Look Who's Pushing For More Regulation

All over town, Republican lawmakers are bashing overzealous regulation from the likes of the Food & Drug Administration and the Environmental Protection Agency. But there's a notable exception. As the derivatives mess spreads from companies to local governments, some new GOP barons on Capitol Hill sense they can't appear indifferent to a possible threat to the nation's financial system. So they may lean on regulators to force an industry cleanup.

Agencies such as the Securities & Exchange Commission and Commodity Futures Trading Commission already are flexing their muscles against excesses in the derivatives markets. On Dec. 22, the SEC and CFTC settled fraud cases against Bankers Trust New York Corp., which was accused of misleading a corporate customer about the value of its derivatives investments. The SEC recently adopted rules for more disclosure by municipalities that issue public securities, and it's probing the Orange County, Calif., debacle. The CFTC has emphasized it will attack dealers it believes commit fraud.

For some Republicans, more vigilant regulation isn't enough. On Jan. 4, House Banking Committee Chairman James A. Leach (R-Iowa) introduced a bill requiring more disclosure by derivatives dealers and buyers. And Senate Banking Committee Chairman Alfonse M. D'Amato (R-N.Y.) scheduled Orange County hearings on Jan. 5-6. "Washington can no longer credibly continue to rationalize a laissez-faire approach to derivatives oversight," says Leach.

But political reality will force the Republicans to rely on the agencies to help show Washington's concern. That's because hardly anyone thinks a bill will pass Congress soon.

"LONG SHOT." For one thing, other issues will distract lawmakers. The Contract With America will dominate the first 100 days of the House. And while Leach has been the most vocal champion of the need for action, he will make regulatory consolidation and reform of Depression-era laws separating commercial and investment banking activities his highest priorities. Derivatives legislation this session is "a long shot," says one congressional staffer.

It's not hard to see why. Industry lobbying against such a bill is one problem. So are jurisdictional squabbles between House committees and the sheer complexity of the subject. "You can't pass a law that prevents people from taking the wrong risks," says one executive of a derivatives dealer.

The industry is adopting tougher self-regulatory measures in hopes of deterring Congress from passing legislation. Bankers and Wall Street are drafting codes of conduct for over-the-counter instruments, including derivatives, and the National Association of Securities Dealers is developing sales-practice rules for government securities that include derivative instruments. That may help forestall Congressional action. But it won't stop new GOP leaders from cheering the regulators on.

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