New Financial Market Watchdog Plan Lacks Teeth Where They're Needed Most
Treasury Secretary Hank Paulson has been on-the-stump lately talking up Treasury Department plans to tighten government oversight of financial markets. Paulson finally went public with this plan yesterday, unveiling the details in a speech.
In the wake of bank failures during the Great Depression, government oversight of commercial banks was tightened considerably in the 1930s to prevent future "runs on the bank." These rules applied mainly to deposit-taking institutions, while oversight of investment banks was largely left in the hands of political appointees at the Securities Exchange Commission (SEC).
Just a few weeks ago however, we had a full-scale "run" on investment bank Bear Stearns, which brought the firm close to bankruptcy, before the Fed stepped in to arrange an 11th hour bail-out. Many were shocked at how a firm with Bear Stearns' nearly century-old tradition and reputation could so rapidly deteriorate to the point of insolvency.
The Fed reasoned that Bear Stearns was too important a player in the financial system to allow an outright failure. Such an event would leave far too many "counter-parties" (other financial firms that transact business with Bear Stearns) hung out to dry - triggering widespread panic.
Since these events, Hank Paulson - former investment banker at Wall Street's venerable Goldman Sachs - has been charged with coming up with fresh ideas to prevent such a mess from happening again. The solution: Pretty much more of the same!
According to details of the Treasury Department's proposal, new oversight of financial markets looks a lot like the current flawed program.
In fact, "Regulation will be limited to institutions that receive explicit federal guarantees - that is, institutions that are already regulated, and have not been the source of today's problems" opines Paul Krugman in yesterday's New York Times.
Two of Wall Street's biggest special interest groups are conspicuously left out of the new oversight plan: Investment banks and hedge funds. Never mind that it was the failure of two over-leveraged Bear Stearns hedge funds last summer that kicked off this whole credit crunch market shock that's still impacting markets. Clearly Wall Street isn't to blame for this mess. Right?
In fact, the Treasury Department's plan does "virtually nothing to regulate the many new financial products whose unwise use has been a culprit in the current financial crisis," according to the Times.
Instead, Paulson's plan sings an old familiar refrain: "Market discipline is the most effective tool to limit systemic risk."
Considering the discipline and risk management (or glaring lack thereof) practiced by Bear Stearns...who needs more stringent oversight anyway?
Treasury Secretary Hank Paulson has been on-the-stump lately talking up Treasury Department plans to tighten government oversight of financial markets. Paulson finally went public with this plan yesterday, unveiling the details in a speech.
In the wake of bank failures during the Great Depression, government oversight of commercial banks was tightened considerably in the 1930s to prevent future "runs on the bank." These rules applied mainly to deposit-taking institutions, while oversight of investment banks was largely left in the hands of political appointees at the Securities Exchange Commission (SEC).
Just a few weeks ago however, we had a full-scale "run" on investment bank Bear Stearns, which brought the firm close to bankruptcy, before the Fed stepped in to arrange an 11th hour bail-out. Many were shocked at how a firm with Bear Stearns' nearly century-old tradition and reputation could so rapidly deteriorate to the point of insolvency.
The Fed reasoned that Bear Stearns was too important a player in the financial system to allow an outright failure. Such an event would leave far too many "counter-parties" (other financial firms that transact business with Bear Stearns) hung out to dry - triggering widespread panic.
Since these events, Hank Paulson - former investment banker at Wall Street's venerable Goldman Sachs - has been charged with coming up with fresh ideas to prevent such a mess from happening again. The solution: Pretty much more of the same!
According to details of the Treasury Department's proposal, new oversight of financial markets looks a lot like the current flawed program.
In fact, "Regulation will be limited to institutions that receive explicit federal guarantees - that is, institutions that are already regulated, and have not been the source of today's problems" opines Paul Krugman in yesterday's New York Times.
Two of Wall Street's biggest special interest groups are conspicuously left out of the new oversight plan: Investment banks and hedge funds. Never mind that it was the failure of two over-leveraged Bear Stearns hedge funds last summer that kicked off this whole credit crunch market shock that's still impacting markets. Clearly Wall Street isn't to blame for this mess. Right?
In fact, the Treasury Department's plan does "virtually nothing to regulate the many new financial products whose unwise use has been a culprit in the current financial crisis," according to the Times.
Instead, Paulson's plan sings an old familiar refrain: "Market discipline is the most effective tool to limit systemic risk."
Considering the discipline and risk management (or glaring lack thereof) practiced by Bear Stearns...who needs more stringent oversight anyway?
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