WASHINGTON - As the Federal Reserve and securities regulators neared an agreement on investment banks, leaders of the U.S. Senate Banking Committee on Friday warned them not to get ahead of Congress with any Wall Street reforms.
Investment banks, which have traditionally enjoyed light regulation, are trying to boost capital in the wake of the subprime mortgage crisis that triggered billions of dollars in write-downs.
The Fed and the Securities and Exchange Commission have been developing a formal agreement to share information about investment banks amid an intensifying debate on what additional regulation may be needed.
Connecticut Democrat Christopher Dodd and Alabama Republican Richard Shelby sent a letter to the Fed, SEC and the Treasury Department about the Fed-SEC agreement. Dodd chairs the banking committee and Shelby is its top Republican member.
"We ask that no action regarding implementation of the (agreement) be taken before we can determine that it is in the best interests of our nation's economy and the well-being of its citizens," the letter said.
The lawmakers' warning came as the Bush administration deals with the aftermath of momentous decisions in March that changed the Fed's relationship to Wall Street, perhaps permanently.
In that month, the Fed helped engineer a takeover of Bear Stearns by JPMorgan Chase & Co and guaranteed a $29 billion loan to facilitate the transaction out of concern that a Bear Stearns bankruptcy could trigger a financial panic.
It was the first time since the Great Depression of the 1930s that the Fed, which regulates commercial banks, stepped in to rescue a nondepository institution. The Fed also set up a temporary, special credit line to make emergency loans to major investment banks, which is due to expire in September.
Some critics contend if investment banks enjoy the shield of the Fed, they should also be held to higher standards for transparency and capital adequacy like those imposed on commercial banks.
Pact to share information
SEC Chairman Christopher Cox hurried to assure lawmakers that his agency and the Fed would not overstep their authority. The planned pact would not in any way "create new legal authorities or responsibilities," Cox said in a Friday evening letter responding to the two senators.
The Fed-SEC agreement is expected to set out the scope for sharing information related to the Fed's discount lending window and other areas. It also would provide a mechanism for regulators to get a broader perspective on institutions and markets that could affect the financial system stability.
Currently, the SEC has oversight of the four largest U.S. investment banks for liquidity and capital levels. However, the program is voluntary and the SEC has urged Congress to give it or another agency clear, legal authority to oversee the banks.
Treasury Secretary Henry Paulson, a former top executive at Goldman Sachs, last week urged new powers for the Fed.
So far, Congress has focused on stemming a wave of housing foreclosures that threatens to trigger a recession. Dodd and Rep. Barney Frank, his counterpart who heads the House of Representatives Financial Services Committee, have put off until 2009 any overhaul of financial services regulation.
In their letter, Dodd and Shelby asked regulators not to adopt any changes "given the limited authority of the Fed and the SEC to regulate investment banks with primary dealer status, and Congress's ultimate responsibility for formulating financial regulatory policy."
Lawmakers sent the letter on the same day the Senate approved the nomination of banker Elizabeth Duke to the Federal Reserve Board but declined to act on two other long-stalled nominees to the central bank. Duke is chief operating officer of TowneBank in Portsmouth, Virginia.
Senators also confirmed three SEC commissioners, restoring the agency to its full strength of five commissioners.
Meanwhile, the outlook for some big banks remains cloudy.
Merrill Lynch & Co may write down $5.4 billion of securities in the second quarter, according to an analyst at Lehman Brothers. Other analysts have expected write-downs to range from $3.5 billion to $4.2 billion.