Senate Banking Committee Finally Sends Warning Shot Across Treasury’s, Fed’s, and SEC’s Bows

Why has taken it taken so long for Congress to try to rein in a Treasury, Fed, and now SEC that has roughshod over their prerogatives? And even odder, why do they send a shot across their bow now that the Fed and SEC are starting to work together on securities reform ideas (or more accurately, window dressing masquerading as reform) when the intent was announced a couple of months ago? Bloomberg reports on the overdue reaction:

The Senate’s top banking legislators told the Federal Reserve and Securities and Exchange Commission to hold off on enacting a deal to oversee Wall Street, concerned that regulators are proceeding without consulting Congress.

Democrat Christopher Dodd and Republican Richard Shelby, the Senate Banking Committee’s top lawmakers, delivered their warning in a letter yesterday as Bernanke and Cox met to wrap up a memorandum of understanding. The SEC plans to provide information on securities firms’ trading positions, capital and leverage, according to two government officials…

Congress is asserting its primacy over how financial markets should be regulated as federal supervisors wrestle with the yearlong credit rout. ….

“We ask that no action” be taken before legislators can decide it’s in the economy’s “best interests,” Dodd, the Connecticut senator who chairs the banking panel, and Shelby of Alabama said in the letter. It was addressed to Bernanke, Cox and Treasury Secretary Henry Paulson..

Note the show of unity across party lines.

But it is still extraordinary that it took this long to muster a response from someone, anyone in Congress. We were stunned at Congress’ posture during its hearings on the Bear rescue. We had thought the legislators would slap the Fed on the wrist for having made an unuathorized fiscal commitment (any losses on the $29 billion loan to JPM get eaten by taxpayers). Similarly, Hank Paulson’s proposal to restructure regulation of financial institutions called for consolidation of various agencies, something beyond Executive Branch authority. An interested but pointed remark from a well placed Congressman or two (along the lines of “we look forward to learning more about the Administration’s proposals”) might have been a useful reminder to a bull-in-the-china-shop Cabinet member.

In fairness, the powers that be in Congress may have chosen to ignore a wish list from a lame duck Treasury secretary. And it was only recently that the press started reporting that Paulson was taking steps to move his agenda forward (although one might think DC insiders would have picked this up sooner). So the pushback by the legislative branch might not be as tardy as it seems.

More details from Bloomberg:

The Fed will share data with the SEC on repurchase agreements, which are short-term loans provided by commercial banks that clear trades and hold collateral for securities firms, said the officials, who declined to be identified because the agreement isn’t final.

Cox offered to brief Dodd and Shelby on the SEC’s talks with the Fed. The memorandum is “intended to facilitate our agencies’ ongoing, day-to-day cooperation,” he said in a letter responding to the two. “It is the role of Congress to decide whether, and if so how, to alter the existing regulatory structure.”

Fed officials in March rescued Bear Stearns Cos. from bankruptcy with $30 billion of financing to secure its takeover by JPMorgan Chase & Co. They also introduced the Primary Dealer Credit Facility, giving securities firms access to loans from the central bank at the same rate as commercial banks. It was intended to last “at least six months,” the Fed said March 16….

Dodd and Shelby flagged in their letter that Congress hasn’t given the Fed permanent authority to lend to securities dealers.

The information sharing between the Fed and SEC will continue even if the central bank stops providing the financing, officials said, citing the draft memorandum. Securities dealers are currently overseen by the SEC. The Fed has introduced its own supervisors at the firms since it started lending to them.

“The only reason for the Fed” to “have an interest in how investment banks are doing is if it intends to step in and provide access to the discount window in more normal times,” said Peter Wallison, a former Treasury general counsel. “Once that idea gets established then market discipline essentially disappears.”

Congress plans to start hold hearings on financial regulation next month…

Cox urged his staff June 23 to not “engage in turf wars among federal regulators,” according to an e-mail the SEC provided to Bloomberg News. He added it’s “inconceivable to me” that under any overhaul approved by the Congress, “the role of the SEC will not be strengthened and expanded.”

Central bankers are debating whether to extend the PDCF beyond September, amid signs of continued stress in financial markets. They may make a decision before their Sept. 16 meeting, when traders anticipate they will announce the first interest- rate increase since 2006…..

“We are in a transitional regime,” said Laurence Meyer, vice chairman at Macroeconomic Advisers LLC and a former Fed governor. Shelby and Dodd “are saying the situation on the ground has changed, the regulatory framework is already evolving, and we haven’t been involved.”