At a hearing on Capitol Hill Wednesday, lawmakers grilled regulators over plans to put greater oversight on the financial sector to prevent another economic crisis. At a separate hearing Treasury Department officials were asked whether American taxpayers are getting their money's worth for the bailout of the banking industry.
The head of the Securities and Exchange Commission, expressed support for U.S. President Barack Obama's plan to expand government oversight over financial products that were previously unregulated. "I believe the plan makes real progress in filling gaps in our regulatory landscape that became apparent in the wake of the financial crisis," said Mary Schapiro in testimony before the House Financial Services Committee.
Specifically, she discussed the new power the SEC will have to regulate derivatives - financial products whose value is based on other assets such as home loans. Many have blamed these complicated instruments for contributing to the economic downturn.
Gary Gensler, head of the Commodity Futures Trading Commission, told lawmakers that businesses that deal in derivatives should be held to higher standards.
"For the dealers, we should set capital standards and margin requirements to help lower risk. We should set business conduct standards to guard against fraud manipulation and other market abuses. And we should also mandate record keeping and reporting with an audit trail to promote transparency," he said.
But those opposed to expanding power for government regulators noted that their oversight had failed in the past. Some lawmakers pointed out that they had missed oncoming crises despite numerous warnings, including the collapse of AIG and the Bernie Madoff investment fraud scandal.
"The premise is wrong: that we suffered from a lack of regulation. It wasn't lack of regulation, it was regulators making mistakes and frankly some dumb regulation," said Representative Jeb Hensarling, a Texas Republican.
Congress is considering President Obama's regulatory reform legislation, which would also seek to give more power to the U.S. central bank, the Federal Reserve.
Later, the House Financial Services subcommittee on Oversight and Investigations held a hearing about efforts to repay taxpayers for the money that was invested in banks in a huge government bailout program.
The Troubled Asset Relief Program sets aside $700 billion to lend to banks in order to help stabilize the financial system. But now that banks have begun paying back some of the money the Treasury is trying to find a way to sell off the warrants - contracts for future stock -- that they received in return.
The Treasury has two options: sell the warrants back to the banks, or sell them at an auction.
The Treasury Department Assistant Secretary for Financial Stability, Herb Allison, told Congress that the department is working to give taxpayers the best deal.
"As my colleagues and I work on this important financial security effort, we will strive to be prudent investors on behalf of the American people and to protect the taxpayers who have entrusted us with so much of their money," he said.
It is a difficult matter because warrants are not traded like other investments, and there are several ways to value them. Therefore the government could lose money if banks buy these warrants back at lower prices.
It was announced Wednesday that the financial institution Goldman Sach's bought back warrants from the Treasury Department for $1.1 billion - the full price Treasury had asked for. The Democratic Chair of the House Financial Services Committee, Barney Frank of Massachusetts, praised the move, saying Goldman Sachs "did the right thing."
