U.S. regulators admitted to failing to head off the 2008 financial crisis as they appeared before a panel whose chairman said he plans to seek testimony from former Federal Reserve Chairman Alan Greenspan.
As President Barack Obama proposed slapping a special fee on banks and criticized bankers' bonuses, the Financial Crisis Inquiry Commission heard regulators confess that they were lulled into inaction by soaring bank and Wall Street profits.
To learn more, commission chairman Phil Angelides said on Thursday he will seek testimony from Greenspan, current Fed Chairman Ben Bernanke and former chairmen of the U.S. Securities and Exchange Commission, including Christopher Cox.
We'll be asking them to come before us because they were the watchers, and I will assure you, we will be as probing of the regulators who were on the scene at the time as we will be of people in the private sector, said Angelides, a former state treasurer of California.
In testimony that urged stricter oversight in future while admitting past errors, Federal Deposit Insurance Corp Chairman Sheila Bair headlined the commission's second day of hearings.
Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities, she said.
When financial firms are making money, even amid questions about how they are doing it, it can be difficult for regulators to take away the punch bowl, she told the commission created by Congress.
Obama on Thursday proposed imposing a fee of up to $117 billion on Wall Street to repay taxpayers for the government bailouts that stabilized the financial system in 2008 and 2009. He slammed bankers for massive profits and obscene bonuses.
My commitment is to recover every single dime the American people are owed, Obama said.
MISJUDGMENTS AND REGRET
The 10-member inquiry commission, in its first public hearing on Wednesday, heard a tale of misjudgments and regret from top banking executives, but got no outright apology or any new explanations for the debacle that shook world markets.
The bankers acknowledged taking on too much risk and having choked on their own financial cooking in the subprime mortgage market, but they defended their pay packages and the huge size of their businesses in the face of proposals to break them up.
The banking titans set off a media circus on Capitol Hill on Wednesday, but the regulators met with a half-empty hearing room. Discussion between them and the panel was more subdued than the sometimes combative exchanges with the bankers.
A day after Goldman Sachs' business practices were questioned by Angelides, the company went to the defense of Chief Executive Lloyd Blankfein, insisting his testimony exonerated the firm of any wrongdoing.
Mr. Blankfein does not believe, nor did he say, that Goldman Sachs had behaved improperly in any way, the company said in a statement, charging that media reports had falsely portrayed Blankfein as admitting to improper practices.
Angelides compared Goldman's practice of creating, then betting against, certain subprime mortgage-backed securities to selling a car with faulty brakes and then buying an insurance policy on the buyer.
In addition to Bair, the commission heard Thursday from Securities and Exchange Commission Chairman Mary Schapiro, who said a program set up by the SEC in 2004 to supervise investment banks was a failure. The program was ended in September 2008.
The Consolidated Supervised Entities program, based on voluntary regulation, was inadequately staffed; over-stretched the SEC's traditional capabilities; and unwisely let firms hold lower levels of capital, she said.
We have to conclude that that program was not successful, she said of the ill-fated attempt by the SEC to oversee global giants such as Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch and Bear Stearns.
Schapiro said the SEC is now reviewing investment bank practices in markets for subprime mortgage-backed securities and collateralized debt obligations in the real estate bubble.
State regulators criticized their federal counterparts for letting the mortgage crisis spiral out of control and for hobbling their own attempts to avert the looming disaster.
Illinois Attorney General Lisa Madigan told the commission on Thursday that she recalled attending a 2006 meeting with federal regulators in which she urged them to implement tougher home loan standards.
At that time, Wall Street was still making tremendous amounts on mortgage-backed securities. The federal regulators did not share my concerns, she said.
BAIR AN EARLY CRITIC
Bair was an early critic of subprime mortgage market excesses that helped inflate a historic housing price bubble well into 2007. When it broke, the aftershocks paralyzed capital markets and panicked the Bush administration.
Multibillion-dollar taxpayer bailouts and the deepest recession since the 1930s followed, saddling President Barack Obama with profound economic challenges and a political backlash that is still far from over.
The Angelides panel is modeled after the Pecora Commission, which probed the 1929 Wall Street crash. Its findings helped lead to the creation of the SEC and other reforms. Whether the new commission will be as substantive remains to be seen.
Its work coincides with efforts in Congress to overhaul financial regulation, a process now more than a year old and in which Bair has emerged as a key innovator.
The House of Representatives last month approved a sweeping reform bill over the objections of Republicans and banks. The Senate is working on a bill. By summer, a compromise House-Senate bill could reach Obama.
(Additional reporting by Karey Wutkowski, Jeremy Pelofsky, Rachelle Younglai, Steve Eder, Alister Bull, Caren Bohan, Dan Margolies; Editing by Tim Dobbyn)