U.S. may need new agency to deal with crisis: Volcker

By Kathy Skipper

NAPLES, Florida (Reuters) - Former Federal Reserve chairman Paul Volcker said on Monday that the U.S. government may have to set up a temporary, new agency with its own resources to deal with the financial crisis rocking global markets.

Volcker told a conference in Naples, Florida, that the fall of investment banks Lehman Brothers and Bear Stearns and the sale of Merrill Lynch showed the entire financial system needed a revamp and that the sky-high pay of company executives needed to be reined in to sensible limits.

"We have a failed financial structure," he said at the Global Financial Leadership Conference.

Volcker said the impersonal trading mechanisms of modern markets were heavily engineered to spread risk, to "cut and paste" both good and bad obligations.

"Unfortunately, instead of spreading risk, it has concentrated risk. It has made it more opaque, not more transparent," he said.

"I have personally, and reluctantly, come to another conclusion. It may require a new government instrumentality, powers that neither the Federal Reserve nor the Treasury enjoy at the present. But the basic idea of an organization with resources of its own, with professional, non-partisan management and limited life is timely."

Global stockmarkets fell on Monday after Lehman Brothers filed for bankruptcy protection, rival Merrill Lynch agreed to be taken over, and the Federal Reserve threw a lifeline to the battered financial industry. Insurer American International Group also sought emergency help.

That came just after the U.S. government intervened in mortgage firms Freddie Mac and Fannie Mae and six months since the collapse of Bear Stearns, all brought down by the implosion of the once booming U.S. housing market and a crippling credit crunch that rocked the world in its wake.

Volcker said the status quo could not deal with the situation fully.

"We cannot count on benign regulators and supervisors. There are structural things that need to be changed," he said.

Volcker also expressed the widely held view that some fundamentals of the broader U.S. economy needed to change. The United States had been consuming too much for too long, and was too dependent on capital from overseas.

He said exports and real savings had to increase to provide a more solid foundation to the U.S. economy and consumption patterns needed to become more sustainable.

"I have been around for quite a while and I've seen crises come and go, and this is a big one," Volcker said.

"Nonetheless, we are handling it and as we work through it, it's going to take steady hands, patience, a willingness to innovate and non-partisan politics, even in an election year."

(Editing by Michael Christie)