At a Full Committee Hearing (Systemic Risk and the Financial Markets) of the House Committee on Financial Services, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke urged Congress to consolidate more power with a single regulator for the oversight of investment banks.

This is the first hearing on this subject, and Congress has plans to continue the series of hearings in July and later in the fall. Witnesses for the coming hearings include New York Federal Reserve President Timothy Geithner, S.E.C. Chairman Christopher Cox, and other federal regulators.

In his prepared statement, Bernanke said that "Under current arrangements, the SEC’s oversight of the holding companies of the major investment banks is based on a voluntary agreement between the SEC and those firms. Strong holding company oversight is essential, and thus, in my view, the Congress should consider requiring consolidated supervision of those firms and providing the regulator the authority to set standards for capital, liquidity holdings, and risk management."

With regards to the Bear Stearns deal, Bernanke said that "Congress may wish to consider
whether new tools are needed for ensuring an orderly liquidation of a systemically important
securities firm that is on the verge of bankruptcy, together with a more formal process for
deciding when to use those tools."

As for Treasury Secretary Paulson, in response to a question about the failure to curb predatory lending, he said that it would never have happened if there was a single regulatory body overseeing consumer protection and mortgage lending practices. And he added that it might be a good idea for Congress to follow up and push through the implementation a 'Mortgage Origination Commission' to evaluate State Programs, a proposed blueprint (Modernized Financial Regulatory Structure) for which was put out by the Treasury earlier this year in March.

The hearing is being broadcast live as I write this, and while Paulson's answers (and to some extent Bernanke's answers too) are quite interesting, the rambling and ameuterish questions are enough to put a budding insomniac to sleep. Its like pulling teeth. You just want the pain to end. So anyway, I'm just going to quote from the prepared text of the statements, and I'll update this post when a written transcript of the entire hearing is available later.

With regards to Bear Stearns, Paulson, in his prepared statement said that "First, Americans have come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk. But the Fed does not have the clear statutory authority nor the mandate to do this; therefore we should consider how to most appropriately give the Federal Reserve the authority to access necessary information from complex financial institutions – whether it is a commercial bank, an investment bank, a hedge fund, or another type of financial institution – and the tools to intervene to mitigate systemic risk in advance of a crisis. The MOU recently finalized between the SEC and the Federal Reserve is consistent with this long-term vision of the Blueprint and should help inform future decisions as our Congress considers how to modernize and improve our regulatory structure."

Note that this MOU is probably what triggered this series of House hearings, and will be likely followed soon by the Senate Banking Committee. In a previous post, I did mention that the Senators overseeing Banking seemed to be miffed that the FED, Treasury and SEC are (were) managing to tweak the financial regulatory system without any input from Congress. So these hearings are probably an effort to ensure that Members of Congress (and their lobbyist friends representing Wall Street) have a say before any change in the regulatory structure is pushed through.

Also note that if these hearings are meant to go on into the fall, there will be no regulatory changes before the November elections. In summary, this whole thing is basically about creating an appearance of being engaged in discussion and debate to change the regulatory structure, while actually making sure that there are no immediate changes in the regulatory structure.