The oversight board for the $700 billion Troubled Asset Relief Program has issued a report calling for a revamp of the nation's financial regulatory system, including increased oversight of credit ratings firms, hedge funds and private equity funds.
The board, led by Harvard University law professor Elizabeth Warren, found numerous holes in the current regulatory framework that was created out of the Great Depression and it said has led to current financial crisis.
"The present regulatory system has failed to effectively manage risk, require sufficient transparency, and ensure fair dealings," the board wrote in its report to be issued today.
The board called for an increased regulation in what it terms the "shadow financial system" that includes hedge funds and private equity funds and products such as off-balance-sheet entities like structured investment vehicles (SIVs), which were used by banks to place many mortgage-backed assets and other risky investments that were not reflected on their bottom lines.
It called for greater transparency in the over-the-counter derivatives market.
Another board recommendation is to create a tougher regulation of mortgages and other consumer credit products, including eliminating pre-emption of state consumer laws over national banks. The board also took aim at executive pay packages that encourage excessive risk-taking, suggesting creating tax incentives that encourage pay packages with a long-term orientation and establishing a framework to recover bonus compensation for executives of failing institutions.
The board's Republican members, Rep. Jeb Hensarling of Texas and former Sen. John Sununu of New Hampshire offered a minority report, disagreeing with Warren's call for greater regulation. "History has also repeatedly shown us that adding rigid new government regulations in the midst of a crisis to solve existing problems may be like the old military adage of armies being prepared to fight the last war," they wrote.
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