DATE: OCTOBER 21, 2008 - NCOIL



DATE:               OCTOBER 21, 2008

TO:                   NCOIL LEGISLATORS

FROM:              MIKE HUMPHREYS

                        NCOIL DIRECTOR OF STATE-FEDERAL RELATIONS

RE:                   HOUSE HEARING TODAY ON REGULATORY REFORM

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Attached is an October 21 Congressional Quarterly Today article regarding the hearing, entitled “Select Committee Likely to Guide Overhaul of Financial Regulations.”

HOUSE HEARING

Hearing testimony may be found at

The U.S. House Committee on Financial Services held a five (5) hour hearing today to continue its investigation of the ongoing financial crisis.  Entitled “The Future of Financial Services Regulation,” the hearing focused on strategies for reform. 

Two panels comprised of academic and industry representatives participated in the hearing.  Rep. Barney Frank (D-MA), Committee Chair, said that public sector witnesses were intentionally not invited so the Committee could focus on future reform.  

OPENING REMARKS

Rep. Paul Kanjorski (D-PA), Chair of the Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises, called deregulation a “relic ideology” and said that Congress must devise a robust regulatory system for the future.  He listed seven (7) principles for reform that included providing regulators with adequate resources and flexibility, recognizing of the “interconnectedness” of the global economy, and general transparency, among other things.  He said that the banking and commerce industries must remain separate.  

Rep. Steven LaTourette (R-OH), listed many factors that may have contributed to the financial crisis including enactment of the Gramm-Leach-Bliley Act (GLBA), the failure to appoint strong leaders at Fannie Mae and Freddie Mac, the lack of credit default swap regulation, and mark-to-market accounting rules, among other things.

Ranking Member Rep. Spencer Bachus (R-AL), said that Congress needed to talk about how to encourage people and the federal government to “live within their means.”  He said the market had been “brutally efficient” and said that Members had to recognize that there should be limits on what the federal government can do in the marketplace.

During opening remarks and later during the question and answer periods, several Members engaged in partisan attacks regarding who is at fault for failures at Fannie Mae and Freddie Mac. 

COMMENTARY

During the question and answer periods, it became clear that

• there is support from industry, academics, and Congress for a second economic stimulus package—that could come forward as early as a tentatively planned lame-duck session in November

• the House seems likely to create a Select Committee to investigate the financial crisis and strategies for reform

• all reform options remain on the table, including reviewing the Gramm-Leach-Bliley and Glass Steagall Acts, as House Members know that they want “comprehensive reform” but have not decided what form that should take

• many Members are interested in punishing those that they determine have “caused” the financial crisis

PANEL ONE

Alice Rivlin, Senior Fellow, Metropolitan Policy Program, Economic Studies, Director, Greater Washington Research Project, Brookings Institution, said that the market breakdown had many causes, including Americans living beyond their means, a “collective delusion” that housing prices would continue to raise, increases in securitizations, and the fact that parties did not ask questions because they were benefitting from the housing delusion.  She said that the federal government should have created minimum standards for all home lenders and commented that the government failed to regulate new types of mortgages.      

Dr. Joseph Stiglitz, Professor, Columbia University, said that the deregulation philosophy “has no basis in economic theory” and noted that government is needed to maintain market stability.  In advocating for a comprehensive reform approach, he said that restructuring must begin with broader reform of corporate governance standards and should not rely on “trickle-down” approaches.  He said that repeal of the Glass Steagall Act had ushered in a new era of risk-taking in an industry that was designed to be conservative.

Mr. Joel Seligman, President, University of Rochester, advised Members to distinguish between emergency legislation and regulatory reform—commenting that comprehensive reform was last enacted during the New Deal period.  He urged both Chambers of Congress to create Select Committees to provide a focused review of the crisis’ contributing factors and what reforms should be addressed.  He said that the scope of reform should be comprehensive and that a single agency should oversee systemic risk while other agencies addressed specific industries.  

Manuel Johnson, JohnsonSmick International, said that most major market players have been partially or fully nationalized and that efforts to restore confidence were because of structure deficiencies in regulation.  He called permanent government control over credit mechanisms “dangerous” and said that the federal government needed to develop an “exit strategy.”  He said that financial regulations should focus on enhanced disclosure. 

PANEL TWO

Steve Bartlett, President and CEO, The Financial Services Roundtable, said that huge gaps existed in the system that prevented regulators from talking to each other.  He listed five (5) near-term recommendations that included giving the Federal Reserve Board broad authority to stabilize the market, expanding the President’s Working Group to enhance coordination, adopting principles-based regulation, urging prudential supervision to identify risks, and addressing financial insurance regulation that, he called, “19th Century” regulation. 

Edward Yingling, President and CEO, American Bankers Association (ABA), said that the biggest failures occurred in unregulated or little-regulated sectors.  He said that the banking sector had been “resilient” and commented that a “logical move” would be to add more bank-like requirements to other sectors.  He advocated for a single regulatory mechanism that would oversee the economy as a whole and identify growing industries, emerging bubbles, and communication gaps before they occurred.

Timothy Ryan, Jr., President and CEO, Securities Industry and Financial Markets Association, said that serious weaknesses exist in financial services regulation.  He said that a financial market stability regulator is needed because companies compete across many lines of business and globally.  He said the regulator should not add an additional level of regulation.  He commented that to improve efficiency and effectiveness of regulation, Congress should consider how to streamline duplicative state and federal regulation.

Mike Washburn, President and CEO, Red Mountain Bank on behalf of the Independent Community Bankers of America, said that the community banking industry is strong and that community banks did not participate in the events that have caused the current crisis.  He said that the financial services sector has become too concentrated.  He listed several principles for reform that included preserving the system of multiple federal regulators, protecting the dual banking system, preserving the thrift charter, addressing inequities for depositors at large and small banks, and maintaining a separation between banking and commerce industries, among other things.

Please feel free to contact me by reply e-mail or at 202-220-3014 should you have any questions.

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