Paulson calls for broad look at financial regulations
WASHINGTON (AP) - March 26, 2008 The Bush administration will soon put forth an oversight
blueprint in an effort to promote smoother functioning of financial
markets, Paulson said in a speech to the U.S. Chamber of Commerce.
The implosion of investment house Bear Stearns and fears that
others could be in jeopardy have sent a tremor rippling through
trading rooms of Wall Street, the corridors of official Washington
and the living rooms of many Americans. The situation has raised
new questions about whether regulations need to be revamped to
better keep up with the world of modern finance and to avert a
repeat of the chaos now confronting the country.
Commercial banks, a national financial bedrock, are subject to
regulations, including bank examinations and rules for submitting
detailed financial information, to help regulators gauge their
safety and soundness.
However, the modern U.S. financial system has become a complex
web of financial players - institutions and individuals and
practices that are subject to widely different rules.
"This latest episode has highlighted that the world has changed
as has the role of other nonbank financial institutions and the
interconnectedness among all financial institutions," Paulson
said. "These changes require us all to think more broadly about
the regulatory and supervisory framework that is consistent with
the promotion and maintenance of financial stability," he added.
In extraordinary actions aimed at preventing a meltdown of the
U.S. financial system, the Federal Reserve recently backed JP
Morgan's takeover of Bear Stearns and agreed to provide a
multibillion-dollar lifeline for the deal. In addition, the Fed, in
the broadest use of its lending authority since the 1930s, said it
would let squeezed Wall Street investment houses come to it
directly for emergency loans. That has long been a privilege just
for commercial banks.
Paulson said he supported that action but added that it raised
important policy considerations about the oversight of investment
houses.
The secretary said that commercial banks' access to the Fed's
emergency lending "discount window" has traditionally been
accompanied by regulatory oversight and supervision. "Certainly
any regular access to the discount window should involve the same
type of regulation and supervision," Paulson said.
And he suggested that the Federal Reserve collect as much
information as necessary on investment houses to "make informed
lending decisions." He said the Fed is currently working to do
that. Paulson suggested the Fed, the Securities and Exchange
Commission and the Commodity Futures Trading Commission also
continue to work to build a framework on this.
These steps, he said, "would enable the Federal Reserve to
protect its balance sheet, and ultimately protect U.S. taxpayers,"
he said.
Paulson defended the government's role in coming to the aid of
Bear Stearns, an action that has been criticized by some Democrats
and others as akin to a federal bailout.
"Bear Stearns found itself facing bankruptcy," Paulson said.
"The Federal Reserve acted promptly to resolve the Bear Stearns
situation and avoid a disorderly wind-down. It is the job of
regulators to come together to address times such as this, and we
did so. Our focus was the stability and orderliness of our
financial markets."
On the broader situation, he said it's too soon to conclude that
other potentially important financial firms should have permanent
access to the Fed. He also said the Federal Reserve's action so far
"should be viewed as a precedent only for unusual periods of
turmoil."
On Capitol Hill, some lawmakers were still skeptical about the
Bear Stearns arrangement.
Max Baucus, D-Mont., the Senate Finance Committee chairman, and
Charles E. Grassley of Iowa, the panel's top Republican, demanded
details about the sale and any possible effect on taxpayers. The
lawmakers asked Paulson and Fed Chairman Ben Bernanke to give them
specifics of the transaction by week's end.
It was a sign that Congress, racing to deal with a housing mess
that encapsulates voters' deep concerns about the economy, has
placed the financial crisis at the top of the election-year agenda,
with investigations and legislation likely to follow.
With home foreclosures at record highs, Paulson said the
administration will explore additional ways to help distressed
homeowners. But he was cool to some of the proposals put forth by
Democrats, saying that "most are not yet ready for the starting
gate."
Rep. Barney Frank, chairman of the House Financial Services
Committee, wants new regulations on investment banks similar to
those that apply to regular banks. That includes mandatory
requirements for cash reserves to cushion losses. The Fed or
another government entity should be designated as a "financial
services regulator" with the power to limit risky practices, said
Frank, D-Mass.
---
Associated Press writer Julie Hirschfeld Davis contributed to
this report.
