The former chairman of the U.S. Securities and Exchange Commission said the recent financial crisis can be blamed on a troika of factors including easy credit, little regulatory oversight and no transparency in the markets.
Former secretary Harvey Pitt made the comments Tuesday at an annual conference in New York hosted by financial consulting firmFinadium, formerly Vodia Group.
Pitt said the rush by Wall Street to encourage the average consumer to take on more debt was one of the driving causes of the fallout in the financial markets.
“There was an over extension of credit on far too easy terms,” said Pitt. That resulted in a financial climate that depended heavily on already-stressed borrowers as an ongoing profit stream.
Pitt also credited the Graham-Leach-Bliley Act, which was passed in 1999 and allowed commercial and investment banks to merge, as being insufficiently attentive to regulatory requirements created by the new business model.
Gramm-Leach "failed to change the regulatory system and deprived regulators of some authority,” said Pitt. As a result, Pitt said, regulatory bodies including the SEC, the Federal Deposit Insurance Corporation and the Federal Reserve were initially unsure if they had the authority to intervene in the subprime mortgage crisis, exacerbating a problem that quickly spread throughout financial markets.
A lack of transparency in rapidly changing markets and complicated financial instruments also contributed to the market turmoil.
“There was a failure of markets that were evolving to evolve transparently,” said Pitt. “There was no internal or external transparency.” That lack of transparency meant banks were unsure about how many toxic assets they held or how leveraged they had become—a crucial problem as banks struggled to get a handle on how exposed they had become to the subprime contagion and failed to reassure investors.
Pitt, who was SEC chairman from 2001 to 2003, heralded the recent efforts of SEC Chairman Christopher Cox and Treasury Secretary Henry Paulson as “remarkable.”
But he cautioned that he remains skeptical about how well-equipped the SEC is to handle any additional crises related to complicated financial instruments. Pitt said that at his last check, the agency only had two full-time staffers in its risk management division.
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