Critics: Financial oversight council tough only on paper

McClatchy NewspapersNovember 2, 2009 

WASHINGTON — A plan by congressional Democrats and the White House to curb future bad behavior on Wall Street would fail to resolve the bureaucratic infighting that helped bring about the global financial crisis, critics warn.

Congress this week begins considering legislation designed to ensure that never again are federal bank regulators asleep at the switch, as they were before the 2008 financial meltdown. To that end, the bill before the House Financial Services Committee would create a Council of Regulators, headed by the Treasury secretary.

The seven federal regulators who'd be the voting members of this council collectively would be charged with determining when an investment bank, hedge fund or other type of financial firm posed a risk to the broader financial system.

The Federal Reserve would be charged with monitoring risks in the largest financial firms that commonly are considered "too big to fail" without harming the global financial system.

Most analysts see the need for much closer supervision, but some critics argue that, as written, the legislation would transfer important supervisory powers away from the independent Fed and create a council that's tough only on paper.

"Terrible idea! It's an awful idea . . . it's just folly, just idiotic," said Laurence Meyer, a normally soft-spoken former Fed governor and a highly regarded economic forecaster.

Meyer rarely speaks harshly, but thinks it's a big mistake to create an inter-agency committee comprised of regulators with differing missions, turf to protect and a mutual lack of respect — and then ask them to forge common policy.

"If you really want to have improved supervision, you give it to supervisors and regulators. You are playing with fire here," said Meyer, who was a Fed governor from 1996 to 2002.

Meyer fears that Congress, in trying to punish the Fed for not preventing the recent crisis, actually may create more inter-agency squabbling than existed in the run- up to the crisis, when individual regulators saw portions of the problems but failed to work together to prevent the crisis from exploding.

Douglas Elliot also questions the approach. A former Wall Street investment banker, Elliot is now a researcher at the Brookings Institution, a center-left policy research center. Like Meyer, he worries that the well-intended council effort may create more bureaucracy.

"In terms of dealing with more subjective systemic-risk type issues, I really doubt that you can have that many people find sufficient agreement on something so difficult" as determining when a financial institution poses risks to the broader financial system, he said.

The nine-member council may not be nimble enough to do anything about accumulating risks, such as when stock prices or home prices become inflated and large financial institutions grow more exposed to asset deflation, he said.

"It's always very difficult to act against a bubble: A committee of bureaucrats doing it? I don't see it happening. Bubbles are politically popular, they are always going to happen," said Elliot, a former executive for almost 20 years at what today is J.P. Morgan Chase.

For example, he said, there was plenty of concern expressed about rising home prices before they eventually triggered the worst financial meltdown since the Great Depression.

"It's hard to imagine the Fed stepping forward, say in 2005, and trying hard to stop the housing bubble. They might have tried, but they would have been backed off pretty hard by the political sector," Elliot said.

Other critics, such as Vincent Reinhart, a former top Fed economist, argue that the council should be headed by an independent, presidentially appointed chairman — perhaps one confirmed by the Senate — someone who isn't protecting turf.

Otherwise, he warned, "It doesn't create the right incentives to operate" properly.

That view's shared by Federal Deposit Insurance Corp. Chairman Sheila Bair.

"This would provide additional independence for the chairman and enable the chairman to focus full time on attending to the affairs of the council and supervising council staff," Bair said in prepared remarks to Congress last week.

As proposed, the council's members would include the Fed chairman, the FDIC chairman, the Securities and Exchange Commission chairman, the comptroller of the currency, the chairman of the Commodity Futures Trading Commission, the head of the National Credit Union Administration and the director of the Federal Housing Finance Agency. A state banking supervisor and a state insurance commissioner each also would have a seat on the council, but as non-voting members.

ON THE WEB

Frank's legislation

Bair testimony

Elliot paper

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