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Jun 09

The Fed once again proves to be a regulatory pushover

Posted by Ron F in Timothy GeithnerRegulationObama Administrationfinancial market reformfinancial crisisFederal ReserveFederal Deposit Insurance Corp.FedEnroncomplianceBanksbanking reformbanking industryBanking

Ron F

Anyone who thinks the Federal Reserve ought to oversee systemic risk ought to take a close look at this article.

By now, of course, it's no surprise that banks used yet another financing gimmick to make their capital look stronger than it really was. This one, involving Trust Preferred Securities known as TruPS, is doubly gimmicky, in so far as it involves both hybrid securities (i.e., a have your cake and eat it combination of debt and equity) and off-balance-sheet treatment. In terms of magnitude and significance, this stuff makes Andy Fastow look like a piker. Then again, Enron violated the letter as well as the spirit of the accounting rules. The banks were smarter than Fastow in that respect, or at least their lawyers and lobbyists were.

The thing is, of the three primary federal bank regulators, only the Fed had no problem with the industry's use of these gizmos. So back in 1996, when both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp balked at counting them as regulatory capital, the Fed stepped in and said it was fine and dandy at the banking holding company level, where the bankers' bank rules the roost.

Tell me again why the Fed not only should not be audited but should retain primary responsibility for overseeing not the just the money supply but the safety and soundness of the banking system.

Once again, the OCC and FDIC look like tough guys compared with the central bank.

It's not too late to reconsider the decision not to strip the Fed of this authority, though at the rate things are going, nothing at all will change. Indeed, the Fed's likely to end up with even more power. And unless it somehow changes its approach, which is next to impossible to believe it will do, another, bigger financial crisis will be around the corner.

To be fair, I haven't checked to see whether earlier proposals to at least limit bankers' influence over regional Federal Reserve banks' boards and the Board of Governors are still in the works, but I wouldn't be surprised if even those have been jettisoned under pressure from the bank lobby. Look for a separate post on this particular issue as financial "reform" comes closer to reality.

At least the Europeans seem serious about structural changes in the industry, via bank taxes of one sort or another, notwithstanding Tim Geithner's recent trip to convince his counterparts across the pond to soften such changes the way he got Congressional Democrats to do. No dice, apparently.

Guess the Europeans aren't Euroweenies after all, at least on bank reform, in contrast to the Obama administration, and that New York City Mayor Mike Bloomberg won't have to worry about losing Wall Street jobs to London or Frankfurt, as if finance were the one industry we need to be protect against foreign competition, for reasons that are never explained. Yet bankers are among the first to defend the virtues of shipping other, more productive industries abroad.

Go figure.

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