The Federal Reserve dodged a bullet in the U.S. Senate Wednesday as lawmakers voted 91-8 to allow the central bank to continue supervising small banks.
The amendment counters the proposal in the 1,400-page financial reform bill that would have stripped the Fed of supervision of all but the country’s largest banks — those with more than $50 billion in assets — which would have radically re-arranged the regulatory landscape.
The arguments were fairly simple. The Fed argued that cutting small banks out of its jurisdiction would have amounted to supervising the U.S. economy with one eye closed, as its tentacles would have only reached the behemoths on Wall Street plus Charlotte, N.C., where Bank of America has its headquarters and San Francisco, where Wells Fargo & Co. resides.
Geography aside, the point is made. The Fed would have lost the ability to directly monitor the vast majority of U.S. banks, the smaller ones that make the deals directly with homeowners and small businesses. The amendment that passed “ensures that the nation’s monetary policy is connected to Main Street and not just to Wall Street,” said Sen. Amy Klobuchar, D-Minn., who introduced the amendment along with Sen. Kay Bailey Hutchison, R-Texas.
The measure defines an emotional turning point. The Fed has long been the target of political frustration, given it amply missed the recession that has erased millions of jobs and given it is suspected of feeding the housing bubble with a prolonged period of low interest rates.
It’s clear, in hindsight, the Fed should have hired John Paulson, the hedge fund manager who made billions betting against the housing market — or it should have sought out his advice.
Paulson was in touch with Main Street in ways many were not, but his warnings were likely not loud enough or early enough to prevent the housing bubble from occurring. Paulson smelled smoke before others did. It is unclear how early he noticed the market resembled a bonfire.
Federal and state investigators are still trying to figure out if the major banks were fueling the disaster by rigging mortgage securities to fail or by playing games with credit rating agencies that also failed to warn investors the market was about to implode.
The New York Times reported Thursday New York Attorney General Andrew Cuomo is investigating eight major banks with a focus on their relationships with Standard & Poor’s, Moody’s Investors Service and Fitch Ratings, which gave mortgage-backed securities high grades just before the collapse.
The Justice Department and the Securities and Exchange Commission are investigating Morgan Stanley to see if traders rigged deals to fail, an allegation similar to the civil lawsuit filed by the SEC against Goldman Sachs last month, The Washington Post reported, following up a report that appeared Wednesday in the Wall Street Journal.
How these developments will nudge markets is unclear. Stocks at Goldman Sachs have dropped 20 percent since mid-April, but Goldman is reportedly willing to settle out of court, which likely means a hefty penalty that Goldman can make up in a day or two of trading. What’s a few million these days?
In international markets, the Nikkei 225 index in Japan added 2.18 percent Thursday, while the Shanghai composite index in China rose 2.06 percent. The Hang Seng index in Hong Kong rose 1.04 percent, while the Sensex in India added 0.41 percent.
In Australia, the S&P/ASX 200 rose 1.75 percent.
In midday trading in Europe, the FTSE 100 in Britain added 0.71 percent, while the DAX 30 in Germany rose 1.12 percent. The CAC 40 in France added 0.35 percent, while the pan-European DJ Stoxx 50 gained 0.41 percent.
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