U.S. financial oversight reform needed: Obama adviser

By Kevin Drawbaugh

DENVER (Reuters) - An economic adviser to Democratic presidential candidate Barack Obama said on Monday that U.S. financial regulation needs modernizing, but hedged on how big a role to give the Federal Reserve.

Laura Tyson, former chair of the Council of Economic Advisers in the Clinton administration, said that in the Obama campaign's view, "We need to look seriously at how to modernize our regulatory structure."

She said in an interview with Thomson Reuters that she personally believes the Fed failed to crack down on subprime mortgage lending in recent years.

That needs to be taken into account when deciding whether to give the central bank a primary role in a revamped system, said Tyson, seen by some investment group strategists as a contender for Treasury secretary in an Obama administration.

"What we have learned from the past two years ... is that the old form of regulation is broken," Tyson said.

"The exact form of the reform is something that we are learning about," she said.

The Fed has already broadened its role in ensuring stability by engineering the recent sale of investment bank Bear Stearns and helping other investment banks deal with the sharpest U.S. housing market slump since the Great Depression.

U.S. Treasury Secretary Henry Paulson has suggested that the Fed's role in regulating the system should be strengthened.

Federal Reserve Chairman Ben Bernanke suggested on Friday at a Fed conference that financial supervision be revamped to take into account the health of the entire system, broadening the mandate of regulators and supervisors.

Tyson said, "Before we go to the conclusion that the Fed should be the single regulator, I believe personally that there was a significant failure of regulation by the Federal Reserve that was part of this crisis."

She said, "There was no effort to take a rule we already have, a regulation we already have, to try to rein in the subprime market lending."

Any financial oversight revamp is highly unlikely to take place until after a new president takes office in January.

(Editing by Howard Goller)