Wednesday, June 17, 2009

Obama Proposing Wide Powers to Seize Financial Corporations

President Barack Obama will unveil his proposal to further regulate the financial industry in his effort to avoid a repeat of the market meltdown we experienced last fall.

The New York Times has the 85-page proposal online. Stephen Labaton of the Times explains its reach:

The plan the president will formally announce on Wednesday would give the Federal Reserve greater supervisory authority over large financial institutions whose problems pose potential risks to the economic system. It would separately expand the reach of the Federal Deposit Insurance Corporation to seize and break up troubled financial institutions. And it would create a council of regulators, led by the Treasury secretary, to fill in regulatory gaps.

In doing so, the plan seeks to give Washington the tools to police the shadow system of finance that has grown up outside the government’s purview, and to make it easier for regulators to head off problems at large, troubled institutions or take control of them if they fail.

The Fed is the big winner in this proposal, but blogger Matthew Goldstein asks, who will the Fed be accountable to in this new order?
Now this is not meant to knock the job the Fed has done in the current financial crisis. In many respects, Fed Chairman Ben Bernanke should be applauded for showing a willingness to improvise and come up with creative solutions for trying to limit the damage to the banking system and the economy. But throughout the crisis, Benanke & Co. have shown an utter disdain for transparency and full disclosure.

A good illustration of this is the contracts the NY Fed signed last fall with investment advisor Blackrock to manage the distressed assets the Fed acquired from AIG, the hobbled insurance giant. The contract between the NY Fed and Blackrock for managing the CDOs that AIG insured and the Fed took off the banks’ hands is 37 pages. But a good number of those pages are blank –- some 13 page to be exact.

And what is spelled out on these blank pages? Oh, just a few minor details like the fees paid to Blackrock, the firm’s potential CDO conflicts and the firm’s key personnel managing the assets. To be clear, this information isn’t totally secret. All this information has been disclosed to the NY Fed. It’s just that Fed officials have seen fit to keep this information secret from the public.

But if you’re counting on this veil of secrecy to be lifted by the Obama administration when it unveils its regulatory overhaul plan on Wednesday —- think again. The architect of the financial regulatory overhaul is Treasury Secretary Tim Geithner, who just happened to head the NY Fed when these contracts with Blackrock were signed.

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