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– BANKING & FINANCIAL SERVICES
Updated Nov. 13, 2008 – 4:02 p.m.
Dodd: Financial Industry Must Make ‘More Progress’ or Face More Legislation
By Benton Ives and Phil Mattingly, CQ Staff
Another top lawmaker expressed impatience Thursday with the financial sector’s response to the economic crisis following an infusion of federal funds, suggesting companies have been slow to act in several areas that could improve the situation.
“I think I speak for many members of the committee and the Senate in saying that we want to see more progress from our friends in the financial sector — more progress in foreclosure mitigation, in affordable lending, and in curbing excessive compensation,” Senate Banking Committee Chairman Christopher J. Dodd said. “And if that progress is not forthcoming, we are prepared to legislate — now if possible, but next year if necessary.”
The Connecticut Democrat made his remarks at the latest in a series of congressional hearings on a financial crisis that has led to record home foreclosures, bank failures and a widespread scarcity of credit.
Dodd’s House counterpart, Financial Services Committee Chairman Barney Frank , D-Mass., Wednesday said Congress should take up legislation to make it easier to renegotiate troubled mortgages, citing what he called a lack of cooperation from mortgage servicers.
If lawmakers press ahead with legislation in the lame duck session next week, Dodd said he would consider bringing up bankruptcy provisions aimed at keeping homeowners out of foreclosure.
The bankruptcy changes would allow bankruptcy judges to modify the terms of home mortgages — potentially reducing the outstanding principle, for example. Under current law, judges are not allowed to modify primary residence loans.
“If there is a vehicle . . . I would like to raise” bankruptcy legislation, Dodd said, adding that it would be “a very limited program dealing with existing mortgages.”
The Senate rebuffed attempts to change the bankruptcy code last spring, but Dodd said the prolonged turmoil in the housing market has strengthened his case. “Maybe I’m getting to the tipping point,” he said.
Lawmakers have also expressed strong concern about how banks are using cash infusions from the federal government under the Treasury Department’s financial rescue program (PL 110-343). They fear banks are hoarding the money or using it to acquire other banks instead of using it to make loans and ease the credit crunch.
Sen. Charles E. Schumer , D-N.Y., said Treasury should review and approve any bank mergers completed with the help of funds from its Troubled Asset Relief Program (TARP).
“While there are mergers that should take place to improve systemic stability and encourage lending . . . giving away government money so that it can be used to gobble up competitors that will not have any impact on the overall stability of the financial sector should not be endorsed,” he said.
Schumer said he would push to give Treasury such authority and advocate other changes to the program — such as guidelines to encourage banks to increase lending — before Congress allows the department to start using the second half of the $700 billion Congress authorized for the program.
Barry L. Zubrow, chief risk officer with JP Morgan Chase, said his bank was using the government funds in accordance with lawmakers’ wishes.
Dodd: Financial Industry Must Make ‘More Progress’ or Face More Legislation
The government money is being used to, “among other things . . . expand the flow of credit to creditworthy U.S. consumers and businesses on competitive terms and to work diligently to modify the terms of residential mortgages to strengthen the U.S. housing market,” Zubrow said.
But he suggested JP Morgan would only lend out the new money as long as it didn’t threaten the overall health of the firm. “At the same time, the decisions on capital usage must be consistent with prudent business practices, and underwriting standards,” Zubrow said.
Hedge Funds in Spotlight
Meanwhile, witnesses at a House Oversight and Government Reform hearing said that while hedge funds played little role in the current economic crisis, the enormity of the largely unregulated funds demanded better transparency and regulation.
Former Securities and Exchange Commission Chairman David S. Ruder led the call for regulation, saying the SEC “should be given the power to require the funds to disclose risks and other activities and to monitor and assess the effectiveness of hedge fund risk management systems.”
Hedge funds have become a hot topic in recent weeks due to their size — some range in the billions of dollars — and the secrecy of their holdings. Massive investor pullouts have put a number of funds in peril, which observers feel might significantly add to the economy’s troubles.
“Hedge funds now pose a very public peril when the bets go bad,” said Thomas M. Davis III of Virginia, the panel’s top Republican.
The global hedge-fund industry lost $100 billion of assets in October, research firm Eurekahedge estimated Wednesday, according to Bloomberg.
Though panelists were in favor of regulation, legislation to address the funds was strongly discouraged.
“The possibility of legislating losses away is obviously impossible and unwise,” said Andrew Lo, a finance professor at the Massachusetts Institute of Technology, citing the intricate and complicated nature of the funds.
Five billionaire hedge fund managers agreed with the call for regulation.
George Soros, the chairman of Soros Fund Management LLC, called for a clearinghouse aimed at slowing the rush to introduce complicated — and often not fully understood — financial instruments to the market.
“...[N]ew products must be registered and approved by the appropriate authorities before they can be used,” he said.
Dodd: Financial Industry Must Make ‘More Progress’ or Face More Legislation
The fund managers said the funds were not responsible for the current crisis, but stronger regulation was necessary.
“I do think that stronger regulation based on market integrity will be useful,” said James Simons, the president of Renaissance Technologies, LLC, who supported Ruder’s SEC proposal.
From the other side of Capitol Hill, Sen. Charles E. Grassley , the ranking Republican on the Finance Committee, said he would retintroduce legislation to require hedge funds to register with the SEC.
“This initiative is one step in helping to make our financial markets more transparent. Openness is the fundamental to the strength and stability of those markets,” Grassley said in a statement. “What’s more, a lot of pension holders have been left in the dark about their exposure to hedge fund losses because transparency is nonexistent. It’s not about fat-cat investors who can afford to lose. It’s about regular workers and their retirement savings.”
Grassley said the bill, to be introduced in 2009, would be modeled after a legislation (
First posted Nov. 13, 2008 12:09 p.m.
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