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September 10, 2007
Politicians, regulators and financial specialists outside the United States are seeking a role in the oversight of American markets, banks and rating agencies after recent problems related to subprime mortgages.Their argument is simple: The United States is exporting financial products, but losses to investors in other countries suggest that American regulators are not properly monitoring the products or alerting investors to the risks.“We need an international approach, and the United States needs to be part of it,” said Peter Bofinger, a member of the German government’s economics advisory board and a professor at the University of WÃ¼rzburg.While regulators in the United States have not been receptive to the idea in the past, analysts said that Europe and Asia had more leverage now. Washington might have to yield if it wants to succeed in imposing bilateral regulations on government-owned investment funds from emerging economies. “America depends on the rest of the world to finance its debt,” Mr. Bofinger said. “If our institutions stopped buying their financial products, it would hurt.” Half a dozen American banking and financial regulators — including the Securities and Exchange Commission and the Federal Reserve Board — had no comment. Several noted that they were not the sole regulators of the subprime market.In general, Washington’s reaction has been that it wants “no form of oversight,” said Kenneth Rogoff, an economics professor at Harvard and a former chief economist of the International Monetary Fund. Banks and investment funds from China to France suffered losses after buying mortgage-related securities and complex financial products based on them in the United States. In many cases, investors were caught by surprise because American rating agencies had given the products top ratings, leading buyers to believe there was little risk. International investors are also asking why American lenders were allowed to give mortgages to home buyers who could not repay them.“In a globalized economy with hedge funds, leveraged buyouts and all these investment funds, we have to ask the question about more transparency,” said Claude BÃ©bÃ©ar, the chairman of the supervisory board of the insurance company AXA. In Europe, the credit crisis appears to have emboldened those who have long been pushing for stricter international rules. Washington and London rebuffed the German government earlier when it pushed for an international code of conduct for hedge funds. Now some economic advisers to the German government are going further, suggesting that rating agencies should be nationalized, that large-scale loans be registered publicly and that minimum standards be developed for complex debt securities. The head of the Council of Economic Analysis in France, which advises the prime minister, said hedge funds should be subject to stricter disclosure rules about their risk exposure. Christian de Boissieu, president of the group and a member of the Committee for Credit and Investment Institutions, which helps regulate French banks, is calling for a global register of hedge funds. In addition, he said, complex securities should be scrutinized before being sold to bank portfolios. President Nicolas Sarkozy of France, who has vowed to “moralize financial capitalism,” has asked his finance minister, Christine Lagarde, to prepare a proposal for stricter disclosure rules on market participants before an October meeting of finance ministers from the Group of 7. On Monday, in a foreign policy speech, Mr. Sarkozy called again for stronger global regulations to avoid financial crises. The Chinese central bank said yesterday that it was moving to standardize disclosure of all asset-backed securities as it increases its own market for the financial instruments. Information about loans, terms and borrowers will need to be included in any new securities in China, it said.The United States and Britain are the source of the bulk of the world’s sophisticated financial products, like the ones that broke down recently. “At the heart of the issue is that the largest financial institutions continue to innovate and create ever more sophisticated products,” said Chris Rexworthy, director of enhanced regulatory services at IMS Consulting in London and a former regulator with the Financial Services Authority in Britain. Regulators talk about the importance of stress-testing, Mr. Rexworthy said, but recent developments create concerns that “institutions are either not investing enough effort in this, getting it wrong, or just producing things too complex for their risk-assessment models to cope with.” “Greater cooperation on the international stage between regulators is undoubtedly one of the things we need to see more of.” United States regulators are aware of the problem. Regulators have found that credit standards were loosened for home loans, and that borrowers in some cases did not understand or qualify for the loans they were given. Treasury Secretary Henry M. Paulson Jr. said in June that the department was seeking better oversight, increased efficiency and a reduction in overlap in general.Some American regulators have been pushing for more international cooperation. The Securities and Exchange Commission has been discussing greater oversight of hedge funds, and it signed several cooperation agreements with regulators from China to Germany in the last 18 months. The S.E.C. understands “the need for closer international cooperation,” said Andrew Larcos, the public affairs officer for the International Organization of Securities Commissions, the global regulatory body. Still, Mr. Larcos added, because the subprime mortgage loans that started the crisis were primarily from the United States, the situation obviously raises questions about market regulation.In the United States, much of the focus is on rating agencies, which are paid by banks for rating products, and which sometimes attached investment-grade ratings to securities that turned out to be not up to that standard. Joseph Mason, a finance professor at Drexel University in Philadelphia, and Josh Rosner, the managing director of the research firm Graham Fisher, have pushed for more oversight of rating agencies. “It’s not just the U.S. regulators that failed, though they did fail,” Mr. Rosner said. International regulators have “thrown the keys to the rating agencies,” which have been left in charge of the safety and soundness of bank capital, insurance and pension money. In Australia, where investors have embraced financial products like derivatives and swaps, several hedge funds were hard hit by exposure to subprime loans, and analysts said they expected it would be months before the extent of the problem became clear. As geographical boundaries are broken down, “a problem in one location is a problem everywhere,” said Dick Bryan, a professor of economics at the University of Sydney. “There is the need to challenge the sovereignty of national regulators,” he said. “Why should the rules of lending in the U.S. be left to U.S. regulators when the consequences go everywhere?” Asian nations were pushing for regional cooperation even before the latest credit problems, as cross-border investing and their equity markets have boomed. Whether the outcry will result in changes remains to be seen. Soon after the 1997 Asian financial crisis, President Bill Clinton and a number of regulators and politicians pushed to remake the global financial system. But the impetus faded as markets stabilized.Economists now expect an increase in international regulation, particularly because Washington has raised questions about the need to impose standards on large investment funds controlled by countries like Russia and China.Ms. Lagarde, the French finance minister, predicted that negotiations might indeed succeed. “There are a lot of shifts happening,” she said. “Once the dust has settled we will see where the different powers stand and what will be on the bargaining table.”
By HEATHER TIMMONS and KATRIN BENNHOLD
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