Federal Reserve Seeks Broad Authority to Oversee “Financial Market Stability”


Cryptogon
March 29th, 2008

“Some changes could actually reduce the power of the Securities and Exchange Commission, which is charged with maintaining orderly stock and bond markets and protecting investors.”

Check out some of the background stories that have been leading up to this:

Goldman Sachs Creates Private Stock Exchange for Unregistered Securities, Clients with $100 Million Minimum

NASDAQ to Open Unregulated Private Stock Exchange for Investors with a Minimum of $100 Million in Assets

Big Traders Dive Into Dark Pools

In other words, if you thought equities were a scam before, you haven’t seen anything yet.

Via: New York Times:

The Treasury Department will propose on Monday that Congress give the Federal Reserve broad authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.

The proposal is part of a sweeping blueprint to overhaul the country’s hodge-podge of regulatory agencies, which many specialists say failed to recognize rampant excesses in mortgage lending until after they triggered what is now the worst financial calamity in decades.

According to a summary provided by the administration, the plan would consolidate what is now an alphabet soup of banking and securities regulators into a trio of overseers responsible for everything from banks and brokerage firms to hedge funds and private equity firms.

While the plan could expose Wall Street investment banks and hedge funds to greater scrutiny, it avoids a call for tighter regulation. The plan would not rein in practices that have been implicated in the housing and mortgage meltdown, like packaging risky subprime loans into securities carrying AAA ratings.

The Fed would also be given some authority over Wall Street firms but only when an investment bank’s practices posed a threat to the financial system over all.

The plan does not recommend tighter rules over the vast and largely unregulated markets for risk-sharing and hedging, like credit-default swaps, which are supposed to insure lenders against loss but became a speculative instrument and gave many institutions a false sense of security.

Some changes could actually reduce the power of the Securities and Exchange Commission, which is charged with maintaining orderly stock and bond markets and protecting investors.

The blueprint suggests several areas where the S.E.C. should take a lighter approach to its oversight, such as allowing stock exchanges greater leeway to regulate themselves and streamlining the approval of new products, even allowing automatic approval of securities products that are being traded in foreign markets.

Under the proposal, the S.E.C. would merge with the Commodity Futures Trading Commission, which regulates exchange-traded futures for oil, grains, currencies and the like.

Under the Treasury proposal, the Federal Reserve would become the government’s “market stability regulator” and would be allowed to gather information from virtually any financial institution. Fed officials would be allowed to examine the practices and even the bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the financial system.

“The Fed would have the authority to go wherever in the system it thinks it needs to go for a deeper look to preserve stability,” Mr. Paulson said in the advance text of Monday’s speech. “To do this effectively, it will collect information from commercial banks, investment banks, insurance companies, hedge funds, commodity pool operators.”

That would be a significant expansion of the central bank’s regulatory mission, which has been limited primarily to supervising commercial banks. When Fed officials agreed earlier this month to rescue Bear Stearns, once the nation’s fifth-largest investment bank, they pointedly noted that the Fed never had the authority to monitor its financial condition or order it to beef up its protections.

In an unprecedented pair of moves, the Fed engineered a shotgun marriage between Bear Stearns and a rival, JPMorgan Chase, and then lent $29 billion to JP Morgan in order to prevent a bankruptcy filing by Bear and a chain of defaults that might have brought down much of the financial system.

For the first time since the 1930s, the Fed also agreed to let investment banks borrow hundreds of billions of dollars from its discount window, an emergency program reserved for commercial banks and other depository institutions.

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