Alan Rappeport
(Please refresh for updates. Live-blog begins from the bottom up.)
11:45am:
The panel, which was much less contentious than Wednesday’s, is taking a 10 minute break. Up next are Lisa Madigan, John Suthers, Denise Voight Crawford and Glenn Theobald. Streaming video is here.
11:43am:
As things are wrapping up, Mr Angelides comes back to the 2004 decision to change leverage limits on broker dealers. He asks for a written explanation as to why limits were lifted and the impact this had.
11:40am:
Commissioner Heather Murren requests a list of all the institutions that are included in the “shadow” banking system.
11:36am:
Short-selling continues to be under fire and Ms Schapiro said that new rules introduced this fall and proposals on an uptick rule and a “circuit-breaker” rule could be helpful.
11:31am:
Ms Schapiro, asked about how accountants can be more useful, said that she supports independent accounting standard-setting and that accounting rules, set by FASB, should be geared toward giving investors as much information as possible to make investing decisions.
11:26am:
Compensation has been largely missing from the discussion, and Commissioner Robert Graham brings it up, asking what “external” factors should be considered when setting compensation, rather than just profitability. Ms Bair said that the FDIC is focused on pay incentives that promote riskier behaviour and that shareholders and board members should be focused on corporate citizenship and leadership when setting pay packages.
11:19am:
Both Ms Schapiro and Ms Bair take shots at Fannie and Freddie, calling them out as areas of government involvement that played a role in the financial crisis.
Ms Schapiro ducks an opportunity to knock her predecessor, Chris Cox, when the SEC is called “missing in action” during key points of the crisis. “I wasn’t there,” Ms Schapiro said. She went on to say that any form of voluntary regulation is not useful and that the SEC did not have the resources to be the type of “consolidated” regulator that was needed to cope with the crisis.
11:11am:
The commission is probing Lanny Breuer on the role of mortgage fraud in the housing market collapse and Mr Holder’s understudy said that last year there were about 70,000 reports of “suspicious” mortgage activity that led to fraud investigations.
11:05am:
Echoing John Mack’s comments on Wednesday, Ms Schapiro said that making the ratings agencies “eat their own cooking” would be interesting to explore. That was in response to a question about agencies being paid with the securities that they rate, rather than in cash.
10:58am:
Ms Bair notes that 25 banks failed in 2008, 142 failed in 2009 and there are 552 on its troubled banks watch list.
10:51am:
Mr Thompson addresses the topic of a single regulator, comparing the US situation to other countries that use a “super” regulator as opposed to a “patchwork quilt”. Ms Schapiro, perhaps protecting the value of her own job, said that systems in other countries did not prove to be more resilient or effective in the financial crisis.
10:49am:
Commissioner John Thompson asks Ms Schapiro if the new regulations in place could have stopped the financial crisis. After some filibustering, she said that it’s really more about supervision, not the rules in place.
10:43am:
Ms Bair says that the FDIC should have sufficient funds as long as the economy does not face further difficulties. She estimates $100bn in losses from 2008 to 2013. Now, she says, most of the difficulties facing banks are due to the broader economy and credit deterioration from job losses.
10:35am:
The commission digs into Ms Schapiro on manipulative short selling and she says that they are still investigating. She is also asked for a memo on the “uptick” rule.
10:29am:
Ms Bair is questioned about how regulators can take action to limit risk on activities that are profitable, which proved difficult leading up to the crisis. “It can be very difficult to take away the punch bowl when people are making money,” she said, noting that regulators need to be supported by Congress.
10:24am:
Reiterating the request he made on Wednesday to the Wall Street “titans”, Mr Angelides asked to see any internal reviews that the regulators have made that explain the “colossal” oversight failure that allowed the financial crisis. All three agreed to hand-over their report cards.
10:18am:
Ms Schapiro acknowledges that a 2004 “consolidated supervised entity programme” that was supposed to oversee large investment bank holding companies was “clearly not a success”. She said that the scheme was understaffed, which was a problem for a new regulatory programme.
10:12am:
Ms Bair says that the OTC derivatives market could pose a systemic risk to the economy and they are on top of her list of priorities. She says that prior legislation has left these in the dark, shielded from regulators.
10:03am:
Bill Thomas, the vice-commissioner, is questioning Ms Bair on the tax policies that helped fuel the housing crisis. He said that home-owners have received tax benefits that allow them to take equity out of their homes every month without appropriate tax penalties.
9:57am:
Mr Angelides rips into the ratings agencies. “It was proven to be worthless, broken and it remains so today”.
Ms Schapiro agrees that the business model where the rated pay for their ratings is flawed and said she is encouraging new business models that will get some “competition into the space”. Ms Bair said that the FDIC is considering a new rule that will prevent financial institutions from being able to use ratings of structured products to set their capital limits.
9:54am:
Mr Holder ducks out early after a brief tussle with Mr Angelides over sharing information with the commission. “This is an important inquiry,” Mr Holder said. “It is our strong desire to cooperate with you.” An unsatisfied Mr Thomas replied, “that doesn’t sound like a yes”.
9:52am:
Mr Holder is dancing around a question from Commissioner Bill Thomas on information sharing. The attorney general says that he wants to be helpful, but is clinging to the cloak of secrecy required for “ongoing investigations”.
9:44am:
Mr Angelides is questioning Mr Holder on white collar crime resources, wondering what impact the shift in resources after the 9/11 attacks has had on the growth in fraud. Mr Holder aknowledges the shift in attention to national security issues, but also notes that there are currently 2,800 FBI investigations looking at mortgage fraud, for example, and that they are ramping up their efforts.
9:38am:
Testimony is over. Phil Angelides is set to begin the grilling.
9:34am:
Consolidated regulation is not a “panacea”, Ms Schapiro says. Still need better capital requirements and better oversight. Going forward, the SEC needs to be more “aggressive” and “even-handed”.
9:30am:
Mary Schapiro, SEC chairman, lists her top lessons from the financial crisis. She starts off blaming mortgage securitisation and over-reliance on the ratings agencies. Under her watch there will be more “accountability” and “transparency”. The next problem was complexity and the lack of regulation on “OTC” – over the counter – derivatives. These need to be subject to central trading and clearing.
9:26am:
In terms of prescriptions, Ms Bair is calling for a “resolution authority” to handle too-big-to-fail institutions so that they can be unwound without taxpayer help. She lauds the bankers for suggesting this too. Further, she said the US needs better oversight and transparency of the derivatives markets, and uniform consumer protection practices across the financial system.
9:23am:
Ms Bair makes the argument that “some banks themselves exploited the opportunity for arbitrage by funding higher risk activity through third parties or in more lightly regulated affiliates” and that if the US just adds new layers to regulation, it will give incentives for financial activity to seek less regulated venues.
9:21am:
Up next is Sheila Bair, FDIC chair. She’s giving some historical context on the financial crisis, educating the panel on the thrift and banking crisis of the 1980s.
9:19am:
Four main types of fraud the DoJ is looking to fight are mortgage fraud, securities fraud (Ponzi schemes), Recovery Act fraud (people manipulating stimulus funds) and financial discrimination (predatory lending).
9:17am:
Mr Holder says that the “dramatic” action that the Justice Deparment is taking is intended “not just to hold accountable those whose conduct may have contributed to the last meltdown, but to deter future conduct as well”.
9:15amET:
Eric Holder, US attorney general, is on first because he has to leave early. First off he’s tackling financial fraud.
9amET:
Day two of the FCIC hearings begins shortly, with Eric Holder, Lanny Breuer, Sheila Bair and Mary Schapiro due to face off against the panel. Streaming video can be found here.
