[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




                               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

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                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire

                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director

                            C O N T E N T S

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 
        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



                       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.
    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 white-collar 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 
    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:]

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    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 
    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.
    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 
    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.
    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 
    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.
    [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 
    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 
    Mr. Greenspan. Thank you very much, Mr. Chairman.
    Chairman Waxman. Pull the microphone a little closer to 



    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 
    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 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 
self-interest 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 
    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 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.
    Thank you, Mr. Chairman.
    Chairman Waxman. Thank you very much, Dr. Greenspan.
    [The prepared statement of Mr. Greenspan follows:]

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    Chairman Waxman. Mr. 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. 
    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 
    Like each of you, I have asked myself what I would do 
differently with the benefit of hindsight. There are several 
    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.
    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 
    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 
    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 nationwide investigation to potential fraud in 
the securities of the some of the Nation's largest financial 
    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 
    [The prepared statement of Mr. Cox follows:]

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    Chairman Waxman. Mr. Snow. Is your microphone on? There's a 

                     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 
    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.''
    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 
    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:]

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    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 
longest-serving 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 
    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 
    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 self-interest 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.
    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 
    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 
    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. 
    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 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 
    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 
    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 
    But let me just, if I may----
    Chairman Waxman. Well, the problem is that the time has 
    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 
    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 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 
    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 
    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, 
    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 
    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 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 
    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----
    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 
    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 
    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.
    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 
    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 
    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 
    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?
    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 
    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 
    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 
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T5764.030
    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 
    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 
    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. 
    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, 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.
    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 
    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.
    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.
    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 
    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 
2\1/2\ 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. 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 
    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 
    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 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 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 private 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 
    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 
    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.''
    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 
    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.
    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 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 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 multi-trillion 
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 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 
    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----
    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 
    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 
    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.
    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 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 
    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 
    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 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 
    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 
    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 inspected 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 
    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 
    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.
    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 
    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 
    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 
    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 
    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 overaggressive regulatory efforts helped create it, 
and specifically get your input on the Community Reinvestment 
    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 
    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 
    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 
    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 
    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 undoubtedly 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.
    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 
    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. Chairman, 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.''
    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 
    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 
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 
    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?
    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. 
    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 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 
    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 
    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 
    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 
    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 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 
    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 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 
    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 
    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 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 
    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.
    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 
    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 
    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 
    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, 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 
    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 
    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 
    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 
    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, 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 
    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 
    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, 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 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 
    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.
    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 
    Chairman Waxman [presiding]. Thank you very much, Mr. 
    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 
    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 
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 
    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 
    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.
    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 
    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 
    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 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, well-formed 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 
    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 
    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.
    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 
    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 
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 
    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 
    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 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 dot-com bubble bust, and now we have this subprime 
    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.
    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 
    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 
    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 
    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.
    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 
    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:]

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    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 
    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 
    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 
    So is what you are saying that most of these derivatives 
are working, is that an implication that we shouldn't do 
something in 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 
    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.
    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 
    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 
    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:]