Autopsy of the Financial Crisis

Today C-SPAN2 broadcast one of the ongoing hearings of the Financial Crisis Inquiry Commission, chaired by Phil Angelides. One of today's witnesses, Mary Schapiro, Chair of the Securities & Exchange Commission, testified that voluntary regulation is a bad idea under almost all circumstances. Presumably this applies to all kinds of government regulations. Schapiro stressed the importance of financial accounting practices that are truly consistent with reality.

She also mentioned that pension funds are required by law to purchase only securities and other investments that have been rated AAA.

Perhaps CalPERS, and other California pension and ordinary investment funds, should consider forming their own rating agency, since the existing agencies (notably Moody's, Standard & Poor's, and Fitch) offered uniformly warped advice, leading many investors to make decisions they thought were sound but turned out to be the kind of investment you usually make in Las Vegas.

Later on, Illinois's Attorney General, Lisa Madigan, described a problem faced by many states, where federal preemption prevented states from regulating these sorts of problems. And Texas' State Securities Commissioner Denise Voigt Crawford reiterated this plaint, describing it as a turf battle that leaves citizens poorly protected from financial predators. Apparently, they fear that proposed 'reform' legislation will deprive states of the right and power to protect their constituents.

Crawford, who is also the President of the North American Securities Administrators Association, went on to express concerns about regulatory capture of securities oversight agencies by businesses such as investment banks.

I suspect that those who want to make government so small you can drown it in the bathtub have overlooked the fact that when business is not equally modest, such regulatory capture will be the rule rather than the exception. But then that's just business as usual.