Committee on Oversight and Government Reform

October 6, 2008

Thank you, Mr. Chairman, for convening a series of hearings to examine the many complex and interlocking causes and effects of the economic paralysis gripping our nation and most of the industrialized world.  Today, tomorrow and in the coming weeks, we will ask some tough questions about the role of investment firms (like Lehman Brothers Holdings), insurers (like AIG), hedge funds, credit rating agencies, regulators and Congress in feeding the boom that has now gone so painfully bust. 

The scope of these hearings effectively rebuts the simplistic premise peddled by some that laissez faire Republicanism and mindless deregulation alone caused the collapse of global capital markets.  That’s the political cartoon version of a complicated life-and-death reality.  Partisan finger-pointing adds nothing to serious oversight of the intricate web of individuals, institutions, market incentives and cyclical trends that have brought us to the brink of the economic abyss.

For more than a decade, all the Wall Street and Washington players engaged in an increasingly elaborate game of high-stakes musical chairs, driven by the mesmerizing siren song of perpetually rising housing prices.  When the music stopped – as it always does – many formerly upstanding financial giants found themselves without a safe or sound place to sit.  Suddenly the phrase “too big to fail” measured only the limits of our foresight, not the size of the all too foreseeable failure. 

So today we start with the case of Lehman Brothers, a venerable investment house that sank into insolvency while others were being thrown federal lifelines.  One lesson from Lehman’s demise:  words matter.  Rumors and speculative leaks fed the panic and accelerated the flight of confidence and capital from that company.  Words matter here as well.  In this volatile environment, unsupported allegations and irresponsible disclosures can inflame fears and trigger a market stampede.  As these hearings proceed, we should watch the pulse of Wall Street and choose our words with great care.

But it must be said the driving factor in the loss of value and confidence in Lehman’s was the financial undertow created by falling home prices and resulting losses on mortgage-backed assets of all kinds.  And central to that crisis in the twelve trillion dollar mortgage securities market were imprudent policies and cozy practices of the two government-sponsored housing finance giants Fannie Mae and Freddie Mac.  We have asked that former Fannie Mae CEO Franklin Raines be invited to testify at a future hearing because that company’s failure offers Congress lessons we dare not overlook.

Many in Congress did turn a blind eye to clear warnings of impending danger sounded as early as 1998.  They missed golden opportunities to treat localized problems before they metastasized throughout the economic system.  Out of well-intentioned zeal to promote home ownership, Members from both parties in both chambers not only tolerated but encouraged the steady erosion of mortgage lending standards.  When an alarm sounded, Fannie and Freddie - holding low-income borrowers as political hostages - mobilized armies of expensive lobbyists to block calls for greater accountability and transparency.  Using lobbying fees and campaign contributions, the mortgage giants bought their way around attempts by Senate and House banking committees to pierce their profitable pyramid scheme.  The Clinton Administration was rebuffed by a Republican Congress; and this Administration had no more success with the Democratic Congress in advancing needed reforms.  This Committee cannot ignore that sad history in our inquiries into the causes and effects of the current economic crisis.

Now that the $700 billion economic rescue bill has been enacted, the debate is no longer whether the federal government should intervene in the credit markets, but how that intervention should be managed to stabilize capital flows and protect taxpayers.   Although it comes too late to help Lehman Brothers, the so-called “bail out” program will have to make wrenching choices, picking winners and losers from a shattered and fragile economic landscape.  These hearings should help mark the landmines and potholes on the path to a restoration of trust and economic vitality.

Trust.  There is a moral dimension to economics we often don’t want to confront.  Economics is a not an objective discipline, but a political art, grounded in certain assumptions about human nature and civilized behavior.   As the process of “deleveraging” unfolds - breaking the economy’s delusional addiction to debt beyond our reasonable means to repay - the goal has to be a restoration of the moral bond between labor and capital.  We need to restore faith in production, savings, and investment over consumption, spending and speculation. 

Our witnesses today can help us do that, and we appreciate their being here.

Click here for a copy of the Minority Staff Report