Yesterday, the Senate Banking Committee held a hearing on the Bush administration’s proposed $700 billion bailout plan. During the hearing, Christopher Cox, Chairman of the Securities and Exchange Commission (SEC), testified that deregulation was a cause of the current financial crisis, including a “regulatory hole” in the credit swap market:
There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion national market in credit default swaps — double the amount outstanding in 2006 — is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.
It’s rather ironic that Cox is now calling for regulation of the credit swap market. After all, trading in the credit swap market was what sunk insurance giant AIG. Once AIG had “sold large quantities of credit-default swaps to financial institutions around the world,” it required an $85 billion federal bailout to keep its failure from affecting the wider financial system.
But its not just on credit swaps that Cox has come around. He also blamed the Gramm-Leach-Bliley Act – which was constructed by former Sen. Phil Gramm (R-TX) in 1999 and deregulated the banking industry – for contributing to the financial meltdown. He said that “the failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake.”
Just six months ago, however, the Bush administration found the credit crisis so manageable that it “unveiled a widely discussed blueprint for U.S. financial regulatory reform that called for less supervision of Wall Street by the Securities and Exchange Commission.” Cox has now realized that a lack of “regulatory authority” is a “mistake,” but only after seeing the result years of deregulation has had on the financial system.