Frank urges overhaul of business regulations
A new era of business regulation is needed to prevent the excesses that created the subprime mortgage crisis and restore confidence in financial markets, US Representative Barney Frank said yesterday.
Frank, a Newton Democrat and chairman of the House Financial Services Committee, said he expects Congress next year to begin a regulatory overhaul to rein in practices of securities firms and mortgage brokers viewed as responsible for the subprime crisis. That crisis, growing from millions of risky loans made to people unable to pay them, has contributed to record foreclosures, infected financial markets, and helped push the economy toward recession.
This week, the Federal Reserve took extraordinary steps to prevent financial markets from grinding to a halt, engineering the sale of collapsing Wall Street investment firm Bear Stearns Cos.; opening its lending window to securities firms for the first time ever; and making deep cuts in interest rates.
"We now see a situation that more damage was done by inadequate regulation," Frank said. "What we have is a systemic problem, and that's what we want to address."
Frank made his case for a new era of "sensible regulation" to the Greater Boston Chamber of Commerce, arguing that rules protecting consumers and investors build confidence that financial markets need to operate. Much as the federal government stepped in with new regulations to break the predatory trusts of the early 20th century, and later restore the financial system during the Great Depression, it needs to intervene again to clean up the subprime mess and shore up faith in the markets, Frank said.
"Sensible regulation is promarket because it can instill confidence," Frank said.
Securities and mortgage industry groups yesterday agreed that a regulatory overhaul is needed. So did the Bush administration. Jennifer Zuccarelli, spokeswoman for the Treasury Department, said Treasury has reviewed financial regulatory structures over the past year, and is close to completing "recommendations for broad changes."
These reactions show how the subprime crisis has sparked a reassessment of government's role after some two decades of deregulation. During this period, financial innovations, such as bundling loans into complex financial instruments, outstripped regulation, Frank said, and now regulation must catch up.
Commercial banks, subject to stricter oversight, didn't write the risky loans driving record foreclosures, Frank noted. Most problem mortgages emerged from lightly regulated segments of the financial industry, such as mortgage brokers and investment banks.
Loans generated by mortgage brokers are typically sold to investment banks, which bundle them into mortgage-backed securities and sell them to investors. This system relieves lenders of the risk and responsibility of collecting loans, Frank said, and breaks the "discipline of the lender-borrower relationship." Ultimately, regulation must restore this discipline.
In other words, he said, "You don't make loans if you don't think people will pay you back."
Robert Gavin can be reached at rgavin@globe.com. 