BANKS AND BANKING : TURF WARRIORS HEAD FOR WASHINGTON / THE FINANCIAL TIMES COMMENTARY & ANALYSIS

Turf warriors head for Washington

By John Gapper

Published: June 10 2009 19:51


This is a painful time for Vikram Pandit. A regulatory turf war is about to break out in Washington and the players are practising on Citigroup’s unfortunate chief executive .

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, wants to eject Mr Pandit and install a chief executive more versed in commercial banking. Her campaign is being resisted by the New York Federal Reserve, one of Citi’s main regulators, which is inclined to give him more of a chance to revive the bank.
Ms Bair may have a point – Mr Pandit’s suitability for the job is open to question. But the tussle between her, the New York Fed and Tim Geithner, the Treasury secretary, who does not appear to trust her, speaks to a bigger problem in Washington and in state capitals – the rivalry among the multiplicity of financial services regulators.

On Tuesday, we saw the beginning of the end of Washington’s grand experiment with taking ownership stakes in banks to protect them from collapse in the credit crisis. It was launched last autumn under Hank Paulson, the former Treasury secretary, and is about to end for 10 institutions that have got approval to repay $68bn (€48.5bn, £41.5bn) in capital.

We are about to observe the next, and even more contentious, phase in the government’s attempt to stabilise the US financial system. It is about to launch its effort to reform the notoriously tangled and overlapping system of financial regulation.

“Everyone admits that we have an irrational regulatory structure. It is time to do something about it and, if we do not, it will lead to other messes in the future,” says Hal Scott, a Harvard professor and president of the independent study group, the Committee on Capital Markets Regulation.

It is vital for Washington to get this right. The alternative is that a bunch of big banks will be allowed to return to their old ways without significant impediments. But there are disturbing signs that inter-agency battles, congressional rivalries and federal-versus-state stand-offs could leave matters as they are now.
Two months ago, I argued that Mr Geithner ought not to permit Goldman Sachs (which is one of the 10 banks in the vanguard) to exit from the troubled asset relief programme before it had sorted out the regulatory reforms required to tame Wall Street in the future.

Since then, some of the objections I raised to Goldman’s exit have been addressed. It no longer has a chance of escaping alone from the Tarp’s capital assistance programme: others, such as JPMorgan Chase, will be accompanying it.

Goldman and the rest of the Tarp 10 have also shown their ability to raise both equity and debt that is not guaranteed by the FDIC. The capital markets, closed to banks in the US and Europe only a few months ago, have re-opened more quickly than expected.

My biggest objection, however, remains in place. With the main lever on the Tarp 10 about to be taken away, what is the chance of Washington following up with a set of reforms to make regulation simpler and more effective? Frustratingly low, I fear.

“We must not let turf wars or concerns about the shape of organisational charts prevent us from establishing a substantive system of regulation that meets the needs of the American people,” Mr Geithner testified to Congress in March.

Unfortunately, he was talking to a bunch of turf warriors.

So far, the only aspect of how Wall Street operates that has galvanised US politicians sufficiently to take action is how banks pay executives. There is no sign of political consensus emerging on the most obviously useful thing that the administration and Congress could do – simplify the structure of financial regulation.


The test is whether the alphabet soup of regulators and supervisors – the FDIC, the Fed, the Securities and Exchange Commission, the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Commodity Futures Trading Commission, and state insurance supervisors – can be boiled down.


Broader oversight needs to be exercised by fewer organisations. In particular, one body needs to be given “resolution trust authority” – the power to wind down financial institutions that have got into trouble – and another responsibility for monitoring systemic risk.


Mr Geithner is not giving much away (nor is Larry Summers, the Treasury secretary manqué at the White House, who has his own ideas) but he seems to want to expand the FDIC’s existing resolution powers, give the Fed systemic oversight, and merge the SEC with the CFTC and the OCC with the OTS, which would at least shed a few Cs.


An SEC/CFTC merger is already in trouble, since they are not only both keen to remain in business but report to two congressional committees, which jealously guard their own powers. Meanwhile, there is a lot of talk of organising “councils” of regulators rather than deciding which should do what.


The tussle over Mr Pandit is a small example of what happens when regulators share power – little happens but there is a lot of furious lobbying. Before the bubble burst, financial institutions found ways to exploit supervisory gaps and tensions to do what they wished.


Mr Geithner will shortly unveil his proposals to ensure that this does not happen again, various regulators will step up their self-interested lobbying and Congress will start to grind out backroom deals. Somehow, it is not a hopeful prospect.


john.gapper@ft.comCopyright



The Financial Times Limited 2009