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Systemic Risk Panel Would Lack Independence; Treasury Secretary Would Call The Shots

First Posted: 03/18/10 06:12 AM ET Updated: 05/25/11 03:45 PM ET

Ellison

If the White House and congressional leaders get their way, the vaunted new oversight council charged with overseeing systemic risk in the financial markets will actually be a house organ of the Treasury Department, lacking the independence required to challenge decisions by government regulators, among others.

Rep. Keith Ellison (D-Minn.) last week tried to fix that, by offering an amendment in the House Financial Services Committee that would give the council an independent staff and independent source of funding. But he was forced to withdraw the amendment after it became clear that he wouldn't get Chairman Barney Frank's approval, said a source familiar with the committee's deliberations.

The committee was crafting a bill that would create a Financial Services Oversight Council, a collection of federal regulators who would oversee the kinds of risks that escaped government attention prior to the financial crisis. Such risks included interconnected Wall Street firms that borrowed $30 for every $1 they kept in reserves, and the insurance that AIG provided to firms for their derivatives contracts without actually keeping any money in case it had to pay up.

As proposed by the Obama administration, the House bill calls for the council to be headed by the Treasury Secretary, who would pick his own staff from within the Treasury Department.

But not only is the council supposed to keep watch over firms and activities that pose a risk, it's also supposed to oversee the work of other regulators in mitigating threats and supervise financial regulation as a whole, according to the bill's language. In short, it has a mandate to watch over everything that could possibly endanger the financial system - including inaction and incompetence by regulators.

The independence of the council is in question, experts say, because it will be overseen by someone whose actions it is supposed to examine and question -- the Treasury Secretary -- who will also be able to handpick the staff that is supposed to act as independent watchdogs.

The current secretary, Timothy Geithner, has been the target of a barrage of criticisms from Democrats, Republicans, and government watchdogs for his handling of the crisis and bailout last fall when he was a Federal Reserve official, and his overall handling of the economy since becoming Treasury Secretary.

Ellison's amendment, according to a copy obtained by the Huffington Post, called for an independent permanent staff -- rather than Treasury employees. In addition, it called for those firms especially subject to the council's heightened regulation to pay, through monthly assessments, the watchdogs' salaries.

Frank spokesman Steven Adamske disputed the source's explanation for why Ellison withdrew his amendment, telling the Huffington Post that "all members are allowed to offer amendments so I don't agree with this characterization."

He added: "As to the council staff, the council is directed by Congress to look out for potential pitfalls in the financial system -- not oversee the agencies."

But as Barbara Roper, director of investor protection at the Consumer Federation of America, explains: "The whole point of the systemic risk regulator is that it was supposed to stand outside the existing regulatory agencies and provide an independent view. It's supposed to point out the regulators' failings. But Treasury is arguably the most political agency you could put it in, and [the council is] most likely to be imbued with the regulatory philosophy of the sitting administration. It's really disturbing."

The Congressional Oversight Panel reviewing the financial markets called for an independent systemic risk regulator. "Systemic risk is caused by institutions that are not currently covered or adequately covered by the financial services regulatory system," the panel wrote in a January report.

So whose idea is it to make this panel subservient to the Treasury Department? Surprise. "It's really Treasury's baby," said the source familiar with the committee's deliberations. Ellison's amendment "was a problem because Treasury, in effect, would be losing power."

The aide said Ellison's amendment would have "almost certainly" passed had the committee had a chance to vote on it.

A spokesman for Ellison did not respond to a request for comment.

Frank has scheduled a Dec. 1 vote on the bill in its current form. No further amendments will be added until the bill reaches the House floor.

As outlined in the current bill, the chances that the council could serve a useful function and point out gaps, including regulatory failings, "is vanishingly small," Roper said. "I'm not at all confident that the regular day-to-day regulating is going to be done appropriately or rigorously."

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