I’ve got the Senate Banking Committee hearing about the Bear Stearns deal on in the background. Life’s too short to liveblog it. But Chris Dodd’s attempt to get somebody to admit that the Fed had ordered that the original sale price be just $2 elicited some interesting responses.
Treasury Undersecretary Robert Steel said that, “There was a view that the price should not be very high, at the low end,” but added that it was really the Fed that was there doing the negotiations.
New York Fed President Tim Geithner, the man on the spot, said that it had been a priority “that the outcome not add to moral hazard.” Both the original $2 sale price and the revised $10 price were acceptable on that account, he went on (now I’m paraphrasing). Were there potential outcomes that the Fed might have rejected on that account? Sure. Were any of them presented to the Fed? No.
Geithner is coming across as by far the most frank and plainspoken of the four guys testifying (Ben Bernanke and the SEC’s Christopher Cox are the other two). Maybe it’s because, unlike the other three guys, he’s not directly accountable to Congress. But I’ve heard Geithner speak before and he’s always come across as far more cautious than this. Our little Timmy is growing up! He still looks a bit like an elf, though. A good elf.
In his testimony, Geithner also offered a set of five principles for financial reform. (He said there also needed to be better consumer protection laws, but didn’t go into that because it’s not really his bailiwick.) Here they are:
We need to ensure there is a stronger set of shock absorbers, in terms of capital and liquidity, in those institutions, banks and a limited number of the largest investment banks, that are critical to market functioning and economic health, with a stronger form of consolidated supervision over those institutions.
We need to substantially simplify and consolidate the regulatory framework, to reduce the opportunity for regulatory arbitrage, not just in the mortgage market, but more broadly.
We need to make the financial infrastructure more robust, particularly in the derivatives and repo markets, so that the system can better withstand the effects of default by a major participant.
We need to redesign the set of liquidity facilities that we maintain in normal times, and in extremis, in the United States and across other major central banks. And these changes will have to come with a stronger set of incentives and requirements for the management of liquidity risk by financial institutions with access to central bank liquidity.
And we need to make sure that the Federal Reserve has the mix of authority and responsibility to respond with adequate speed and force to the prospects of systemic threats to financial stability.
