FDIC chief blames Fed for crisis

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FDIC chief blames Fed for crisis

By Tom Braithwaite in Washington, The Financial Times, January 14 2010

Financial Crisis Inquiry Commission
‘Regulators were wholly unprepared and ill-equipped for a systemic event,’ said Sheila Bair before the Financial Crisis Inquiry Commission

The Federal Reserve was blamed by a fellow regulator for contributing to the financial crisis on Thursday as the central bank and one of its former chairmen fought back against congressional moves to curb its powers.

In unusually pointed criticism, Sheila Bair, chairman of the Federal Deposit Insurance Corporation, told the Financial Crisis Inquiry Commission that “much of the crisis may have been prevented” had the Fed dealt with subprime mortgages seven years before it did.

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In New York, Paul Volcker, former Fed chairman and now White House economic adviser, was making the case for the defence.

He said there was “a compelling case that central banks should have a strong voice and authority in regulation and supervisory matters”.

Both Ms Bair and Mr Volcker carry weight on Capitol Hill, where the Fed has drawn blame for aspects of the crisis.

Mr Volcker told the Economics Club of New York he was “particularly disturbed” about moves to take away the Fed’s regulatory function.

Chris Dodd, Senate banking committee chairman, has proposed consolidating bank supervision into a single regulator.

The Fed published a paper on Thursday, which had been sent to Mr Dodd on Wednesday, arguing that its financial stability and monetary policy roles were complemented by supervising bank holding companies.

Institutions at the centre of the crisis, such as Lehman Brothers, AIG and Countrywide, had been outside its jurisdiction and subject to “far less comprehensive” regulation, it said.

The Fed paper marks a public and proactive stance by a body whose culture and independence from Congress have made it less willing than other agencies to fight for power in the altered regulatory landscape.

It acknowledged some failures but said the Fed was at the forefront of new and improved techniques of oversight, such as “cross-firm, horizontal exams” to assess common exposures and vulnerabilities, and “forward-looking stress testing based on alternative projections for the macroeconomy”.

Mr Volcker said: “What seems to me beyond dispute, given recent events, is that monetary policy and the structure and condition of the banking and financial system are irretrievably intertwined.”