UPDATE:US Rep Frank To Seek To Toughen Subprime Lending Rules
03 Februar 2009 - 7:42PM
Dow Jones News
The U.S. government's overhaul of the financial system needs to
aggressively address a number of issues, including putting new
limits on executive compensation for top executives and improving
the operation of the securitization markets, a top House Democrat
said Tuesday.
House Financial Services Committee Chairman Barney Frank,
D-Mass., said the first step for policymakers will be the creation
of a systemic risk regulator to help prevent market shocks such as
those that led to the current crisis. Consensus is growing for that
power to reside with the Federal Reserve, he said, but whichever
agency is chosen it needs to have the authority to shut down major
financial institutions in an orderly fashion.
Serving as a backdrop for efforts, he continued, will be the
growing public displeasure surrounding the government's $700
billion rescue package for Wall Street. Frank said he plans to call
eight top banking chief executives before his committee next week
to discuss how they've used government funds and the lavish
compensation packages that have increased public skepticism.
"They are getting a lot of money, they made a lot of mistakes,
they have to lean over backwards not to offend people," Frank said
at a press conference discussing his committee's 2009 agenda.
He ticked off a wide-range of issues that he hopes to pursue
this year: providing debt relief for poor countries, a government
insurance program for municipal bonds, and consideration of an
optional federal charter for the insurance industry, particularly
life insurers. Additionally, he said the panel would eventually
address what to do with now government-controlled Fannie Mae (FNM)
and Freddie Mac (FRE).
One issue he said he wants to address early is altering the
securitization market, potentially instituting some form of
loss-sharing on firms that securitize loans and send them into the
market. He said this could be done by requiring firms to be
responsible for some portion of the securitization that is sold out
into the market.
"If enough bad loans are made and securitized it's hard to
protect yourself against them. Not enough due diligence can be
done," Frank said.
Regarding municipal bonds, Frank said he envisions a
government-run insurance program modeled like the one for banks
that is administered by the Federal Deposit Insurance Corp. He
didn't say whether a new agency would run the program, but said
premiums could be collected to pay for any losses in the rare event
there's a default on a municipal bond.
He also made clear that Democrats hope to take advantage of the
increased majorities they enjoy in both the House and Senate after
November's elections to press legislation that Republicans have
been able to hold up in the past. Consumer protection legislation,
a more aggressive crackdown on subprime lending, and executive
compensation restrictions are all on the agenda, he said.
On executive compensation, Frank sought to frame the issue by
tying it to the broader question of systemic risk. He said too many
corporations allowed executives to make huge bets with no penalties
if those risks paid off; a "heads I win, tails I break even"
situation helps create problems like those currently being seen, he
said.
"I think we need to write into this prohibitions on those forms
of exec compensation that give perverse risk incentives," Frank
said.
-By Michael R. Crittenden, Dow Jones Newswires; 202-862-9273;
michael.crittenden@dowjones.com
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