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Paul Kiesel
Paul Kiesel
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Senate Banking Committee: The Genesis of the Economic Crisis

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Former SEC Chairman Arthur Levitt, Senate Banking Committee Chairman Chris Dodd and Senator Robert Casey (D-PA), this morning, gave their opinions on what they believe led to the economic and foreclosure crisis: a major failure of regulation by the SEC & Federal Reserve and a lack of transparency throughout credit markets.

Arthur Leavitt, who was chairman of the SEC from 1993 to 2001, harshly criticized his former agency saying, "As the markets needed more transparency, the SEC allowed opacity to reign [. . .] As an overheated market needed a strong referee to rein in dangerously risky behavior, the commission too often remained on the sidelines."

The Senate Banking Committee Chairman, Chris Dodd (D-CT), said regulators, including the Fed, failed to adequately police the mortgage lending markets, resulting in the "creative mortgage" boom and its fallout. Dodd said, "Our nation’s financial regulators willfully ignored abuses taking place on their beat, choosing to embrace the same faulty assumptions that fueled excessive risk-taking in the marketplace."

As the $700 billion bailout plan slowly releases funds to struggling financial institutions, the Senate Banking Committee will hold a series of hearings in order to analyze what pushed the U.S. (Wall Street and Main Street) into its current economic state. So far the rescue plan that was passed two weeks ago has done little to mollify Wall Street’s concerns and has resulted in negligible positives for homeowners.

Pennsylvania Senator Robert Casey said that the Treasury’s shift to more quickly inject capital into banks instead of buying up banks’ troubled mortgage assets and loans is having ill effects. Casey said the, "Treasury needs to work more quickly to fully explain their plans to the American people and to the players in the marketplace." Casey believes that the current Treasury plan to curb foreclosures is not working because banks are waiting to modify loans in order to see if they can sell them to the Treasury first and wash their hand of the situation.

Ultimately, after much discussion on how the government should reform its banking regulatory practices, Leavitt emphasized this: "[L]et me be clear: a restoration of the SEC to its position from before this current slide is not enough [. . .] At this moment, we need dramatic rethinking of our financial regulatory architecture — the biggest since the New Deal."

And Leavitt’s last statement most likely doesn’t take the looming Pay Option ARM loan fallout (2009-10) into account. By most economists’ figures, the option ARM loan interest rate resets starting next year could result in another $200 billion in bad mortgages, thus, prompting another declivity in home prices and reignite rising foreclosure rates. Regulatory reform is needed, but so are short term plans to stave off further economic damage due to lenders who flooded the markets with bad loans (TILA violations). Until that’s been done, any regulation reform will not make a difference until this current crisis has ended.