Economic Outlook: Regulating hot potatoes

NEW YORK, June 16 (UPI) -- Asian markets turned sharply lower Tuesday following a broad sell-off in U.S. stocks triggered, in part, by negative manufacturing data.

Market movement included hotel chain Extended Stay filing for bankruptcy Monday. On Tuesday, General Motors Corp said it had agreed to sell its ailing Swedish automotive producer Saab to niche automaker Koenigsegg Automotive AB backed by a group of European investors.

In Asia, the Nikkei average dropped for the second consecutive day, losing 2.86 percent, 286.79 points, to 9,752.88, losing its grip on the coveted 10,000-point mark that it hit last week. The Hang Seng index in Hong Kong fell 1.8 percent to 18,165.50. The Singapore Straits Times lost 1.23 percent to 2,288.16, while the S&P/ASX in Australia dropped 1.72 percent to 3,962.50.

European markets held up, however, with the FTSE 100 in London up 0.52 percent to 4,348.54. The DAX 30 in Frankfurt gained 0.23 percent to 4,901.22. The CAC 40 in Paris gained 0.32 percent to 3,229.94. The broader DJStoxx 600 gained 0.25 percent to 209.54.

In Washington, the Obama administration said its overhaul of the regulatory system would take on the Gordian knot of bundled mortgage securities that helped bring the financial system to its knees when defaults began rising at the start of the recession.

At issue are asset-backed securities that were supposed to be safe, but ended up as bundled risk, creating "a serious market failure that fed the housing boom and deepened the housing bust," Treasury Department spokesman Andrew Williams told The Washington Post.

The mortgages originate with employees who are paid to sell loans without having to face any repercussions if the loans go into default. Investors then rely on rating companies to assess the securities, a system that proved badly flawed in the current financial crisis. The banks, having sold the loans for short-term profits, have incentive to write more loans, as short-term profits are deemed better than long-term risks.

It's an equation that figures quite differently, however, when you change the terminology from banks selling long-term risks to banks selling long-term responsibility.

The Obama administration said it would seek to have employees paid gradually for loans they write and to have banks hold on to some of the loans they now sell. The thinking is that banks would take less risk if forced to hold onto some of the loans.

While the economy is good, no one complains. As the economy soured, however, holding onto troubled assets looked more and more like a nightmarish version of a game of hot potatoes.

The administration will push the Securities and Exchange Commission to make data on these securities available to investors and set guidelines for standardized contracts. Rating companies, frequently paid by banks, will be required to disclose conflicts of interest.

"There may be parts of this proposal where the industry disagrees, but we pledge to work closely with the administration and global policymakers on this vital topic," George Miller, executive director of the American Securitization Forum told the Post.