Leach blames Washington derivatives bill's defeat for Orange County mess.

Washington - The failure of lawmaker and regulators to beef up the regulation of derivatives is responsible for triggering Orange County, Calif.'s financial troubles and subsequent bankruptcy filing, Rep. Jim Leach, chairman-elect of the House Banking Committee, said last week.

"Washington's failure to provide adequate oversight of the derivative market was at the heart of this week's bankruptcy filing," the Iowa Republican said in a speech last week to a General Accounting Office conference on banking.

"Blunt questions must be asked in and of Washington," Leach said.

Orange County filed for bankruptcy last week after suffering at least $1.5 billion in paper losses as a result of its investments in derivatives.

In the wake of the bankruptcy filing, Leach questioned why the Clinton Administration did not endorse legislation he introduced in the last Congress that would have improve derivatives oversight and might have curbed state and local government losses similar to those in Orange County.

Leach's bill would have brought the regulation of derivatives under one body composed of the Securities and Exchange Commission, the Commodity Futures Trading Commission, the Federal Reserve Board, and the Treasury Department.

"Why did this administration refuse to endorse the common-sense legislation that I introduced on the subject?" he said, adding that his initiative was based on recommendations from the Fed, the Treasury, the SEC, and a top financial services industry group.

Leach said that derivatives losses reported in the last year alone should have been a catalyst for improved oversight.

"Why did Congress fall to act, despite the litany of derivatives-related losses that accumulated in the private sector last year?" the lawmaker said.

Leach's criticisms didn't stop with Washington. The lawmaker said a fullscale lobbying campaign by the derivatives industry within Congress and the executive branch was a successful tool in blocking his legislation.

He questioned why the industry lodged the campaign against his bill when it "contained no presumptive restrictions but simply enhanced executive branch accountability"

At any rate, self-regulation isn't working, Leach said.

"Just as in banking and S&L regulations the public must be wary of ever allowing the fox to guard the chicken coop, so in: the derivatives arena it must insist that foxes be guarded by more than roosters," Leach said.

"Self-interest is the greatest policeman in the financial community when participants in the economic games find ways to take law into their own hands, the public has no choice but to look for new marshals," Leach added.

Hence, Leach said Orange County's troubles strengthen the case for action from Washington. "A public call for greater law and order is inevitable," he said.

"Government in Washington can no longer credibly continue to rationalize a laissez-faire approach to derivatives oversight," Leach said.

He said derivatives, among others issues including banking reform, will be a top issue for Republicans on the House Banking Committee.

"Republicans on the House Banking Committee are prepared to hit the ground running in three broad areas next year: derivatives review, Glass-Steagall reform, and regulatory consolidation," Leach said.

Leach emphasized that efforts in Washington shouldn't put a damper on the derivatives industry.

"The vast majority of derivatives products and transactions are extraordinarily beneficial to the economy," he said. "The market should be encouraged, not chilled."

Leach warned that lawmakers and regulators shouldn't impose too much burden on the industry. "The role of government should be to strengthen and stabilize the market, not send it offshore," he said. "All markets, particularly financial ones, depend on confidence."

Currently, the Commodity Futures Trading Commission has taken an aggressive approach toward regulating over-the-counter derivatives transactions, including interest rate swaps.

The futures trading agency said earlier that it will reconsider rules put in place during the Bush Administration. The agency concerns are primarily that state and local governments shouldn't always be considered sophisticated investors that are less needy of federal protection.

The Securities and Exchange Commission is expected to release guidelines next week it has drafted with top securities industry representatives for the operations of affiliated over-the-counter derivatives firms that have, for the most part, escaped government regulation.

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