'WHEN THE HURLYBURLY'S DONE'
From Washington
Kathleen W. Collins

Kathleen W. Collins is a partner in Morgan, Lewis & Bockius, and Washington Counsel of the Bank Insurance & Securities Association. She and Richard Starr write the "From Washington" column in alternate issues.

IN A SCENE eerily blending aspects of Macbeth and A Midsummer-Night's Dream, the players in the financial world's latest drama assembled mid-July in Washington. After months of restraint, and driven no doubt by fear that the turmoil in the financial markets could yet produce a repeat performance of Bear Stearns, the players surveyed the regulatory landscape as they conjured up the magic potion needed to cure what ails the markets.

As a first step, Securities and Exchange Commission (SEC) Chairman Christopher Cox and Board of Governors of the Federal Reserve System Chairman Ben Bernanke signed an agreement to "collaborate, cooperate and share information in areas of common regulatory and supervisory interest to facilitate their oversight of financial services firms."

Eye of newt, and toe of frog

A day later, Chairman Bernanke in a speech in Arlington, VA, logically pointed out that if the Fed were to be held more "formally" accountable for promoting financial stability beyond its normal commercial banking responsibilities, it would need to examine directly those financial institutions and require corrective actions as warranted in cases where firms' actions have potential implications for financial stability.

Picking up steam, Chairman Bernanke, testifying before Rep. Barney Frank's House Financial Services Committee later in the week, said that new regulatory powers were definitely needed in order to provide for an orderly liquidation of failing investment banks (now referred to as "I Banks").

At the same hearing, Treasury Secretary Paulson urged a complete overhaul of financial regulation based upon his "three pillar" approach to regulation based on establishing three regulators that would focus on market stability, the soundness of financial institutions with federal guarantees, and the protection of consumers and investors.

The ingredients developed over the decades to deal with the regulation of bank holding companies need to be carefully analyzed and measured before being applied to a very difference industry, much of which is not in crisis.

Lizard's leg, and howlet's wing

Meanwhile, Senate Banking Committee Chairman Christopher Dodd and Ranking Member Richard Shelby reminded federal bank and securities regulators that "it is Congress' role to determine if and how any alterations to our financial regulatory system should be undertaken." A Washington Post editorial the day of the hearings speculated that Mr. Bernanke needed to improvise since the financial system remained shaky and many doubt Congress' ability to adopt contentious legislation in what's left of an election year. With the lead Post editorial in mid-July advocating that a new financial regulatory structure should be assembled by Congress "sooner rather than later," the cast around the boiling cauldron was complete.

Placing eye of newt to one side of the medicine cabinet, the ingredients developed over the decades to deal with the regulation of bank holding companies need to be carefully analyzed and measured before being applied to a very different industry, much of which is not in crisis.

The Federal Reserve keeps its charges in line by (1) approving the entrant; (2) requiring notice of new activities or acquisition; (3) requiring periodic financial and other event-driven reports; (4) examining the company; (5) prescribing capital requirements; (6) enforcing the numerous laws and regulations at its disposal, and, when things go awry, protecting the subsidiary banks by requiring termination of activities by the holding company or forcing divestiture of the banks. A potent brew of powers, and a reason why many nonbanking financial firms remained on the sidelines post-Gramm-Leach-Bliley rather than acquire a bank and become financial holding companies, and why many private equity firms cringe when they are told of the pleasures that await should they take that 25 percent stake in the bank they have been analyzing.

But perhaps the actors may yet strike the right theme. House Financial Services Committee Chairman Barney Frank offered a cautious question at the end of the week's performances. "I gather what you're saying is, it is better, in this very complex and very important set of issues, that we do it right than that we do it very quickly?" Both Secretary Paulson and Chairman Bernanke, thankfully, replied in the affirmative.

When shall we three meet again
In thunder, lightning, or in rain?