–Fed, SEC Failed To Clamp Down On Excesses In Financial Sector
–Financial Crisis Was Avoidable

By Brai Odion-Esene

WASHINGTON (MNI) – The commission charged with investigating the
root causes of the 2008 meltdown in the financial markets Thursday held
up the Federal Reserve and other government agencies as major culprits,
accusing financial regulators of failing to clamp down on excesses and
risky behavior in the run-up to the crisis.

The report by the Financial Crisis Inquiry Commission, which paints
the picture of regulators who were either asleep or chose not to act in
the face of clear evidence, concluded that “this financial crisis was
avoidable.”

“The captains of finance and the public stewards of our financial
system ignored warnings and failed to question, understand, and manage
evolving risks within a system essential to the well-being of the
American public,” the FCIC said. “Theirs was a big miss, not a stumble.”

The prime example, the report said, “is the Federal Reserve’s
pivotal failure to stem the flow of toxic mortgages, which it could have
done by setting prudent mortgage-lending standards. The Federal Reserve
was the one entity empowered to do so and it did not.”

The widespread failures in financial regulation and supervision
proved devastating to the stability of the nation’s financial markets.
the FCIC concluded. “The sentries were not at their posts,” it
continued, with regulators choosing instead to hold to the widely
accepted faith in the self-correcting nature of the markets and the
ability of financial institutions to effectively police themselves.

It singled out the push for deregulation and self-regulation
championed by former Fed Chairman Alan Greenspan, accusing such efforts
of stripping away key safeguards that could have helped avoid the
catastrophe.

“This approach had opened up gaps in oversight of critical areas
with trillions of dollars at risk, such as the shadow banking system and
over-the-counter derivatives markets,” the FCIC report said. “In
addition, the government permitted financial firms to pick their
preferred regulators in what became a race to the weakest supervisor.”

One of the main arguments that proponents of the Dodd-Frank Act is
that it grants regulators much needed powers and authority that they
lacked prior to the collapse of Lehman Brothers and the subsequent
turmoil in the financial markets.

“We do not accept the view that regulators lacked the power to
protect the financial system. They had ample power in many arenas and
they chose not to use it,” the FCIC said.

“And where regulators lacked authority, they could have sought it.
Too often, they lacked the political will — in a political and
ideological environment that constrained it — as well as the fortitude
to critically challenge the institutions and the entire system they were
entrusted to oversee.”

The report went on to highlight a few examples when regulators
could have acted to stamp out risky practices but failed to do so. The
Securities and Exchange Commission, it said, could have required more
capital and halted risky practices at the big investment banks. “It did
not.”

The Federal Reserve Bank of New York — then led by current
Treasury Secretary Timothy Geithner — and other regulators could have
clamped down on Citigroup’s excesses in the run-up to the crisis. Nor
did policy makers step in to halt “the runaway mortgage securitization
train.”

“In case after case after case, regulators continued to rate the
institutions they oversaw as safe and sound even in the face of mounting
troubles, often downgrading them just before their collapse,” the report
said.

And despite the unprecedented amount of actions taken, and
liquidity pumped in, by the government and the Fed to keep the financial
system afloat, the commission still concluded that “the government was
ill prepared for the crisis, and its inconsistent response added to the
uncertainty and panic in the financial markets.”

The greatest tragedy, the report said, would be to accept the
refrain that no one could have seen this coming and thus nothing could
have been done. “If we accept this notion,” it warned, “it will happen
again.”

The report was agreed to by only six commissioners of the 10. Three
others are writing a minority report that focuses more on the credit
bubble beyond housing and less on U.S. regulators’ performance. There
was also a fourth separate dissent.

** Market News International Washington Bureau: 202-371-2121 **

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