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Cox: Panel Turf War Contributed To Crisis

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The top federal securities regulator says the structure of congressional committees may be one factor that led to the current chaos in the credit default swaps market.

U.S. Securities and Exchange Commissioner Christopher Cox was one of the officials who testified today before the U.S. House Oversight and Government Reform Committee on the role of federal regulatory agencies in failing to keep the markets for mortgage-backed securities and credit default swaps from imploding.

One lesson is that the government should not let originators pass on all risk of a transaction through securitization, Cox said.

“If you don’t have skin in the game, you’re inclined to take more risk,” Cox said.

Another lesson is that the government should declare “all out war on complexity,” and a third lesson is that the government needs to find ways to bring regulators together, Cox said.

Cox argued that, even in Congress, balkanization contributed to the legislative gap that left credit default swaps unregulated.

In Congress, Cox said, financial services committees oversee banking, securities and insurance, but agriculture committees oversee the CDS market and other derivatives markets, Cox said.

Congress needs to set up select committees to overcome conflicts over jurisdiction, Cox said.

“Other witnesses and lawmakers also talked about the balkanization of federal financial services regulation and the need to modernize the system.

“Nowhere in our financial regulatory system is there anyone with full accountability and a full 360 degree view on risk and leverage,” said former Treasury Secretary John Snow.

“They’re all touching a piece [of the elephant], but they don’t know what the big picture is,” Snow said.

Alan Greenspan, the former chairman of the Federal Reserve Board, known for promoting efforts to let markets regulate themselves as much as possible, noted that many types of derivatives continue to perform well.

Even mortgage-backed securities, the villain of the day, were performing well, Greenspan said.

“It wasn’t until securitization became a significant factor, in 2005, that you have this huge increase in demand for subprime loans,” Greenspan said.

Once lenders and Wall Street securitized the mortgage-backed securities, investors outside the United States began investing in the securities, and that made the MBS problems an international concern, Greenspan said.

Greenspan acknowledged that some forecasters predicted the problems in the MBS market.

“There were always a lot of people raising issues,” Greenspan said. “But half the time they were wrong. What do you do? … We cannot expect perfection in any area where forecasting is required.”


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