How to restore confidence in the system?

As federal regulators continue to unveil new measures to reverse the global financial crisis, Congress on Tuesday began weighing what changes might be needed to restore confidence in the U.S. financial system and prevent future crises. Here are five proposals being considered by the House Financial Services Committee, which will be instrumental in drafting regulatory changes:

1. Creating a special committee of Congress to draft the upcoming regulatory overhaul. Broad membership on such a committee could bridge the gaps that have resulted in the agriculture committees, not finance panels, having jurisdiction over the futures markets, where contracts for future deliveries of oil, natural gas and farm products are sold. Wall Street investment banks, which fall under the finance committees, have pumped trillions of dollars into commodities markets. Some critics charge that this distorted these markets and pushed up the price of oil and a number of farm products to record levels earlier this year. Joel Seligman, president of the University of Rochester, said Congress should establish a single select committee to address the problem rather than have competing committees with different jurisdictions pursue an ad hoc approach.

2. Giving the Federal Reserve expanded powers. The Fed has pushed the limits of its authority with numerous steps to bolster markets since March, when the financial crisis began snowballing. These include lending to investment banks, corporations and even foreign central banks, none directly under its regulatory umbrella. In the crisis, the Fed has acted as the top regulatory cop, but in many areas it lacks sufficient authority. On Tuesday, the Fed unveiled another new effort to restore confidence, this time shoring up the $1.7 trillion money market mutual fund industry by agreeing to backstop as much as $540 billion worth of lending. Fed Chairman Ben Bernanke said last week that he was powerless to prevent the bankruptcy of investment bank Lehman Brothers because of his limitations under existing law.

3. Merging some regulatory agencies and increase their scope. Among the possibilities is merging the regulators of banks and thrifts into a single entity, and merging the Securities and Exchange Commission with the Commodity Futures Trading Commission to reflect that Wall Street now is deeply entrenched in markets for a wide array of products other than stocks. Said Alice Rivlin, a former Fed vice chairman and now a researcher at the Brookings Institution, a public-policy organization in Washington: "The number of regulators should be less than we have now; we clearly have a lot of duplication.

4. Bringing exotic financial instruments, such as credit default swaps, under regulation for the first time. Credit default swaps promise payment to investors in mortgage bonds in the event of a default. These swaps and derivatives were excluded from the last overhaul of commodity trading rules in 2000, and credit-default swaps were prominent in September's collapse of global insurer American International Group. AIG was the leading issuer of swaps, but after paying out more than $18 billion on bets against mortgage bonds, it lost the confidence of investors. That prompted the Fed to step in with an $85 billion loan to prevent the potential collapse of the unregulated swap system. The SEC and the CFTC are vying for the right to regulate swaps. The Federal Reserve Bank of New York also has been working with the financial industry to create a transparent mechanism for settling contracts between buyers and sellers of swaps.

5. Investigating whether certain accounting rules should be loosened as Republicans and industry groups would like. They complain that the rules, which require companies to account for their assets at the price they could get if they had to sell them, can needlessly erode an institution's balance sheet.

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