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Shelby Misses Mark As Fed “Dodges Bullets”
Some proposed Fed reforms address "the criminal problem," but might not go far enough
Posted By: Mark MelinPosted date: May 12, 2015 12:07:34 PMIn: BusinessNo Comments
The U.S. Federal Reserve, and in particular the New York Fed, have apparently dodged significant bullets in draft legislation being offered to Congress that notably does not significantly tighten oversight on an agency that has been criticized by both Democrats and Republicans alike.

Richard Shelby Fed

WSJ: Fed Dodges Bulletts in Shelby Reform Proposal

The powerful Senate Banking Chairman, Richard Shelby (R-AL), is set to unveil what is being called wide-ranging regulation that attempts to reign in the Fed’s regulatory apparatus, which was documented to have overlooked its regulatory mandate when supervising the big banks, critics have charged. The legislation, which is required to go through Shelby’s committee, is also aimed to adjusting numerous regulations designed for risk-taking big banks and their complex derivatives positions and easing such restrictions for small- and medium-size banks, Victoria McGrane and Ryan Tracy exclusively report in The Wall Street Journal today.

The legislation is being described by some journalists as easy treatment of the Fed. A Wall Street Journal post from Jon Hilsenrath, headlined with “Fed Dodges Bulletts in Shelby Reform Proposal,” notes the bill does not include sought after provisions for transparency into Fed decision making processes nor an “Audit the Fed” proposal where the Government Accountability Office would review the Fed in similar fashion to other government agencies. The bill is also reported not to include a mandate to follow mathematical decision making processes, instead leaving Fed economic action to be determined on a discretionary basis by their Board of Governors.

New York Fed appears safe in Shelby bill

An issue not mentioned in media reports and absent from the Shelby proposal is to formally remove big bank regulatory authority out of the New York Federal Reserve bank. Significant behind the scenes discussions have taken place regarding independence of the Fed relative to the whims of the big banks. This is particularly the case with the New York Fed, as a picture of regulatory sub servitude is painted against a backdrop where big bank criminal behavior is all around in market manipulation, mortgage fraud and tax evasion. The new bill provides banks a “safe harbor” from avoiding compliance with federal mortgage underwriting standards as well as providing additional guidance regarding how organizations should be labeled as “systemically important.”



The Fed even had several internal scandals where confidential market moving information was leaked to a private firm with a financial interest. While these issues have galvanized discontent on both the right and left of the political spectrum — and even some younger staff inside the New York Fed are documented to have advocated a tougher regulatory approach — Shelby’s proposed legislation today, described as “the most ambitious attempt to revamp the financial regulatory regime since the 2010 Dodd-Frank Act,” is likely to disappoint law and order regulatory critics on both sides of the political spectrum.

Appointment of powerful New York Fed president to change, but holds on to regulatory duties

The proposed legislation requires the powerful New York Fed president to be nominated by the U.S. president and confirmed by the Senate. In recent Congressional testimony New York Fed President William Dudley was even unclear as to how he was appointed. The proposal also allows incoming Fed governors the ability to hire their own staff. Unlike all other government regulatory structures, Fed governors were required to maintain the long-term, most often big bank-friendly staff, many of whom were appointed during Larry Summers era at the U.S. Treasury and when Alan Greenspan was Federal Reserve Chairman. This issue was seen as a roadblock to any reformist Fed governor who might desire to institute a more traditional regulatory structure, and Shelby’s reform efforts in this regard are viewed in a positive light.

There have been attempts to satisfy regulatory critics who now point to documented criminality that previously was only discussed in whispers. The New York Fed Executive Vice President Sarah Dahlgren, in charge of regulatory issues, announced she was resigning at the end of the year and change is underway to centralize regulatory control in Washington D.C. as opposed to New York, as reported in ValueWalk. With Fed Chair Janet Yellen at the helm, recent moves by the central bank to hold bankers accountable for criminal acts are part of an internal battle being fought to reign in the most damaging behavior. Sources have indicated, however, the problem at the New York Fed goes higher than Dahlgren and Shelby’s bill, while addressing some of the obvious issues, appears not to touch certain key control problems.

Ten Democrats on the committee signed a letter objecting to the process Shelby was using to push the bill through the committee. Democrats led by Sherrod Brown (D-OH) are reported to advocate for additional regulatory relief for community banks. The initial draft of the bill is scheduled to be released this afternoon.

http://www.valuewalk.com/2015/05/shelby-fed-bill/