tie ourselves in knots” to make the systemic-risk regulator any agency but the Fed, because it’s the “lender of last resort

TO BE NOTED: From Bloomberg:

"Obama Administration Said to Favor Fed as Systemic Risk Agency

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By Robert Schmidt

May 9 (Bloomberg) -- The Obama administration is likely to support giving the Federal Reserve the power to oversee financial companies that could pose a danger to the banking system, said participants in a White House meeting yesterday.

Treasury Secretary Timothy Geithner, a former Federal Reserve Bank of New York president, told representatives of the trade groups representing securities firms, hedge funds and banks that a single supervisor needs the authority over the biggest financial firms.

While the Fed was first favored to take the job, since a proposal by former Treasury Secretary Henry Paulson last year, lawmakers and some regulators have shifted away from that view. Federal Deposit Insurance Corp. Chairman Sheila Bair and Securities and Exchange Commission Chairman Mary Schapiro this week recommended that a council of regulators assume the role.

The divergence of views suggests that it will take months before any agreement on how to overhaul U.S. financial regulation in the aftermath of the worst credit crisis since the 1930s.

“There are going to be a number of regulators with oars in the water” over various parts of the banking system, Alan Blinder, a professor of economics at Princeton University and former Fed vice chairman, said in an interview with Bloomberg Television. Still, “we would have to tie ourselves in knots” to make the systemic-risk regulator any agency but the Fed, because it’s the “lender of last resort,” he said.

The SEC is best placed to oversee hedge funds, Blinder said.

Industry Groups

Representatives of the Securities Industry and Financial Markets Association, International Swaps and Derivatives Association and Chamber of Commerce were among those who attended yesterday’s meeting. Geithner dropped by the hour-long gathering in the Roosevelt Room, the people said on condition of anonymity.

The gathering was run by Diana Farrell of the National Economic Council and Pat Parkinson, a Fed staffer on detail to the Treasury, participants said. After Geithner left the meeting, Parkison told the attendees that the Fed would likely be the agency to supervise firms that are found to be too big to fail, they said.

“Geithner believes that we need a single independent regulator with responsibility for systemically important firms and critical payment and settlement systems,” Treasury spokesman Andrew Williams wrote in an e-mailed response to questions. “He does see a role, however, for a council to coordinate among the various regulators.”

‘Council’ of Agencies

Bair, in a May 7 speech at a Chicago conference, proposed a “Systemic Risk Council” that has “a mandate to monitor developments throughout the financial system, and the authority to take action to mitigate systemic risk.”

Schapiro said yesterday at an Investment Company Institute conference in Washington that she’s “inclined” to support Bair’s proposal.

“I have long been concerned about excessive concentration of power, which really means excessive concentration of a point of view in a single regulator,” Schapiro said.

Senate Banking Committee Chairman Christopher Dodd said in a May 6 hearing that “It is my preference that authority not lie in any one body; we cannot afford to replace Citi-sized financial institutions with Citi-sized regulators,” referring to Citigroup Inc., one of the largest U.S. financial firms.

In March, Geithner proposed creating a systemic risk regulator though he didn’t identify which agency should have those duties. President Barack Obama has said he wants to sign legislation overhauling financial rules by the end of the year.

Popular anger over the taxpayer-financed rescues of American International Group Inc., Bear Stearns Cos. and other firms has spurred Congress and the White House to push for regulatory changes that may become the most sweeping since the 1930s.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net."

If needed, big banks and other financial institutions should be broken up in those instances

TO BE NOTED: From the NY Times:

"FDIC's Bair Calls for 'Systemic Risk Council'

By THE ASSOCIATED PRESS

Filed at 10:33 a.m. ET

WASHINGTON (AP) -- The head of the Federal Deposit Insurance Corp. says new powers are needed to oversee companies that pose financial risks to the economy, an authority that could be shared by the FDIC and other regulators.

In testimony at a Senate hearing Wednesday, FDIC Chairman Sheila Bair called for a new system of supervision that prevents institutions from taking on excessive risk and becoming so large their failure would threaten the financial system.

She suggested the Treasury Department, FDIC, Federal Reserve and Securities and Exchange Commission could be members of a new ''systemic risk council'' set up to monitor large institutions and potential risks to the system.

Bair stressed again that the ''too big to fail'' policy used by the government in the financial crisis must end.

''Our current system has clearly failed in many instances to manage risk properly and to provide stability,'' Bair said.

She maintains that a mechanism is needed to resolve troubled financial institutions similar to what the FDIC does with federally insured banks and thrifts.

''We're talking about a resolution and not a bailout,'' Bair told the Senate Banking Committee. If needed, big banks and other financial institutions should be broken up in those instances, she said.

Policymakers are trying to craft a new system of financial rules to replace the ''too big to fail'' stamp put on federal policy in the financial tumult, as the government rushed in to rescue insurance giant American International Group Inc., and pumped tens of billions of dollars into Citigroup Inc. and Bank of America Corp.

The Obama administration has presented to Congress an extensive overhaul of financial regulation meant to prevent a repeat of the banking crisis. A pillar of the plan is creating a so-called systemic regulator to monitor against the risks that plunged markets worldwide into distress last year.

A ''council'' of regulators would be better equipped than a single agency to exercise that oversight, writing rules and collecting data on large institutions that pose potential risk to the system, Bair said.

For taking over and resolving financial institutions, Bair said the FDIC is well equipped to do so. She suggested Congress could give the agency the authority to resolve bank holding companies like Citigroup or Bank of America -- now under the supervision of the Fed. The FDIC now can take over and resolve only the subsidiaries of bank holding companies that take federally insured deposits.

Rep. Barney Frank, chairman of the House Financial Services Committee, and other lawmakers have proposed that the Fed assume the role of systemic regulator."