CovOps
 Location : Ether-Sphere
Job/hobbies : Irrationality Exterminator
Humor : Über Serious
 |  Subject: Insane: Treasury Wants To Give Broad Powers To Fed  Sat Mar 29, 2008 7:38 am | |
| WASHINGTON — The Treasury Department will propose on Monday that Congress give the Federal Reserve broad authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.
The proposal is part of a sweeping blueprint to overhaul the country’s hodge-podge of regulatory agencies, which many specialists say failed to recognize rampant excesses in mortgage lending until after they triggered what is now the worst financial calamity in decades.
According to a summary provided by the administration, the plan would consolidate what is now an alphabet soup of banking and securities regulators into a trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.
While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it avoids a call for tighter regulation. The plan would not rein in practices that have been implicated in the housing and mortgage meltdown, like packaging risky subprime loans into securities carrying AAA ratings.
The Fed would also be given some authority over Wall Street firms but only when an investment bank’s practices posed a threat to the financial system over all.
The plan does not recommend tighter rules over the vast and largely unregulated markets for risk-sharing and hedging, like credit-default swaps, which are supposed to insure lenders against loss but became a speculative instrument and gave many institutions a false sense of security.
Some changes could actually reduce the power of the Securities and Exchange Commission, which is charged with maintaining orderly stock and bond markets and protecting investors.
The blueprint suggests several areas where the S.E.C. should take a lighter approach to its oversight, such as allowing stock exchanges greater leeway to regulate themselves and streamlining the approval of new products, even allowing automatic approval of securities products that are being traded in foreign markets.
Under the proposal, the S.E.C. would merge with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like.
The proposal itself began last year as an effort by the Treasury secretary, Henry M. Paulson Jr., to make American financial markets more competitive against overseas markets by modernizing a creaky regulatory system.
Mr. Paulson’s goal was to streamline the different and sometimes clashing rules for commercial banks, thrifts and non-bank mortgage lenders.
“I am not suggesting that more regulation is the answer, or even that more effective regulation can prevent the periods of financial market stress that seem to occur every 5 to 10 years,” Mr. Paulson will say, according to a draft of a speech he plans to deliver on Monday. “I am suggesting that we should and can have a structure that is designed for the world we live in, one that is more flexible.”
Almost every element of the proposal would have to be approved by Congress, where Democratic leaders are already drafting bills to impose tougher supervision over investment banks, hedge funds and the fast-growing market in derivatives like credit-default swaps.
Mr. Paulson’s proposal for the Fed echoes ideas championed by Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. While both see the Fed taking a central role in overseeing risk across the entire financial spectrum, Mr. Frank is likely to favor a stronger Fed role, and to subject investment banks to the same rules that commercial banks must follow, especially for capital reserves.
Under the Treasury proposal, the Federal Reserve would become the government’s “market stability regulator” and would be allowed to gather information from virtually any financial institution. Fed officials would be allowed to examine the practices and even the bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the financial system.
“The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability,” Mr. Paulson said in the advance text of Monday’s speech. “To do this effectively, it will collect information from commercial banks, investment banks, insurance companies, hedge funds, commodity pool operators.”
That would be a significant expansion of the central bank’s regulatory mission, which has been limited primarily to supervising commercial banks. When Fed officials agreed earlier this month to rescue Bear Stearns, once the nation’s fifth-largest investment bank, they pointedly noted that the Fed never had the authority to monitor its financial condition or order it to beef up its protections.
In an unprecedented pair of moves, the Fed engineered a shotgun marriage between Bear Stearns and a rival, JPMorgan Chase, and then lent $29 billion to JP Morgan in order to prevent a bankruptcy filing by Bear and a chain of defaults that might have brought down much of the financial system.
For the first time since the 1930s, the Fed also agreed to let investment banks borrow hundreds of billions of dollars from its discount window, an emergency program reserved for commercial banks and other depository institutions.
Mr. Paulson’s proposal, however, would fall short of the kind of regulation that Democrats have been proposing. Mr. Frank and other senior Democrats have argued that investment banks and other lightly regulated institutions now compete directly with commercial banks and should be subject to the same kind of regulation — including examiners who regularly pore over their books and quietly demand changes in their practices.
In a recent interview, Mr. Frank said he realized the need for tighter regulation of Wall Street firms after a meeting with Charles O. Prince III, then chairman of Citigroup.
During the meeting, Mr. Frank said that he asked why Citigroup had kept billions of dollars in “structured investment vehicles” off the firm’s balance sheet. Mr. Prince’s response, Mr. Frank said, was that Citigroup, as a bank holding company, would have been at a disadvantage because investment firms can operate with higher debt and lower capital reserves.
Senator Charles E. Schumer, Democrat of New York, has taken a similar stance.
“Commercial banks continue to be supervised closely, and are subject to a host of rules meant to limit systemic risk,” Mr. Schumer wrote in an op-ed article on Friday in The Wall Street Journal. “But many other financial institutions, including investment banks and hedge funds, are regulated lightly, if at all, even though they act in many ways like banks.”
By contrast, Mr. Paulson’s proposal carefully limits the Fed’s regulatory authority to situations that pose threats to the entire financial system. “Such actions should not be focused on specific individual institutions,” the executive summary said.
Because the proposal would affect scores of deeply entrenched industry groups, it is likely to provoke bruising turf battles in Congress between rival agencies and rival industry groups that benefit from the current system of regulation.
Administration officials acknowledged on Friday that they do not expect the proposal to become law this year, but said they hoped it would help frame a policy debate that will extend well after the elections in November.
In a nod to the debacle in mortgage lending, the administration proposed a “Mortgage Origination Commission” that would be led by representatives from the Fed and other bank regulators and would evaluate the effectiveness of state governments in regulating mortgage brokers and protecting consumers.
But the bulk of the proposal was developed before soaring mortgage defaults kicked off a much broader credit crisis, and most of the proposals are geared to streamlining regulation.
In addition to putting the Fed in charge of “market stability,” the proposal would dramatically consolidate a slew of regulators into roughly three big new agencies.
The plan would then consolidate bank supervision — now divided among five different federal agencies — into a “Prudential Financial Regulator,” which would have the power to send examiners into any bank or depository institution that is protected by either federal deposit insurance or other federal backstops. It would eliminate the distinction between “banks” and “thrift institutions,” which are already indistinguishable to most consumers, and shut down the Office of Thrift Supervision.
Any effort to merge the Commodity Futures Trading Commission with the S.E.C. is all but certain to provoke a bruising turf battle between the agencies as well as the companies they regulate.
Specialists, however, have long argued that futures, which are contracts to buy or sell anything from corn to Treasury securities at a specified price in the future, are simply a variant of securities.
Yet another proposal in the blueprint would, for the first, time create a national regulator for insurance companies, an industry that is now regulated by state governments. Administration officials argue that a national system would eliminate inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any encroachment by the federal government.
Link |
|
