Hearing Of The Subcommittee On Investigations Of The Senate Committee On Homeland Security And Governmental Affairs - Wall Street And The Financial Crisis: The Role Of High Risk Home Loans

Statement

Mr. Chairman, thank you for your leadership in undertaking this in-depth investigation
into the root causes of the financial crisis that began in 2008 and left our nation in the throes of
the Great Recession.
Chairman Levin and Ranking Member Coburn spent many months delving into
disfunctional facets of our financial markets, which drove us into turmoil so damaging that it
nearly produced a second "Great Depression."
While many experts have pointed to the role played by the housing market bubble in
sparking this near-catastrophe, this investigation reveals in detail exactly how that bubble began
and was then inflated. Investors speculating on a rising housing market certainly played a role;
however, PSI's investigation indicates that from the top to bottom within the mortgage industry,
some people who knew better turned a blind eye to the gathering storm. Too many showed little
commitment to effective risk-management of laons. Worse, some were even willing to commit
fraud to originate and securititze more and more high-risk residential loans.
The witnesses today will tell the story of Washington Mutual. It was the country's
largest savings and loan association until 2008, when it traded that stunning superlative for a
stunning collapse, becoming the largest bank failure in U.S. history. It may be tempting to think
of the WaMu case as an exception to the rule or an unfortunate anomaly, but the thrift's
problems reflects faults that were rife throughout the mortgage business. It is a case study in the
financial meltdown, which offered shoddy securitized mortgages that were bought and sold on
Wall Street, ultimately leading to an implosion that nearly caused our economy to collapse.
In hindsight, it seems obvious that every aspect of the financial markets was operating
under the faulty assumption that prices in the housing market could only go up and never go
down, that somehow the red-hot real estate market would defy the cycles of the free market,
which is akin to defying the laws of gravity. What goes up, didn't necessarily have to ever come
down.
As long as prices continued their upward path, it simply didn't matter that a borrower was
unlikely to be able to shoulder his or her mortgage. The increasing cost of the housing market
would buoy up the difference.
Looking back, we now realize we needed a regulator who could look across the breadth
of the economy and spot risky asset bubbles in advance -- before investment in a single aspect of
our economy came to dominate and control the vast majority of people's financial investments.
In order to address this problem, I introduced the Financial Stabilization and Reform Act
of 2009 a year ago. This bill created a council of existing regulators, such as the FDIC, the SEC
and the CFTC, to act as a systemic risk monitor for our financial markets. This concept remains
valid today as we look to ways to prevent our economy from ever again reaching such a state of
crisis.
Indeed, this concept has been incorporated into the financial reform bill that the Banking
Committee reported earlier this year. That bill takes on many other aspects of financial
regulation as well, but in this one area, we agree on a key aspect of reform.
The series of hearings that this Subcommittee intends to hold will help inform Congress
and the American people of the need for additional reforms to our financial system. I look
forward to these hearings and look forward to the testimony from our witnesses today.

Source