Dodd, Shelby Tell Fed, SEC to Hold Off on Securities Agreement

By Jesse Westbrook and Craig Torres

June 28 (Bloomberg) -- The Senate's top banking legislators told the Federal Reserve and Securities and Exchange Commission to hold off on enacting a deal to oversee Wall Street, concerned that regulators are proceeding without consulting Congress.

Democrat Christopher Dodd and Republican Richard Shelby, the Senate Banking Committee's top lawmakers, delivered their warning in a letter yesterday as Bernanke and Cox met to wrap up a memorandum of understanding. The SEC plans to provide information on securities firms' trading positions, capital and leverage, according to two government officials.

``Congress wants to have its say,'' said David Becker, a former SEC general counsel now in private practice at Cleary Gottlieb Steen & Hamilton LLP in Washington. ``Reshuffling who has information could have a significant impact on the distribution of regulatory influence.''


Congress is asserting its primacy over how financial markets should be regulated as federal supervisors wrestle with the yearlong credit rout. Regulators are debating how to strengthen oversight of investment banks after the Fed started emergency lending to securities firms in March.

``We ask that no action'' be taken before legislators can decide it's in the economy's ``best interests,'' Dodd, the Connecticut senator who chairs the banking panel, and Shelby of Alabama said in the letter. It was addressed to Bernanke, Cox and Treasury Secretary Henry Paulson.

Sharing Data

The Fed will share data with the SEC on repurchase agreements, which are short-term loans provided by commercial banks that clear trades and hold collateral for securities firms, said the officials, who declined to be identified because the agreement isn't final.

Cox offered to brief Dodd and Shelby on the SEC's talks with the Fed. The memorandum is ``intended to facilitate our agencies' ongoing, day-to-day cooperation,'' he said in a letter responding to the two. ``It is the role of Congress to decide whether, and if so how, to alter the existing regulatory structure.''

Fed officials in March rescued Bear Stearns Cos. from bankruptcy with $30 billion of financing to secure its takeover by JPMorgan Chase & Co. They also introduced the Primary Dealer Credit Facility, giving securities firms access to loans from the central bank at the same rate as commercial banks. It was intended to last ``at least six months,'' the Fed said March 16.

Some officials have expressed concern about any perception that the Fed's actions would only spur greater risk taking.

Treasury's Ryan

``We don't want to encourage dependence upon the Federal Reserve as a backstop,'' Assistant U.S. Treasury Secretary Anthony Ryan said in a June 24 interview with Bloomberg Television.

Dodd and Shelby flagged in their letter that Congress hasn't given the Fed permanent authority to lend to securities dealers.

The information sharing between the Fed and SEC will continue even if the central bank stops providing the financing, officials said, citing the draft memorandum. Securities dealers are currently overseen by the SEC. The Fed has introduced its own supervisors at the firms since it started lending to them.

``The only reason for the Fed'' to ``have an interest in how investment banks are doing is if it intends to step in and provide access to the discount window in more normal times,'' said Peter Wallison, a former Treasury general counsel. ``Once that idea gets established then market discipline essentially disappears.''

Hearings Planned

Congress plans to start hold hearings on financial regulation next month.

``We look forward to continuing to work with Congress on these important issues,'' said Fed spokeswoman Michelle Smith in Washington.

Cox urged his staff June 23 to not ``engage in turf wars among federal regulators,'' according to an e-mail the SEC provided to Bloomberg News. He added it's ``inconceivable to me'' that under any overhaul approved by the Congress, ``the role of the SEC will not be strengthened and expanded.''

Central bankers are debating whether to extend the PDCF beyond September, amid signs of continued stress in financial markets. They may make a decision before their Sept. 16 meeting, when traders anticipate they will announce the first interest- rate increase since 2006.

Concern about rising loan losses has sent the Standard & Poor's 500 Banks Index into a 22 percent dive this month, putting it on course for its worst monthly return in almost a decade.

Fed Vice Chairman Donald Kohn told lawmakers June 19 that policy makers are ``studying a range of options'' for the PDCF. Fed governors and district-bank presidents June 25 heard from supervisors working with investment banks.

Clear Rules

Philadelphia Fed President Charles Plosser and Richmond Fed chief Jeffrey Lacker have urged setting clear ground rules for access to central bank funds. They also warned this month that the lending risks provoking future crises by causing moral hazard, or encouraging firms to take on more risk in the anticipation of Fed aid in case their bets go wrong.

``We are in a transitional regime,'' said Laurence Meyer, vice chairman at Macroeconomic Advisers LLC and a former Fed governor. Shelby and Dodd ``are saying the situation on the ground has changed, the regulatory framework is already evolving, and we haven't been involved.''

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net; Craig Torres in Washington at ctorres3@bloomberg.net
Last Updated: June 28, 2008 00:01 EDT