Sarbanes urges tougher bank, hedge fund regulation

By Sudip Kar-Gupta

PARIS (Reuters) - Former Sen. Paul Sarbanes, behind one of the most sweeping set of finance reforms since the Great Depression, said on Friday investment banks and hedge funds needed tighter regulation amid the global subprime crisis.

Sarbanes said a recent move by the U.S. Federal Reserve to rescue Wall Street investment bank Bear Stearns BSC.N had to be accompanied by stricter controls of a sector that has racked up billions in losses from the credit crunch.

"I don't think you can set access to the Fed in this unprecedented manner without more oversight from the Fed and other agencies," said Sarbanes, speaking after an Institutional Investor Educational Foundation conference in Paris.

"It's not a free pass. I think they'll review the investment banks more closely than they have in the past."

In 2002, Sarbanes co-authored the Sarbanes-Oxley corporate reform law after a wave of corporate scandals that began with the 2001 bankruptcy of U.S. utility giant Enron Corp. and telecoms group WorldCom.

The Sarbanes-Oxley Act has been praised for restoring investor confidence following the Enron and WorldCom scandals but also criticized for overburdening firms with regulation.

The act has also been blamed for New York losing out on stock market listings to London, where authorities have opted for a less rigid form of regulation.

However, Sarbanes said the New York regulatory environment still had advantages over London and that many emerging markets companies who have listed on London's secondary AIM market might have difficulties meeting U.S. requirements.

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"Many of these companies wouldn't qualify to begin with in New York. Companies get a premium for listing on the U.S. capital markets," he told the conference earlier.

Credit rating agencies faced criticism over their role during the Enron and WorldCom crises for not having spotted signs of problems at those companies.

Those same agencies are again in the firing line over the subprime debacle for having handed out investment grade ratings to debt-laden assets later regarded as "toxic waste".

Sarbanes said politicians were considering how to make those agencies more accountable. "They're being looked at in Congress."

He was also in favor of hedge funds registering with the U.S. Securities & Exchange Commission (SEC). "I think we need to know more about the hedge fund world."

Sarbanes added that the SEC possibly needed more funding to cope more effectively with the turbulent financial environment.  Continued...