More Regulatory Authority? How About Using What You've Got
At their joint hearing with the House Financial Services Committee, both Tim Geithner and Ben Bernanke advocated for regulatory authority over non-bank financial institutions. I'm trying to get a handle on this. First of all, the investment banks all went under this past fall, so Goldman Sachs, under current law, is a bank. JP Morgan is a bank. So is Merrill Lynch. AIG stands out as the exception to the rule, but regulating their PRODUCTS would seem to be the key, not granting emergency authority to seize them. What's more, states regulate insurance companies, and while I think there ought to be a federal overseeing authority, that could get messy. And as you'll read below, the financial products unit did have federal oversight. Then there are hedge funds and the like, but again, I see the regulatory needs in the product line and not necessarily the ability to seize. FWIW here's Bernanke's argument:
The decision by the Federal Reserve on September 16, 2008, with the full support of the Treasury, to lend up to $85 billion to AIG should be viewed with this background in mind. At that time, no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG. Unfortunately, federal bankruptcy laws do not sufficiently protect the public's strong interest in ensuring the orderly resolution of nondepository financial institutions when a failure would pose substantial systemic risks, which is why I have called on the Congress to develop new emergency resolution procedures. However, the Federal Reserve did have the authority to lend on a fully secured basis, consistent with our emergency lending authority provided by the Congress and our responsibility as central bank to maintain financial stability. We took as collateral for our loan AIG's pledge of a substantial portion of its assets, including its ownership interests in its domestic and foreign insurance subsidiaries. This decision bought time for subsequent actions by the Congress, the Treasury, the Federal Deposit Insurance Corporation, and the Federal Reserve that have avoided further failures of systemically important institutions and have supported improvements in key credit markets.
Yves Smith sounds the right notes in her skepticism.
AIG, poster child of insufficient regulation, was overseen at the parent level (which is where the black hole creating Financial Products unit sat) by the Office of Thrift Supervision (no joke), which is an agency of the Treasury! So the Treasury is acting like it needs more authority to prevent future AIG's when its own agency was responsible for the doomsday machine part of AIG.
And the hedge fund supervision bit probably means less than meets the eye. Even if a lot of them have operations in Fairfield County or Manhattan, a lot are domiciled in the Caymans or Luxembourg. You do need to observe certain forms to make sure the designation sticks (have local counsel, have annual meeting there, etc.) but after the Bear Stearns hedge funds screwed up on that front (setting up funds there but not taking other steps consistent with having them domiciled offshore), other funds may have cleaned up their act [...] The problem is not regulatory authority, the problem is the lack of a special resolution regime of the sort the UK has for putting big complex financial firms into receivership. Merely giving Treasury authority is insufficient without putting in place needed bankruptcy type provisions [...] Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is NOT, appearances to the contrary, to be able to put more firms into receivership. It is to get broader authority to bail them out.
After the events of last week, Congress has little appetite for giving Treasury or the Fed more authority. Steny Hoyer shot it down today. Regulations are nice, but regulatory will appears to be what's lacking here, and giving the same people who want to bail out the whole sector with no strings attached more power doesn't seem advisable.