Ex-SEC Chief Opposes Plan To Boost Fed Powers

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The Obama administration wants to expand the powers of the Federal Reserve as part of its efforts to overhaul the financial regulatory system. Former Securities and Exchange Commission Chairman William Donaldson, who opposes that plan, says the Fed should focus on monetary policy.


One of the big legislative initiatives of the Obama administration is the overhaul of financial regulation. As part of the overhaul, the main responsibility for regulating systemic risk would go to the Federal Reserve. The expanded role of the Fed has drawn some criticism from among others, a New York-based organization called The Investors' Working Group.

William Donaldson is one of two former chairmen of the Securities and Exchange Commission who chair that group. They released a report yesterday - it outlines their recommendations for regulatory reform, which differ from the Obama administration's. Mr. Donaldson told us that he believes the Fed should not have the final word on serious risky business.

Mr. WILLIAM DONALDSON (Chairman, The Investors' Working Group): The Federal Reserve has primary responsibility and has its hands full in terms of monetary policy and in terms of keeping interest rates steady and keeping unemployment high, and in so far as you dilute that mission and add other things, you begin to move the Federal Reserve out of its primary mission area. So we favor a systemic risk oversight board…

SIEGEL: A new board, you're saying.

Mr. DONALDSON: A new board. And that new board would be made up of presidential appointments, probably four or five very senior, highly-experienced individuals with a very strong chairman. And basically the charge would be that they can have our authorized - under law - to go anywhere to search out where they see systemic risk potential growing. And when they identify that, then they turn their findings over to the proper regulatory agency for their attention.

SIEGEL: But bear with me for a brief thought experiment here. If there had been such a board overseeing systemic risk throughout, well, if it had been in existence in the 1990s, say, until now, what would it have done that all of the existing regulators and the people at the Fed and the Treasury did not do to stop the country from getting far too leveraged in investing in so many risky securities?

Mr. DONALDSON: Well, that's a good question. I think that one of the large mistakes that they made here was basically the taking away of the authority for oversight from both the SEC and the CFTC and in the area of derivatives. So you had these - this explosion in new instruments, if you will, highly volatile instruments ranging all the way up to credit swaps derivatives where there was no regulation. And, clearly, I believe that the explosive growth of these instruments would not have escaped a systemic risk overseer.

SIEGEL: For people listening and trying to follow the whole financial regulation debate, what the administration has said, what your group and others are saying, what do you say to the cynics? Is it - it really doesn't matter how many boards there are, how many regulators there are and what turf they regulate if they're all going to be drawn from the same pool of people who are going in and out of the same jobs and basically have the same view of what the investment community should be doing.

Mr. DONALDSON: Well, you know, I don't think they are necessarily drawn from the same pool. I mean, the SEC has, you know, a very long and very distinguished history as a regulatory agency and you have to look at the events of the last, you know, decade or so, with the explosion of technology and the explosion of instruments, you have to look at the cutbacks that were made - an atmosphere of date regulation. And this is to say, I think, that going forward we need to attract a more sophisticated, well-trained people to the SEC. We need to arm them with the technology and the knowledge to look around a corner and over the hill and anticipate the things that are going on.

SIEGEL: Mr. Donaldson, thank you very much for talking with us.

Mr. DONALDSON: Nice to talk to you.

SIEGEL: That's William Donaldson, former chair of the Securities and Exchange Commission, and now a co-chair of The Investors' Working Group, which has released a report and making its proposals for financial regulatory reform.

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