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March 01, 2009 at 02:00 AM
As new Treasury Secretary Timothy Geithner was preparing to announce a four-pronged revamp of the bank bailout package–which would include a “bad bank” that allows banks to purge themselves of bad assets–and debate on the stimulus package waged on (the Senate passed its version of the House’s H.R. 1 on February 10), a consensus was emerging among lawmakers that the Federal Reserve be named the systemic risk regulator overseeing all financial services activities. Meanwhile, SEC Chairwoman Mary Schapiro was laying the groundwork for a significantly beefed up enforcement division at the Commission, just as its current director, Linda Chatman Thomsen, abruptly resigned after being lambasted recently by Congress over the SEC’s failure to detect the Bernie Madoff Ponzi scheme.
In setting out his agenda for this year, Rep. Barney Frank (D-Massachusetts), chairman of the House Financial Services Committee, told reporters in early February that one of the most important near-term issues for Congress and the new Administration to tackle is systemic risk. “The biggest single problem we’ve had here is not just in subprime loans,” Frank said. “There have been too few constraints on major financial institutions incurring far more liability than they could handle.” That’s why it’s paramount to empower a systemic risk regulator, he said, which will likely be the Federal Reserve.
Frank said the systemic risk regulator–which Congress hopes to have in place by the middle of the year–”will have some flexibility as to what the reach is,” but “you cannot define this too specifically legislatively, because if you do, people will get around it.” Frank noted, however, that the Fed’s new duties to constrain excessive risk taking would not “take away from the SEC or the CFTC or any of the bank regulators.” The Congressman added that “complete transparency for hedge funds has to be part of the systemic risk operation.”
Where the Congress Stands
Just what changes Congress has in store for the SEC under financial services reform have yet to unfold. However, Rep. Paul Kanjorski (D-Pennsylvania), chairman of the House Financial Services Subcomittee on Capital Markets, issued a stern warning to SEC senior staff, during a hearing on the Madoff scandal in early February, saying the agency’s fate could be changed under the reforms being worked out in Congress.
