Congress’s proposed overhaul of U.S. bank regulation wouldn’t have averted the 2008 financial crisis and does too little to prevent a recurrence, two former chairmen of the Securities and Exchange Commission said.
Legislation being refined by a House-Senate conference after passage by both chambers relies too heavily on regulators such as the Federal Reserve that previously failed, said Richard Breeden, who led the SEC from 1989 to 1993. Congress failed to address emerging threats, such as abuses in the municipal-bond market, that might trigger the next meltdown, said Arthur Levitt, who was SEC chairman from 1993 to 2001.
“There was massively too much leverage within the financial system,” Breeden said at a Bloomberg Link Boards & Risk Conference in Washington yesterday. “Regulators had the authority to control that and eliminate it. We can keep passing laws, but if the regulators don’t have the backbone to enforce the rules and to be realistic, then that’s a different problem.”
The House and Senate are finishing legislation designed to address an economic collapse that led to the failure of Lehman Brothers Holdings Inc. and pushed the U.S. banking industry to the brink of collapse. The measures would create a mechanism for winding down systemically risky financial firms, a regulatory structure for the derivatives market and a new federal bureau responsible for overseeing and regulating consumer financial products such as mortgages and credit cards.
“I certainly don’t think it would prevent the turmoil coming up, and I doubt very much it would have had much impact on the turmoil we have just experienced,” Levitt said at the Bloomberg conference. “You might surmise from that that I’m not a fan.”
Regulators need to have the courage to make banks smaller, and less profitable, Breeden said.
“We would all be safer,” he said.
Breeden, 60, and Levitt, 79, said they don’t believe that the SEC filed an April 16 lawsuit against Goldman Sachs Group Inc. to help President Barack Obama win passage of the financial-regulation overhaul.
“I don’t believe that for a single second,” said Levitt, who serves as an adviser to Goldman Sachs. “The SEC will not be impacted by public pressure to bring an action.”
In its lawsuit, the SEC said Goldman Sachs sold a security tied to mortgages without disclosing that the Paulson & Co., the hedge fund run by John Paulson, helped pick the underlying assets. Paulson was betting the security would fail, the SEC said. New York-based Goldman Sachs said the case has no merit.
Levitt said he doesn’t think Goldman Sachs will be required to appoint an independent monitor to review the company’s practices as part of any potential settlement with the SEC. Levitt also serves as an adviser to the Carlyle Group and is a board member of Bloomberg LP, the parent of Bloomberg News.