Meeting of the Minds On Regulatory Revamp

By Neil Irwin
Washington Post Staff Writer
Friday, July 11, 2008

The nation's top economic policymakers took their campaign to rework financial regulation to Capitol Hill yesterday, urging Congress to make major changes in the oversight of Wall Street firms and other financial institutions.

Calls by Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke for legislation intended to prevent a financial crisis like the one of the past year received a warm reception from the House Financial Services Committee. Most questions from lawmakers were about when and how to overhaul the system, not whether to do so.

The hearing marked a transition in the debate that has followed the recent financial problems and the near-collapse of investment bank Bear Stearns in March. Paulson, Bernanke and many others have offered ideas for changing the regulatory system to avoid a repeat of these events. That discussion is moving to Congress and closer to a debate over specific legislation, though Paulson and Bernanke both acknowledged that major changes were unlikely to be enacted this year because the task is sufficiently complicated.

"We have the power to respond if there are crises," Rep. Barney Frank (D-Mass.), the committee's chairman, said at the hearing. "What we are looking for are rules that will make the crises less likely."

"We will begin working on this," he said, "And I hope that early next year we will be able to complete it."

A recurring theme at the hearing was that sweeping change will be a slow and difficult effort, given the sheer complexity. For example, the Treasury Department worked on its proposal for more than a year before releasing it in March.

Frank endorsed one proposal, advocated by Paulson, to give the Fed explicit responsibility and new powers to ensure the stability of the financial system, and asked if it was sufficiently urgent to enact it this summer. "That will clearly take some time to consider and to get the legislation through," Paulson said.

Paulson said there was greater urgency to create a new system to dispose of the assets of a failing financial firm in a way that would not cause broad economic distress. He acknowledged that too will take time.

"I gather what you're saying is, it is better, in this very complex and very important set of issues, that we do it right than that we do it very quickly?" Frank asked. Paulson and Bernanke agreed.

"We both would like additional tools," Paulson said. "We're not saying take forever, but we recognize the fact that the regulatory structure hasn't been changed in a long time and . . . that it's not going to be easy."

Paulson called for replacing the multitude of regulators that have varying missions and responsibilities with three that each have a coherent focus. One would concentrate on market stability, another on the soundness of financial institutions that have federal guarantees, and the third on protecting consumers and investors.

"A major advantage of this structure is its timelessness and its flexibility," Paulson said. "Because it is organized by regulatory objective . . . it can more easily respond and adapt to the ever-changing marketplace."

Bernanke offered a narrower set of recommendations, along the lines of a speech he delivered Tuesday. He favors giving the regulator of investment banks, currently the Securities and Exchange Commission, more explicit legal authority. He wants the Fed to have more power to strengthen the nuts and bolts of the financial system, such as the systems banks use to settle payments to each other. He also echoed Paulson's call to create a process for dissolving failed financial firms without causing a broader economic crisis.

Bernanke faced several questions on the rescue of Bear Stearns, which was engineered in March to prevent what Fed leaders feared could have caused a global financial catastrophe.

"I believe we did the right thing," Bernanke said. "I would do it again. I think it was necessary to protect the financial system. I don't want to do it again." He said that he had consulted with congressional leaders the weekend the Bear Stearns action was undertaken and that he would intervene to prevent a wide crisis again unless Congress made it clear that he shouldn't do so.

Frank, in embracing the idea of giving the Fed formal responsibility for financial stability, acknowledged that the agency was not ideal for the role. He evoked a line by comedian Henny Youngman. "How's your wife? Compared to what? And the Federal Reserve compared to what? I don't see any alternative to the Federal Reserve," Frank said.

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