Congress tackles Wall Street reform
Finance experts testify on Capitol Hill over the need for regulatory restructuring of the finance industry.
NEW YORK (CNNMoney.com) -- Members of Congress, fiscal experts and Wall Street lobbyists gathered Tuesday to discuss ways to change regulation of the finance industry to shore up its foundations and prevent future crises.
"We must recognize that regulation is needed to prevent systemic collapse," said Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises.
Kanjorski vowed to reign in Wall Street excesses, focusing on what he called the "shocking" behavior of executives from the battered insurance giant AIG (AIG, Fortune 500), which hosted a $440,000 conference just days after taking out a $85 billion loan from the U.S. government, which has since swelled to a credit line of nearly $123 billion.
To prevent future failures and abuses, Kanjorski said the Federal Reserve must monitor corporate spending and executive pay caps from companies like AIG. He called for "genuine transparency," particularly with hedge funds, private equity firms, credit default swaps and other derivatives. Kanjorski said the government must take measures to prevent the failure of companies that cause "disastrous, ricocheting effects elsewhere."
Rep. Barney Frank, D-Mass., chairman of the Financial Service Committee, moderated the hearing. Speaking after Kanjorski, fiscal expert Alice Rivlin, the founding director of the Congressional Budget Office, testified that blame for the problem is nationwide, and not just on Wall Street.
"Americans have been living beyond our means, individually and collectively, for a long time," said Rivlin, who under the President Clinton administration served as vice chairman to the Federal Reserve Board and director of the White House Office of Management and Budget.
"We have been spending too much, saving too little, and borrowing without concern for the future from whomever would support our over-consumption habit - the mortgage company, the new credit cards, or the Chinese government," she said.
Rivlin recommended changes to regulations in the mortgage industry to alleviate future problems: requiring minimum down payments and proof of ability to pay, and making sure that the debtor understands the rates.
The government's takeover of the collapsed mortgage giants of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) in September precipitated the current financial crisis, widely considered the worst since the Great Depression of the 1930s.
Since then, the government rescued AIG while allowing Lehman Brothers to fail, and Congress approved a $700 billion bailout to buy bad mortgage investments from Wall Street firms. Massive consolidation has hit the finance industry, with Bank of America (BOC) acquiring Merrill Lynch, JPMorgan (JPM, Fortune 500) acquiring Washington Mutual and Wells Fargo (WFC, Fortune 500) taking over Wachovia.
Dr. Joseph Stiglitz, a professor at Columbia University who won a Nobel prize in 2001 on the subject of market transparency, testified Tuesday that the "trickle-down economics" of bailing out Wall Street should be accompanied by a "comprehensive recovery program" to prevent further problems.
"We are giving a massive blood transfusion to a patient who is hemorrhaging from internal bleeding - but we are doing almost nothing to stop that internal bleeding," he said.
The hearing included testimony from two other experts: Joel Seligman, president of the University of Rochester and former Fed vice chairman Manuel Johnson of the financial advisory firm JohnsonSmick International.
In addition, the hearing received testimony from chief executives representing various Wall Street lobbyist organizations.
Michael Washburn of Red Mountain Bank in Hoover, Ala., representing the Independent Community Bankers of America, and Edward Yingling of the American Bankers Association both said the banking industries were completely separate from the turmoil on Wall Street.
Both of them criticized the "mark-to-market" system of reporting asset valuations as partly responsible for the troubles. Washburn said this type of accounting - which periodically require firms to declare the value of their assets - forces companies to report these values at "irrational levels."
Yingling said the mark-to-market system was "simply incompatible with the banking system as we have come to know it."
Steve Bartlett of The Financial Services Roundtable said the regulatory system was too "fragmented," suggesting that it be standardized nationwide.
"[Federal and state regulators] do not share a common vision or operate under common principles that balance consumer and investor protection, market integrity and stability, and even competition," said Bartlett.
Timothy Ryan of the Securities Industry and Financial Markets Association suggested that regulation be standardized globally, to reflect that the fact that the markets are international.
"We need a global approach to financial regulatory reform," said Ryan. "Close cooperation among policy makers on an international basis will play an important part in effectively addressing weaknesses in financial regulation." 
