WASHINGTON (AP) - Faced with rising economic anxiety and the high-profile
rescue of a major investment bank, lawmakers are considering sweeping changes to
financial regulation and a massive effort to buy troubled home loans.
While they debate what if anything more should be done, frustrations are
building that Congress, which is halfway through a two-week recess, and the Bush
administration aren't doing enough to combat the economic impact of falling home
prices, banks' unwillingness to lend freely and a seized-up market for
mortgage-linked investments.
"These people have to get past stepping on each other's toes and kicking
each other in the shins and get out and start providing some leadership," said
James Cox, a Duke University law professor and securities law expert.
Housing industry groups are preparing to lobby hard for help when Congress
returns from recess March 31. Arguing that the stimulus package signed by
President Bush last month doesn't aid the housing sector enough, builders want
more-- including a new tax credit for people who buy homes.
"The housing economy has been the root cause of this recession," said Jerry
Howard, chief executive of the National Association of Home Builders. "Unless
you do something to shore up the housing markets, we're not going to be able to
get out of this situation."
Rep. Barney Frank, D-Mass., chairman of the House Financial Services
Committee, and Sen. Christopher Dodd, D-Conn., who heads the Senate Banking
Committee, are crafting a plan in which the Federal Housing Administration would
guarantee up to $300 billion in refinanced mortgages in exchange for agreements
from investors to take a loss on those loans.
That proposal gets a warm reception from the mortgage industry, which
desperately seeks a way to set a value for mortgage securities that have become
nearly impossible to sell. Fixing that is crucial, said Francis Creighton, vice
president for legislative affairs at the Mortgage Bankers Association.
"When you don't know where the bottom (of the market) is, you just hold off
and you invest in something else," he said.
Regulators are taking urgent steps to shore up the market for mortgage
investments. The Federal Reserve earlier this month allowed investment firms to
borrow up to $200 billion in safe Treasury securities and put up mortgage-backed
securities as collateral. On Monday, regulators authorized the 12 regional banks
in the Federal Home Loan Bank system to increase purchases of Fannie Mae and
Freddie Mac mortgage securities by $100 billion.
Democrats and Republicans did compromise last month on an economic stimulus
package that sends checks of up to $1,200 to 130 million households later this
year.
However, replicating that cooperation on thornier issues, such as whether
the government should do more to aid homeowners or tighten investment bank
regulation will be tough, especially in a politically charged presidential
election year.
Democrats are trying mightily to cast the Bush administration as more
sensitive to the concerns of bankers than homeowners, hoping to build momentum
for their own proposals. Already under the microscope on Capitol Hill: the
near-collapse of Bear Stearns Cos., which saw billions of dollars in market
value nearly evaporate over three days, and the questions it raises about the
Fed's role in an 11th-hour rescue by JPMorgan Chase & Co.
In a weekend scramble earlier this month, the central bank provided $30
billion in backing for that deal, raising concerns that the Fed, and ultimately
U.S. taxpayers, could wind up on the hook.
JPMorgan on Monday boosted its offer for Bear Stearns to $10 per share from
$2 a share, aiming to soothe angry Bear Stearns shareholders who say the company
is being undersold.
The new agreement calls for the Fed to assume control of $30 billion of Bear
Stearns' assets, which will be managed by New York-based investment firm
BlackRock Inc.
Going forward, if there are losses on those assets, JPMorgan will take
responsibility for the first $1 billion, with the Fed responsible for further
losses. The arrangement, and the potential risks it poses to taxpayers, is sure
to bring scrutiny from lawmakers.
A key question is whether the Fed is setting an inappropriate precedent with
Bear. In the Senate, Max Baucus, D-Mont., has trained his finance committee's
oversight on the transaction's impact on taxpayers. Rep. Henry Waxman, D-Calif.,
who heads the House Oversight and Government Reform Committee, is collecting
information for an inquiry, a committee aide said last week.
The Bear Stearns meltdown has also prompted calls for tighter controls over
investment banks -- including stricter cushions against losses -- and brings up
issues not tackled since 1999, when Congress tore down the legal wall separating
banks, securities firms and insurers.
An ineffective and unwieldy patchwork is how critics see the current
regulatory system, in which the Fed, divisions of the Treasury Department and
the Securities and Exchange Commission each have jurisdiction over different
types of financial institutions.
Frank last week unveiled a proposal to give the Fed or a new regulator the
power to supervise the operations of major financial players, whether they be
banks, investment firms or hedge funds.
The Bush administration has its own ideas and is expected to propose a
legislative "blueprint" for financial regulation reform soon. A broader role for
the Fed as an "umbrella" regulator is expected to be included, but the thrust is
toward easing what are considered onerous regulatory burdens.
Rep. Vito Fossella, R-N.Y., hopes the Bear Stearns meltdown provides an
opportunity to examine the sometimes-overlapping powers of bank regulators, but
cautions against quick fixes. "We have to renovate the house and not just slap a
coat of paint on it and say we've solved the problem," he said.
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