Earlier today, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke called on Congress to expand the government's power to deal with non-bank financial institutions in trouble.
In prepared remarks, Geithner said, "Our regulatory system was not equipped to prevent the build-up of dangerous levels of risk. Compensation practices encouraged risk-taking and rewarded short-term profits over financial stability, overwhelming the checks and balances in the system."
We saw an overwhelmed system bring down banks Washington Mutual (gobbled up by JPMorgan Chase (NYSE:JPM)) and National City (now property of PNC (NYSE:PNC)), among others. But Geithner's focus today wasn't the traditional banks. "The U.S. government does not have the legal means today to manage the orderly restructuring of a large, complex non-bank financial institution that poses a threat to the stability of our financial system," he went on to say.
Expanding the power of the federal government would mean that Uncle Sam could seize control of a non-bank financial company and reduce its exposure to risky investments by selling or transferring parts of the company, among other things.
How do Fools feel about this latest move by Geithner and Bernanke? Nine Motley Fool analysts and writers share their thoughts.
Morgan Housel, Motley Fool Writer: Despite the obvious failure to self-regulate over the past decade, I think the trauma of the past eight months will do more to rein in the financial industry than any amount of government regulation will achieve. They can slap as many new rules and regulations on banks as they wish, but, look, the shadow-banking industry is pretty much already gone. The non-bank mortgage lending industry has almost ceased to exist. Hedge funds are dying off in droves. The remaining investment banks -- Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) -- opted to become bank holding companies, essentially volunteering to become part of an industry already effectively regulated. Banks don't want to be part of a failed system anymore. The reason self-regulation didn't work over the past decade was because Wall Street hadn't seen widespread failure since the Great Depression. Well, guess what? Now we've seen it. And it's bad. It's no fun. It'll bankrupt you. Regulation or no regulation, the biggest problems that plagued us over the past decade are vanishing on their own accord.
Nick Kapur, Motley Fool Analyst: Given the government's inability to effectively monitor and regulate financial institutions in the past, what makes anyone believe that an increase in control and oversight would lead to an improvement in the future? I fail to see why giving more power to the federal government would correct the fundamental problems affecting our economy. I urge Bernanke and Geithner to spend more time restructuring the incentives and practices of our nation's financial systems rather than increasing the scope of their authority. Address the root causes of this financial calamity. Fix the ratings agencies, create sustainable lending standards, establish real risk management practices on Wall Street, improve transparency across the board -- these are the initiatives worthy of your time. Ditch the power play. Cure us of what ails us most!
Matt Koppenheffer, Motley Fool Writer: Bernanke and Geithner's call for FDIC-like powers over non-bank financial institutions is a good reminder that the U.S. banking system is not a free market system. It's more of a public-private partnership that the government (attempts) to carefully control so that we can prevent another 1930s-style banking collapse. What we've found with the current financial mess is that not only is it not advisable to loosen regulations designed to keep banks in check, but we also need to make sure that we are on top of systemic threats that originate outside of the banking system.
I think about it like this -- let's say we put locking down our borders as our No. 1 priority to keep out terrorists. Let's also say it actually worked and it became easier to become president of the United States and American Idol winner in one year than to be a terrorist and get into the U.S. But what happens when terrorists start sitting just across the Mexican and Canadian borders lobbing ICBMs into the U.S.? In both cases -- financial and defense -- we need to make sure we have the power to combat all threats.
Joe Magyer, Senior Analyst for Income Investor: Sure, we can rely on our trusty regulators to get us out of this mess: Just ask any Bernie Madoff investor. Look, I'm sorry, but you need more control? Congress spent most of last week arguing over $165 million of AIG (NYSE:AIG) bonus money. Meanwhile, you announced you're going to paradrop over $1 trillion into the bond markets -- without approval from our elected legislature, no less. Sounds like you already control the conch shell, fellas. Thanks, but no thanks.
Ilan Moscovitz, Motley Fool Editor: This seems like a no-brainer to me. We have a system in place for seizing conventional banks when they fail because bankruptcies would have ugly systemic consequences. Why should it be any different for larger, more complex financial institutions whose bankruptcies would have even uglier effects? It's silly to think that the FDIC has the authority to regulate or seize Colorado National Bank because it's a traditional bank, but there'd be no mechanism in place for regulating or seizing a complex entity like Citigroup (NYSE:C), whose bankruptcy would pose a much greater threat.
Michael Olsen, Senior Analyst for Motley Fool Hidden Gems: The perils of increased government intervention, particularly in our financial system, have been pretty thoroughly parsed. On the high level, it's pretty hard to split the opportunity cost of moral hazard and systemic failure. So I won't. Instead, I'll ask Mr. Geithner and the many fine members of Congress: How? I'm not trying to get all Ron Paul on you. But the perils of a too-powerful Fed are all but evident, as we sit amid this mess. And a regulatory body, with political appointees (let's take the Treasury, as an example) running the show? Now that portends yet another blend of risk. Do we really want a financial system whose agenda pivots on four- and/or eight-year timetables? And conversely, do we want the Fed biting off even more power? So, pray tell -- what constitutes a balanced, unpartisan breed of broader government power?
Jim Royal, Motley Fool Editor: In principle, the plan sounds acceptable, at least before the nitty-gritty has been publicized. But I have to question its long-term feasibility. As an arbiter of the larger public interest, the federal government must regulate massive interconnected financial institutions whose fate could have ramifications well beyond their shareholders. Such a mission involves not just permitting corporate profits, but safeguarding the financial (and derivatively, the political and social) stability of American society. However, as we have seen, the American government has been woefully inept at enforcing the regulations already on the books and protecting its oversight role from undue political (read: bank lobby) influence. I'm looking at the slippery slope of Glass-Steagall's demise, which was whittled away piecemeal by the banking industry over several decades. Nevertheless, if the federal government abrogates its duty to the broader public, the foxes really will be in control of the henhouse. Who watches the watchmen?
Chuck Saletta, Motley Fool Writer: I think it's yet another example of rewarding failure, punishing success, and dismantling the market's ability to cleanse away bad ideas through bankruptcy and restructuring. The economy cannot and will not recover until the zombie companies are allowed to fail in peace. The ones that operated more successfully should be allowed to grow into the markets vacated by those failures. Instead, they're being severely punished by being forced to compete against the government -- an institution that has an unlimited printing press and the ability to regulate everyone else out of existence.
It is a horrendous idea and one that will further push back the day when the economy can finally recover.
Nate Weisshaar, Analyst for Global Gains: The U.S. government already owns 80% of AIG. Why don't we have the authority to seize it? The only reason we stopped at 80% was because of a completely irrational political fear of "nationalization," which is just rhetoric at this point since we are using unheard-of amounts of public money to "support" these companies.
If anyone else had taken an 80% position in a company, they would have booted the previously failed management and installed their own team and proceeded to wind down the garbage. If this sounds familiar, it should. This is what Geithner did with Bear Stearns (and chose not to do with Lehman Brothers) when he was just a lowly member of the New York Federal Reserve. So, why exactly does he need Congress to grant him some new level of power? Weren't we just in an uproar because former Treasury Secretary Hank Paulson wanted increased power for the office?
Todd Wenning, Analyst for Motley Fool Pro: There's no question that existing regulations need to be updated to adapt to a market that's exponentially more dynamic than it was even 10 years ago. However, it's also imperative for government to fully consider any and all long-term systemic consequences of the actions they decide to take. There must be incentive, for instance, for our financial institutions to attract and retain top talent and lead financial innovations into this century, otherwise we may very well fall behind the rapidly modernizing emerging markets in this field. Our country and economy remain a "city upon a hill" to the world in so many ways, and I hope our government representatives -- both elected and unelected -- keep this in mind as they craft new regulations.
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