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1
C
ONGRESSIONAL
O
VERSIGHT
P
ANEL FOR THE
T
ROUBLED
A
SSETS
R
ELIEF
P
ROGRAM
S
PECIAL
R
EPORT ON
R
EGULATORY
R
EFORM
 
I. Executive Summary ........................................................................................................................... 3
 
1. Lessons from the Past ........................................................................................................... 3
 
2. Shortcomings of the Present ................................................................................................. 3
 
3. Recommendations for the Future ......................................................................................... 5
 
II. Introduction ....................................................................................................................................... 7
 
III. A Framework for Analyzing the Financial Regulatory System and its Effectiveness ................... 9
 
1. The Promise and Perils of Financial Markets ...................................................................... 9
 
2. The Current State of the Regulatory System ...................................................................... 10
 
Failure to Effectively Manage Risk ........................................................................... 10
 
Failure to Require Sufficient Transparency ............................................................... 14
 
Failure to Ensure Fair Dealings .................................................................................. 17
 
3. The Central Importance of Regulatory Philosophy............................................................ 21
 
IV. Critical Problems and Recommendations for Improvement ........................................................ 24
 
1. Identify and Regulate Financial Institutions that Pose Systemic Risk ............................... 24
 
2. Limit Excessive Leverage in American Financial Institutions .......................................... 26
 
3. Modernize Supervision of Shadow Financial System ....................................................... 304. Create a New System for Federal and State Regulation of Mortgages and otherConsumer Credit Products ................................................................................................ 33
 
5. Create Executive Pay Structures that Discourage Excessive Risk Taking ........................ 40
 
6. Reform the Credit Rating System ....................................................................................... 44
 
7. Make Establishing a Global Financial Regulatory Floor a U.S. Diplomatic Priority ....... 48
 
8. Plan for the Next Crisis ....................................................................................................... 50
 
V. Issues Requiring Further Study ...................................................................................................... 53
 
VI. Acknowledgments......................................................................................................................... 54
 
VII. About the Congressional Oversight Panel .................................................................................. 55
 
VIII. Alternative Views ....................................................................................................................... 56
 
Appendix: Other Reports on Financial Regulatory Reform ............................................................... 59
 
 
 
2Report Submitted under Section 125(b)(2) of Title I of the Emergency Economic Stabilization Actof 2008, Pub.L-110-343
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