Fed Says Financial System Needs Overhaul

New Powers Needed To Prevent Widespread Economic Damage In Event Of Wall Street Collapse

(CBS/ AP)  Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told Congress Thursday that new regulatory powers are needed to insulate the national economy from damage if a big Wall Street firm collapses.

After years in which the Bush administration stressed deregulation and free markets, its top financial officials told Congress they agree what's needed now is a lot more power for regulators to get control over the markets, and, as CBS Radio's Bob Fuss reports -- step in when needed.

Paulson said things changed with the near collapse of the Wall Street firm Bear Sterns. He and Bernanke agree they need more coordinated control and plans on what to do next time a major bank or investment company starts teetering, Fuss reports.

Their recommendations were part of a broader debate before the House Financial Services Committee about the best ways to revamp the country's antiquated regulatory system. The idea is to brace the system to better respond to modern-day crises like the housing and credit debacles that have badly bruised the economy.

Both Bernanke and Paulson endorsed creating new procedures by which the government can guide an orderly liquidation of a failing investment bank in an effort to minimize any fallout that might be inflicted on the broader financial system and the overall economy. Such procedures, which are in place for commercial banks, might have made the dissolution of Bear Stearns more orderly.

"In light of the Bear Stearns episode, Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools," Bernanke said.

Paulson, who recently laid out such a proposal, said: "It is clear that some institutions, if they fail, can have a systemic impact." However, financial players need to be disciplined in managing risk and not expect the government to fly to their rescue, he added. "For market discipline to effectively constrain risk, financial institution must be allowed to fail," he said.

The Fed's financial backing of JPMorgan Chase's takeover of the troubled Bear Stearns has drawn criticism from Democrats, who call it a government bailout that could put billions of taxpayer dollars at risk.

The Treasury chief also sought Thursday to calm investor jitters about the financial health of mortgage giants, Fannie Mae and Freddie Mac. They are "working through this challenging period," Paulson told Congress. "Their regulator has made clear that they are adequately capitalized."

Shares of Fannie and Freddie tumbled on Monday after a Lehman Brothers report said that an accounting change could force the companies to raise billions in new capital. That sent a tremor through financial markets.

Bernanke in recent days has called for stronger oversight of big Wall Street firms, which are regulated by the Securities and Exchange Commission. Those firms have been given unprecedented - albeit temporary - access to tap the Fed for emergency loans, a privilege that has been granted for years to commercial banks, which are more tightly regulated.

With credit problems persisting, the Fed may extend the lending privilege to investment banks into next year, Bernanke has said.

The Fed chief called on Congress to consider giving the central bank explicit authority to oversee systems that process payments and other financial transactions by investment firms as well as banks.

And, he recommended that Congress give a regulator the authority to set standards for capital, liquidity holdings and risk management practices for the holding companies of the major investment banks. Currently, the Securities and Exchange Commission's oversight of these holding companies is based on a voluntary agreement between the SEC and those firms.

"The financial turmoil that began last summer has impeded the ability of the financial system to perform its normal functions and adversely affected the broader economy," Bernanke said. "This experience indicates a clear need for careful attention to financial regulation and stability by the Congress and other policymakers."

The Fed, which regulates banks, and the SEC, which oversees investment firms, announced an information-sharing agreement on Monday aimed at better detecting potential risks to the financial system. With the Fed lending money to Wall Street firms, it needs to have a firm grasp of their financial shape.

Paulson has put forward an ambitious overhaul that would turn the Fed into a super cop in charge of financial market stability. But the plan would remove the Fed from day-to-day banking supervision, which Bernanke opposes.

No action is expected this year on such a regulatory overhaul and the debate is likely to spill over to the next president and the next Congress.

However, the sudden demise of the once mighty Bear Stearns, which was forced to the edge of bankruptcy after a run on the investment bank, underscored how quickly fortunes can change and raised new questions about the effectiveness of the regulatory system.

[randynason]

Now that the Feds have identified the problem maybe they can come up with a solution.


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Posted by SkyFive

Don''t hold your breath. If the Feds come up with anything, it will be how to hold onto their financial holdings in the wake of a full-blown recession/depression. The average person is left to his/her own devices.

[pensacola88]

Rather go to bed with out dinner than to rise in debt. -Benjamin Franklin

Remember that credit is money. - Benjamin Franklin

Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones. - Benjamin Franklin

One today is worth two tomorrows. Benjamin Franklin

He that is of the opinion money will do everything may well be suspected of doing everything for money. -Benjamin Franklin

Having been poor is no shame, but being ashamed of it, is.- Benjamin Franklin

Even peace may be purchased at too high a price.- Benjamin Franklin

Beware of little expenses. A small leak will sink a great ship.-Benjamin Franklin

All wars are follies, very expensive and very mischievous ones. - Benjamin Franklin

By failing to prepare, you are preparing to fail. - Benjamin Franklin

Do good to your friends to keep them, to your enemies to win them.- Benjamin Franklin

[demwatcher]

"Silly you...97% are not in foreclosure because you haven''''t been foreclosed YET !!! DOOFUS.

Posted by whitemale08 at 06:25 PM : Jul 10, 2008"

You must be a LIBERAL to be so (cough) optimistic.

Dumbarse.

[deacon20081]

Here is the link

Accounting Plan Would Allow Use of Foreign Rules

http://www.nytimes.com/2008/07/05/business/05sec.html?partner=rssnyt

[deacon20081]

July 5, 2008 News
Accounting Plan Would Allow Use of Foreign Rules

Google it

[apprxam]

Phil Gramm, America''s financial guru...because he knows everything.

[whitemale08]

97 plus percent all USA homeowners -

NOT IN FORECLOSURE!!!

Posted by badaxmofo at 03:28 PM : Jul 10, 2008-

Silly you...97% are not in foreclosure because you haven''t been foreclosed YET !!! DOOFUS.

[geneonlbk]

I guess Bush is to be congratulated for getting eight years at the hog troth for all the rich neocons. Too bad it was on the backs of the working man.

[iphyt4u]

How about a plan to help people with food and medicine? How about a plan to help the homeless? How about a plan to help underprivaledged kids attend institutions of higher learning? How about a plan to watch over and assist the elderly? Republican welfare, lets help the banks that stole money from hard working people.

[stevex47]

This system works just fine when you don''t have idiot nutjobs at the helm.