Washington, D.C. - U.S. Senator Daniel K. Akaka.(D-Hawaii), a member of the Banking Committee, questioned Treasury Secretary Henry M. Paulson, Federal Reserve Chairman Ben Bernanke, Securities and Exchange Commission Chairman Christopher Cox, and Federal Housing Finance Agency Director James Lockhart at a hearing today on Turmoil in US Credit Markets: Recent Actions Regarding Government Sponsored Entities, Investment Banks and Other Financial Institutions.
An mp3 audio file of the q&a is available by clicking here: http://demradio.senate.gov/actualities/akaka/akaka080923.mp3
A transcript of the exchange appears below:
AKAKA: Thank you very much, Mr. Chairman.
This is a historic time in our nation, and I want to commend all of you, the administration as well as the Congress, for using the spirit of working together to try and find the best way to work ourselves out of this disaster we're in.
Historically, we've just been through a disaster that's natural, and now we are in a manmade disaster. But we're using the spirit of working together to try to make a difference.
Chairman Bernanke, this economic downturn and credit crisis have produced great public concern, and it has been expressed here many times. My question to you has to do with human capital concerns.
What effect will this troubled assets program have on the supervisory duties, the supervisory duties, of the Federal Reserve?
BERNANKE: Well, for those institutions that we supervise, we'll continue to evaluate their positions, their capital, their risk management and so on.
But I think this will obviously be helpful in removing some risk from their balance sheet and allowing them to expand their lending. So I don't see any problem from this. But we'll certainly keep close track of what's going on.
AKAKA: I'm also concerned about the statutory and as well as regulatory aspects that what we're trying to do will affect us, and so, Chairman Bernanke, the Federal Reserve's statutory responsibilities focus on monetary policy to promote maximum employment, stable prices and moderate long-term interest rates.
My question is to what extent will the injection of this $700 billion affect your ability to meet these goals?
BERNANKE: Well, if the program works, it'll be extremely helpful, because we're in a situation now with financial markets freezing up, and it's very difficult for us to achieve the objective of full employment in a situation where credit's not available and the financial markets are so unstable.
So I think we've taken the view -- we've been working very hard over the last year, using a variety of tools, to try and promote financial stability. That was, in fact, the historic purpose of the Federal Reserve. But I view it as essential to the other objectives you just mentioned.
Without financial stability, you're not going to have full employment and price stability. So we think that's very important, and we have been working together with the Treasury secretary very intensely on trying to promote stability in our financial markets.
AKAKA: Chairman Bernanke, should we worry? Should we worry about the Treasury being given the ability to move $700 billion in and out of the economy and the potential impact that this could have on monetary policy and also, the political independence of the Federal Reserve?
BERNANKE: I don't see any problem in terms of macroeconomics, only a positive effect in terms of stabilizing the financial system.
And the Federal Reserve would like to get out of dealing with some of these crises we've been dealing with, because there's no broader authority, no broader support, and we prefer to get back to monetary policy, which is our function, our key mission.
AKAKA: Mr. Secretary, you mention about needing the right group of experts to help in this huge effort. Has there been any consideration, Mr. Secretary, given to specifically what parts of the Federal Acquisition Regulations would need to be waived to get contractors and consultants to establish this program?
PAULSON: Yeah, we've given a lot of thought to that. We've worked it through very carefully with our general counsel.
AKAKA: Do you plan to have competitive bidding? And if not, why not?
PAULSON: Well, we have procedures that are designed to mitigate against conflicts, but we need to move very quickly here. And so we can't go through all of the normal processes or it wont' work for the markets.
AKAKA: Chairman Cox, do you need additional statutory authority to properly regulate brokerage holding companies? If not, why not?
COX: Senator, the regulatory hold that I have referred to that still exists gives no regulator the authority or the responsibility to regulate investment bank holding companies.
The marketplace has dealt with this in the context of the current market turmoil by investment banks opting to become, or merging, or combining to become bank holding companies.
But the problem remains, and if there are to be other pure investment banks in the future, there is no statutory responsibility.
The SEC, for its part, does not have legal authority over the entire investment banking firm. It doesn't have the authority to require that it maintain capital levels or liquidity or what have you.
We have had a voluntary program that was put in place one year before I arrived. Senator Shelby referred to our view of that early in the year, prior to Bear Stearns in March, the trial by fire for this voluntary program, it was very clear that it was broken, and it did not serve the purpose -- certainly, it did not serve the purpose of looking at systemic risk, something that the SEC is not assigned to do in statute.
And so I think with respect to this question, we have now an MOU that we signed up with the Federal Reserve immediately in the wake of Bear Stearns so that we could take a look at information about regulated investment bank subsidiaries -- or I should say regulated broker-dealer subsidiaries of bank holding companies, and the Fed could take a look at the same information for investment bank holding companies.
That is working very well, or was working very well, to broaden our reach, but it -- the fundamental flaw was that it was voluntary, and -- and so I think, yes, that needs to be taken care of.
I also mentioned the other regulatory hole which I think is urgent in the current circumstances, and that is CDS. We are looking at effects of short selling, but those same effects and, indeed,
greater opportunities for manipulation exist in the CDS market.
COX: No regulator has authority, except antifraud authority, with respect to credit defaults laws.
CHAIRMAN CHRIS DODD (D-CT): Thank you, Senator, very much.
Earlier in the hearing, Senator Akaka delivered his opening statement, available by clicking here: http://akaka.senate.gov/public/index.cfm?FuseAction=PressReleases.Home&month=9&year=2008&release_id=2410
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