Fed losing support as super-regulator of markets

By Alison Vekshin
Bloomberg News
Saturday, March 21. 2--9

http://www.bloomberg.com/apps/news?pid=20601087&sid=acda83O7fg0g&refer=home

WASHINGTON -- A proposal to put the Federal Reserve in charge of market oversight is losing congressional support after its main backer, U.S. Rep. Barney Frank, said criticism over American International Group Inc. "undercuts" his proposal.

"There's still a need for a systemic-risk regulator," Frank, a Massachusetts Democrat who chairs the House Financial Services Committee, said yesterday. "The argument for the Fed alone has lost a lot of political support. I think that's now got to be re-looked-at."

Senate Banking Committee Chairman Christopher Dodd and Richard Shelby, the panel's top Republican, said March 19 they are reluctant to expand the Fed's role, faulting the central bank for lapses leading to the financial crisis.

Congress is overhauling U.S. financial regulations and agencies that lawmakers have faulted for lax oversight. Frank, who is playing a lead role in the redesign, has been pushing to expand the Fed's authority.

Lawmakers are considering setting up a regulator or giving power to an existing agency to monitor risk and detect problems across an array of financial-services firms to prevent shocks to the economy such as the one caused by the collapse of Lehman Brothers Holdings Inc. in September.

Congress chastised AIG Chief Executive Officer Edward Liddy over $165 million in retention pay after the New York-based insurer received $173 billion in taxpayer funds. Lawmakers advanced legislation that would tax bonuses at AIG and other companies that are getting federal aid.

The bonus controversy "throws open the question about how you do it," Frank said. "It's something we're now all thinking about."

Dodd and Shelby endorsed the idea of creating a systemic- risk regulator. "Whether or not those vast powers will reside at the Fed remains an open question," Dodd said at a March 19 hearing on the issue.

"I think we're going to have to create a systemic-risk regulator," Shelby, of Alabama, told reporters on March 19, adding he's still weighing whether an existing or a new agency should get those powers.

The Federal Reserve Bank of New York has been in the lead in overseeing AIG since the company's initial bailout in September. The Fed gave AIG "a massive infusion of cash" in September "and the many funds since then without any requirements or conditions," House Speaker Nancy Pelosi said on March 19.

"I'm not enamored with some of the Fed's actions regarding oversight," Shelby said about the idea of giving the authority to the Fed. "Some of the biggest failures in the world occurred under their watch."

Dodd, a Connecticut Democrat, raised the idea of giving the systemic-risk authority to the Federal Deposit Insurance Corp., the bank regulator that insures deposits.

"I'm not rejecting the Fed as an alternative," Dodd told reporters. Still, he expressed doubts about housing the authority at the Fed, citing "the obvious mistakes the Fed made in the run-up to the current crisis."

Dodd has repeatedly chided the Fed for not using its authority under a 1994 law to approve new rules to strengthen consumer protections in mortgage lending. The Fed adopted tougher mortgage rules in July 2008.

Questions about the Fed's performance on consumer protection issues are "going to come up," said Kevin Barnard, co-head of the financial institutions practice at law firm Arnold & Porter LLP in New York. "Did the Fed perform as well as some might have liked? What does that tell us about their ability to be the systemic-risk regulator?"

The Fed's role as a regulator has not been without setbacks, Chairman Ben S. Bernanke admits. "We probably could have done more," Bernanke told CBS Corp.'s "60 Minutes" program March 15.

The Fed chief has said he supports creating a systemic-risk regulator, without saying whether the principal authority should go to the Fed.

"Effectively identifying and addressing systemic risks would seem to require the involvement of the Federal Reserve in some capacity, even if not in the lead role," Bernanke said in a March 10 speech.

Treasury Secretary Timothy Geithner is scheduled to testify on the issue in Frank's committee on March 26.

"It was a dangerous idea to give that power to the Fed," said Peter Wallison, a financial policy fellow at the American Enterprise Institute, who testified on the issue in Frank's committee on March 17. "It would have compromised them and threatened their credibility as a monetary authority."

He suggested giving the authority to the President's Working Group on Financial Markets, which includes the leaders of the Fed, the Treasury Department, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.

The American Bankers Association "can tolerate it going to the Fed if we can make sure it doesn't compromise the Fed's monetary-policy role, which is their No. 1 priority," said Wayne Abernathy, the Washington-based industry group's executive vice president of financial institutions policy.

* * *

To contribute to GATA, please visit:

http://www.gata.org/node/16