Banking rules gaining favor
NEW YORK – One of the casualties of the ongoing credit crisis is a long-held notion on Wall Street – that the investment banking community can take care of its own problems.
Everyone from Barack Obama to Treasury Secretary Henry Paulson is floating ideas about how to strengthen oversight of financial institutions after decades of deregulation. And the Federal Reserve is at the center of the debate after intervening to save Bear Stearns Cos. from collapse by engineering its sale to JPMorgan Chase & Co.
Increased government regulation of Wall Street’s investment houses, including an expanded role for the Fed as a regulator, remains a tricky balancing act. The fear among analysts is that too much regulation could hamper the companies’ ability to drive profits and in turn shift an increasing amount of business to financial centers overseas.
The investment banks aren’t commenting about potential changes in how they’re regulated. It’s a painful subject, particularly as they try to recover from billions of dollars in losses over the past year from bad investments in risky mortgage-backed securities.
“We’re in perilous times, and that’s why we have to tread very carefully,” said Mark Bloomfield, president of the Washington-based American Council for Capital Formation. “There are some that are skeptical of the free market, and others who say don’t touch the free market because you don’t know the unintended consequences.”
Typically, Wall Street’s big players take the lead in fixing their own problems in a financial survival of the fittest – historically, when one company has been in trouble, a competitor or competitors have taken it over. It is rare for the government to take a hands-on approach to bailing out the financial sector – though that appears to be changing, and could affect how investment banks operate.
Some lawmakers and government officials contend the problems at Bear Stearns might have been prevented with more oversight. Once the nation’s fifth-largest investment bank, Bear Stearns used massive amounts of leverage to buy mortgage-backed securities – a tactic that proved disastrous when the market collapsed amid a wave of foreclosures.
Paulson, a former Goldman Sachs Group Inc. chief executive, this past week endorsed giving the central bank greater regulatory scrutiny. He has called the current system an “alphabet soup” of federal and state regulators, and wants to see the Fed take the lead.
Meanwhile, Obama, in a campaign speech, called for a “21st-century regulatory framework” that includes direct Fed oversight of all institutions, minimum liquidity and capital requirements, and enhanced rules for “complex financial instruments” used by investment banks.