Posted on Mon, Oct. 26, 2009
last updated: October 27, 2009 05:13:29 PM
WASHINGTON — The chairman of a key congressional panel Monday scaled back important parts of the Obama administration's plan to dismantle financial institutions that are deemed "too big to fail."
Lawmakers won't give the independent Federal Reserve as many powers as President Barack Obama had proposed, according to a senior congressional staffer, sharing details with McClatchy on the condition of anonymity because the emerging bill hasn't been made public. The measure, which tackles some of the thorniest issues of bank oversight, is intended to rewrite seven decades of financial regulation.
Rep. Barney Frank, D-Mass., the chairman of the House Financial Services Committee, worked over the weekend and throughout Monday to draft the legislation. It would provide the government with first-ever authority to shut down large globally interconnected financial institutions.
Under this authority, jokingly referred to as "Death Panels for Banks," the Federal Deposit Insurance Corp. would oversee the dismantling of large financial firms much as it does now when it intervenes in commercial banks that are at risk of insolvency.
Decisions about which institutions are so large that they pose a system-wide risk and must be monitored would be made by a Council of Regulators, comprised of leaders from the Fed, the Treasury Department, the FDIC, and other bank-oversight agencies.
This marks a shift, since Obama wanted the Fed to take the lead role as a "systemic risk regulator." However, lawmakers in the House of Representatives and the Senate are wary of that, not least because the Fed didn't foresee the gathering storm in mortgage finance that led to a near meltdown of the global financial order last year.
"A lot of members thought the Fed missed it," the congressional staffer said.
Some independent analysts also have warned that handing the Fed new, expansive powers as the systemic risk regulator could distract it from its principal role of setting monetary policy to sustain growth and contain inflation.
"I didn't want the Fed to have that role because I think monetary policy is too important," said Vincent Reinhart, a former top Fed economist who's also wary of the emerging legislation. "If all you do is a college of regulators, that's just inviting a debating society."
Details of the widely anticipated bill filtered out Monday as Frank's staff negotiated final issues with the Obama administration, which earlier had issued its own blueprint for the biggest overhaul of financial regulation since the Great Depression.
One unanswered question was whether the Council of Regulators would have a first among equals who calls the shots.
"By not having a decider, they're potentially creating an entity that won't be forceful enough," said Reinhart, now a scholar at the American Enterprise Institute, a center-right policy organization. "A committee without a head is an invitation to create a discussion group."
Under the emerging bill, Congress wouldn't set specific requirements, but would leave it to the Council of Regulators to determine how much capital banks should hold in reserve, or how much investing they can do with borrowed money. Insufficient reserves and too much borrowed money, called leverage, were primary contributors to the financial meltdown.
Many pieces of Obama's plan already have moved through Frank's committee, or are about to do so. These include curbs on executive compensation in the financial sector, the creation of a new Consumer Financial Protection Agency, first-ever rules for complex financial instruments called derivatives, first-ever registration for secretive hedge funds that invest on behalf of the mega-wealthy and new rules for credit-rating agencies that shirked their duty in the run-up to the financial crisis.
The centerpiece, however, remained how to dismantle banks that are so large that their failure would endanger the world's biggest economy and thus the rest of the global financial system.
During last year's turmoil in global finance, the government lacked such powers and improvised, first brokering the sale of investment bank Bear Stearns, later sending a conflicting signal by letting Lehman Brothers fail, and then stepping in to rescue insurer American International Group. All of this was done to save the financial system, but with taxpayer dollars, which struck many ordinary people as the little guy saving the fat cat.
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