- If even the Americans themselves can't figure out how widespread and extensive the fallout will be in the States, what more the rest of the world?
- Who believes rating agencies anymore, anyway? Aren't these the same folks who give debtlodocus americanus a triple-A rating for its sovereign debt?
- Don't we already have a Bank of International Settlements (BIS) doing some oversight?
- Haven't the Americans already signed up to Basel II regulations on banking supervision? Why weren't provisions concerning all these newfangled financial instruments given more consideration? We can't go back to the drawing board again...
Politicians, regulators and financial specialists outside the United States are seeking a role in oversight of American markets, banks and rating agencies in the wake of recent problems related to subprime mortgages.
Their argument is simple: The United States is exporting financial products, but losses to investors in other countries suggest that American regulators are not properly monitoring the products or alerting investors to the risks.
"We need an international approach, and the United States needs to be part of it," said Peter Bofinger, a member of the German government's economics advisory board and a professor at the University of Würzburg.
While regulators in the United States have not been receptive to the idea in the past, analysts said that Europe and Asia have more leverage this time around. Washington might have to yield if it wants to succeed in imposing bilateral regulations on state-owned investment funds from emerging economies.
"America depends on the rest of the world to finance its debt," Bofinger said. "If our institutions stopped buying their financial products, it would hurt."
Banks and investment funds from China to France were recently hit with heavy losses after buying mortgage-related securities and complex financial products originating from the United States. In many cases, investors were caught by surprise because American rating agencies gave the products top ratings, leading buyers to believe there was little risk. International investors are also asking why American banks were allowed to give mortgages to home buyers who could not repay them.
"In a globalized economy with hedge funds, leveraged buyouts and all these investment funds, we have to ask the question about more transparency," said Claude Bébéar, the chairman of the supervisory board of AXA, one of the world's largest insurers.
Half a dozen U.S. banking and financial regulators - including the Securities and Exchange Commission and the Federal Reserve Board - would not comment. Several mentioned, however, that they were not the sole regulators of the subprime market.
In Europe, the credit crisis appears to have emboldened those who have pushed for stricter international rules for some time.
The German government was rebuffed by Washington and London earlier when it pushed for an international code of conduct for hedge funds. Now some economic advisers to the German government are going further, suggesting that rating agencies should be nationalized, that large-scale loans be registered publicly and that minimum standards be developed for complex debt securities.
The head of the French Council of Economic Analysis, which advises the prime minister, said hedge funds should be subject to stricter disclosure rules about their risk exposure.
Christian de Boissieu, president of the group and a member of the Committee for Credit and Investment Institutions, which helps regulate the French banking sector, is also calling for a global register of all hedge funds. In addition, he said, complex securities should be scrutinized before being authorized for banking portfolios.
President Nicolas Sarkozy of France, who has vowed to "moralize financial capitalism" has asked his finance minister, Christine Lagarde, to prepare a proposal for stricter disclosure rules on market participants before a meeting of the Group of 7 countries' finance ministers in October.
On Monday, in a foreign policy speech, Sarkozy called again for an enhanced global rule book to avoid financial crises.
Such crises could recur, "if the leaders of major countries fail to take resolute concerted action to foster transparency and regulation of international markets," Sarkozy said.
The Chinese central bank said Tuesday that it was moving to standardize information disclosure of all asset-backed securities as it expands its own market for these financial instruments. Information about loans, terms and borrowers will need to be included in any new securities that are introduced in China, it said.
The United States and Britain are the genesis of the bulk of the world's sophisticated financial products, like the ones that broke down recently, in part because Wall Street banks have a big presence in both countries.
"At the heart of the issue is that the largest financial institutions continue to innovate and create ever more sophisticated products," said Chris Rexworthy, director of enhanced regulatory services at IMS Consulting, a London compliance consulting firm, and a former regulator with the British Financial Services Authority.
Regulators around the world talk about the importance of stress-testing, Rexworthy said, but the recent developments create concerns that "institutions are either not investing enough effort in this, getting it wrong, or just producing things too complex for their risk-assessment models to cope with," he said. "Greater cooperation on the international stage between regulators is undoubtedly one of the things we need to see more of."
U.S. regulators are aware of the problem. American banking and financial services regulators conducted a series of surveys and reviews dating back to 2005 that found that credit standards had loosened for home loans, and that borrowers in some cases did not understand or qualify for the loans they were given.
Some financial institutions are managing the risk from nontraditional mortgage loans by following more prudent underwriting, the U.S. Federal Deposit Insurance Corporation said in September 2006, while some are "spreading the risk of these products to investors."
Some American regulators have been pushing for more international cooperation in general. The Securities and Exchange Commission has been discussing greater hedge fund oversight in recent months, and it signed several cooperation agreements with regulators from China to Germany in the past 18 months.
The commission is a "very active member" of the International Organization of Securities Commissions, the global body that brings together all securities regulators, said Andrew Larcos, the international group's public affairs officer. "They do understand the need for closer international cooperation." Still, he added, because the subprime mortgage loans that kicked off this current crisis were primarily from the United States, the situation "obviously raises questions about how that market is regulated."
In the United States, much of the blame is being focused on rating agencies, which are paid by banks for rating products, and who sometimes attached investment-grade ratings to securities that turned out to be less so.
Joseph Mason, a finance professor at Drexel University in Philadelphia, and Josh Rosner, the managing director of the research firm Graham Fisher, have pushed for more oversight of rating agencies.
"It's not just the U.S. regulators that failed, though they did fail," Rosner said. International banking regulators have "thrown the keys to the rating agencies," which have been left in charge of the safety and soundness of bank capital, insurance and pension money.
In Australia, where investors have embraced financial products like derivatives and swaps, several hedge funds were hard hit by exposure to subprime loans, and analysts said they expected it would be months before the extent of the problem is seen.
As geographical boundaries are broken down, "a problem in one location is a problem everywhere," said Dick Bryan, a professor of economics at the University of Sydney. In the aftermath of a credit crunch, "there is the need to challenge the sovereignty of national regulators - why should the rules of lending in the U.S. be left to U.S. regulators when the consequences go everywhere?"
Asian nations were pushing for some regional cooperation even before the credit crisis, as cross-border investing and their equity markets have boomed. The South Korean market regulator, the Financial Supervisory Committee, has been particularly vocal on the issue.
"Regulators and policy makers in the region are quietly looking at the unfolding developments and asking many questions to themselves about what's happening and what should be done," said Douglas Kim, a spokesman for the South Korea regulator. "Few would doubt that more policy cooperation and coordination are in the region's interest even in times of market calm," he said.
In general, Washington's reaction has been that it wants "no form of oversight," said Kenneth Rogoff, an economics professor at Harvard and a former chief economist of the International Monetary Fund. "We're talking about America's most dynamic export industry."