Congress wants review of market plunge

[May 08, 2010]  WASHINGTON (AP) -- Lawmakers are trying to learn the causes of the drastic stock market sell-off to ensure that high-tech trading is monitored and average investors are protected in the wilds of Wall Street.

Sens. Ted Kaufman, D-Del., and Mark Warner, D-Va., have asked Senate Banking Committee Chairman Christopher Dodd to use the pending overhaul of financial regulations to address the Dow Jones industrial average's sudden, brief drop of almost 1,000 points Thursday. The House has scheduled a hearing on the market plunge for Tuesday.

President Barack Obama said Friday that regulatory authorities are evaluating the "unusual market activity" with an eye toward protecting investors and preventing a recurrence. He said regulators would make their findings and recommendations public.

Warner and Kaufman, in a letter to Dodd Friday, want to use the financial overhaul bill moving through the Senate to require the Securities and Exchange Commission and the Commodity Futures Trading Commission to undertake a thorough study of high-frequency trading and other tools that move markets in fractions of a second.

"To simply say this was a technology anomaly would be a huge mistake," Warner said in an interview. Trades that use complex algorithms are "even more esoteric than the derivatives sector."

"It needs a little more light shined on it."

In their letter, Warner and Kaufman spelled out issues they want the SEC and CFTC to consider, including whether the agencies should require "circuit-breaker mechanisms" to prevent runaway computer-driven selloffs or whether the high-tech trading operations of large banks present risks to the markets.

They also want to know how the agencies intend to track high frequency trades to detect manipulative transactions.

"The sense is here -- with the volatility in the market, the hangover from 2008 -- the last thing the market needs is for everyday investors to be robbed of confidence," Warner said.

In the House, Rep. Paul Kanjorski, D-Pa., has called for a Tuesday hearing of a subcommittee to examine the causes of the sudden freefall and partial rebound, some of the most volatile trading in market history. Kanjorski has asked SEC Chairwoman Mary Schapiro to investigate the causes of Thursday's gyrations.

The startling market dive and bounce came amid doubts over Greece's ability to confront its national debt and overarching stock market nervousness.

It also came as the Senate moved fitfully through a massive bill to put restraints on the financial sector, bickering over procedural delays amid periodic bursts of action.

The Wall Street plunge was unlikely to alter the outlook for the bill, which at this stage appears to be clearing a path for itself toward passage.

But the Senate has yet to address other aspects of the bill, including a bipartisan proposal to audit the Federal Reserve's emergency loans to banks during the months leading to and after the 2008 financial crisis.

Republican senators have also proposed to strike a provision in the legislation that would force banks to spin off their business in derivatives, the complex securities blamed for helping precipitate the meltdown a year and a half ago.

Their position received a boost from former Federal Reserve Chairman Paul Volcker this week. Volcker, in a letter to key senators dated Thursday, said banks should be permitted to provide derivatives to customers "in the usual course of a banking relationship."

Volcker is an economic adviser to the White House and has advocated that commercial banks be prohibited from engaging in speculative trades with their own accounts.

But the financial regulation bill would go further by incorporating a provision sought by Sen. Blanche Lincoln, D-Ark., that would force banks to give up not only their own trades but also the business of creating the financial products for clients.

Volcker's letter, addressed to Senate Banking Committee Chairman Christopher Dodd, said he is "aware of, and share, the concerns about the extensive reach of Senator Lincoln's proposed amendment." A week ago, Federal Deposit Insurance Corp. chairwoman Sheila Bair also sent a letter to senators objecting to Lincoln's proposal.

Lincoln, in a statement Friday, said that without her provision "we have not done enough to address the massive size of entities that became so large that taxpayers were left with no option but to bail them out."

Over two days, Republicans and Democrats have voted together to adopt changes on how to liquidate large banks, split along partisan lines to kill a GOP consumer protection proposal as too weak, then joined again to defeat a liberal plan to limit the size of giant banks.

With senators ready to offer 100 or more amendments, time will become the main point of conflict. Senate Majority Leader Harry Reid, D-Nev., says he wants to wrap the bill up by the end of next week. Republican leader Mitch McConnell of Kentucky wants to take his time.

The Senate has scheduled no votes until Tuesday.

[Associated Press; By JIM KUHNHENN]

Associated Press writer Darlene Superville contributed to this report.

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