- The Washington Times - Wednesday, April 21, 2010

A probe of one of Wall Street’s biggest failures has become a proxy battle in the congressional fight that could decide the fate of President Obama’s push to overhaul the nation’s financial regulatory system.

As talks continued on a bid to reach a compromise deal, lawmakers on Tuesday used the investigation into the historic September 2008 bankruptcy of Lehman Brothers to spar over key provisions of the bill, which is shaping up as the biggest partisan clash on Capitol Hill since the passage of Mr. Obama’s health care law.

Separately, Securities and Exchange Commission (SEC) Chairman Mary Schapiro told a House panel that her agency has begun investigating whether any of the country’s 19 largest banks are using the same questionable accounting practices that were uncovered after Lehman’s collapse.

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Sweeping legislation pushed by Mr. Obama and Democratic leaders to reform Wall Street regulation relies heavily on the judgment of many regulators [JUMP]who missed abuses in the past to try to prevent crises in the future, as well as to close large institutions when they fail. A House-passed bill would enable regulators to break up large companies that pose a danger to the financial system, but it does not target specific firms.

Senate Majority Leader Harry Reid told reporters Tuesday that he expects to bring the Senate version of the regulatory overhaul bill to the chamber floor this week or next, but it is still not certain whether he can attract enough Republican support to block an expected minority filibuster.

Congressional Republicans said that regulators’ failure to prevent Lehman’s collapse is proof that Mr. Obama’s proposed financial reforms won’t work as written either.

Given their track record, giving these regulators more power will provide the markets with a false sense of security, while hampering the free market, said Rep. Scott Garrett, New Jersey Republican.

Treasury Secretary Timothy F. Geithner told a House Financial Services Committee hearing that Lehman’s failure highlights why the Obama administration’s proposal to reform the financial system is needed.

“No regulatory regime will be able to prevent major financial firms from reaching the point of insolvency, Mr. Geithner said. But a well-designed regulatory framework must put in place shock absorbers to contain the damage caused by a major firm’s default.”

Despite the heated rhetoric, backroom negotiating between the two parties continued on Capitol Hill, and at least one key Republican, Sen. Bob Corker of Tennessee, was predicting a deal would eventually be struck.

Senate Minority Leader Mitch McConnell, a sharp critic of the original bill, said after a meeting of Senate Republicans Tuesday that the process to strike a compromise “has not been reconstituted.”

“We are all confident that this can be fixed,” the Kentucky Republican said.

Rep. Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, said that the administration’s plans simply to give bank regulators such as the Federal Reserve and the SEC more authority to police the markets would be a mistake.

“The regulatory proposals that have been offered by this administration and are now being considered by Congress double down on the same policies, the same regulators, and in some cases, the same individuals, that failed us two years ago,” said Mr. Bachus during his panel’s daylong hearing that looked into the Lehman Brothers’ collapse.

Lehman is gone, but the failures of the Fed and SEC are still with us, and should not be rewarded with new regulatory powers, Mr. Bachus said.

Lehman’s collapse, the biggest corporate bankruptcy in United States’ history, significantly contributed to the global financial crisis that erupted in the autumn of 2008.

Republicans such as Mr. McConnell have also argued that Mr. Obama’s blueprint will mean more federal bailouts in the future by calling for the injection of more money into failing Wall Street companies.

But House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, said that the GOP criticisms were flatly contradicted by the text of the bill and that no taxpayer money would be used until an institution is out of business.

There is a blatant mischaracterization that we are trying to put capital into these companies, Mr. Frank said. The notion that we inject capital into institutions is flatly wrong.

Two Western Democrats said numerous local governments, school districts and hospitals in their states are suffering crippling financial losses in the wake of Lehman’s bankruptcy.

These were school districts and local governments that made investments that they believed were conservative, said Rep. Ed Perlmutter, Colorado Democrat. They trusted that federal regulators were keeping a watchful eye on companies like Lehman Brothers.

Rep. Anna G. Eshoo, California Democrat, said that 40 municipalities nationwide lost an estimated $1.7 billion with the firm’s failure, including a $155 million loss for San Mateo County, which is in her district. She is introducing legislation that would require the federal government to compensate those governments.

Ms. Schapiro said that her agency is investigating Lehman’s use of a controversial accounting practice known as Repo 105 that allowed it to mask financial weaknesses from investors before it failed. A bankruptcy examiner’s report says the firm effectively concealed $50 billion in debt.

Federal Reserve Chairman Ben S. Bernanke told the House panel that the central bank wasn’t aware that Lehman used the accounting practice.

Ms. Schapiro said her agency has written to the 19 largest U.S. banks for information about the use of similar accounting practices.

Former Lehman Chief Executive Officer Richard Fuld told the committee that the examiner distorted the facts and that he had no recollection of any documents related to the Repo 105 accounting maneuver.

Ms. Schapiro, who wasn’t at the SEC at the time of Lehman’s bankruptcy, acknowledged that her agency didn’t do enough to oversee the five largest investment banks, even though it had authority over them since 2004. She said a lack of resources was to blame for the insufficient monitoring.

The SEC is determined to become a more effective regulator, she told the panel.

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