Regulators Avoided ‘Forceful Actions’ Before Crisis, GAO Says

Regulators Avoided ‘Forceful Actions’ Before Crisis, GAO Says - 3/19/2009

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Regulators Avoided ‘Forceful Actions’ Before Crisis, GAO Says
Jesse Westbrook

Bloomberg. March 19, 2009
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EXCERPT: U.S. regulators failed to make banks and securities firms rein in their risks before the economic crisis and too often relied on companies’ assessments of their financial health, according to a federal report released today. A Government Accountability Office review of the watchdogs including the Federal Reserve and the Securities and Exchange Commission said the agencies found “numerous weaknesses” in the management of risks. Regulators shunned “forceful actions” because the firms reported “strong” finances and pledged to change their practices, the GAO said in a 35-page report, requested by Democratic U.S. Senator Jack Reed of Rhode Island. “Regulators acknowledged that in some cases they had not fully appreciated the extent of these weaknesses until the financial crisis occurred,” the report said. “Regulators also acknowledged that they relied heavily on management representations of risks.” U.S. financial companies including Bear Stearns Cos.,Washington Mutual Inc. and Wachovia Corp. failed or were forced to find a buyer as a collapsing subprime mortgage market led businesses worldwide to report more than $1.2 trillion in writedowns and credit losses since 2007. Congress is beginning the biggest overhaul of financial regulation since the Great Depression to prevent future meltdowns. Reed, who leads a Senate subcommittee on securities, insurance and investment, will hold a hearing today to examine oversight of risk management by the Fed, SEC, the Office of Thrift Supervision and the Office of the Comptroller of the Currency. ‘Red Flags’ Lawmakers have chided the bank regulators for failing to prevent mortgage underwriting practices that contributed to the financial crisis. SEC Inspector General H. David Kotz said in a September report that his agency failed to respond to “red flags” at Bear Stearns such as its “high leverage” and over- concentration in mortgage securities before the company collapsed a year ago.

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