updated 10/15/2009 10:46:15 AM ET 2009-10-15T14:46:15

A House panel voted Thursday to regulate for the first time privately traded derivatives, the kind of exotic financial instruments blamed for helping bring down Lehman Brothers and nearly toppling American International Group.

The 43-26 vote by the House Financial Services Committee, was a major step toward completing President Barack Obama's proposed overhaul of the regulations governing the nation's financial institutions.

The mostly party line vote showed that Democrats were prepared to band together to override objections by Republicans and the financial lobby to push for increased protections for investors.

The Obama administration hailed the legislation as throwing sunlight on an opaque and growing $600 trillion global market that has so far escaped government oversight.

The bill "is absolutely essential to preserving a strong marketplace, preserving transparency (and) getting incentives right in the system," said Michael Barr, Treasury's assistant secretary for financial institutions.

"We don't want to allow any firm like an AIG to be able to engage in derivatives transactions without requiring those transactions be reported and to be traded on an exchange," he said.

In the case of AIG, the company sold a form of derivatives to investors who were looking to protect themselves against losses in the housing market. When the economy tanked, AIG didn't have enough resources to make good on all of its promises and required a hefty government bailout to avoid folding.

Under the proposed bill, which still faces scrutiny by the full House and in the Senate, AIG would have been required to show government regulators that it had sufficient reserves as a back up.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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