New Era of Responsibility for U.S. Financial System?

President Barack Obama’s administration was promising over the weekend quick actions geared to tighten regulations on the U.S. financial system. Changes in the works might include strict federal regulations on hedge funds, credit rating facilities and mortgage brokers. Presidential aides said they planned to propose federal standards for mortgage brokers that issued inappropriate mortgage products and are regulated by state officials, according to a New York Times report Saturday. The Times reported the aides are also considering proposals to increase the Securities and Exchange Commission‘s supervision of underwriting standards of mortgage-backed securities. It was reported by White House aids that regulators may seek greater supervision in the trading of derivatives such as credit default swaps through a central “clearinghouse.” Such proposals are geared to address regulatory shortcomings that led, in part, to the financial crisis, according to the officials. The move toward heavier regulation — along with rumors circulating around possible bank stimulus funds beyond the Treasury Department‘s TARP and Obama’s forthcoming $800 billion-plus economic stimulus package — seem to set the stage for another discussion taking place within the administration: the notion of a nationalized banking system. House speaker Nancy Pelosi on Sunday hinted about nationalization of the largest banks, although she denied any possible “total ownership” strategy, the Times reported Sunday. “Well, whatever you want to call it,” Pelosi said, according to the Times. “If we are strengthening [the banks], then the American people should get some of the upside of that strengthening. Some people call that nationalization.” A group of the largest U.S. banks — Bank of America Corp. (BAC) (with Merrill Lynch & Co.), Citigroup Inc. (C), JP Morgan Chase & Co. (JPM), Morgan Stanley (MS) and Wells Fargo & Co. (WFC) — together have received some $150 billion through the TARP’s capital purchase and targeted investment programs. Counting in the $40 billion bailout of “systemically significant failing” American International Group Inc. (AIG), just six publicly-traded financial institutions have gobbled up $190 billion of the Treasury’s TARP spending power in just three months since the program’s inception. With such a significant share in the banks’ stocks already, the government seems poised to exercise at least some degree of nationalization. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.