A resource-strapped SEC allowed confusion and reckless risk-taking to dominate financial markets, Levitt, who led the agency from 1993 to 2001, told the Senate Banking Committee.
"As the markets grew larger and more complex - in scope and in products offered - the commission failed to keep pace. As the markets needed more transparency, the SEC allowed opacity to reign. As an overheated market needed a strong referee to rein in dangerously risky behavior, the commission too often remained on the sidelines," Levitt said.
His testimony came at a hearing on the roots of the economic crisis.
The SEC says the agency's enforcement staff levels are higher now, and the commission has taken many more enforcement actions than was the case in the 1990s.
An SEC spokesman said he had no direct comment on Levitt's testimony, but noted that as chairman, Levitt hadn't sought the kind of regulations that he is now faulting the SEC for failing to impose.
Indeed, Levitt acknowledged that in 1998, he opposed imposing rules on a type of obscure and extremely complicated financial instrument - known as credit default swaps - that are increasingly being blamed for igniting the crisis. He instead called at the time for establishing a clearing facility to keep better track of the swaps, but didn't seek to mandate one.
"I wish that I had probed further. I wish that I had asked for swaps and derivatives to be given the transparency," Levitt said.
In the thick of the meltdown last month, current SEC Chairman Christopher Cox called for the swaps to be regulated as part of a broader financial overhaul Congress plans to tackle next year.
Sen. Chris Dodd, D-Conn., the panel chairman, blamed unscrupulous lending practices for the meltdown, saying the tactics "will be remembered as the financial crime of the century."
He said regulators "willfully ignored the abuses taking place on their beat."
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