Treasury official reflects on financial crisis

Treasury Building Treasury Building

WASHINGTON – Thank you so much for inviting me to join you here.

Today’s date evokes strong memories for me.  Four years ago, on September 14th, I was working at a major investment management firm where I oversaw the fixed-income division. That Sunday, my entire staff was in the office.

We were still absorbing the extraordinary news that Fannie Mae and Freddie Mac had been placed into conservatorship the weekend before. We expected a bankruptcy filing by Lehman Brothers to happen imminently. We were hard at work trying to anticipate the impact that it would have on the financial markets. We had no idea of what lay ahead.

Over the next two days Lehman filed for bankruptcy, Merrill Lynch was sold to Bank of America and AIG emerged as a threat so large that the Federal Reserve would need to step in to prevent its collapse. In short order, Washington Mutual and the Wachovia Corporation were acquired by competitors.

Every corner of our financial system was ravaged by the crisis, and there was no playbook for how to respond. Markets were in total disarray. Investment grade credit ratings lost their meaning. Massive illiquidity drove asset prices down, making it hard to execute trades, price publicly traded mutual funds or secure even the shortest-term financing. A large money market fund “broke the buck.”

I’ve called it the ultimate stress test. While the financial system survived, the “patient” required significant rehabilitation. We are still repairing the damage to market confidence and our economy.

I know, and you know, that we don’t ever want to weather a storm like that again. That is why President Obama and Secretary Geithner remain committed to finishing the job of fixing our financial regulatory system. And that is why we need to work together to implement reform in a way that protects our economy and lays a strong foundation for growth.

I left my job in the private sector to work at Treasury because I wanted to help make sure we got this right.


So where are we today?

We were given a big assignment, and we have made significant progress. Our banking system is far stronger than it was only a few years ago.  Our nation’s financial institutions have raised hundreds of billions of private capital and are far less reliant on the so-called “shadow banking system” for funding. The government has closed most of the emergency programs put in place during the crisis, and has recovered the money it invested in the banks at a profit. Just this week, we announced a $15.1 billion positive return on the Federal Reserve and Treasury’s rescue of AIG.

The broader economy is also strengthening, although not as quickly as anyone would like. We have added more than 4.6 million private sector jobs over the last 30 months. Exports have rebounded, and the stock market has returned to near its pre-crisis peak.  Even the housing market is stabilizing – and in many parts of the country, is starting to come back to life.

Financial reform has significantly improved our ability to monitor and contain risks to the financial system. Exchanges and clearinghouses have brought more transparency to derivatives markets. New institutions – like the Consumer Financial Protection Bureau, the Financial Stability Oversight Council, and the Office of Financial Research – are up and running.  We now have the framework in place for better informed, better coordinated federal oversight.

We are also making good progress implementing many of the critical reforms contained in the Dodd-Frank Act – far more progress than is widely appreciated. Today, around 90 percent of the rules scheduled to be in place are either proposed or finalized. And we expect even more to take shape by the end of the year. That should leave consumers, businesses and other market participants with a much clearer picture of where we are headed.

So what role does Treasury play? Unlike the independent regulators, in most instances, Treasury does not write the rules.  What we can do is listen to key stakeholders and raise potential issues for our colleagues as they arise. We can also bring regulators together to help make sure that our rules are coordinated and that our financial system is competitive and safe.

In some cases, Dodd Frank requires Treasury to play a formal role, such as coordinating the work on risk retention to re-start asset backed securities markets and for the Volcker Rule. But even on issues where we don’t have an official role, we are actively reaching out to our colleagues at the independent regulatory agencies.

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