Fed plans major overhaul
WASHINGTON (AP) - March 31, 2008 Under an ambitious Bush administration plan, the Federal Reserve
would take on the unwieldy role of uber cop in charge of financial
market stability. Other regulatory agencies could see their
influence diminished.
The proposal won't fix the host of economic and financial
problems that threatens to plunge the United States into a deep
recession, but it might help guard against future troubles. It
would take years and a lot of political wrangling - in Congress, on
Wall Street, in statehouses and elsewhere - to implement all the
changes envisioned.
Yet, the initiative, formally announced Monday, casts a fresh
spotlight on the best way to protect the country from financial
catastrophes in an intricate web of complex, often-changing
financial products and the wide array of financial players using
them in the United States and beyond. That debate probably will
take center stage in the next president's administration.
Asked if President Bush's goal was to get the revamp approved
before he leaves office, press secretary Dana Perino acknowledged
the enormity of the plan. "We'll have to see. It is a big
attempt," she said.
Democrats in Congress said the administration should be focusing
its efforts on easing the country's current woes, including
providing more relief for millions of distressed homeowners
clobbered by the housing collapse and credit crunch. Foreclosures
have hit record highs.
"We must take steps now to provide help to families who are
hurting," said House Speaker Nancy Pelosi, D-Calif.
Senate Banking Committee Chairman Chris Dodd, D-Conn., called
the administration's proposal a "wild pitch."
"It's not even close to the strike zone," Dodd said. "This is
a very legitimate issue, but why bring this up today when really
this had nothing to do with the current problems we're facing?"
Democratic presidential contender Hillary Rodham Clinton was
even more emphatic: "No amount of rearranging the deck chairs can
hide the fact that our housing and credit markets are in crisis and
they are sinking deeper every day."
Sen. John McCain, who has wrapped up the Republican nomination,
welcomed Paulson's recommendations. "I think consolidation of the
various supervisory bureaucracies is very important recognition
that we are in a global economy, and transparency and closer
oversight is necessary," he said.
The plan would greatly expand the role of the Fed, created in
1913 after a series of bank panics, to oversee the stability of the
entire financial system including commercial banks, investment
banks, insurance companies, hedge funds, private-equity firms and
others.
Rather than checking on the health of a particular organization,
the Fed's focus would be on whether a firm's or industry's
practices pose a danger to overall financial stability, said
Treasury Secretary Henry Paulson, the former head of investment
giant Goldman Sachs whom Bush put in charge of the plan.
"It will have broad powers and the necessary corrective
authorities to deal with deficiencies," Paulson said.
Lyle Gramley, former Fed official and now senior economic
adviser at the Stanford Washington Research Group, believes the
plan isn't clear about the Fed's such corrective powers. "If you
create a police force and don't give them any weapons, it is going
to be useless," Gramley warned.
Others expressed concern about concentrating too much power at
the Fed while also streamlining or consolidating the duties of
other regulators. They feared that a safety net of checks and
balances could be lost.
"The cataclysmic mistake is that if you eliminate so many
'eyes' that monitor the markets, and the single eye, no matter how
super, misses something, then catastrophe," said Anthony Sabino, a
professor of law and business at St. John's University.
For similar reasons, Howard Chernick, economics professor at
Hunter College, said, "I would prefer not putting all my eggs in
the Fed's regulatory basket."
The Consumer Federation of America accused the Fed of failing to
heed warnings about risky mortgages that triggered the meltdown in
credit markets in the first place and questioned expanding its
scope. "Giving the Fed new responsibility to monitor market risks
will do nothing if it is not accompanied by much broader authority
for the Federal Reserve to act than this proposal provides, and
even more important, by a willingness for the Federal Reserve to
use the authority it has."
At the same time, the Fed would lose daily supervision of big
banks, something the Fed probably would fight to keep intact,
Gramley said. Taking away that supervision is a problem because the
Fed is also the lender of last resort for commercial banks, he
said.
In the biggest expansion of its credit authority since the
1930s, the Fed in mid-March temporarily granted that emergency
lending privilege to big investment houses. It came after the crash
of the once-mighty Bear Stearns, the nation's fifth-largest
investment firm, stoked fears others could be in jeopardy.
Day-to-day banking supervision would be consolidated into one
agency, compared with the current five. The Office of Thrift
Supervision, which oversees savings and loans, and the Commodity
Futures Trading Commission, which oversees the trading of gas, oil
and other commodities, would be eliminated, with their functions
merged into other agencies.
"I think it is a mistake to discard some federal agencies"
because protective checks and balances could be lost, Chernick
said. "A paper reorganization that is going to help must have the
legal teeth and the staff behind it to regulate the industries,"
he said.
Walt Lukken, acting chairman of the CFTC, warned that his
agency's expertise "may be jeopardized with the creation of a
larger regulatory bureaucracy."
The Bush administration's creation of the Homeland Security
Department, which merged 20 or so federal agencies into the new
Cabinet level office, stirred turf battles, culture clashes and
mission-identity crises. The new agency's effectiveness was
hobbled, critics say.
While some regulators no doubt will be fearful of losing powers,
those regulated had their own concerns.
"Dismantling the thrift charter and crippling state banking
charters will weaken banking in America," said Edward Yingling,
president of the American Bankers Association.
The plan, which would require congressional approval for its
biggest changes, such as the Fed's expanded authority, would alter
how the government regulates thousands of businesses from the
nation's biggest banks and investment houses down to the local
insurance agent and mortgage broker. It aims to overhaul a
patchwork collection of sometimes overlapping regulatory
jurisdictions and build a new structure that better suits the needs
of the modern financial world.
Sen. Charles Schumer, D-N.Y., wanted even more regulatory
consolidation, saying a "single regulator may be a better
approach."
It would create one super agency in charge of business conduct
and consumer protection, performing many of the functions of the
current Securities and Exchange Commission.
The plan also would ask Congress to establish a federal Mortgage
Origination Commission to set recommended minimum licensing
standards for mortgage brokers, many of whom now operate outside of
federal regulation. And, the plan would also take a first step
toward federal regulation of the insurance industry by asking
Congress to establish an Office of Insurance Oversight inside the
Treasury Department.
Massachusetts Secretary of the Commonwealth William F. Galvin
blasted Paulson's approach as "a disastrous backward step that
would put the investor in jeopardy" because it would pre-empt
state regulation of securities and insurance.
Paulson acknowledged that most of the changes will not occur
until after a lengthy debate in Congress, leaving it to the next
administration to deal with the biggest changes proposed by the
report.
"Tearing down the existing regulatory structure and rebuilding
it is an extraordinarily difficult task, involves a tremendous
amount of turf battles in Washington and will be awfully difficult
to solve," Gramley said. "Proceeding in this direction will
happen very, very slowly."
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AP Economics Writer Martin Crutsinger contributed to this
report.