|FINANCIAL FIX Timothy F. Geithner, Treasury secretary nominee, said that the current economic crisis has exposed serious shortcomings in the regulatory system.|
Obama plans to move quickly to tighten financial regulatory system
Team targets the roots of economic crisis
WASHINGTON - The Obama administration plans to move quickly to tighten the nation's financial regulatory system.
Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies, and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.
Broad new outlines of the administration's agenda have begun to emerge in recent interviews with officials, in confirmation proceedings of senior appointees, and in a recent report by an international committee led by Paul A. Volcker, a senior member of President Barack Obama's economic team.
A theme of that report, that too many major companies and financial instruments now mostly unsupervised must be swept back under a larger regulatory umbrella, has been embraced as a guiding principle by the administration, officials said.
Some of these actions will require legislation, while others should be achievable through regulations adopted by several federal agencies.
Officials said they want rules to eliminate conflicts of interest at credit rating agencies that gave top investment grades to the exotic and ultimately shaky financial instruments. The core problem, they said, is that the agencies are paid by companies to help them structure financial instruments, which the agencies then grade.
"Until we deal with the compensation model, we're not going to deal with the conflict of interest, and people are not going to have confidence that the ratings are worth relying on, worth the paper they're printed on," Mary Schapiro, the nominee to head the Securities and Exchange Commission, testified this month before the Senate Banking Committee.
Timothy F. Geithner, the nominee for Treasury secretary, made similar comments in written and oral testimony before the Senate Finance Committee.
Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the Securities and Exchange Commission become more involved in supervising the underwriting standards of securities that are backed by mortgages.
The administration is also preparing to require that derivatives instruments, including many kinds of credit default swaps, be traded through a central clearinghouse and possibly on one or more exchanges, a move that would make it significantly easier for regulators to monitor and supervise their use. Credit default swaps, which protect the holder of a debt security against a possible default, have been widely blamed for spreading the crisis.
Officials said that the proposals were aimed at the core regulatory problems and gaps that have been highlighted by the market crisis. They include lax government oversight of financial institutions and lenders, poor risk management efforts by banks and other financial companies, the creation of exotic financial instruments that were not adequately supported by their issuing companies, and risky and ill-considered borrowing habits of many homeowners whose homes are now worth significantly less than their mortgages.
"I believe that our regulatory system failed to adapt to the emergence of new risks," Geithner said in a written response to questions that was made public on Friday by Senator Carl Levin, a Michigan Democrat. "The current financial crisis has exposed a number of serious deficiencies in our federal regulatory system."
The regulatory changes are a major piece of a broader package by the new administration to address the market crisis.