http://www.bloomberg.com/apps/news?pid=20601068&sid=ac9RIF2WhmMo&refer=economy
July 11 (Bloomberg) -- The U.S. Treasury Department's top domestic-finance official and a Federal Reserve governor said investor losses from subprime-mortgage delinquencies aren't posing broader risks to the financial system.
Robert Steel, a Treasury undersecretary, said at a House Financial Services Committee hearing today that the sell-off in subprime securities ``does not seem to be a systemic issue.'' The Fed's Kevin Warsh told the same panel that the losses ``don't appear to be raising, to this point, systemic risk issues.''
The officials spoke amid concern that losses on bonds backed by subprime mortgages, made to the riskiest borrowers, will ripple through Wall Street. Bear Stearns Cos., the fifth-biggest U.S. securities firm, last month was forced to lend $1.6 billion to one of its hedge funds to rescue it from immediate collapse following bad bets on subprime mortgages.
The market ``is going through an adjustment process,'' Steel, a former executive at Goldman Sachs Group Inc., told the hearing in Washington. ``It seems to be happening in an orderly way.''
Warsh, a former Morgan Stanley investment banker, said that ``our overall view is that there are certainly losses, that we might not be at the bottom of this tumult.'' At the same time, ``we don't see any immediate systemic risk issues that are brought to bear,'' added Warsh, a White House aide on financial- markets policy before joining the Fed.
`Very Real Losses'
Subprime mortgages are ``generating very real losses'' for investors, Warsh said without specifically mentioning New York- based Bear Stearns.
At the hearing, the U.S. Securities and Exchange Commission's top market-regulation official, Erik Sirri, said Bear Stearns will likely resolve problems with its funds in an ``orderly fashion.''
Credit Suisse Group analysts this week estimated investors have lost as much as $52 billion amid the sell-off in the $800 billion market for mortgage securities backed by subprime loans. Moody's Investors Service yesterday lowered the credit ratings on $5.2 billion of bonds backed by subprime mortgages.
``The losses that have been felt by hedge funds and other financial intermediaries are certainly forcing them to go back to first principles, revisit their exposures,'' Warsh said. ``What we're trying to do in our supervisory capacity is ensure that they still have adequate cushions, that they still have sufficient capital, so that they can operate robustly.''
Banking Picture
In addition to setting interest rates, the Fed is one of several U.S. bank regulators and was established in 1913 with the goal of mitigating or preventing financial panics.
Philadelphia Fed President Charles Plosser said in London today that most banks remain in ``good shape'' as subprime losses mount. Referring to the ratings cut by Moody's, he said in answering questions after a speech today ``I don't think that was entirely unanticipated. Sometimes I buy a stock thinking it will go up and it doesn't.''
Asked about the possibility of a credit crunch, Plosser said he's a ``little less concerned'' about that happening compared with previous similar incidents.
The House hearing's principal topic was financial-system risks from hedge funds. The private pools of capital that allow managers to share in gains have avoided strict U.S. regulation because they cater to wealthy individuals and pension funds rather than less-affluent investors.
Frank's View
Barney Frank, the Massachusetts Democrat who chairs the Financial Services Committee, said hedge funds pose potential risks to the financial system and that the existing federal regulatory structure may not be adequate to handle them.
``We have a kind of an easy consensus that there is a potential problem here that we wish we were more sure about how to approach,'' he said.
Frank told reporters after the hearing that he planned to hold hearings later this year on rating agencies and the way they graded subprime mortgage bonds. ``Some of them appear to have been overvalued,'' he said.
U.S. financial regulators in February concluded after a review of hedge funds that market discipline, rather than regulation, is the best way of policing risks. Steel reiterated that view today, while noting that the guidelines set by the President's Working Group on Financial Markets were no ``endorsement of the status quo.''
Warsh said in his prepared testimony that said global banks need to make ``further progress'' in managing risks from hedge funds and that the Fed's hands-off regulatory stance doesn't mean the government will be ``passive.''
Under questioning, Warsh said that ``we're not in the business of trying to ensure that there aren't losses but only to ensure there are capital cushions, risk management processes and proper oversight to ensure that those losses don't become systemic.''
