Sept. 15 (Bloomberg) -- Democratic presidential nominee Barack Obama said regulation of Wall Street needs to ``catch up'' with changes in financial markets, and investors can't expect taxpayers to bail them out in bad times.

Obama said the role of ratings services must be examined as part of any revamping of the way markets are monitored and regulated, and he suggested that he doesn't favor having the government stepping in to rescue failing firms.

``The idea that taxpayers can continue to be on the hook for failures at firm after firm after firm I think is a real problem,'' Obama said in an interview tonight with Bloomberg Television.

Obama, 47, and his Republican rival, John McCain, are calling for tighter government regulations following the collapse of New York-based Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm until last week.

Separately, Bank of America Corp., the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. for about $50 billion. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are trying to arrange financing for American International Group Inc., the biggest U.S. insurer by assets, to plug a $70 billion to $75 billion financing gap, according to people familiar with the situation.

Volatility

Investors and government officials are worried that Lehman's bankruptcy, the biggest in history, will trigger more volatility in the financial markets, crimp credit-market liquidity and further slow an already sluggish economy.

Obama blamed the crisis in the housing and financial markets on the failure of President George W. Bush's administration to monitor markets and push for new systems of oversight.

He argued that McCain would continue Bush's economic policies, which the Illinois senator blames for creating conditions for the Wall Street meltdown and housing-market rout.

It's ``premature to offer up'' detailed prescriptions to prevent a similar crisis in the future, Obama said in the interview tonight from Denver.

He said Treasury Secretary Henry Paulson was correct in calling for a streamlined regulatory system and that the Federal Reserve can't be expected to shoulder the whole load. Nor, he said, can the government bail companies out of risky ventures.

`Extraordinary Risks'

``Whether it's Freddie Mac or some of the investment banks, at some level what you had is a situation in which investors and management at these firms were taking extraordinary risks with enormous upside when the market was good, but you can't have a situation where you expect the taxpayers to foot the bill when times are bad,'' he said. ``I think Secretary Paulson understands that at some point the markets are going to have to solve some of these problems.''

Obama said a new regulatory system must be significantly more transparent. Just as after the stock market cash of 1929 banks had to maintain certain capital requirements in exchange for government support, some of today's non-traditional banks must have same kind of transparency and accountability, he said.

Obama singled out credit-ratings companies as in need of closer scrutiny.

Rating Debt

``There's a lot of work that has to be done in examining the degree to which ratings agencies were involved in making some of this debt, some of the leverage that was taken on, look like it was much safer and less risky than it was,'' he said. ``So that's a whole area that we have to examine.''

The financial-industry distress comes as Obama is trying to calm fears among Democrats that he's not doing enough to respond to McCain's attacks and the Republican's recent momentum in polls. McCain's choice of Alaska Governor Sarah Palin as his running mate has energized conservative Republicans, who had been lagging in their support of the Arizona senator, 72.

The financial crisis sparked an exchange of attacks today on the campaign trail and both candidates consulted with Paulson as well as their own advisers.

Obama talked this morning with his top economic advisers, including former Treasury Secretary Robert Rubin and former Federal Reserve Chairman Paul Volcker. While his campaign issued a statement early, Obama, who was traveling to Colorado from Chicago in the morning, didn't speak about the crisis until almost five hours after Arizona Senator McCain, 72, made his first public remarks in Jacksonville.

McCain's campaign also quickly released a television ad, with shots of the Lehman Brothers and New York Stock Exchange building emblems, that says ``our economy is in crisis'' and ``only proven reformers McCain and Palin can fix it.''

To contact the reporters on this story: Kim Chipman in Denver at kchipman@bloomberg.net; Peter Cook in Washington at pcook6@bloomberg.net.

Last Updated: September 15, 2008 23:29 EDT