WASHINGTON--Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said today that Congress will likely move next year to require companies which insure credit default swaps, such as American International Group, to at least partially reserve against potential losses.

In comments at the Consumer Federation of America's annual conference, Rep. Frank labeled AIG's decision to guarantee against losses on mortgage-backed securities backed by sub-prime loans at the holding company level "as unregulated speculation."

At the same time, Rep. Frank sought to douse speculation that Democrats, in control of the White House, and both houses of Congress for the first time since 1993, will impose Draconian regulation on financial services companies.

He said Democrats will not act to "stifle innovation, but to contain it."

He predicted that next year will be the "best year for public policy since the New Deal."

Regarding credit default swaps, he explained that Congress is likely to pass legislation curbing speculation on CDS partly by imposing "some reserving authority" on the unit which sells such guarantees.

"Look at AIG," he said, in citing how Congress will move to place curbs on risk taking by financial institutions.

He said AIG is looking at its regulated insurance entities to pay the debts of its unregulated entities because it sold guarantees on mortgage backed securities through credit default swaps "without regard with the [holding company's] ability to pay claims.

"We will not allow people to do that going forward," he added.

Moreover, he said, Congress will likely move to regulate systemic risk, the sale of securities backed by mortgages and other assets, separately from regulation that moves to protect investors and consumers.

"The bullets" that caused the current problems faced by financial institutions were subprime loans," he said. "The gun that spread it was securitization," he explained.

He said systemic risk will be "regulated by the activity no matter who conducts the activity," while consumer protection will be separately regulated, presumably the entity's primary regulator.

Special Reports /

Rep. Frank Says Congress Will Move To Halter Credit Swaps

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