Gregg urges change in financial regulation

Congress needs to cut the number and strengthen the “breadth” of federal regulators in financial services to prevent companies from shopping for the weakest one, which led to the $85 billion government loan rescue of American International Group, said U.S. Sen. Judd Gregg.

Gregg, who strongly endorsed the AIG deal, was in the group of House and Senate leaders that Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke privately briefed about it Sept. 16, the night the deal was hammered out.

“Clearly one of the things that is coming out of this whole situation is we have too many regulators, and what you see is these aggressive financial entities shopping around for the weakest regulator,” Gregg said during a telephone interview. “We need to streamline down to one or two that have breadth and the strength to go after these companies, create transparency so that people know the underlying risk.”

AIG created a holding company that offered insurance-like guarantees to back up billions of investments in financially risky loans, activity that went unregulated but it would have been had a bank or insurance firm done it.

The firm’s financial reach into the world economy was too large for the federal government to ignore once private investors refused to prop it up, Gregg said.

“Economic expansion would have basically come to a halt, banks would be closing left and right, money would not be lent and job producers would not be able to get loans because there would be a massive contraction of the economy,” Gregg said.

The state’s senior senator said AIG’s failure would have caused many banks and investment houses here and overseas to follow.

“This was a big deal, and it wasn’t only a big deal for our economy but the world economy,” Gregg said.

The AIG loan represents what Gregg likened to the “end of the beginning” or the last, threatened collapse that represented a fundamental threat to the economy.

“There will be some other institutions that will fail, some very big ones I am afraid, and a fair number of banks, but they are going to be containable,” Gregg said. “Nobody on Main Street is threatened.”

New Hampshire Banking Commissioner Peter Hildreth said state banks remain healthy because they didn’t invest in subprime mortgages.

“I’d be hard-pressed to see a direct impact here, except for how it’s affecting the global market, that this will affect our banks,” Hildreth said.

It’s too early to know whether a government-created entity, such as a Resolution Trust Corp., should be formed to buy these subprime assets to give them more value prior to a discount sale, Gregg said.

When Gregg was governor, federal officials created an RTC that sold assets when overeager development and a real estate depression led to the closure of most of the state’s major banks.

“Are we at a point where we need an RTC? We are at a point where we should be willing to discuss it in a non-inflammatory, non-partisan environment,” Gregg said. “I don’t know if we need it.”

Both presidential campaigns are seizing on the issue and trying to lay political blame that is misplaced, he added.

“This is a serious fiscal problem that was not brought on by one party or the other, it was brought on by a systemic failure that was the gross expansion of debt and easy credit in the real state markets,” Gregg said.

“We are further into the presidential campaign and seeing hyperbole from both camps. That is politics, but it’s not constructive.”