Not unlike the rest of the country, I found myself channeling Clara Peller when reviewing last week's bailout plan as presented by Treasury Secretary Timothy Geithner: Where's the beef? However, I found myself uttering another culinary cliche when Geithner suggested expanding the Federal Deposit Insurance Corp. (FDIC) to have authority on shutting down nonbanks: I didn't order that!
In concept, Geithner was on the right track. When Lehman Brothers Holdings and American International Group (AIG) hit their respective icebergs last year, there was no federal regulatory agency to wind down the companies. The absence of a specific regulator for this situation exacerbated the catastrophe that befell the financial services industry.
But Geithner's notion of giving this responsibility to the FDIC may not be the best approach. Why would an agency that regulates banks be allowed to have responsibility over institutions that operate outside of the banking industry? Granted, it would require congressional legislation to expand the FDIC's authority to handle such responsibilities. Yet Geithner's approach suggests he may be thinking inside of the proverbial box without seeing the greater problem.
In next month's Secondary Marketing Executive, I detail a recent report issued by Gene L. Dodaro, the acting comptroller general of the U.S. In this report, Dodaro explains the genesis of the current crisis. His diagnosis is clearly troubling: We are operating in a rickety and antiquated system that was slapped together over the years – starting in 1913 and frequently thrown together in an improvised manner.
This system was never proactive in anticipating changes and has no history of keeping up with the progressive evolution of the financial services industry. Not surprisingly, large sections of this industry are absent of federal supervision. Nobody seemed to notice that until it was too late, as in the case of Lehman Brothers and AIG.
Dodaro calls for a massive overhaul of the system, but Geithner's FDIC plan contradicts that call. In that sense, Geithner is wrong. The situation does not require the expansion of a single agency to absorb more work, but it demands a new approach to the federal flowchart of regulatory entities.
Last week, the Office of Thrift Supervision (OTS) sent off a loose cannon volley by suggesting the 800-plus thrifts it regulates consider a moratorium on foreclosures. Let's stop for a minute and ask, why do we need both the FDIC and the OTS? Or for that matter, why do we need the National Credit Union Administration as a separate entity? Is it efficient to have three different regulatory agencies covering the nation's depository institutions?
Here's an idea: What if we had one regulatory agency that handled banking-relating depository institutions (the banks, thrifts and credit unions) and one regulatory agency that handled the nonbank financial institutions? Each agency could subdivide the duties regarding the specific types of institutions. The nonbank entity would also vacuum up the financial industries that are currently operating outside of cogent federal oversight, including hedge funds, mortgage brokers and payday lenders.
This circles back to the points raised in the Dodaro report – we have to stop being reactive to crises as they erupt and start being proactive in our planning in order to ensure that tomorrow will not see a worse crisis. Yes, we can expand the FDIC in the Geithner approach. But that leaves us with the rickety and repetitious system that fell apart – except that the FDIC is somewhat bigger than before.
Of course, the Geithner plan was just a bare-bones framework. As more details come forward, we can debate this further. But at the present time, I have to question whether Geithner is missing the bigger picture because of the demands of the current crisis.
What's your opinion? Please contact me and let's discuss this further.
– Phil Hall, editor, Secondary Marketing Executive.
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