The need for tighter federal regulation was the dominant message sent on Thursday to the panel established by Congress to examine the causes of the financial crisis.
Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, and Mary L. Schapiro, chairwoman of the Securities and Exchange Commission, agreed on several recommendations for regulatory reform, including regulation of over-the-counter derivatives.
In addition, they said, financial institutions should not reach the point where they are deemed ''too big to fail,'' because a government bailout or a market collapse are the only possible outcomes.
''The financial crisis calls into question the fundamental assumptions regarding financial supervision, credit availability and market discipline that have informed our regulatory efforts for decades,'' Ms. Bair told the 10-member bipartisan panel, the Financial Crisis Inquiry Commission.
Ms. Bair, who has been outspoken since assuming her job in 2006, said the crisis was ''the culmination of a decades-long process by which our national policies have distorted economic activity'' away from savings and investment in industry and toward consumer consumption, housing and finance.
Ms. Schapiro cited lax regulation of asset-backed securities, an excessive reliance on credit rating agencies, executive compensation that encouraged unhealthy risk-taking and a failure to oversee hedge funds and private equity funds.
She expressed sympathy for the idea of a council of regulators ''with the power to evaluate risk across the financial sector,'' and added, ''large, interconnected institutions should be supervised on a consolidated basis.''
The House last month adopted an overhaul that would give the government new powers to break up huge companies, create a consumer financial protection agency and tighten oversight of derivates trading. The Senate has yet to vote on the measure.
The attorney general, Eric H. Holder Jr., told the commission that the F.B.I. was investigating more than 2,800 mortgage fraud cases, almost five times as many as the 534 inquiries in 2004.
Of the cases, 1,842 involved more than $1 million in losses. As of November, federal charges related to mortgage fraud were pending against 826 defendants.
Lanny A. Breuer, the assistant attorney general for the Justice Department's criminal division, said prosecutors were focused not only on lenders that underwrote risky mortgages, but also on companies that packaged and sold the mortgages to investors.
''We absolutely are looking at the conduct of the securitizers themselves, and what did they say to those who purchased the securitizations; and what did they say about the underlying conduct,'' Mr. Breuer said.
But several state officials told the panel that federal action had come too late -- a point made by the commission's chairman, Phil Angelides, who said the head of the F.B.I.'s criminal division had warned in 2004 of an ''epidemic'' of mortgage fraud that, if unchecked, could match the savings-and-loan crisis of the 1980s in magnitude.
''In the years preceding the crisis, federal regulators often showed no interest in exercising their regulatory authority, or worse, actively hampered state authority,'' Lisa Madigan, the Illinois attorney general, told the commission.
The Federal Reserve failed to tighten underwriting standards, while the Office of the Comptroller of the Currency and the Office of Thrift Supervision were ''actively engaged in a campaign to thwart state efforts to avert the coming crisis,'' she said.
John W. Suthers, the Colorado attorney general, described the fallout from the housing crisis. He spoke of ''a dramatic shift in consumer complaints'' in the last two years.
''We are receiving fewer complaints about mortgage originators,'' Mr. Suthers testified, ''and we now have voluminous complaints about mortgage servicing and foreclosure relief scams.''
Denise Voigt Crawford, the Texas securities commissioner, called the erosion of state regulatory and enforcement powers ''a significant factor in the severity of the financial meltdown.''
Ms. Crawford gave the S.E.C. an overall grade of D-minus, but its regional offices a grade of A-plus.
''It's only in Washington that we've had this problem, and it's not always been the case,'' she said.
''Prior to about 10 years ago, the S.E.C. was, in our estimation, the crown jewel of the federal agencies.''
PHOTO: From left, Mary Schapiro of the S.E.C., Sheila Bair of the F.D.I.C., Lanny Breuer of the Justice Department and Eric Holder, the attorney general, testified Thursday. (PHOTOGRAPH BY JASON REED/REUTERS)
