Highlights: Geithner, Paulson at financial crisis inquiry

WASHINGTON (BestGrowthStock) – Following are key quotes from testimony by Treasury Secretary Timothy Geithner and his predecessor Henry Paulson to the U.S. commission investigating the causes of the financial crisis.

GEITHNER ON CAPITAL FLOWS, RATES

“I believe that a long period of very low interest rates around the world absolutely contributed to the crisis.”

ON DERIVATIVES EXPOSURE

“In this world of millions of … contracts, it was like spaghetti clumping together. And when the crisis hit you had to untangle those, try to figure out, ‘what’s my exposure to default risk across the system?’

“It was very hard for people to know and they reacted as people do when facing fear. They decided, ‘I am going to withdraw…wherever I can.'”

ON CREDIT RATINGS AND CRISIS

“What we did not know was the degree to which the system was reliant on ratings. Ratings that did not capture what failing housing prices would do … the extent to which this parallel financial system… when it came crashing down would threaten the stability of the system.”

ON WHETHER PEOPLE MAKING DECISIONS WERE TOO CLOSE TO

ISSUES

“Fundamentally I don’t think that was the problem. I think the problem was that you did not have centralized accountability matched with authority anywhere in the government to look across the system.”

GEITHNER PREPARED TESTIMONY ON BANK FUNCTIONS, REGULATION

“We cannot make the economy safe by taking functions central to the business of banking, functions necessary to help raise capital for businesses and help businesses hedge risk, and move them outside banks.”

“If our regulatory and supervisory systems had had the tools and authorities to prevent risks from accumulating in unregulated sectors of the financial system in the first place, such a large emergency response would not have been necessary.”

“A company like AIG or Lehman Brothers will not be able to escape consolidated supervision by virtue of its corporate form, and will have to operate on a level playing-field with large commercial banks and traditionally regulated financial institutions.”

PAULSON EARLIER IN Q&A:

ON MISTAKES MADE IN CRISIS

“I think my mistakes were primarily communications mistakes and I hardly know where to begin there.”

“Let’s start with the TARP. When we sent a three-page outline up to Congress, we should have had a press conference and should have said ‘this is not take it or leave it. This is not complete. This is a starting point for negotiations.'”

“I was never able to explain to the American people, in a way in which they understood it, why these rescues were for them, for their benefit, not for Wall Street.

“(I was) never, ever (able) to make that connection and the rescues today remain very, very, very unpopular.”

“I think things that are generally pointed out as mistakes that we made are in most cases are situations like Lehman Brothers were we didn’t have the authority.”

“I think the major decisions we made — and I think with 20-20 hindsight it’s easier to say this — working with the imperfect tools and authorities, were the right ones.

“But along the way, there were plenty of mistakes made by everyone and I sure wish I had communicated better a lot of the time.”

ON WHAT WOULD HAVE HAPPENED IF BEAR STEARNS FAILED

“This occurred at a time when the credit crisis had been under way for seven months and the system was very fragile…”

“Secondly, we didn’t have the tools to wind them down outside of a bankruptcy process.

“So what I saw in the marketplace was a market gripped with fear and that Bear was not the cause, but Bear was a symptom of the fear and panic in the market and this broader problem of illiquidity.

“So, as I said to you, I believe that if Bear had failed, there were all sorts of counterparties which would have grabbed their collaterals, sold it. It would have led to bigger losses and to bigger write-downs.”

ON CONCENTRATION OF ASSETS

“The level of concentration where we have 10 big institutions with 60 percent of the financial assets — this is a dangerous risk. I believe these institutions are necessary and they perform a valuable role.”

ON FUTURE FAILURES AND CRISES

“Regulation will never be perfect. Unless you hypothesize that these institutions wanted to blow themselves up, it’s hard to believe that some regulators are always going to be able to find problems that they can’t find themselves.

“And so there will be, there will continue to be, failures. There have been since the beginning of time. Since the time we’ve had capital markets, institutions have failed and we’ve had financial crises.

“That is why I believe, in addition to strengthening the regulatory system, you need these resolution authorities.”

ON NOT BEING AWARE OF GROWTH OF SECURED LENDING

ARRANGEMENTS AT WALL STREET FIRMS

“I would say to the (committee) chairman, this is something I was not aware of, the extent of the issue. I had seen it at one little lens at Goldman Sachs. And so, this big market had grown up, no regulator had looked it. So now, when the crisis comes and investors are afraid … they’re concerned about Bear Sterns. They lose confidence. Then, when you say it’s predatory, if someone is afraid and they’re afraid about their own institutions surviving, then they pull money or they don’t roll over their secured lending.”

ON SECURITIES LAWS’ RELIANCE ON RATINGS AGENCIES

“I think, no matter how the rating agencies are regulated — and we need more regulation and we need more disclosure around the rating agencies — I do not like the fact that we have several rating agencies that are enshrined in our securities laws and regulatory manuals. I think that’s just a crutch, and a dangerous crutch.

“I support the legislation that would take reference to credit ratings out of our security laws.”

PAULSON ON REPO MARKET

“It grew like topsy turvy, the systems didn’t keep up with it. The participants got sloppy in their credit decisions.

“The biggest sloppy practice of all were the banks and investment banks, that they didn’t maintain liquidity.”

ON BEING CAUGHT BY SURPRISE

“Let me tell you what wasn’t clear to me and I don’t think was clear to very many people, if any, when I arrived. That was the scale and the degree of the problem…

“We could see some of the problem in, for instance, subprime and housing. But no one, at least that I was talking to, predicted this massive decline in housing prices across the United States.

“And when I ask myself why, why wouldn’t experts have predicted that? And I think it was because we were all looking at the paradigm that existed in this country since World War II, where residential housing prices have essentially gone up, mortgages were a safe investment.

“And so, the economic models didn’t project the kind of wholesale significant decline in housing prices.

“But having said that, if we had seen that coming I’m not sure what we could have done different.”

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Highlights: Geithner, Paulson at financial crisis inquiry