WASHINGTON, D.C. –U.S. Sen. Sherrod Brown (D-OH), Chair of the U.S. Senate Banking Subcommittee on Financial Institutions and Consumer Protection, today conducted a hearing entitled, “Enhancing Safety and Soundness: Lessons Learned and Opportunities for Continued Improvement.” The hearing examined Washington’s failure to protect the economy from unsafe banks before the financial crisis, and how their oversight can be improved.
“Risky behavior by banks and a lack of oversight by regulators helped push us toward a fiscal crisis. And as a result, many American families and investors have lost confidence in our financial system,” Brown said. “As our economy begins to recover, we must examine past mistakes and ensure that we restore faith in our financial system and protect our nation’s consumers and small businesses.”
Today’s hearing is the second in a series to be held by Brown entitled, “Banking that Benefits Main Street.” The first hearing examined issues facing the community banking industry, including implementation of the Wall Street Reform Bill, recent increased industry consolidation, and community banks’ role in supporting small businesses and boosting job creation.
Below is Brown’s opening statement, as prepared for delivery.
From 1999 to 2007, Wall Street was a big party without any adult supervision – mortgage originators, investors, and investment banks all made money, and large megabanks made lots and lots of money.
Citigroup CEO Chuck Prince famously asked Treasury Secretary Hank Paulson, “Isn’t there something you can do to order us not to take all of these risks?” The answer was “yes.” But no one did. And so, Prince concluded, “as long as the music is playing, you’ve got to get up and dance.”
A Former Federal Reserve Chairman once said that the Fed’s job is to, “take away the punch bowl just as the party gets going.” So where were the regulators?
One Fed supervisor told the Financial Crisis Inquiry Commission that, “Citigroup was earning $4 to $5 billion a quarter … When that kind of money is flowing out quarter after quarter … it’s very hard to challenge.”
While the securitization machine was in full swing, Wall Street basically wrote its own rules. Banking regulators relied on Wall Street’s own internal risk models and allowed the banks to hold no capital buffer against their subprime securities while these securities were rubber stamped as triple-A by the ratings agencies.
The OCC’s head of Large Bank Supervision has acknowledged that they did not have enough information about market risk and failed to intervene before the crisis.
According to a 2009 evaluation, the New York Fed’s supervision of Citigroup, “lacked a disciplined and proactive approach in assessing and validating actions taken by the firm to address supervisory issues.” And the former head of the Office of Thrift Supervision compared its ability to regulate AIG to that of a “gnat on an elephant.”
With supervision like this, the party was sure to end in financial disaster. Now there is a constant drumbeat on Wall Street and in Washington that focusing on safe and sound financial practices will hold back our economic recovery.
Wall Street and my conservative colleagues in Washington have a bad case of amnesia – they have forgotten that poor safety and soundness oversight helped push us toward a fiscal crisis.
The Congressional Budget Office projects that the financial crisis will increase federal debt held by the private sector by 40 percent of GDP.
Standard & Poor’s estimates that another financial sector bailout could have up-front costs as high as $5 trillion.
But these are not the only costs. Home prices have fallen by more than they did during the Great Depression. Nearly 28 percent of homeowners are currently under water, owing more on their house than it is worth. And reports of foreclosure fraud and mortgage-backed securities failures are commonplace.
Lax supervision also makes it harder to hold wrongdoers accountable, because law enforcement agencies rely on referrals from bank regulators.
As the New York Times noted in April, the Office of Thrift Supervision has not referred a single case to the Justice Department since 2000, and the OCC has referred only three. When laws can be ignored, then property can be taken from its rightful owners – homeowners and investors – and given to servicers and originators.
A safe and sound banking system should attract capital from investors and provide it to borrowers to finance productive economic activity. Guided by clear-cut, sensible rules, our banking system – for over 5 decades – has been a model of safety and security for the world.
Yet, it is clear that we forgot the lessons learned in prior bank crises, at home and abroad: that an unsafe and unsound banking system destroys wealth and drains resources from the rest of the economy.
I am afraid that American families and investors have lost confidence in our financial system.
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