Liquidity Battle Moves To Different Universe

Bloomberg is reporting Fed May Emerge From Crisis With More Influence at SEC Expense.

America's financial system faces its biggest overhaul since the Great Depression as officials weigh lessons from the credit-market rout and the near collapse of Bear Stearns Cos.

Federal Reserve policy makers are redefining which companies are vital to the flow of credit, an area once the sole domain of commercial banks, and which institutions pose risks to the entire economy if they fail. Treasury Secretary Henry Paulson said in a speech yesterday that the Fed should broaden its oversight to include Wall Street investment firms, now regulated by the Securities and Exchange Commission.

"This is tectonic," said Ralph Ferrara, a former general counsel at the SEC, and now a partner at Dewey & LeBoeuf LLP in Washington. "We no longer want to have a balkanized response to a national crisis." The SEC will be so diminished that it "will be given a nice view of the Potomac from whatever floor of the comprehensive financial services regulator they are given," said Ferrara.

"Because of financial innovation, we have lots of these financial firms that started to look like banks," said Mark Gertler, a New York University professor and visiting scholar at the New York Fed. "Any institution that may need to go to the discount window directly or indirectly ought to be under the supervisory control of the Fed."

Legislators are already considering a new regulatory structure. House Financial Services Chairman Barney Frank said last week Congress should consider creating an agency to monitor market risk or give that authority to the Fed. The Massachusetts Democrat also said he will seek less duplication. Currently, there are five separate regulators of banks, thrifts, and credit unions.

Lovely. Let's give the most guilty party in creating the mess, more power to make an even bigger mess. Not to be outdone, the Bank of England and the ECB join the battle.

BOE and ECB Join Liquidity Battle

Things are so bad that the BOE Will Take Revolutionary Action.

The Bank of England is poised to take revolutionary action to find a “resolution” to the problems faced by British banks unable to sell or refinance portfolios of mortgage-backed debt, Mervyn King, the governor, signalled on Wednesday.

Mr King also suggested that the Bank was becoming more open to interest rate cuts. His comments came as Hank Paulson, US Treasury secretary, offered strong support for the Federal Reserve’s handling of the Bear Stearns crisis.

In a statement to the British parliament, Mr King said the Bank of England’s existing lending against mortgage-backed securities was “a useful bridge to a longer-term solution”, but can “be only a temporary measure”.

He said a longer-term resolution was needed to deal with the “fragility” of financial markets and to relieve the “overhang on banks’ balance sheets of assets in which markets have closed”.

Mr King was not specific about the mechanisms that might be used. But possibilities are understood to include the purchase or the swapping of asset-backed securities for liquid assets or cash – ideas that have been discussed with other central banks, as the FT reported last week.

To ensure taxpayers were not left with banks’ bad debts, Mr King insisted that the government would have to be insured against any credit losses. Insisting that the big problem in the UK was liquidity, not irresponsible lending, he added: “The banks neither need nor want the taxpayer to insure them against these losses.”

[My comment: Excuse me but insured by who? Ambac? MBIA? Northern Rock?]

Meanwhile, Jean-Claude Trichet, European Central Bank president, told the European parliament that the ECB was committed to easing financial market tensions, but the rescue of banks facing solvency difficulties would be “in a different universe” and require taxpayers’ money.

A Different Universe

Now there's an interesting admission by Trichet: Easing financial tensions will be in a different universe requiring taxpayer money. Meanwhile, the Bank Of England wants guarantees from the tooth fairy that taxpayers will not be at risk. And back in the US, Congress is investigating into how the Fed and the Treasury department handled Bear Stearns while looking into giving the Fed more still power to wreak havoc.

Does anyone else want to join this mad hatters tea party? There seems to be plenty of room at the table for Japan.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List