New financial watchdog considered

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By David R. Sands

The federal agency that managed the bailout of the savings and loan industry in the 1980s and 1990s has emerged as the leading model to contain the fallout from Wall Street's current meltdown.

But while the Senate and House financial services committees plan hearings next week, top congressional Democrats say any major overhaul of the government's financial regulatory agencies will have to wait until next year.

"We're in new territory," said Senate Majority Leader Harry Reid, Nevada Democrat. "This is a new game and we're going to have to figure out what to do."

With Congress set to adjourn at the end of the month, Mr. Reid said he planned to keep the Senate in a "pro-forma session" in part so committees will still be able to hold hearings if another financial crisis arises.

House Financial Services Committee Chairman Barney Frank and former Federal Reserve Board Chairman Paul Volcker are among those mulling a new agency along the lines of the S&L-era Resolution Trust Corp. (RTC) to manage a massive backlog of bad real estate investments that have rocked the markets and led to the effective federal seizures of Fannie Mae, Freddie Mac and insurance giant American International Group Inc.

Mr. Frank, Massachusetts Democrat, told CNBC Wednesday that the Bush administration's pattern of "ad hoc intervention" had to be changed.

"We have to consider whether or not we need to create another entity," Mr. Frank said.

The RTC was credited with limiting the losses from the S&L scandal by taking real estate projects and other assets from failed lenders and holding on to them until private investors regained the money and confidence to buy them. The agency managed nearly $400 billion in assets from some 747 failed S&Ls over its six-year history, which ended in 1995.

Mr. Volcker, former Reagan Treasury Secretary Nicholas F. Brady, and former Clinton banking regulator Eugene A. Ludwig urged the creation of a new RTC in a joint op-ed article published Wednesday in the Wall Street Journal.

"Until there is a new mechanism to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further and we will have to live through the mother of all credit contractions," they warned.

One difference between the S&L debacle and today's Wall Street meltdown is that the federal government had clear title to the assets of federally insured savings and loans when they failed in the 1980s.

Even with the seizure of mortgage giants Fannie Mae and Freddie Mac and the effective takeover of AIG, the Treasury does not directly own the bad assets that are dragging down the market.

Senate Banking, Housing and Urban Affairs Committee Chairman Christopher J. Dodd, Connecticut Democrat, told reporters Wednesday that setting up a new rescue agency could take months. The Federal Reserve, he argued, already has the authority to directly insure some $300 billion in troubled mortgages under a law Congress passed in July.

"Debating whether or not you're going to set up some new agency is a nice point, but I don't think we have the luxury of waiting another year," he said.

While slamming what they called the Bush administration's record of lax market regulation that failed to head off the recent crises, congressional Democrats declined to criticize Treasury Secretary Henry M. Paulson Jr.'s decision Tuesday to organize the $85 billion rescue plan for AIG.

"I don't think anyone wants to be second-guessing the decision at this point," said Sen. Byron L. Dorgan, North Dakota Democrat. "We want to get the economy back on track."