The Whole Story: Bush Administration’s Anti-Regulation Philosophy Contributed to Failure to Prevent Financial Meltdown

Experts Say Bush “Bears Part Of The Blame” For The Financial Crisis Due To “Personnel Choices” And “Overarching Antipathy Toward Regulation.” According to the New York Times, “And while economists and other experts say there are plenty of culprits — Democrats and Republicans in Congress, the Federal Reserve, an overzealous home-lending industry, banks and also Mr. Bush’s predecessor, Bill Clinton — they do agree that the Bush administration bears part of the blame. These experts, from both political parties, say Mr. Bush’s early personnel choices and overarching antipathy toward regulation created a climate, that, if it did not set off the turmoil, almost certainly aggravated it. [New York Times, 9/19/08]

Bush Administration “Backed Off Proposed Crackdowns” On Risky Lending And “Ignored Remarkably Prescient Warnings That Foretold The Financial Meltdown.” According to the Associated Press, “The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents. […] Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.” [Associated Press, 12/1/08]

Bush’s First Two Treasury Secretaries Lacked “Wall Street Expertise” And Were Considered “Less Comfortable With The Mysteries Of Markets.” According to the New York Times, “The president’s first two Treasury secretaries, for instance, lacked the kind of Wall Street expertise that might have helped them raise red flags about the use of complex financial instruments that are at the heart of the crisis. […] Mr. Bush’s first two Treasury secretaries, Paul H. O’Neill and John W. Snow, came from top jobs in industry, not Wall Street. They were viewed in Washington as advocating the interests of business, and being less comfortable with the mysteries of markets.” [New York Times, 9/19/08]

Former Reagan Adviser Bartlett: “The President Erred… By Appointing Two Secretaries Who Had No Background In Finance.” According to the New York Times, ““The primary agency responsible for keeping an eye on these things is, and should be, the Treasury Department, and I think the president erred in the first place by appointing two secretaries who had no background in finance,” said Bruce R. Bartlett, a Republican economist who worked for President Ronald Reagan and President George H. W. Bush.” [New York Times, 9/19/08]

Bush Treasury Secretary Henry Paulson Was “Wary” Of Additional Regulation Of Derivatives. According to ProPublica, “In June, Treasury Secretary Paulson told the Washington Post that in one of his first meetings with President Bush, he warned that the growing use of derivatives posed a fundamental risk to the market. If that is the case, he didn’t say so publicly. In response to a written question by Sen. Mike Crapo (R-ID) submitted at the Treasury Secretary’s Senate confirmation hearing in June 2006, Paulson said he was ‘wary’ of proposals to strengthen regulation of derivatives because of their importance in managing risk.” [ProPublica, 10/6/08]

Paulson Warned That Derivatives Regulation “Could Have Significant Unintended Consequences.” According to ProPublica, at his Senate confirmation hearing, Henry Paulson responded to a question about derivatives regulation by saying, “I believe these proposals could have significant unintended consequences for the risk-management functions that the markets – whether over-the –counter or exchange-based – perform in our economy. It is my view that absent a clearly demonstrated need, we should be wary of major changes to the manner in which we regulate our derivatives markets. The importance of derivatives markets in the U.S. economy should not be taken lightly, as businesses, financial institutions, and investors throughout the economy rely on these markets to manage their risks and to protect themselves from market volatility. These markets have contributed significantly to our economy’s ability to withstand and respond to various market stresses and imbalances.” [ProPublica, 10/6/08]

Federal Reserve Chairman Bernanke Dismissed Concerns About Derivatives By Saying “Very Sophisticated Financial Institutions” Had Incentives “To Use Them Properly.” According to ProPublica, at his Senate confirmation hearing, Federal Reserve Chairman Ben Bernanke responded to a question characterizing derivatives as “time bombs” by saying, “I am more sanguine about derivatives than the position you have just suggested. I think, generally speaking, they are very valuable. They provide methods by which risks can be shared, sliced, and diced, and given to those most willing to bear them. They add, I believe, to the flexibility of the financial system in many different ways. With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly. The Federal Reserve’s responsibility is to make sure that the institutions it regulates have good systems and good procedures for ensuring that their derivatives portfolios are well managed and do not create excessive risk in their institutions.” [ProPublica, 10/6/08]

Former Bush Fed Chairman Greenspan “Admitted That He Had Put Too Much Faith In The Self-Correcting Power Of Free Markets.” According to the New York Times, “But on Thursday, almost three years after stepping down as chairman of the Federal Reserve, a humbled Mr. Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending. ‘Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,’ he told the House Committee on Oversight and Government Reform. […] He noted that the immense and largely unregulated business of spreading financial risk widely, through the use of exotic financial instruments called derivatives, had gotten out of control and had added to the havoc of today’s crisis. As far back as 1994, Mr. Greenspan staunchly and successfully opposed tougher regulation on derivatives.” [New York Times, 10/23/08]

Bush SEC Chief Christopher Cox Opposed Derivatives Regulation While In Congress. According to ProPublica, “Securities and Exchange Commission Chairman Cox now leads the call for increased regulation of derivatives. In testimony before the Senate Banking Committee on September 23, he singled out credit derivatives in particular, pointing out that the market in credit default swaps is ‘regulated by absolutely no one’ making it ‘ripe for fraud and manipulation.’ Cox has long known about the pitfalls of poorly understood hedging instruments; as a Congressman, he represented Orange County, California, when it declared bankruptcy in 1994 after its investments in derivatives went badly awry. But at the time, he did not join calls to regulate them: ‘I’m concerned that now anything called a derivative will be considered inherent evil in Congress,’ Cox said, according to the Orange County Register. ‘It is sort of like a fire hose: In the wrong hands, it is dangerous.’ Did his opinion evolve by the time he was confirmed as SEC Chairman? You won’t find any clues by looking at his Senate confirmation hearing of July 2005. That is because no senator asked him a question about the topic.” [ProPublica, 10/6/08]

Former SEC Chief In 2008: “The Commission In Recent Years Has Handcuffed The Inspection And Enforcement Division.” According to the Washington Post, “Although Cox speaks of staying calm in the face of financial turmoil, lawmakers across the political spectrum counter that this is actually another way of saying that his agency remained passive during the worst global financial crisis in decades. And they say that Cox’s stewardship before this year — focusing on deregulation as the agency’s staff shrank — laid the groundwork for the meltdown. ‘The commission in recent years has handcuffed the inspection and enforcement division,’ said Arthur Levitt, SEC chairman during the Clinton administration. ‘The environment was not conducive to proactive enforcement activity.’” [Washington Post, 12/24/08]

SEC Inspector General Review Found Agency “Did Not Take Actions” To Address “Numerous Potential Red Flags” At Bear Stearns Before Its Collapse. According to the Washington Post, “Under [Christopher] Cox, the SEC has taken particular heat for its oversight of the five major investment banks — all finance titans synonymous with Wall Street. […] The March collapse of Bear Stearns illustrated an array of agency shortcomings, according to a review by the SEC’s inspector general. He concluded that agency officials had been aware of ‘numerous potential red flags’ at Bear Stearns ‘but did not take actions to limit these risk factors.’ ‘It is undisputable,’ the inspector general concluded, that the “program failed to carry out its mission in its oversight of Bear Stearns.’” [Washington Post, 12/24/08]

Washington Post: “The Agency Also Knew About But Failed To Adequately Address Various Weaknesses In Bear Stearns’s Management Of Mortgage Risk.” According to the Washington Post, “The SEC was aware that the firm’s exposure to mortgage securities exceeded its internal limits and represented a significant risk, but the agency made no effort to reduce that exposure, the report found. The agency also knew about but failed to adequately address various weaknesses in Bear Stearns’s management of mortgage risk, such as a lack of expertise, persistent understaffing and an apparent lack of independence between risk managers and traders. In violation of an SEC rule, agency officials also allowed Bear Stearns and other investment banks to entrust critical checks and balances to internal, rather than outside auditors, the report found.” [Washington Post, 12/24/08]

Bush SEC Chairman Christopher Cox Acknowledged Failure Of “Voluntary Supervision Program” Enacted Under His Predecessor In 2004. According to the New York Times, “The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down. […] Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations. The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson.” [New York Times, 9/27/08]

Failed Program Was Created “After Heavy Lobbying” From Major Investment Banks, Including Goldman Sachs, Which Was Led By Future Treasury Secretary Henry Paulson. According to the New York Times, “Known by the clumsy title of ‘consolidated supervised entities,’ the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components. The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan. The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.” [New York Times, 9/27/08]