The Congressional commission’s scathing account of the financial crisis casts regulators in a rather unflattering light, as the sheriff who didn’t stop Wall Street from becoming the Wild West.
In its exhaustive report released on Thursday, the Financial Crisis Inquiry Commission lambastes an alphabet soup of federal regulatory agencies – including the Securities and Exchange Commission, the Treasury Department and the Federal Reserve. The report blames the agencies for missing the mortgage bubble and for turning a blind eye to Wall Street’s excessive risk taking that threatened to topple the economy.
“The sentries were not at their posts,” the report said.
The report called out several top regulators by name, including former the Federal Reserve chairman, Alan Greenspan, who “championed” deregulation, the commission said.
The commission also cast regulators as unresponsive on the one hand — and clueless on the other. For instance, the same week that Bear Stearns collapsed, Christopher Cox, the S.E.C. chairman at the time, expressed “comfort about the capital cushions” on Wall Street.
As late as summer of 2007, with housing already past its prime, the Federal Reserve chairman, Ben S. Bernanke and the Treasury secretary, Henry M. Paulson Jr., “offered public assurances that the turmoil in the subprime mortgage markets would be contained,” according to the report.
Regulators have pleaded that their hands were tied – a bogus excuse, according to the commission.
“They had ample power in many arenas and they chose not to use it,” the report said, citing the S.E.C. decision to relax capital requirements for big investment banks as one example.
The S.E.C.’s “poor oversight” of the nation’s five biggest investment banks “failed to restrict their risky activities and did not require them to hold adequate capital and liquidity for their activities.” The commission noted that all five firms took enormous government bailouts.
The commission was particularly unforgiving of the S.E.C.’s handling of Lehman Brothers, which collapsed and filed for bankruptcy in 2008.
The agency “knew of the firm’s disregard of risk management,” the report said. “The S.E.C. knew that Lehman continued to increase its holding of mortgage securities, and that it had increased and exceeded risk limits.” The S.E.C. cannot play dumb, the report said, because the agency noted these facts nearly every month in official documents.
When the agency did try to crack the whip on Wall Street, lobbyists and their allies on Capital Hill rushed to complain.
Lawmakers would “harass” the agency when it proposed controversial regulations, Arthur Levitt, former chairman of the S.E.C. told the commission. Mr. Levitt described it as “kind of a blood sport to make the particular agency look stupid or inept or venal.”