One, obviously, large financial institutions, systemically important around the globe, made bad investments. Over-concentration of risk, and there was too much leverage and inadequate capital.

Two, there’s gross failure in corporate governance at these institutions. Where were the boards of directors? Where was the senior management? Hundreds of billions of dollars in capital were wiped out in twelve to eighteen months.

Three, either inadequate risk management systems or failures of them at these institutions, most of which are very large sophisticated, heavily regulated institutions.

And four, regulators who were either not regulating—doing their job—or were told not to do their job. That’s the story that I think needs to be investigated and told. The OCC was on-site at Citigroup, for instance. They have very qualified competent people. Why weren’t they—maybe they were—why weren’t they identifying these exposures and these risks? Why weren’t they taking any corrective actions? Maybe they tried to and they were told not to.

TA: Nobody really came out shining in this whole thing. It wasn’t just the Republican Bush coming in saying “free markets.” Clinton was calling off the dogs to a certain extent, too. How directly were regulators/staff/lawyers told to either look the other way or be hands-off?

JB: Even in the Clinton administration, a lot has to do with the fact that the appointees to these regulatory agencies had profound connections to Wall Street. There’s always this presumption or this assertion that a Treasury secretary needs to come from Wall Street. I don’t think it’s necessarily a good thing for a Treasury secretary to be from Wall Street.

TA: Why not?

JB: Because they have potential conflicts of interest and because there’s the revolving door—they’re going to go back to Wall Street. That’s why. And one should really explore the incestuous ties between Goldman Sachs, the Federal Reserve Bank of New York, and the Treasury department over the past eight years. It’s about personnel; about the financial interests.

TA: How do you stop that revolving door? People say “well, you need to know what you’re doing.” If you haven’t been in the business you’re not going to understand how to regulate the business.

JB: I think you need more openness in the process. What you need to do is bring transparency to the regulators’ operation and make sure they’re politically accountable to elected officials.

That’s the problem with the Federal Reserve being a regulator. My position has changed about this. The reason is because they’re not politically accountable. They’re designed to be and should be independent in order to conduct monetary policy.

It’s also under the control of one individual, the chairman. A big part of what happened is that we had a Fed chairman who was chairman for so long and who was such a free-market ideologue that not only did he oppose any extension of regulation, when Congress gave him authority to set the terms for mortgages, he refused to follow it. And they’re secretive, they’re not transparent.

There needs to be reform of the Federal Reserve.

TA: I haven’t heard any discussion of that—except to beef it up. It’s a fundamentally undemocratic institution. For monetary policy, it may need to be, but when you expand powers for an undemocratic institution, that’s problematic.

JB: There can be conflicts of interest when you’re setting monetary policy and when you also have responsibility for supervising financial institutions because the direction of interest rates and the magnitude of change affects the financial condition of the people you’re regulating. Tremendous conflict of interest.

Chuck Bowsher, who was comptroller general at time (at GAO)—he deserves a lot of the credit for supporting this work—he used to have major regulators over for private lunches. Greenspan was a regular attendee and I’ll never forget the time he said—he did not believe in any regulation—but he also said “I don’t know why the Federal Reserve has regulatory authority over banks.” Truth be told, he wanted more because he didn’t want to use it.

Also, to show how extreme he was, I did hear him question the need for margin requirements in stock accounts.

TA: (laughs) Which is like let’s do 1929 all over again.

JB: Yes. I was just dumbfounded.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at