Obama Calls for Closer Scrutiny of Credit-Ratings Agencies

By Peter Cook and Kim Chipman

Sept. 16 (Bloomberg) -- Democratic presidential nominee Barack Obama said investors shouldn't expect taxpayers to bail them out when financial markets are in turmoil and proposed closer scrutiny of credit-ratings services.

The Illinois senator, reacting to the collapse of New York- based Lehman Brothers Holdings Inc., said regulation of Wall Street needs to ``catch up'' with changes in financial markets.

``Whether it's Freddie Mac or some of the investment banks, at some level what you had is a situation in which investors and management at these firms were taking extraordinary risks with enormous upside when the market was good, but you can't have a situation where you expect the taxpayers to foot the bill when times are bad,'' Obama said in an interview yesterday with Bloomberg Television.

Obama, 47, and his Republican rival, John McCain, are calling for tighter government regulations in the wake of Lehman's bankruptcy, which came after Bank of America Corp. and Barclays Plc walked away from takeover talks. The collapse of Lehman dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.

Separately, Bank of America, the biggest U.S. consumer bank, agreed to acquire Merrill Lynch & Co. for about $50 billion. Goldman Sachs Group Inc. and JPMorgan Chase & Co. are trying to arrange financing for American International Group Inc., the biggest U.S. insurer by assets, to plug a $70 billion to $75 billion financing gap, according to people familiar with the situation.

More Volatility

Investors and government officials are worried that Lehman's bankruptcy will trigger more volatility in the financial markets, crimp credit-market liquidity and further slow an already sluggish economy.

Obama blamed the crisis in the housing and financial markets on the failure of President George W. Bush's administration to monitor markets and push for new systems of oversight.

He argued that McCain would continue Bush's economic policies, which the Illinois senator blames for creating conditions for the Wall Street meltdown and housing-market rout.

It's ``premature to offer up'' detailed prescriptions to prevent a similar crisis in the future, Obama said in the interview from Denver.

He said Treasury Secretary Henry Paulson was correct in calling for a streamlined regulatory system and that the Federal Reserve can't be expected to shoulder the whole load. Nor, he said, can the government bail companies out of risky ventures.

Market Solutions

``The idea that taxpayers can continue to be on the hook for failures at firm after firm after firm I think is a real problem,'' he said. ``I think Secretary Paulson understands that at some point the markets are going to have to solve some of these problems.''

Obama said a new regulatory system must be significantly more transparent. Just as, after the stock market cash of 1929 banks had to maintain certain capital requirements in exchange for government support, some of today's non-traditional banks must have same kind of transparency and accountability, he said.

Obama singled out credit-ratings companies as in need of a closer study of their practices.

Less Risky

``There's a lot of work that has to be done in examining the degree to which ratings agencies were involved in making some of this debt, some of the leverage that was taken on, look like it was much safer and less risky than it was,'' he said. ``So that's a whole area that we have to examine.''

A U.S. Securities and Exchange Commission investigation into credit-rating companies including Standard & Poor's, the largest ratings agency, and Moody's Corp., the second biggest, found in July that the firms improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds.

News about Lehman and broader financial-industry distress comes as Obama is trying to calm fears among Democrats that he's not doing enough to respond to McCain's attacks and the Republican's recent momentum in polls. McCain's choice of Alaska Governor Sarah Palin as his running mate has energized conservative Republicans, who had been lagging in their support of the Arizona senator, 72.

The financial crisis sparked an exchange of attacks yesterday on the campaign trail and both candidates consulted with Paulson as well as their own advisers.

Obama talked with his top economic advisers, including former Treasury Secretary Robert Rubin and former Federal Reserve Chairman Paul Volcker. While his campaign issued a statement, Obama, who was traveling to Colorado from Chicago early yesterday, didn't speak about the crisis until almost five hours after McCain made his first public remarks in Jacksonville.

McCain's campaign also quickly released a television ad, with shots of the Lehman Brothers and New York Stock Exchange building emblems, that says ``our economy is in crisis'' and ``only proven reformers McCain and Palin can fix it.''

To contact the reporters on this story: Kim Chipman in Denver at kchipman@bloomberg.net; Peter Cook in Washington at pcook6@bloomberg.net.