BuckleySandler InfoBytes Regulatory Restructuring Report, Issue Two, June 19, 2009
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Secretary Geithner Testifies on Financial Regulatory Reform in Senate; American Securitization Forum Releases Study on the Benefits of Securitization
Secretary Geithner Testifies in Senate Banking Committee. One day after the Obama Administration released its White Paper setting forth the proposal for financial regulatory reform (as reported in BuckleySandler Regulatory Restructuring Report, Issue One), Treasury Secretary Timothy Geithner testified in front of the Senate Banking Committee to formally present the plan to Congress. (Secretary Geithner was also scheduled to testify in front of the House Financial Services Committee in the afternoon, but a series of votes on the House floor forced postponement of the hearing.)
Secretary Geithner’s testimony was consistent with the proposals set forth in the White Paper and did not add any additional color to the proposals outlined in the White Paper.
The hearing was noteworthy as a gauge of the current positions and concerns of the members on this key committee. The vast majority of the members attended and pressed Secretary Geithner on a number of issues presented by the White Paper. Below are some of the more noteworthy comments and exchanges from the hearing:
Senators on both sides of the aisle, including Chairman Dodd (D-CT) and Ranking Member Shelby (R-AL), expressed concern about expanding the power of the Federal Reserve. The stated concerns ranged from irritation that the Federal Reserve failed to address systemic risk in the past, to the fact that the Federal Reserve has no expertise in systemic risk oversight, to concerns that such oversight responsibility will take away from its core mission of conducting monetary policy. Other senators noted that simply having an oversight council may not be enough of a check and balance against a Federal Reserve with greater centralized power.
Two senators, Sen. Crapo (R-ID) and Sen. Kohl (D-WI), questioned the wisdom of separating consumer protection functions from safety and soundness functions, citing testimony from the heads of the OCC and FDIC, who both argued against such a schism earlier this year. In response, Secretary Geithner stated that they considered these arguments, but concluded that the current model, which combines those oversight functions, was broken and ineffective, and a new model was in order. On the other side, Senator Schumer lauded the creation of a consumer protection regulator.
Two senators, Sen. Schumer (D-NY) and Sen. Hutchison, (R-TX) both supported the concept of requiring mortgage originators to retain an interest in the loans they sell.
A few senators pressed Secretary Geithner why the plan does not include more consolidation of regulation beyond just combining the OCC and OTS (including, for example, the SEC and CFTC).
Senator Bennett (R-UT) pressed Secretary Geithner about the proposal to require industrial banks to be regulated under the Bank Holding Company Act. He noted that no industrial bank contributed to the current financial crisis, and questioned why the Administration is threatening to eliminate this industry if they were actually a source of strength and provided reliable credit through the crisis. In response, Secretary Geithner reiterated the overarching goal of requiring all financial institutions that act like banks to be subject to the same regulatory structure in order to eliminate the regulatory arbitrage issues that were a cause of the crisis, but that he would work with Senator Bennett on this issue.
Senator Vitter (R-LA) questioned why the Administration was "punting" on resolution of Fannie and Freddie, since they were a major cause of the financial crisis. Secretary Geithner agreed that they were primary causes, but that sensible and thoughtful resolution of these entities was not the most pressing issue facing the Administration given that Congress overhauled their regulatory oversight last year. Instead, the goal was to tee up and begin the discussion and the White Paper recommends reporting on the issue by the end of this year.
A couple senators also touched on the issue of "too big to fail." Senator Vitter wondered why labeling an institution a "Tier 1 FHC" isn’t akin to a "neon sign" flashing "too big to fail." Secretary Geithner stated that the Administration was cognizant of the dilemma.
For a copy of Secretary Geithner’s testimony, please see http://www.treas.gov/press/releases/tg176.htm.
American Securitization Forum Releases Report on Securitizations. On June 17, the American Securitization Forum ("ASF") released a 240-page economics study relating to the benefits of securitization, including on consumer loan availability and pricing. This study is relevant to the concept that loan sellers and securitization issuers be required to maintain a "risk retention" piece of loans or securities sold, a concept set forth both in the White Paper (and H.R. 1728, the "Mortgage Reform and Anti-Predatory Lending Act"). This concept is meant to address the concern that securitization and the "originate to distribute" model is substantially flawed because they separate originators from risks on the loans they make. Presumably, this ASF study is one part of the effort to make the case for securitization and ensure that any restrictions that are created are crafted in such a way as to not make securitization uneconomic. For a copy of the study, please see http://www.americansecuritization.com/uploadedFiles/ASF_NERA_Report.pdf. For a copy of the companion policy analysis, please see http://www.americansecuritization.com/uploadedFiles/nerastudycompanionpiece_final.pdf.