Yesterday, the House Committee on Oversight and Government Reform held a hearing on the role of federal regulators in the recent financial crisis. Three witnesses testified during the hearing:

Alan Greenspan, former Chairman, Federal Reserve Board

John Snow, former Secretary of the Treasury

Christopher Cox, Chairman, SEC

The focus of the hearing, which bordered on confrontational at times, was on the action and inaction of federal regulators. The most dramatic development occurred when former Federal Reserve Chairman Greenspan accepted limited responsibility for the current crisis: “I made a mistake in presuming that the self-interest of organizations was such that they were best capable of protecting their shareholders. The problem here is something that looked to be a pillar of free markets did break down. That did shock me. I don’t understand why it happened, and I will change my views as a result.”

The major themes that emerged at the hearing were the need for regulation of credit default swaps (CDS) and better regulatory enforcement of existing laws and regulations, including more vigorous exercise by regulators of their existing authority.

With respect to CDS, Greenspan acknowledged that “credit default swaps have serious problems associated with them” but that the derivatives market is successful overall, and that the recent problems with CDS were limited to that type of derivative instrument. Chairman Cox claimed that Congress should have restricted CDS in the Commodity Futures Modernization Act. As he has done in prior Congressional hearings, Cox urged Congress to pass legislation regulating CDS. He also expressed the view that the creation of a central counterparty for credit default swaps, as well as an exchange for their trade, should be an integral part to the solution of the broader financial crisis. Last week, the House Committee on Agriculture also held hearings on this issue.

Accountability for the credit crisis was also a focus of the hearing, with Chairman Cox agreeing that “aggressive law enforcement is needed now more than ever.”

Panel members disagreed on solutions to the crisis. Greenspan deemphasized the need for aggressive regulation, and argued that the primary solution should be to wait for housing prices to stabilize. Chairman Cox and former Secretary Snow argued for a simplification of the financial regulatory system.