Doubts greet Obama's financial oversight plan
Friday, October 30, 2009
The Obama administration on Thursday ran into skepticism from lawmakers on both sides of the aisle, as well as a key regulator, as it pushed for broad new powers to monitor risks throughout the financial system and to wind down large, troubled financial firms whose failure could endanger the economy.
The criticisms included how the proposals would be funded, whether the Federal Reserve stood to gain too much influence and if the government would end up with the ability to continually bail out big financial firms without congressional approval.
The divisions arose as Treasury Secretary Timothy F. Geithner headed to Capitol Hill seeking to convince lawmakers that the proposed expansion of government authority is vital to remedy the root causes of last fall's financial crisis.
"The current rules in place for our financial system are inadequate and outdated," Geithner told members of the House Financial Services Committee. "We have all experienced what happens when, during a crisis, the government is left with limited tools and limited choices. That is the searing lesson of last fall."
Under legislation unveiled this week by the committee chairman, Rep. Barney Frank (D-Mass.), in close coordination with the Obama administration, an oversight council of regulators would act as a monitor of systemic risk throughout the financial system and impose tougher regulatory standards on the largest companies. Compared to an earlier draft put forward by President Obama's team, the current bill expands the role of the council, entrusting it to identify risks to the system. The Fed would be the enforcer of the council's recommendations.
But that structure came under fire from Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., who argued the new council should be headed by an independent chairman rather than by the Treasury secretary, and that the council should have greater authority.
Bair also joined both Republican and Democratic lawmakers in questioning the government's plan to pay for the cost of winding down large, failing financial firms. The plan calls for companies with more than $10 billion in assets to be assessed fees only after a large collapse, rather than contributing ahead of time into an insurance-like fund. Geithner and Frank have said the intent is to shift the burden of such failures from taxpayers to the financial industry itself, but Bair argued for the insurance approach.
"We believe a pre-funded reserve has significant advantages," Bair, testifying after Geithner, told lawmakers Thursday. "All large firms, not just the survivors, would pay risk-based assessments into the fund. This approach would also avoid assessing firms in a crisis."
Geithner defended the plan against charges that the current proposals would give too much power to the executive branch and could create a perpetual version of the $700 billion bailout fund, known as the Troubled Assets Relief Program. Rep. Brad Sherman (D-Calif.) referred to parts of the current bill as "TARP on steroids." Rep. Jeb Hensarling (R-Tex.) said the proposals "will actually institutionalize 'too big to fail.' "
"It does not create permanent TARP authority," Geithner responded. "And it does not give the government broad discretion to step in and rescue insolvent firms."
Geithner said bankruptcy would remain the primary tool for most failing institutions. He said the new legislation would create authority similar to what the FDIC currently has to seize faltering commercial banks. In addition, he said it is critical that regulators be able to impose "strong constraints on risk-taking and leverage" on companies to "limit dramatically any expectation of government support."
No regulator would gain more out of the proposed legislation than the Federal Reserve, which endorsed the bill, with Fed Governor Daniel Tarullo saying it "provides a strong framework for achieving a safer, more stable financial system."
Under the current draft, if the central bank sees a problem industry-wide or at a particular firm, it could direct other federal regulators to take action. If that regulator refused, the Fed could take the action itself. The Fed also would have the authority to regulate thrift holding companies and, in limited cases, to force ailing companies into bankruptcy. Moreover, the central bank would be given a seat on the FDIC. The Fed, however, would need Treasury approval to extend emergency loans such as the ones it used to rescue Bear Stearns and American International Group.
A growing chorus of prominent economists have raised questions recently over whether the Fed, or any government regulator, could adequately judge which risks pose a threat to the system.
Former Fed chairman Alan Greenspan said in an interview that the administration's proposal "presumes government officials can accurately forecast risks to the system better than the markets." Over his nearly 19 years at the central bank, Greenspan said he learned that, as a regulator, "you only dimly see the future." When problems arise in plain view, the markets almost immediately correct the issue, he said.
Greenspan agreed with the administration's proposals to increase bank capital, which ensures these firms will have more of a buffer in a downturn, and to grant the federal officials the authority to seize and break up failing financial firms. But the plan to set up government agencies to hunt for threats to the entire system will "create a problem of a bias toward regulatory solutions, and risks that we allow political judgments rather than economic judgments to prevail," he said.
Others, meanwhile, have pushed for more direct solutions to deal with banks that have become too big to fail. Obama's top outside economic adviser, Paul Volcker, also a former Fed chair, has promoted restoring a modern version of the law that once kept commercial banking and investment operations separate. The idea has been endorsed by no less than John Reed, a former Citigroup chairman, who was among those who led the charge to break down that division in the late 1990s.