Super Fed

By Lisa Valentine

The U.S. Department of Treasury released “A New Foundation: Rebuilding Financial Supervision and Regulation” on June 17. The 89-page report outlines the Obama administration’s long-anticipated recommendations for getting the U.S. financial system back on its feet and to prevent the recurrence of the systemic breakdown from which the world economy is still. The reforms seek to undo what the report calls complacency among financial intermediaries and investors that “go back decades.”

A large part of the reform focuses on expanding the role of the Federal Reserve, putting the Fed in charge of supervising all firms “that could pose a threat to financial stability, even those that do not own banks.”

This Super Fed will have oversight over all areas of the financial services industry (although relatively unscathed are insurers) as well as any firm that has tentacles in financial dealings, including previously under-the-radar companies s that offer financial products such as GE and Wal-Mart.

Here are some of the highlights of the reform:

· Create a new financial services oversight council charged with identifying systemic risks.

· Require hedge funds and other capital private pools such as private equity and venture capital funds to register with the SEC under the Investment Advisers Act.

· Regulate OTC derivatives, including CDS.

· Require issuers and originators of securities to put their money where their mouth is and retain “a financial interest in securitized loans.”

· Protect consumers from “unfair, deceptive, and abusive practices” from with a new Consumer Financial Protection Agency. It’s unclear whether or not the agency will make sure that these consumers don’t purchase homes that they could never, ever afford.

If the reform is passed, we’ll be the lucky recipients of four new government agencies: the Financial Services Oversight Council, the Consumer Financial Protection Agency, the National Bank Supervisor, and the Office of National Insurance. We do lose the Office of Thrift Supervision so net gain is only three new agencies.

Are the proposed changes onerous? It depends in your position on the financial services food chain. Large financial institutions will experience additional red tape perhaps similar to the knee-jerk passing of the U.S. Patriot Act in response to the terrorist attacks of 9/11 and the Sarbanes-Oxley accounting standards hastily passed in the wake of the Enron and WorldCom misdeeds. Many large banking firms may feel that they got off easy since the proposal leaves most of the current regulatory structure in place—a structure that they well-experienced in dealing with.

Most impacted by the reforms, should they pass the house and senate as is, will be smaller firms, believes John Berlau with the Competitive Enterprise Institute. He writes, “This new mountain of red tape could choke many small businesses, the engines of economic recovery, and do little to prevent the next crisis.”

Is this a new foundation? A new foundation would mean bulldozing the current financial regulatory agencies. This looks more like a repair job.