Those who do not understand the past are doomed to repeat it and the US mortgage market is looking to do just that with the aid of several key economists and policy makers looking to pave the way for a more secure tomorrow.

The aforementioned group is looking to implement a new system that would force financial houses that issue and sell loans as securities to retain some of the inherent risk in order to prevent another mortgage meltdown.

The Wall Street Journal reports that the actions would give companies a reason to monitor their securitized loans in a much more effective and responsible manner.

This retained risk should/would be “enough to make it hurt if their product turns out to be of a much lower value than the initial assessment suggests,” notes Richard Portes, president of the Centre for Economic Policy Research think tank. Portes is also one of the distinguished authors of a report that deals with international financial stability. The report was released to the public on Tuesday.

The news comes at the conclusion of a year that has been plagued with subprime horror that has claimed billions of dollars in losses for all of the major investment banks, including countless financial institutions that suffered via indirect exposure overseas.

The new report was co-authored by Roger Ferguson, a former vice chairman of the Federal Reserve and now an executive at Swiss Re, Philipp Hartmann, head of financial research at the European Central Bank and Fabio Panetta, a high-level employee at the Bank of Italy. It was published by the CEPR and the International Center for Monetary and Banking Studies.

"The regulators as a class missed the accumulation of these highly complex financial instruments that were probably mispriced," Portes noted. "At the same time, one could say that all the fuss about the hedge funds meant that hedge funds were actually OK," he added.

One of the board members at the European Central Bank, Gertrude Tumpel-Gugerell, noted that there stands to be a tremendous amount of improvement in the area of clearing and settlement services regarding over-the-counter derivatives markets. One of these improvements, according to Gugerell, is centered on giving commercial banks the power to utilize various types of collateral on a cross-border basis. This would ultimately pin them against their money-market operations in order to facilitate the maximum amount of market liquidity. In Gugerell;s mind, this availability of eligible collateral “becomes the ultimate liquidity issue for banks.”

In a completely separate but relevant report the International Monetary Fund called for a catalog of overhauls to the European banking system. Their goal is to add transparency and also to prevent future credit shocks. According to the report, “the effectiveness of crisis management by the regulators and central banks may need to be reviewed, in particular in dealing with individual problem institutions and systemwide liquidity strains.”

According to the Wall Street Journal, some of the IMF's recommendations are as follows:

• European governments should speed the public sector's withdrawal from bank ownership, introducing greater market scrutiny and disclosure requirements.

• Restrictions on bank consolidation should be loosened to create greater economies of scale and improve the competitiveness of the broader banking sector.

• State-run preferential deposit schemes should be abolished and ceilings on interest rates and fees charged on financial services should be made more flexible, creating a wider range of investment vehicles.

• European financial integration should be accelerated by harmonizing regulatory and tax regimes, standardizing clearing and settlements systems and relaxing government restrictions on cross-border mergers.

• The rules governing new financial instruments such as collateralized debt obligations and asset-back securities should be modified. These bundled credit derivatives draw from various debt sources, not all of them subprime.

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