANKS AND GOVERNMENTS ARE BEING REQUIRED TO TAKE UNPRECEDENTED MEASURES. YOU, IMPORTANTLY, REPRESENT THOSE ON WHOSE BEHALF ECONOMIC POLICY IS MADE. THOSE WHO ARE FEELING THE BRUNT OF THE CRISIS IN THEIR WORKPLACES AN HOMES. I HOPE TO ADDRESS THEIR CONCERNS TODAY. THIS MORNING I WOULD LIKE TO PROVIDE MY VIEWS ON THE SOURCES OF THE CRISIS, WHAT POLICIES CAN BEST ADDRESS THE FINANCIAL CRISIS GOING FORWARD, AND HOW I EXPECT THE ECONOMY TO PERFORM IN THE NEAR AND LONGER TERM. I ALSO WANT TO DISCUSS HOW MY THINKING HAS EVOLVED AND WHAT I HAVE LEARNED THIS PAST YEAR. IN 2005, I RAISED CONCERNS THAT THE PROTRACTED PERIOD OF UNDERPRICING OF RISK, IF HISTORY WAS ANY GUIDE, WOULD HAVE DIRE CONSEQUENCES. THE CRISIS, HOWEVER, HAS TURNED OUT TO BE MUCH BROADER THAN ANYTHING I COULD HAVE IMAGINED. IT HAS MORPHED FROM ONE GRIPPED BY LIQUID ITYITY RESTRAINTS TO ONE OF FEARS OF SOLVENCY ARE PARAMOUNT. GIVEN THE FINANCIAL DAMAGE TO DATE, I CANNOT SEE HOW WE CAN AVOID A SIGNIFICANT RISE IN LAYOFFS AND EMPLOYMENT. FEARFUL AMERICAN HOUSEHOLDS ARE ATTEMPTING TO ADJUST AS BEST THEY CAN TO A RAPID CONTRACTION IN CREDIT AVAILABILITY. THREATS TO RETIREMENT FUNDS AND INCREASE JOB INSECURITY. ALL OF THIS IMPLIES A MARKED RETRENCHMENT OF CONSUMER SPENDING AS HOUSEHOLDS TRY TO DIVERT AN INCREASING PART OF THEIR INCOMES TO REEPLENISH DEPLETED ASSETS NOT ONLY IN 401-K'S BUT IN THE VALUE OF THEIR HOMES. A NECESSARY CONDITION FOR THIS CRISIS TO END IS THE STABILIZATION OF HOME PRICES IN THE UNITED STATES. THEY WILL STABILIZE AND CLARIFY THE LEVEL OF EQUITY IN U.S. HOMES HOMES, THE ULTIMATE COLLATERAL SUPPORT FOR THE VALUE OF MUCH OF THE WORLD'S MORTGAGE-BACKED SECURITIES. AT A MINIMUM, STABILIZATION OF HOME PRICES IS STILL MANY MONTHS IN THE FUTURE. WHEN IT ARRIVES THE MARKET FREEZE SHOULD BEGIN TO MEASURABLY THAW AND FRIGHTENED INVESTORS WILL TAKE STEPS TOWARD RE REENGAGEMENT IN RISK. BROKEN MARKET TIES AMONG BANKS, PENSION AND HEDGE FUNDS AND ALL TYPES OF NONFINANCIAL BUSINESSES WILL BECOME RE ESTABLISHEDESTABLISHED AND OUR COMPLEX GLOBAL ECONOMY WILL MOVE FORWARD. BETWEEN THEN AND NOW, HOWEVER, TO AVOID SEVERE RETRENCHMENT BANKS AND OTHER FINANCIAL INTERMEDIARIES WILL NEED THE SUPPORT THAT ONLY THE SUBSTITUTION OF SOVEREIGN CREDIT FOR PRIVATE CREDIT CAN BESTOW. THE $700 BILLION TROUBLED ASSETS RELIEF PROGRAM IS ADEQUATE TO SERVE THAT NEED. INDEED, THE IMPACT IS ALREADY BEING FELT. YIELD SPREADS ARE NARROWING. AS I WROTE LAST MARCH THOSE OF US WHO HAVE LOOKED TO THE SELF-INTEREST OF LENDING INSTITUTIONS TO PROTECT SHAREHOLDER EQUITY, MYSELF ESPECIALLY, ARE IN A STATE OF SHOCKED DISBELIEF. SUCH COUNTERPARTY SURVEILLANCE IS A CENTRAL PILLAR OF OUR FINANCIAL MARKET'S STATE OF BALANCE. IF IT FAILS AS OCCURRED THIS YEAR, MARKET STABILITY IS UNDERMINED. WHAT WENT WRONG WITH GLOBAL ECONOMIC POLICIES THAT HAD WORKED SO EFFECTIVELY FOR NEARLY FOUR DECADES? THE BREAKDOWN HAS BEEN MOST APPARENT IN THE SECURITIZATION OF HOME MORTGAGES. THE EVIDENCE STRONGLY SUGGESTS THAT WITHOUT THE EXCESS DEMAND FROM SECURITIZERS SUBPRIME MORTGAGE ORIGINATIONS UNDENIABLY THE ORIGINAL SOURCE OF THE CRISIS WOULD HAVE BEEN FAR SMALLER AND DEFAULTS FAR FEWER. BUT SUBPRIME MORTGAGES POOLED AND SOLD AS SECURITIES BECAME SUBJECT TO EXPLOSIVE DEMAND FROM INVESTORS AROUND THE WORLD. THESE MORTGAGE-BACKED SECURITIES BEING SUBPRIME WERE ORIGINALLY OFFERED AT WHAT APPEARED TO BE EXCEPTIONALLY HIGH RISK ADJUSTED MARKET INTEREST RATES. BUT WITH THE U.S. HOME PRICES STILL RISING, DELINQUENCY AND FORECLOSURE RATES WERE DECEPTIVELY MODEST. LOSSES WERE MINIMAL. TO THE MOST SOPHISTICATED INVESTORS IN THE WORLD THEY WERE WRONGLY VIEWED AS A STEAL. THE CONSEQUENT SURGE IN GLOBAL DEMAND FOR U.S. SUBPRIME SECURITIES BY BANKS, HEDGE AND PENSION FUNDS SUPPORTED BY UNREALISTICALLY POSITIVE RATING DESIGNATIONS BY CREDIT AGENCIES WAS IN MY JUDGMENT THE CORE OF THE PROBLEM. DEMAND BECAME SO AGGRESSIVE THAT TOO MANY SECURITIZERS AND LENDERS BELIEVED THEY WERE ABLE TO CREATE AND SELL MORTGAGE-BACKED SECURITIES SO QUICKLY THAT THEY NEVER PUT THEIR SHAREHOLDERS' CAPITAL AT RISK. HENCE, DID NOT HAVE THE INCENTIVE TO EVALUATE THE CREDIT QUALITY OF WHAT THEY WERE SELLING. PRESSURES ON LENDERS TO SUPPLY MORE PAPER COLLAPSED SUBPRIME UNDERWRITING STANDARDS FROM 2005 FORWARD. UNCRITICAL ACCEPTANCE OF CREDIT RATINGS BY PURCHASERS OF THESE TOXIC ASSETS HAS LED TO HUGE LOSSES. TFRLS THE FAILURE TO PROPERLY PRICE SUCH RISKY ASSETS THAT PRECIPITATED THE CRISIS. IN RECENT DECADES A VASS RISK MANAGEMENT AND PRICING SYSTEM HAS EVOLVED COMBINING THE BEST INSIGHTS OF MATHEMATICIANS BE A FINANCE EXPERTS SUPPORTED BY MAJOR ADVANCES IN COMPUTER AND COMMUNICATIONS TECHNOLOGY. A NOBEL PRIZE WAS AWARDED FOR THE DISCOVERY OF THE PRICING MODEL THAT UNDERPINS MUCH OF THE ADVANCE IN DERIVATIVES MARKETS. THIS MODERN RISK MANAGEMENT PARADIGM HELD SWAY FOR DECADES. THE WHOLE INTELLECTUAL EDIT PHYSICAL HOWEVER COLLAPSED IN THE SUMMER OF LAST YEAR BECAUSE THE DATA INPUTTED INTO THE RISK MANAGEMENT MODELS GENERALLY COVERED ONLY THE PAST TWO DECADES, A PERIOD OF EUPHORIA. HAD THE MODELS BEEN FITTED MORE APPROPRIATELY TO HISTORIC PERIODS OF STRESS CAPITAL REQUIREMENTS WOULD HAVE BEEN MUCH HIGHER AND THE FINANCIAL WORLD WOULD BE IN FAR BETTER SHAPE TODAY IN MY JUDGMENT. WHEN IN AUGUST OF 2007 MARKETS EVENTUALLY CRASHED THE CREDIT AGENCIES RATINGS A BLANKET OF UNCERTAINTY DESCENDED ON THE INVESTMENT COMMUNITY. DOUBT WAS INDISCRIMINATELY CAST ON THE PRICING OF SECURITIES THAT HAD ANY TAINT OF SUBPRIME BACKING. 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 ISSUED. THIS WILL ADJUST SET IN PART MARKET DEFICIENCIES STEMMING FROM THE FAILURES OF COUNTER COUNTERPARTY SURVEILLANCE. THERE ARE ADDITIONAL REGULATORY CHANGES AT BREAKDOWN OF THE CENTRAL PILLAR OF MARKETS REQUIRES IN ORDER TO RETURN TO STABILITY STABILITY, PARTICULARLY IN THE AREAS OF FRAUD, SETTLEMENT AND SECURITIZATION. IT IS IMPORTANT TO REMEMBER, HOWEVER, THAT WHATEVER REGULATORY CHANGES ARE MADE, THEY WILL PALE IN COMPARISON TO THE CHANGE ALREADY EVIDENT IN TODAY'S MARKETS. THOSE MARKETS WERE AN INDEFINITE FUTURE WILL BE FAR MORE RESTRAINED THAN WHAT ANY CURRENTLY CONTEMPLATED NEW REGULATORY REGIME. THE FINANCIAL LANDSCAPE THAT WILL GREET THE END OF THE CRISIS WILL BE FAR DIFFERENT FROM THE ONE THAT ENTERED IT LITTLE MORE THAN A YEAR AGO. INVESTORS WILL BE EXCEPTIONALLY CAUTIOUS. STRUCTURED INVESTMENT VEHICLES AND A MYRIAD OF OTHER EXOTIC INSTRUMENTSES ARE NOT NOW AND ARE UNLIKELY TO EVER FIND WILLING BUYERS. REGRETTABLY, ALSO ON THAT LIST ARE SUBPRIME MORTGAGES. THE MARKET FOR WHICH HAS VIRTUALLY DISAPPEARED. HOME AND MALL BUSINESS OWNERSHIP ARE VITAL COMMITMENTS TO A COMMUNITY -- SMALL BUSINESS OWNERSHIP ARE VITAL COMMITMENTS TO A COMMUNITY AND WE SHOULD SEEK WAYS TO REESTABLISH A MORE SUSTAINABLE SUBPRIME MORTGAGE MARKET. THIS CRISIS WILL PASS AND AMERICA WILL REEMERGE WITH A FAR SOUNDER FINANCIAL SYSTEM. THANK YOU, MR. CHAIRMAN. |
| 00:25:28 | Cooper, Jim "James" H. | THANK YOU VERY MUCH, DR. GREENSPAN. MR. COX? |
| 00:25:34 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN, RANKING MEMBER DAVIS AND MEMBERS OF THE COMMITTEE FOR INVITING ME TO DISCUSS THE LESSONS FROM THE CREDIT CRISIS AND LESSONS FOR THE FUTURE OF FEDERAL REGULATION. I'M PLEASED TO JOIN WITH FORMER CHAIRMAN GREENSPAN AND WITH FORMER SECRETARY SNOW, WHO TOGETHER HAVE GIVEN MORE THAN 30 YEARS OF SERVICE TO THEIR COUNTRY. THE S.E.C.'S PLACE IN THE REGULATORY STRUCTURE IS DIFFERENT THAN THE FEDERAL RESERVE AND TREASURY. THE S.E.C. SETS THE RULES FOR DISCLOSURE OF MATERIAL INFORMATION BY PUBLIC COMPANIES. WE SET THE RULES FOR SECURITIES EXCHANGES AND BROKER/DEALERS WHO TRADE ON THE EXCHANGES AND ABOVE ALL THE S.E.C. IS A LAW ENFORCEMENT AGENCY. THE LESSONS OF THE CREDIT CRISIS ALL POINT TO THE FOR A STRONG S.E.C. S.E.C., WHICH IS UNIQUE IN ITS ARM'S LENGTH RELATIONSHIP TO WALL STREET. THE GENESIS OF THE CURRENT CRISIS AS THIS COMMITTEE HAS HIGHLIGHTED IN RECENT HEARINGS WAS THE DETERIORATION OF MORTGAGE ORIGINATION STANDARDS. AS THE S.E.C.'S FORMER CHIEF ACCOUNTANT TESTIFIED, IF HONEST LENDING PRACTICES HAD BEEN FOLLOWED MUCH OF THIS CRISIS WOULD NOT HAVE OCCURRED. THE PACKAGING OF RISKY MORTGAGES INTO COMPLEX STRUCTURED SECURITIES WITH TRIPLE A RATINGS SPREAD THE RISK IN THE SECURITIES MARKETS AND WHAT SIGNIFICANTLY AMPLIFIED THIS CRISIS AROUND THE GLOBE WAS THE PARALLEL MARKET IN CREDIT DEFAULT SWAPS WHICH IS COMPLETELY UNREGULATED. CREDIT DEFAULT SWAPS MULTIPLIED THE RISK FROM THE FAILURE OF BAD MORTGAGES BY ORDERS OF MAGNITUDE AND ENSURED THAT WHEN HOUSING PRICES COLLAPSED THE EFFECTS CASCADED THROUGHOUT THE FINANCIAL SYSTEM. LIKE EACH OF YOU I HAVE ASKED MYSELF WHAT I WOULD DO DIFFERENTLY WITH THE BENEFIT OF HINDSIGHT. THERE ARE SEVERAL THINGS. FIRST, I THINK THAT EVERY REGULATOR WISHES HE OR SHE HAD BEEN ABLE TO PREDICT THE UNPRECEDENTED MELTDOWN OF THE ENTIRE U.S. MORTGAGE MARKET WHICH OF THE FUNDAMENTAL CAUSE OF THE CRISIS. SECOND ALTHOUGH HE WAS NOT AT THE S.E.C. IN 2004 WHEN THE VOLUNTARY CONSOLIDATED SUPERVISED ENTITIES PROGRAM WAS UNANIMOUSLY ADOPTED BY THE COMMISSION KNOWING WHAT I KNOW NOW I WOULD HAVE WANTED TO QUESTION EVERYONE OF THE PROGRAMS' ASSUMPTIONS FROM THE START. IN PARTICULAR I WOULD WANT TO QUESTION ITS RELIANCE ON THE WIDELY USED BASTL STANDARDS FOR COMMERCIAL BANKS AND FEDERAL RESERVE'S 10% WELL CAPITAL IESZED STANDARD FOR BANK HOLDING COMPANIES. THOSE STANDARD PROVED INSUFFICIENT FOR COMMERCIAL BANKS AS WELL. THIRD, KNOWING WHAT I KNOW NOW I WOULD HAVE URGED CONGRESS TO PASS LEGISLATION TO REPEAL THE CREDIT DEFAULT SWAP LOOPHOLE IN THE COMMODITY FUTURES MODERNIZATION ACT. LAST MONTH I FORMALLY ASKED CONGRESS TO FILL THIS REGULATORY GAP AND I URGE THIS COMMITTEE TO JOIN IN THIS EFFORT WHICH CANNOT WAIT UNTIL NEXT YEAR. FOURTH, I WOULD HAVE BEEN EVEN MORE AGGRESSIVE IN URGING LEGISLATION TO REQUIRE STRONGER DISCLOSURES TO INVESTORS IN MUNICIPAL SECURITIES. INDIVIDUAL INVESTORS ACCOUNTOR NEARLY TWO-THIRDS OF THIS MARKET AND YET NEITHER THE S.E.C. NOR ANY FEDERAL REGULATOR HAS THE AUTHORITY TO INSIST ON FULL DISCLOSURE. MOST IMPORTANTLY, WE HAVE LEARNED THAT VOLUNTARY REGULATION OF FINANCIAL CONGLOMERATES DOESN'T WORK. NEITHER THE S.E.C. NOR ANY REGULATOR HAS THE STATUTORY AUTHORITY TO REGULATE INVESTMENT BANK HOLDING COMPANIES EXCEPT ON A VOLUNTARY BASIS. THAT MUST BE FIXED. THE CURRENT CRISIS HAS ALSO HIGHLIGHTED WHAT DOES WORK. IN PARTICULAR THE S.E.C.'S REGULATION OF BROKER/DEALERS AND ITS PROTECTION OF THEIR CUSTOMERS. SO, IN STRENGTHENING THE ROLE OF THE S.E.C. CONGRESS SHOULD BUILD ON THAT 74-YEAR TRADITION AND THE AGENCY'S STRONG LAW ENFORCEMENT AND PUBLIC COMPANY DISCLOSURE REGIME THAT PROVIDES TRANSPARENCY FOR INVESTORS. FINALLY, WE HAVE LEARNED THAT FOR REGULATORS TO MAKE ACCURATE PREDICTIONS REQUIRES A COMPREHENSIVE PICTURE OF CAPITAL FLOWS, LIQUIDITY AND RISK THROUGHOUT THE SYSTEM. BUT COORDINATION AMONG REGULATORS IS ENORMOUSLY DIFFICULT IN THE CURRENT SYSTEM. HERE THE ORGANIZATION OF CONGRESS ITSELF IS PART OF THE PROBLEM. LEGISLATIVE JURISDICTION IS SPLIT SO BANKING, INSURANCE AND SECURITIES FALL WITHIN THE PROVINCE OF THE HOUSE FINANCIAL SERVICES COMMITTEE AND THE SENATE BANKING COMMITTEE WHILE FUTURES FALL UNDER THE AGRICULTURE COMMITTEES IN BOTH THE HOUSE AN SENATE. THIS LONG RUNNING TURF BATTLE ONE REASON CREDIT DEFAULT SWAPS ARE NOT REGULATED. THE CONGRESS HAS OVERCOME THESE JURISDICTIONAL DIVIDES BEFORE IN DIFFERENT CIRCUMSTANCES WITH THE APPOINTMENT OF A SELECT COMMITTEE. AS SOON AS POSSIBLE CONGRESS SHOULD APPOINT A SELECT # @ RATING AGENCY REFORM ACT TO STRENGTHEN THE RATINGS PROCESS. WE HAVE WORKED WITH THE FINANCIAL ACCOUNTING STANDARDS BOARD ON OFF BALANCE SHEET LIABILITIES, FAIR VALUE STANDARD AND BANK SUPPORT FOR MONEY MARKET FUNDS. WE HAVE REQUIRED DISCLOSURES OF SHORT POSITIONS TO THE S.E.C. AND STRENGTHENED INVESTOR PROTECTIONS AGAINST NAKED SHORT SELLING. WE ARE WORKING TO ESTABLISH ONE OR MORE CENTRAL COUNTERPARTIES FOR CREDIT DEFAULT SWAPS. OUR ENDIVORCEMENT -- OUR ENFORCEMENT DIVISION HAS INVESTIGATIONSENED WAY AND WE HAVE MOUNTED A NATIONWIDE INVESTIGATION OF POTENTIAL FRAUD AND SECURITIES OF SOME OF THE LARGEST FINANCIAL INSTITUTIONS. THIS PAST YEAR THE S.E.C. BROUGHT THE LARGEST NUMBER OF INSIDER TRADING CASES IN HISTORY AND THE SECOND HIGHEST NUMBER OF OF CASES OVERALL. OUR RECENTLY ANNOUNCED PRELIMINARY SETTLEMENTS WITH SOME OF THE LARGEST FINANCIAL INSTITUTIONS ON WALL STREET WILL RETURN $50 BILLION TO INVESTORS IN AUCTION RATE SECURITIES BY FAR THE LARGEST SETTLEMENTS IN THE S.E.C.'S HISTORY. MR. CHAIRMAN, THE ROLE OF THE S.E.C. HAS NEVER BEEN MORE IMPORTANT. I'M HUMBLED TO WORK SIDE BY SIDE WITH THE DEDICATED MEN AND WOMEN WHO FIGHT EACH DAY FOR THE FOR EXAMPLE OF AMERICA'S INVESTORS. THANK YOU FOR THE OPPORTUNITY TO DISCUSS THE ROLE OF THE S.E.C. AND LESSONS FROM THE CURRENT CRISIS. I WILL BE HAPPY TO TAKE YOUR QUESTIONS. |
| 00:32:19 | Cooper, Jim "James" H. | THANK YOU VERY MUCH. WE WILL HAVE QUESTIONS FOR YOU, ALL THREE OF YOU, AFTER ALL OF YOU HAVE TESTIFIED. MR. SNOW. IS YOUR MICROPHONE ON? |
| 00:32:32 | Cooper, Jim "James" H. | THANK YOU VERY MUCH, MRFRM, RANKING MEMBER DAVIS, MEMBERS OF THE COMMITTEE. IT IS AN HONOR AND PRIVILEGE TO BE WITH YOU TODAY TO TALK ABOUT THIS ISSUE OF EXTRAORDINARY IMPORTANCE TO THE AMERICAN PEOPLE PEOPLE. MILLIONS OF AMERICANS NOW REALIZE THAT THE HEALTH OF THE FINANCIAL SYSTEM ISN'T SOME ABSTRACTION. IT IS THE STUFF OF REAL DAY-TO-DAY LIFE FOR THEM. WE MEET IN AN EXTRAORDINARY TIME TIME. NOWHERE THAT I CAN RECALL DURING MY ADULT LIFETIME HAS THE FINANCIAL SYSTEM BEEN SO DEEPLY TROUBLED, SO FRACTURED, FROZEN. THE CONSEQUENCES OF THE FROZEN FINANCIAL SYSTEM OF COURSE ARE SPILLING OVER TO THE REAL ECONOMY. WE NOW SEEM TO BE ON A CLEAR PATH TO MUCH SLOWER GROWTH RATES, PROBABLY GOING NEGATIVE IF THEY ARE NOT NEGATIVE ALREADY ALREADY, WITH SIGNIFICANT CONSEQUENCES FOR THE LIVES OF OUR CITIZENS, WITH MANY JOBS PUT IN JEOPARDY AND THE PROSPERITY OF THE AMERICAN PEOPLE PUT IN JEOPARDY. BUT THIS IS A GLOBAL PROBLEM, NOT JUST A U.S. PROBLEM AS THE LEADERS OF THE WORLD NOW RECOGNIZE. I SERVED AND WAS HONORED TO SERVE AT THE TREASURY DEPARTMENT EARLY 2003 UNTIL THE MIDDLE FOF 2006. TREASURY DOESN'T HAVE DIRECT REGULATORY AUTHORITY AS YOU KNOW. BUT IT DOES HAVE BROAD POLICY RESPONSIBILITIES. ONE OF THE KEY RESPONSIBILITIES OF TREASURY IS TO TRY TO IDENTIFY RISKS. THE RISKS THAT THREATEN THE HEALTH AND PROSPERITY OF THE AMERICAN PEOPLE, THE RISKS, THE SYSTEMIC RISKS THAT COULD PRODUCE FAR-REACHING CONTAGION IN THE FINANCIAL SYSTEM AND SPILL OVER INTO THE GLOBAL ECONOMY AND U.S. ECONOMY. I TRIED WHEN WAS TREASURY SECRETARY TO KEEP MY EYE ON WHAT THOSE RISKS WERE, TO FOCUS ON THEM. WHERE WE SAW CLEAR VISIBLE RISKS RISKS, SOME OF YOU SAW THEM AS WELL, THINKING HERE OF CONGRESSMAN SHAYS WHERE WE SAW CLEAR VISIBLE RISKS IN THE CASE OF THE G.S.E.'S WE ACTED. I TESTIFIED BEFORE THE CONGRESS IN 2003. I TESTIFIED AGAIN IN 2005. I GAVE COUNTLESS SPEECHES, HAD COUNTLESS MEETINGS WITH MEMBERS OF CONGRESS POINTING OUT THAT THE G.S.E.'S REPRESENTED A HUGE SYSTEMIC RISK, A RISK THAT UNFORTUNATELY GREW DURING THAT PERIOD AS THEY CONTINUED TO BROADEN OUT IN EXTRAORDINARY BLOWOUT GROWTH OF THEIR OWN INVESTMENT PORTFOLIOS. I CALLED FOR A STRONG REGULATOR. WE CALLED FOR DISCLOSURE. WE CALLED FOR APPLICATION OF THE SECURITIES LAWS. WE CALLED FOR A REGULATOR WHO WOULD HAVE AUTHORITY OVER CAPITAL STANDARDS. WE CALLED FOR A REGULATOR WHO COULD LIMIT THE GROWTH OF THEIR PORTFOLIOS. WE CALLED FOR A REGULATOR WHO COULD LIMIT THE LINES OF BUSINESS THEY COULD GET INTO. AND MOST IMPORTANTLY TO DEAL WITH THE IMPLIED GUARANTEE, WHICH WAS AT THE HEART OF THE PROBLEM, IN FACT THEIR PAPER TRADED LIKE U.S. GOVERNMENT PAPER. WE CALLED FOR A REGULATOR WITH THE ABILITY TO HAVE A RESTRUCTURING THROUGH LIQUIDATION AND BANKRUPTCY OF THOSE ENTITIES SENDING A CLEAR MESSAGE TO THE MARKETS THAT THEY WEREN'T, QUOTE, TOO BIG TO FAIL. I THINK IF WE HAD ACTED THEN, MR. CHAIRMAN, THERE MAY NOT HAVE BEEN THE NEED FOR THIS HEARING TODAY. 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 MOST VISIBLE SYSTEMIC RISK AT THE TIME. BEYOND FANNIE MAE AND FREDDIE MAC WE WERE ALSO CONTINUOUSLY ON THE LOOKOUT FOR PROBLEMS THAT COULD EMERGE. AS I THOUGHT ABOUT THE PROBLEMS THAT COULD EMERGE IN 2003 AND 2004. IT BECAME CLEAR TO ME A WE NEEDED A NEW REGULATORY SYSTEM. WE NEEDED TO CHANGE IT. WE HAVE A FRACTURED REGULATORY SYSTEM. ONE IN WHICH NO SINGLE REGULATOR HAS A CLEAR VUIEW A 360-DEGREE VIEW OF THE RISKS INHERENT IN THE SYSTEM. WE NEED TO CHANGE THAT. WE NEED TO MOVE TO A 360-DEGREE VIEW REGULATORY SYSTEM. DURING MY TIME AT TREASURY I COMMISSION ADD BLUEPRINT TO PUT THAT IN PLACE. I'M PLEASED TO SEE A VERSION OF THAT BLUEPRINT IS BEFORE YOU AND I HOPE I WILL ACT ON IT. SO, BASICALLY, MR. CHAIRMAN, WHERE WE SAW AT TREASURY IN OUR POLICY ROLE VISIBLE RISKS AS WITH THE G.S.E.'S WE ACTED. WE CALLED FOR THE STRONG REGULATOR. WHERE THE RISKS WERE INCHOATE, WHERE THEY WERE NOT YET CLEARLY VISIBLE, WE RECOGNIZED THAT A MUCH STRONGER, MORE EFFECTIVE REGULATORY SYSTEM SHOULD BE PUT IN PLACE. I LOOK EACH HAVING THE RIGHT TO RESERVE TIME FOR LATER USE. I WILL START THE QUESTIONING. DR. GREENSPAN, I WANT TO START WITH YOU. YOU WERE THE LODGEST SERVING CHAIRMAN -- LONGEST SERVING CHAIRMAN OF THE FEDERAL RESERVE IN HISTORY AND DURING THIS PERIOD OF TIME WERE PERHAPS THE LEADING PROPONENT OF DEREGULATION OF OUR FINANCIAL MARKET S MARKETS. CERTAINLY YOU WERE THE MOST INFLUENTIAL VOICE FOR DE DEREGULATION. YOU HAVE BEEN A STAUNCH ADVOCATE FOR LETTING MARKETS REGULATE THEMSELVES. LET ME GIVE YOU A FEW OF YOUR PAST STATEMENTS. IN 1994, YOU TESTIFIED AT A CONGRESSIONAL HEARING ON REGULATION OF FINANCIAL DIFFICULT ACTIVIST. YOU SAID THERE'S NOTHING INVOLVED IN FEDERAL REGULATION WHICH MAKES IT SUPERIOR TO MARKET REGULATION. IT 1997 YOU SAID THERE APPEARS TO BE NO NEED FOR GOVERNMENT REGULATION OF OFF EXCHANGED DERIVATIVE TRANSACTIONS IN 2002 WHEN THE COLLAPSE OF ENRON LED TO RENEWED CONGRESSIONAL EFFORTS TO REGULATE DERIVATIVES, YOU WROTE THE SENATE WE DO NOT BELIEVE A PUBLIC POLICY CASE EXISTS TO JUSTIFY THIS GOVERNMENT INTERVENTION. EARLIER THIS YEAR YOU WROTE IN THE FINANCIAL TIMES BANK LOAN OFFICERS IN MY EXPERIENCE KNOW FAR MORE ABOUT THE RISKS AND WORKINGS OF THEIR COUNTERPARTIES THAN DO BANK REGULATORS. MY QUESTION FOR YOU IS SIMPLE. WERE YOU WRONG? |
| 00:40:20 | Cooper, Jim "James" H. | PARTIALLY. BUT LET'S SEPARATE THIS PROBLEM INTO ITS COMPONENT PARTS. I TOOK A VERY STRONG POSITION ON THE ISSUE OF DERIVATIVES AND THE EFFICACY OF WHAT THEY WERE DOING FOR THE ECONOMY AS A WHOLE, WHICH IN EFFECT IS ESSENTIALLY TO TRANSFER RISK FROM THOSE WHO HAVE VERYGREAT DIFFICULTY ABSORBING IT TO THOSE THAT HAVE THE CAPITAL TO ABSORB LOSSES IF AND WHEN THEY OCCUR. THESE DERIVATIVES ARE WORKING WELL. LET ME PUT IT TO YOU VERY SPECIFICALLY. |
| 00:40:57 | Cooper, Jim "James" H. | SO YOU DON'T THINK YOU WERE WRONG IN NOT WANTING TO REGULATE THE DERIVATIVES? |
| 00:41:02 | Cooper, Jim "James" H. | IT DEPENDS WHICH DERIVATIVES WE ARE TALKING ABOUT. CREDIT DEFAULT SWAPS I THINK HAVE SERIOUS PROBLEMS ASSOCIATED WITH THEM. BUT THE BULK OF DIFFICULT ACTIVIST AND INDEED -- DERIVATIVES AND THE ONLY DERIVATIVES THAT EXISTED WHEN THE MAJOR DISCUSSION STARTED IN 1999 WERE THOSE OF, FOR INTEREST RATE RISK AND FOREIGN EXCHANGE RISK. |
| 00:41:28 | Cooper, Jim "James" H. | LET ME INTERRUPT YOU BECAUSE WE HAVE A LIMITED AMOUNT OF TIME. YOU SAID IN YOUR STATEMENT THAT YOU DELIVERED THE WHOLE INTELLECTUAL EDIT PHYSICAL OF MODERN RISK MANAGEMENT COLLAPSED. YOU ALSO SAID THOSE OF US WHO HAVE LOOKED AT THE SELF-INTEREST OF LENDING INSTITUTIONS TO PROTECT SHAREHOLDER EQUITY, MYSELF ESPECIALLY ARE IN A STATE OF SHOCK AND DISBELIEF. THAT SOUNDS TO ME LIKE YOU ARE SAYING THAT THOSE WHO TRUSTED THE MARKET TO REGULATE ITSELF, YOURSELF INCLUDED, MADE A SERIOUS MISTAKE. |
| 00:41:59 | Cooper, Jim "James" H. | WELL, I THINK THAT IS TRUE OF SOME PRODUCTS BUT NOT ALL. I THINK THAT IS THE REASON WHY IT IS IMPORTANT TO DISTINGUISH THE SIZE OF THIS PROBLEM AND ITS NATURE. AND WHAT I WANTED TO POINT OUT WAS THAT EXCLUDING CREDIT DEFAULT SWAPS, DERIVATIVES MARKETS ARE WORKING WELL. |
| 00:42:23 | Cooper, Jim "James" H. | WHERE DO YOU THINK YOU MADE A MISTAKE THEN? |
| 00:42:26 | Cooper, Jim "James" H. | I MADE A MAKE IN PRESUMING THAT THE SELF-INTEREST OF ORGANIZATIONS, SPECIFICALLY BANKS AND OTHERS, WAS SUCH AS THEY WERE BEST CAPABLE OF PROTECTING THEIR OWN SHAREHOLDER AND THE EQUITY THE FIRMS. AND IT HAS BEEN MY EXPERIENCE, HAVING WORKED BOTH AS A REGULATOR FOR 18 YEARS AND SIMILAR QUANTITIES IN THE PRIVATE SECTOR, ESPECIALLY 10 YEARS AT A MAJOR INTERNATIONAL BANK, THAT THE LOAN OFFICERS OF THOSE INSTITUTIONS KNEW FAR MORE ABOUT THE RISKS INVOLVED AND THE PEOPLE TO WHOM THEY LENT MONEY THAN I SAW EVEN OUR BEST REGULATORS AT THE FED CAPABLE OF DOING. SO, THE PROBLEM HERE SIS SOMETHING WHICH LOOKED TO BE A VERY SOLID EDIT PHYSICAL AND INDEED A CORRECTLY PILLAR TO MARKET COMPETITION AND FREE MARKETS DID BREAK DOWN AND I THINK THAT EDITSHOCKED ME. I STILL DO NOT FULLY UNDERSTAND WHY IT HAPPENED AND TO THE EXTEND THAT I FIGURE OUT WHERE IT HAPPENED AND WHY I WILL CHANGE MY VIEWS. |
| 00:43:47 | Cooper, Jim "James" H. | PAUL KRUGMAN THE PRINCETON PROFESSOR OF ECONOMICS WHO JUST ONE A NOBEL PRIZE WROTE COLUMN IN 2006 AS A SUBPRIME MORTGAGE CRISIS STARTED TO EMERGE AND HE SAID IF ANYONE IS TO BLAME FOR THE CURRENT SITUATION IS MR. GREENSPAN WHO POOH-POOHED WARNINGS ABOUT AN EMERGING BUBBLE AND DID NOTHING TO CRACK DOWN ON IRRESPONSIBLE LENDING. HE OBVIOUSLY BELIEVES YOU DESERVE SOME OF THE BLAME FOR OUR CURRENT CONDITIONS. I WOULD LIKE YOUR PERSPECTIVE. DO YOU HAVE ANY PERSONAL RESPONSIBILITY FOR THE FINANCIAL CRISIS? |
| 00:44:23 | Cooper, Jim "James" H. | LET ME GIVE YOU A LITTLE HISTORY, MR. CHAIRMAN. THERE'S BEEN A CONSIDERABLE AMOUNT OF DISCUSSION ABOUT MY VIEWS ON SUBPRIME MARKETS IN THE YEAR 2000. AND, INDEED, ONE OF OUR MOST DISTINGUISH THE GOVERNORS AT THE TIME TIME, GOVERNOR GRAMWORK WHO IS REGRETTABLY DECEASED BUT WAS ONE OF THE BEST GOVERNORS I EVER HAD TO DEAL WITH. CAME TO MY OFFICE AND SAID THAT HE WAS HAVING DIFFICULTIES WITH A PROBLEM OF WHAT REALLY TURNED OUT TO BE FAIRLY MAJOR PROBLEMS IN PREDATORY LENDING. |
| 00:45:12 | Cooper, Jim "James" H. | HE URGED YOU TO MOVE WITH THE POWER THAT YOU HAD AS THE CHAIRMAN OF THE FED, AS BOTH TREASURY DEPARTMENT AND HUD SUGGESTED, THAT YOU PUT IN PLACE REGULATIONS THAT WOULD CURB THE EMERGING ABUSES IN SUBPRIME LENDING. BUT YOU DIDN'T LISTEN TO THE TREASURY DEPARTMENT OR MR. @@@@@@@@@@ @ @ gRR) R AND AN OUTSIDE COUNSEL OF EXPERT PROFESSIONALS TO ADVISE ON REGULATORY MATTERS. AND WHAT THE SYSTEM ACTUALLY DID WAS TO TRY TO CORRESPONDAL ALL OF THIS TO -- |
| 00:46:37 | Cooper, Jim "James" H. | I'M GOING TO INTERRUPT YOU. THE QUESTION I HAVE FOR YOU IS, YOU HAD AN IDEOLOGY. YOU HAD A BELIEF THAT FREE COMPETITIVE -- THIS IS YOUR STATEMENT. I DO HAVE AN IDEOLOGY. MY JUDGMENT IS THAT FREE COMPETITIVE MARKETS ARE BY FAR THE UNRIVALED WAY TO ORGANIZE THE ECONOMIES. WE HAVE TRIED REGULATION. NONE MEANINGFULLY WORKED. THAT WAS YOUR QUOTE. YOU HAD THE AUTHORITY TO PREVENT IRRESPONSIBLE LENDING PRACTICES THAT LED TO THE SUBPRIME MORTGAGE CRISIS. YOU WERE ADVISED TO DO SO BY MANY OTHERS. AND NOW OUR WHOLE ECONOMY IS PAYING ITS PRICE. DO YOU FEEL THAT YOUR IDEOLOGY PUSHED YOU TO MAKE DECISIONS THAT YOU WISH YOU HAD NOT MADE? |
| 00:47:51 | Cooper, Jim "James" H. | YOU FOUND A FLAW IN THE REALITY -- |
| 00:47:54 | Cooper, Jim "James" H. | FLAW IN THE MODEL THAT I PERCEIVED AS THE CRITICAL FUNCTIONING STRUCTURE THAT DEFINES HOW THE WORLD WORKS. |
| 00:48:08 | Cooper, Jim "James" H. | PRECISELY. THAT PRECISELY THE REASON I WAS SHOCKED, BECAUSE I HAD BEEN GOING FOR 40 YEARS OR MORE WITH VERY CONSIDERABLE EVIDENCE THAT IT WAS WORKING EXCEPTIONALLY WELL. BUT LET ME IF I MAY -- |
| 00:48:21 | Cooper, Jim "James" H. | THE PROBLEM IS THE TIME HAS ALREADY EXPIRED AND AS YOU CAN SEE THERE ARE -- |
| 00:48:25 | Cooper, Jim "James" H. | HE WANTS TO ANSWER. |
| 00:48:27 | Cooper, Jim "James" H. | IF YOU HAVE BRIEFLY ANSWER BECAUSE EFFICIENT MANY MEMBERS. |
| 00:48:33 | Cooper, Jim "James" H. | THE REASON BASICALLY IS THAT GOVERNOR GRAMLICH SAID TO ME THAT HE HAD PROBLEMS. INDEED, I HAD HEARD VERY MUCH THE SAME THING. I FRANKLY THOUGHT THAT WHEN OUR MEETING ENDED THAT THE SUBCOMMITTEE OF THE BOARD WHICH SUPERVISES ALL OF THE VARIOUS ASPECTS OF CONSUMER AND COMMUNITY AFFAIRS WITHIN THE BOARD OF GOVERNORS IN THE FEDERAL RESERVE SYSTEM WOULD MOVE FORWARD AND PRESENT TO THE BOARD AS A WHOLE RECOMMENDATIONS TO BE MADE. THAT WAS NOT MADE AND I PRESUMED AT THE TIME THAT ESSENTIALLY THE SUBCOMMITTEE DIDN'T THINK IT ROSE TO THE HIGHER LEVEL. BUT, JUST QUICKLY TO SAY THAT THE OVERALL VIEW THAT I TAKE OF REGULATION IS THAT I TOOK A PLEDGE -- I TOOK AN OATH OF OFFICE WHEN BECAME FEDERAL RESERVE CHAIRMAN. AND I RECOGNIZED THAT YOU DO WITH THAT -- WHAT I DID IS I SAID THAT I'M HERE TO UPHOLD LAWS OF THE LAND PASSED BY THE CONGRESS, NOT MY OWN PREDILECTIONS AND I THINK YOU WILL FIND THAT MY HISTORY IS THAT I VOTED FOR VIRTUALLY EVERY REGULATORY ACTION THAT THE FEDERAL RESERVE BOARD MOVED FORWARD ON. INDEED, I VOTED WITH THE MAJORITY AT ALL TIMES AND I WAS DOING SO BECAUSE I PERCEIVED THAT THAT WAS THE WILL OF THE CONGRESS CONGRESS. AND, IN FACT, IF YOU GO BACK AND LOOK AT THE RECORD, I FELT REQUIRED BY MY OATH OF OFFICE TO ADHERE TO WHAT I'M SUPPOSED TO DO, NOT WHAT I WOULD LIKE TO DO. AND THAT IS MY HISTORY AND I THINK THE EVIDENCE ISVERY STRONGLY SUPPORTS THAT. |
| 00:50:35 | Cooper, Jim "James" H. | I APPRECIATE THAT. ON THE OTHER HAND YOU DIDN'T GET TO VOTE ON REGULATIONS THAT YOU DIDN'T PUT BEFORE THE FEDERAL RESERVE BOARD EVEN THOUGH YOU HAD THE LEGAL AUTHORITY FOR THOSE REGULATIONS. THAT MORE NOT A QUESTION BUT A COMMENT. |
| 00:51:14 | Cooper, Jim "James" H. | THANK YOU. LET ME START WITH ALL OF YOU, BUT DR. GREENSPAN, I WILL START WITH YOU. I THINK WHAT WE SEE IS LAYING A PREDICATE FOR WHAT I FEAR HAPPENS WHEN THERE IS A CRISIS IS CONGRESS OVERREACTS TO THE SITUATION. IT SEEMS TO ME THAT IT WASN'T JUST DEREGULATION THAT ALLOWED THIS CRISIS. IT WAS THE MICH OF REGULATIONS AND REGULATORS WITH TOO NARROW A VIEW OF THE INTEGRATED NATIONAL AND GLOBAL MARKETS. BUT I WOULD LIKE TO GET ALL OF YOUR REACTION TO THE FOLLOWING. IN TERMS OF LEGISLATION PASSED BY THE CONGRESS, WHAT EFFECTS IF ANY AND WERE THEY RIGHT OR WRONG IN GRAHAM, LEACH, BLYLEY, COMMODITIES FUTURES MODERNIZATION AND FAILURE TO REGULATE FANNIE AND FREDDIE. AS YOU LOOK AT THOSE TO WHAT EFFECT IF ANY DID THEY HAVE ON THIS CRISIS? AND IF WILL IS ANY SUGGESTION YOU WOULD MAKE IN THE FUTURE IN TERMS OF HOW WE PROCEED. |
| 00:52:12 | Cooper, Jim "James" H. | I HAVE TALKED AT GREAT LENGTH. |
| 00:52:18 | Cooper, Jim "James" H. | THANK YOU, MR. CHAIRMAN. REGULATORY GAPS HAVE BEEN THE DEVILLING SOLUTION DURING THE LAST YEAR. IT HAS BEEN ONE YEAR SINCE WE HAD THE ALL-TIEMME STOCK MARKET HIGH. REGULATORS HAVE BEEN COOPERATING AT THE INTERNATIONAL LEFTVEL AND FEDERAL AND STATE MORE CLOSELY BUT WHAT WE ARE SEEING IS DIFFERENT PARTS OF THE ELEPHANT AND WE ARE TRYING TO INTEGRATE THAT AS CLOSELY AS WE CAN. THE COORDINATION IS COMPLICATED BY THE FACT THAT FIRST THE AGENCIES THEMSELVES ADMINISTERED DIFFERENT LAWS AND GOVERNED ECONOMICALLY SIMILAR PRODUCTS IN DIFFERENT WAYS. SECOND, THEIR JURISDICTION COMES TO AN ABRUPT STOP AND SOMETIMES THE NEXT REGULATORY AGENCY DOESN'T PICK UP WHERE THAT LEAVES OFF. ONE OF THE MOST SIGNIFICANT GAPS IS ONE YOU HAVE ALLUDED TO, THE GAP IN THE 2000 QFMA THAT LEFT UNREGULATE AND LEAVES OPEN TODAY AS WE MEET THE $58 TRILLION MARKET IN CREDIT DEFAULT SWAPS. THE REASON THAT HAS TURNED OUT TO BE SO IMPORTANT IS NOT SIMPLY THE DOLLAR AMOUNT OF RISK INVOLVED BUT THE FACT THAT IT IS OPAQUE. THE FACT THAT PARTIES AND COUNTERPARTIES DON'T KNOW WHERE THE EXPOSURES ARE. IT MAKES IT VERY DIFFICULT TO PRICE RISK THROUGHOUT THE SYSTEM. THAT IS WHY I THINK IT IS SO URGENT WE ADDRESS THAT GAP, WE ADDRESS THE GAP -- JERKS CHAIRMAN COX, THAT PARTICULAR ASPECT OF THE ACT WHERE WE FAILED TO ADDRESS THAT WAS A MISTAKE IN RETROSPECT? BASICALLY LEGALIZED GAMBLE ING? |
| 00:53:59 | Cooper, Jim "James" H. | I THINK IT IMPORTANT TO NOTE AS CHAIRMAN GREENSPAN DOES HOW MUCH HAS CHANGED SINCE THIS WAS FIRST LOOKED AT DURING THE CLINTON ADMINISTRATION IN 1999. BECAUSE BACK THEN AS CHAIRMAN GREPS POINTS OUT THE CREDIT DEFAULT SWAPS MARKET HAD BARELY EMERGED. AS A SHARE OF THE TOTAL DERIVATIVESES MARKET IT WAS TOO MALL TO BE NOTICED. IT HAS DOUBLED IN THE LAST IT YEARS. SO, IT IS ABSOLUTELY URGENT NOW THAT WE KNOW HOW IMPORTANT IT IS IN THE CONTEXT OF THE CURRENT CRISIS AND DIFFICULTY AT THAT TIME MARKETS AND INVESTORS ARE HAVING PRICING RISK WE BRING CLOSURE TO THIS AND LET THE MARKET SEE WHERE THE RISK IS AND PRICE ACCORDINGLY. |
| 00:54:39 | Cooper, Jim "James" H. | THANK YOU. ALSO ON THE FREDDIE AND FANNIE ISSUE. |
| 00:54:49 | Cooper, Jim "James" H. | THANK, CONGRESSMAN DAVIS. IT SEEMS TO ME THE ROOT ISSUE WHEN YOU GET DOWN TO IT SIS RISK AND LEVERAGE. AND TO WHERE IN OUR FINANCIAL REGULATORY SYSTEM IS THERE ANYONE WITH FULL ACCOUNTABILITY AND FULL 360-DEGREE VIEW ON THAT PROPOSITION, RISK AND LEVERAGE. I SAW THAT IN MY DAYS AT THE TREASURY DEPARTMENT. I REMEMBER IN 2005 SENSING THAT THERE WERE DEVELOPMENTS IN THE DEBT MARKETS, THE SUBPRIME AND MORTGAGE MARKETS THAT NEEDED TO BE BETTER UNDERSTOOD. I TOOK WHAT WAS DEEMED TO BE A FAIRLY EXTRAORDINARY STEP AND CALLED IN ALL OF THE SUBSTANTIVE REGULATORS OF THE MORTGAGE MARKET MARKET. AND I ASKED THEM TO GIVE THEIR CONSIDERED VIEWS ON WHETHER OR NOT UNDUE RISK WAS BEING CREATED. WE DIDN'T YET HAVE A HOUSING CRISIS. WE DIDN'T YET HAVE A SUBPRIME CRISIS. BUT I WANTED TO GET THEIR VIEW THAT DID EVENTUALLY LEAD TO NEW GUIDANCE TO THE REGULATORS. BUT IT WAS CLEAR THAT NO ONE OF THEM HAD THAT VIEW. THEY HAD PIECES OF THE PUZZLE. IT IS LIKE THE BLIND MAN AND ELEPHANT. THEY ARE ALL TOUCHING A PIECE OF IT BUT AT THE DON'T KNOW WHAT THE BIG PICTURE IS. THAT IS WHY I DID COMMISSION THE EFFORT TO PRODUCE A BLUEPRINT FOR A NEW REGULATORY SYSTEM. AS YOU KNOW, THE TREASURY SET UP A NEW BLUEPRINT TO CREATE SOME AGENCY WITH THE THE 360-DEGREE VIEW. WITH THE G.S.E.'S I THINK WE ALL MADE A MISTAKE NOT ACTING MUCH, MUCH EARLIER. IF IF A STRONG REGULATOR WAS PUT IN PLACE IN A TIMELY WAY, IF THE MARKET HAD HAD MORE VISIBILITY -- |
| 00:56:59 | Cooper, Jim "James" H. | LET ME ASK THIS. HAD A STRONG REGULATOR BEEN PUT IN EARLIER WOULD THAT HAVE REALLY AVERTED THIS CRISIS? |
| 00:57:30 | Cooper, Jim "James" H. | AND THEY HAD THE APPEARANCE OF GOVERNMENT BACKING IT |
| 00:57:33 | Cooper, Jim "James" H. | IT ABSOLUTELY HAD THE APPEARANCE OF GOVERNMENT BACKING, WHICH WAS AT THE CENTER OF THE RISK CREATION PROCESS. BECAUSE IF YOU CAN BORROW AT GOVERNMENT RATES YOU CAN MAKE MONEY ON ANY OTHER INSTRUMENTS, ANY OTHER FINANCIAL INSTRUMENTS. SO IT CREATED AN INCENTIVE TO BORROW AT AN EXTRAORDINARY RATE AND BUY ALL THE PAPER YOU COULD GET HOLD OF. THAT IS WHY WE SEE THE EXPLOSION, IT IS NOT AN EXAGGERATION, IN THEIR FOR-PROFIT ACTIVITIES, THEIR OWN HELD PORTFOLIO THAT WENT WAY BEYOND ANYTHING THAT WAS NEEDED TO CARRY ON THEIR PUBLIC POLICY MISSION OF MAKING THE SECONDARY MARKET. |
| 00:58:16 | Cooper, Jim "James" H. | DR. GREENSPAN, THE COMMODITIES FUTURES MODERNIZATION ACT WHICH PASSED CONGRESS BY AN OVERWHELMING MARGIN, PASSED THE HOUSE ON SUSPENSION SUSPENSION, I THINK ONLY A HANDFUL OF DISSENTING VOTES, SIGNED BY PRESIDENT CLINTON. IN RETROSPECT, AS WE LOOK AT THAT, WAS THIS A QUESTION OF REGULATION REGULATION/DEREGULATION OR JUST GAPS IN REGULATION WHERE YOU HAD SO MANY STOVE PIPES NO ONE COULD SEE THE TOTAL LANDSCAPE AND THINGS STARTED TO OCCUR UNDERNEATH IT AND WE WERE NOT ABLE TO REACT? AND ALSO I WILL ASK YOU ABOUT FREDDIE AND FANNIE AND THEIR ROLES IN THIS. |
| 00:58:57 | Cooper, Jim "James" H. | IT IS IMPORTANT WHEN TALKING ABOUT REGULATION NOT TO TALK IN BLANKET TERMS BUT TO FOCUS ON SPECIFIC ISSUES. FOR EXAMPLE, AS I MENTIONED BEFORE, THE DISCUSSION THAT CAME OUT OF THE ORIGINAL 2000 ACT RELEVANT TO DERIVATIVES HAS WORKED REASONABLY WELL WITH THE EXCEPTION OF A MAJOR CHANGE WHICH IS CREDIT DEFAULT SWAPS. IN THE YEAR 2005, THE FEDERAL RESERVE BASIC OF NEW YORK BECAME QUITE CONCERNED ABOUT THE ISSUE OF THE SETTLEMENT PROCESS ON CREDIT DEFAULT SWAPS AND STARTED TO TRY TO GET A VERY SIGNIFICANT IMPROVEMENT IN THE TECHNOLOGIES WHICH THEY WERE INVOLVED WITH. AND THAT EFFORT HAS CONTINUED CONSIDERABLY. AND THE REASON WHY THERE IS A BIG PROBLEM THERE IS PARTLY BECAUSE OF THE HUGE SURGE, AS CHAIRMAN COX SAYS, WAS NEGLIGIBLE IN 2000 AND THEY JUST JUST, FROM 2% OF THE TOTAL MARKET THEY ARE UP OVER 10% NOW IN A VERY FEW YEARS. THE PROBLEM BASICALLY IS@@@@@"Ik) @ @ @ @ @ @ @ @ @ @ @ @ BaT @ RESOLVED BECAUSE AT SOME POINT THE VOLUNTARY AGREEMENT PROCESS IS GOING TO BREAK DOWN AND YOU WILL HAVE A VERY SERIOUS PROBLEM. SO, WHERE I THINK CRITICAL REGULATORY ISSUES HAVE GOT TO OCCUR IS ON THE LEGAL QUESTION OF DEFINING THE PROCESS BY WHICH THE RESOLUTION OCCURS. . |
| 01:01:54 | Cooper, Jim "James" H. | DR. GREENSPAN, PRIOR TO THE BANKRUPTCY OF LEHMAN BROTHERS LAST MONTH, ONE OF THE LARGEST IN OUR HISTORY, AS WAS THE COLLAPSE OF ENRON. I WANT TO ASK YOU ABOUT AND ON AND THE USE OF DERIVATIVES. AFTER AN ON'S COLLAPSE, INVESTIGATIONS BY THE STATE OF CALIFORNIA AND OTHER STATES SHOWED WIDESPREAD MARKETS BY ENRON AND OTHER COMPANIES USING SCHEMES LIKE FAT BOY, DEATH STAR. THEY BYPASSED REGULATORY PROTECTIONS AND DROVE ENERGY PRICES SKY-HIGH. AT THAT TIME, THERE WAS NO REGULATION OF AND ON'S TRADING FOR ENERGY AND DERIVATIVES. THERE WERE NO PUBLIC DISCLOSURE REQUIREMENTS FOR RECORD-KEEPING REQUIREMENTS. THERE WERE NO ANTI-FRAUD PROVISIONS. BASICALLY, THERE WAS NO OVERSIGHT WHATSOEVER. WHAT WAS THERE WAS REMOVED. WHAT HAPPENED IS THAT ENRON AND OTHER COMPANIES TOOK ADVANTAGE OF THIS LACK OF OVERSIGHT. IN 2004, I TRIED TO CLOSE THIS LOOPHOLE. I OFFERED AN AMENDMENT AT THE BANKING COMMITTEE WHICH WOULD HAVE REQUIRED REGULATION OF DERIVATIVES. UNFORTUNATELY, BIPARTISAN SUPPORT, THE AMENDMENT FAILED. OTHER MEMBERS OF CONGRESS TRY TO CLOSE THIS LOOPHOLE, MOST NOTABLY A SENATOR WHO INTRODUCED TRADING DERIVATIVES. SHE TRIED TO DO THIS THROUGH FREESTANDING BILLS AND ADDITIONAL AMENDMENTS TO OTHER PIECES OF LEGISLATION. DR. GREENSPAN, YOU ADAMANTLY OPPOSED THESE EFFORTS. I WOULD LIKE TO SHOW YOU A LETTER THAT YOU SENT IN SEPTEMBER 2002. IN THIS LETTER, HE STATED," PUBLIC DISCLOSURE OF PRICING DATA WOULD NOT IMPROVE THE OVERALL PRICE DISCOVERY PROCESS." YOU ARGUED THAT, IN THESE LETTERS, DISCLOSURE WOULD INCREASE THE VULNERABILITY OF OUR ECONOMY TO POTENTIAL FUTURE STRESSES. DESPITE AND RON'S ABUSES, HE SAID, "WHICH DO NOT BELIEVE THAT A PUBLIC POLICY CASE EXISTS TO JUSTIFY THIS GOVERNMENT INTERVENTION." I SINCERELY BELIEVE THAT EFFORTS SUCH AS MUCH EFFORT IN THE BANKING COMMITTEE WOULD HAVE PASSED WITHOUT YOUR OPPOSITION. DR. GREENSPAN, IN RETROSPECT, DO YOU THINK THAT YOU WERE RIGHT TO OPPOSE THESE EFFORTS TO REGULATE ENERGY DERIVATIVES? |
| 01:04:57 | Cooper, Jim "James" H. | THE SENATOR SAID AT THE SAME THING TO ME. SHE IS A LONGTIME FRIEND AND WE HAVE DEBATED THIS ISSUE CONSIDERABLY. FIRST OF ALL, A MAJOR PROBLEM THAT I WAS HAVING WITH THE ENERGY DERIVATIVE ISSUE WAS THAT IT WAS AN ELECTRIC POWER PROBLEM. THE ELECTRIC POWER, AS YOU KNOW, CANNOT BE STORED. AS A RESULT -- |
| 01:05:26 | Cooper, Jim "James" H. | EXCUSE ME. MY AMENDMENT AND MY EFFORT WAS THAT IT BE LISTED ON THE COMMODITIES FUTURES EXCHANGE. THERE WAS AN EFFORT TO REMOVE IT FROM LISTING, SO THERE WAS ABSOLUTELY NO KNOWLEDGE OF WHAT WAS HAPPENING IN ENERGY DERIVATIVES. |
| 01:05:44 | Cooper, Jim "James" H. | I UNDERSTAND. |
| 01:05:48 | Cooper, Jim "James" H. | MINE WAS A BROADER ONE. BASICALLY, IT WAS REGULATION OF ENERGY DERIVATIVES. |
| 01:05:54 | Cooper, Jim "James" H. | I GENERALLY REMEMBERED THAT ISSUE, I WOULD HAVE TO GO BACK AND REFRESH MY MEMORY. IF I MAY, LET ME LOOK AT IT AS SOON AS I CAN. |
| 01:06:05 | Cooper, Jim "James" H. | THANK YOU. I WOULD APPRECIATE THAT. IN LIGHT OF WHAT HAS HAPPENED IN THE MARKETS, TO YOU BELIEVE THAT THERE SHOULD BE SOME OVERSIGHT AND REGULATION OF DERIVATIVES IN GENERAL? |
| 01:06:22 | Cooper, Jim "James" H. | I HAVE JUST CITED ONE WITH THE CREDIT DEFAULT SWAPS. |
| 01:06:26 | Cooper, Jim "James" H. | ONLY IN THAT AREA, THANK YOU. MR. SNOW, YOU ALSO OPPOSED THIS EFFORT, JOINING DR. GREENSPAN. THIS IS WHAT YOU WROTE. "IN OUR JUDGMENT, THE ABILITY OF COUNTERPARTY SURVEILLANCE TO REGULATE THESE MARKETS CAN BE UNDERMINED BY APPROPRIATE EXTENSIONS OF GOVERNMENT REGULATION." WHAT WAS IT INAPPROPRIATE TO PROVIDE TRANSPARENCY AND DISCLOSURE FOR ENERGY TO RELATIVES? -- FOR ENERGY DERIVATIVES? |
| 01:07:00 | Cooper, Jim "James" H. | TURN ON YOUR MICROPHONE. |
| 01:07:02 | Cooper, Jim "James" H. | THANK YOU FOR THE QUESTION. AS WAS THE CASE WITH THE CHAIRMAN, I DO NOT REMEMBER THAT SINCE FOR THE ALPS AND THE DEBATE AROUND IT. -- A DO NOT REMEMBER THE DETAILS. GENERALLY, THAT MEET RESPOND THIS WAY. -- LET ME RESPOND THIS WAY. THERE IS A BALANCE WHEN IT COMES TO MARKETS AND REGULATION. IT IS NOT IN MY VIEW ONE OR THE OTHER, IT IS FINDING THE RIGHT BALANCE. ONE OF THE ARGUMENTS THAT WAS ALWAYS IN THE BACK OF MY MIND WHEN SOMEONE PROPOSED MORE REGULATION, WOULD THIS MAKE THE MARKET BETTER OR GET IN THE WAKE OF THE WAY MARKETS WORK? IT IS WHAT ECONOMISTS CALL A MORAL HAZARD ISSUE WITH REGULATION, WHERE THE MARKET ITSELF BEGINS TO LOOK TO THE REGULATION TO SAY THAT THAT IS THE GOVERNMENT'S GOOD HOUSEKEEPING SEAL OF APPROVAL ON THESE ACTIVITIES. WHEN THERE IS A PERCEPTION OF A GOOD HOUSEKEEPING SEAL OF APPROVAL, SOME OF THE INCENTIVES OF THE DUE DILIGENCE GETS UNDERMINED. THAT WAS PROBABLY, I DO NOT RECALL, THAT WAS PROBABLY WHAT I WAS REFERRING TO. |
| 01:08:32 | Cooper, Jim "James" H. | WE WILL BE PLEASED TO HOLD THE RECORD OPEN TO GET ANY ADDITIONAL COMMENTS. |
| 01:08:39 | Cooper, Jim "James" H. | MR. WAXMAN, MAY I REQUEST AN ADDITIONAL 30 SECONDS TO ASK MY QUESTION? |
| 01:08:47 | Cooper, Jim "James" H. | 30 QUESTIONS TO ASK THE QUESTION AND THEN WHO KNOWS HOW LONG TO ANSWER THE QUESTION. |
| 01:08:53 | Cooper, Jim "James" H. | I WILL SEND IT TO YOU IN WRITING. |
| 01:08:58 | Cooper, Jim "James" H. | ON THE REPUBLICAN SIDE, -- |
| 01:09:02 | Cooper, Jim "James" H. | MR. CHAIRMAN, MAY I MAKE A UNANIMOUS CONSENT MOTION? |