By Kevin Drawbaugh
WASHINGTON (Reuters) - Sharply criticizing Wall Street's mismanagement and mania for leverage and risk, lawmakers began on Tuesday what will be a major push in months ahead to overhaul how the government oversees high finance.
With markets in crisis over the worst banking turmoil in decades, the House of Representatives Financial Services Committee held a hearing where lawmakers called for more disclosure by hedge funds and private equity firms.
Markets for credit default swaps -- one of the many complex financial instruments behind the credit crunch -- need to be more open, while the future of mortgage giants Fannie Mae
Credit rating agencies failed to do their jobs, they said, while the debt piled up and regulators fell hopelessly behind the rapid pace of innovation that yielded fortunes for a handful of bankers and a disaster for the American public.
"Our financial regulatory system is broken and needs to be fixed," said New York Democratic Rep. Gary Ackerman.
With elections just two weeks away, committee Chairman Barney Frank, a Massachusetts Democrat, urged members to look forward to 2009, but some partisan bickering erupted.
Republicans blamed Democrats for allowing Fannie and Freddie to run amok in the markets and the halls of Congress. Democrats replied that Republicans for years failed to rein in the companies while in charge of Congress and the White House.
The Bush administration and Congress in recent weeks have scrambled to stabilize the financial system, injecting hundreds of billions of taxpayer dollars into markets, seizing control of failing institutions and buying stock in major banks.
Former Federal Reserve Vice Chairman Alice Rivlin, now a senior fellow at the Brookings Institution think tank, assured lawmakers at the hearing that recent cries about creeping socialism and the downfall of capitalism were overheated.
"But market capitalism is a dangerous tool," she said. "Like a machine gun or chainsaw or nuclear reactor, it has to be inspected frequently to see that it is working properly and used with caution according to carefully thought out rules."
Resetting the rules will be Congress' job next year, with either Democrat Barack Obama or Republican John McCain in the White House. Rivlin urged lawmakers to approach the task with an open mind.
"Getting financial market regulation right is a difficult, painstaking job. It is not a job for the lazy, the faint-hearted or the ideologically rigid -- applicants should check their slogans at the door," she said.
Congress is expected to tackle issues such as mark-to-market accounting, that requires valuing assets at current market values, which Frank said at the hearing will be addressed next year. He said it would be possible to leave mark-to-market accounting in place, but make it more flexible.
Critics of mark-to-market accounting say it has created a downward spiral of writedowns on corporate balance sheets.
Scrutiny is also expected in the months ahead of fundamental questions, such as the definition of what is a bank, which agencies should regulate financial services, and the government's role in the troubled housing finance sector.
(Reporting by Kevin Drawbaugh; Editing by Tim Dobbyn)
