Ahead of a hearing on what happened when stocks fell precipitously last week, regulators and exchange leaders held meetings Monday on the unusual trading.
Commodity Futures Trading Commission Chairman Gary Gensler, who will testify Tuesday afternoon before the House Financial Services Committee, called meetings "constructive" with leaders from the Chicago Mercantile Exchange and Intercontinental Exchange Inc.
"Today's meetings with the futures exchanges were constructive in providing information regarding the market events of May 6," Gensler said in a statement. "The exchanges have been very cooperative in essential data and analyses relating to their respective markets."
Securities and Exchange Commission Chairman Mary Schapiro met with six exchanges on Monday and also will testify later today on what happened last week. The SEC and CFTC have launched an investigation into the nearly 1,000-point freefall on Thursday. They have said they will make their findings public.
Gensler and Schapiro also met with Treasury Secretary Tim Geithner on Monday, along with representatives from the futures and securities exchanges to "discuss contributing factors of the unusual trading and exchanges' preliminary thoughts on how to best protect investors."
New York University economist Nouriel Roubini -- the famed professor who predicted the widespread collapse of the financial system , which earned him the title Dr.Doom -- on Monday said that financial crises are an integral part of capitalism and more of them should be expected.
"They are not the exception, but rather the rule," he told Spiegel Online International. "Many elements vital to capitalism, like innovation and risk-taking, also trigger frequent collapse. And what we just went through could get much worse in the future... Probably we will have even more crises in the future."
The Senate is likely to vote Tuesday morning on an amendment to financial overhaul legislation that would require an audit of the Federal Reserve.
Senate Banking Chairman Chris Dodd (D-Conn.) pegged the vote on the amendment, offered by Sen. Bernie Sanders (I-Vt.) for about 11:30 a.m. Tuesday.
Dodd signed onto the amendment after a compromise late last week, giving it greater potential for Senate approval. Several tweaks were made to ensure that Congress wouldn't get involved in monetary or interest rate policy.
The amendment requires an audit of Federal Reserve assets taken on between December 2007 and enactment of the legislation. That audit would take about a year with a report set for delivery to Congress three months later by the General Accounting Office.
Rep. Ron Paul (R-Texas), a co-author of a similar amendment in the House-passed financial reform measure, reiterated in a column Monday on his website that the Sanders amendment doesn't go far enough to reveal the totality of the Fed's actions.
"A one-time disclosure now will not do us a lot of good down the road when the cycle repeats itself and friends of the Fed find themselves in trouble again," he wrote.
Paul urged support for an amendment by Sen. David Vitter (R-La.), that is identical to what's included in the House-passed bill that will require "full disclosure and full accountability going forward."
A properly structured tax on banks can limit bailouts during a financial crisis more effectively than legislation under consideration by Congress.
While bailouts are inevitable during a financial crisis to prevent systemic collapse, their damage can be limited by a tax on financial institutions, Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, told the Economics Club there Monday.
"No matter how well-written or how well-intentioned the legislation may be, no law can completely eliminate the kinds of collective investor and regulator mistakes that lead to financial crises," he said.
Determining the right tax may be complicated but it could be properly targeted using specific information within financial markets, he said.
Kocherlakota's preferred policy would have the government estimate the expected, discounted value of bailouts that a financial institution would receive in the future, based on a firm's specific leverage ratio, the maturity structure of its liabilities, the risk characteristics of its investment portfolio and its incentive compensation schemes.
So the expected bailout will be higher with firms with riskier investments than for firms with less risky portfolios, he said.
Based on those factors, the government would charge the firm a tax that is exactly equal to the "expected discounted value of the firm's bailouts," with the amount exactly equaling the extra cost taken on by taxpayers because of bailouts, adjusted for risk and the time value of money, ensuring that the "firm pays the full costs -- private and social -- on its production decisions."
"Knowing that it faces this tax schedule, the firm no longer has an incentive to undertake inefficiently risky investments," he said. "It's investment choices will be socially efficient."
SEC Chairman Mary Schapiro on Monday met with leaders from the 6 exchanges to discuss what could have caused last week's near 1,000 point swoon in Dow. The group decided that circuit breakers, designed to keep markets from tumbling, should be strengthened.
"As a first step, the parties agreed on a structural framework, to be refined over the next day, for strengthening circuit breakers and handling erroneous trades," the Securities and Exchange Commission announced.
Sens. Jeff Merkley (D-Ore.) and Carl Levin (D-Mich.) on Monday introduced what they deemed the "Volcker amendment" that would replace the 'Volcker Rule' contained in legislation reforming the financial sector.
"This replaces the Volcker rule language, which was essentially a placeholder that said that what we will do is ask [regulatory] leaders to do a study, decided if there is an issue, and then tell us about what should be done," Merkley said. "What we are saying is we are declaring as a Congress that high-risk proprietary trading is inappropriate to have in the same house as a bank."
Named after former Fed Chairman Paul Volcker the rule is about banning proprietary trading.
Sen. Mark Warner (D-Va.) floated the idea on Monday of restrictions on the frequency of stock trades in the wake of a sudden drop last week.
Warner, a member of the Senate Banking Committee, said that limits on high-frequency trading, which he's said contributed to a sudden, 1,000-point drop last week in the Dow, might be a good rule to prevent future similar instances.
"I'm not saying what the answer is -- maybe there needs to be speed limits in the system," Warner said Monday during an appearance on CNBC. "Even in NASCAR, they only build the car to be a certain speed."
While the Dow recovered some of the losses in last Thursday's drop, regulators including the Securities and Exchange Commission (SEC) have not yet identified the exact cause of the drop. Warner and Sen. Ted Kaufman (D-Del.) have proposed an inquiry into the causes of the crash.
Sen. Judd Gregg (R-N.H.), appearing alongside Warner on CNBC, said it would be premature to include regulations on high-frequency trades in the current Wall Street reform bill before the Senate, as long as the exact causes of last week's drop haven't yet been identified.
Warner said that forethought would be key to insulating the market from any havoc that high-frequency trades could wreak.
"I have this strange feeling that high-frequency trading could be the next wave, the way derivatives, CDSs, and some of the swaps business that started in 2002-03," he said. "We didn't seem to know enough about it then. We ought to try and get ahead of this one."
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