SeriousBull

Reform the Fed also. Doing less will not work.

Tags: Federal Reserve + investing + Markets + Paulson + Regulation + Treasury

Secretary of Treasury Hank Paulson today proposed to revamp the US financial regulatory framework to strengthen the Federal Reserve’s powers to oversee products, transactions, and financial solvency across the landscape of American financial institutions. Specifically he proposed to eliminate the Office of Thrift Supervision

and move oversight of Thrifts and State chartered banks into a new Office of Insurance inside Treasury. He additionally proposed that mortgage brokers become subject to minimum licensing standards and that one “super federal agency,” under the Treasury’s responsibility, be in charge of business conduct and consumer protection.  Paulson emphasized that he is not proposing more regulation, but rather a unified regulatory agency instead of the duplicated, out-dated regulatory structure now in place. 

Before any changes are made Paulson wants to get beyond the current financial crisis. He restated his belief that he did not think it is “fair or accurate to blame our regulatory structure for the current market turmoil. ”

No doubt few would argue that we need greater oversight of the US financial system. And certainly it will help to streamline regulations so that there is one standard and one set of regulations to follow.  But beyond that, SB disagrees that the current regulatory structure is not to blame. It’s the lack of oversight by those who operated the existing regulatory structure that is at fault and they should be blamed, penalized, and fired.  Because of their failure to regulate or provide  even common sense oversight, we have a mountain-sized load of bad debt and the US government has guaranteed a significant percentage of it. The Federal Reserve is directly responsible for most of the malfeasance for its push to dismantle the Glass-Stegall Act which served to bifurcate banking from speculative bokerage practices. The Federal Reserve is likewise directly responsible for not curtailing outrageous lending practices at banks and their off balance sheet mortgage origination subsidiaries. The Federal Reserve likewise permitted or ignored the excessive guarantees made by banks in their packaged derivative security transactions sold to pension plans, consumers and sovereign governments  around the world.  And the Federal Reserve blindly permitted or ignored the monstrous, aggregate leveraging up by banks and incredulously failed in their audits of banks to ascertain that banks often do not have proof of ownership of the very mortgages they claim they own that constitutes their required reserve capital!  Even now the Federal Reserve is bending the rules permitting banks to count questionable assets as capital for loans, permitting them to hold ” for investment purposes” categories of securities artificially priced at 100% of principal value, and is by all accounts violating “full disclosure” rules having adopted a ‘gradualism’ of write-offs (over several accounting periods) approach ignoring altogether mark-to-market accounting mandates that informs investors as the degree of risk they assume.

It is outrageous that the same group responsible for the widespread failure of oversight should fix their own inadequacies when the magnitude of their failures has put the global financial system at risk.  Indeed, for some curious reason Paulson expects the Fed to now know and curtail risks when it sees it when the current debacle is clear evidence they are inept at such insight. So in our view we need a new ’super regulator’ but it should  be built separate and apart from the Federal Reserve who has demonstrated its inability to serve the public good.  After all, the desired outcome is a better system and there is no evidence that moving around the chairs will result in anything new or effective. Instead we must reinstate Glass Stegal and tell banks if they want to  risk capital it needs to be shareholder capital, not public money. No longer should banks be permitted special favor: to offer CDs backed by the FDIC, to originate loans and have 90% of them guaranteed by the US Government, or to artificially categorize assets for favorable accounting treatment failing to mark their prices to the daily market price.  Doing so has created the mountain of financial excess and debt that will burden taxpayers for years to come.  So yes Mr. , reform is needed, but it must be comprehensive if it is to actually end the reprehensible practices that created this financial crisis and continue to plague us today.  This requires building a ‘Chinese Wall’ between the ’super regulator’ and those who are regulated. It’s time to end the cozy arrangement that fosters bailouts every time the banks get in trouble. It’s time to end the conflicts of interest and have one statutory requirement. Doing something less will not make America truly competitive nor nor demonstrably  accountable.

March 31, 2008 - Economy, Markets, Politics