Obama administration’s plan to revamp regulation

WASHINGTON — The Obama administration’s plan to revamp regulation and prevent any more crashes like those that felled AIG and Lehman Brothers includes a bold new idea: Empower the Federal Reserve to oversee the biggest financial players whose failure could threaten other institutions and the economy.

But some lawmakers and economists say making the Fed a "systemic risk regulator” would itself be a high-stakes risk that would distract from its core mission: reviving the economy.

They say the Fed shares blame for the financial crisis that erupted last fall. Along with other regulators, it failed to crack down on risky mortgages and lax lending standards that ignited the crisis.

Unless the Fed improved its oversight abilities, "giving the Fed more responsibility at this point is like a parent giving his son a bigger and faster car right after he crashed the family station wagon,” said Mark Williams, professor of finance and economics at Boston University and a former Fed bank examiner.


Eyes and ears
Treasury Secretary Timothy Geithner and Lawrence Summers, head of the White House’s National Economic Council, said in an opinion piece published Monday in The Washington Post that the Fed would become a "systemic risk regulator” for "large, interconnected firms whose failure could threaten the stability of the system.”
They also would create a council of regulators with "broader coordinating responsibility across the financial system,” Geithner and Summers wrote.

These regulators — which weren’t identified — would serve as extra eyes and ears to police risky financial products throughout the financial landscape.

President Barack Obama plans to unveil the regulatory plan today, with congressional hearings on Thursday.


Financial super cop
Even inside the Fed, there’s recognition that its examiners would need to improve their ability to detect risks if it was to be made a new financial supercop. Under Alan Greenspan, who led it for 18 years, the Fed and other agencies overlooked the risks of allowing exotic mortgages to go to financially shaky borrowers. And they resisted efforts to regulate risky and complex instruments such as derivatives.
"We must ensure that we continue to increase our expertise so it is properly matched with the problems and challenges we will face in both our bank supervisory role and in meeting our traditional financial stability mandate,” Fed Chairman Ben Bernanke acknowledged in a recent speech.

Some lawmakers and Wall Street analysts worry, too.



by the associated press