Treasury officials wary of excessive regulation

By Steven C. Johnson and Burton Frierson

NEW YORK (Reuters) - U.S. Treasury officials on Wednesday said the United States should not resort to heavy-handed regulation of financial markets or foreign investment by state-run enterprises and funds.

Robert Steel, the Treasury's undersecretary for domestic finance, said at a Wall Street Journal Dealmakers Conference that recent moves to expand central bank lending to investment banks has brought "a new level of regulatory" engagement with Wall Street firms.

But he stressed that avoiding future credit problems will require better regulation rather than simply more regulation.

"The idea that just piling on more regulation is the antidote isn't right," he said, adding "there's an irony here that the most heavily regulated institutions are probably the homes of the largest amount of problems."

He said the breakdown in U.S. mortgage lending standards played a large role in sparking the global credit crunch of the past year, adding that subprime loans did a lot of good for borrowers with less than stellar credit.

Steel also criticized credit rating agencies, saying they "clearly got it wrong" when they provided top ratings for structured financial products such as collateralized debt obligations, many of which have tanked in value due to the housing slump.

All financial market participants, including regulators, ratings agencies and investors, must raise their standards to avoid more credit problems in future, he said.

Steel conceded that problems in financial markets were having an impact on the U.S. economy but added that progress was being made in sorting out lingering credit issues.

Steel also said the takeover of investment bank Bear Stearns by JPMorgan Chase (JPM.N), engineered in part by officials at the Federal Reserve and U.S. Treasury Department, was not about one institution but about the state of markets.

LIGHT TOUCH FOR SOVEREIGN WEALTH FUNDS

Regulators should also employ a light touch when it comes to vetting investment by state-run wealth funds, even though their activities do raise some concerns, Assistant Treasury Secretary Clay Lowery said on Wednesday.

Speaking at the same conference, Lowery said sovereign wealth funds from the Middle East and Singapore have been responsible investors, while newer funds from China, Russia and South Korea could learn best practices from these and others.

While Treasury will continue to review investments on a case by case basis, he added that "we in the United States should not be looking for transactions to block."

Some lawmakers and economists fear that sovereign wealth funds, thought to control some $3 trillion in assets, lack transparency and may compromise national security by buying into strategic firms or sectors.

The U.S. Treasury heads the inter-agency Committee on Foreign Investment or CFIUS, which is charged with reviewing all foreign acquisitions.