"Fixing the Financial Crisis"-Regulating the Financial Regulatory System
Wednesday, November 12, 2008SUSIE GHARIB: The financial crisis has revealed massive gaps in the regulatory system. So as policymakers focus on the short-term fix, they also have to look at what changes need to be made to ensure this doesn't happen again. As we continue our series "Fixing the Financial Crisis," Stephanie Dhue looks at the longer term regulatory issues facing American business.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: The 111th Congress and the incoming Obama administration face a massive undertaking overhauling the financial regulatory system. Senate Banking Committee Chairman Chris Dodd says he will proceed carefully.
SEN. CHRISTOPHER DODD, BANKING COMMITTEE CHAIRMAN: I want to make sure that we are, we are, we have a regulatory system that has the transparency, the proper supervisory role that we ought to be playing, but at the same time, does not strangle creativity and imagination that has been a hallmark of our success as well.
DHUE: Some of that overhaul is already under consideration. Back in March, Treasury Secretary Henry Paulson unveiled a blueprint for reform. He wants the Federal Reserve to be a kind of super-regulator, overseeing market stability and risk. Currently, the Fed shares those responsibilities with other agencies, including the Securities and Exchange Commission which has come under fire for not doing more to regulate investment banks. Barry Barbash worked at the SEC in the 90s. He says making the Fed a super regulator could work, but he still expects a now-wounded SEC to flex its muscle.
BARRY BARBASH, PARTNER, WILLKIE FARR & GALLAGHER: Whenever the SEC wants to show its strength what it does is it brings enforcement cases, so from that standpoint, the securities business, the hedge fund business will be under pressure from the regulators in the form of enforcement cases and really hard examinations as well.
DHUE: A mortgage regulator may also be part of a fix. Former FHA official Ira Peppercorn says any overseer should be able to sound an early trouble warning.
IRA PEPPERCORN, FORMER DEPUTY, FEDERAL HOUSING COMMISSIONER: What we need is an early detection system that can say, this community is experiencing a high level of foreclosures or not just by the community level, but by a lender or by a broker, that can say, look at the default rate on the portfolio that this lender is originating. Someone needs to step in.
DHUE: Mortgage lending will also need to be addressed. A bill to crack down on predatory lending and create a national licensing system for mortgage originators passed the House of Representatives last year. The Senate may ramp that up and take a more aggressive approach, including letting bankruptcy judges work out troubled mortgages in court. Congress will also have to address Fannie Mae and Freddie Mac. The Treasury's authority to lend money to the mortgage giants expires in a year. But analyst Andy Laperriere says it may take longer to get Fan and Fred back on track.
ANDY LAPERRIERE, MANAGING DIRECTOR, ISI: The companies are going to be bleeding money a year from now and that's just a very tough environment in order to spin them off and have them go back to the private sector and do what they were doing.
DHUE: Lawmakers and regulators also want to address the role of credit rating agencies. Enron's collapse seven years ago unearthed serious conflicts that compromised the rating system. But regulators and lawmakers didn't fix the problems back then. Laperriere says it's still thorny.
LAPERRIERE: They recognize that there's a conflict of interest there, but how do you properly align their incentives and there really aren't very many good ideas out there on how to do it.
DHUE: Also on the to-do list, addressing the largely unregulated derivatives market, which nearly brought down insurance giant AIG. Michael Greenberger headed the CFTC in the '90s and at the time pushed for national derivatives regulation. It didn't happen then. He expects it will happen now.
MICHAEL GREENBERGER, FORMER DIRECTOR, TRADING & MARKETS, CFTC: At the very least, I think it is going to go under a sophisticated regulatory system, maybe onto regulated exchanges, but at the very least a system where a Federal regulatory agency will have reporting, will ensure adequate capital reserves, proper marking the market and anti-fraud and anti- manipulation authority.
DHUE: But there are local efforts. Beginning in January, New York insurance regulators plan to regulate some credit default swaps as insurance. President-Elect Obama has made fixing the economy his top priority. But he has offered few details on what regulatory changes he would make to the regulatory system. Clearly, any overhaul will be a complex and lengthy process. Stephanie Dhue, NIGHTLY BUSINESS REPORT, Washington.
