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Fallout: The Financial Crisis

Federal Reserve to oversee risks

Amy Scott Jun 17, 2009
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Fallout: The Financial Crisis

Federal Reserve to oversee risks

Amy Scott Jun 17, 2009
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TEXT OF STORY

Kai Ryssdal: Beyond rethinking who regulates what, as John mentioned, the president talked this morning a lot about risk.

PRESIDENT BARACK OBAMA: One of the reasons this crisis could take place is that while many agencies and regulators were responsible for overseeing individual financial firms and their subsidiaries, no one was responsible for protecting the whole system from the kinds of risks that tied these firms to one another.

So in a perfect White House world, the Federal Reserve will have new powers to regulate any institution that could pose a risk to the system. The FDIC could seize it if it ran into trouble. Hedge funds, insurance companies and banks would all be under one risk-management umbrella. From New York, Marketplace’s Amy Scott reports.


AMY SCOTT: The Fed would become a sort of super-watchdog with powers to prevent any one firm from dragging down the entire financial system.

Karen Shaw Petrou is with Federal Financial Analytics. She says the Fed would have new authority to police firms that aren’t banks but often act like it.

KAREN HAW PETROU: Some of the big hedge funds, it could be GE, as long as GE owns a bank, big insurance companies, it’s really a very, very wide swath of the financial system.

The plan also calls for a council of regulators led by the Treasury Department. The council would advise the Fed and coordinate between agencies to make sure no one’s taking too much risk. In the event of another Lehman Brothers or AIG, the government would also have new tools to prevent an economic catastrophe.

Mike Pagano teaches finance at Villanova School of Business. He says during the financial crisis, officials have had two choices when a big firm has run into trouble.

MIKE PAGANO: Do you let them go under, like they did with Lehman, or do you bail them out, is really what you had a choice between.

Under Obama’s plan, the government would have a third option. Close the doors, break up the company, and sell the assets to investors in an orderly fashion.

Much like the FDIC does with banks. Of course, the hope is with all the new protections against excessive risk-taking that option won’t be necessary.

In New York, I’m Amy Scott for Marketplace.

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