Administration: Fed needs more protective powers

Administration: Fed needs more protective powers

Posted: Friday, June 20, 2008 9:22 pm

By MARTIN CRUTSINGER AP Economics Writer WASHINGTON (AP) — The Bush administration said Thursday that the Federal Reserve should be given sweeping new powers to protect the integrity of the financial system, contending that this year’s market turmoil has exposed a badly outdated regulatory system. While acknowledging that debate on the issue in Congress would take time, Treasury Secretary Henry Paulson said the discussion should begin without delay because the stakes for the financial system are so high. “We should quickly consider how to most appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene to protect the system so they can carry out the role our nation has come to expect — stabilizing the overall system when it is threatened,” he said in a speech to a women’s banking group in Washington. Paulson said the near-collapse of Bear Stearns, once the country’s fifth largest investment bank, had “placed in stark relief the outdated nature of our financial regulatory system.” Because of the problems highlighted by the ongoing credit crisis, Paulson said, “We must dramatically expand our attention to the fundamental needs of our system and move much more quickly to update our regulatory structure.” Later, responding to an audience question about how quickly the reform could be approved, Paulson said, “Do I have an expectation that it will get done this year. Probably not … but it needs to be focused on soon.” The Fed moved in March — as Bear Stearns teetered on the brink of collapse — to provide $30 billion to facilitate the sale of Bear Stearns to JP Morgan Chase & Co. and for the first time to begin lending money to other investment banks, something it has continued to do as it fights to calm financial markets in the wake of a severe credit crisis. Paulson said the country had come to rely on the Fed in times of crisis, citing the central bank’s actions to broker a rescue of giant hedge fund Long Term Capital Management in 1998 during the Asian currency crisis and the Bear Stearns episode this year. “Our nation has come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk,” Paulson said. “But, as we noted in our blueprint, the Fed has neither the clear statutory authority nor the mandate to anticipate and deal with risk across our entire financial system.” On March 31, Paulson released a blueprint that proposed the most sweeping overhaul of the nation’s financial regulatory system since the stock market crash of 1929. It would change how the government regulates thousands of businesses, from the nation’s biggest banks and investment houses to local insurance agents and mortgage brokers. The blueprint urged Congress to consider ways to expand the Fed’s powers to oversee investment banks, but Paulson did not set out a time frame for when this should occur. However, on Thursday he said that work should begin on the overhaul “very quickly” and should proceed with a sense of urgency. Paulson’s blueprint proposes giving the Fed more power to protect the stability of the entire financial system, but under the plan the central bank would lose its authority to oversee day-to-day bank supervision, which would be transferred to a single bank regulatory agency, merging the powers of five current federal bank regulatory agencies. Fed officials have said they must continue to have day-to-day supervision of commercial banks to monitor the banking system’s health. Paulson’s comments came on the same day that two former Bear Stearns managers were arrested on securities fraud and other charges, becoming the first executives to be charged criminally in the wake of the subprime mortgage debacle. House Financial Services Chairman Barney Frank, D-Mass., has announced his panel will hold hearings on Paulson’s recommendations later this year but Senate Banking Committee Chairman Christopher J. Dodd, D-Conn., has set no date for committee hearings. Neither panel is expected to take up actual legislation on the overhaul proposals until next year when a new administration will be in office. Currently, the Fed and the Securities and Exchange Commission, which has the primary oversight over investment banks such as Bear Stearns, are working on a formal memorandum of understanding to guide their joint oversight. Fed Vice Chairman Donald Kohn told a Senate Banking subcommittee on Thursday that the Fed recognized opening its borrowing window to investment banks was “an extraordinary step, but considered it necessary” to prevent a more adverse impact on the overall economy. He said the Fed currently has staffers on site at the four largest investment banks in the country. Democrats have complained Paulson’s regulatory proposals don’t go far enough to deal with abuses in mortgage lending while state officials have criticized what they see as an unwanted federal intrusion on their turf. On the overall economy, Paulson said Thursday that the nation was going through a “rough period” which was being mitigated by quick passage of the economic stimulus program. “While the stimulus is making our economy stronger than it otherwise would have been, the headwind of high energy prices has the potential to lengthen the economic slowdown,” Paulson said. ——— On the Net: The Federal Reserve Board: http://www.federalreserve.gov Published in The Messenger 6.20.08

Leave a Comment