The Wall Street Party is Over
Source: Financial Times
The Treasury Department on Monday plans to unveil a series of recommendations that would radically reshape the regulation of the US financial services industry, giving broad new powers to the Federal Reserve to tackle systemic risk.
The move comes amid growing pressure in Congress to overhaul financial regulation in the US, after the credit crisis exposed significant lapses in the government’s ability to monitor Wall Street and prevent it from making overly risky bets on mortgages. Some of the largest institutions suffered multi-billion dollar losses, and the Fed this month was forced to take the dramatic step of offering emergency cash to investment banks.
One of the main features of Treasury’s plan, which however is unlikely to be fully implemented for several years, would give the Fed greater power to regulate financial firms such as investment banks and hedge funds, when their actions could pose a threat to the system. However, the proposal falls short of permanent regulation by the Fed of investment banks such as Goldman Sachs and Merrill Lynch, which some lawmakers have suggested.
A second feature of the plan, which Hank Paulson, Treasury secretary, will outline in a speech on Monday before he travels to China, involves a reduction in the role of the Securities and Exchange Commission. The SEC would be merged with the Commodity Futures Trading Commission and would take a more hands-off approach in its oversight of exchanges in favour of the CFTC’s “principles-based” self-regulation, according to the proposal.
That should put a stop to what Barack Obama calls the "ethic of greed" which led to the US subprime mortgage crisis. Indeed, the Wall Street party over CDOs and credit default swaps is coming to an end. Or so it seems.