Battered US financial industry faces more oversight

Videos
Photos

(Agencies)
Updated: 2008-10-06 09:24

The committee will hold three more hearings this month on hedge funds, credit rating agencies and the role of regulators in the run-up to the crisis.

Former Federal Reserve chairman Alan Greenspan has been invited to testify at the third hearing, the committee said.

Meanwhile, the House Agriculture Committee, which has some oversight of commodities and futures trading, plans to hold a hearing this month on a class of derivatives known as credit default swaps. AIG held huge amounts of credit default swaps, which act as insurance against bond defaults. The prospect that AIG wouldn't be able to pay out the swaps was a major reason the government took over the company.

Hedge funds, which invest huge pools of money for wealthy investors and pension funds, are part of what some analysts call the "shadow banking" system that also included investment banks such as Lehman.

The "shadow" system provided the capital for many subprime mortgage brokers by buying huge amounts of mortgage-backed securities and creating demand for more mortgage loans.

Credit rating agencies such as Moody's Investors Service, Standard & Poor's and Fitch Ratings have been criticized for slapping their top ratings on complex mortgage-related securities that few investors are now willing to buy.

The battle lines are already emerging for next year's fight. Industry lobbyists will push to consolidate the numerous financial regulatory agencies, similar to a proposal outlined by Treasury Secretary Henry Paulson earlier this year. To prevent future meltdowns, they want the Federal Reserve to focus on "systemic risk," or the risk that individual banks pose to the larger financial system. Currently, regulators focus too much on individual banks in isolation, Talbott said.

Business groups also will push to loosen accounting standards that they blame for deepening the current crisis.

Some consumer groups, meanwhile, argue that structural changes to the financial regulatory system aren't as important as having regulators enforce existing rules more strictly.

If regulators had cracked down on abusive lending practices in the mortgage industry several years ago, much of the current meltdown could have been avoided, said Travis Plunkett, legislative director for the Consumer Federation of America.

"It was a failure of will on the part of existing agencies to use their existing authority that triggered this crisis," Plunkett said.

For example, only this summer did the Federal Reserve issue rules that barred lenders from making loans to risky borrowers without proof of the borrower's income, long after "the horse was out of the barn," he said.

Looking ahead, Plunkett said Congress should allow individual mortgages to be adjusted by judges in bankruptcy courts, a proposal opposed by the financial industry.

Consumer groups sought to include such a provision in the bailout bill but failed.

In addition, many regulatory agencies, such as the Office of Thrift Supervision, receive some of their funding from fees assessed on the companies they regulate, Plunkett said.

"That's a conflict of interest we need to reduce or eliminate," he said.

Congress will also have to figure out the future of Fannie Mae and Freddie Mac, the mortgage giants taken over by the government last month after sustaining huge losses.

There's a broad consensus that the two companies' hybrid structure as government-backed entities and for-profit private companies put them in the difficult spot of serving two conflicting goals: provide financial support for the housing market while also maximizing shareholder profit.

The two companies could end up as much smaller federal agencies, or they could be fully privatized, among other options.

How the push for new regulations will play out depends, in part, on whether Republican presidential nominee Sen. John McCain or Democratic nominee Sen. Barack Obama wins the White House.

But no matter who is president, the next set of officials at financial agencies such as the Office of Thrift Supervision, the Federal Deposit Insurance Corp. and the Securities and Exchange Commission will likely be much tougher.

"In the future, I think we'll see fewer political hacks and industry mouthpieces and more competent regulators," said Howard Glaser, an industry consultant who has worked for Fannie Mae and Freddie Mac.

Previous page 1 2 Next Page