Senators press SEC chief

Senators press SEC chief

	Published : Tue, 31 Jul 2007 22:53 By : Agencies Print this Story

WASHINGTON (AP) - With stock markets jittery over mortgage troubles, senators on Tuesday pressed the head of the Securities and Exchange Commission on what the agency is doing about complex mortgage securities and hedge funds, seen as posing risks to the financial system.

The recent turbulence on Wall Street, with last week being the worst for the Dow Jones Industrial Average in five years, appeared to loom as an unofficial guest during SEC Chairman Christopher Cox's testimony before the Senate Banking Committee. The swoon was blamed on investors' growing anxiety that problems in the market for high-priced home mortgages for riskier borrowers could spread to the broader economy.

The downward slide resumed Tuesday, with the market falling sharply as renewed concerns about soured home loans decimated what had looked like a solid recovery rally. The Dow industrials lost nearly 150 points.

'You must remain vigilant that there are no abuses in the packaging of loans into securities' and continue to monitor the role of Wall Street rating agencies in the subprime mortgage debacle, Sen. Jim Bunning, R-Ky., told Cox at the hearing.

During several hours of questioning, several members of the panel underlined concerns about the competitiveness of U.S. financial markets in a fast-changing global economy. Others, mostly Democrats, warned of the potential risks to the system from hedge funds and other high-flying investment vehicles.

'I think we are increasingly getting a clearer picture of what's going on,' Cox said, noting the lack of transparency of hedge funds, large investment pools that operate largely outside of government regulation.

He also said the SEC is 'grappling with how to handle the rising prominence of sovereign wealth funds' -- government investment vehicles which manage assets separately from countries' official currency reserves.

Projected to reach $12 trillion by 2015, 'sovereign wealth funds are larger than all the world's hedge funds combined' and are even less transparent, Cox said.

Cox disclosed in late June that the SEC had started about a dozen investigations related to complex aggregations of debt known as collateralized debt obligations, in which hedge funds have increasingly invested. The situation took on urgency recently after two hedge funds managed by Wall Street investment firm Bear Stearns Co. and invested in such instruments lost practically all their value.

The SEC is not the 'frontline' regulator of mortgage lenders, Cox noted, though it does have oversight of public financial companies that bundle mortgage loans into securities for sale to investors worldwide. The issue 'is a real one and it is one about which the SEC is concerned, and so we will use the tools that we have, in the piece of this that we are responsible for, to go after it,' he said.

In addition, the role of the credit-rating agencies in the high-risk mortgage troubles has been criticized by some lawmakers and regulators, who say the agencies failed to properly evaluate the risks of bonds backed by subprime mortgage loans despite rising delinquencies. A law enacted last fall expands the SEC's authority over the rating agencies and gives the regulators a detailed look into their operations.

The field is dominated by Moody's Investors Service, Standard & Poor's and Fitch Ratings. The ratings can be key factors in determining which securities will be purchased by mutual funds, banks, state pension funds or local governments.

Cox told the senators that the SEC is devoting considerable resources and inspectors to overseeing the rating agencies.

Cox is a member of a White House policy group that has urged increased vigilance, not new government rules, as the best way to handle risks in the trillion-dollar hedge fund industry -- an approach supported by business groups.

But some lawmakers maintain that the burgeoning size of the industry, which is not subject to government regulation, and some stunning recent failures of hedge funds demonstrate the need for stricter controls and inspections.

'I think we have to carefully examine the protections that are in place and whether they are sufficient,' said Sen. Robert Menendez, D-N.J.

Committee Chairman Sen. Christopher Dodd of Connecticut, who is seeking the Democratic presidential nomination and whose state is home to scores of hedge funds, said 'I think hedge funds perform a very, very important and valuable role in the capital markets' but acknowledged that there are concerns.

Last fall, hedge fund Amaranth Advisors lost billions of dollars because of wrong-way bets on natural gas prices, costing the employee pension fund of California's San Diego County an estimated $85 million.

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