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XMFSinchiruna (26.57)

OMG!! Fed to Seek Broader Oversight Powers!! :(



March 29, 2008 – Comments (6) | RELATED TICKERS: JPM , BSC.DL , MER.DL2

Lest we forget... the Fed is not a government agency, but a consortium of private banks!!!  So now a state-sponsored banking cartel will be regulating the very markets that have made them so very wealthy all these years!  This is starting to look more and more similar to the events of the Great Depression.

Treasury Dept. Plan Would Give Fed Wide New Power

By EDMUND L. ANDREWSPublished: March 29, 2008

WASHINGTON — The Treasury Department will propose on Monday that Congress give the Federal Reserve broad new 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 nation’s hodgepodge of financial regulatory agencies, which many experts say failed to recognize rampant excesses in mortgage lending until after they set off what is now the worst financial calamity in decades.

Democratic lawmakers are all but certain to say the proposal does not go far enough in restricting the kinds of practices that caused the financial crisis. Many of the proposals, like those that would consolidate regulatory agencies, have nothing to do with the turmoil in financial markets. And some of the proposals could actually reduce regulation.

According to a summary provided by the administration, the plan would consolidate an alphabet soup of banking and securities regulators into a powerful 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 carefully avoids a call for tighter regulation.

The plan would not rein in practices that have been linked to the housing and mortgage crisis, like packaging risky subprime mortgages into securities carrying the highest ratings.

The plan would give the Fed some authority over Wall Street firms, but only when an investment bank’s practices threatened the entire financial system.

And 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 themselves and gave many institutions a false sense of security.

Parts of the plan could reduce the power of the Securities and Exchange Commission, which is charged with maintaining orderly stock and bond markets and protecting investors. The plan would merge the S.E.C. with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like.

The blueprint also suggests several areas where the S.E.C. should take a lighter approach to its oversight. Among them are 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.

The proposal began last year as an effort by Henry M. Paulson Jr., secretary of the Treasury, to make American financial markets more competitive against overseas markets by modernizing a creaky regulatory system.

His goal was to streamline the different and sometimes clashing rules for commercial banks, savings and loans and nonbank 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 in a speech on Monday, according to a draft. “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.”

Congress would have to approve almost every element of the proposal, and Democratic leaders are already drafting their own bills to impose tougher supervision over Wall Street investment banks, hedge funds and the fast-growing market in derivatives like credit default swaps.

But Mr. Paulson’s proposal for the Fed echoes ideas championed by Representative Barney Frank, the Massachusetts Democrat who is chairman of the House Financial Services Committee.

Both see the Fed overseeing risk across the entire financial spectrum, but Mr. Frank is likely to favor a stronger Fed role and to subject investment banks to the same rules that commercial banks now must follow, especially for capital reserves.

The Treasury plan would let Fed officials examine the practices and even the internal bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the overall financial system.

That would be a significant expansion of the central bank’s regulatory mission.

When Fed officials agreed 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 bolster its protections against a collapse.

In two unprecedented moves, the Fed engineered a marriage between JPMorgan Chase and Bear Stearns, lending $29 billion to JPMorgan to prevent a Bear bankruptcy and a chain of defaults that might have felled 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 lending program reserved for commercial banks and other depository institutions.

But Mr. Paulson’s proposal would fall well 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 with commercial banks and should be subject to similar 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.

When Mr. Frank asked why Citigroup had kept billions of dollars in “structured investment vehicles” off the firm’s balance sheet, he recalled, Mr. Prince responded 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.”

Mr. Paulson’s proposal is likely to provoke bruising turf battles in Congress among agencies and rival industry groups that benefit from the current regulations.

Administration officials acknowledged on Friday that they did not expect the proposal to become law this year, but said they hoped it would help frame a policy debate that would extend well after the elections in November.

In a nod to the debacle in mortgage lending, the administration proposed a Mortgage Origination Commission to evaluate the effectiveness of state governments in regulating mortgage brokers and protecting consumers.

The bulk of the proposal, however, was developed before soaring mortgage defaults set off a much broader credit crisis, and most of the proposals are geared to streamlining regulation.

This plan would consolidate a large number of regulators into roughly three big new agencies.

Bank supervision, now divided among five federal agencies, would be led by a Prudential Financial Regulator, which could 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 likely to provoke battles.

Yet another proposal would, for the first time, create a national regulator for insurance companies, an industry that state governments now oversee.

Administration officials argue that a national system would eliminate the inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any federal encroachment.

Arthur Levitt, a former S.E.C. chairman who has long pushed for stronger investor protection, said his first impression of the plan was positive. Even though the S.E.C.’s powers might be reduced, Mr. Levitt said, the plan would create a broader agency to regulate business conduct in all financial services.

“It’s a thoughtful document,” he said. “I’m intrigued by the fact that it puts an emphasis on investor protection, and that it establishes an agency specifically for that purpose, which would operate across all markets. I think that’s a very constructive first step.”

6 Comments – Post Your Own

#1) On March 29, 2008 at 5:05 AM, StockSpreadsheet (65.23) wrote:

I like the idea of consolidating the current miriad of regulators into fewer, but more powerful and far-reaching bodies.  Turf wars cut down on the effectiveness of federal regulatory institutions.  A few regulators that have more broad powers would be better. 

1)  I think merging the SEC with the CFTC is a good idea.  That would give one regulator of markets, whether they are securities, futures, whatever, and you wouldn't have the problem where something like an ETF might have the CFTC claim they have jusisdiction and the SEC also claim they have jurisdiction.  If there is only one agency, then no turf war over jurisdiction.  Also, you have the chance to get rid of a whole lot of beaurocrats, since you would only need one bloated management structure instead of two.  I also think that the SEC or the OCC should be able to investigate investment banks, brokerages, hedge funds or whomever long before they are considered a threat to the financial system.  The time to act is before it becomes a crisis.  The old addage "An ounce of prevention is worth a pound of cure" comes to mind.  If there was an ounce of prevention exercised by either the Fed, the SEC or both before this financial crisis snowballed into its present huge dimensions, it could have been headed off and fixed with limited damage, instead of the major mess we now need to get ourselves out of.

2)  I also like the idea that somebody like the Office of the Comptroller of the Currency could have jurisdictional control over banks, brokerage houses, investment banks, thrifts, savings and loans, etc..  That would put all those industries under one regulator and they could then be subject to the same rules regarding reserves, leverage, etc., to cut down on some of the folley that lead us into this mess in the first place.  I think there should still be an OCC with powers separate but equal to the Fed, since the OCC is a federal agency and the Fed is only a quasi-federal agency owned by private banks.  This allows some federal oversight of our financial institutions, instead of pure self-policing, (which rarely works in practice, as Wall Street has demonstrated).

One of the biggest problems I see currently with the plan is its timing.  Trying to consolidate agencies, rewrite policies and change supervisory roles in the midst of a crisis is rarely a good idea.  You get gridlock while everyone tries to figure out what their new jobs and responsibilities are instead of action to fix the current problem. 

This is part of the problem we have with the response to Katrina.  Bush reorganized FEMA, Homeland Security and a bunch of other departments right before Katrina hit.  The fallout was that people weren't reporting to the right people, nobody knew who was supposed to make decisions, and you ended up with a lot of wasted time and gridlock instead of quick action to help the needy.   New Orleans and Louisiana politicians compounded the problem by worrying more about getting kickbacks instead of help, but FEMA still could have done a much better job if it wasn't being consolidated into Homeland Security at the time.

I think there are a lot of flaws from what I read regarding the way Secretary Paulson wants this to play out, (which is not surprising considering he is from Wall Street and so wants to do something that aids Wall Street at the expense of the American taxpayer), but maybe with the Democrats sticking their oars in the water, (and them wanting to help their own interest groups as the expense of the American taxpayer), then whatever comes out might actually be better for the average Joe than what either of them would come up with separately.  Hard to see this getting done while we have an election going on and the national election coming up, so whoever gets elected to the Presidency and to Congress in the fall could have a big influence on the way this plays out.  Will be interesting to watch.



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#2) On March 29, 2008 at 7:46 AM, Capsperson wrote:

Fox guarding hen house ?

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#3) On March 29, 2008 at 11:06 AM, abitare (30.20) wrote:

Where is the FBI or some other agency to bring down the FED? They need to get Paulson to Guantanmo and find out who he is working for.

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#4) On March 29, 2008 at 11:17 AM, dwot (29.28) wrote:

Well, double excellent, great article to bring to our attention and awesome response Craig.

I tend to agree I absolutely would not want the bankers making up their own rules, they so screwed the world already, but obviously there needs to be a broader range of control as it is probably more the investment banks that did more of the damage.

And, that is such an excellent point about making changes in a crisis...

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#5) On March 29, 2008 at 4:53 PM, XMFSinchiruna (26.57) wrote:

Agreed... excellent comments Craig!  I have to take a closer look at the detailed of the proposal when I get a moment.  The CFTC has done a horrible job of regulating the blatant manipulations of the gold and silver futures markets by the small group of powerful investment institutions who have used market-cornering short positions to maintain downward pressure on the prices, with the recent action in the price of silver amidst a global shortage of bullion being a clear example.  I don't hold much hope that the SEC will perform their duties any better, but it certainly can't get any worse.

Interesting angle about reorganizing during a crisis.  I agree!

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#6) On March 31, 2008 at 10:01 AM, XMFSinchiruna (26.57) wrote:

Inside The Paulson Plan
Liz Moyer 03.29.08, 12:43 PM ET

Treasury Secretary Henry Paulson's proposed sweep of financial regulation would emphasize more control at the federal level, at the expense of state oversight, and consolidate an alphabet soup of existing agencies.

It is an idea that has been kicking around for a while, and one that is bound to provoke heated debate on Capitol Hill and among the various banking and market oversight agencies, which are already tripping over each others' turf. It is also bound to please some circles of Wall Street because the plan, while strengthening the Federal Reserve's role over certain aspects of the markets, like risk taking, would also emphasize greater self-regulation over other aspects, including business conduct.

Paul Maidment: Reform Needed To Keep U.S. Markets Competitive

Paulson's plan is a recognition that Wall Street has pushed beyond regulators' abilities to keep up with innovation. Asset securitization and other structured finance activities, where the credit crisis was created, didn't exist at the time the federal banking agencies were established decades ago. And since the repeal of Depression-era laws separating risky brokerage activities from consumer deposit safeguarding, Wall Street and major commercial banks have increasingly been competing in trading, stock and bond underwriting, and other risk-taking activities.

Even the markets have morphed. The major U.S. stock exchanges have moved into trading options and bonds and have gone across the Atlantic to merge with major European exchanges. Futures trading is their next ambition. Meanwhile, the major U.S. futures exchanges have been merging, giving rise to electronic trading networks and plans by the big Wall Street firms to set up rival markets.

Wall Street's main lobby group, the Securities Industry and Financial Markets Association, embraced Paulson's proposals. "Our present regulatory framework was born of Depression-era events and is not well suited for today's environment where billions of dollars race across the globe with the click of a mouse," said Tim Ryan, chief executive of the association. "That fact, teamed with the current market conditions, result in an universal agreement that it is time to modernize and revitalize the current system."

Paulson proposes combining federal bank and thrift regulators, creating a federal insurance regulator and merging the Securities and Exchange Commission with the Commodities Futures Trade Commission. He also recommends the creation of a Mortgage Origination Commission to oversee the licensing of mortgage lenders.

But he potentially dilutes the power of state regulators by emphasizing greater authority for a new federal deposit institution regulator. State power to regulate banks has been waning in the last decade as major institutions switched their licenses to federal charters to take advantage of less restrictive consumer privacy and other regulations at the federal level.

And it comes as existing federal agencies are scrambling to respond to the crisis amid tighter budgets. The Federal Deposit Insurance, for example, is increasing its staff 60% to prepare for an expected wave of bank failures. On Friday, it cracked down on another mortgage lender, ordering troubled California-based Fremont General (nyse: FMT - news - people ) to raise capital or sell its bank subsidiary in 60 days.

In insurance, where regulation is entirely at the state level, a proposed federal regulator is bound to provoke opposition. New York state's insurance commissioner, Eric Dinallo, has been at the forefront of one aspect of the credit crisis: trying to rescue the bond insurance industry by pushing the companies to raise capital and inviting new companies into the sector, including Berkshire Hathaway (nyse: BRKA - news - people ). The bond insurers, most of them heavily exposed to credit derivatives, are scrambling to avoid credit rating downgrades that could impede their ability to provide insurance to the $2.6 trillion municipal bond market.

The plan is the result of a study Paulson commissioned last June, just before the markets started to implode. In transferring more authority over the markets to the Federal Reserve, the plan tries to close gaps in regulation that helped create the current credit crisis, including the fact that many of the subprime mortgage lenders that contributed to the housing bubble operated outside the grasp of banking regulators.

Reform took on more urgency earlier this month when the Fed and Treasury intervened in the collapse of Bear Stearns (nyse: BSC - news - people ), pushing it into a merger with JPMorgan Chase (nyse: JPM - news - people ) to avoid a bankruptcy filing and a potentially cataclysmic rush to sell assets.

No one is saying the system should stay the same, that's for sure. But so far the Bush administration's proposals have stopped short of much stricter, or even permanent, oversight of investment banks. Even Paulson's plan would limit the Fed's oversight of Wall Street firms to times of extreme market stress, when investment banks approach it to borrow money directly, as they are now allowed to do. And it would preserve, if not enhance, the power of self-regulatory organizations like the major stock exchanges to police market conduct themselves.

Critics of the current system have argued that there are too many ways for ill-intentioned market participants to operate around existing rules. Democrat Charles Schumer, a member of the Senate Banking Committee, said in a statement late Friday, "In broad outlines, we agree with large parts of Secretary Paulson's plan. He is on the money when he calls for a more unified regulatory structure." But the New York senator added the plan should address the issues of complex structured finance activities, which in large part contributed to the credit crisis.

Last week, Massachusetts Congressman Barney Frank said Congress should authorize the Fed to act as a risk regulator across the markets. "To the extent that anybody is creating credit, they ought to be subject to the same type of prudential supervision that now applies only to banks," he said.

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