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The head of a U.S. congressional finance panel said Monday he would seek to regulate the fast-growing $55 trillion credit default swaps market, which has been blamed for exacerbating the financial meltdown.
Rep. Barney Frank, a Massachusetts Democrat, said regulation is needed to stem the financial crisis that has rocked Wall Street and shaken investor confidence.
“Failure to regulate the economy appropriately is what led to this mess,” Frank, the chairman of the House Financial Services Committee, told a Capitol Hill news conference.
The committee, which has oversight of the Federal Reserve, Treasury Department and Securities and Exchange Commission, plans to hold hearings on Oct. 21.
Frank said he would seek “sensible” regulation of the credit default swap (CDS) market when the new Congress meets in 2009.
“The turmoil in the market has given us a little bit of a breathing space,” he said. “They have screwed up so badly that they can’t screw up again for a while. Before they gain the ability to screw up, we have to put the (regulations) in place.”
CDS are used to protect or insure against the risk that a borrower will default on debt, or to speculate on a borrower’s credit quality.
Used by banks, brokerages, insurance companies and others, the swaps have been criticized for posing systemic risks because the opaque market makes it impossible to know the size of a counterparty’s exposures and where they are distributed.
Calls for regulation and a central CDS clearinghouse gathered steam after Lehman Brothers Holdings Inc collapsed and U.S. authorities were forced to rescue insurer American International Group with an initial $85 billion loan one month ago, followed by another of $38 billion last week.
It remains unclear which federal regulator might be tapped to police the CDS market, but both SEC Chairman Christopher Cox and a commissioner with the Commodity Futures Trading Commission, Bart Chilton, have called for regulation.
The U.S. House and Senate agriculture committees, which oversee the CFTC, were set to hold hearings this week on the role of credit derivatives in the U.S. economy.
Talk of reforming financial regulation has intensified amid a frozen credit market and worry that more financial institutions teeter on the edge of bankruptcy.
Democratic leaders in the House of Representatives pushed on Monday for a second economic stimulus package and greater regulation of the financial markets.
Former SEC Chairman Arthur Levitt, who led the agency during the Clinton administration, is among a group advising the Democratic leaders.
“There are all kinds of signals that have been sent that this is not an investor-friendly environment,” Levitt told Reuters after a news conference to announce the Democrats’ new economic stimulus package.
“Investors don’t have access to the (corporate) proxy, hedge funds are not inspected by the SEC, we don’t have investors with a non-binding vote on compensation,” he said.
(Reporting by Rachelle Younglai, Thomas Ferraro, Donna Smith; editing by Mohammad Zargham, Gerald E. McCormick, Leslie Gevirtz)