US regulators failed to act

REGULATORS failed to protect the American public from the global financial crisis, one of its leading watchdogs said yesterday.

The Federal Deposit Insurance Corporation chairwoman Sheila Bair told the Financial Crisis Inquiry Commission that regulators had acted too slowly to stop the problems with sub-prime mortgage lending.

“Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities,” Bair said.

“Regulators were wholly unprepared and ill-equipped for a systemic event that destroyed liquidity in the shadow banking system and subsequently spread to the largest firms throughout the financial system.”

She said regulators were alerted as early as 2000 to the potential problems of sub-prime mortgages but the Federal Reserve waited seven years before taking strong action on the industry. She also said regulators had been blinded by Wall Street profits.

“Record profitability within the financial services industry also served to shield it from some forms of regulatory second-guessing. When financial firms are making money, even amid questions about how they are doing it, it can be difficult for regulators ‘to take away the punch bowl’.”