Today, the Financial Crisis Inquiry Commission (FCIC) held day two of its first public hearing to investigate the causes of the financial crisis. Yesterday's hearing involved testimony from several Wall Street chief executive officers, financial market participants and economists. Testifying today before the FCIC were the following witnesses:

Panel 1 - Federal Officials

Panel 2 - State and Local Officials

The Panel 1 witnesses briefly discussed the historical context of the financial crisis. Chairman Schapiro specifically mentioned the many "interconnected and mutually reinforcing" causes of the financial crisis, noting in particular the rise of mortgage securitization and its "unintended facilitation of weaker underwriting standards," a "wide-spread view" that markets would simply self-correct, an "inadequate appreciation" of the risks of deregulation, the "proliferation of complex financial products," including derivatives, with illiquidity and other risk characteristics that were "not fully transparent or understood," "insufficient risk management and risk oversight," and a "siloed financial regulatory framework that lacked the ability to monitor and reduce risks flowing across regulated entities and markets." Chairman Bair noted that the recent financial crisis questions certain "fundamental assumptions" with respect to supervision and market discipline that have been a force in regulatory efforts for decades, and suggested that there must be a "reassess[ment]" of whether financial institutions can be "properly managed and effectively supervised through existing mechanisms and techniques." Chairman Bair echoed many of these points, but also observed that compensation programs at financial services companies created “perverse incentives for riskier behavior." She also took the Federal Reserve to task for waiting until 2008 to adopt more stringent regulations under 1994's Home Ownership and Equity Protection Act, noting that stronger consumer protection standards "could have avoided a lot of the problems" with subprime mortgages.

Looking forward, Chairman Schapiro stated that the SEC needs to be more “aggressive” and “even-handed,” and Attorney General Holder stated that the Justice Department is taking "dramatic action" to investigate several types of fraud including mortgage fraud, securities fraud, American Recovery and Reinvestment Act of 2009 fraud, and financial discrimination.

The FCIC questioned the Panel 1 witnesses on a variety of topics, including underwriting standards and subprime mortgages, credit rating agencies, tax policies, over-the-counter (OTC) derivatives, and systemic risk. In particular, FCIC Chairman Phil Angelides questioned the business model of the credit rating agencies stating it was "proven to be worthless, broken and it remains so today." Chairman Schapiro agreed that the credit rating agency business model is "flawed," and would encourage "new competition into the space." Chairman Bair also responded that the FDIC is considering a new rule that will prevent financial institutions from being able to use ratings of structured products to set their capital limits. Finally, Chairman Bair stressed the importance of the systemic risk council of regulators, as proposed as part of the recent Wall Street Reform and Consumer Protection Act (H.R. 4173) passed by the House of Representatives this past December, in order to assist with the monitoring the financial system for risks associated with large interconnected companies that pose systemic risk. Reiterating the request he made on Wednesday to the Wall Street executive witnesses, FCIC Chairman Angelides asked to see any internal reviews that the regulators have made that explain the “colossal” oversight failure that contributed to the financial crisis, to which the Panel 1 witnesses agreed to provide such internal reviews.

The Panel 2 witnesses also briefly discussed their individual views on factors contributing to the economic crisis and "near collapse of our financial system." The witnesses focused particularly on the lack of consumer protection and related practices of the mortgage lending industry as a root cause of the financial and economic crisis, which led to massive foreclosures, spiraling credit card debt, and widespread debt management and credit repair fraud. They strongly supported the proposed Consumer Financial Protection Agency as a means of "establishing and enforcing basic consumer protection rules." Several Panel 2 witnesses also described various enforcement actions taken at the state level with respect to mortgage fraud, false advertising and state securities regulation.