Feb 06 2009

Modernizing the U.S. Financial Regulatory System


"Thank you, Mr. Chairman, for calling this hearing.  Today, the Committee will hear from one of this nation’s most respected economists and veteran policymakers.  During the financial crisis in the late 1970's, it was Paul Volcker who helped put our economic house back in order.  I welcome him back to the Committee.”

“While I am very interested in the views of our witnesses on regulatory modernization, I think this hearing is a bit premature.  As I have said many times and will continue to say, I believe that before we discuss how to modernize our regulatory structure, or even before we consider how to address the current financial crisis, we need to first understand its underlying causes.  If we don’t have a comprehensive understanding of what went wrong, we will not be able to determine with any degree of certainty whether our regulatory structure was sufficient and failed, or was insufficient and must change.”

“I understand that next week the Chairman plans to hold a hearing on the origins of the financial crisis.  I welcome that hearing, but I believe that one hearing or even a handful of hearings falls well short of what these exceptional times demand.  Instead, this Committee should and must conduct a full and thorough investigation of the market practices, regulatory actions, and economic conditions that led to this crisis.  The Committee should hear testimony from all relevant parties and produce a written report of its findings.  This work is crucial if we are to develop policies that will end this crisis.”

“While I understand many people have their own views of what happened, this committee has yet to make that determination in a comprehensive and organized manner.  As a result –  nearly a year and half later –  we still have not documented what started the crisis and why it became so severe.  The uncertainty about its origins has not only exacerbated our economic downturn by undermining confidence in our entire financial system, but it has left us without a clear understanding of what needs to be done.  Therefore, the efforts of the Treasury Department and the Congress have been ad hoc at best.”

“When this all began, I strongly opposed the TARP bailout legislation because I believe Congress jumped right to a legislative solution without first identifying the problem it was trying to solve.  Since we never developed a consensus about what caused this crisis, neither Congress nor the Treasury Department could devise a targeted solution.  As a result, TARP has drifted rudderless since it was passed four months ago, wasting taxpayer dollars while the crisis rages on without an end in sight.  It is well past time that we investigate the origins of the financial crisis so that we can begin to lay the groundwork for a bipartisan, effective and durable solution.”

“In the absence of such an effort, there is now talk of creating a commission to examine the origins of the financial crisis and to make recommendations for further action.  At this time, I oppose the creation of such a commission because a thorough investigation is something this Committee can and must do.  The American people rightly expect their elective representatives, not unaccountable commissions, to do the work necessary to solve the problems facing this country.  This Committee is uniquely positioned to conduct a transparent investigation that could build the necessary political consensus around the appropriate legislative remedy.”

“This particular Committee has a long history of conducting such investigations.  The best precedent for the type of investigation that our current economic situation demands is the year-long investigation of stock market abuses the Committee conducted during the Great Depression.  The so-called Pecora hearings produced a detailed report exposing a wide range of abuses on Wall Street.  The Committee heard testimony from hundreds witnesses, producing nearly 12,000 pages of transcripts from over one hundred hearings.  The investigative staff was made up of dozens of individuals and included attorneys, accountants, and statisticians.  They conducted scores of interviews and sworn depositions.  The Committee subpoenaed corporate records, and heard testimony from the heads of Wall Street and industry, including three days of testimony from J.P. Morgan himself.  The Committee’s investigative record comprises 171 boxes in the National Archives.  The record the Pecora hearings established ultimately laid the groundwork for the passage of the Securities Acts and the creation of the Securities and Exchange Commission.”

“Recently, renowned economic historian Ron Chernow wrote an editorial in the New York Times, calling for Congress to initiate an investigation in the tradition of the Pecora hearings.  Mr. Chernow clearly stated the importance of such an investigation to resolving the current crisis, by pointing out that:

‘If history is any guide, legislators can perform a signal service by moving beyond the myriad details of the rescue plans to provide a coherent account of the origins of the current crisis. The moment calls for nothing less than a sweeping inquest into the twin housing and stock market crashes to create both the intellectual context and the political constituency for change.’

“I believe Mr. Chernow is correct.” 

“The hearings this Committee has held to date on the credit crisis, while helpful, have lacked the focus and purpose displayed during the Pecora hearings, partly due to the Committee’s lack of resources.  To remedy this problem, Chairman Dodd and I have already submitted an initial request for additional funding and office space for the Committee.  We were recently informed that the Committee is going to receive additional funding, although not what is necessary to conduct a thorough and fair investigation.  I am hopeful that our colleagues on the Rules Committee would agree that this type of effort is not only necessary, but deserving of their support.”

“I believe the investigation should start by calling before the Committee all of the regulators from the past decade who were appointed, and in most cases confirmed by the Senate, to make sure this crisis did not happen.  The Committee has heard from regulators on their views on how to solve the crisis, but it has yet to hear from present and former regulators on what caused this crisis and whether steps could have been taken to prevent it.  The Committee should supplement this testimony with an exhaustive review of the records of the regulators from the period.”

“Once again, there will be a time to discuss what needs to be done.  But, before we entrust any new or existing regulator with additional responsibilities or authorities, we need to know if, and how, our present regulatory structure failed.  After we complete a thorough review of the role of the regulators, we should then call the CEOs of the largest banks, insurance companies, brokerage firms, home builders, realtors and other financial services companies of the past decade to testify.  This, of course, would be preceded by an exhaustive staff effort to examine the activities of each institution or industry.”

“Since the crisis began, the Committee has not yet heard from Wall Street CEOs on their role in creating the toxic assets that have spread through our financial system like a cancer.  Nor have they publicly explained why their risk management systems failed, or why they operated with such dangerous levels of leverage.  Because many of these firms have either failed, received public money, or sought some type of federal assistance, they owe it to the American people to explain how this crisis started and what role they played in it.  Last year I called for a hearing to examine the role of underwriters in spawning this crisis.  The Committee announced that it would hold a hearing to examine underwriting practices, but it was postponed and has yet to be rescheduled.  That hearing could now be a part of this effort.”

“Mr. Chairman, I believe this Committee is uniquely positioned to perform this important service for the American people.  I pledge my full support should you choose to undertake your own version of the Pecora Hearings.”

“Thank you.”