Paul Sarbanes gives his views on the US sub-prime crisis

US regulators should be more aggressive in dealing with the sub-prime crisis, according to Senator Paul Sarbanes, who is in Singapore for a business talk.

Mr Sarbanes, who co-authored the Sarbanes-Oxley Act – hailed as the most far-reaching reforms of American business practices – said some mortgage lending practices should have never been allowed.

US investment bank Bear Stearns is the latest high-profile casualty of the US sub-prime crisis.

The global credit crunch has also caused market players to lose confidence, according to Mr Sarbanes. He said it stems from the failure to use business judgement and prudence when it comes to loan extensions.

He added that the US Congress is now considering legislative measures to address the sub-prime issue. He said some areas include how credit rating agencies assess the credit worthiness of securities issuers.

The lending practices of banks should also be more tightly regulated, requiring them to ascertain the income of borrowers to ensure they could service the loan.

Mr Sarbanes said, “I am very sceptical about the teaser rates, they are inducing people to come in at a very low rate and then jumping that rate on people.

“I think the regulators need to examine more carefully the amount of leveraging that is taking place by some of these financial entities…”

Mr Sarbanes also shared how the Sarbanes-Oxley Act can help protect investors. The Act was passed into US law in 2002 in the wake of the Enron and WorldCom accounting scandals.

However, the law was criticised for significantly raising compliance costs for US-listed companies.

Mr Sarbanes said, “The SEC (Securities and Exchange Commission) and the oversight board are giving a revised guidance on auditing standards, particularly as it affects smaller public companies.

“I think that cost should be regarded in some respect… (as) a capital cost – you make the investment, you put it in place and then you use it year after year. And studies have shown that there’s been a declining cost in subsequent years.”

Mr Sarbanes also said the provisions in the Act have been recognised as best practices and implemented in some European and Asian countries.

Source : Channel NewsAsia – 19 Mar 2008

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