Treasury officials wary of excessive regulation
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.
A recent proposal to subject foreign investment in sensitive U.S. assets to security reviews, even if they were for stakes smaller than 10 percent, has drawn sharp criticism from authorities in China, Britain and elsewhere.
Lowery said the low U.S. savings rate -- he called it the country's weakest economic fundamental -- means the U.S. is in no position to refuse foreign investment, which creates jobs and wealth.
"If anything, we should be looking at figuring out ways to get investment to continue to flow, because that's really what's in our national security interest," he said, adding "part of our national security is having a healthy economy, and that includes attracting investment."
David Marchick, managing director of government and regulatory affairs at buyout firm Carlyle, said at the same conference that most foreign investments carry no security implications, while those that do are reviewed accordingly.
"We have a process in place that's very strong and has a good track record," he said.
Sovereign wealth funds from China, Abu Dhabi, Dubai, Kuwait, Singapore and elsewhere have invested in giant U.S. financial firms such as Citigroup (C.N), Morgan Stanley (MS.N) and Blackstone Group (BX.N) in recent years.
Marchick added that the attitude toward foreign investment had improved significantly since the Dubai Ports deal. Dubai Ports World's DPW.DI planned purchase of a British company that owned U.S. ports in 2006 drew a wide range of criticism from U.S. lawmakers and others arguing the investment could endanger national security.
"The more Congress has learned about sovereign wealth funds, the more comfortable they are, and they recognize that they provided liquidity at a critical time," he said after the conference.
(Additional reporting by Megan Davies; Editing by Gary Hill)
