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MarketWatch, December 4, 2008 article and comments



Frank: More rules on mortgage securitizations

Says House should reject $350 billion to Treasury without loan modification


By Ronald D. Orol, MarketWatch

Last update: 4:10 p.m. EST Dec. 4, 2008

WASHINGTON (MarketWatch) - A key lawmaker on Thursday outlined a broad agenda to hike regulations on securitized mortgage products, hedge funds and beef up controls on executive compensation.

House Financial Services Committee chairman Barney Frank, D-Mass., told consumer advocates that he plans to introduce legislation that would require lenders to have a stake in the mortgage before packaging and selling the loans as securitized products. Mortgage backed assets are considered a key contributor to the financial crisis.

"Should you require the entity that packages up the loans and sells them to retain a certain percentage of the liability?" Frank said. "Don't let people sell 100%."

Frank also said he expects to pass "tougher" across-the-board restrictions on CEO pay packages including a measure that would give investors a so-called "say on pay," a non-binding vote on corporate executive pay packages.

The House approved the measure last year, but lawmakers in the Senate did not bring it up. Frank said he expects to have more support for this and other executive compensation legislation next year in the Senate, which now is more dominated by Democrats.

"When we brought up 'say on pay' bill, people criticized us, 'why weren't we tougher on those people?' I didn't think we had the votes, but now that we do have the votes, I think we're going to be tougher," said Frank.

The House Financial Services Committee is expected to re-consider legislation that would require hedge fund managers to register with the Securities and Exchange Commission and open up their books to regulatory staffers.

In 2006, Frank introduced hedge fund legislation, but it did not gain any support. However, in 2009, Frank said he believed hedge fund regulations has more support, in part because of the financial crisis and more Democratic support. One possibility Frank considered in 2006 would require hedge fund managers that accept capital from public and corporate pension funds to register with the agency.

"In 2006, people believed hedge fund managers were safe if investors in the entity had $1 million to invest," Frank said. "Tell that to a hospital that has several hundred million dollars in a hedge fund and can't get their money back."

Treasury Secretary Henry Paulson's proposal to reorganize financial regulators will also be examined by the committee, but Frank said he expects to work on separating the function of systemic risk protection and investor and consumer protection.

"Those areas have to be kept in separate areas, because the investor and consumer protection will loose out," Frank said.

More on the bank bailout

A congressionally appointed oversight panel will make recommendations for the future of a $700 billion bank bailout fund. Frank told reporters he supported the decision to nominate Harvard Law School professor Elizabeth Warren to the board. Warren, who is speaking at the consumer conference on Friday, has promoted an idea to create a government funded independent Financial Products Safety Commission that would regulate and rate mortgage assets.

"We believe Elizabeth Warren is not going to neglect her responsibility," Frank said. "No better appointment made than putting her on board and the other democratic nominees make her chair on the board."

Frank also told reporters that he would push lawmakers not to approve granting the Treasury Department the second half of the $700 billion bank bailout package without a provision that would require some of that capital be used for loan modification.

Senate Banking Committee Chairman Chris Dodd, D-Conn., also urged more loan modification. "More mitigation, what Shiela Bair is talking about, needs to be done," Dodd said to reporters following a hearing on U.S. automakers' request for federal assistance.

Democratic lawmakers have endorsed a proposal introduced by Federal Deposit Insurance Corp. chairwoman Bair that would use $24.4 billion of the bailout funds to modify mortgages. Bair estimated that her proposal, which so far has been rejected by Paulson, would avert 1.5 million mortgage foreclosures.

"At the very least he would have to agree that some of that money was put to use to foreclosure relief," Frank said.

It's unclear whether President-elect Barack Obama will keep Bair as FDIC chairwoman, despite her efforts to support struggling homeowners. A report Thursday indicated that incoming Treasury Secretary Timothy Geithner may want to replace Bair.

Frank said Bair has support in Congress. "I think she should stay on and I think she should be given a broader role on formulating policy on mortgage foreclosures," Frank said. End of Story

Ronald D. Orol is a MarketWatch reporter, based in Washington.

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