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January 27, 2010
Via FedEx
Phil AngeHdes
Cllairmall
Mr. Peter J. Solomon
Founder and Chairman
Peter J. Solomon Company
520 Madison 1\ venue
New York, NY 10022
Han. Bill Thomas
Re:
Vice Cllairmall
Financial Crisis Inquiry Commission Hearing on
January 13,2010
Dear Mr. Solomon:
Brooksley Born
Commissioner
Byron S. Georgiou
CommissiOIll:r
Senator Bob Graham
Commissioner
On January 20, 2010, Chairman Angelides and Vice Chairman Thomas sent you a
letter thanking you for testifying at the January 13,2010 hearing and informing
you that the staff of the FCIC might be contacting you to follow up on certain
areas of your testimony and to submit written questions and requests for
information related to your testimony. During the hearing, some of the
Commissioners asked you to answer certain questions in writing. Please provide
your response to the question below by February 26, 2010.
1. What questions would you suggest that the Commission ask the CEOs of
the banks, government regulators, or any other public or private entity
related to the causes of the financial crisis?
Keith Hennessey
Commissioner
Douglas Holtz-Eakin
Commissioner
Heather H. Murren, CFA
The Commissioners and staff of the FCIC sincerely appreciate your continued
assistance with this inquiry. If you have any questions or concerns, please do not
hesitate to contact Chris Seefer at (202) 292-2799, or cseeferiWfcic.gov.
Commissioner
John W. Thompson
Commissiollef
Peter J. Wallison
Commissioner
Sincerely,
Thomas Greene
Executive Director
cc:
Phil Angelides, Chainnan, Financial Crisis Inquiry Commission
Bill Thomas, Vice Chairman, Financial Crisis Inquiry Commission
1717 Pennsylvania Avenue, NW, Suite 800 • Washington, DC 20006-4614
Thomas Greene
Ext'clltiVt' Director
202.292.2799 • 202.632.1604 Fax
Peter J. Solomon
Chairman
520 Madison Avenue
New York, New York 10022
TEL: 212.508.1601
FAX: 212.5°8.1633
pjs@pjsolomon.com
February 3, 2010
Mr. Phil Angelides, Chainnan
The Honorable Bill Thomas, Vice Chainnan
Financial Crisis Inquiry Commission
1717 Pennsylvania Ave., NW - Suite 800
Washington, DC 20006-4614
Dear Chainnan Angelides and Vice Chainnan Thomas:
This letter responds to Mr. Thomas Greene's letter of January 27,2010, clarifies
my view ofthe role Gramm-Leach Bliley played in contributing to the financial crisis and
makes a proposal.
Let me say it was my privilege to appear before the Financial Crisis Inquiry
Commission. Pane12 on January 13th was infonnative and the Commissioners'
questions were to the point and perceptive.
First, in regard to the questions posed by Mr. Greene, I would suggest that the
Commission focus on three questions:
1. For the commercial bank CEO's: What is the relationship between the
extension credit and the non-credit investment banking services provided and charged
corporate borrowers? The question relates to "bundling", that is, tying credit decisions to
other services for which the corporate customer pays the lender.
2. For all commercial banks, investment banks and regulated entities: What
effect did the passage of Gramm-Leach-Bliley have on the way you conducted your
business? What was the effect of the change to "functional" regulation from "entity"
regulation?
3. For the regulators, the primary question is: What were the industry or political
forces that led to certain decisions? For example, in a simple case, how did the S.E.C.
happen to eliminate the long-standing "short selling" rule? To what extent did political
pressure from the White House, Congress or the industry influence this and other such
decisions?
www.pjso[omon.com
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Second, I do want to follow-up on some of the comments I made in my testimony
and during the Commissioners' questioning. Specifically, I want to focus on the role of
the Gramm-Leach-Bliley Act of 1999 in the crisis.
As I testified, the effect of the Act generally was to legitimize the extension of
financial firms into new areas and to give Congressional approval and recognition to the
obliteration of historical business differences encapsulated in the Glass-Steagall Act. For
65 years, commercial banks, investment banks, insurance companies, S&Ls, investment
advisors, all pursued different kinds of business. Gramm-Leach-Bliley removed the
barriers.
In the world of Glass-Steagall, it made sense to have a regulatory geography
based on the singular activity of each business. Thus, the Fed, FDIC and OCC had
responsibility for commercial banks; the S.E.C. regulated investment banks and
investment advisors; the CFTe supervised futures dealers; OTS regulated S&Ls; and
insurance companies generally fell under the supervision of State Commissioners.
In the last decades, lines of business blurred. The conglomeration of businesses
was blessed and codified by Gramm-Leach-Bliley. It is not clear that diversification
allowed by Gramm-Leach-Bliley in itself caused the crisis. What is clearer is that the
restructuring of the regulatory geography mandated in the Act, putting regulation on a
"functional" basis rather than an "entity" basis, made regulation less effective.
This part of the Gramm-Leach-Bliley Act has not worked. Financial
conglomerates are too complex. Activities of the financial institutions are spread around
subsidiaries of holding companies in a complex manner, making it impractical to assign
regulators to subsidiaries in the way Gramm-Leach-Bliley had hoped. Gramm-LeachBliley, therefore, achieved the almost impossible result - simultaneous chaotic overlaps
and large gaps in regulation.
Third, a single regulator is the most effective means of creating uniform and
coherent regulatory oversight. To accomplish this objective requires merging virtually all
the regulatory functions into one regulator as the UK has done with the FSA. Thus, the
OCC, SEC, OTS and CFTC would all become part of an entity that might be called the
US FSA.
I would not propose merging the FDIC into this new regulator. The tension
between the FDIC's responsibility for protecting the insurance fund and effecting
resolutions and the chartering responsibility housed in the US FSA is desirable. Those
seeking bank charters naturally want to see institutions grow and expand their activities,
while insurer/resolution authorities are naturally conservative wanting to contain growth
and complexity.
The new consolidated regulator ("US FSA") would be created from the merger of
a number of current regulators. Alternatively, the Fed could be the surviving institution.
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It has the obvious expertise, despite clear lapses in its regulatory effectiveness over
recent years.
At the hearing, I argued against the construct of a "Council of Regulators", in
favor of a single regulator, namely, the Fed because of its cadre of professions. While I
continue to favor a single regulator, I fear that placing the Fed in that role might
compromise its primary responsibility of managing the nation's monetary policy. The
House legislation increasing oversight on the Fed shows how tempting it will be for
Congress to exert political influence on the Fed. Virtually all economists agree that
reducing the Fed's independence in setting monetary policy would be a dangerous step.
In sum, the amalgamation of most of the existing regulators into a US FSA now
seems the best solution to control a dynamic and innovative financial system.
I hope the above comments are helpful. Let me know if I can provide further
assistance.
With best wishes,
PJS:jev
@FedFRASER