Wikinvest Wire

On the role of federal regulators

Thursday, October 23, 2008

Well, committee chairman Henry Waxman (D - California) just banged the gavel for today's session of the House Committee on Oversight and Government Reform, saying something like, "... if Federal regulators had paid more attention..."

The star witness today (pictured above) released his testimony to Bloomberg earlier today and they offer the following preview:

Former Federal Reserve Chairman Alan Greenspan called for tighter regulation of financial companies, distancing himself from the free-market culture that he helped to create.

Firms that bundle loans into securities for sale should be required to keep part of those securities, Greenspan said in prepared testimony to the House Committee on Oversight and Government Reform. Other rules should address fraud and settlement of trades, he said. Greenspan's office released the text ahead of the hearing scheduled for 10 a.m. in Washington.

The comments contrast with Greenspan's aversion to increasing financial supervision as Fed chairman from August 1987 to January 2006. He said in a May 2005 speech that ``private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.''

Today, the former chairman asked: ``What went wrong with global economic policies that had worked so effectively for nearly four decades?'' During his term at the Fed's helm, Greenspan repeatedly warned lawmakers against inhibiting markets, such as by tightening oversight of certain types of derivatives.

Greenspan, reiterated his ``shocked disbelief'' that financial companies failed to execute sufficient ``surveillance'' on their trading counterparties to prevent surging losses. The ``breakdown'' was clearest in the market where securities firms packaged home mortgages into debt sold on to other investors, he said.
The former Fed chairman takes a shot at identifying the "root cause" of the current crisis, finding it far, far away from Washington D.C. in the "surge in global demand" for U.S. suprime mortgage debt which was facilitated by "unrealistically positive rating designations by credit agencies".

More to come in a little while...

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