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(Recasts first paragraph; adds Biggert, Frank, Stiglitz comments)
By Kevin Drawbaugh
WASHINGTON, Oct 21 (Reuters) - The long road to U.S. financial oversight reform began to take shape on Tuesday at a congressional hearing where many lawmakers clamored for more transparency in exotic debt securities.
With markets in turmoil over the worst financial crisis in generations, members of a House of Representatives committee sharply criticized bankers for a decade-long surge in leverage, risk and mortgage-lending abuses that produced a bonanza for a handful of elite investors, but a disaster for the economy.
As emergency measures to bail out banks and stabilize markets are implemented in the Bush administration's last days, Congress in the months ahead will tackle longer-term reforms likely to reshape the Washington-Wall Street relationship.
"Our financial regulatory system is broken and needs to be fixed," said New York Democratic Rep. Gary Ackerman.
A top goal must be to "never again have the taxpayers pay for Wall Street's mistakes," said Illinois Republican Rep. Judy Biggert at the House Financial Services Committee hearing.
Some committee members said they support forming a congressional select committee to deal with the issue.
"That's a reasonable idea," committee Chairman Barney Frank told reporters after the hearing.
The Massachusetts Democrat also said he favors a moratorium on bonuses for executives of Wall Street firms.
"There should be a moratorium on it, on bonuses, yes," he said. "They have a negative incentive effect because they are the ones that say, if you take a risk and it pays off you get a big bonus. But if it costs money, you don't lose anything."
Frank said the moratorium should be in place until firms can devise new compensation schemes that eliminate the "perverse incentives" of the existing bonus system.
The committee's hearing was the first of many to come, with Congress expected to tackle issues as broad as redefining what a bank is, and as specific as closing offshore tax shelters.
Lawmakers at the hearing called for more disclosure by hedge funds and private equity firms, as well as more openness in markets for credit default swaps -- one of the many complex financial instruments behind the global credit crunch.
Credit rating agencies failed to do their jobs, lawmakers said, while debt piled up, the home-price bubble grew and regulators fell hopelessly behind rapid innovation that spawned a tangle of complex new debt instruments.
"Part of the problem in the past was that we had regulators who didn't believe in regulation," said Nobel Prize-winning economist Joseph Stiglitz, a witness at the hearing.
The Columbia University professor urged Congress to do more soon to stem the tide of home foreclosures engulfing many U.S. families. "We need to do something about the foreclosure problem and that needs to be done quickly," he said.
The future of housing finance giants Fannie Mae FNM.P and Freddie Mac FRE.P, seized by the government last month, needs clarity, lawmakers said.
In addition, lawmakers said, they will try again next year to bring order to the patchwork of federal agencies that regulate banking, markets and financial services.
Frank urged members to look forward to 2009 at the hearing, but partisan bickering erupted.
Republicans blamed Democrats for allowing Fannie and Freddie to run amok in the markets and the halls of Congress. Democrats replied that Republicans for years failed to rein in the companies while in charge of Congress and the White House.
The Bush administration and Congress in recent weeks have scrambled to stabilize the financial system, injecting hundreds of billions of taxpayer dollars into markets, seizing control of failing institutions and buying stock in major banks.
Former Federal Reserve Vice Chairman Alice Rivlin, now a senior fellow at the Brookings Institution think tank, assured lawmakers at the hearing that recent cries about creeping socialism and the downfall of capitalism were overheated.
"But market capitalism is a dangerous tool," she said. "Like a machine gun or chainsaw or nuclear reactor, it has to be inspected frequently to see that it is working properly and used with caution according to carefully thought out rules."
Resetting the rules will be Congress' job next year, with either Democratic Sen. Barack Obama or Republican Sen. John McCain in the White House. Rivlin urged lawmakers to approach the task with an open mind.
"Getting financial market regulation right is a difficult, painstaking job. It is not a job for the lazy, the faint-hearted or the ideologically rigid -- applicants should check their slogans at the door," she said. (Reporting by Kevin Drawbaugh with additional reporting by Karey Wutkowski and Rachelle Younglai; Editing by Tim Dobbyn)