Breeden gets it

Former SEC chairman (under Bush I) Richard Breeden testified to the Senate Banking committee today. His comments were some of the best, on-point statements on how we got into this financial crisis.

Since his stint at the SEC Breeden, has become a work-out specialist (Worldcom) and private equity investors. So his thoughts are worth listening to.

Some snippets:

"... the disasters we have seen did not arise due to lack of resources for the Federal Reserve, the SEC or any of the other agencies that didn’t perform as well as they needed to do."

"Many people are today pointing at “gaps” in the regulatory structure, including “systemic risk authority”. If the Fed hasn’t been worried about systemic risk all these years, then
people really should be fired. The problems we have experienced grew in plain sight of all our regulators. For the most part, we lacked adequate leadership at major regulatory agencies, not legal jurisdiction. ... Oversight of derivatives and swap markets is probably the major exception where firms like AIG were operating far outside of anyone’s oversight authority. That is a good reason to refuse to bail out swap counterparties of AIG in my opinion."

"Rather than simply calling for more authority for people who didn’t use the authority they already had, we need to reexamine why our regulators missed so many of the risks staring them 5
in the face."

"It is frankly almost incomprehensible how few directors of firms requiring taxpayer assistance have been forced to step down, even after investors and taxpayers lost billions because directors didn’t act prudently."

"Over time our governance standards have come to be weaker than those of many other countries, and our commitment to accuracy in accounting and disclosure has slipped considerably. The SEC’s enforcement program in recent years has not been as effective as the times demanded, with too many smaller cases and not enough focus on the largest problems".

"Transferring SEC accounting, disclosure or enforcement programs to the Fed would be a recipe for utter disaster."

"Overstating the value of assets is NEVER in investor interests, and if the system doesn’t require accurate values to be disclosed investors will simply

withdraw from the market due to lack of confidence.... in general the people who try to blame mark to market for the problems of insolvent institutions are simply wrong."

"There is no single person, and no single agency, that can be omniscient about risk. ... This can create inefficiency. More importantly, it can create systemic risk because if the regulatory “czar” proves wrong, every part of the system will be vulnerable to damage."