Today, the House Oversight Committee held a hearing on the causes and effects of the failure of Lehman Brothers, the investment bank that filed for bankruptcy on September 15. This is the first of five hearings aimed at unraveling the causes of the current financial crisis.

Prior to the hearing, Republican members of the Oversight Committee released a report in which they concluded that deregulation is not to blame for the current trouble in the financial system.

The report goes on to discuss the net-capital rule, which is a regulation limiting the amount of debt that financial institutions are allowed to take on. In the report, House Republicans argue that there should be no such rule, because bankers will just “find ways around” it:

Banking regulations require financial institutions to limit their asset risk per unit of capital, but writing regulations that simply mandate an appropriate level is unlikely to work for very long because it is in the interest of bankers to find ways around these requirements in pursuit of profit.

However, the report completely fails to note that financial institutions carrying huge debt-to-capital ratios contributed to the recent meltdown. Furthermore, it was the Bush administration, through the auspices of the Securities and Exchange Commission, that actively relaxed the debt-to-capital regulation.

In 2004, the SEC loosened the rule mandating “that broker dealers limit their debt-to-net capital ratio to 12-to-1.” The five investment banks that qualified for an alternative rule – Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs, and Morgan Stanley – were allowed “to increase their debt-to-net capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1.”

According to the New York Times, the investment banks themselves lobbied for the rule change, because it would “unshackle billions of dollars held in reserve as a cushion against losses on their investments.” However, when the subprime mortgage bubble burst, the investment firms no longer had enough cash on hand “to weather the storm.”

Chairman of the Oversight Committee, Rep. Henry Waxman (D-CA), said this lax regulation “proved to be a temptation” that the investment firms “could not resist,” but “when asset values decline — as the subprime market did — leverage rapidly consumes a company’s capital and jeopardizes its survival.

Barry Ritholz wrote that the SEC exemption is “in large part responsible for the huge build up in financial sector leverage over the past 4 years — as well as the massive current unwind“:

The current excess leverage now unwinding was the result of a purposeful SEC exemption given to five firms. You read that right — the events of the past year are not a mere accident, but are the results of a conscious and willful SEC decision to allow these firms to legally violate existing net capital rules.

So bankers don’t really need to “find ways around” regulations, when the Bush administration is willing to knock the regulations out of the way.

Digg It!

Our guest blogger is Van Jones from Green for All, a senior fellow at the Center for American Progress Action Fund.

At best, the federal government’s bail out of Wall Street will help the U.S. economy — which is already in a ditch — avoid a total meltdown. Fine. Now we need a plan to jumpstart the economy and actually get America moving again.

In my new book, The Green Collar Economy, I propose a bold, green cure for the economic mess we are in. Think of it as a comprehensive plan to bail out ordinary people — and the planet, too.

We just found $700 billion. Let’s find another $350 billion. That’s half the price tag of the Wall Street rescue — which has no guarantee of success. But with $350 billion investment, we absolutely and positively could retrofit and repower America using clean, green energy — and create millions of new jobs, in the process.

In other words, a comprehensive “green bailout” could give America TWICE the bang … for half the bucks. Other experts agree with me. A new report just released by the U.S. Conference of Mayors says that we can create more than 4 million green jobs if we aggressively shift away from traditional fossil fuels toward alternative energy and a significant improvement in energy efficiency.

Another report just released by the Political Economy Research Institute and the Center for American Progress shows that the U.S. can create two million jobs over two years by investing $100 billion in a green economic recovery plan. The report also shows that this investment would create four times more jobs than spending the same amount of money within the oil industry.

The time for choosing has arrived. Looking at both our energy system and our financial system, we face some hard choices. Our energy system can create awesome storms. Or it can create awesome jobs. Our financial system can become a global sinkhole — or a global springboard.

The gray economy that is collapsing is based on consumption, debt and environmental destruction. The green economy that is emerging will be based on production, smart savings and environmental restoration.

The bottom line is: you can’t base a national economy on credit cards. But you can base it on solar panels, wind turbines, smart bio-fuels and massive, a program to weatherize every building and home in America.

A green economy would be less vulnerable to oil shocks and financial bubbles. In a green economy, we would rely on less credit from overseas and more on creativity right here at home. It’s time to stop borrowing and start building.

As Thomas Friedman says, “We don’t just need a bailout. We need a buildup.”

Rather than just giving platinum parachutes to those who wrecked the economy, let’s throw a green lifeline to the ordinary people who want to rebuild it. We can’t drill and burn our way out of our present mess. But we can invent and invest our way out. And in The Green Collar Economy, I suggest a game plan for getting started.

Join MicCheck Radio to hear an exclusive interview with Van Jones about the Green Collar Economy.

UPDATE: Living on Earth’s Jeff Young explores the “elements of a green economic bailout” with CAPAF fellows Bracken Hendricks, Carol Browner, and Van Jones:

As Washington rescues Wall Street, a growing chorus of big thinkers from the left and right are calling for a greener approach– using investment in clean energy and efficiency as a way to stimulate the economy.