Treasury Chief Says Federal Reserve Needs More Regulatory Power Over Wall Street

Treasury Secretary Henry Paulson said Thursday that the government must move quickly to give the Federal Reserve more powers to regulate the financial system, contending that this year's financial market turmoil had highlighted the need for action.

Paulson said that the central bank's powers should be expanded in the wake of the near collapse earlier this year of Bear Stearns, the giant Wall Street investment firm.

He said there was a need to consider quickly how to give the Fed the power it needs to obtain information from investment banks and the responsibility to intervene to protect the overall financial system. His comments were provided by the Treasury Department as excerpts from a speech he was to give later in the day.

In late March, Paulson unveiled a blueprint that proposed the most sweeping overhaul of the nation's financial regulatory system since the stock market crash of 1929 and the ensuing Great Depression.

At the time, he said Congress should consider ways to expand the Fed's powers to oversee investment banks but he set no timeframe for when this should occur. However, in his speech Thursday he stressed the urgency of acting soon.

"We should quickly consider how to most appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene to protect the system so that they can carry out the role our nation has come to expect — stabilizing the overall system when it is threatened," he said.

Paulson did not spell out how the new powers should be provided. It is possible some actions could be made through administration decisions without the need for laws being passed.

Currently, the Fed and the Securities and Exchange Commission, which has the primary oversight of investment banks such as Bear Stearns, are working on a formal memorandum of understanding to guide their joint oversight. The Fed currently has staff members on site, monitoring developments at the major investment banks.

The Fed moved in March, as Bear Stearns teetered on the brink of collapse, for the first time to lend money to investment banks, something it has continued to do as it battles to calm financial markets in the wake of a severe credit crisis.

Paulson, in his speech, said the Bear Stearns troubles had "placed in stark relief the outdated nature of our financial regulatory system."

Because of the problems that have been highlighted, Paulson said, "We must dramatically expand our attention to the fundamental needs of our system and move much more quickly to update our regulatory structure."

Paulson's comments echoed views expressed earlier this month by Timothy Geithner, president of the New York Federal Reserve Bank, who said in a speech that the central bank needs more authority over firms that may need financial support from the Fed in a crisis.

Paulson said that the country had come to rely on the Federal Reserve in times of crisis, citing the Fed's actions to broker a rescue of giant hedge fund Long Term Capital Management in 1998 during the Asian currency crisis and the Bear Stearns episode this year.

"Our nation has come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk," Paulson said. "But, as we noted in our blueprint, the Fed has neither the clear statutory authority nor the mandate to anticipate and deal with risk across our entire financial system."

Paulson's blueprint, which was released on March 31, would change how the government regulates thousands of businesses from the nation's biggest banks and investment houses down to local insurance agents and mortgage brokers.

Democrats have complained that it did not go far enough to deal with abuses in mortgage lending while state officials have criticized what they saw as an unwanted federal intrusion on their turf.

The blueprint proposed giving the Federal Reserve more power to protect the stability of the entire financial system but under the plan the Fed would lose its authority to oversee day-to-day bank supervision, which would be transferred to a single bank regulatory agency, merging the powers of five current federal bank regulatory agencies.

Fed officials have said that they need to continue having day-to-day supervision of commercial banks as a way of monitoring the health of the banking system.