Treasury faces battle in bid for broad powers

John W. Schoen Senior producer • Profile • E-mail

The global market meltdown has created broad consensus that tough new  rules are needed to prevent anything like this from happening again. But as Congress and the White House begin getting down to details, that’s pretty much as far as the consensus goes.

The scope of the undertaking came into clearer focus this week as Treasury Secretary Geithner unveiled a long list of broad principles that the administration says should guide the proposed changes.

"Over the past 18 months, we have faced the most severe global financial crisis in generations," Geithner told the House Financial Services Committee. "To address this will require comprehensive reform. Not modest repairs at the margin, but new rules of the game."

On top of Geithner’s wish list is an expansion of the government’s power to rein in financial companies that get so big they pose a “systemic risk” to the entire financial system. The Obama administration also wants broader powers to clean up the financial mess created when one of those firms fails and better protection for consumers against abusive lending practices by mortgage lenders and credit card companies. The administration says oversight gaps between the dozens of existing state and federal financial regulators need to be closed. And all of this needs to be better coordinated with dozens of financial regulators around the world.

It’s a monumental task. By putting so much on the table at once, the administration may be trying to avoid the intense backlash generated at various critical stages of the financial rescue plan engineered by the Treasury and the Federal Reserve over the past six months.  But drawing up the blueprint for which agency regulates what is sure to ignite a series of political battles that will draw in some of the most powerful lobbying groups in Washington.

Unlike the rapid pace of bailout measures announced over the past six months, the process of overhauling regulations enforced by dozens of agencies won’t happen quickly. Given the stakes, that may not be such a bad thing, according to former Fed Chairman Paul Volcker.

"There's a great urge to get it done," Volcker told a conference on regulatory overhaul this week. "My personal feeling is 'not too fast'."

There’s no shortage of good ideas on how to create an uber-regulator to rein in firms before they take on so much risk they pose the threat of widespread collateral damage. Some have suggested the Fed take on the role.

Sen. Susan Collins, R-Maine, has introduced a bill calling for a “council of regulators” from existing agencies headed by an independent chairman. Sen. Chris Dodd, D-Conn., head of the Senate Banking Committee, said last week he thinks the Fed already has its hands full and the task should go to a separate agency.

Some members of Congress fear the Fed may already have too much power. Since the financial crisis began, the central bank has dramatically expanded its role based on a single clause in the 1913 law that created it, which grants it virtually unchecked lending power in times of “exigent circumstances.”

“The thing that worries me about the Fed is they have this tremendous power under (the law) to loan money to just about anybody on terms that they think are sufficiently secured,” said Rep. Brad  Sherman, D-Calif. “The more we make them a regulator, the more inclined they'll be to say, ‘We don't want anybody to say we screwed up as a regulator, so let's keep the  company alive by making it some loans.”

Other members have expressed strong doubts about handing such powers to the Treasury Department. Memories are still fresh of the $700 billion Congress handed former Treasury Secretary Hank Paulson to buy up “toxic assets” clogging the banking system, only to see him unilaterally change course and use the money to buy bank stock.  House Republican Leader John Boehner called parts of the Treasury’s latest proposal "an unprecedented grab of power."

"Before that occurs, there ought to be a real debate about whether we give that authority to the Treasury secretary," he said Wednesday.

Regulatory arbitrage
The need to streamline the sprawling complex of state and federal oversight has long been clear as decades of tinkering with financial regulations left authority dispersed among many state and federal agencies. The result has been the practice of “regulatory arbitrage” — where professional investors and firms work the system to maneuver as far as possible from regulators’ reach. When the stock and housing markets were booming, there was little political enthusiasm for requiring more disclosure or otherwise tightening the rules.

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