The Federal Reserve could become the supercop for “too big to fail” companies capable of causing another financial meltdown under a proposal being seriously considered by the White House.
The administration of US President Barack Obama told industry officials on Friday that it was leaning toward making such a recommendation, said officials who attended a private one-hour meeting between Obama’s economic advisers and representatives from about a dozen banks, hedge funds and other financial groups.
Treasury Secretary Timothy Geithner and other officials made it clear they were not inclined to divide the job among various regulators as has been suggested by industry and some federal regulators. Geithner told the group that one organization needed to be held responsible for monitoring systemwide risk.
“Committees don’t make decisions,” one participant quoted Geithner as saying.
Officials from the Treasury Department and National Economic Council, which hosted the meeting, told participants that the Fed was considered the most likely candidate for the job, said several officials who attended or were briefed on the discussions.
The administration officials said a legislative proposal would likely be sent to Capitol Hill in June with the expectation that the House Financial Services Committee, led by Democratic Representative Barney Frank, would consider the measure before the July 4 recess.
The officials requested anonymity because the meeting had not been publicly announced and they were not authorized to discuss it.
A Treasury Department statement on Friday confirmed Geithner’s position that he wants a “single independent regulator with responsibility for systemically important firms and critical payment and settlement systems.”
A spokesman said Geithner also is open to creating a council to “coordinate among the various regulators, including the systemic risk regulator.”
The Fed itself hasn’t taken a position on whether it should have the job, although Chairman Ben Bernanke has said the Fed would have to be involved in any effort to identify and resolve systemwide risk.
Separately, Geithner said on Friday it was time to review how regional Federal Reserve banks are governed to ensure the public feels confident no conflicts of interest are at play.
Geithner was asked during a Reuters Television interview about the resignation on Thursday of Stephen Friedman, a member of Goldman Sachs Group Inc’s board of directors and a former chief at the firm, from his post as chairman of the New York Federal Reserve Bank’s board. The resignation came after questions were raised about Friedman’s purchases of Goldman Sachs stock.
In the interview, Geithner, who was president of the New York Fed until his approval for the Treasury post in January, called Friedman “an enormously dedicated, talented leader of the financial community.” Still, Geithner said he and Bernanke felt it was time to take a look at how the central bank handles potential conflicts of interest.
Friedman, who had led the New York Fed’s board since January last year, bought shares in Goldman last December and again in January. During that period, the Treasury and the Fed were drafting plans to bolster the capital held by the nation’s big banks.
In his resignation letter, Friedman said he had complied with rules governing such purchases, but did not want to become a distraction while the Fed was fighting a recession. He repeated on Friday that he did not break any rules.
Geithner said the Fed’s structure, which dates to its creation in 1913, helps bring diverse interests to bear on the making of monetary policy by involving people from the business and civil community in governing regional Fed boards.
“That’s a very valuable model for the country, it has served the country enormously well,” Geithner said. “But we’re taking a fresh look at all aspects of our financial system now and we’re going to take a fresh look at the role of the Fed in the system generally. That’s a useful thing for us to do.”
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