Will Bernanke Doom the SEC?

As the Federal Reserve chairman pushes ahead with his effort to expand the Fed’s oversight of investment banks, traditionally the jurisdiction of the Securities and Exchange Commission, some officials said the move would severely limit the securities agency’s influence on Wall Street and could even lead to its dismantling.In testimony yesterday on Capitol Hill, Chairman Ben Bernanke reiterated his call for Congress to write legislation that would give the Fed regulatory authority over investment banks, including the four New York-based behemoths: Lehman Brothers, Merrill Lynch, Morgan Stanley, and Goldman Sachs. This would diminish the role of the SEC by effectively removing its control over the most important institutions, industry officials said. Even if the SEC did maintain responsibility, the proposal would further complicate the intricate regulatory web.“The Fed is making a major move that comes at the expense of the SEC,” a partner at Cleary Gottlieb Steen & Hamilton and former SEC general counsel, David Becker, said. “There has been a subterranean, but extremely intense, rivalry between the Fed and the SEC, and now that the Fed effectively wrote a $30 billion check for Bear Stearns, it seems they have the rights.”Mr. Bernanke, along with the Treasury secretary, Henry Paulson, testified yesterday before the House Committee on Financial Services. Noting that the SEC’s oversight of the major investment banks is based on a voluntary agreement between the parties, Mr. Bernanke said that “strong holding company oversight is essential.”Calling the financial turmoil “ongoing,” the Fed chief also said that “in light of the Bear Stearns episode, the Congress may wish to consider whether new tools are needed for ensuring an orderly liquidation of a systemically important securities firm that is on the verge of bankruptcy, together with a more formal process for deciding when to use those tools.”As traditional merchant banks expand into other businesses such as brokerage, and broker dealers venture into products including life insurance, the regulatory framework has grown increasingly intertwined and confusing, experts said. This, combined the Fed’s decision to begin lending directly to investment banks in the wake of the collapse of Bear Stearns — a program Mr. Bernanke said may continue through 2009 — gives the Fed the right to a heightened role over the institutions, many said.There is disagreement within the government and on Wall Street, however, about how best to proceed.While Mr. Bernanke and the SEC chairman, Christopher Cox, advocate more interchange between the regulators, as is set down in the memorandum of understanding the two agencies signed earlier this week, others said it is a recipe for disaster.“My concern is that people are looking for a panacea that will cure the burden faced by regulators, and I think they are mistaken,” a lawyer who oversees the financial services group at Sadis & Goldberg, Ron Geffner, said. “The SEC has had 60-plus years to get it right, and I would prefer to see more resources go there rather than divert them elsewhere.”The American Bankers Association issued a statement calling for patience, with the group’s chief executive, Edward Yingling, noting: “We urge policy makers to proceed carefully and to consider all of the possible ramifications of policy changes.”Even the Treasury Department appears on the fence, with some officials there concerned that should the Fed begin to oversee financial institutions on a day-to-day basis, it would affect judgment about when it is safe to let a bank fail and when it is too much of a threat to stability.“I worked for eight years at the SEC, and we were always dubious about the Fed’s attitude toward the banks; we always felt that they regarded the banks more as a constituent that had to be satisfied, and even in some instances appeased,” a former special counsel at the SEC, Ross Albert, now a partner at Morris, Manning & Martin, said. “The SEC’s mission, on the other hand, is to be the investors’ advocate.”Some are surprised that Mr. Cox has agreed to Mr. Bernanke’s proposal to increase the Fed’s oversight of the investment banks. “I’ve talked to some former colleagues, and some who still work at the SEC, who are shocked that Cox has indicated a willingness to go along with it,” Mr. Albert said.With so much disagreement, it is unlikely anything will happen soon, officials said.“Congress is going away in August, then the election season will begin, so it is unlikely anything will happen until the next administration,” Mr. Becker said.As for the SEC, it maintains that Mr. Bernanke’s proposal in no way diminishes the agency’s role. There is a fundamental difference in the focus of the Fed, which monitors risks to the banking system, and the SEC, which monitors risks to banking customers. Currently, the Fed has no jurisdiction to oversee the systemic risk posed by investment banks, but this would change under the proposal. Additionally, the SEC would continue to maintain its oversight of customer risks at these investment banks, it said.The “establishment of a regulator to oversee systemic risk is not an alternative to current regulation by any agency, but an addition that strengthens all of the regulators,” a spokesman for the SEC, John Nester, said.“I don’t think giving the Fed more authority — which I support — means the SEC is irrelevant,” the chief executive of consulting firm Kalorama Partners, Harvey Pitt, a former SEC chairman, said. “If the Fed is going to backstop investment banks, then it needs to have access to appropriate financial information relating to those investment banks.”

Will Bernanke Doom the SEC?

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