Giving The Fed More Power

Posted by Bull Bear Trader | 3/30/2008 07:28:00 AM | , , , | 0 comments »

The NY Times and Wall Street Journal are reporting that the Treasury Department will propose giving the Federal Reserve broad new authority to oversee the financial markets and insure their stability.

As one step, the plan would merge the SEC with the CFTC (Commodity Futures Trading Commission). This will no doubt raise some objections. As a carrot, these agencies would also be given greater flexibility to regulate themselves and streamline the approval of new products. I can just see all the new ETFs. EFTs of ETFs anyone ....... but I digress.

The Fed would also be granted greater power, allowing it to examine the practices and bookkeeping of brokerage firms, hedge funds, the commodity exchanges, or for that matter, any institution that might pose a risk to the system (Does this include Congress? Just a thought.). There is also interest in allowing the Fed to have additional access to information from those securities firms and investment banks that might borrow money from the central bank. Maybe this will make it easier in the future to tell whether Bear Stearns is worth $2 or $10 dollars ...... but I digress again.

The proposal also calls for a Mortgage Origination Commission to evaluate state governments in regulating mortgage brokers. It would also eliminate the distinction between banks and thrift institutions, close the Office of Thrift Supervision (which regulates federal thrifts), and merge it with the Office of the Comptroller of the Currency (which regulates national banks). Given that the lines between these two are close already, this change may offer less debate.

But we are not done yet. The proposal would also create a national regulator for insurance companies, something currently done at the state level. Like with mortgages, there is a trend in the proposal to move regulatory authority from the states to the federal level. Somewhat of an unusual move for the current administration, but given the current mess, probably not totally unexpected.

It is believed that the proposal will take years to implement, given the depth of change and debate that is likely to ensue, so who knows what will become of it. There is already an expectation that some in Congress will want investment banks to fall under some of the same oversight currently placed on commercial banks. I imagine this debate will begin/continue in earnest.

Finally, most of the proposals are pitched as being geared toward streamlining regulation, but as we know, just because you take two or three existing agencies and create one larger one, you don't always get more efficiency. Unlike companies, which hope to cut waste after mergers (not always successfully), government agencies rarely do. Since they cannot typically layoff the employees, where would they go anyway? You often just get bloated agencies with even more layers of approval. I hope I am wrong, but I am certainly not optimistic.