U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

55–764 PDF 2010

THE FINANCIAL CRISIS AND THE ROLE OF

FEDERAL REGULATORS

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

OCTOBER 23, 2008

Serial No. 110–209

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

JACKIE SPEIER, California

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

LAWRENCE HALLORAN, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on October 23, 2008 .......................................................................... 1

Statement of:

Greenspan, Alan, former chairman of the Federal Reserve Board; Christopher Cox, chairman of the Securities and Exchange Commission;

and John Snow, former Secretary of the Treasury .................................... 11

Cox, Christopher ........................................................................................ 20

Greenspan, Alan ........................................................................................ 11

Snow, John ................................................................................................. 36

Letters, statements, etc., submitted for the record by:

Cox, Christopher, chairman of the Securities and Exchange Commission,

prepared statement of ................................................................................... 23

Greenspan, Alan, former chairman of the Federal Reserve Board:

Letter dated November 4, 2008 ................................................................ 52

Prepared statement of ............................................................................... 15

Lynch, Hon. Stephen F., a Representative in Congress from the State

of Massachusetts, article dated June 24, 2008 ........................................... 99

Sali, Hon. Bill, a Representative in Congress from the State of Idaho,

prepared statement of ................................................................................... 111

Snow, John, former Secretary of the Treasury, prepared statement of ....... 38

Towns, Hon. Edolphus, a Representative in Congress from the State

of New York, prepared statement of ........................................................... 108

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared statement of ........................................................... 3

(1)

THE FINANCIAL CRISIS AND THE ROLE OF

FEDERAL REGULATORS

THURSDAY, OCTOBER 23, 2008

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m., in room 2154,

Rayburn House Office Building, Hon. Henry A. Waxman (chairman

of the committee) presiding.

Present: Representatives Waxman, Maloney, Cummings,

Kucinich, Tierney, Watson, Lynch, Yarmuth, Norton, McCollum,

Cooper, Van Hollen, Hodes, Murphy, Sarbanes, Davis of Virginia,

Shays, Mica, Souder, Platts, Issa, Bilbray, and Sali.

Staff present: Phil Barnett, staff director and chief counsel; Kristin Amerling, general counsel; Stacia Cardille, counsel; David

Rapallo, chief investigative counsel; Theo Chuang and John Williams, deputy chief investigative counsels; Roger Sherman, deputy

chief counsel; Margaret Daum, counsel; David Leviss, senior investigative counsel; Karen Lightfoot, communications director and senior policy advisor; Caren Auchman, communications associate; Daniel Davis, professional staff member; Zhongrui Deng, chief information officer; Rob Cobbs, Mitch Smiley, and Jennifer Owens, special

assistants; Brian Cohen, senior investigator and policy advisor;

Earley Green, chief clerk; Jennifer Berenholz, assistant clerk;

Leneal Scott, information systems manager; Larry Halloran, minority staff director; Jennifer Safavian, minority chief counsel for oversight and investigations; Brien Beattie, Molly Boyl, Benjamin

Chance, and Alex Cooper, minority professional staff members;

John Cuaderes, Nick Palarino, and Larry Brady, minority senior

investigators and policy advisors; Adam Fromm and Todd Greenwood, minority professional staff members; Patrick Lyden, parliamentarian and Member services coordinator; and Brian McNicoll,

minority communications director.

Chairman WAXMAN. The 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 examined the bankruptcy of Lehman Brothers. We learned

that this investment bank failed after it made highly leveraged investments that plummeted in value.

Our second hearing examined the fall of AIG. We learned that

this huge insurance company was brought to the brink of bankruptcy by speculation in unregulated derivatives called credit default swaps.

2

Our third hearing, which we held yesterday, examined the role

of credit rating agencies. We learned that these firms sacrificed

their rating standards—and their credibility—for short-term gains

in sales volumes.

Each of these case studies is different, but they share common

themes. In each case, corporate excess and greed enriched company

executives at enormous cost to shareholders and our economy. In

each case, these abuses could have been prevented if Federal regulators had paid more attention and intervened with responsible

regulations.

This brings us to today’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.

The Federal Reserve had the authority to stop the irresponsible

lending practices that fueled the subprime mortgage market, but

it’s long-time chairman, Alan Greenspan, rejected pleas that he intervene. The SEC had the authority to insist on tighter standards

for credit rating agencies, but it did nothing, despite urging 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 SEC relaxed leverage standards on Wall Street, the Offices

of Thrift Supervision and the Comptroller of the Currency preempted State efforts to protect home buyers from predatory lending. The Justice Department slashed its efforts to prosecute whitecollar fraud.

Congress is not exempt from responsibility. We passed legislation

in 2000 that exempted financial derivatives from regulation, and

we took too long, until earlier this year, to pass legislation

strengthening oversight of Fannie Mae and Freddie Mac.

Over and over again, ideology trumped governance. Our regulators became enablers rather than enforcers. Their trust in the

wisdom of the markets was infinite. The mantra became government regulation is wrong, the market is infallible.

Our focus today is financial 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 fail filled with formaldehyde.

Today we will ask our witnesses hard questions about the regulatory decisions they made and they failed to make, but I want

them to know I value their public service and their cooperation

with the committee. Our committee house stayed busy in recent

weeks, as we have held hearings on the financial crisis, and I want

all the Members to know how much I appreciate their involvement

in these hearings.

It’s 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 am proud

of the work we are doing, and especially the contribution of members of the committee.

[The prepared statement of Hon. Henry A. Waxman follows:]

3

4

5

6

7

8

Chairman WAXMAN. Mr. Davis, I want to recognize you.

Mr. DAVIS OF VIRGINIA. Thank you, Mr. Chairman.

Let me just say yesterday I agreed with your opening statement

and associated myself with it. Today I am in disagreement with

much of what you have to say.

Of all the hearings we have had so far on the causes and effects

of the economic crisis, I think today’s testimony and discussion

gives us the opportunity to talk for the first time about the systems

and structures meant to maintain stability and root out abusive

practices in financial markets.

I hope this distinguished 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 still radiating

global toxic shock waves from the epicenter of their subprime sinkhole. By the way, these were areas where we did try to regulate

in some on our side and were stopped from the other side of the

aisle from bringing regulation in earlier.

Our earlier hearings have focused on important, but to be honest,

somewhat tangential issues, a unique case bailout, a bankruptcy,

flawed credit ratings, executive compensation, and the cost of corporate retreats. No one is minimizing or defending corporate malfeasance. We share the outrage of most Americans at the greed

that blinded Wall Street to its civic duty to protect Main Street.

But this committee can take a broader view of the patchwork of

Federal financial regulators built by accretion after each cyclical

crisis and artificially subdivided behind Congress’ jurisdictional

walls. No single agency, by action or omission, caused this crisis,

and no existing agency alone can repair the damage or prevent the

next, some believable, inevitable, booming and bust.

It wasn’t deregulation that allowed this crisis. It was the mishmash of regulations and regulators, each with too narrow a view

of increasingly integrated national and global markets. The words

‘‘regulation’’ and ‘‘deregulation’’ are not absolute goods and evils,

nor are they meaningful policy prescriptions. The dynamic structure of our markets has made creating an enduring regulatory system a perennial and bipartisan challenge.

After the 1933 commercial bank failures, the Glass-Steagall Act

separated investment and commercial banking activities and established the Federal Deposit Insurance Corporation, restoring public

confidence in the banking system.

But by 1999, the marketplace had outgrown these post-depression rules. The increasingly global market led the Congress and a

Democratic president to adopt the Gramm-Leach-Bliley Act, repealing Glass-Steagall, and allowing commercial banks to diversify and

underwrite in trade securities. That was not regulation for

deregulation’s sake. These activities were seen by many as actually

reducing risk for banks through diversification, and allowing banks

to compete in a rapidly globalizing marketplace.

When Enron and other scandals erupted earlier this decade, Congress respond with Sarbanes-Oxley, putting new regulations on

public companies. The bipartisan Band-Aid approach to oversight

and regulation continued.

9

In the past few years, the market, as it tends to do, changed

again. New securities were created and traded and, once again,

analog government was out of sync with the digital world.

While regulators pushed paper, the quants pushed electrons,

moving money around the globe at the speed of light. Free markets

are constantly evolving and innovating. Regulators by law, bureaucratic custom or just bad habit tend to remain static. Modernization to Federal regulatory structures have 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 voiced some level of alarm about dangers to the total financial system posed by hyperactive subprime

lending and its high yield, high-risk progeny, collateralized debt obligations, derivatives and other exotic and other unregulated mortgage backed instruments.

Some of those were intentionally designed to slip between existing regulatory definitions. Is a credit default swap an investment

vehicle or insurance agreement? Should they be considered futures

contracts regulated by the Commodities Future Trading Commission or securities under the purview of the SEC? Today’s 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 incentives

of consumers, lenders and borrowers to achieve stable and healthy

markets based on transparency and good faith.

Mr. Greenspan, Mr. Snow, Mr. Cox, I hope you will give us your

thoughts on the core issues that led to this crisis, and, more importantly, your ideas on a framework for the lean but supple regulatory approach that can defect, and hopefully 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, healthy.

While we are at it, we might ask ourselves why the Congress

didn’t convene these hearings last March when market turbulence

first turned toxics. There’s plenty of blame to go around as we try

to unravel the wildly complex tangle of 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. But retribution needs to be tempered by wisdom. There’s an apocryphal tale by about the great

American industrialist, Andrew Carnegie, that I think explains

why. It seems one of his lawyers made a mistake in drafting a contract that cost Carnegie $100,000. When he was asked why he

didn’t fire the attorney, Carnegie replied, ‘‘Well, I just spend

$100,000 training him.’’

Well, we are learning some expensive lessons and hopefully will

put them to good use.

Thank you, Mr. Chairman.

Chairman WAXMAN. Mr. Davis——

Mr. MICA. Mr. Chairman, I have a unanimous consent request.

10

Chairman WAXMAN. The gentleman will state his unanimous

consent request.

Mr. MICA. 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 recall——

Chairman WAXMAN. The unanimous consent is to put the document into the record?

Mr. MICA. Yes. If you recall, during the hearing——

Chairman WAXMAN. Over the objection—is there any objection,

because you are not recognized for a speech.

The unanimous consent request——

Mr. MICA. Well, I just wanted to explain that this hearing is

being hijacked.

Chairman WAXMAN. Well, there is objection, and the gentleman

is no longer recognized.

Mr. MICA. Coverage before——

Chairman WAXMAN. We have before us now——

Mr. MICA. Fannie Mae and Freddie Mac. After next week.

Chairman WAXMAN. The gentleman will cease his comments so

we can go ahead with our hearing.

Mr. MICA. Thank you for allowing me to successfully put that

thought.

Chairman WAXMAN. 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 and Exchange Commission, Mr. Cox is currently the chairman of the Securities and

Exchange Commission. 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 he served 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 3 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

CEO of CSX Corp. Mr. Snow also 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. So

I would like to request the three of you please to stand and raise

your right hands.

11

[Witnesses sworn.]

Chairman WAXMAN. 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. I want 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

our ideas of where we go for the future.

As I said, your prepared statements were going to be in the

record in full.

I am going to recognize each of you. We ordinarily ask that oral

presentations be no more than 5 minutes. We will keep a clock, but

we will not enforce that 5 minutes rigorously, but we do want that

clock to be there to inform you that the green light is on for 4 minutes, the orange light means there’s 1 minute left. When the red

light is on, the 5 minutes has expired.

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’s a button on

the base the mic. You are not inexperienced in testifying before

Congress, so I will recognize you to proceed as you see fit.

Mr. GREENSPAN. Thank you very much, Mr. Chairman.

Chairman WAXMAN. Pull the microphone a little closer to you.

STATEMENTS OF ALAN GREENSPAN, FORMER CHAIRMAN OF

THE FEDERAL RESERVE BOARD; CHRISTOPHER COX, CHAIRMAN OF THE SECURITIES AND EXCHANGE COMMISSION;

AND JOHN SNOW, FORMER SECRETARY OF THE TREASURY

STATEMENT OF ALAN GREENSPAN

Mr. GREENSPAN. Thank you very much, Mr. Chairman. I appreciate having an extra few minutes, because I will run slightly over.

I will try to do it as expeditiously as possible.

Mr. Chairman, Ranking Member Davis and members of the committee, thank you for this opportunity to testify.

Mr. SHAYS. Could you just put the mic a little closer, Mr. Greenspan. Thank you, that will help.

Mr. GREENSPAN. 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 represent economic policy is made, those who are feeling the brunt of the crisis in their workplaces and homes. I hope

to address those 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 long 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

12

than anything I could have imagined. It has morphed from one grip

by liquidity restraints to one in which fears of insolvency are now

paramount.

Given the financial damage to date, I cannot see how we can

avoid a significant rise in layoffs and unemployment. Fearful

American households are attempting to adjust as best they can to

a rapid contraction in credit availability, threats to retirement

funds and increased job insecurity.

All of this implies a marked retrenchment of consumer spending,

as households try to divert an increasing part of their incomes to

replenish depleted assets, not only in 401(k)’s, but in the value of

their homes as well. Indeed, 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, 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 tentative steps

toward reengagement with risk. Broken market ties among banks,

pension and hedge funds, and all types of nonfinancial businesses,

will become reestablished, 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 selfinterest of lending institutions to protect shareholders equity, myself especially, are in a state of shocked disbelief. Such

counterparty surveillance is a central pillar of our financial markets 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,

accordingly, 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

13

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, and, 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.

It was the failure to properly price such risky assets that precipitated the crisis. In recent decades, a vast risk management and

pricing system has evolved, combining the best insights with mathematicians and finance experts, supported by major advances in

computer and communications technology.

A Nobel Prize was awarded for 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 edifice, 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.

Instead, the model has 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 2007, markets eventually trashed the credit

agencies rosy ratings, a blanket of uncertainty descended on the

community. Doubt was indiscriminately cast on pricing of securities that had any taint of subprime backlog—backing.

As much as I would have preferred otherwise, in this financial

environment I see no choice but to require that all securitizers retain a meaningful part of the securities they issue. This will offset,

in part, market deficiencies stemming from the failures of

counterparty surveillance.

There are additional regulatory changes at this breakdown of the

central pillar of competitive markets requires in order to return to

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 exchange already evident in today’s markets. Those markets for an indefinite

future will be far more restrained than with 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, chastened, will be exceptionally cautious. Structured

investment vehicles, Alt-A mortgages, and a myriad of other exotic

financial instruments 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 small business

ownership are vital commitments to a community. We should thus

seek ways to reestablish a more sustainable subprime mortgage

market. This crisis will pass, and America will reemerge with a far

sounder financial system.

14

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you very much, Dr. Greenspan.

[The prepared statement of Mr. Greenspan follows:]

15

16

17

18

19

20

Chairman WAXMAN. Mr. Cox.

STATEMENT OF CHRISTOPHER COX

Mr. COX. Thank you, Chairman Waxman, Ranking Member

Davis and members of the committee for inviting me to discuss the

lessons from the credit crisis and the lessons for the future of Federal regulation.

I am pleased to join with former Chairman Greenspan and with

former Secretary Snow, who, together, have given more than 30

years in service to their country.

Chairman WAXMAN. Will you pull the mic a little closer. Thanks.

Mr. COX. The SEC’s place in the regulatory structure is, of

course, different than the Federal Reserve and the Treasury.

The SEC sets the rules for disclosure of material information by

public companies. We set the rules for the securities exchanges and

the broker dealers, who trade on those exchanges, and, above all,

the SEC is a law enforcement agency.

The lessons of the credit crisis all point to the need for a strong

SEC, which is unique in its arms-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 SEC’s former chief accountant testified at

one of your earlier hearings, if honest lending practices had been

followed, much of this crisis, quite simply, would not have occurred.

The packaging of risky mortgages into complex structured securities with AAA ratings spread the risks into 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 of the failure of

bad mortgages by orders of magnitude. And they 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 that he or she had

been able to predict the unprecedented meltdown of the entire U.S.

mortgage market which was the fundamental cause of this crisis.

Second, although I was not at the SEC 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 every one of the program’s assumptions from

the start.

In particular, I would have wanted to question its reliance on the

widely used Basel standards for commercial banks and the Federal

Reserve’s 10 percent well-capitalized standard for bank holding

companies. Those standards, as we have seen, 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 swaps loophole in the

Commodity Futures Modernization Act. Last month, I formally

asked Congress to fill this regulatory gap, and I urged this committee to join in this effort, which cannot wait until next year.

21

Fourth, I would have been even more aggressive in urging legislation to require stronger disclosure to investors in municipal securities. Individual investors account for nearly two-thirds of this

multi trillion dollar market, and yet neither the SEC, nor any Federal regulator, has the authority to insist on full disclosure. Most

importantly, we have learned that voluntary regulation of financial

conglomerates does not work. Neither the SEC nor any regulator

has the statutory authority to regulate investment bank holding

companies, except on a voluntary basis, and that must be fixed.

The current crisis has also highlighted what does work, in particular, the SEC’s regulation of broker dealers and its protection of

their customers. So in strengthening the role of the SEC, Congress

should build on that 74-year tradition, as well on the agency’s

strong law enforcement and its 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 risks throughout the system. But coordination among

regulators, which is so important, is enormously difficult in the

current Balkanized regulatory system.

Here, the organization of Congress itself is part of the problem.

Legislative jurisdiction is split so that 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 and the Senate. This long-running turf battle is one of the reasons that credit

default swaps aren’t regulated.

But the Congress has overcome these jurisdictional divides before

in urgent circumstances with the appointment of a select committee. As soon as possible, Congress should appoint a select committee on financial services regulatory reform, that includes representatives from all the affected jurisdictions.

As you know, I chaired such a committee for 2 years after 9/11,

following which the House created the permanent Homeland Security Committee.

A select committee could address these urgent questions from a

comprehensive standpoint. It could tackle the challenge of merging

the SEC and the CFTC, which I strongly support. This would bring

futures within the same general framework that currently governs

economically similar securities.

Mr. Chairman, these are some of the lessons learned during this

crisis and some of the future opportunities, but just as important

is dealing with the current emergency. The SEC is using our new

authority, under the Credit 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

standards in inactive markets and bank support for money market

funds.

We have, required disclosures of short positions to the SEC and

strengthened investor protections against naked short selling, and

we are working to establish one or more central counterparties for

credit default swaps. Our enforcement division has over 50

subprime investigations underway, and we have mounted a nationVerDate 11-MAY-2000 11:25 Jun 07, 2010 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 U:\DOCS\55764.TXT KATIE PsN: KATIE
22

wide investigation to potential fraud in the securities of the some

of the Nation’s largest financial institutions.

This past year, the SEC brought the largest number of insider

trading cases in the agency’s history and the second highest number of cases overall. And 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. These

will be, by far, the largest settlements in the SEC’s histories.

Mr. Chairman, the role of the SEC has never been more important. I am humbled to work side by side with the dedicated men

and women who fight each day for the protection of America’s investors in our markets. Thank you for the opportunity to discuss

the role of the SEC and the lessons from the current crisis. I will

be happy to take your questions.

Chairman WAXMAN. Thank you very much, Mr. Cox. We will

have questions for you, all three of you, after all of you have testified.

[The prepared statement of Mr. Cox follows:]

23

24

25

26

27

28

29

30

31

32

33

34

35

36

Chairman WAXMAN. Mr. Snow. Is your microphone on? There’s a

button.

STATEMENT OF JOHN SNOW

Mr. SNOW. Thank you very much, Mr. Chairman, Ranking Member Davis, members of the committee, it’s an honor and a privilege

to be here with you today to talk about this issue of extraordinary

importance to the American people.

Millions and millions of Americans now realize that the health

of the financial system isn’t some abstraction, it’s the stuff of real,

day-to-day life for them.

We meet in an extraordinary 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, Mr.

Chairman, are spilling over to the real economy, and we now seem

to be on a clear path to much slower growth rates, probably going

negative, if they are not negative 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. This is 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

from early 2003 until the middle of 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 and 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, into the U.S. economy.

I tried, when I was Treasury Secretary, to keep my eye on what

those risks were, the focus on them. Where we saw clear visible

risks, and some of you saw them as well with—I am thinking here,

of Congressman Shays, where we saw clear visible risks as in the

case of the GSEs, 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 GSEs represented a huge systemic

risk, a risk that unfortunately grew during that period, Mr. Chairman, as they continued to broaden out, an extraordinary blowout,

growth of their own investment, their own investment portfolios.

I called for a strong regulator. We called for a 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, the fact their

paper traded like U.S. Government paper.

We called for a regulator with the ability to have a restucturing

through liquidation and bankruptcy of those entities, sending a

clear message to the markets that they weren’t, ‘‘too big to fail.’’

37

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 risk that I saw as the largest and most visible systemic

risk at the time.

Beyond Fannie and Freddie, we were also continuously on the

lookout for the problems that could emerge. As I thought about the

problems that could emerge in 2003 and 2004, it became clear to

me that 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 view, 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 commissioned a blueprint to put

that in place. I am pleased to see that now a version of that have

blueprint is before you, and I hope you will act on it.

So, basically, Mr. Chairman, where we saw at Treasury in our

policy role, visible risks, as is with the GSEs, we acted, we called

for the strong regulator. Where the risks where inchoate, where

they were not yet clearly visible, we recognized that a much stronger, mother effective regulatory system should be put in place.

I look forward to responding to your questions. Thank you very

much.

Chairman WAXMAN. Thank you very much, Mr. Snow.

[The prepared statement of Mr. Snow follows:]

38

39

40

41

42

43

44

Chairman WAXMAN. We will now proceed to questioning by the

Members. Without objection, the questioning of witnesses will proceed as follows.

Questioning will begin with a 12-minute block of time for each

side with the chairman and the ranking member 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 longestserving chairman of the Federal Reserve in history, and during this

period of time, you were, perhaps, the leading proponent of deregulation of our financial markets. Certainly you were the most influential voice for 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 derivatives. You said are, ‘‘There’s nothing involved in

Federal regulation which makes it superior to market regulation.’’

In 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?

Mr. GREENSPAN. Partially.

Chairman WAXMAN. Be sure the mic is turned on.

Mr. GREENSPAN. Sure. 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 very difficulty—have great difficulty in absorbing

it, to those who have the capital to absorb losses if and when they

occur. These derivatives are working well. Let me put it to you very

specifically.

Chairman WAXMAN. So you don’t think you were wrong in not

wanting to regulate the derivatives?

Mr. GREENSPAN. Well, it depends on which derivatives we are

talking about. Credit default swaps, I think, have serious problems

associated with them.

But, the bulk of derivatives, and, indeed, the only derivatives

that existed when the major discussion started in 1999, were those

of interest rate risk and foreign exchange risk.

Chairman WAXMAN. Let me interrupt you, because we do have

a limited amount of time, but you said in your statement that you

delivered the whole intellectual edifice of modern risk management

collapsed. You also said, ‘‘those of us who have looked to the selfinterest of lending institutions to protect shareholders’ equity, myself especially, are in a ‘‘state of shock, disbelief.’’ Now that sounds

to me like you are saying that those who trusted the market to regulate itself, yourself included, made a serious mistake.

45

Mr. GREENSPAN. Well, I think that’s true of some products, but

not all. I think that’s the reason why it’s important to distinguish

the size of this problem and its nature.

What I wanted to point out was that the—excluding credit default swaps, derivatives markets are working well.

Chairman WAXMAN. Well, where did you make a mistake then?

Mr. GREENSPAN. I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such is

that they were best capable of protecting their own shareholders

and their equity in the firms.

And it’s 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 is something which looked to be a very solid

edifice, and, indeed, a critical pillar to market competition and free

markets, did break down. And I think that, as I said, shocked me.

I still do not fully understand why it happened and, obviously, to

the extent that I figure out where it happened and why, I will

change my views. If the facts change, I will change.

Chairman WAXMAN. Dr. Greenspan, Paul Krugman, the Princeton Professor of Economics who just won a Nobel Prize, wrote a column in 2006 as the subprime mortgage crisis started to emerge.

He said, ‘‘If anyone is to blame for the current situation, it’s 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?

Mr. GREENSPAN. Well, 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 distinguished Governors at the time, Governor Gramlich who,

frankly, is, regrettably deceased, but was unquestionably one of the

best Governors I ever had to deal with—came to my office and said

that he was having difficulties with the problem of what really

turned out to be fairly major problems in predatory lending.

Chairman WAXMAN. Well, he urged you to move with the power

that you as chairman of the Fed, as both Treasury Department and

HUD suggested, that you put in place regulations that would have

curbed these emerging abuses in subprime lending. But you didn’t

listen to the Treasury Department or to Mr. Gramlich.

Do you think that was a mistake on your part?

Mr. GREENSPAN. Well, I questioned the facts of that. He and I

had a conversation. I said to him, I have my doubts as to whether

it would be successful.

But to understand the process by which decisions are made at

the Fed, it’s important to recognize what are lines of responsibilities and lines of authority are within the structure of the system.

The Fed has incredibly—professional large division, that covers

46

consumer and community affairs. It has probably the best banking

lawyers in the business, in the legal department, and an outside

counsel of expert professionals to advise on regulatory matters.

And what the system actually did was to try to corral all of this

ongoing information and to eventually filter into a subcommittee of

the Federal Reserve board——

Chairman WAXMAN. Dr. Greenspan, I am going to interrupt you.

The question I had for you is you had an ideology. You had a belief

that free, competitive—and this is shown—your statement, ‘‘I do

have an ideology. My judgment is that free, competitive markets

are by far the unrivaled way to organize economies. We have tried

regulation, none meaningfully worked.’’

That was your quote. You have the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis.

You were advised to do so by many others.

Now, our whole economy is paying its price. You feel that your

ideology pushed you to make decisions that you wish you had not

made?

Mr. GREENSPAN. Well, remember, though, whether or not 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 exists is accurate or not. What I am

saying to you is, yes, I found a flaw, I don’t know how significant

or permanent it is, but I have been very distressed by that fact.

But if I may, may I just finish an answer to the question——

Chairman WAXMAN. You found a flaw?

Mr. GREENSPAN. I found a flaw in the model that I perceived is

the critical functioning structure that defines how the world works,

so to speak.

Chairman WAXMAN. In other words, you found that your view of

the world, your ideology, was not right, it was not working.

Mr. GREENSPAN. Precisely. That’s 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 just, if I may——

Chairman WAXMAN. Well, the problem is that the time has expired.

Mr. DAVIS OF VIRGINIA. He wishes to answer. Can you just let

him answer.

Chairman WAXMAN. We have many Members.

Mr. GREENSPAN. If I could have just a minute. The reason, basically, is this—Governor Gramlich said to me, that he had problems.

Indeed, I agreed that I had heard very much the same thing. I

frankly thought that when our meeting ended, that a subcommittee

of the board which supervises all of the various aspects of consumer and community affairs within the Board of Governors and

the Federal Reserve system, would move forward and prevent 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, when—I took an oath of office when

I became Federal Reserve chairman, and I recognized that you do

47

with that, what I did is I said that I am here to uphold the laws

of the land passed by the Congress, not my own predilections.

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 was the will of the Congress. In

fact, you go back and you look at the record, I felt required by my

oath of office to adhere to what I am supposed to do, not what I

would like to do. And that is my history, and I think the evidence

very strongly supports that.

Chairman WAXMAN. Well, I appreciate that. On the other hand,

you didn’t get to vote on regulations that didn’t put before the Federal Reserve Board, even though you have the legal authority for

those regulations. That’s more—not a question but a comment.

Mr. Davis.

Mr. ISSA. Mr. Chairman, Mr. Davis, I was just going to ask if you

needed more than the 12 minutes, because we had run over, but

it’s done.

Mr. DAVIS OF VIRGINIA. Thank you. Let me start with all of you,

but, Dr. Greenspan, I will start with you. I think what we see now

as laying a predicate for what I always fear happens when there’s

a crisis, and that it is that Congress overreacts to the situation.

It seems to me that it wasn’t just deregulation that allowed this

crisis, it was the mishmash of regulations and regulators with too

narrow a view of the increasingly integrated national global markets. But I would like to get all of your reactions to the following.

In terms of legislation passed by the Congress, what effects, if

any, and were they right or wrong in Gramm-Leach-Bliley, the

Commodities Futures Modernization Act and our failure to regulate

Freddie and Fannie. If you would look at those three all congressional actions or inactions, to what effect, if any, did they have on

this crisis and if there are any suggestions you would make in the

future in terms of how we would proceed.

Mr. GREENSPAN. I have been talking at great length——

Mr. DAVIS OF VIRGINIA. Mr. Cox, let me start with you, Chris.

Mr. COX. Thank you, Mr. Chairman.

Regulatory gaps have been the be deviling solution to this crisis

now during the last year. It’s been 1 year since we had the all-time

stock market high. Are you still having trouble hearing?

During the past year, regulators have been cooperating at the

international level and within the Federal Government, and Federal to State, more closely than ever before. But what we are seeing is different parts of the elephant. 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 with where that

leads off.

One of the most significant regulatory gaps is the one to which

several of you have alluded here this morning, and that is the gap

in the 2,000 CFMA that left completely unregulated and leaves

48

open today as we meet here the $58 trillion notional 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 its opaque, the

fact that parties and counterparties don’t know where the exposures are. It makes it very, very difficult to price risk throughout

the system. It’s why I think it’s so urgent that we address that gap,

that we address the gap——

Mr. DAVIS OF VIRGINIA. Chairman Cox, that particular act where

we failed to address that was a mistake in retrospect, it basically

legalized gambling.

Mr. COX. Well, I think it’s important to note, as Chairman

Greenspan does, how much has changed since this was first look

at in the Clinton administration in 1999. Because back then, as

Chairman Greenspan points out, the credit default swaps market

had barely emerged.

It was a share of the total derivatives markets that was too small

to be noticed. It has grown enormously in the recent years. It has

doubled just in the last 2 years. So it’s absolutely urgent—now that

we know how important it is in the context of the current crisis

and the difficulty that the markets and the investors are having

pricing risk that we bring disclosure to this corner of the market,

that we let the market see where the risk is and market it accordingly.

Mr. DAVIS OF VIRGINIA. Thank you. Mr. Snow, also on the

Freddie and Fannie issues, you have addressed that in your opening markets.

Mr. SNOW. Thank you, Congressman Davis. It seems to me the

root issue here, when you get right down to it, is risk and leverage.

Nowhere 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 the 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.

I asked them to give their considered views on whether or not

undo 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 the Congressman was quoting me that no one of them had

that view. They had pieces of the puzzle. It’s like the blind man

and the elephant. They are all touching a piece of it, but they don’t

know what the big picture is. That’s why I did commission the effort to produce the blueprint for a new regulatory system.

As you know, the Treasury has set up a new blueprint to create

some agency with that 360-degree view. With the GSEs, I think we

all made a mistake in not acting much, much more earlier. If that

strong regulator had been put in place in a timely way, if the market had had more visibility——

49

Mr. DAVIS OF VIRGINIA. Well, let me ask this: If a strong regulator had been put in earlier, would that really have averted this

crisis?

Mr. SNOW. Nobody really knows for sure whether it would have

averted it, but I am confident that it would have been a much different kind of crisis. Because the GSEs were the source of such an

extraordinary amount of risk in the system, risk that wasn’t really

visible, risk that really wasn’t seen to most of the participants.

Mr. DAVIS OF VIRGINIA. And they had the appearance of government backing?

Mr. SNOW. And 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

then go out and buy all the paper you could get ahold of. That’s

why we see the explosion, it’s 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.

Mr. DAVIS OF VIRGINIA. Dr. Greenspan, the Commodities Futures

Modernization Act, which passed Congress by an overwhelming

margin based the House on suspension. I think only their view is

a handful of dissenting votes signed by President Clinton.

In retrospective, as we look at that, was this a question of regulation, deregulation or just gaps in regulation where you had so

many stovepipes no one could actually see the total landscape and

things started to occur underneath it, and we weren’t able to react.

And also, I would ask you about Freddie and Fannie and their

roles in this.

Mr. GREENSPAN. Well, it’s important, when talking about a 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, actually has worked

reasonably well with the exception of a major change, which is

credit default swaps.

In the year 2005, the Federal Reserve Bank 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. That effort

has continued considerably.

The reason why there’s a big problem there is partly because of

the huge surge, as Chairman Cox says, it was negligible in 2000,

and they just, from, you know, 2 percent of the total market, they

are up over 10 percent now in a very few years.

The problem basically is the credit default swap requires that legally, when bankruptcy occurs, the person who has given the protection has the legal right to the instrument.

That’s fine, so long as you have a small amount of credit default

swaps. They are now running 10 times the size the actual instrument being insured and because of the default they are required

to do cash settlements. But that’s a voluntary basis. It’s not legally

mandated.

50

In my judgment, it’s very important that issue be resolved because at some point, the voluntary agreement process is going to

break down, and we will have a very serious problem. So, where

I think critical regulatory issues have to occur is on the legal question of defining the process by which the resolution occurs.

Mr. DAVIS OF VIRGINIA. It didn’t help that the rating agencies

were rating all of these instruments the way they were. That made

it look like less risk for the people that were in the swaps.

Mr. GREENSPAN. Indeed it did. Yes.

Mr. DAVIS OF VIRGINIA. I will reserve the balance of my time.

Chairman WAXMAN. Thank you, Mr. Davis.

Mrs. Maloney.

Mrs. MALONEY. Thank you, Mr. Chairman. And I welcome all the

panelists. I have some questions for Mr. Snow, Mr. Cox and Dr.

Greenspan on market manipulation.

Dr. Greenspan, prior to the bankruptcy of Lehman Brothers last

month, one of the largest bankruptcies in our history, was the collapse of Enron. I want to ask you about Enron and your views

about the regulation of derivatives. After Enron’s collapse investigations by the State of California and other States revealed widespread manipulation of energy markets by Enron and other energy

companies. Using schemes like Fat Boy, Death Star, and Get

Smarty, Enron created artificial shortages, bypassed regulatory

protections and drove energy prices sky high.

At the time there was no regulation of Enron’s trading in energy

derivatives. There was no public disclosure requirements and no

record keeping requirements. There were no anti-fraud or anti-manipulation provisions. Basically there was absolutely no oversight

whatsoever, and what was there was removed. And what happened

is that Enron and other companies took advantage of this lack of

regulation and oversight.

In 2000, before the Enron collapse, I tried to close this loophole.

I offered an amendment at the Banking Committee which would

have required regulation of energy derivatives. Unfortunately despite bipartisan support, the amendment failed. After Enron other

Members of Congress tried to close this loophole, most notably Senator Feinstein, who introduced amendments and legislation about

trading in energy 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 on September 18, 2002. In this

letter you stated that, ‘‘public disclosure of pricing data would not

improve the overall price discovery process.’’ You argued in these

letters that ‘‘disclosure would actually increase the vulnerability of

our economy to potential future stresses,’’ and despite Enron’s

abuses you said, ‘‘We do not believe a public policy case exists to

justify this government intervention.’’

I sincerely believe that efforts such as my effort in the Banking

Committee and Senator Feinstein’s efforts in the Senate would

have passed without your opposition. So, Dr. Greenspan, in retrospect do you think you were right to oppose these efforts to regulate energy derivatives?

51

Mr. GREENSPAN. Senator Feinstein said the same thing to me.

She’s a longtime friend and we have debated this issue to considerable extent.

First of all, the major problem I was having with the energy derivative issue was that it was an electric power problem. Electric

power, as you know, cannot be stored and as a result——

Mrs. MALONEY. Excuse me, Dr. Greenspan, my amendment was

that—and my effort was that it be listed on the Commodities Future Exchange. It was listed. Then there was an effort to remove

it from listing. So there was absolutely no knowledge of what was

happening in energy derivatives. So mine was a broader one. It

was not specifically to California.

Mr. GREENSPAN. OK. Let me do this——

Mrs. MALONEY. So basically it was regulation of energy derivatives.

Mr. GREENSPAN. I generally remember the issue, but I’d have to

go back and refresh my memory. And if I may, let me look at it

and come back to you as soon as I can if you allow me to do so.

[The information referred to follows:]

52

53

Mrs. MALONEY. Thank you. I’d appreciate that.

Now in light of what has happened in the markets, do you believe there should be some oversight and regulation of derivatives

in general?

Mr. GREENSPAN. Well, I have just cited one, the credit default

swaps.

Mrs. MALONEY. OK. I have some questions for the others. Thank

you for your service.

Mr. Snow, you also opposed this effort, joining Dr. Greenspan in

another letter the next year. Here is what you wrote: ‘‘In our judgment the ability of private counterparty surveillance to effectively

regulate these markets can be undermined by inappropriate extensions of government regulation.’’

Why was it inappropriate to require transparency and disclosure

for energy derivatives, Mr. Snow?

Mr. SNOW. Thank you for the question. As is the case with the

chairman, I don’t recall the ins and outs of your amendment or the

debate around it but——

Mrs. MALONEY. In this case I’m asking about your statements

and letters where you said you opposed it——

Mr. SNOW. But I don’t have them with me and——

Mrs. MALONEY. I’ll get you a copy.

Mr. SNOW [continuing]. I don’t have your amendments or your

language. But generally let me respond this way.

There is always a balance when it comes to markets and regulation. It’s not in my view one or the other. It’s finding the right balance. And one of the arguments that always was in the back of my

mind whenever anybody proposed more regulation is will this make

the market work better or will it get in the way of the way markets

work? And there is what exists call a moral hazard issue associated

with regulation where the market itself begins to look to the regulation to say, well, that’s the government’s good housekeeping seal

of approval on these activities and when there is a perception of

a government good housekeeping seal of approval, some of the incentives for the due diligence on the part of the counterparties gets

undermined.

I don’t recall the specifics, but I think that was probably what

I was referring to.

Chairman WAXMAN. We’ll be pleased to hold the record open to

get any further comments on this particular issue from both Dr.

Greenspan and Mr. Snow.

Mrs. MALONEY. Mr. Waxman, may I request 30 seconds to ask

my question of Dr. Cox?

Chairman WAXMAN. Well, I think that would be 30 seconds to

ask the question and who knows how long to answer the question.

Mrs. MALONEY. Then I will send it to you in writing.

Chairman WAXMAN. On the Republican side, Mr. Issa—Mr. Mica.

Mr. SHAYS. Mr. Chairman, can I just make a unanimous consent

motion?

Chairman WAXMAN. The gentleman wishes to be recognized for

unanimous consent?

Mr. SHAYS. Because of the questioning that you allocated each of

you and our ranking member, you had to consume 11 minutes and

53 seconds and our ranking member 10 minutes and 14 seconds,

54

and I’d like to make unanimous consent that both sides be given

another 10 minutes because I think it’s important for either you

and us to be able to inject ourselves.

Chairman WAXMAN. Any objection to that very generous unanimous consent? If not, that will be the order.

Mr. Mica, you’re recognized.

Mr. MICA. 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 appointed. I’m truly disappointed that these hearings have been hijacked and put off now

until November 20th. November 20th is the date that now has been

chosen for the people to know who the real culprits were. Let’s put

this out here. And I have a question for all of the panelists. Do you

know what comes before November 20th?

Mr. SNOW. The 19th.

Mr. MICA. Chris, you might recall. A little thing like an election.

What we don’t want is the trail to lead to people who have done

the wrong thing. What we don’t want is this committee to hold people who started this whole mess, this fiasco, accountable. What

we’ve been doing is we’re sort of tiptoeing around the tulips when

somebody’s driven a bulldozer through our financial garden.

Well, let’s see. Chris, you weren’t around—excuse me, Mr. Cox,

you weren’t around. You two were around. Mr. Greenspan, you go

for two, well, three Presidents. How many years total?

Mr. GREENSPAN. Eighteen and a half.

Mr. MICA. Mr. Snow, when were you Secretary?

Mr. SNOW. I was Secretary in February 2003 until the end of

June 2006.

Mr. MICA. OK. You testified a few minutes ago, Mr. Snow, that

you tried to regulate, right? That 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 to stop what you

were trying to do? Did you know that?

Mr. SNOW. I didn’t know the number, Congressman, but I knew

there was a ferocious opposition.

Mr. MICA. The three of you, who is the big subprime producer

in the United States? Who? What private company? Countrywide.

I will answer it for you. Countrywide?

Mr. SNOW. I’ll agree.

Mr. MICA. Did any of you know that Countrywide was giving

preferential discounted loans to public officials and the heads of a

government-sponsored mortgage security agency? Did you know

that when you were in charge?

Mr. GREENSPAN. I did not.

Mr. MICA. Did you know that, Mr. Snow?

Mr. SNOW. No, I didn’t.

Mr. MICA. Well, Chris, you came along later. Did you ever get

one?

Do you know who the largest recipient of campaign contributions

is in 20 years from Fannie Mae and Freddie Mac, their political action organization? Do you know?

Mr. GREENSPAN. I do not.

Mr. MICA. Do you know?

Mr. SNOW. I don’t.

55

Mr. MICA. I said in 20 years. Maybe you’re thinking it’s Senator

Dodd because he was there 20 years. You know, it wasn’t Senator

Dodd. Do you know who it was? Senator Obama in less than 4

years.

Nobody wants to get to the bottom of this. Nobody wants to stop

the money trail. And I’m going to ask in a minute to put in the

record Exhibit A and it’s called Follow the Money Trail. For those

of you who have difficulty distinguishing who participated, I have

pictures, photographs of the individuals involved.

You testified in 2003, September 10th, and you came back and

testified again asking for regulation. Did you ever see—and you did

it before the whole committee. Did you ever see the proceedings of

October 6, 2004, of one of the subcommittees of Financial Services

and hear the now chairman, Mr. Frank, and what he said about

what kind of risks some of these speculative investments posed?

Did you ever see that?

Mr. SNOW. I don’t believe I did.

Mr. MICA. I recommend you all go on YouTube and see that

hearing of October 6. Mr. Frank said there’s no risk. Mr. Frank

said we ought to roll the dice. Maxine Waters, a member of the

committee, did you hear what she said? She said, ‘‘If it ain’t broke,

don’t fix it.’’ Did you hear that, Mr. Greenspan? Did you hear those

comments?

Mr. GREENSPAN. I did not.

Mr. MICA. Did you hear them, Mr. Snow?

Mr. SNOW. No, I didn’t.

Mr. MICA. You ought to see that and you ought to see the language one of the members of the committee used about how he was

mad because people were proposing legislation. Well, I will tell you

the language that he used is the language that people are using

out there that want folks held accountable.

Now, this is a nice dog and pony show and maybe it’s theater,

but people want someone held accountable. They want people to go

to jail who brought down our financial markets. Do you agree we

should have some means for those folks to pay who’ve ripped us

off? Could you answer my question?

Mr. GREENSPAN. That’s not the type of thing—issue with which

I deal.

Mr. MICA. Thank you.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. MICA. Could I just have them answer——

Chairman WAXMAN. Just a minute, Mr. Mica. Mr. Mica, just a

minute. You’ve asked your questions and your time is up. Now I

will give the opportunity of the witnesses to answer them but not

to have you continue to engage them. Your time is up.

Mr. Cox, do you want to respond to it?

Mr. COX. Certainly. Aggressive law enforcement is now needed

more than ever. The SEC is a law enforcement agency dedicated

to making sure that anyone who broke the securities laws is held

accountable, and we are very, very busy on that right now.

Mr. SNOW. Any criminal behavior, fraudulent behavior obviously

ought to be investigated and acted upon by the appropriate authorities.

56

Mr. MICA. Thank you, Mr. Chairman. I yield back the balance of

my time.

Chairman WAXMAN. The Chair yields himself some of the generous time that’s been allotted to us to say that we’ve held four hearings and we have two more scheduled. We have them scheduled

after the election. But this isn’t an issue that’s going to go away

after the election. It’s one we seriously need to examine. And 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 they played in this current crisis as well as hedge funds. But

I think what we have heard from Mr. Mica is a political statement,

not one looking into the real issues. It’s a political statement. And

just to put the facts in perspective, the explosion in subprime lending was primarily 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 percent of

subprime loans, Freddie Mac .4. Combined they purchased a total

of 2.9 percent of the subprime loans. In 2007, Fannie Mae increased its purchases of subprime loans to 11.2 percent while

Freddie Mac increased it to 2.5. So their combined purchase total

went up to 13.7 percent of subprime loans. These are hardly market driven—driving numbers. Both companies also invested in

subprime securities created by Wall Street. Again, they were not

the dominant factor in Wall Street. In 2006 their combined market

share was less than 25 percent of the secondary market.

I point those facts out not in any way to excuse Fannie Mae or

Freddie Mac and the responsibility they have. We’re going to look

at their responsibility. But they were not the cause of the financial

crisis. And I’d be interested to know if any of the three witnesses

believe that Fannie Mae and Freddie Mac was the cause of our financial crisis. They certainly played a role in it, but do any of you

believe they were the cause of this financial crisis?

Dr. Greenspan.

Mr. GREENSPAN. I think it was a significant factor but not the

primary cause.

Chairman WAXMAN. Mr. Cox.

Mr. COX. I would agree with that. I think there’s no question

that the GSEs, Fannie Mae and Freddie Mac, played a significant

role in the subprime crisis and in fact in the creation of structured

securities and the market for those.

Chairman WAXMAN. Let me hear from Mr. Snow on that.

Mr. SNOW. I agree with that. There’s no single cause of this.

Many, many things contributed to it, but one of the primary contributors among all the contributors is certainly the role of Fannie

and Freddie.

Chairman WAXMAN. I agree with the three of you, and that’s why

we are going to look at those issues. But I don’t think it makes a

difference that we’re looking at it after the election or before the

election. We are going to look at hedge funds after the election and

we’ve got a problem we have to deal with. That is not connected

to this election calendar unless of course you want to make it a

connection to the electoral calendar, which is the purpose of the

gentleman from Florida.

57

Mr. DAVIS OF VIRGINIA. Mr. Chairman, can I yield myself——

Chairman WAXMAN. Mr. Davis.

Mr. DAVIS OF VIRGINIA. Mortgage brokers were regulated; they

were just regulated at the State level, isn’t that right? So it wasn’t

that they didn’t have any regulation. Their regulation was at the

State. And as I’ve said before, one of the problems here—these

were stovepipes. Nobody had a view of what anybody else was

doing, and when you regulate these entities at the State level nobody has a view of what’s going on nationally. I’d asked Secretary

Snow prior had Fannie and Freddie been brought under control

earlier, there’s no question this crisis would not have been to the

dimensions it was and you would agree with that, don’t you, Mr.

Secretary?

Mr. SNOW. I agree with that.

Mr. DAVIS OF VIRGINIA. Mr. Mica.

Mr. MICA. First of all, did you all know too 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?

Mr. SNOW. Well, I know there was an investigation by the

regulator——

Mr. MICA. Yeah, I have a copy of that.

Mr. SNOW [continuing]. That found some irregularities in the accounting practices——

Mr. MICA. Fannie Mae was pumping out these subprimes.

Fannie Mae was a government-sponsored mortgage security operation and then competing with folks like Lehman Brothers; so you

had them discounting the amount of capital they had as a reserve

from 10. They didn’t do that, now. I guess Andrew Cuomo did that.

But you had them discounting their reserve from 10 to 21⁄2 and you

had them pumping out there no doc, no down payment subprime

loans; is that not the case? And then who follows? Wall Street,

who’s trying to—in our system they are trying to make a buck, so

they are discounting——

Mr. COX. Congressman Mica, with respect to cooking the books,

the Securities and Exchange Commission sued Fannie Mae for

fraud in one of the largest settlements in the history of the SEC.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. MICA. I have a unanimous consent request. All I’m asking,

Mr. Chairman, as I mentioned, this in my first round——

Chairman WAXMAN. State your unanimous consent request.

Mr. MICA. I ask unanimous consent that Exhibit A, Follow the

Money, and I guess we could do—the pictures be included in the

record.

Chairman WAXMAN. Without objection, what you seek to submit

for the record, some article called Follow the Money, will be put

into the record. It’s called Exhibit A.

Mr. Cummings.

Mr. CUMMINGS. Thank you very much, Mr. Chairman. And

today, Mr. Chairman, I just want to—I want to ask questions that

my constituents would ask, all of those that are losing their investments, unable to get student loans, businesses unable to get lines

of credit, businesses going out of business, people losing their jobs.

58

I want to ask some questions on behalf of them. And I’m going to

direct my questions to you, Mr. Cox. I want to ask you about your

position on regulating derivatives, especially credit default swaps,

which now amounts to greater than the world’s annual economic

output weighing in at $54 trillion as of September. You’ve given

the committee very strong testimony urging greater regulation in

this area. By the way, I completely agree with you. As our hearing

on AIG demonstrated, the lack of regulation of credit default swaps

has created chaos in the financial markets all around the world.

My question is where have you been all these years? Mr. Cox,

last month you announced that the SEC would begin requiring

hedge fund managers, broker dealers, and institutional investors to

disclose their credit default swap holdings. That’s a terrific step.

That’s real, real nice. But you took that step after Senator McCain

said, ‘‘he has betrayed the public trust,’’ and after Carly Fiorina,

the former head of Hewlett-Packard, said that you were, ‘‘asleep at

the switch.’’ I want to know—and then of course it was after—you

made these decisions after Senator McCain to his credit saying

that the first thing he would do as President was to fire you.

Now, you became SEC chairman over 3 years ago. Why didn’t

you act sooner to require the disclosure of credit default swaps?

Mr. COX. Thank you. As you know, I have been in the vanguard

of regulators and indeed I believe I’m the first Federal regulator incumbent to call for this legislation. But we would have liked to

have known what we know now I think years ago. If you wish me

to answer explicitly where was I, I was here with you. Indeed I was

vice chairman of this committee when Congress had the opportunity to do what I’m asking Congress to do now, which is close

this regulatory hole.

Mr. CUMMINGS. But I’m talking about the 3 years that you were

there. We paid your salary. The taxpayers, the ones that are losing

their homes right now, paid your salary for 3 years. I know what

Mr. Mica said. He kept telling you you weren’t there; so I’m going

to excuse you, I’m going to excuse you. I’m talking about the times

you were there.

Mr. COX. During the time I have been chairman, what we have

seen is a market that was completely unregulated outside the jurisdiction of the SEC. I have to live within the statutory authorities

that Congress gives me, that this market has grown substantially,

that it has created risk that is difficult for markets to appraise.

Mr. CUMMINGS. OK. I only have a limited amount of time.

Mr. COX. I would just redouble my challenge—my request to

Congress—all I can do is tell you what I see as chairman that we

don’t have authority to do. We don’t have authority to regulate

credit default swaps because Congress hasn’t given us that authority. I think Congress——

Mr. CUMMINGS. Well, let me—Mr. Cox, let me ask you about

what you could do. Your predecessor, Bill Donaldson, before he left

he set up a task force specifically to look into the problem of financial derivatives such as credit default swaps, in March 2005, a few

months before you became SEC chairman. The Financial Engineering News reported that the SEC had assembled, ‘‘people from each

SEC division,’’ Corporation Finance, Enforcement, Market Regulation, and Investment Management to look at issues relating to the

59

derivatives market and the implication of the growth of credit derivatives. What happened to that task force under your leadership?

Mr. COX. We have increased the number of people that are focused on risk in the derivatives——

Mr. CUMMINGS. What happened to the task force? Is it still in existence?

Mr. COX. The number of people focused on risk, Congressman,

are increased under my chairmanship.

Mr. CUMMINGS. Well, let me tell you what your staff says, the

ones that come to work every day that we pay. Let me tell you

what they said. They said we have been told by former SEC staff

that you failed to support the work of the task force. In fact, you

basically defunded the whole Office of Risk Assessment that had

been assembled for the task force. In July 2006, you testified at the

Senate Banking Committee hearing, you took a completely different position. You said there should be no interference with the

investment strategies or operations of hedge funds, including their

use of derivative trading, leverage, and short selling.

Are you now telling us, sir, that you were mistaken 2 years ago

when you expressed opposition to any regulation of derivative trading?

Mr. COX. First, I don’t think that’s an accurate representation of

my position. Second, the Office of Risk Assessment was not ever responsible for specifically looking at derivatives. The Office of Risk

Assessment when I came to the SEC had seven people. It has

seven people now. But what we have done is increased throughout

the agency the number of people that are focused on risk assessment. We’ve done that in each of the divisions and offices that

you’ve named. It’s a vitally important function and it’s one to which

the agency and I are still strongly committed. But there are more

people doing this now than ever before.

With respect to hedge fund regulation, I have strongly supported

the efforts of the SEC to get at this even though we have 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. But as a result

of standing up for those rules, as I did, we now have almost all of

the hedge fund advisers voluntarily registered. I think we need legislation, however, to——

Mr. CUMMINGS. I wish I had more time.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. Souder is recognized for 5 minutes.

Mr. SOUDER. Thank you, Mr. Chairman. One of the huge challenges, you’ve referred to the moral hazard and risk, and the frustration you’re hearing here and across America is the irresponsibility and greed of people in Wall Street and other people who were

risk takers has endangered the lives, the jobs, the savings of just

millions of Americans. I have a letter from one of the many thousands of e-mails lobbying me for my vote of a lady from my hometown of Grabel, where I grew up, and she said, I turned down a

bigger house. I don’t understand. We’ve lived so cautiously, and

now we’re asking in effect what you all referred to as to take the

moral hazard. I took two tough votes for this rescue bill and voted

‘‘yes.’’ It may have endangered my career. I did it because I was

60

worried about the people in my district. But they are legitimately

angry that people seem to sit here hearing after hearing, well, it

wasn’t my responsibility and that you kind of knew it was happening. Whether it was Congress or here or there, but they’re furious.

And I have a couple of questions we’ve been going through hearing

after hearing in different angles with this. And Mr. Cox or my

friend Chris, has the SEC, your law enforcement agency, initiated

any investigations and attempts, without getting into specifics,

without saying where they are, since August and we have had this

crisis, have you started the process to see whether there is any

legal culpability of some of the people who have caused this mess?

Mr. COX. That is an intense national focus right now from the

SEC’s Washington headquarters and our 11 regional offices. We

have over 50 subprime investigations underway. We also have a coordinated national effort, coordinated also with criminal authorities

and with other civil law enforcement authorities in the States to

look at manipulation and fraud in the securities of the Nation’s

largest financial institutions. As you know, this crisis has particularly beset the financial sector. The volatility in the market has

particularly been visited upon the financial sector. The crisis in

banking, the credit crisis that we’re living through, is a mortal danger to many of these institutions. And so determining the extent

to which violations of the law may have contributed to this and

holding anyone who violated the law accountable is of vital importance, and we are admitting massive resources to it.

Mr. SOUDER. We were hearing yesterday in the rating authorities, as we saw AIG—I mean in AIG we had in July they are paying bonuses, in August they’re broke, in September they are getting

bailed out at $61 billion. It is inconceivable to me with a business

background and knowing how they were exposed that there wasn’t

knowledge in the rating services. The number of loans that went

out doubled in a short period of time. The interest rates go up.

Anybody with a slight investigation would have known that they

were bundling, that they were doing things that were probably illegal in the sense of taking origination fees, high interest loans,

packing them higher than the value of the house. And it isn’t just

the culpability of the people in the direct subprime. It’s a culpability of the people who knew what they were buying who were pretending to see no evil, hear no evil, report no evil, and the question

is even in an unregulated market my belief is that many of them

are criminal. We have talked a lot of different things in the credit

swaps and so on. But one of the questions here is where are the

corporate boards? Those of us who believe in the private sector believe that there was supposed to be some kind of corporate check

on the stockholders.

Do any of you have any suggestions of what we might be looking

at here because clearly they were asleep at the wheel, that if anything else, cooperation; that the fault firings on Merrill Lynch and

others only dealt with that they committed a crime and that we

seem to have locked in a corporate structure of hedge fund for

management that you win if you do well and you win if you lose;

that we have to have tougher accountability in some way. And I

wonder if any of you have any suggestions because this is critical

as to how much government is going to do this because if the priVerDate 11-MAY-2000 11:25 Jun 07, 2010 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 U:\DOCS\55764.TXT KATIE PsN: KATIE
61

vate sector does not have a mechanism to hold people accountable,

if the private sector rewards any type of thing and the moral hazard goes to the taxpayers, we have a problem. Do any of you have

any suggestions?

Mr. GREENSPAN. Well, if I may, Congressman, the markets have

already punished the people whom you are referring to. A lot of

these products have disappeared and they probably will never return. Some of the fees that were charged and paid when euphoria

and essentially which led to significant greed showed up, they’re

gone. And I suspect that we are going to find that this is a very

chastened market and that many of the problems that we’ve observed during the euphoria stage of the expansion will not be back

if—at any time if ever.

Mrs. MALONEY [presiding]. The gentleman’s time has expired.

The Chair recognizes Mr. Kucinich for 5 minutes.

Mr. KUCINICH. I thank the gentlelady. Apropos of Mr. Greenspan’s comments that the markets are punishing people, our constituents are getting punished. They’re losing their homes. And Mr.

Greenspan, you have well acquitted yourself as a spectator but I’m

not sure you’ve done that with respect to your being a participant.

The epicenter of the financial crisis, as we understand, is the

securitization of home mortgages. There are about 10 million

homes that are still in jeopardy. In your testimony you blame

securitizers, banks, credit rating agencies, risk management models, but what about your role as head of the Fed? In your testimony

you spoke of the Fed structure having the best banking attorneys,

expert outside counsel. According to the Federal Reserve Web site,

the Fed has one of the finest research staffs, 450, half of them

Ph.D.’s, but under your term as head of the Fed, public and private

debt exploded from $10.5 trillion to $43 trillion. Yet as documented

by Jim Oleske in his book called ‘‘Yeah, Right,’’ you, Mr. Greenspan, promoted adjustable rate mortgages that fueled the subprime

market. You said in February 2004, ‘‘American consumers might

benefit if lenders provided greater mortgage product alternatives to

the traditional fixed rate mortgage. The traditional fixed rate mortgage may be an expensive method of financing a home.’’

In June 2005, you stated, ‘‘Although we certainly cannot rule out

home price decline especially in some local markets, these declines

were they to occur would not have substantial macroeconomic implications.

In September 2005, you stated, ‘‘The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in housing prices.’’

The next year in May 2006, you said, ‘‘We are not about to go

into a situation where prices will go down,’’ speaking about housing. ‘‘There is no evidence home prices are going to collapse.’’

By mid-2006 there was evidence that the housing market was beginning to have trouble. But you said in October 2006, ‘‘The worst

may well be over. I suspect we’re coming to the end of this down

trend.’’

One month later in November 2006, you said, ‘‘It looks as though

the worst is behind us. The global economy is in extraordinarily

good shape. Things don’t look so bad.’’

62

Now, Mr. Greenspan, before the collapse of the housing bubble

didn’t you also say that the United States has not experienced

housing slumps to justify your policy that there would be no bubble

and can you tell this committee when it occurred to you that there

was a housing bubble?

Mr. GREENSPAN. Well, first let me correct several issues here

which I regret have been carried on for quite a significant period

of time.

Mr. KUCINICH. Could you speak closer to the mic?

Mr. GREENSPAN. Yes, I’m sorry. First with respect to adjustable

rate mortgages, it is true as you point out that I gave a speech

which was essentially constructed by—it was reporting on a Federal Reserve staff study which is stating the obvious, that if you’re

going to be somebody who can only live in a home for 2 years before you move elsewhere, you may—you should look at the adjustable rate mortgage issue. The point, however, is it then came out

that I was trashing the 30-year mortgage. A week later I appeared

at the Economic Club of New York with a thousand people and I

basically said that the remarks that I made the previous week

clearly did not mean I in any way was talking about——

Mr. KUCINICH. With all due respect, Mr. Greenspan, did you retract what you said?

Mr. GREENSPAN. I did.

Mr. KUCINICH. Well, I’ve got here from USA Today, if we could

put it up on the screen, relative to what you were just saying. You

said ‘‘I’d reproduce that speech word for word today.’’ Now, I’m not

sure——

Mr. GREENSPAN. No. The point at issue is that speech per se

taken literally is an unexceptional speech. It essentially said obviously if you’ve got interest rates rising significantly, then you

would basically run into the problem——

Mr. KUCINICH. Here’s your words, Mr. Greenspan. On one hand

you’re saying there was no connection. On the other hand you’re

saying you would reproduce that speech word for word today. When

did you know there was a housing bubble and when did you tell

the public about it? Answer the question.

Mrs. MALONEY. The gentleman’s time has expired. Mr. Greenspan can answer, but your time has expired.

Mr. KUCINICH. When did you tell the public about it?

Mr. GREENSPAN. If I may respond, that speech was essentially a

report on a staff study which if you read today you would find or

should find it was exceptional. The problem with respect to my arguing for adjustable rate mortgages as a general proposition is

false. I went before this Economic Club of New York just days later

and very significantly pointed out that the 30-year mortgage is the

most important mortgage we have and that whenever I took out a

mortgage I didn’t take out an adjustable mortgage because I

thought it was too risky.

Chairman WAXMAN [presiding]. The gentleman’s time has expired.

Mr. KUCINICH. With all due respect, and maybe some other Member could take this up, he didn’t actually respond to the question

about when he knew there was a housing bubble.

63

Mr. GREENSPAN. The housing bubble became clear to me sometime in early 2006 in retrospect. I did not forecast a significant decline because we had never had a significant decline in prices, and

it’s only as the process began to emerge that it became clear that

we were about to have what essentially was a global decline in

home prices.

Chairman WAXMAN. Thank you, Mr. Kucinich.

Mr. Sali.

Mr. SALI. Thank you, Mr. Chairman. Gentlemen, I hope you keep

in mind that 5 minutes is a pretty short time to get through some

questions. I would like to get through a couple of items pretty

quickly.

It was mentioned earlier in testimony that there was a great

level of expertise in your agencies and you would all agree that’s

a great deal more than anything we have here in Congress in

terms of the level of expertise and the number of people working

on those issues; is that correct? Do you all agree with that? You’re

all saying yes. OK.

Well, Mr. Mica just rattled off a list of what I think most people

would consider are fairly important things, and each of you said

that you knew nothing about it. Would you agree that’s in spite of

all the expertise some sort of failure on the part of the three agencies that you’re involved with?

Mr. SNOW. Congressman, let me start this time. I don’t think I

could have been clearer, as some of you know, about the huge

threat to the financial system posed by the GSEs. I was up here,

testified a number of times, gave speeches on it, called for action

over and over and over again. I don’t think I could have been clearer.

Mr. COX. If I may respond with respect to the GSEs, in both the

108th and 109th Congresses, as a member of the relevant committees of jurisdiction, I joined with Congressman Shays in cosponsoring legislation by Representative Baker that was designed to give

the GSEs a strong regulator—we have all seen the importance of

a strong regulator for the GSEs, for Fannie Mae and Freddie Mac,

but that legislation was making its way through the Congress as

early as 2003 when I originally sponsored the bill. I note that I got

a chance to vote for it in the Financial Services Committee in 2005.

I note that it passed the House on a bipartisan basis in this November 2005 right after I left and became chairman of the SEC.

And I also read with chagrin in the newspaper the sad tale of exactly how it was prevented from coming to a vote in the Senate or

at least the influence that was brought to bear to make sure that

legislation never happened. But the House did its part, I’d want to

point out. I think many of the Members here did and I certainly

very early on saw that important task, as did Secretary Snow and

I’m sure Chairman Greenspan and many others here. The role of

the GSEs is now abundantly clear to just about everybody in retrospect because the Federal Government had to bail them out.

Mr. SALI. Mr. Cox, I guess in looking at Idaho’s mom and pop

investors who have lost so much of their hard-earned savings, their

retirement funds, while some of the corporate CEOs have received

golden parachutes and those kinds of things, what do you say to

64

the people in Idaho who have lost their investment? I mean are the

people that have caused this—is somebody going to go to jail?

Mr. COX. There’s no question that somewhere in this terrible

mess many laws were broken. Right now the criminal authorities

and the civil authorities not only in the Federal Government and

the State governments but in other countries because this is now,

as you know, a matter of attention of international focus are working to make sure that law breakers are held accountable and people are brought to justice. The SEC has anti-fraud authority that

we are very aggressive about using. As I mentioned earlier, we

have over 50 subprime investigations underway right now and we

also have a nationwide dragnet involving all 11 of our regional offices and our headquarters, working in coordination with other law

enforcement authorities. But cleaning up the mess through law enforcement after the fact, while important, is not ideal. And the best

thing that we can do of course, as many of you are focused on, indeed this hearing is focused on this, is to infer lessons from what

happened and prevent anything like this astonishing harm can

happen again.

Mr. SALI. The chairman is taking us in a direction that indicates

he thinks we need more regulation, that perhaps we need more

people out there doing regulating with more authority. And I guess

I would challenge each of you in the three agencies that you have

represented, I think you have sufficient authority—with perhaps

exception of the GSEs you had sufficient authority to probably

avoid most of the troubles that we have seen. And I guess what the

chairman suggested, it begs the question if we didn’t get the job

done with enough authority to get it done, how will giving more

regulators more power do anything different when each of you said

you weren’t even aware of all the things that Mr. Mica pointed out

that were a tremendous problem? How do you respond to that?

Mr. SNOW. Congressman, let me take a crack at it. As I said in

my period at the Treasury, it became clear to me that no single

regulator had a clear view, had a 360 view of the problem. When

I invited the various mortgage market regulators to come and talk

to me about what they saw in the subprime markets and with respect to these new instruments, the interest only and mortgage

amortization and so on, no one had a clear view of it. They had differing and very different views of it. My suggestion here is that nobody sees the whole picture and we ought to put in place some institution of our government that has a clear view of transparency

on risk and leverage in the system. When you get right down to

it, this is about excessive risk and excessive leverage and nobody

saw because no regulator has that full scope of authority had the

full field of view.

Mr. GREENSPAN. If I may just add a word or two, I think that

it’s interesting to observe that we find failures of regulation all the

time, and one of the reasons is a very significant amount of regulation in the economic area is based on a forecast to know in advance

whether or not particular products will go bad or the cycle will

turn. If we are right 60 percent of the time in forecasting, we’re

doing exceptionally well. That means we are wrong 40 percent of

the time, and when you observe the extent of the broad failure, the

difficulty is that nobody can forecast. And if you try to take a look

65

at what the private sector does it’s precisely the same thing that

goes on in government.

We at the Federal Reserve had a much better record forecasting

than the private sector, but we were wrong quite a good deal of the

time and that is reflected in how one views what the appropriate

regulatory authorities are because unless you can anticipate the

types of problems that are going to happen, it’s very difficult to

know what to do. And I think that’s the problem that this type of

thing confronts and I don’t see any way in which that’s going to

be fundamentally changed. We can try to do better, but forecasting

is never—never gets to the point where it’s 100 percent accurate.

Mr. SALI. Chairman Greenspan——

Chairman WAXMAN. The gentleman’s time has expired.

Mr. COX. Mr. Chairman, may I answer on behalf of the SEC?

Chairman WAXMAN. Yes. The time for asking questions has expired, but we will allow the answers to the questions.

Mr. COX. I just want to respectfully disagree with the premise of

the question that there is adequate regulatory authority in our current regulatory system for the regulators to deal with the problems

that we’re seeing in the markets today. There are significant regulatory holes, significant regulatory gaps. We have seen them, for

example, with respect to the fact there is no statutory regulator

whatsoever anywhere in the system for investment bank holding

companies. We’ve seen it with respect to credit default swaps, a

$58 trillion market with no regulator. There has been allusion

made to the fact that in the mortgage brokerage market there is

not adequate regulation. And certainly with respect to the multitrillion dollar market in municipal securities, there is—the SEC

and no one has any authority just to require disclosure to investors

of what they’re getting. It’s not really a simple question of more or

less regulation. Once you’ve got a regulated industry, which we do

in financial services, then when you create these big what were

pockets that then become a whole universe of unregulated activity

it’s really distortive.

So you’ve got to have a system that actually hangs together and

makes sense. You can’t regulate futures in one way and then economically equivalent securities in another way with different margin rules and so on and expect all of this not to produce discontinuities or disruptions in the market. So there is an enormous opportunity to fix this problem in Congress.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. MICA. Mr. Chairman, I have a unanimous consent——

Chairman WAXMAN. I’m sorry. You will have to hold off on that.

You can make it later.

The Chair yields himself some time because there was a representation made about my view of regulation and the gentleman

from Idaho said I want more regulation. Well, I want smart regulation. But I want to point out that what I’m hearing from our witnesses today is they just didn’t know. They couldn’t make projections about what the future was or they’re not always right. The

truth of the matter is there were a lot of warning signs. And we

have a large staff in some of these agencies. For example, the Federal Reserve has one of the finest economic research staffs in the

United States, including a staff of 450, about half of whom are

66

Ph.D. economists. The reasons why we set up your agencies and

gave you budget authority to hire people is so that you can see

problems developing before they become a financial crisis. To tell

us afterwards when we are now faced with the disaster that we’re

seeing that you couldn’t have foreseen it, it just doesn’t satisfy me.

Now, Mr. Cox has come in with a whole long list of regulations

he’d like to see in place that make a lot of sense to me because they

sound reasonable. I wanted to have Mr. Arthur Levitt here. He

couldn’t be here, but I can’t imagine he would have had too much

of a difference of opinion on the proposals that you’ve made. But

the reality is, Mr. Cox, you weren’t doing that job of proposing

these regulations beforehand. You didn’t either anticipate the problem or you agreed with the philosophy that we don’t need regulation, the markets could correct themselves. So I just want to suggest—and I’m not really asking a question. I really want to suggest

to my colleagues for them to say that there’s no way you could have

known what was going on, there’s no way you could have acted,

there is a long list of warning signs and prominent economists were

saying things should have been done and this problem is going to

get out of hand, and yet the Federal Reserve, the SEC, the Department of Treasury and other agencies didn’t act, and to say now we

need regulations is helpful.

I also want to say something about the GSEs because I think it’s

a political point that’s been thrown out there for politics. It’s about

as—to say the GSEs started this whole crisis is about as accurate

as saying that offshore drilling will solve our energy crisis. It’s a

political argument. It’s not a factual one. And I’d like us to go into

the facts. Sometimes by looking at the facts we can learn from

what happened and hopefully not repeat the mistakes in the future.

I gather Mr. Cox and others are suggesting we have a task force,

that we bring everybody together to redo all our regulatory system.

Well, that may make sense but it is certainly dealing with closing

the barn door after the—whatever the metaphor is, after the horses

or cows have already escaped. We’re already in the mess and now

we’ve got to figure out how to get out of it and learn from the past,

not rewrite it.

Mr. DAVIS OF VIRGINIA. Can I yield myself a few minutes?

Chairman WAXMAN. The gentleman is recognized.

Mr. DAVIS OF VIRGINIA. Let me just say I mean we’re talking culpability here. What was Congress doing all this time?

Chairman WAXMAN. Yes, good point.

Mr. DAVIS OF VIRGINIA. I mean I think at this point we had all

the warning signals that everybody else did, and the inability to

move particularly on Freddie and Fannie where the warnings came

from the administration on down constantly, warnings in the newspapers, warnings from economists, and we had party-line votes in

the Senate not to move forward on regulating that aspect which all

of our witnesses said——

Chairman WAXMAN. Will the gentleman yield?

Mr. DAVIS OF VIRGINIA. I’d be happy to.

Chairman WAXMAN. Well, the law that was being proposed was

adopted in the House by a bipartisan vote overwhelmingly.

Mr. DAVIS OF VIRGINIA. In the Senate it was——

67

Chairman WAXMAN. And in the Senate it was bipartisan as well

for those who opposed it, and we couldn’t—those of us who supported legislation—get enough votes to stop a filibuster because of

Democrats and Republicans.

Mr. DAVIS OF VIRGINIA. Mr. Chairman, let me reclaim my time.

I mean, look, it was the chairman of the Financial Services Committee who said there wasn’t a problem, and we’ve been through

all this. But rather than culpability, it lies all around. And I just

came in the room as you were going through—lecturing Mr. Cox

and others on culpability. I think we all agree there’s a lot of blame

to go around here but it doesn’t lie with any party or any agency.

This was global in its nature. It even for the mortgage brokers goes

back to State regulation. You can go back to New York. What were

they doing during this time period as well? What we need to focus

on is what are we going to do from here on out? And we’re hearing

a lot of rhetoric about regulation, deregulation. The fact of the matter, we’re dealing with so many silos here that nobody gets the

whole picture. It reminds me of 9/11 where everybody knew a little

bit of everything but nobody knew the whole story. And as we listened to people that have been intimately involved with this, that

seems to be what they are saying.

I would give my remaining time to Mr. Sali.

Chairman WAXMAN. You have 15 seconds.

Mr. DAVIS OF VIRGINIA. So 15 seconds for a quick question.

Mr. SALI. For the three of you, is the best that we can hope for

here that because you rely on projections that whatever regulation

we give, and I hope we will be smart about it and not be in overhanded with this—overly harsh with this, is the best we can expect, though, a regulation that will have a 40 percent chance of

being wrong no matter what happens, as Chairman Greenspan has

said? Do you all three agree with that premise?

Chairman WAXMAN. The gentleman’s time has expired, but we

will let the witnesses answer.

Mr. GREENSPAN. I obviously agree with it. I made the statement.

Chairman WAXMAN. Mr. Cox.

Mr. COX. That’s a little more quantitative than I feel comfortable

being in, estimating the future probability of success of regulation.

But I think the point that it’s a fallible human process always has

to humble anyone in Congress or anyone in regulation. Nonetheless

when we look at it structurally, it’s just very clear we can do a

much better, more rational job. And we have to take a look at the

fact that this system of regulation was fundamentally designed in

the 1930’s and 1940’s. The markets have changed a great deal. It

is time to have a thorough going—restructuring that rationalizes

all this and closes the regulatory gaps.

Mr. SNOW. I think regulators need more transparency on the

risks and the leverage in the financial system. I think some regulators should be given responsibility for assessing 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 some businesses’ behavior, as you now have with

the GSEs, to step in and stop it. That’s what we lack today, I

think.

Chairman WAXMAN. Thank you.

68

Mr. MICA. Mr. Chairman, I have my unanimous consent.

Chairman WAXMAN. The gentleman will have to hold until after

we finish with the other Members.

Mr. MICA. I have to ask after each timely——

Chairman WAXMAN. No. Why don’t you wait until all the Members have had a chance to ask questions and then——

Mr. MICA. I just want to put this one page in from the Wall

Street Journal that mentions you and me and today’s hearing.

Chairman WAXMAN. You have one page and that’s it?

Mr. MICA. Yes, sir.

Chairman WAXMAN. Without objection, your one page will be

made part of the record.

And the Chair will only comment that the statement that everybody has responsibility means nobody has responsibility. It’s like

saying a criminal acted without personal responsibility because the

society caused all the problems that led that person to act that

way. That’s the way I hear it.

And let me also point out the Republicans controlled the Congress for 12 years. It’s only the last 2 years the Democrats have

been in power and we have had a Republican administration for 8

years, and I can see why you don’t want to hold any party responsible but I just think that fact ought to be out there.

Mr. DAVIS OF VIRGINIA. Mr. Chairman, as long as we’re doing

facts, the Commodities Futures Modernization Act was signed by

President Clinton by—Democrats, by the way, controlled the Senate for the first 2 years of the Bush administration. Let’s not get

into partisanship. Why don’t we focus—I’m responding to what the

chairman is saying. I have tried to stay away from that today. I

think we need to focus on the issues. That’s what the public is interested in. They are tired of this partisan carping back and forth.

Chairman WAXMAN. We will stop the harping and go to Mr.

Tierney for his questions.

Mr. TIERNEY. Thank you, Mr. Chairman.

Dr. Greenspan, I don’t think all of it was relative to forecasting

on that, and I want to go back over a little bit about the irresponsible subprime lending, which I think many or most experts have

indicated they think that is the root cause of this crisis. I think

when I looked at your testimony you said subprime mortgage organizations were undeniably the original source of the crisis, so I assume that you agree.

Mr. GREENSPAN. I do.

Mr. TIERNEY. And Mr. Cox has said this. He said the current

credit crisis began with the deterioration of mortgage orientation

standards. And Mr. Snow cited lax lending practices as one of the

causes of the financial crisis.

So when Mr. Waxman was discussing that with you, Dr. Greenspan, in response to the question of why you hadn’t used the regulatory authority that Congress gave you in 1994 to rein in the irresponsible subprime lending, you said I took an oath that I am here

to uphold the law of the land, the will of the Congress, not my own

predilections. But you had a clear directive to act. I went back and

checked. The law of the land as of 1994, the Homeownership Equity Protection Act, Title 15, United States Code, Chapter 41, subchapter 1, part b, section 1639, subsection 11(2) and all that, it

69

says this. It says 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 that are otherwise not in the interests of the borrower.

Now, you had a nice conversation where you said, well, Mr.

Gramlich came in, he came into the conversation where he requested that you send bank examiners out on this. You didn’t do

that. But then you said to Mr. Waxman that you spoke of sending

them up to the committee thinking they would come back and that

you would act, and then you also said you voted for regulations.

But unfortunately, the regulations on which you voted in 2001,

they dealt only with high cost mortgages. That leaves like 99 percent of subprime mortgages totally off the table. You didn’t deal

with deceptive tease rates, you didn’t deal with balloon payment

loans, you didn’t deal with prepayment for homeowners who wanted to refinance before their rate goes up.

So I guess the question again to you is, you had Mr. Gramlich’s

cautions, you had the Treasury Department and the Housing and

Urban Development office all asking you to use the authority that

Congress gave you as a mandate, not a wish, but a mandate. So

can you still say I guess that you thought that you were carrying

out the law of the land and the will of Congress as opposed to having your own ideology sort of influence, not having strong enough

regulation that you didn’t bring to the Board and you didn’t press

for stronger regulation of the unsavory subprime loans?

Mr. GREENSPAN. Well, 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 am concerned, looks at that statement and then says how do

they determine as a regulatory group what is unfair and deceptive?

And the problem that they were concluding and therefore were

raising with the staff of the Congress was the issue of maybe 10

percent or so are self-evidently unfair and deceptive, but the vast

majority would require a jury trial or other means to deal with it

and that rulemaking—can I finish my sentence?

Mr. TIERNEY. The debate was over. The law passed. The debate

between your office and Congress was over. In 1994, the Congress

passed a law telling your board and you to actually do something

about it and it wasn’t done. I guess the evidence of that is—we

have that situation, and I don’t want to—I share with Mr. Davis

the desire not to get political about this, but Mr. Mica and others

sort of went off on this GSE thing here.

1994 I guess was a Democratic Congress instructed you to do

that. It wasn’t done. 1995 to 2006, the Republicans are in. They

don’t pressure to do it. Nothing got done in that respect. But the

core part of this problem is the irresponsible subprime lending.

Then in 2007, when Democrats take control, a bipartisan group

in the House passes by a significant margin a directive to you.

They basically write your regulation for you and tell you, by that

time you are gone, but tell the Board what it should do in terms

of dealing with subprime mortgages. It passes by a huge bipartisan

vote in the House, 291 to 127, but it doesn’t go anywhere in the

70

Senate because the Bush administration opposes it and kills it and

then they don’t deal with it then.

In 2005, back when the Republicans were still in charge, Mr.

Oxley made an effort to have a bipartisan group do something

about subprimes because the Fed Board wasn’t doing it, and in his

own language the White House gave him what he said was the one

finger salute on that. It wouldn’t deal with it. But it still passed

the House by 331–90, so you had a bipartisan group in the House

that wanted to deal with it.

So I think that if we are going to talk about what happened here,

there was at some point somebody who didn’t want to regulate, but

a group at least in the House of Representatives that did.

I understand my time is up. Thank you.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. Bilbray.

Mr. BILBRAY. Thank you, Mr. Chairman.

Gentleman, I appreciate you pointed out that even though it may

look small, the iceberg that we call the toxic twins, Freddie and

Fannie Mae, had a much more substantial impact than appearances may first appear. So that scuttling of the ‘‘good ship economy’’ can be traced back to an incident that can be related though

those toxic twins, that iceberg, Freddie and Fannie.

But even with that damage done and the severe damage done to

the economy by that small little low profile thing called the iceberg,

Freddie and Fannie, there was other things that could have helped

to mitigate this impact. I guess the quality control, the safety inspections, to make sure that the good ship was able to take this

kind of hit doesn’t appear to have been there to the level we want.

Mr. Cox, I realize that the SEC has just recently been granted

the authority to regulate the credit rating agencies, the ones who

are supposed to be inspecting the craft and telling us that it is safe

to use. In your testimony, in the testimony we heard yesterday, it

was clear that the credit rating agencies are not significantly regulated and that there were major abuses of the independent raters.

Considering the level of Federal regulations to these independent, so-called independent assessments, and how important that is,

do you think that 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

do you need more regulation and more authority to be able to create more transparency?

Mr. COX. We do have the authority that we need in this area.

One of the first things that I did when I became chairman is work

with the 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 with the chairmen of the authorizing committees in both the House and in the Senate.

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 in fact beat the deadline in the statute

by a month to put out the first rules under the statute. We inVerDate 11-MAY-2000 11:25 Jun 07, 2010 Jkt 000000 PO 00000 Frm 00074 Fmt 6633 Sfmt 6633 U:\DOCS\55764.TXT KATIE PsN: KATIE
71

spected the big three in this industry and produced this report,

which was the basis for much of the questioning yesterday.

We looked through 2 million e-mails, some of which we provided

to this committee, to discover what was going on in this industry,

and then to propose even more thoroughgoing new rules that will

govern many of the problems that we have seen here. Without even

waiting for the notice and comment period and the implementation

of the rules to take effect, we have worked with the industry to put

those reforms into place, and as I think you saw yesterday, this is

a much chastened industry because of what has gone on and the

impact on the markets and investors.

Mr. BILBRAY. Now you were talking about one of the problems

with regulation is not just how much we have, but where it is and

the ability to respond. You squeeze off one part of the private sector with regulation here and they tend to find another place where

all at once it starts blossoming, blooming and growing out of control. Much with the swaps were a good example.

Do you think now we have the flexibility for regulators to be able

to move laterally over to respond to these kind of bubbles as they

are created by our regulation being at one location or another, or

do you need more flexibility to be able to respond to those? Gentleman? Either one.

Mr. COX. I don’t think the current regulatory system works when

it comes to integration and cooperation and sharing of information.

The SEC, even before we had the avalanche of problems in 2008

in the industries that we regulated and that the Federal Reserve

regulates, began work with the Fed on a memorandum of understanding to share information, because it was, as someone alluded

to here earlier, too much like the blind man and the elephant. Everyone had a good view of their part of the problem, but by law

they were focused only on that part and not on the total picture.

So in addition to having the regulatory gaps filled, which is of

vital importance, there also has to be a much more seamless integration.

Mr. BILBRAY. So a lot of parallel to what we saw on 9/11 where

the Intel people were not sharing information and no one group

had all the information, we are running into the same thing here.

There has been a proposal by Mr. Issa to have a bipartisan commission, like the 9/11 Commission, not only to look at what has

happened in the past and do a report within that 1 year, but also

stay in force for 5 years to avoid this.

Gentleman, do you have any comment about us approaching this

with that general bipartisan view so we avoid the bickering that

you have seen up here today?

Chairman WAXMAN. The gentleman’s time has expired, but we

would like to hear answers to the question.

Mr. GREENSPAN. I don’t have any response to that.

Mr. COX. I think it is vitally important, as this hearing is doing

today, as your other hearings have done, and as you have proposed

and Congressman Issa has proposed, to understand it is very complex how all of these things have happened around the world. History is going to tell us eventually a lot more than we know even

today.

72

It is also important to do the other piece of what you have described, and that is to confront it in an empirical way. That is what

‘‘bipartisan’’ in this context I think means. We have to make sure

that we are after the facts and that we are willing to infer the

tough lessons from those facts.

Finally, I would say, make sure that you have a forward-looking

approach. If all that we do is look backward and say ‘‘that is who

shot John,’’ and we don’t protect the economy, investors, our kids

and grandkids whose debt is getting run up right now, then that

will be a new failure on top of all that is happening.

Chairman WAXMAN. Mr. Snow.

Mr. SNOW. I have nothing to add.

Chairman WAXMAN. Thank you. The gentleman’s time has expired.

Mr. Yarmuth.

Mr. YARMUTH. Thank you, Mr. Chairman.

With all apologies to my New England colleagues here, I feel like

I am looking out there at three Bill Buckners, the first baseman

for the Red Sox who let the ball go through his legs and cost his

team the championship. All of you let the ball go through your legs.

You didn’t want to let the ball go through your legs, you didn’t try

to let the ball go through your legs, but it got through. And it is

important that we do try to find out why it got 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 were unforeseeable. There is

no question about that. But some of them were very foreseeable.

And I want to refer to the credit rating agencies, because we knew

beginning at least in 2001 when Enron was given a superior rating

4 days before it collapsed, and we knew it in subsequent events.

In 2002, the SEC published its own report which found serious

problems—I am sorry, 2003. But before that in 2002 the Lieberman

committee in the Senate issued a report on these problems. And

the SEC was actually moving it seemed like with good intentions

and with intelligence to create some authority to regulate the credit rating agencies. And in 2005 they issued a proposed rule that

never was acted on.

Mr. Cox, why was that not acted on?

Mr. COX. Well, the SEC cannot create for itself authority over

credit rating agencies. The proposed rule was a designation of

NRSROs, but it was not 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 strongly supported that legislation

going back even 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, AAA. These problems have been recurrent.

What was absolutely necessary and what I took on full tilt when

I became chairman, was getting authority to make that a regulated

industry, not an unregulated industry, and we have been using our

authority to great effect since we have gotten it.

73

Mr. YARMUTH. I appreciate that, and I agree that the steps you

are taking are commendable and I think they make sense. But

your predecessor, William Donaldson at the SEC, he wrote a letter

to Congress in 2003 and said he did have ample authority to regulate credit rating authorities because he could decertify them if he

found that they weren’t doing the job properly.

So you did have authority, maybe not specific legislative authority, but you had authority to use the certification process, didn’t

you?

Mr. COX. The certification process was the basis—remember, in

that period there were essentially three main rating agencies and

they were already there. So rubber stamping them as ‘‘certified’’

was rather circular and tautological. What was under development,

as I mentioned earlier, 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 chairman of the Tech Committee

of the International Organization of Security Commissions and I

have a deep and abiding respect for the work of IOSCO, I saw immediately that a voluntary code of conduct was going to be as nothing against what this industry needed, which was actual regulation. And I am very, very pleased that the 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, and all that they were going to get was volunteer. Volunteer regulation does not work. We have seen it over and

over again.

Mr. YARMUTH. I would agree with that. I still don’t understand

the fact—I don’t understand your point that you couldn’t decertify

these agencies. You say basically the certification was a rubber

stamp. What if you took the rubber stamp away?

Mr. COX. Well, the rule concerning the designation of NRSROs

was essentially limited to that. You know, you have to credit the

agency for trying to move into that space. But what happened in

2005 is that we finally got legislation moving, and that clearly

made more sense than trying to do something without any authority.

Mr. YARMUTH. So that is why you dropped the rulemaking process? That is why you stopped that?

Mr. COX. Yes. The focus was on getting the legislation passed,

which actually happened very, very quickly. And, as I said, we beat

the deadline in the statute for putting out rules. We moved very,

very quickly.

Mr. YARMUTH. My time has expired. Thank you.

Chairman WAXMAN. Thank you are, Mr. Yarmuth.

Mr. Platts.

Mr. PLATTS. Thank you, Mr. Chairman. I appreciate you and the

ranking member’s efforts on investigating this crisis facing our

country and appreciate all three of our witnesses.

There has been a lot of discussion, Fannie Mae and Freddie Mac

and the 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, but how maybe overVerDate 11-MAY-2000 11:25 Jun 07, 2010 Jkt 000000 PO 00000 Frm 00077 Fmt 6633 Sfmt 6633 U:\DOCS\55764.TXT KATIE PsN: KATIE
74

aggressive regulatory efforts helped create it, and specifically get

your input on the Community Reinvestment Act.

Mr. Cox, you shared in your testimony that if honest lending

practices had continued and we hadn’t gotten to where there was

almost no lending practices being used for these no-down-payment,

no documentation loans, that played a huge role in where we are

today.

Back home, I have had numerous banking officials, bank board

members, address with me the Community Reinvestment Act, that

in essence they are being forced by the bank regulators to engage

in making loans, to have a specific or certain part of their portfolio,

to risky applicants, and they are in essence being forced by the regulators to make loans that they would not otherwise make and that

they know are at great risk of default.

So I would be interested in each of your opinions on that role in

this crisis, big or small, and is it something we should be looking

at, reforming the way the Community Reinvestment Act is being

enforced and implemented by the regulators?

Mr. GREENSPAN. Well, you know, it is instructive to go back to

the early stages of the subprime market, which has essentially

emerged out of the CRA.

The evidence now suggests, but only in retrospect, that this market evolved 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 that it did.

It wasn’t until the securitization became a significant factor,

which doesn’t occur until 2005, that you have this huge increase in

demand for subprime loans, because remember that without

securitization there would not have been a single subprime mortgage held outside of the United States; that it is the opening up

of this market which created a huge demand from abroad for

subprime mortgages as embodied in mortgage-backed securities.

Now, we didn’t know that the deterioration in the standards was

occurring until 2005, because you look now at the outstanding

subprime mortgages and 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 and Freddie were involved,

from them as well.

So, it strikes me that if you go back and ask yourself how in the

early years anybody could realistically make a judgment as to what

was ultimately going to happen to subprime, I think you are asking

more than anybody is capable of judging. And we have this extraordinarily complex global economy which, as everybody now realizes,

is very difficult to forecast in any considerable detail.

Mr. Chairman, I know I agree with you in the fact that there

were a lot of people who raised issues about problems emerging.

But there were always a lot of people raising issues, and half the

time they are wrong. And the question is, what do you do?

I mean, you point out quite correctly that 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 unVerDate 11-MAY-2000 11:25 Jun 07, 2010 Jkt 000000 PO 00000 Frm 00078 Fmt 6633 Sfmt 6633 U:\DOCS\55764.TXT KATIE PsN: KATIE
75

doubtedly was the cause of the world problem with respect to mortgage backed securities, I think we have to ask ourselves, why is

that? And the answer is that we are not smart enough as people.

We just cannot see events that far in advance. And unless we can,

it is very difficult to look back and say why didn’t we catch something?

I think it is a very, very difficult problem with respect to supervision and regulation. We cannot expect perfection in any area

where forecasting is required, and I think we have to do our best,

but not expect infallibility or omniscience.

Mr. PLATTS. Can Mr. Cox and Mr. Snow answer the question?

Chairman WAXMAN. Yes. If Mr. Cox and Mr. Snow, if you wish

to respond to the question outstanding?

Mr. COX. I am sorry, Congressman Platts, do you want to restate

the question?

Mr. PLATTS. Specifically on CRA and going forward. And, Dr.

Greenspan, I am not asking if we could have predicted it. In going

forward, should we be looking at reforms to the Community Reinvestment Act? What my local bankers are saying, they feel very

pressured by regulators to make loans they know are not good

loans and risky loans and likely to be defaulted or have been defaulted in the past.

Mr. COX. Well, I would just point out the obvious which is that

the SEC does not regulate lending or credit or mortgages. But on

the more general point of whether or not legislation needs to be

carefully drafted and carefully conceived so that it does not create

risk in the system, I have abundant agreement, and as the investors’ advocate, obviously when that kind of legislation or those kind

of regulatory policies lead to the creation of new risk that otherwise

wouldn’t exist, investors are indeed very ill-served.

Mr. PLATTS. Thank you.

Mr. SNOW. Congressman, I actually think it is a much broader

phenomena, and in the risk of being maybe a little controversial

here, you know, we have had a policy in the United States to promote homeownership for a long time. That is a good thing. Administrations of both stripes and Congresses of both stripes have continued to push for policies that would encourage homeownership.

We see that very much in the Tax Code. We saw that with GSEs.

We saw it in a number of ways.

I think the larger problem here, frankly, is that we have probably somewhat overdone that without reference to the consequences that commitment to housing has created for the country

as a whole. I think 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 very much.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. Davis, you seek recognition for 1 minute?

Mr. DAVIS OF VIRGINIA. One minute, yes.

Dr. Greenspan, you made an interesting comment. The Federal

Reserve has probably the best economic organization in the world,

and yet you couldn’t reach any agreement on seeing this coming

and predicting it.

76

Let me ask this question to all three of you, because as I have

gone through the testimony, it looks like the regulatory regimes, it

wasn’t a question of deregulation, re-regulation, overregulation.

The regulatory regimes that were set up appear to be too fragmented, too stove-piped, too non-communicative, so that no one

could see the problems arising in total, everybody saw a piece of

that, until it was too late. Is that a fair statement?

Mr. GREENSPAN. I am not sure, Congressman. I think that we all

had as much information as probably was available. So I am not

clear by any means that if you combine the levels of ignorance, that

you somehow enhance insight.

I mean, for example, as I just was mentioning, we now know that

the subprime mortgages that were originated in 2004 and earlier

are not our problem. These are data that are available only now.

We didn’t know that at the time. And I am not sure that merely

conglomerating everybody’s insights—and as I said, I have dealt

with many different organizations, and if the Federal Reserve at

the level of technical capability is not capable of confronting this

type of problem, I think it is telling us something about the nature

of the problem which itself is incapable of being handled in the way

we all would like.

Mr. DAVIS OF VIRGINIA. Mr. Cox.

Mr. COX. I think I am going to answer the question from a slightly different angle so as not to disagree any more than I have to

with the answer that 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 in the caldron of these crises, events have

been moving on not just a day-to-day basis, but an hour-to-hour

basis. The coordination of information and the demands that has

placed on regulators are 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 SEC 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 SEC has other of those firms, we don’t get the same clear

picture of what is going on in the market in real time that I think

we need.

So it is fine these statistics are all published and everyone has

access to them and we can all understand it eventually, but you

have to do this in real time. The President’s working group was

formed to deal with crises like this. It has been an ongoing meeting

of the President’s working group for several months now. We have

all been working 20 hours a day, 7 days a week since March. So

we just need all the tools we can get to coordinate better.

Chairman WAXMAN. Thank you, Mr. Cox.

Mr. SNOW. I agree with you, Congressman Davis. I will be clear.

I think we have too many stovepipes 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 of an agency, Mr. ChairVerDate 11-MAY-2000 11:25 Jun 07, 2010 Jkt 000000 PO 00000 Frm 00080 Fmt 6633 Sfmt 6633 U:\DOCS\55764.TXT KATIE PsN: KATIE
77

man, you know well, NTSA, and I have an appreciation of the burdens and complexities of regulation.

But it does seem to me that we have regulators, I think the

chairman said, Chairman Cox mentioned this earlier, regulating

under different jurisdictions and with different bodies of law the

same thing. Equivalent things ought to be regulated on an equivalent basis.

We also have the turf battles. This was clear just last week in

an article in the Washington Post, Mr. Chairman, on the subject

of the swaps market and who would regulate the swaps market.

We had the three agencies, according to this article, in serious conflict about who should have the jurisdiction.

Now, I think it is time to overhaul the regulatory system.

Chairman WAXMAN. Thank you very much.

Ms. Norton, but as I understand it, Mr. Yarmuth had a unanimous consent request?

Mr. YARMUTH. I ask unanimous consent that it be placed 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 SEC implement rules to regulate the credit rating agencies.

Mr. Cox said that they moved in an expeditious way. He may have,

but the SEC was asked to do that in 2002.

Chairman WAXMAN. Without objection, the document will be

made part of the record.

Ms. Norton.

Ms. NORTON. This is a question for all three of you. I will be

using language from Dr. Greenspan, but it is for all of you. I agree

that all of us 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 really goes to remedy, and particularly to remedy as events unfold.

Dr. Greenspan, you have said that regulation by its nature is ineffective because it cannot actually predict problems, and you have

indicated the percentage of predictability, and I think that is pretty

good, too. I am interested in what happens as events occur and

nothing happens.

For example, 14 years ago, in 1994, GAO published a 2-year

study, 200 pages, exhaustive study, entitled ‘‘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 at the end of a President’s term because we think we are

seeing perhaps the collapse of the economy itself. Now, I am really

into remedy at this point.

The GAO, I want to quote it. ‘‘Derivatives are rapidly expanding’’—this is 1994—‘‘and increasingly affected by the globalization

of commerce and financial markets. The sudden failure or abrupt

withdrawal from trading of any of these large dealers could liquify

the problems in the markets and could also pose risk 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.’’

78

That is the only remedy we have now, huge intervention into the

market system of the kind none of us would have desired.

The GAO, of course, wasn’t alone in warning. Representative

Markey had a hearing. Representative 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? And

you, Dr. Greenspan, said ‘‘negligible.’’ Those are your words. ‘‘Short

of a virtually inconceivable situation, one cannot envisage where

taxpayer funds would show up.’’

Four years, of course, ago we saw the collapse of Long-Term Capital Management and Enron. Now AIG, $140 billion worth of essentially bailout.

Now, I am going to ask you in light of the fact that these are

new instruments that people say none of us understand because

people who are outside of your and my sphere made them up, could

you regulate now? At one point along this timeframe should some

form of regulation have taken place? Could you regulate now? Do

you understand enough of what happened to regulate now? And 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 bailouts as the only remedy that the Federal Government

has?

Mr. GREENSPAN. First of all, on derivatives, remember in 1994

and indeed pretty much throughout maybe 2004, even 2005, the

major part of derivatives were interest rate and foreign exchange

derivatives, and they are still functioning rather well. In other

words, the problem that has emerged——

Ms. NORTON. Well, the GAO talked about it , they did this in

1994.

Mr. GREENSPAN. I understand that. I think they were mistaken.

In other words, that was one of the forecasts that didn’t go right.

In other words, the types of things they were raising——

Ms. NORTON. What did go right is they said you could see a bailout and the collapse of our financial system. That was predicted.

That happened.

Mr. GREENSPAN. Remember, the point I am trying to make is the

only areas where we are running into some problems, which are

curable, frankly, by resolving certain structural problems which the

Federal Reserve Bank of New York is working on, is——

Ms. NORTON. How would you advise this committee, this Congress, to begin to do the appropriate, intelligent regulation or remedy seeking, whatever you call it?

Mr. Snow, you seem to wish to answer that question as well.

Mr. SNOW. I think there are a number of things that can be done

and should be done. The securitization market is a good market.

It shouldn’t be disestablished in any way. But it seems to me, Congresswoman Norton, it would work an awful lot better if the original loan, the people who make the loans initially——

Ms. NORTON. What about them?

Mr. SNOW. Kept some skin in the game. You know, we used to

have something that functioned real well in this country called

Bank Credit Committees where the question would be asked can

the borrower repay the loan? How will the borrower repay the

79

loan? What is the collateral the borrower has for the loan? That is

good banking practices.

One of the unintended consequences I think of the securitization

market is that function isn’t being carried on nearly as effectively

as it once was.

So a suggestion for you would be when somebody originates a

loan and then sends it off to the securities market, keep a percentage of that loan.

Something else that seems to me should be done in the name of

transparency and openness to get our markets working better:

When investment banks and banks are selling these products into

the market and also hedging those projects by going on the other

side, there ought to be transparency. They ought to be telling the

marketplace, yeah, we are selling you these things, but we are also

hedging them. That would provide useful information to the would

be buyers of those issuers.

So I have a lot of suggestions for you I can give you for the

record.

Ms. NORTON. Mr. Cox didn’t get a chance to answer.

Chairman WAXMAN. Do you have something you want to add to

this, Mr. Cox, briefly?

Mr. COX. First of all, I strongly believe with former Secretary

Snow that the movement from the originate to hold model to the

originate to securitize model contributed to the breakdown in market discipline, and as he very straightforwardly put it, if you don’t

have skin in the game, you are just passing off the risk to someone

else and then you are inclined to take more risk. And that built

risk into the system we have seen has been dangerous.

Second, I think it is 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 the risk in them. There is no

tracking right now, for example, on a loan-by-loan basis of whether

the loan amount is more or less the property value, whether the

loan is current. With data tagging, this could be accumulated and

the securities valued by analysts so that investors would understand and the market would be able to price the risk of these structured securities.

Ms. NORTON. Mr. Chairman, can I put in the record the document from which I quoted from the GAO in 1994, Financial Derivatives: Action Needed to Protect the Financial System?

Chairman WAXMAN. Without objection, that document will be

made in put in the record.

Ms. WATSON. Mr. Chairman, matter of personal privilege, please.

I notice there is a banner up down on the other side, and I remember being asked to take a banner down that I had.

What is your procedure for banners that are put up by members?

Mr. ISSA. The gentleman has left.

Ms. WATSON. I would like the chairman to respond.

Mr. ISSA. The gentleman has left.

Ms. WATSON. No, I still would like the chairman to respond. Can

everyone do that from time to time? Can any Member?

80

Chairman WAXMAN. If you will a yield to me, I wasn’t aware of

it. I don’t know that we have standard. I hear the point you are

making, and the banner has been taken down.

It is now the Chair’s opportunity to recognize Mr. Cooper. And

I consider that a great opportunity, so I do recognize Mr. Cooper.

Mr. COOPER. Thank you, Mr. Chairman.

As important as it is to learn from the 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 probably best exemplified by this official U.S. Treasury document that comes out every year, but very

few Americans, very few Members of Congress have ever seen or

heard about this document.

It is called the Financial Report of the U.S. Government. It is

available for free on the Treasury or GAO Web site. And yet it

seems to be a deep, dark secret in Washington, despite the fact

that this is the only official U.S. Government document that actually uses real accounting, accrual accounting, to describe our problem, and the only one that contains audited numbers. All the rest

of the budget documents we use around here don’t meet those

standards.

Well, why is this document such a deep, dark secret? And it is

not classified. It is hidden in the public domain. Perhaps if we did

classify it, some spy would try to steal it and then it would get

more publicity. But why is this document so hidden? Because it

contains such bad news.

Now, this document goes out under the signature of the Secretary of the Treasury. This particular one was signed by former

Secretary Snow. The deficit that all the politicians talked about

that year was $316 billion. The deficit contained in this document

was $760 billion, over twice as large. And the debt is also much

worse, because that year the debt was, the official statutory debt

was something like $8 trillion. Here the fiscal gap is $46 trillion.

So, my question for each of the panelists is this: Secretary Snow,

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 that everybody in America knew the

real story about the real numbers for America?

Mr. SNOW. Thank you for that, calling attention to that report.

You asked me what I did. 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 risk associated with the unfunded liabilities, and that is

what that report deals with, primarily the unfunded liabilities. The

promises we have made to the future that we have not provided

for would swamp any problem we have ever seen financially, handily.

Mr. COOPER. Mr. Secretary, my time is so limited, only four

Members of Congress get this officially. More Members of Congress

were briefed on the ultra-secret NSA wiretapping than on this document. You were kind enough to write me a letter after you left

office saying how important it is to get this information out, but

81

there is no evidence of any press conference or any public statement that I could find that you made while you were Secretary of

the Treasury to get the word out.

Mr. Cox, Chairman Cox, you are well aware that every public

company in America has to meet certain strict disclosure standards. They have to use real accounting. Well, the Federal Government has exempted itself for many years from these standards.

And wasn’t it the first plank in the Contract with America to stop

these Federal Government exemptions from the laws that apply to

regular Americans?

So here we are in the situation where the Federal Government

is the only large entity in America, for profit or nonprofit, government or nongovernment, that has successfully exempted itself from

real accounting standards. Have you done anything in your tenure

at the SEC to highlight the real numbers for America?

Mr. COX. Indeed, just on the point that you made about the Contract with America, specifically that was about making sure that

Congress didn’t exempt itself from the rules that apply to everybody also.

But I just so strongly agree with you that for the entire time that

I served here in Congress, I mailed that report in the form of an

annual report of the U.S. Government to my constituents every

year. And I also made it available to every Member of Congress so

that they could do the same with their constituents.

Now, obviously because the SEC does not have authority to oversee books of the Federal Government, this is a Treasury report, so

it is not the SEC’s province. But as a Member of Congress, every

single year I sent that out to my constituents instead of the promotional mailings that people get from their Senators and Representatives. People very much want to see that. I couldn’t agree

with you more.

Mr. COOPER. Well, if you are so informed about these numbers,

what is the current fiscal gap for the United States of America?

Mr. COX. It is changing very rapidly.

Mr. COOPER. Give me a ballpark number.

Mr. COX. I just met with Director Nussle and talked to him

about what would be the impact——

Mr. COOPER. Ballpark is fine. Give me a number.

Mr. COX. The scoring of the $700 billion that the Congress just

approved will have such a material impact on this that the ballpark is rather enlarged.

Mr. COOPER. So you don’t know. The last report said $54 trillion.

Chairman Greenspan, you were the longest serving chairman of

the Federal Reserve in our history. You are a well-known financial

expert. What did you do in your tenure to help Americans and help

Congress understand the real numbers for America?

Mr. GREENSPAN. Congressman, I took a version of that, which is

essentially the—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 quite a significant period of time is

that we have underfunded for Medicare, which is a very significant

part of the numbers that you are concerned about, by half. In other

words, in order to actually honor all of the promises that are being

made to the next generation, the Baby Boom Generation who are

82

retiring, we would have to either cut benefits by 50 percent, raise

taxes to a point which probably cannot fundamentally be sustained,

and therefore we are looking at as the underlying meaning of these

types of reports, is we essentially promised to the American people

far more than we can deliver.

And I am 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 inexorable grind of the numbers,

I think we are doing a very great disservice to the American people.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman. For the gentleman from

Tennessee and perhaps for the Chair, it would be interesting under

GAAP accounting on the balance sheet what we would do with the

House-Senate and other buildings here in Washington. Would they

be on at set-side or liability side?

Chairman Greenspan, thank you for your many years of service.

Today people seem to want to think that you were somehow a partisan for the Bush administration. I am never sure which Bush administration they are talking about here when they somehow think

your many years of great service should be clouded by your inability 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 Mr. Bilbray said a little while ago, I am calling for

and have a draft bill which is being circulated with all the Members here today, saying that this, and I think this is evidenced here

today, is not something Congress will deal well with. There are too

many interests, such as Freddie and Fannie, such as all the other

parts of this moving target, that I think we need to rise above Congress in suggestions for how much we regulate and for how much

transparency we have.

I would hope that sort of each of you would comment on whether

or not you support taking it out of the hands both of the next administration and of 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 you though on, and this is

also for Chairman Cox, there are a number of modeling systems

that are at your disposal today and more you are looking at. Chairman Cox, I believe the XBLR system is one you are familiar with

that is being developed.

But should the Congress bring to bear additional resources for

each of you and for other agencies so that your predictive modeling

and your doomsday scenarios, and specifically for you, Chairman

Greenspan, the doomsday scenario we now live with undoubtedly

could have been modeled but wasn’t predictively modeled by any of

the agencies of government and delivered to Congress.

Should we be in fact investing in that kind of modeling? In other

words, micro-modeling of everybody’s product and derivative products, but macromodeling of if in fact there is a hiccup of 6 percent

in the California market for homes and it ripples throughout the

United States, then what could or would happen? If that modeling

83

is available today, please tell me. Otherwise tell me, do you think

we should be investing in that?

Mr. GREENSPAN. It is not available. Indeed, Congressman, earlier

this year I raised the question about modeling procedures for the

economy, and the econometric work that is being done has essentially been restricted to taking the whole history and assuming

that it is homogenous and therefore you can get some insight.

What is very evident to me, and I think increasingly others, is

that the way the economy functions in the period of expansion is

really quite different from what happens on the way down. And I

should think that we will find that we could model the euphoria

stage, as I like to put it, and the fear stage, and they are really

quite different, and I think we would find that we learn a great

deal about specifically the fear stage, because we do have numbers

of episodes in the past.

Our major problem is that we don’t have a third model which

tells us which of those two are about to happen. And the reason

essentially is that a financial crisis must of necessity be unanticipated, because if it is anticipated, it will be arbitraged away, and

if a financial crisis by definition is a discontinuity in asset prices,

then it means from 1 day to the next people were surprised. Something fundamentally different happened.

I think that, and I have argued this, and I am not saying whether the government resources are relevant to this, I think the academic community could do it surely as well. And what we do have

to understand is that our view of the way an economy functions is

not properly modeled by what we now have.

Just let me say quickly, the Federal Reserve has an as sophisticated a modeling structure and capable people as any organization

I am aware of. It did not forecast what is happening.

Mr. ISSA. I see. As a pilot, by the way, I know that a landing is

not just a takeoff in reverse.

Mr. GREENSPAN. That is a very good analogy, I think.

Mr. ISSA. Mr. Cox.

Mr. COX. Well, you alluded to XBRL, and I will just point out

that is not a modeling system, but it could contribute very much

to the construction used for models. The SEC is focused on moving

us from the bare bones disclosure that we have right now, which

is just paper data, and tagging each element of the elements of a

financial statement so that computers can do work on behalf of

people that the people don’t even have to mine. It will deliver results to them.

It will permit you instead of looking at the financial statements

of one company or financial reports about one security, to instantly

do comparative analysis. It will vastly improve as a result risk

analysis in the market and by regulators, and we are very focused

on it for that reason.

With respect to modeling all of the risk 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 whole world in all

of its complexity. That is probably an aspiration that we ought not

to have. Therefore, we have to recognize that computer modeling

is going to always have its weaknesses, and we have certainly seen

that in the last year. We have seen it in a lot of the risk models

84

that people relied on. We saw it in Long-Term Capital Management. We have seen it many times over. A lot of those things required more human input.

Chairman WAXMAN. Do you have any comment on that before we

move on?

Mr. SNOW. Just very briefly.

Chairman WAXMAN. Is your mic on? If you forget to look to turn

on your mic, you might forget to look at your model.

Mr. SNOW. I share the basic thrust of your question here, which

is can’t we do better? Can’t 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 represents the

earning power, the debt represents the obligations.

Congressman Cooper talked to us about future obligations that

vastly—that rise at a very significant rate relevant to the GDP of

the United States. That sort of thing in rough and ready terms we

should be able to model and have signals go off.

But no model I think could ever be really anywhere 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 has said that paper is

a lot riskier than you the banks thought it was. So the market has

driven down the value of that paper. And as long as the housing

problems continue, it continues to drive down the value of the

paper. Nobody really knows where the bottom is, and only the market will have the capacity to figure that out.

I don’t think you can really model anywhere near with perfection, as has been said, but you always ought to look at the assumptions, the assumptions finely on point. The assumptions in the

models of many of our banking institutions that housing prices

would keep rising and rising and rising probably should have been

seen as a mistake.

Chairman WAXMAN. Thank you, Mr. Issa. Your time has expired.

Mr. Van Hollen.

Mr. VAN HOLLEN. Thank you, Mr. Chairman. Thank all of you

gentleman for your testimony. I think these hearings are important

to try and figure out what went wrong and to hold individuals and

institutions accountable, and, most importantly to try and figure

out how we can learn from the mistakes that were made.

Mr. Cox, I had some questions for you with respect to the capital

requirements and leverage rules in place for investment banks. I

am sure you have seen the quote that you made on March 11,

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 SEC in 2004 where

you loosened the leverage requirements, allowing these banks to

borrow big, big amounts of dollars and to take even bigger, bigger

risks with those dollars.

85

From where you sit now, do you believe that decision in 2004

was a mistake?

Mr. COX. 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 SEC did not have

the statutory authority to do most of what it was doing on a mandatory basis.

Second, the metrics.

Mr. VAN HOLLEN. If I could, I am asking a slightly different

question. There were two pieces to that deal, as I understand it,

right? One was changing the net capital rule to allow more borrowing. And as part of that it was supposed to be balanced by more

SEC oversight. Let me just ask you on first part, did you think it

was wise?

You weren’t there at the time. Was it wise of the SEC to change

the capital requirement rules and allow much more leverage, was

that wise?

Mr. COX. Well, you are correct that I was not there at the time,

and so I have to ascribe to the Commission, which voted unanimously to do this in 2004, the best motives. It was very clear that

at that time——

Mr. VAN HOLLEN. I am just asking you based on what you know

today. Was that a mistake or not?

Mr. COX. Yes. I have said that the program was fundamentally

flawed. We know this in hindsight because we saw that, as you

mentioned, for example, Bear Stearns met the capital requirements, met the liquidity requirements in the program.

It used the internationally accepted Basel standards that other

banks have relied upon. And, yet, those metrics did not help us in

the week of March 10th when the liquidity of Bear Stearns in the

space of 2 days went from $12 billion to $2 billion.

Mr. VAN HOLLEN. Now, I understand and agree with you that a

voluntary program is not—doesn’t give you the kind of leverage

that you want in terms of oversight. But it was the only oversight

that was part of that deal.

In other words, I think, based on what you just said, I think it

was a mistake to loosen the capital requirements and allow all of

this borrowing. But what was agreed at the time was that the SEC

would take on greater oversight responsibilities. It was a voluntary

program.

And, in light of that, I just wanted to read to you from the New

York Times, the October 3rd article from this month that says,

‘‘The supervisory program under Mr. Cox was a low priority. The

office had not completed a single inspection since its was reshuffled

by Mr. Cox more than a year and a half ago.’’

They go on to say, despite the fact it had the weaknesses you

talk about, former officials, as well the Inspector General’s report—

that was issued in connection with Bear Stearns—‘‘I have suggested that a major reason for its failure was Mr. Cox’s use of it.’’

And they quote Mr. Goldschmidt, one of the former SEC Commissioners saying, ‘‘In retrospect, the tragedy is that the 2004 rulemaking gave us the ability to get information that would have been

critical to sensible monitoring, and, yet, the SEC didn’t oversee

well enough.’’ That was a quote from a former SEC Commissioner,

86

who said that given the fact that those were the tools you did have

at your disposal, you just didn’t use them adequately to protect investors.

I would like you to respond to that.

Mr. COX. Well, I have had occasion to talk to Commissioner

Goldschmidt, and I think I understand his views more fully than

are represented there about the program, because while he voted

to create it, and while he understood the 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 everybody needs to understand, and

that is that the 2004 rule change—again, I was not at the Commission in 2004 when this change occurred, but it’s just a fact about

it that it did not loosen leverage requirements on investment bank

holding companies. That’s not at all what happened, because, prior

to 2004, there were no requirements of any kind that the SEC

placed on investment bank holding companies. They had no regulation.

As I pointed out several times today, by statute they have no regulator. And up until 2004, when this voluntary program was created, there was absolutely nothing.

So what was created in 2004 was at least more than existed before. As we have seen, it was not nearly enough, and I think it

used the wrong metrics. I think that has been amply illustrated.

In terms of reshuffling the program or dismantling it or what, I

think that must refer to some other program, because the Consolidated Supervised Entities Program, during my chairmanship, was

increased in terms of its staffing by over 30 percent. We focused

more resources on this, recognizing its importance.

Mr. TIERNEY [presiding]. Thank you very much. Thank you, Mr.

Van Hollen.

Mr. Hodes, you are recognized for 5 minutes.

Mr. HODES. Thank you, Mr. Chairman.

Dr. Greenspan, during your tenure at the Fed, we went from irrational exuberance to an unregulated Wild West of subprime lending, 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 got to the epilogue, you seem to have changed that view

somewhat. And, today, we talked about infallibility, the inability to

predict risk, because we were infallible human beings.

And also, in your epilogue, you said, ‘‘Modern political reality requires elected officials to respond to virtually every economic aberration with a government program.’’

Well, we are now in an unprecedented economic crisis. We have

just passed a bailout, which I opposed. You supported an unprecedented ideological upside-down turn of events in terms of the massive nature of that government intervention in the free markets,

following, apparently, the Lincoln philosophy, the purpose of government is to do what the free markets cannot or will not do so

well for themselves.

Yet the fundamental problem, a mortgage foreclosure crisis, is

still raging in this country all over the country. Those subprimes,

87

which you talked about, are still being foreclosed on. It slopped

over into the AAAs and the prime mortgages. We have seen record

job losses, and it strikes me that until we deal with the mortgage

foreclosure crisis we are not going to really get a handle on things.

Now, back in December, you said that you favored spending government money to assist Americans struggling to make mortgage

payments without fundamentally changing market structure. You

said, I don’t know if it would work, but it would certainly help people. It would help their incomes. It would help their personal state

without affecting the structure of the way markets are behaving

and the way the adjustment process is going on.

With all that as background, what do you think we need to do

now to get to the root, the cause of the mortgage foreclosure crisis?

And do 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?

Is the button pressed?

Mr. GREENSPAN. Sorry about that.

The foreclosure crises is basically the result of the decline in

prices of homes, because clearly it impacts on the amount of equity

that is in the homes. And, obviously, as prices fall, generally we are

seeing an ever increasing number of American households whose

mortgages exceed the value of their homes. That will stop only as

prices stabilize, and they will.

But prior to that, we still have a rise in foreclosures, and we will,

and 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, because nobody gains from foreclosure.

I recall, before we had all of the securitization and the like,

when, for example, most of the loans were made by savings and

loans, when the borrower got into trouble, the holder of the mortgage recognized that if foreclosure occurred that he would lose as

well. And they got together and essentially resolved what a new

mortgage would look like.

So anything that can be done in the area of bringing the people

together, which is far more difficult—and I think as Secretary

Snow was saying—we have servicers who are too far removed from

the borrower. And we have to find ways in which we can cut

through that issue to resolve it.

But there is nothing like a stabilization of home prices to resolve

this issue. Until that happens we have more difficulties. We are

clearly in a position where, as I mentioned in my prepared remarks, we have several months to go at least. And as I said earlier,

as you point out, that ultimately what you don’t want to do is restructure the market because, for example, if you alter the mortgage contract, it’s going to cost future borrowers much higher interest rates.

And my view is that if we just give transfer payments to people

who are in difficulty, that would be a way to carry over the difficulty of transition during this period when prices are still declining.

So I would say that it’s a short-term problem, it’s not a long-term

problem. Indeed, there are numbers of scenarios which are basically saying that if the rate of mortgage foreclosures slows down,

88

even though it’s still increasing, what happens is that the number

of homeowners who fall into foreclosure start to decline. We are not

there yet, but we are getting close.

Mr. TIERNEY. Thank you very much.

Mr. Murphy, you are recognized for 5 minutes.

Mr. MURPHY. Thank you very much.

Mr. Chairman, I want to ask one retrospective question and one

prospective question, because my constituents certainly are interested in how we got to this situation we are in, but I think most

of our constituents are much more interested in how we move forward from here.

I want to come back to this issue, Mr. Cox, of the CSE program.

Understanding that you have terminated the program due to certain systemic failures, inability to do the job that it set out to do,

the report from the Inspector General’s office specific to the oversight that was done on Bear Stearns is troubling not for the systemic failures, but for 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, that it allowed Bear Stearns to do some of the audits themselves, rather than being done by the SEC, that the SEC

didn’t perform reviews in a timely fashion.

And I certainly understand your problem in that even with that

information, the SEC doesn’t have all the tools necessary to make

the corrective changes that you might want to make, but at the

very least the Inspector General notes that the lack of information

that the SEC got through its work, specifically with Bear Stearns,

had the result of ‘‘depriving investors of material information that

they could have used to make well-informed investment decisions.’’

Building on Representative Van Hollen’s questions, what do you

make of the Inspector General’s specific findings on the lack of

oversight at Bear Stearns? Did you know about those red flags, and

how troubling is it to you, those specific findings as to that one

company?

Mr. COX. Well, with the exception of the last one that you referred to, with respect to the annual review of the 10-Ks, 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 was

meant, as I mentioned a moment ago, to provide a window into

what was going on at the holding company level.

I think it’s important, that first, you asked what I think of the

Inspector General’s recommendations and report. We have either

already implemented or are implementing all of the recommendations. I would think that having such a report——

Mr. MURPHY. But do you think there’s a specific failure—forget

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?

Mr. COX. I think the things that you are describing, they fall into

two categories. They were sort of procedural and paperwork issues

89

that need to be corrected, and those are, you know, 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 SEC have better foreseen the

mortgage meltdown that other regulators didn’t see, and could we

have, you know, used different metrics, different scenarios, for

stressing the portfolios, for 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, you know, failing that, I don’t think that the program itself would have had a different outcome. Unless you could

go in as a regulator and actually regulate the investment bank

holding company, all that was being done then was reviewing, according to the program metrics, and the SEC rather aggressively

managed against those metrics. So the Inspector General found at

all times all of the CSE firms were well above the capital requirements and the liquidity requirements of the program.

Mr. MURPHY. Before my time expires, let me then go to a little

bit broader question.

Understanding that our inability to manage risk and leverage to

allow some of these firms like Bear Stearns to get so large that

they became a part of this new category called ‘‘too big to fail’’—

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 financial firms in the

future to make these same types of risks that they made that got

themselves into this position, because we have now set up a precedent that we are going to come in rescue them? How do we address

that issue?

Mr. GREENSPAN. 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. The result of that is 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? That’s

a, you know, once you have gone down this road, everyone is not

going to believe you. But, remember, we used to argue strenuously

that Fannie and Freddie were not backed by the full faith and

credit of the U.S. Government because that’s what the law said.

The markets didn’t believe that.

Mr. MURPHY. What would we do if we wanted to eliminate too

big to fail, if we wanted to? What would be the first steps we would

take?

Mr. GREENSPAN. Well, I think the first thing you would have to

say, as a minimum, you would have to eliminate these—the larger

institutions’ subsidy effectively, and one way to do that is to either

raise capital charges or to raise fees, but you cannot allow it to go

on without very serious consequences.

90

At the end of the day, there has to be something which penalizes

those firms which move above the level where they become too big

to fail, and that raises very, very large questions.

Chairman WAXMAN [presiding]. Thank you very much, Mr. Murphy.

Mr. Sarbanes.

Mr. SARBANES. Thank you. Thank you to the panel. Thank you,

Mr. Chairman.

We have been talking a lot about this metaphor, the blind man

and the elephant. I don’t really buy that, because I think what—

I certainly don’t buy it as an explanation for what happened. I

think it’s being used as kind of an excuse to pass the buck and sort

of say, well, nobody could see the whole picture, so we were each

compromised in our ability to take action that would have mattered

and made a difference, but the 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 lessened its impact.

So we keep putting it off when we didn’t have a model that

worked. We had to develop new models, and they couldn’t be developed as quickly as needed and so forth.

Dr. Greenspan, you talk about how, I think you said, we are not

smart enough as people to predict where these things are going

and so forth. Well, I mean, that may be true when it comes to understanding the full extent of the securitization of these subprime

mortgages, how things would kind of spin from there, but certainly

we are smart enough as people to have put basic underwriting

standards in place or to have preserved basic underwriting standards. I mean, that doesn’t take a lot of smarts, really, and we certainly are that smart, but you didn’t do that when people were

coming to you that you respect and were saying, we have to take

some steps here to make sure that these subprime mortgages are

being judged accurately in terms of their danger.

So, I mean, you have responded a few times to that, but respond

again to me, because I don’t understand that. I think that if you

had taken some action with tools that you had available to you,

that it would have acted to push back against the securitization demand or appetite that you have described. You sort of said, well,

what happened was you had this huge appetite from the

securitizers to package these things up and market them around

the world to get better yields, and that’s what kicked in in 2005

and 2006 and 2007, and that just kind of overwhelmed the system.

But if in 2003, 2004 and 2005, and during those periods when

you were being asked to exercise more aggressively these tools of

oversight with respect to the lending standards, if that had been

done, that would have acted as a kind of firewall against this pressure that was coming from the securitizers, and it might have

made a difference.

So, if you could speak to that, I would appreciate it.

Mr. GREENSPAN. Well, remember, we did not know the size of the

subprime market probably until late 2005.

In short, we had no data that was worthwhile in the public sector. We had, for example, HMDA data on mortgage holders that

91

you are familiar with, but we had no indication that the subprime

market had soared to the level that it did until very late in 2005.

In retrospect, we now know with the data we have that subprime

mortgages constituted about 7 percent of total originations for

mortgages in the United States. By 2005, it had gotten up to 20

percent, and we didn’t know that at the time.

Mr. SARBANES. Well, I appreciate that. My time is going to run.

Let me just followup on that quickly, because certainly you are not

suggesting that it’s only when a problem gets to be of a certain—

in other words, if you see the fact that even in a handful of circumstances, basic traditional principles of honest underwriting and

lending standards are being compromised, it shouldn’t be that the

fact that the size of that problem, volume of it, it hasn’t reached

a certain threshold that satisfies you that you don’t need to take

action. You ought to be taking action just based on what’s happening here, which if it had happened, would have 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.

Now, I am about to run out of time. Let me just close with this

observation, Mr. Chairman, if you will indulge me for a second.

What concerns me, and I have read some of your writings, is 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

haven’t conceded is I think a flaw in the ideology that suggests

that the market will always punish the bad actors, or at least not

allow for the fact that if you put a driver in a car and they drive

recklessly, and maybe they have a car crash, it’s 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’s what happened. There’s a lot of the American

people out there who feel like innocent bystanders, and they have

been hurt.

Thank you.

Chairman WAXMAN. Thank you, Mr. Sarbanes.

Mr. SNOW. Mr. Chairman, can I just——

Chairman WAXMAN. Yes.

Mr. SNOW. Since Congressman Sarbanes mentioned Treasury in

his opening comments, suggesting we, too, were not on the watch,

let me just go back to a point I have tried to make over and over

again, Congressman. That is we were on the watch. When we saw

a large systemic risk, we called it to the attention of the Congress.

We couldn’t 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 didn’t duck our responsibilities. We assumed them, and we put a lot of effort—I am glad

to see that it eventually resulted in Congress enacting the strong

regulator legislation. It would have been better if it could have

acted sooner.

Chairman WAXMAN. Ms. Watson.

Ms. WATSON. Thank you so much. I would like to thank the three

gentlemen for their ability to withstand this current barrage of

questions and your responses.

Mr. Cox, I want to start with you. I would like the other two gentlemen to respond, too.

92

Since the beginning of the economic crisis, you have come up

with a number of suggestions in order to properly oversee America’s financial markets.

Now, if you, with all clarity, can respond to this, and I would like

the other two gentlemen to follow, do you believe in regulating the

financial markets, and what role do you think the Federal Government should play in the U.S. economy in light of our current economic crisis?

Mr. COX. Thank you, Congresswoman. First, the answer is yes,

and, strongly, I believe in regulation of financial markets. That is

why I serve as the chairman of the Securities and Exchange Commission.

Embedded within the description of regulation of financial markets are two things, regulation and markets, and both are good,

and both are important. Congressman Sarbanes just a moment ago

analogized to driving and the rules of the road. It’s vitally important for markets that there be rules of the road.

It would be very, very difficult to get people in America to part

with their money, to have investors be confident that they could

put money into the system with rules. So I support——

Ms. WATSON. Congressman Cox, who should be involved in formulating those rules?

Mr. COX. Pardon me?

Ms. WATSON. Who should be involved in formulating those rules?

Mr. COX. Well, clearly the Congress, first and foremost, needs to

describe the architecture and rulemaking, as has been devised by

the Congress as a means of addressing things at a level of granularity that legislation can’t reach. I think that’s a sound system.

With respect to the second part of your question, the role of the

government in the economy, that’s the market’s part. I think it’s

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, the markets are

going to make decisions that a central government can’t. We have

seen the failure of central planning before but not both. You have

to have regulation and markets.

Ms. WATSON. Let me just, because our time is going to run out,

what additional authority would you, as Secretary need, or whoever follows you need, to do the job smartly?

Mr. COX. First and foremost, close the regulatory gaps that I

have described with respect to investment bank holding companies,

with respect to municipal securities, with respect to credit default

swaps, harmonize the regulation of economically competitive products that currently are regulated by the CFTC and the SEC.

If we fill those regulatory gaps, then I think the SEC will be able

to do a far better job than what it already does.

Ms. WATSON. All right. And would you then put in writing to the

committee those specific items that you just pointed out?

Mr. COX. I would be very pleased to do that.

Ms. WATSON. Thank you. Let me go to Mr. Snow.

Chairman WAXMAN. Microphone.

Mr. SNOW. I keep forgetting it. I agree with the comments and

associate myself with the comments of Chairman Cox. It’s not a

93

matter of no regulation or some regulation. We know we have to

regulate financial markets. It’s the matter of getting, I think as the

chairman said, smart regulation, targeted, effective regulation.

On the economy, I think the economy is in tough shape. I think

it’s going down a bad, bad path. And I think that the stimulus

package that’s being talked about, a targeted, well-shaped, wellformed stimulus package would make good sense at this time.

Ms. WATSON. Mr. Greenspan, please.

Mr. GREENSPAN. We have to recognize that this is almost surely

a once-in-a-century phenomenon. 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, create greater wealth, than, say, centrally planned economies.

Ms. WATSON. We know that, and I am sure you are very experienced in explaining that. But who should then formulate the regulations? Where would that lie?

Mr. GREENSPAN. I think it has to lie with the Congress.

Ms. WATSON. All right, OK.

I have one question, I am going to run out of time, may I just

ask, and they can respond?

Chairman WAXMAN. Sure.

Ms. WATSON. We have a personal problem in California and Los

Angeles, Mr. Cox, you might be aware of it. It’s with the Los Angeles County Metropolitan Transit Authority, MTA. The Southlands

commuter rail agency sold most of its train cars and locomotives

in four lease-back deals, three of which involved AIG.

Metrolink and the MTA have to look for another firm to replace

AIG, which provided $1 billion in loans to finance the lease-back

transaction. This is a daunting task, considering the Nation’s 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?

And thank you for allowing me to finish my questions.

Chairman WAXMAN. If you could answer very, very briefly. In

fact you can say, yes, no or maybe.

Mr. SNOW. Unfortunately, yes.

Mr. GREENSPAN. I second that statement.

Mr. COX. I have no reason to disagree with what has been said

thus far.

Chairman WAXMAN. Well, we are sorry to hear your answers, but

we appreciate that you gave us an answer.

Ms. McCollum.

Ms. MCCOLLUM. Thank you, Mr. Chairman.

A free market isn’t the same thing as an unregulated market.

The private sector and the government play two different but very

essential roles in our economy, and there’s a healthy tension between the private and the public interest, and that’s the balance

you were referring to, Mr. Snow.

94

But when financial regulators decide to let the private markets

run free, the public interest is left defenseless to the greed of Wall

Street.

Mr. Snow, this morning you talked about the importance of regulation, and you gave examples of regulatory matters you wish Congress had acted on. But that seems to be a change of heart from

when you were Treasury Secretary.

I would like to show you a photograph taken in 2003 while you

were in charge of the Treasury Department. The picture includes

some of Treasury’s top officials, including the Director of the Office

of Thrift Supervision, James Gilleran; the Comptroller of the Currency, John Hawke. The picture also includes representatives of

the banking industry.

Now, this photo was taken at a press conference to announce a

new initiative to limit regulations on banks. There they are, standing happily, destroying a tall stack of Federal rules.

I think it’s telling that they are not using a scissor to cut up the

regulations, they are not even using an Enron paper shredder.

They are using a chain saw. So there’s not much nuance there, Mr.

Snow.

The photo obviously is intended to send a clear, unmistakable

message to the market and to the public.

Mr. Snow, in your opinion, what message is this photograph conveying about regulation in the Treasury Department when you

were the head of it, and how do you interpret this photo?

Mr. SNOW. Sorry, Congresswoman, I don’t see myself in that

photo. Maybe I am in there, maybe my eyesight has failed me.

Ms. MCCOLLUM. Mr. Snow, I did not say you were in the photo.

What I did say is you were head of the Treasury, and these are

people who are very highly placed Treasury officials.

Mr. SNOW. Congresswoman, I have no knowledge of what that

photo is about or what those smiling people are celebrating.

Ms. MCCOLLUM. Well, Mr. Snow, at the time you were in charge

of the Treasury Department you were unaware of this massive deregulation, cutting up of the banking industry?

Mr. SNOW. Yes, I am unaware of any massive deregulation, cutting the banking industry.

Ms. MCCOLLUM. Well, Mr. Snow, taking a chain saw to the banking regulations was just the beginning. Two months after this press

conference, the Office of Comptroller of the Currency issued a rule

that prevented States from banning predatory lending.

Your Treasury Department didn’t act to prevent this crisis. In

fact, your Department blocked, your Department blocked the States

from protecting their citizens. Is that correct, yes or no?

Mr. SNOW. I think that’s false.

Ms. MCCOLLUM. So your Department did absolutely no lobbying

to stop States from being able to regulate predatory lending?

Mr. SNOW. I don’t think the Treasury Department lobbied on

that matter. This was an action, as I recall it, taken by the OCC,

and under laws established by the Congress, the OCC on regulatory matters is, enforcement matters, is entirely independent of

the Treasury Department.

Ms. MCCOLLUM. Mr. Snow, do you think that a law should have

been put in place that would have allowed States who wanted to

95

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?

Mr. SNOW. Well, I think an awful lot depends on the circumstances and particulars of the law in question.

Ms. MCCOLLUM. Well, I am a former State representative, yes or

no. I mean, it’s pretty clear to me, States rights or not.

Mr. SNOW. Well, I would have to see the law. I am not going to

give a blanket answer to something unless I know what the proposal is.

Ms. MCCOLLUM. Thank you.

Well, Chairman Cox, I have to agree with your statement at CQ

Weekly this month. You said the last 6 months has made it abundantly clear that voluntary regulation does not work. I have heard

Dr. Greenspan refer to the fact that what he thought the market

would regulate to protect its investors it did not regulate. I am

paraphrasing from your earlier statement.

One of the lessons from this financial crisis is that over the long

term voluntary regulation is really no regulation at all. We saw

that at Lehman Brothers, AIG, and the credit rating agencies that

testified yesterday. Unregulated markets and voluntary regulation,

was a failed experiment. It’s an ideological approach to government

that is erasing hard-earned retirement and savings of millions of

Americans, including my constituents.

If we need an ideology, if we need a philosophy to govern, as Mr.

Greenspan suggested, I would suggest we give pragmatism a try,

we give common sense a try.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Ms. McCollum. We have two

Members who have not asked questions, Mr. Shays and Mr. Lynch,

and I think that will close out the hearing.

Mr. Shays.

Mr. SHAYS. 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’s all of us.

I do want to say that I think Ms. McCollum’s questions were

misinterpreting what was happening, where banks were being told

that 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 we don’t have it for us, thank God, huh?

But the Freedom of Information, when we had the hearing on the

regulators, excuse me, those who appraised the value of companies

and transactions, one of them said we just lost a huge Mitsu 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 risks; because they were rating them higher, they had to have a greater

set-aside.

Another memo we had was we don’t have sufficient staff, with

the appropriate expertise, to research and establish criteria to engage in dialog with our clients and to be responsive. There were all

96

these instruments, and we think the rating agencies didn’t understand them.

This is the one that really gets me. They said rating agencies

continue to create an even bigger monster, the CDO market. Let’s

hope we are all wealthy and retired by the time this house of cards

falters. I mean, that’s the kind of testimony we get, or the kind of

testimony where we learn that after we bail out AIG, just days

afterwards, they went to a swanky St. Regis resort in Monarch

Beach for a week of wining and dining of top salespeople.

As it happens, congressional investigators release that they paid

more than $440,000 for the event, including $200,000 for 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, and then we had the commercial banks in the late 1980’s and early 1990’s. Then we had the dotcom bubble bust, and now we have this subprime meltdown.

My sense is, first off, somewhere between there was Enron and

Sarbanes-Oxley, and a bill I voted for. Was Sarbanes-Oxley intended to prevent any of what we have seen here, and, if so, did

it?

I am not looking for a long answer. I will start with you, Mr.

Greenspan.

Mr. GREENSPAN. Well, it did one thing that I thought was important; namely, to put the responsibility for the accounting system on

the—make it responsible for the chief executive officer, because, as

we have all learned in recent years——

Mr. SHAYS. OK, that’s the first one. Any other benefit?

Mr. GREENSPAN. I am hard pressed to find any of them.

Mr. SHAYS. When we passed Sarbanes-Oxley, we learned that the

Fannie Mae and Freddie Mac, these huge giants, were not under

it. They weren’t under it because they are not under the 1933 act

and they are not under the 1934 act. That’s the SEC. They were

not you, Mr. Cox, were they?

Mr. COX. No. They had their own regulator, OFHEO.

Mr. SHAYS. They weren’t under the regulator. They weren’t

under the SEC. We forced them, by introducing legislation in 2002

and 2003 to put them under both. They voluntarily, kind of arrogantly, voluntarily agreed to be under the 1934 act. That just made

us understand their macro numbers. The 1933 act would have been

all these different instruments. Why in the world is not Fannie

Mae and Freddie Mac under the 1933 act?

Mr. COX. There is no good reason for that.

Mr. SHAYS. Thank you.

Mr. COX. I have consistently urged, and I think we missed a big

opportunity in the emergency economic——

Mr. SHAYS. And the reason why it’s not happening is Congress

doesn’t want to put them under it, and that’s the challenge that we

have.

We also, Mr. Snow, you advocated that they be, have a stronger

regulator. We have finally done it, but you went after it day in and

day out. Mr. Cox, you did as well. Mr. Greenspan, you advocated

that they have a better regulator.

97

So, my understanding is that the housing market, the drop, the

subprime, that has 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 then you kept easy

money after we were out of it. And some of my constituents said

that led to dumb lending and dumb borrowing.

They said it was not just dumb lending to individuals buying

homes, people buying homes they couldn’t 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.

I am just wondering with hindsight if you would have maybe

pushed the rates up a little higher a little sooner?

Mr. GREENSPAN. It’s very evident, from all of 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.

Without getting into the 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, 5 or 6 years, and 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 up as 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, all central banks are being driven to

the point where for longer-term issues they basically are confronted

with this global situation.

Mr. DAVIS OF VIRGINIA. Mr. Chairman, I would ask to yield 1 additional minute to Mr. Shays.

Chairman WAXMAN. I recognize Mr. Shays for 1 additional

minute.

Mr. SHAYS. Mr. Cox, I would like you to have the opportunity to

respond to criticism that said in 2004 the SEC allowed Lehman

Brothers, Bear Stearns, Morgan brothers, Merrill Lynch, Goldman

Sachs, to leverage at 30–1, in some cases even higher, from their

practice of doing 12–1 or 15–1. That has been a severe criticism

against you. I would love to hear your answer.

Mr. COX. Well, first, that 2004 rule change occurred while I was

a Member of Congress. But what the SEC did in 2004 was not to

lift leverage requirements on investment bank holding companies

or to repeal a 12–1 leverage rule. First, there was no 12–1 leverage

rule; and, second, there was no rule whatsoever for investment

bank holding companies.

98

The SEC never purported to regulate them, had no statutory authority to do so. So, until 2004, there were simply 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 SEC otherwise could have.

Nonetheless, as I have pointed out several times, that was a fundamentally flawed system of voluntary regulation with metrics that

did not work any better in the investment banks than they did for

WaMu or for IndyMac or for commercial banks in this country and

around the world that were using the Basel standards.

Mr. SHAYS. Thank you.

Chairman WAXMAN. Thank you, Mr. Shays.

Mr. Lynch.

Mr. LYNCH. Mr. Chairman, in the interest of time, I would ask

unanimous consent that I submit for the record, this is a speech,

actually an article by Harvey Pitt, former SEC chairman, in Compliance Week from June 24, 2008. And also there’s another article,

actually a piece here, a report by Mark Jickling for Congress, entitled Averting Financial Crisis, dated October 8, 2008.

Chairman WAXMAN. Without objection.

[The information referred to follows:]

99

100

101

102

103

104

105

Mr. LYNCH. Thank you, Mr. Chairman. I too want to thank the

panelists for their willingness to come forward and help this committee with its work. This Congress and the next Congress will be

charged with the responsibility of trying to reconfigure our regulatory framework to deal with the problems that now have become

evident.

While each of you have said during today’s testimony that there’s

probably not one cause of this, I think there is one way to describe

the current problem we have now, which is valuation risk, and the

inability of market participants to really, you know, value products

and to ascertain where they stand and where some of their

counterparties stand.

Accurate information for the markets is really its life’s blood. If

we don’t have that, we will never gain back the trust that we need

in these markets.

We had a couple of glaring examples. 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 had a quote

here, they were talking about their balance sheet, and they said we

currently have $19 billion in complex derivatives on our books, 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 E. Stanley O’Neill, the CEO of Merrill, came out

in early October 2007, said we had losses of $4 billion. Came out

a week later, said we have losses of $7 billion. Came out 3 weeks

later and said we have losses of $11 billion.

Clearly, you know, these folks had no idea of what was really

going on, and it’s a function of the complexity of some of these instruments.

I think the complexity amplified some of the problems that we

had.

Dr. Greenspan, I was—and this happens in a number of ways.

It’s not only the complexity of the instruments, but also some of

them are off book, off the balance sheets, so we don’t know about

them.

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 am getting and I was a little surprised, Dr.

Greenspan, at your comments earlier today, although you may

have started to clarify them a little bit, that there’s nothing wrong

or that most of the derivatives are working properly, because the

complexity of some of those—now, if you are talking about the

standard, very common derivatives that are used in interest rate

calculation and the early payments of mortgages, prepayment penalties, that type thing, those are very common. But we also have

some very complex derivatives that are really 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 the

opacity, I guess, of what their derivatives are and some of their

holdings.

So is what you are saying that most of these derivatives are

working, is that an implication that we shouldn’t do something in

106

terms of regulatory action with respect to some of these complex

derivatives, is that what you are saying?

Mr. GREENSPAN. Well, I think you are going to find, Congressman, that many of those complex derivatives are gone, never to be

seen again.

Mr. LYNCH. Well, I wish I could—I wish I could believe that, but

we have short memories around here, and as soon as the urgency

and this crisis is over, folks, you know, there’s 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 you that these things

won’t come back, but I want to make sure.

Because it will be to the Congress’ detriment, as well as to the

financial industry, if these things do come back or if we have another failure like we are having right now.

Mr. GREENSPAN. Well, I certainly have no objection to regulating

those instruments. I mean, structured investment vehicles, for example, my puzzlement is who is 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.

Mr. LYNCH. Interestingly enough, 72 percent of them were held

by hedge funds, the smartest people in the room, we are told.

Mr. GREENSPAN. 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. LYNCH. Mr. Chairman, could I give the other two witnesses

a crack at that?

Chairman WAXMAN. Yes, certainly, if they wish to engage.

Mr. LYNCH. Please.

Mr. COX. First, an observation about what we can do in real

time—an observation about what we can do in real time to address

some of the problems that you have just 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 had regulation of them, so we can have a disclosure, that will help.

Beyond that, a more general point, the financial system that’s

administered by Wall Street institutions exists for a purpose. It exists to raise money for productive enterprise. It supports a lot of

jobs, it’s what the real economy needs to operate on. It should not

be an end in itself. It should not become a baroque cathedral of

complexity that pays itself richly in the short run while exposing

all the rest of us to extraordinary risk that can threaten the Nation

itself.

I think we need to understand that complexity in and of itself

can frustrate investors’ understanding of what is in the market,

can make it difficult for markets to work. An all-out war on complexity is absolutely important. It’s needed in accounting. We have

been doing it with the Financial Accounting Standards Board to

make sure that we simplify GAAP, but all the complexity and the

instruments and the disclosures where we have been working to

simplify it so investors can understand it, and the lack of transparency in the markets, all of that, I think you are absolutely right,

conspires to let risk grow in the darkness.

107

Mr. LYNCH. Thank you.

Chairman WAXMAN. Mr. Snow.

Mr. SNOW. I will just say I thought your statement, Congressman, was a very coherent and lucid description of the problem in

the banking system today. It’s gummed up, I think that was your

word, with all of this paper that is hard to get price discovery on.

They can’t find out what the darn stuff is worth because it’s so

opaque, and the banks don’t trust each other’s balance sheets.

You can put liquidity in, as is being done by the Fed and Treasury, and you can put capital in which is being done through the

TARP program you approved, but unless you clear up this complexity, unless people trust each other’s balance sheets and the paper

on the balance sheets, they are pretty darn disinclined. It’s called

risk aversion. You are really risk averse with your counterparty.

I think as long as this continues, 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 done

capital, but they have put in place guarantees, interbank lending

guarantees so the banks will start lending to each other, and 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, get it out of the system. But in the interim while the disgorging and price discovery goes on, it would

seem to me it would make sense for us to move toward interbank

guarantees so that banks will start lending again and overcome the

risk aversion that they see in all their counterparts.

Mr. LYNCH. Thank you. Thank you, Mr. Chairman.

Chairman WAXMAN. The gentleman’s time has expired. When I

talked to Dr. Greenspan about coming to testify, he told me that

hearing could last 4 hours. You were absolutely on the mark. This

hearing has lasted 4 hours.

It has been a very helpful 4-hour period for us to have the three

of you here to give us your views on 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 your willingness to answer our

questions for such a lengthy period of time.

We stand adjourned in terms of the hearing. Those who are here

for the hearing certainly could leave. I thank you for that.

We are adjourned for the hearing.

[Whereupon, at 1:55 p.m., the committee was adjourned.]

[The prepared statements of Hon. Edolphus Towns and Hon. Bill

Sali follow:]

108

109

110

111

112

113

Æ