WASHINGTON - The credit crisis' adverse impact on state and local governments makes legislation to improve municipal market disclosure more important than ever so that investors can better understand the tax-exempt debt they own, Securities and Exchange Commission chairman Christopher Cox told a congressional panel yesterday.

Speaking before the House Committee on Oversight and Government Reform, Cox included muni disclosure legislation among a list of regulatory changes he would like to see enacted. He also called for the establishment of a regulator for the roughly $58 trillion credit-default swaps market, which he said could not wait until next year to be regulated.

Cox said there are "significant regulatory gaps" with respect to the $2.7 trillion dollar municipal securities market. "Individual investors account for nearly two-thirds of this multi-trillion dollar market, and neither the SEC nor any federal regulator has the ability to insist on full disclosure," he said.

Cox's remarks came at the start of a four-hour hearing on the roles the federal agencies have played in the credit crisis that also featured testimony from former Federal Reserve chairman Alan Greenspan and former Treasury Secretary John Snow.

In Cox's more detailed written testimony, which went much further than his oral remarks, he noted the looming possibility that Jefferson County, Ala., may default on its bonds, which he said is "only the most recent reminder of what can go wrong" in the market.

He also pointed to the recent securities fraud charges the SEC brought against five former San Diego officials claiming, among other things, that they made false and misleading statements in connection with $260 million of muni securities the city issued in 2002 and 2003.

"The multibillion dollar fraud in the city of San Diego ... has injured investors and taxpayers alike," he said in the prepared testimony. "The economic slowdown will now make it even harder for many state and localities to meet their obligations."

Turning to interest-rate swap agreements, Cox noted in his written remarks: "Many municipalities continue to use interest-rate swaps in ways that expose them to the risk that the financial intuitions on the other side of the derivatives contract may fail. That is why, repeatedly over the last two years, I have asked Congress to give the SEC the authority to bring municipal finance disclosure at least up to par with corporate disclosure. Knowing what we now know, I would have begun this campaign on my first day on the job."

The testimony is the strongest yet from Cox on the need for improvements to municipal disclosure and comes nearly 15 months after he unveiled a list of municipal market initiatives to boost municipal disclosure and accounting standards.

Only one initiative - the establishment of a central repository for continuing disclosure documents - has gained any traction and that did not require congressional action.

Lawmakers grilled Cox and the two former officials on the causes of the financial crisis. Greenspan conceded he made some mistakes in his assumptions about unregulated markets but called the credit crisis a "once-in-a-century credit tsunami."

Reading from a prepared statement, Greenspan said the crisis "has turned out to be much broader than anything I could have imagined," morphing from "one gripped by liquidity restraints to one in which fears of insolvency are now paramount."

Greenspan said his mistake was assuming that the financial firms, rather than federal regulators, were best situated to protect their companies and their shareholders.

"Those of us who have looked to the self-interest of lending institutions to protect shareholders' equity (myself especially) are in a state of shocked disbelief," he said. "Such counterparty surveillance is a central pillar of our financial markets' state of balance. If it fails, as occurred this year, market stability is undermined."

And in sharp contrast to his nearly indecipherable prose during the 17 years he was at the Fed, Greenspan warned straightforwardly that more economic pain is likely to come.

"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," he said.

Committee chairman Henry Waxman, D-Calif., placed a significant amount of blame at the feet of Greenspan. The Fed "had the authority to stop the irresponsible lending practices that fueled the subprime mortgage market," he said. "But its longtime chairman rejected pleas that he intervene."

Using colorful metaphors to describe the miscues of Washington regulators and lawmakers, Rep. John Yarmuth, D-Ky., reverted to sports, calling Cox, Greenspan and Snow the "three Bill Buckners" - a reference to the infamous Boston Red Sox first baseman who mishandled an easy ground ball that is widely thought to have cost the team the 1986 World Series.

Earlier in the panel, Waxman asked Greenspan if he was wrong to oppose regulation of derivatives.

"Partially," he said, adding that even though credit-default swaps have "serious problems associated with them," the "bulk of derivatives" that existed and were used to hedge against interest-rate and foreign-exchange rate risk when the debate about whether they should be regulated began in 1999 "are working well."

Pressed by Waxman to elaborate about where he made a mistake, Greenspan said: "I made a mistake in presuming that the self-interest of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms."

"I have found a flaw," Greenspan said, referring to his free-market stance. "I do not know how significant or permanent it is. But I have been very distressed by that ... I had been going for 40 years or more with very considerable evidence that it was working exceptionally well."

Asked if regulators plan to prosecute anyone for the financial crisis, Cox said, "There's no question that somewhere in this terrible mess many laws were broken." He added that "the best thing that we can do, of course, as many of you are focused on ... is to infer lessons from what happened and prevent anything like this and this astonishing harm from happening again."

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