Treasury Secretary Henry Paulson said on Wednesday that the Federal Reserve should broaden its oversight to include Wall Street investment firms in a shakeup of the supervisory system set up during the Great Depression.
In a speech to the U.S. Chamber of Commerce, Paulson praised the Fed’s decision last week to lend to securities dealers and said the policy should be reserved for times of market stress. “Certainly, any regular access to the discount window should involve the same type of regulation and supervision,” he said in the remarks yesterday in Washington, D.C.
Paulson, who spent three decades on Wall Street, is finishing his yearlong review of how the American financial system is regulated. He said the Fed-orchestrated purchase of Bear Stearns Cos. by JPMorgan Chase & Co. underscores that “the world has changed,” and the roles of investment banks and commercial banks require regulators to “think more broadly about the regulatory and supervisory framework.”
The Fed’s role in helping to finance the rescue of Bear Stearns and the expansion of the central bank’s role as lender of last resort suggest it may gain power at the expense of the Securities and Exchange Commission.
“The Bear Stearns action was a sea change,” said Gilbert Schwartz, a former associate general counsel at the Fed, and now a partner at Schwartz & Ballen in Washington. “The Fed should be the umbrella agency for all these institutions. The SEC is not set up to handle this.”
As Paulson’s speech came to a close, top lawmakers on the Senate Finance Committee announced plans to review JPMorgan Chase & Co.’s purchase of Bear Stearns, including the Fed’s investment in illiquid mortgage securities. (See sidebar, this page.)
Committee Chairman Max Baucus, a Montana Democrat, and Iowa Sen. Charles Grassley, the panel’s top Republican, wrote to the firms’ chief executives, as well as Paulson, Fed Chairman Ben S. Bernanke, and New York Fed President Timothy Geithner seeking details on how the buyout was negotiated.
Senate Banking Committee Chairman Christopher Dodd said he will hold a hearing next week to probe “serious public-policy questions” raised by regulators’ role in the sale of Bear Stearns.
The SEC was created to restore confidence in U.S. capital markets in the wake of the 1929 stock market crash and the Great Depression that followed. The agency’s mandate is to make sure investors are treated fairly, and it enforces rules for both companies that sell stock to the public and people who sell and trade securities.
Congress gave the agency broad authority to make rules for securities firms and stock exchanges. President Franklin D. Roosevelt appointed Joseph Kennedy, father of the future President John F. Kennedy, as the first SEC chairman in 1934.
Paulson noted that the SEC invited the Fed to participate in the agency’s supervision of investment banks, SEC spokesman John Nester said.
“While each of the agencies has different roles and responsibilities, together we bring our collective authorities to bear on behalf of investors and capital markets,” Nester said.
The central bank’s “creativity in the face of new challenges deserves praise, but the circumstances that led the Fed to modify its lending facilities raises significant policy considerations that need to be addressed,” Paulson said. “These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.”
Paulson said it would be premature to assume that the Fed will make its new lending facility permanent, calling recent market conditions “an exception to the norm.” Bear Stearns “found itself facing bankruptcy,” he said.
“At this time, the Federal Reserve’s recent action should be viewed as a precedent only for unusual periods of turmoil,” he said.
In his speech, Paulson said Treasury’s review of U.S. financial regulators, will come out “soon,” as part of his push to streamline the regulatory system to improve American competitiveness.
Bush administration officials are working to avert a recession brought on by plunging housing prices and the worst credit crunch in over two decades. The Treasury chief said the U.S. was in a period of “turbulence” that will take time to resolve.
He didn’t repeat earlier comments that the U.S. will avoid falling into recession.
“Our economy and our capital markets are flexible and resilient and I have great confidence in them,” he said. “I am certain we will work through this situation and go on to new heights as we always do.”
— Bloomberg News