By Robert Schmidt and Jesse Westbrook
June 17 (Bloomberg) -- The Obama administration plans to restrict the Federal Reserve’s emergency-lending powers while endowing it with new authority for systemic risk, ushering in what may become the Fed’s biggest overhaul in decades.
President Barack Obama’s proposal on financial regulation, to be released in Washington today, would force the central bank to get written approval from the Treasury secretary before using the authority, according to a copy of the document obtained by Bloomberg News. Obama also calls for a study of the Fed’s governance structure, including how it regulates financial firms.
The move is part of a proposal that would alter almost every facet of federal rules for the industry, aiming to prevent the regulatory lapses and build-up of risks that led to the worst crisis since the Great Depression. Much of the plan will require approval in Congress, where jurisdictional battles and ideological clashes may delay and alter the legislation. Obama aims to sign a bill by the end of the year.
“We have to have somebody who is responsible for seeing the risks of the system as a whole and not just individual institutions,” Obama said yesterday in an interview with Bloomberg News, referring to making the Fed the systemic risk regulator. “The Fed is best positioned to do that.”
New Agency
A new agency would oversee consumer financial products, such as mortgages and credit cards. The proposal, much of which has been reported earlier, encompasses areas ranging from derivatives to executive pay to the mortgage-backed securities that helped fuel the housing boom and touch off the credit crisis. It also requests federal oversight for the first time for hedge and private equity funds.
The Treasury and outside experts “should have substantial input into the review and the resulting report” on the Fed’s governance study, according to the paper. The Treasury can propose changes to the central bank’s structure “to improve its accountability and its capacity to achieve its statutory responsibilities.”
Obama said changes are needed to restore confidence in U.S. markets. “We now need some sensible rules of the road so that people aren’t taking exorbitant risks,” he said.
The overhaul comes on the heels of the credit crisis, the collapse of major Wall Street firms like Bear Stearns Cos. and the government’s $700 billion bailout for the banking, auto and insurance industries.
Extra Capital
“While this crisis has had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of the financial system,” Obama’s administration says in the document.
Investment banks “operated with insufficient government oversight” while hedge funds exist “completely outside of the supervisory framework,” according to the paper.
The administration is seeking to require firms that pose the biggest risk to the financial system to hold extra capital. It proposes those levels should be determined by Dec. 31. It asks for a committee, led by the Treasury, to do a “fundamental reassessment” of how banks are supervised by Oct. 1.
The administration downplayed reining in the Fed’s emergency powers, and said the central bank sought and received the Treasury secretary’s approval for lending during the crisis.
The administration called for a national insurance office within the Treasury to gather information about the industry and try to identify gaps in regulation that “could contribute to a future crisis,” according to the plan.
Insurance Industry
The office will also make recommendations to the Fed on whether it should regulate individual insurance companies as systemically important, subjecting them to capital and leverage requirements.
The proposal follows multiple government bailouts of American International Group Inc., once the world’s largest insurer before losses on derivative contracts put the company on the brink of collapse. It stops short of recommending federal regulation of insurance companies, which are overseen by states.
Additional insurance regulation would be considered if it would “further reduce systemic risk,” according to the paper.
The administration plans to offer recommendations on housing-finance companies Fannie Mae and Freddie Mac, which were effectively seized by the government last year, by the time the 2011 federal budget is released.
‘Continued Stability’
“We need to maintain the continued stability and strength” of the companies “during these difficult financial times,” the paper says.
The Obama proposal calls on the Securities and Exchange Commission to make brokerage firms fiduciaries to their clients. Such a standard, which already applies to money managers, would require brokers to put their customers’ interests above the firm’s in securities transactions.
Obama would tie compensation for market participants who securitize loans to the performance of the assets over time, according to the document. The pay for brokers, underwriters and others who package mortgages into bonds “should be linked to the longer-term performance of the securitized assets, rather than only to the production, creation or inception of those products,” the paper says.
Commentaries
Now raising intellectual capital
Who is the Fed accountable to?
It’s pretty clear the Federal Reserve is going to emerge as the big winner in the Obama administration’s proposed overhaul of the financial regulatory system. But any grant of new powers to the Fed must come with legislation requiring greater accountabilty from the nation’s central banker.
Now this is not meant to knock the job the Fed has done in the current financial crisis. In many respects, Fed Chairman Ben Bernanke should be applauded for showing a willingness to improvise and come up with creative solutions for trying to limit the damage to the banking system and the economy. But throughout the crisis, Benanke & Co. have shown an utter disdain for transparency and full disclosure.
A good illustration of this is the contracts the NY Fed signed last fall with investment advisor Blackrock to manage the distressed assets the Fed acquired from AIG, the hobbled insurance giant. The contract between the NY Fed and Blackrock for managing the CDOs that AIG insured and the Fed took off the banks’ hands is 37 pages. But a good number of those pages are blank–some 13 page to be exact.
And what is spelled out on these blank pages? Oh, just a few minor details like the fees paid to Blackrock, the firm’s potential CDO conflicts and the firm’s key personnel managing the assets. To be clear, this information isn’t totally secret. All this information has been disclosed to the NY Fed. It’s just that Fed officials have seen fit to keep this information secret from the public.
But if you’re counting on this veil of secrecy to be lifted by the Obama administration when it unveils its regulatory overhaul plan on Wednesday—think again. The architect of the financial regulatory overhaul is Treasury Secretary Tim Geithner, who just happened to head the NY Fed when these contracts with Blackrock were signed.
As I pointed out last week, Geithner hasn’t shown much interest in the need for government transparency in his new job. Treasury, in agreeing to let 10 banks repay money to the TARP, couldn’t even name the list of financial institutions.
Financial regulatory overhaul won’t mean much unless the general public and investors get more information about the inner workings of the financial institutions the government is seeking to better control. And the new regulations won’t inspire much confidence, if the public doesn’t feel the regulators are also being held to account.
No comments:
Post a Comment