Former Securities and Exchange Commission Chairman Arthur Levitt blamed recent SEC actions for contributing to the credit crisis and urged legislators to expand fair value accounting.

In a Senate Banking Committee hearing on the genesis of the current market crisis, Levitt (pictured) praised past chairmen of the SEC such as William Donaldson and Richard Breeden, but said the SEC has failed to enforce the laws on the books in recent years, implicitly taking to task current Chairman Christopher Cox.

"Recently, at critical moments and on critical issues, the SEC has been reactive at best or has shown no real willingness to stand up for investors," he said. "And it's these moments that weaken the power of the agency and investors' faith in the markets."

Levitt also defended fair value accounting, which has been blamed by the American Bankers Association for contributing to the credit crisis.

"One of the biggest steps we can take to bring to light a fuller picture of companies' financial health would be to expand fair value accounting to cover all of the financial instruments—the securities positions and loan commitments—of all financial institutions," he said. "Yet in recent weeks, fair value accounting has been used as a scapegoat by the banking industry—the financial equivalent of shooting the messenger. If financial institutions were accurately marking the books, they would have seen the problems they are experiencing months in advance and could have made the necessary adjustments—and we could have avoided the current crisis." 

However, another witness at the hearing, Promontory Financial Group CEO Eugene Ludwig, a former U.S. Comptroller of the Currency, disagreed, saying the accounting standard "clearly added to the catastrophe" and recommended revising the standard.

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