Panel spells out financial sector regulatory needs

[January 29, 2009]  WASHINGTON (AP) -- The financial sector -- from banks to private equity funds -- needs tough new regulations that reduce dangerous risk taking, give consumers greater protections and limit threats to the overall economy, a congressional watchdog panel says.

In a draft report scheduled for release Thursday, the Congressional Oversight Panel for the Troubled Asset Relief Program spelled out eight urgent needs that it said could help avoid the mistakes that led to the credit crisis at the center of the tanking economy.

They include identifying and regulating institutions considered "too big to fail" because of their far-flung impact on the economy, increasing supervision of "shadow" markets such as hedge funds and over-the-counter derivatives, and a new system of federal and state regulations of consumer credit products.

It also urges the government to make a diplomatic priority out of establishing global regulatory standards. And it recommends restrictions on executive pay so top company officials are discouraged from taking unnecessary financial risks.

The recommendations come as Congress and President Barack Obama are making a new financial regulatory regime one of their top agenda items. White House spokesman Robert Gibbs said Obama met with Treasury Secretary Timothy Geithner and top economic advisers Paul Volcker and Lawrence Summers on Wednesday to discuss re-regulating the financial markets.

"The current crisis should come as no surprise," the congressional panel's draft report says. "The present regulatory system has failed to effectively manage risk, require sufficient transparency and ensure fair dealings."

The panel, headed by Harvard law professor Elizabeth Warren, was created by Congress to watch over the administration's use of $700 billion in taxpayers' money to rescue financial institutions and free up credit.

Bailing out the financial sector has been the federal government's first order of business. But correcting regulatory lapses and increasing supervision of the financial sector is gaining urgency both at the White House and on Capitol Hill.

House Financial Services Committee Chairman Barney Frank, D-Mass., is tackling regulatory restructuring, beginning with an idea to create an overarching risk regulator for the industry.

Geithner on Wednesday met with members of the oversight panel and with other officials charged with keeping track of the financial bailout fund.

The oversight panel also proposed in its report that the government place leveraging limits on U.S. financial institutions, overhaul the credit rating system and create a council of financial experts to help anticipate the next crisis.

[Associated Press; By JIM KUHNHENN]

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