Address financial crisis, calmly

The crisis that has swept the financial markets in the past few months, beginning with the collapse of The Bear Stearns Cos. Inc. of New York and continuing with the bailout of Fannie Mae and Freddie Mac, and now the government takeover of American International Group Inc. of New York, makes obvious the need to revamp totally the nation’s financial-markets regulation.

While the measures proposed by Treasury Secretary Henry Paulson Jr. and the administration last week address some of the short-term problems, they do not remove the necessity for a complete revamping of financial regulation.

But the country doesn’t need rushed, ill-thought-out regulatory reform done in a political panic or feeding frenzy. Rather, we need considered, clear-sighted, thoughtful regulation based on a thorough understanding of why the crisis occurred and how similar disasters might be avoided.

Before any regulation is proposed, Congress should establish a commission to examine the causes of the mortgage bubble and collapse, and why that spilled over into the broader capital markets. Weak regulation wasn’t the only cause.

The model would be the Brady Commission, which examined the causes of the 1987 market crash and proposed regulatory changes.

In any examination of this crisis, fingers will certainly be pointed at the Federal Reserve for the excess liquidity it pumped into the economy during the 2003-07 period, which inflated the real estate bubble.

Fingers will be pointed at the Securities and Exchange Commission for not permanently banning naked short selling, for abolishing the uptick rule and for not demanding better transparency in derivative securities.

The role of mark-to-market accounting standards in deepening the crisis should be considered.

Fingers should be pointed at Congress itself for pressuring banks and other mortgage lenders to make more mortgages in low-income areas.

Borrowers in those areas weren’t alone in not being able to make the 20% down payment conventional mortgages often demanded.

Congressional pressure contributed to the development of low- or no-down-payment mortgages that contributed greatly to the crisis.

The crisis extended, obviously, into middle- and upper-class borrowers.

Another factor was that investment technology in the past two decades has outrun the ability of financial managers and regulators to understand, control and regulate it.

This greatly magnified the crisis, which otherwise might have affected only the real estate and mortgage industries, and perhaps inflicted some damage on Washington-based Fannie Mae and Freddie Mac of McLean, Va.

Also contributing, no doubt, was a breakdown in the regulation of mortgage lenders and brokers, some at the state level.

No one monitored brokers who pushed homebuyers into inappropriate mortgages so they could buy homes they couldn’t afford, and now are losing.

Another factor was the inability of ratings agencies to analyze thoroughly and rate accurately the collateralized mortgage obligations, collateralized debt obligations, etc., that Fannie, Freddie and the investment banks produced.

Only after examining all the factors that contributed to the crisis should Congress attempt to draft modern financial-industry regulation.

The administration wants to see a package sometime this week.

While Congress should conduct a review and develop a new regulatory framework for the financial realities of the 21st century, it needs to be done in a deliberate manner.