The Chairman’s New Clothes


New York – An article from BusinessDay today sets out the conflicts between Congress, the Fed, the Administration and the SEC over perceived new oversight powers being awarded the Fed. Senators Dodd and Shelby of the Senate Banking Committee, sent a letter to Fed Chairman Bernanke, SEC Chairman Cox and Treasury Secretary Paulson to take no action regarding the Fed’s new powers until Congress reviews and approves them.

The cause to the issue is the $30 billion emergency loan that the Fed gave to Bear Stearns in order to avert the investment bank from going into bankruptcy. This loan is outside of the jurisdiction of the Fed, since the Fed’s discount window is for commercial banks and not Investment banks or securities dealers.

Paulson is a proponent of widening the Fed’s powers to include monitoring investment banks, but this would clearly require congressional consent .  A new structure would allow the Fed to monitor reserves, capital, liquidity and leverage of the commercial and investment banking communities.

Congress feels that having the Fed as a backstop for the investment banks might encourage a moral hazard. We wonder what happens to the Fed funds market and the Repo markets. Will they become one?  There are collateral issues related to this, specifically who is holding the collateral. But in any case the spread between repos and fed funds would at least converge.


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