Congress must close regulatory gaps that helped cause financial crisis, ex-SEC chief says

Ex-SEC chief says regulatory gaps must be closed

WASHINGTON — Congress must act to close gaps in the regulatory system that helped cause the financial crisis, a former head of the Securities and Exchange Commission said.

Christopher Cox is testifying Wednesday before a panel investigating the roots of the financial crisis. He said in his prepared testimony that the SEC and the Federal Reserve tried to work together to fill the gaps in regulation of investment banks before the crisis struck in 2008.

“It is urgent that these gaps be filled,” Cox said in his testimony prepared for a hearing by the Financial Crisis Inquiry Commission. Executives who led Bear Stearns before the Wall Street firm’s implosion in March 2008 are saying they did all they could to keep it afloat before it collapsed as clients withdrew their assets.

Phil Angelides, the head of the inquiry panel, said a “shadow banking system” of financial institutions and markets operating outside the regulatory structure represented $8 trillion in assets.

The system has been “upended,” Angelides said. He said the panel on Thursday will ask Treasury Secretary Timothy Geithner and former Treasury chief Henry Paulson, the chief architect of the federal bailout, how the “shadow” system grew out of control.

“Our job is to find out how the fire started. … Who was playing with matches,” Angelides said.

The panel will begin by questioning James Cayne, who was Bear Stearns’ CEO until January 2008, and Alan Schwartz, who succeeded him for a few months. Both were testifying Wednesday before the bipartisan panel investigating the roots of the crisis.

The firm’s collapse “was due to overwhelming market forces that Bear Stearns … could not resist,” Cayne said in his testimony prepared for the hearing.

Bear Stearns was the first Wall Street bank to blow up in the recent crisis, caught in the credit crunch in early 2008 and foreshadowing the cascading financial meltdown in the fall of that year. It collapsed in March 2008 and the Federal Reserve orchestrated its rescue buyout by JPMorgan Chase & Co. with a $29 billion federal backstop.

Two of Bear Stearns’ hedge funds failed in June 2007 as a result of bad bets on the subprime mortgage market, costing investors $1.8 billion and touching off the domino chain that brought the firm to the brink in March 2008.

The congressionally chartered inquiry panel, which has been holding a series of hearings on the causes of the crisis, is looking at Bear Stearns as a case history of the “shadow” banking system.