NY officials to Washington: fix financial oversight

NEW YORK (Reuters) - New York City's mayor on Monday said U.S. regulators must stop short-sellers from "preying on the weakest firms" and the state comptroller said that without "rational" reforms, the demise of Lehman Brothers Holdings could cripple financial marts and the economy.

The two politicians were responding to the extraordinary trifecta of Lehman's bankruptcy, Merrill Lynch's hasty acquisition by Bank of America and a capital crunch at American International Group, once the world's largest insurer ranked by market value.

Some of Bloomberg's latest comments were a shift from last year, when a commission he formed urged regulators to relax costly and burdensome rules that help other global capitals, most notably London, attract financial companies.

Wall Street is the tap root for both the city and state economies. The total compensation paid to financial workers accounts for 35 percent of the city's wage base and pays one of every five state tax dollars.

Democratic Gov. David Paterson, who on Monday helped state-regulated AIG buy time by clearing the way for it to legally give itself a $20 billion bridge loan from its subsidiaries, also spoke out about financial regulation.

Paterson pinned the current financial crisis on the lack of transparency, saying: "Nobody really understood what was going on ... Innovation has really come back to bite us.

"What I would encourage is that as much information be shared with the public as possible so that we can really get our arms around how large this crisis actually is," he added.

State Comptroller Thomas DiNapoli called on the Federal Reserve to follow the governor's lead in aiding AIG, saying: "The first goal of both New York and the federal regulators is to restore confidence and stabilize the markets."

Though states regulate insurers, most of the giant banks headquartered in the city are overseen by federal officials.

The Federal Reserve on Monday asked JPMorgan Chase and Goldman Sachs to explore arranging $70 billion to $75 billion in loans to shore up AIG, among other options, according to a person familiar with the situation.

DiNapoli, blaming U.S. regulators for ignoring banks' "excessive risks and over-leveraging of capital," added that without more "rational risk management," the collapse of Lehman "could be a crippling blow to American financial markets and our economy."

Bloomberg, a billionaire who founded the news agency that bears his name, said he had spoken with the Securities and Exchange Commission about reining in short-selling and been assured this was a top priority.

"The fact is, our financial system cannot continue to stand this game of speculators preying on the weakest firms -- and trying to destroy them by profit," the mayor said, adding that the country's future was linked to "our ability to work together instead of trying to tear each other down."

Bloomberg also faulted Congress, saying that due to politics, oversight of banks and brokerages was still divided among committees in a way that no longer made sense because financial companies are often involved in many areas.

He also said the greater disclosure required of U.S. corporations is one of the greatest strengths of this country's markets, saying Sarbanes-Oxley rules largely were successful, though they could be simplified for smaller companies. His commission, which looked at ways to keep the city competitive, had criticized some of these strict rules.

But Bloomberg stood by other commission recommendations, saying, for example, that immigration should be reformed so that talented foreigners are not barred from the United States.

(Reporting by Joan Gralla; Editing by Dan Grebler)