Post by Sapphire Capital on Jul 25, 2008 4:37:03 GMT 4
July 24 (Bloomberg) -- U.S. Securities and Exchange Commission Chairman Christopher Cox asked lawmakers to bolster the agency's authority to police investment banks, as the Federal Reserve seeks to expand oversight of the world's biggest financial firms.
Wall Street firms including Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. should have mandatory SEC oversight of their capital, liquidity and risk management, Cox told the House Financial Services Committee today. Federal Reserve Bank of New York President Timothy Geithner asked the panel for more authority over firms that can borrow from the central bank and play a ``critical role'' in markets.
``Legislative improvements are necessary'' Cox said. ``The Commission should be given a statutory mandate to perform this function at the holding company level, along with the authority to require compliance.''
Representative Barney Frank, the Massachusetts Democrat who leads the financial services panel, has said he supports giving the Federal Reserve a role in setting capital, liquidity and risk-management policies at investment banks. Former securities regulators say a more powerful Fed risks undermining the SEC and its responsibility for protecting investors.
Bear Stearns Response
Goldman, Lehman, Merrill Lynch & Co. and Morgan Stanley now voluntarily submit capital and liquidity positions to the SEC. That arrangement didn't keep a run on Bear Stearns from putting the company on the brink of bankruptcy. The crisis led the Fed to let brokers borrow from its discount window, typically open only to commercial banks, to prevent additional failures.
With the Fed ``lending money to investment banks, they can do a great deal'' to influence regulation of securities firms, former SEC Chairman Arthur Levitt said in an interview. ``It's up to Cox to make sure that great deal doesn't run over the SEC.''
Frank is holding hearings on revamping financial regulation in response to the March collapse of Bear Stearns and the worst U.S. housing slump since the Great Depression. The collapse of the U.S. subprime-mortgage market has contributed to $467.8 billion in writedowns and credit losses since the start of 2007.
The Fed and SEC agreed this month to share more data about the financial companies they regulate, giving the central bank a permanent role in determining how much money and assets investment banks must keep on hand.
Cox, in his testimony, said the goal in making any changes to how investment banks are regulated should be eliminating ``the need for continued access to the Fed's liquidity facilities.''
`Rapid Deterioration'
The SEC chairman also asked lawmakers to give his agency authority over troubled securities firms similar to the role the Federal Deposit Insurance Corp. plays with commercial banks deemed at risk of collapse.
``No one today has sufficient authority to take effective action if a major financial enterprise experiences rapid financial deterioration,'' Cox said. ``The SEC should be given explicit authority to do this for all investment-bank holding companies.''
In his prepared remarks, Geithner said ``strong supervisory authority is required over the consolidated financial entities that are critical to a well-functioning financial system.''
He said the Fed is seeking a ``better match'' between its responsibilities and its authority over companies and markets.
Congress will ultimately decide which regulator has sway over securities firms' capital and liquidity, Erik Sirri, who heads the SEC's trading and markets division, said last month.
Primary Regulator
The Fed, as the primary regulator of commercial banks such as Citigroup Inc. and JPMorgan Chase & Co., is focused on keeping financial institutions solvent. The SEC's priority has been protecting shareholders from fraud, not keeping securities firms from going out of business.
``The risk is that the culture of safety and soundness, which is the bank culture, will trump the culture of investor protection,'' Levitt said.
Applying commercial-bank regulation to securities firms ``would be a mistake,'' Cox said in his testimony. Intentionally discouraging risk and restricting business ``would fundamentally alter the role that investment banks play in the capital formation that has fueled economic growth and innovation domestically and abroad.''
Levitt is a senior adviser to Washington-based Carlyle Group and sits on the board of New York-based Bloomberg LP, the parent company of Bloomberg News.
Wall Street firms including Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc. should have mandatory SEC oversight of their capital, liquidity and risk management, Cox told the House Financial Services Committee today. Federal Reserve Bank of New York President Timothy Geithner asked the panel for more authority over firms that can borrow from the central bank and play a ``critical role'' in markets.
``Legislative improvements are necessary'' Cox said. ``The Commission should be given a statutory mandate to perform this function at the holding company level, along with the authority to require compliance.''
Representative Barney Frank, the Massachusetts Democrat who leads the financial services panel, has said he supports giving the Federal Reserve a role in setting capital, liquidity and risk-management policies at investment banks. Former securities regulators say a more powerful Fed risks undermining the SEC and its responsibility for protecting investors.
Bear Stearns Response
Goldman, Lehman, Merrill Lynch & Co. and Morgan Stanley now voluntarily submit capital and liquidity positions to the SEC. That arrangement didn't keep a run on Bear Stearns from putting the company on the brink of bankruptcy. The crisis led the Fed to let brokers borrow from its discount window, typically open only to commercial banks, to prevent additional failures.
With the Fed ``lending money to investment banks, they can do a great deal'' to influence regulation of securities firms, former SEC Chairman Arthur Levitt said in an interview. ``It's up to Cox to make sure that great deal doesn't run over the SEC.''
Frank is holding hearings on revamping financial regulation in response to the March collapse of Bear Stearns and the worst U.S. housing slump since the Great Depression. The collapse of the U.S. subprime-mortgage market has contributed to $467.8 billion in writedowns and credit losses since the start of 2007.
The Fed and SEC agreed this month to share more data about the financial companies they regulate, giving the central bank a permanent role in determining how much money and assets investment banks must keep on hand.
Cox, in his testimony, said the goal in making any changes to how investment banks are regulated should be eliminating ``the need for continued access to the Fed's liquidity facilities.''
`Rapid Deterioration'
The SEC chairman also asked lawmakers to give his agency authority over troubled securities firms similar to the role the Federal Deposit Insurance Corp. plays with commercial banks deemed at risk of collapse.
``No one today has sufficient authority to take effective action if a major financial enterprise experiences rapid financial deterioration,'' Cox said. ``The SEC should be given explicit authority to do this for all investment-bank holding companies.''
In his prepared remarks, Geithner said ``strong supervisory authority is required over the consolidated financial entities that are critical to a well-functioning financial system.''
He said the Fed is seeking a ``better match'' between its responsibilities and its authority over companies and markets.
Congress will ultimately decide which regulator has sway over securities firms' capital and liquidity, Erik Sirri, who heads the SEC's trading and markets division, said last month.
Primary Regulator
The Fed, as the primary regulator of commercial banks such as Citigroup Inc. and JPMorgan Chase & Co., is focused on keeping financial institutions solvent. The SEC's priority has been protecting shareholders from fraud, not keeping securities firms from going out of business.
``The risk is that the culture of safety and soundness, which is the bank culture, will trump the culture of investor protection,'' Levitt said.
Applying commercial-bank regulation to securities firms ``would be a mistake,'' Cox said in his testimony. Intentionally discouraging risk and restricting business ``would fundamentally alter the role that investment banks play in the capital formation that has fueled economic growth and innovation domestically and abroad.''
Levitt is a senior adviser to Washington-based Carlyle Group and sits on the board of New York-based Bloomberg LP, the parent company of Bloomberg News.