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Coalition to attack plan for Fed powers
By Francesco Guerrera in New York and Tom Braithwaite in Washington
Published: July 15 2009 05:01 | Last updated: July 15 2009 11:27
Barack Obama’s plan to give the Federal Reserve extensive powers over all large US financial groups will be attacked on Wednesday by a coalition of investors, analysts and ex-regulators who say the Fed’s credibility has been “tarnished” by its role in contributing to the crisis.
The strong stance by the investor community will fuel the heated debate over financial regulation and strengthen Congressional opposition to the administration’s push for the Fed to monitor any company whose failure would endanger the banking system.
Wednesday’s report, by an alliance including two former heads of the Securities and Exchange Commission, a group of investors with a total $3,000bn in assets and the investment analysts’ trade body, will break the investment industry’s silence on regulatory reform.
The 39-page document, seen by the Financial Times, calls for the creation of an independent body to police risks across the financial sector.
In contrast, last month’s government proposals envisage turning the Fed into a “systemic regulator” with powers to oversee large banks and insurers, such companies as General Electric, and possibly hedge funds and private equity firms.
A body proposed by the investors – the Systemic Risk Oversight Regulator – would have a full-time staff led by a chairman and four members appointed by the president and confirmed by the Senate, and would be accountable to Congress.
William Donaldson, a co-chair with fellow former SEC head Arthur Levitt of the Investors’ Working Group, told the FT the new agency should have “carte blanche to go everywhere it wants . . . to find systemically weak areas within the system”.
Letting the Fed regulate all large financial groups would detract from its focus on monetary policy and could have “serious drawbacks” given its poor record in the run-up to the crisis, the report says.
It criticised the central bank for lax bank supervision and the role its low interest rate policy played in inflating the housing bubble earlier this decade.
“[The Fed’s] credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky, complex securitised products,” the report says.
“Other serious concerns stem from the Fed’s regulatory failures – its refusal to police mortgage underwriting or to impose suitability standards on mortgage lenders – and the heavy influence banks have on the Fed’s governance.”
The Fed declined to comment but, in the behind-the-scenes talks before the government proposals to Congress, it is believed to have lobbied hard to become the systemic regulator.
Eventually the Treasury and the House financial services committee came up with a compromise that gives most powers to the Fed but adds a council of regulators, including the SEC and the Federal Deposit Insurance Corporation, to work alongside the central bank.
The investor group includes senior figures from Calpers, the large Californian state pension fund, BlackRock, the asset management giant, and Legg Mason, the investment firm.
It also wants curbs on banks’ proprietary trading and urges corporate boards to split chairman and chief executive roles.
By Francesco Guerrera in New York and Tom Braithwaite in Washington
Published: July 15 2009 05:01 | Last updated: July 15 2009 11:27
Barack Obama’s plan to give the Federal Reserve extensive powers over all large US financial groups will be attacked on Wednesday by a coalition of investors, analysts and ex-regulators who say the Fed’s credibility has been “tarnished” by its role in contributing to the crisis.
The strong stance by the investor community will fuel the heated debate over financial regulation and strengthen Congressional opposition to the administration’s push for the Fed to monitor any company whose failure would endanger the banking system.
Wednesday’s report, by an alliance including two former heads of the Securities and Exchange Commission, a group of investors with a total $3,000bn in assets and the investment analysts’ trade body, will break the investment industry’s silence on regulatory reform.
The 39-page document, seen by the Financial Times, calls for the creation of an independent body to police risks across the financial sector.
In contrast, last month’s government proposals envisage turning the Fed into a “systemic regulator” with powers to oversee large banks and insurers, such companies as General Electric, and possibly hedge funds and private equity firms.
A body proposed by the investors – the Systemic Risk Oversight Regulator – would have a full-time staff led by a chairman and four members appointed by the president and confirmed by the Senate, and would be accountable to Congress.
William Donaldson, a co-chair with fellow former SEC head Arthur Levitt of the Investors’ Working Group, told the FT the new agency should have “carte blanche to go everywhere it wants . . . to find systemically weak areas within the system”.
Letting the Fed regulate all large financial groups would detract from its focus on monetary policy and could have “serious drawbacks” given its poor record in the run-up to the crisis, the report says.
It criticised the central bank for lax bank supervision and the role its low interest rate policy played in inflating the housing bubble earlier this decade.
“[The Fed’s] credibility has been tarnished by the easy credit policies it pursued and the lax regulatory oversight that let institutions ratchet higher their balance sheet leverage and amass huge concentrations of risky, complex securitised products,” the report says.
“Other serious concerns stem from the Fed’s regulatory failures – its refusal to police mortgage underwriting or to impose suitability standards on mortgage lenders – and the heavy influence banks have on the Fed’s governance.”
The Fed declined to comment but, in the behind-the-scenes talks before the government proposals to Congress, it is believed to have lobbied hard to become the systemic regulator.
Eventually the Treasury and the House financial services committee came up with a compromise that gives most powers to the Fed but adds a council of regulators, including the SEC and the Federal Deposit Insurance Corporation, to work alongside the central bank.
The investor group includes senior figures from Calpers, the large Californian state pension fund, BlackRock, the asset management giant, and Legg Mason, the investment firm.
It also wants curbs on banks’ proprietary trading and urges corporate boards to split chairman and chief executive roles.