Just when Treasury Secretary Henry Paulson had Washington focused on his blueprint for overhauling capital markets regulation, what with the collapse and bailout of Bear Stearns Cos., along comes spiking oil prices to steal the attention. Thursday Paulson tried to reclaim a little of the spotlight. In a speech to Women in Housing and Finance, Paulson reminded Washington of his plan to assign the Federal Reserve to the beat of overseeing investment banks. The underlying message: The credit crunch isn't over, and he wants Congress to sign off on procedures for providing emergency funding to and, if necessary, liquidating an investment bank.
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"We must dramatically expand our attention to the fundamental needs of our system, and move much more quickly to update our regulatory structure," he said.
The Securities and Exchange Commission is getting impatient with oil-distracted lawmakers as well. In testimony to Senate Banking's subcommittee on securities, Erik Sirri, SEC director of trading and markets, reminded them that major aspects of the interagency-designed blueprint need legislation to be implemented. "An imperative from the Bear Stearns crisis is addressing explicitly through legislation how and by whom large investment banks should be regulated and supervised."
One area where Congress can help -- as the comments of Paulson and Sirri make clear -- is to sort out where the Fed's responsibilities end and the SEC's begin. Paulson said Washington should "consider how the SEC and the Fed should coordinate regarding capital and liquidity requirements for these firms."
Although the two agencies are working on a memorandum of understanding to formalize their duties in this world of extra Wall Street oversight, delineating responsibilities hasn't been easy. Paulson noted that "in reality, the Fed is already expected to play the role" of market stability regulator. But he conceded it "has neither the clear statutory authority nor the mandate" to deal with risks spanning the entire financial system, including when and how it should act as a lender of last resort. Sirri, on the other hand, called on Congress to give the SEC "an explicit mandate" to be the chief supervisor of investment banks' holding companies.
Unfortunately for both agencies, this is an election year, and Congress doesn't handle thorny issues quickly when there's campaigning to do. - Bill McConnell
See a transcript of Paulson's speech
See a transcript of Sirri's testimony
See related story from The Washington Post
