By Zachary A. Goldfarb, Binyamin Appelbaum and Tomoeh Murakami Tse
Washington Post Staff Writers
Friday, March 27, 2009
Even as Treasury Secretary Timothy F. Geithner yesterday was presenting to Congress his new blueprint for revamping financial oversight, federal regulators at the Securities and Exchange Commission and elsewhere were joining the battle over the creation and apportionment of any expanded powers.
The Obama administration wants Congress to vastly expand federal oversight of previously unregulated financial markets such as trading in derivatives, and to impose more rigorous regulations and curbs on risk-taking by the largest financial companies, including major banks, insurers and hedge funds.
SEC Chairman Mary L. Schapiro urged that her agency play a major role, telling the Senate Banking Committee that the SEC may soon ask for new authority to oversee financial firms and products, including hedge funds, derivatives and municipal bonds. At the same time, she warned that the administration's proposal to endow some federal agency with the authority to detect risks throughout the economy "could usurp" the work of the SEC and other regulators.
Rival agencies -- including the Federal Reserve, Commodity Futures Trading Commission and banking regulators -- already are pushing similar arguments. Consumer advocates, meanwhile, say they are being ignored. Industry groups caution against a surfeit of new regulation.
The administration is taking advantage of what Geithner described yesterday as an "opportunity" to enact regulations that before the financial crisis might have faced much more opposition. Notable by their absence, however, were proposals addressed at the causes of the crisis. There was no mention of increased regulation of the mortgage industry, for example, or of securitization, the process of bundling loans for sale to investors that funded much of the boom in lending.
In part, the administration appears to be deferring to Congress. Rep. Brad Miller (D-N.C.) yesterday introduced legislation to create national regulations for mortgage lending. Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, opened the Geithner hearing with a speech about the need for increased regulation of securitization.
The administration, by contrast, is focused first on creating a system for regulating the largest financial companies, limiting the risks they take and granting the government new powers to seize large firms before they collapse.
In her testimony, Schapiro said she could endorse in principal the proposal to assign a single agency to regulate systemic risk but was concerned this could harm the effectiveness of the SEC. For example, a regulator that worries primarily about risks that one firm poses to the entire financial system might favor relaxing accounting standards in periods of crisis or oppose stiff penalties for an already struggling financial company. Enforcing accounting standards and securities laws are the SEC's bread and butter.
"We have to have equal attention on investor protection, and an independent agency like the SEC focuses on that," Schapiro said in an interview yesterday.
Another area already being contested is Geithner's proposal to regulate derivatives, the exotic financial instruments such as credit-default swaps that have exacerbated the crisis. The SEC and CFTC are both trying to lay claim to overseeing this market. Schapiro yesterday cited the SEC's experience in regulating similar forms of trading as "a pretty compelling reason to be involved in their regulation." The CFTC released a statement asserting its own expertise and saying that it looked forward to contributing to the overhaul of derivatives regulation.
Industry executives, fearful of regulatory overreach, are gearing up for marathon discussions with the administration and key members of Congress.
"We want to achieve meaningful regulatory reform to make sure these products remain widely available, in a way that is cost effective," said Robert Pickel, chief executive of the International Swaps and Derivatives Association.
The turf battle between agencies is mirrored on Capitol Hill, where House and Senate agriculture committees with authority over the CFTC do not want to cede authority to the financial services and banking committees that have oversight over the SEC.
Yet another conflict is brewing over regulation of hedge funds. Geithner wants larger funds to register with the SEC. Schapiro wants all hedge funds to register with the agency. Geithner has also suggested that venture capital and private-equity firms register with the SEC. Schapiro hasn't expressed opposition to this but said that such companies may need to be subject to different rules than hedge funds.
James Chanos, an outspoken hedge fund manager, said yesterday that while the industry is willing to accept some new regulations, Congress shouldn't be quick to treat them the same way as banks and other financial firms.
"Hedge funds and their investors have generally absorbed the painful losses of the past year without any government cushion; the same certainly cannot be said of the major investment and commercial banks, insurance companies, and [Fannie Mae and Freddie Mac] that have had to run to the taxpayer to cushion against the losses caused by poor investment decisions, faulty risk management or fraud," he said.
"Private equity can make a cogent argument that the problem was not of its own making," said an executive at a major private-equity firm who spoke on condition of anonymity because he expects to be part of the discussions with government officials in formulating details of the plan. "It poses no systemic risk. . . . The worst that can happen is the fund goes to zero. It doesn't suddenly turn into this black hole threatening to suck in everything around it."
Perhaps Geithner's friendliest reception came from the House Financial Services Committee, whose members earlier this week had slammed the Treasury secretary for his role in the payment of bonuses to employees at American International Group.
Staff writer Amit R. Paley contributed to this report. Tse reported from New York.