More bank regulation a certainty
NEW YORK (Reuters) - If markets are to regain a semblance of sanity, financial sector regulation must be tightened or overhauled to ensure that excesses that led to the global market crisis are not repeated soon, or ever.
At the Reuters Global Finance Summit this week, experts said keys to restoring market confidence are to make investments and their accounting methods less secretive, to ensure capital levels are sufficient, and to reduce risk.
"One of the greatest flaws in the system was really understanding what was going on," said Gary Parr, deputy chairman of the investment bank Lazard Ltd (LAZ.N). "There's going to be more regulation and transparency. That will be one of the major events of the next year, if not two years."
Years of lax or eased oversight may be coming to an end.
The reasoning? No longer should a Lehman Brothers Holdings Inc (LEHMQ.PK) carry a bloated balance sheet; or a Washington Mutual Inc (WAMUQ.PK) stuff $176 billion of home equity, adjustable-rate and subprime loans on its books; or a Merrill Lynch & Co Inc MER.N take on massive exposure to collateralized debt obligations that no one understood.
Many experts believe Democrats, fortified by the election of Barack Obama as president and gains in Congress, will make a serious effort in 2009 to overhaul the regulatory landscape, perhaps even merging the government's oversight agencies.
"I think it is on top of their agenda," said Robert Kapito, president of asset manager BlackRock Inc (BLK.N). "We need major process changes, major infrastructure changes, major regulatory changes. There's no question about that."
MORE TRANSPARENCY NEEDED
Some fear any new regulatory fervor could go too far.
"Re-regulation of the financial sector, particularly in the U.S. but worldwide and Europe, is one of the big issues," said Rick Waugh, chief executive of Bank of Nova Scotia (BNS.TO). "Is there an overreaction on capital levels? Is there an overreaction on where you should, or should not, do business?"
Still, aggressiveness could be justified, said Denis Salamone, chief operating officer of Hudson City Bancorp Inc (HCBK.O), a large New Jersey mortgage lender that has sidestepped the credit crisis.
"It's deserved if it goes overboard a little bit," he said. "The industry, right across the board from sophisticated Wall Street firms that created the trusts and the CDOs, down to the intermediaries that made the loans, and in many cases borrowers' irresponsibility, will require more regulation."
Structural changes may be particularly hard to make in light of the politics and power struggles involved.
A March proposal by U.S. Treasury Secretary Henry Paulson to shuffle responsibilities among agencies and give more power to the Federal Reserve has had only limited impact, though pieces of his plan could yet come to fruition.
Paulson and Fed Chairman Ben Bernanke agreed that market disruptions showed the need to overhaul rules on financial behavior. Rep. Barney Frank, a Democrat who chairs the House Financial Services Committee, has long advocated structural change among regulators.
Pouring $700 billion into the financial industry won't be enough, especially as it's unclear where all the money will end up.
Several experts, speaking at the Reuters Summit, called for more transparency to ensure that a company's critical decisions and assumptions don't end up in a black box.
American International Group Inc (AIG.N), once the world's largest insurer by market value, spent years goosing profits with complex derivatives known as credit default swaps that were tied to the performance of risky debt such as subprime mortgages.
"Investment banks said, 'Why don't we just package these loans, and we will bring them over to the rating agency and get them rated.' So they did, and they got 'triple-A' ratings," said Maurice "Hank" Greenberg, who ran AIG until 2005. "Nobody seemed to understand what was (in) these packaged loans."
As a result, the government rescued AIG with a bailout that has ballooned to $150 billion from an original $83 billion. In return, the government has taken a nearly 80 percent stake in
AIG.
Edward Liddy, AIG's new CEO, has said even the $150 billion may not be enough.
NO KRYPTONITE
AIG, Lehman, Merrill and Washington Mutual are hardly the only casualties of the detritus that had long won the seal of approval from investors, major credit rating agencies and Wall Street.
"For anybody that told me in the last six months, 'I know what the losses are, I believe I know what the losses are for any big bank,' I would just say 'nonsense,'" Parr said.
One certainty is that regulation will reduce risk-taking. That's especially true at former investment banks Goldman Sachs Group Inc (GS.N) and Morgan Stanley (MS.N), which converted into bank holding companies and must reduce leverage.
"They have said they won't look very different. It's hard for me to see that," said Meredith Whitney, the Oppenheimer & Co analyst. "It is banks that all of a sudden thought that they had kryptonite powers that have to come back to earth."
Some experts worry that excessive regulation could inhibit growth, adding to pressure on an already-distressed economy.
"Too much regulation means businesses can move to other places in the world," said Donald Marron, the former PaineWebber chief who now runs private equity firm Lightyear Capital.
But with countries such as Great Britain, Iceland and the Netherlands seeing some of their own lenders go up in smoke, any changes in the United States won't take place in a vacuum.
"Some kind of rules, minimum capital rules, it seems to me, are necessary so no bank is able to take undue risk in borrowing too much, or have assets that are too risky," said John Whitehead, a former chairman at Goldman.
"I'm sure the setting of those regulations is still ahead of us," he added. "And I hope that they are done with wisdom."
(For summit blog: summitnotebook.reuters.com/))
(For more on the Reuters Global Finance Summit, see [ID:nN10403323])
(Additional reporting by Lynne Olver; editing by Jeffrey Benkoe)
