Monday, March 30, 2009

How I would Remake Federal Financial Regulation

(Disclaimer: After working on the Hill for 11 years, I joined the Carter Administration, in 1980, as Director of Congressional Liaison at the savings and loans regulatory agency, the Federal Home Loan Bank Board. I took a similar job with the Board of Governors of the Federal Reserve System, in 1981, when Paul Volcker was Chairman. After toiling at the Fed for 30 months, I moved to Fannie Mae, from which I retired in 2004, after 21 years of lobbying. The Fed was and still is a powerful place, with many thoughtful/capable employees. When I worked there, the Fed showed--and still may carry the vestiges of--a disdain for the mortgage finance industry. Home loans were not big banking business, then. They are today. But expanding the Fed's regulatory role is a better alternative than perpetuating federal regulatory competition.)

Time for a Major Change!

The Obama Administration and Congress need to substantively refurbish the federal financial regulatory network, which failed us as a nation during the Bush years and continues to provide more questions than answers.

Rhetoric to the side, federal policy makers have an opportunity today to drive a significant restructuring or just could wimp out and merely change the coverlet on the financial regulatory bed, introducing some pretty new colors, but leaving in place soiled blankets and sheets underneath.

The early Obama/Geithner plans look more like the latter than the former. The President needs to be bolder.

I would take this historic opportunity, which combines national problems, international financial challenges, the American public’s desire for some serious new approaches to governing, and the popularity of President Obama to truly produce a whole new regulatory fabric.

I would not create a new federal financial regulator to oversee “systemic risk,” or just those companies which on their own could bring down serious segments of our economy or the whole ball of wax, if they faltered or failed.

I would not expand the powers of the SEC, giving it more control over hedge funds, equity funds, insurance companies, and other larger than life institutions.

The Fed, The Fed, The Fed

What I would do is take those disparate powers and authorities and give them to all the Federal Reserve System, right now. Don’t stop there. Give the Fed control over all state banking and insurance regulation, too. Get the states out of those two businesses.

The first one to say “no” will be the Fed, but it should be ignored for the time being. It will say it doesn't want “all” of that power (disingenuous, at best, since It has a great deal of it, already).

Face it; the Treasury already is powerful because it is the President’s political voice on financial and economic matters. The Board of Governors of the Federal Reserve System is all powerful because it is the nation’s central bank, manages our national monetary policy, and regulates several dozen bank holding companies, which means the Fed already control lots of control over the banked assets, the payments system and the banks' far flung holding company empires.

The SEC wants its hand made bigger and the Administration starts much of this with the Geithner demand for a wholly new “systemic risk agency,” which can control all of those hedge funds, private equity firms, and everything else “Too Big to Fail (TBTF),” already not tied down by one of the existing financial regulators.

If the Congress goes this route, they merely are recreating a more competitive version of the confusing mess we now have, but this time with four weighty regulatory principals able to bring things to a halt or worse give a green light--either actively or because they misread the threat--to some financial miscreant, no matter what the other regulatory agencies think. (See SEC and credit fault swaps and…well, you remember.)

Don’t Just Create Competitors, Reduce Confusion, Build Strength

The overlapping and sometimes conflicting existing federal financial regulators (FDIC, SEC, CFTC, OTS FHFA, CoC, NCUA, etc.)—plus the fact that the insurance industry, mortgage brokers, private mortgage insurance companions, title insurance companies, etc, as well as the fact that 8000 banks are regulated by 50 different states—has helped produce the ineffective system we have.

End that morass. Off with their institutional heads!

Mr. Obama, if you are going to fix healthcare, the environment, and create a true national energy policy, then go right along and fix financial services regulation as a logical part of your economic initiatives.

It’s just a different pew in the same church!

Failing to give significant new authority to the Fed over all financial institutions, while doing away with the rest of the regulators, just will create a new set of Washington financial turf rivalries like we already have.

The Fed will tell you that it can’t do what I suggest and that it needs to concentrate on its monetary policy mission, and it does. But it already oversees the nation’s bank holding companies, which means it already has regulatory authority over a major section of the nation’s assets, payments system and principals. Its debt ratio regs also cover the hedge funds.

Congress should make de jure what is de facto. Give total power to one already powerful Federal Reserve System, including the regulation of the insurance industry and end the abuses of McCarran-Ferguson, i.e. the 1945 federal law which perpetuates state regulation of insurers.

Do we want the U.S. to have brave new financial regulatory world—where banks, other depositories, insurance companies, investment banks, hedge funds, equity firms, and others, all play by the same rules (including Fannie and Freddie, and the Home Loan Bank System, assuming they survive)--or do you just want to change the surface colors in the guest bedroom?

Yes, at the margin, the Congress greatly would enhance Fed power, but more importantly it also will reduce duplication, waste, inefficiency, and unnecessary bureaucracy.

Regulate the Unregulated

Under my all-powerful Fed approach, investment banks, hedge funds, private equity funds, etc, which will get far more regulation or a new regulatory regime will howl--as they already have begun --assuring you that they are for “systemic risk regulation,” but need their little industrial niche carved out because they really don’t have to play by the same rules.

Don’t buy the defensive arguments about how they are “unique and different.

They all borrow money (from someone) at one price and try and invest it at a higher one, living off the spread. After that, it just a matter of sorting out the different names.

Use the Obama audacity and Tim Geithner’s funky freshness (if you can’t use Paul Volcker’s skill and reputation) and do something structurally and dramatically dynamic and seismic.

The affected industries will complain and the GOP, I am sure, will say you are seeking “Kremlin like powers” over the financial services industry or “Soviet-style fianncial regulation.” Many in Congress will bitch, too, because they like to have their own “pet” regulatory agency to throttle or from which to generate institutional obsequiousness. (“We thank you, Mr. Chairman for agreeing with our agency and for your foresight and keen intellectual….gag, yak, spew.”), not to mention industry financial contributions.

Listen politely to those arguments, but let them go in one ear and out the other.

Because it is the nation’s central bank and does conduct monetary policy, the Federal Reserve Board always will be the most prominent regulatory agency in the Capital. There’s nothing wrong with that. I’m just saying make it even tougher.

The Fed and its Chairman now get the lion’s share of Congress’ attention. In part because of the mystery which surrounds its work, it garners the media’s focus and it gets grudging bows from the other banking agencies.

Congress should acknowledge that truth and expand on it. Don’t create dilutive Fed competitors.

We already have the existing residual political power in the U.S. Treasury, and now, possibly, some new concentrated power in a brand new “Systemic Risk” unit, while expanding/maintaining the SEC and leaving in place other agencies which policy makers won’t have the political will to atomize.

What in this structure guarantees the cooperation, complementary behavior, coordination and early discussion which didn’t exist for much of the past eight years (and equally for many years under the Democrats, who did not face these serious external economic challenges)? In other words, the model wasn’t really good when times were good.

A gradual enhancement of regulatory authorityand a new "systemic risk agency" is neither much progress nor much “change.”

Put all of the authority in one institution, under one person--the Fed Chairman--and let the Federal Reserve sort out the regulatory pieces over banks, thrifts, insurance companies. investment banks, holding companies, hedge funds. The Fed can have “managing directors” and oversight units for those each industries all reporting to the Board of Governors or a Board governor for each of them, with his/her own jurisdiction. But, all financial services actions get coordinated by that Board.

The Fed will figure it out a lot faster than the Hill and likely do a better job than a new model with watered down regulatory powers for several agencies.

We’ll survive as a nation, if President Obama breaks all of the old regulatory china. So will all of those financial companies and groups who call for regulating everyone but themselves!

Maloni 3-30-2009

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