Once the smoke clears from the conflagration in the financial markets, Congress and the next presidential administration will face a challenge: how to keep the next fire from burning down the house.
New regulations, or better enforcement of the old, are certain to be high on the agenda.
“We’ve got to have the most dramatic rethinking of our regulatory structure since the New Deal,” said former Securities and Exchange Commissioner Harvey Goldschmid, now a law professor at Columbia University.
Legal and political observers think lawmakers are likely to focus first on three broad areas: tighter regulation of mortgage lending, streamlining regulatory enforcement and oversight of unregulated financial markets.
Mortgage lending is an obvious target because so much of the bad debt dragging down banks originated with the lax practices of brokers and lenders who handed out loans to poorly qualified buyers with scant collateral.
“The ‘three C’s’ of mortgage lending have always been credit, collateral, capacity to pay,” said Edward Kramer, executive vice president for regulatory services at Wolters Kluver Financial Services, a consulting firm. “These are the most basic elements of loan underwriting, and we lost sight of that.”
Legislators might also try to rationalize the patchwork of government authority over banks.
They are now regulated by four agencies — the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the Federal Reserve — with overlapping and sometimes contradictory jurisdictions.
Treasury Secretary Henry Paulson proposed a similar overhaul in March. His plan involved converting the Fed into a banking “supercop” and merging the SEC and the Commodity Futures Trading Commission.
At the time, many observers saw his proposal as a pretext for deregulation. But in the wake of the financial crisis, the idea is gaining currency.
“This is clearly a system that was built a piece at a time as opposed to on a blank sheet of paper,” said Donald P. Gould, president of Gould Asset Management, a Claremont, Calif., investment firm. “That has led to a lot of finger-pointing and made it easy for things to fall into the gaps.”
Lawmakers might also try to bring unregulated markets, including those for such arcane derivative securities as credit-default swaps, under control.
