Charles Dharapak/AP
President Barack Obama and Treasury Secretary Tim Geithner speak with reporters as
they meet in the Oval Office of the White House on Thursday.

Will the TARP Oversight Report Change Anything?

January 30, 2009 02:00 PM
by Anne Szustek
The Congressional Oversight Panel released a report Thursday detailing regulatory slip-ups leading to the current recession. What action, if any, will the Obama administration take?

COP Report Lays Down the Oversight Law

The Congressional Oversight Panel, or COP, stated in its report that financial regulators fell short in recent years in managing “risk, but also failed to require disclosure of risk through sufficient transparency.”

Three of the five-member panel, chaired by Elizabeth Warren, Harvard University professor and outspoken critic of the Troubled Assets Relief Program (TARP) moved to approve the report. The two dissenters were Republicans Rep. Jeb Hensarling of Texas and former N.H. Sen. John E. Sununu, who released their own report that stressed regulatory shortcomings to “consolidate, strengthen and increase regulatory oversight of Fannie [Mae] and Freddie [Mac],” the two mortgage companies that came under government conservatorship last year. They also called for the Securities and Exchange Commission and the Committee Futures Trading Commission to be merged.

The 109-page COP document acknowledges the cyclicity of economic downturns; namely that they have happened every 15–20 years since America’s independence. But the past several downturns have been less intense than the current recession, mainly because of the regulatory framework implemented during and after the Great Depression.

The COP argues that the relative economic calm led to complacency and a push against regulation, casting it out as “a barrier to efficient functioning of the capital markets rather than a necessary precondition for success. This change in attitude had unfortunate consequences.” The report continues: “As financial markets grew and globalized … the U.S. regulatory system could have benefited from smart changes. But deregulation and the growth of unregulated, parallel shadow markets were accompanied by the nearly unrestricted marketing of increasingly complex consumer financial products that multiplied risk at every stratum of the economy, from the family level to the global level.”

Also called out were a lack of oversight on consumer finance, namely “excesses in mortgage lending”; risk management of financial institutions that were considered “too big to fail,” especially with regard to short selling; and more accurate credit ratings for companies issuing risky investments.

“If companies issuing high-risk credit instruments had not been able to obtain AAA ratings from the private credit rating agencies, then pension funds, financial institutions, state and local municipalities, and others that relied on those ratings would not have been misled into making dangerous investments,” wrote the report.

The findings in the report about how the economy got to its current state surprised few observers. The focus now is on the panel’s recommendations for how to fix it.

Background: COP Recommendations

If the COP’s recommendations are implemented expect to see the return of more rigid regulations. A formal exchange for credit-default swaps, a financial instrument considered to have contributed in large part to the conditions that led to the current recession, would be in the works, as well as a credit rating review board.
The report recommends that the SEC approve more National Recognized Statistical Rating Organizations and curb corporations’ payments to rating agencies, rather having firms pay money to a body that would select a ratings agency at random.

Hedge funds would have to register with the SEC and be subject to occasional accounting oversight. Derivatives investors would have to have a minimum amount of capital and have limits on their leveraging capabilities.

Reference: Congressional Oversight Panel: Special Report on Regulatory Reform

Related Topic: Cities battle against apparently dubious mortgage lenders

The cities of Baltimore, Md., and St. Paul, Minn., are spearheading the Multi-City Litigation Group, a coalition of several U.S. cities in a quest to go after allegedly unscrupulous mortgage lenders, to work to reduce the number of foreclosures, save urban neighborhoods blighted by the mortgage crisis and tighten the legal reins on subprime mortgage purveyors.

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