Thursday, March 26, 2009

Geithner Calls for ‘New Rules of the Game’

by Calculated Risk on 3/26/2009 10:57:00 AM

From Bloomberg: Geithner Calls for ‘New Rules of the Game’ in Finance

... Geithner’s proposals would bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic risk regulator would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.
The administration’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission. The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing.

The strategy also would require derivatives to be traded through central clearinghouses. And it would add new oversight for money-market mutual funds ....

While the Bush administration had proposed that the Federal Reserve take on the authority of a systemic-risk regulator, Geithner didn’t specify which agency should have the job. Bernanke has also called for such a regulator, and said the central bank should have some role.
Imagine if the Federal Reserve had been the "systemic-risk regulator" during the bubble.

According to Greenspan in 2005 "we don't perceive that there is a national bubble", just "a little froth", and even in March 2007 Bernanke said "the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained".

How would a systemic-risk regulator help if they miss the problem?

I'm not opposing this idea - I don't see how it could hurt - and I think having the FDIC, OTS, Fed, state agencies, and others all providing risk oversight is unworkable.