While the Treasury Department of Henry Paulson drives the $700 billion Troubled Assets Relief Program bus that is meant to restore confidence and liquidity to the credit markets, and capital to banks, insurance companies, and, who knows--maybe individual mortgage borrowers--regulators whose previous (and current) job was to guard the market henhouse testified before Congress at the end of October on what they saw as the causes of the current financial crisis. Former Fed Chairman Alan Greenspan, former Treasury Secretary John Snow, and current SEC Chairman Christopher Cox, all of whom appeared before California Democratic Rep. Henry Waxman's House Committee on Oversight Government Reform on October 23, also proffered some ideas on how to forestall a recurrence of the crisis.
Greenspan admitted that the crisis "turned out to be much broader than anything I could have imagined." Moreover, the damage is not all in yet, he suggested: "I cannot see how we can avoid a significant rise in layoffs and unemployment." In rather strong and direct language for the former Fed oracle, Greenspan further admitted that "those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief."
It all came down to risk, Greenspan argued, noting that a "modern risk management paradigm held sway for decades," but then collapsed in the summer of 2007 "because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria." Cox pinned the blame mostly on the lack of coordinated regulation. "Where SEC regulation is strong and backed by statute, it is effective," he said.
Cox lamented "the nearly complete collapse of lending standards by banks and other mortgage originators," and added that what "amplified this crisis, and made it far more virulent and globally contagious, was the parallel market in credit derivatives."
Snow said that what occurred was a "breathtaking breakdown in traditional risk management activities in the financial sector.
The Solutions
The three men propose different approaches to solving the crisis. Greenspan said he saw "no choice but to require that all securitizers retain a meaningful part of the securities they issue. This will offset in part market deficiencies stemming from the failures of counterparty surveillance." Cox called for closure of "the most dangerous regulatory gaps," specifically credit default swaps, and for "rationalization" of "outdated laws that treat broker/dealers dramatically differently from investment advisors, futures differently from economically equivalent securities, and derivatives as something other than investment vehicles or insurance."
Snow said that we need "a new framework to stem the excessive leveraging and deleveraging that accentuate boom and bust cycles."
The Numbers Are In
The Internal Revenue Service announced Oct. 16 its annual cost-of-living adjustments that will affect federal income tax filings for tax year 2009. Among the changes, the annual gift exclusion rises to $13,000 for an individual taxpayer (from $12,000 in 2008), while personal exemptions and standard deductions will also rise and tax brackets will widen. The value of each personal and dependency exemption, available to most taxpayers, is $3,650, up $150 from 2008, while the new standard deduction is $11,400 for married couples filing a joint return (up $500); $5,700 for singles and married individuals filing separately (up $250); and $8,350 for heads of household (up $350). Because of the COLA adjustments, tax-bracket thresholds will also increase for each filing status. See www.wealthmanagermag.com for the full IRS treatment of these changes.
James J. Green, editorial director, can be reached at jgreen@sbmedia.com.
