AFL-CIO Blasts Proposals To Give Federal Reserve Excess Powers, Questions Fed Governance Structure
In a surprisingly aggressive piece of prepared testimony before the House Financial Services Committee by AFL-CIO president Richard L. Trumka, the labor union, which represents over 11 million working members, shares some very harsh words with regard to the proposed regulatory reform in general, and the continue functioning of the Federal Reserve in particular. Notable is that many of the concerns voiced by the AFL-CIO are precisely those that should be highlighted by many other presumably much more sophisticated entities which are expected to carefully consider all potential impacts of future regulatory reform, yet which have expressed a surprising interest in perpetuating the status quo except for a few minor cosmetic changes.
From the AFL-CIO testimony:
On Fed proposed powers and governance issues:
[W]e cannot support the discussion draft made public earlier this week because it gives dramatic new powers to the Federal Reserve without reforming its governance so that the banks themselves are removed from the governance of the Federal Reserve System. Even more alarmingly, the discussion draft would appear to give power to the Federal Reserve to preempt a wide range of rules regulating the capital markets—power which could be used to gut investor and consumer protections. If this Committee wishes to give more power to the Federal Reserve, it must make clear this power is only to strengthen safety and soundness regulation and it must simultaneously reform the Federal Reserve’s governance. Reform cannot be put off until another day.
On the Fed's responsibility for the bubble:
The Federal Reserve currently is the regulator for bank holding companies. In that capacity, it was responsible throughout the period of the bubble for regulating the parent companies of the nation’s largest banks.
On the conflicts of interest within the Fed:
While regulatory authority rests in the Board of Governors of the Federal Reserve in Washington, routine responsibility for regulatory oversight has been delegated by the Board of Governors to the regional Federal Reserve Banks. The Federal Reserve System’s regulatory expertise resides in these regional banks. The problem is that these regional Federal Reserve Banks are actually controlled by their member banks—the very banks whose holding companies the Fed regulates. The member banks control the selection of the majority of the regional bank boards, and the boards pick the regional bank presidents, who are effectively the CEO’s of the regulatory staff. These arrangements may explain why the Federal Reserve has never given any account of how it allowed bank holding companies like Citigroup and Bank of America to arrive at a point where they required tens of billions of dollars of direct equity infusions from the public purse to avoid bankruptcy.
On the complicity of the Fed, the Treasury and the Too Big To Fail banks:
Giving the Federal Reserve with its current governance control over which financial institutions are bailed out in a crisis is effectively giving the banks the ability to raid the Treasury for their own benefit.
On the Fed's ongoing position as merely enhancing ongoing risk:
We are also deeply troubled by provisions in the discussion draft that would allow the Federal Reserve to use taxpayer funds to rescue failing banks, and then bill other nonfailing banks for the costs. The incentive structure created by this system seems likely to increase systemic risk.
On who is protected as a result of regulatory changes:
In addition, language in the draft that appears to limit taxpayer bailouts of bank stockholders actually does no such thing, rather it simply ensures that when stockholders are rescued with public funds, bondholders and other creditors are rescued with them.
On the ongoing secrecy vis-a-vis Goldman et al's future bailouts:
Finally, and not least, the discussion draft appears to envision a process for identifying and regulating systemically significant institutions, and for resolving failing institutions, that is secretive and optional—in other words, the Federal Reserve could choose to take no steps to strengthen the safety and soundness regulation of systemically significant institutions. In these respects, the discussion draft appears to take the most problematic and unpopular aspects of the TARP and makes them the model for permanent legislation.
Full testimony below: