Even after passage of two important financial reform bills, the Emergency Economic Stabilization Act of 2008 and the earlier Housing and Economic Recovery Act of 2008, the nation and the rest of the world still face unprecedented economic turmoil, with tight credit markets, plummeting housing prices and growing job losses. In addition to a possible stimulus package in a lame-duck session of the 110th Congress, we expect the 111th Congress to consider a massive restructuring of the financial system, including issues of executive compensation and the regulation and oversight of hedge funds, credit default swaps, and other financial sectors. In addition, the House Financial Services Committee and Senate Banking Committee, as well as the government reform and oversight committees of both Houses, will continue to hold extensive hearings focusing on the economy, housing and financial markets generally, and specifically on oversight of implementation of the stabilization package under a new President and new Treasury Secretary, who will no doubt face significant scrutiny by the Congress, which is struggling to demonstrate to the American people that the rescue package will work and was worth the significant cost.

In recent months, hearings have been held on a wide variety of topics, including possible additional measures that could be taken to address the market crisis, activities of the Federal Housing Finance Agency and the roles played by credit rating agencies and credit default swaps in the market meltdown. Congress is likely to focus on other issues that may be tangentially related to the core issue of market turmoil, including executive compensation and hedge fund regulation and oversight. The hearings held during the end of the 110th Congress should be viewed as a precursor to hearings that will be held in the 111th, with additional emphasis on the investigatory role of Congress.

On October 21, 2008, at the end of the 110th congressional session, the House Financial Services Committee held a hearing to assess the extent to which an outdated financial regulatory system contributed to the nation’s financial crisis, and whether adoption of a more robust system could facilitate a speedy recovery. At the hearing, Chairman Barney Frank (D-MA) offered a preview of the actions Congress would take during the 111th Congress, stating that House leaders would likely form a select committee to explore a rewrite of the regulatory structure governing the financial industry. Despite calls from Republicans for a cautious approach to new regulation, the hearing left no doubt that House Democrats believe that the financial crisis was caused by a lack of regulatory oversight and, during the 111th Congress, they intend to pursue a dramatic regulatory overhaul featuring a robust supervisory regime. The “cautious approach” suggested by Republicans may well be muted by significantly increased majorities in the House and Senate. The Obama Administration is also expected to take more of a hard-line approach to additional regulation and ensuring significant transparency in the government’s acquisition of troubled assets. Additionally, expect efforts to either limit or require significant additional public disclosure of executive compensation packages as well as stricter oversight by federal regulators.