Internal Power Struggle: Who's To Blame?

So, I was watching Cspan coverings on Tuesdays senate panel discussing with the Federal Reserve, FDIC chairperson, and the Comptroller of the Currency .. (I know.. I was bored)

One question posed by Sherrod Brown (D-OH) to the panel present was: Why the strife between regulatory agencies on "turf" (power), and specifically.. why this fighting over Obama's plan?

A rather simple question, but Sheila Blair gave an interesting (albeit, long winded response and by the red glazed over look in Brown eyes I don't think he understood any of it...) response.

This is all in regards to Timmy the Tax Cheat having a temper tantrum in front of Blair, Bernake and other agencies..

Obama's plan is basically to take a rather significant amount of power away from the Treasury, the FED, the FDIC, and most likely quite a few other agencies.. and create a brand new agency called "Consumer Financial Protection Agency"

So we would have the following:

SEC
FDIC
FED
CFPA
Treasury

All monitoring basically the same entities.. the problems being that the more bureaucracies that are created, the bigger the loop holes the more likely another major discombobulation of the financial markets is to occur.

I actually side with the Federal Reserve, Treasury and FDIC on this one.. Blair put it quite nicely:

The problems that arose around massive credit expansion and the creation of the Housing Bubble came about, largely, from non-regulated (or at least lax-regulation) companies.

The Federal Reserve, Treasury and FDIC all monitor, regulate and insure BANKS, and Bank Holding companies..

The biggest players in the financial collapse were companies like Country Wide Home Loans, American International Group, General Electric Financing, and various other funds, investment holding companies, mortgage brokers and insurance companies.

The agencies listed above, for the most part, do not regulate companies like this.. In fact, it turns out, aside from the SEC, apparently no body regulated these institutions (except Insurance, which State insurance boards should have been investigating, as per AIG, that's the State of New York's fault)

Let's take Country Wide as an example. Country Wide originates Home Loans, for the most part ... the lent more money for sub-prime mortgages than anyone else.. and usually sold the mortgages to either other banks or GSE's like Fannie and Freddie. But country wide did not have deposits .. thus they were not regulated by the FDIC. They were a bank, or bank holding company.. thus they were not regulated by the Federal Reserve, nor the Treasury. They were not trading or investing in other peoples money, just selling mortgages, thus they were not regulated by the SEC. Who regulated them? No body, or at least.. no one is taking responsibility if they were. When it came to light Country Wide had absolutely no cash, bankrupt, and used illegal methods to originate mortgages, the company promptly collapsed.

Some companies like General Electric (which took a $140 billion dollar bailout) was also not a bank, bank holding, or deposit institution .. unregulated. It came to light too that they were giving credit to anyone and everyone .. GE had to transform their finance arm into a Bank Holding company to receive funds, and become regulated by the Federal Reserve.

American Express: Same story. No regulation because they were outside of the perimeters.. they converted into a Bank Holding to be regulated and receive funds.

AIG, being an Insurance corporation was also not regulated by the FDIC, or FED, or Treasury.. they were regulated by the SEC .. which ... failed. to say the least. Which smells of corruption, or stupidity, or both. The SEC is a very strict regulator, to anyone who has ever had their Series 6-7-whatever license can attest. They failed with Bernnie, they failed with AIG .. One of the benefits of the FDIC and FED is they are not Federally operated, immune to politics and such. Government Agencies.. not so much.

Anyways

Obama wants to create a NEW agency to regulate apparently anything not being regulated.. the FDIC, Treasury (well it seems everyone but Timmy) and FED are all saying "Hey, we can regulate these institutions with the systems in place.. we just need to be allowed to." Obama and co seem to be on a mission to create this new entity. The new program would over see investment banks (which are not really banks) as well, and it should be pointed out Obama's financial advisers are mostly ex-Goldman Sachs employees.. which are drafting the resolution to create the very entity that would regulate them, as an investment banking company. Goldman was outside of most of the regulation agencies, as an investment bank .. they made much of their wealth selling insurance securities on mortgages called Credit Default Swaps. These instruments helped bring down the largest banks. hmmm.

Hope that helps clarify Timmy the Tax Cheat's little tantrum, and perhaps the entire crisis as a whole.

Great post puck!

Lets not forget about the issue of regulatory capture. Most of the people that work in the regulatory agencies don't do so out of a sense of seeing justice done. They get paid nothing like the amounts of the people that they regulate. Many only take a job with a regulatory agency so that they can later get a job with one of the companies that they regulate. Is someone who is hoping to land a job at one of the BBB's going to aggressively go after an entity that if they had a job offer to they would gladly jump ship from the civil servant position?

reply to post by jefwane


Well Jeff, that's certainly an angle I had no looked at before lol. I do recall watching interviews with SEC officials as to how they failed with AIG. A lot of it centered around the regulators lack of understanding of complex derivatives like CDS, CDO, and the various others.. Since at the time AIG wasn't posting huge losses, no one seemed to give it a second thought. I honestly don't buy that.. when one arm of a corporation makes more than the entire corporation it's self.. especially with tools the SEC doesn't even understand, you don't just let them walk free and clear. How the SEC missed that, and missed $50 billion dollar ponzie scheme, among other little ponzi schemes that have been revealed this year.. I just cannot fathom. Perhaps the institution that really needs looking at is the Securities and Exchange Commission.

Government Agencies. I always say, anything the Government touches withers and dies.. SEC and everything they were supposed to regulate can now join the list of Government failures.

Is it any wonder the non-Government regulators are pissed off Obama wants more power for another SEC style agency?