The Regulators Step Up

The public face on the government’s efforts to keep the economy from keeling over has been the Treasury Secretary and the Federal Reserve Chairman in recent weeks.  That may now be changing behind the scenes, as some real regulators step up to the plate.

As I write this, I’m trying to decipher a release from the Securities and Exchange Commission, which is responsible for oversight of the financial markets (you may remember that John McCain said he would fire the SEC chief, former Congressman Chris Cox.)

It looks like the SEC has taken a first step to loosen what are known as the “mark to market” accounting standards, which some lawmakers say have wrongly caused a financial pinch for institutions that are holding a lot of mortgage backed securities.

“When an active market for a security does not exist, the use of management estimates that incorporate current market participant expectations of future cash flows, and include appropriate risk premiums, is acceptable,” says part of the SEC release.

When you look at so-called Mortgage Backed Securities, which is what the feds want to buy up in the $700 billion Wall Street bailout, right now those MBS have almost no value.  That’s why they are a drag on the bottom line of so many companies.

We’ll see if this is something real, or just an accounting trick.

Meanwhile, some real heavy lifting is going on over at the Federal Deposit Insurance Corporation, where FDIC Sheila Bair has again engineered another major financial takeover, without any negative waves spilling over into the markets.

The latest was the Citigroup purchase of Wachovia’s banking operations.  If you read closely about it, you will see that the FDIC is putting some taxpayer money on the line by assuming any Citibank debts that may reach over $42 billion on a pool of loans worth more than $300 billion.

“Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk,” said a press release from the FDIC.

In other words, Bair has just gotten the feds at $12 billion stake in Citigroup. 

Larry Kudlow, who appears on CNBC regularly, says Bair may be one of most powerful people involved in the current financial mess on Wall Street that people don’t know.

“Hank Paulson may not be the most powerful financial person in the country right now. That honor goes to Sheila Bair, the chairman of the FDIC,” wrote Kudlow.

“It suggests to me that if the Congress is unable to craft a deal for Treasury purchases of toxic assets, the nation is still in good hands as a result of the good offices of the highly professional, credible, and trustworthy Federal Deposit Insurance Corporation, run very well by Ms. Bair,” added Kudlow.

I will guarantee you that the next time Bair appears on Capitol Hill for a hearing, she will get a bit of rock star treatment, as long as no depositors lose their money in banks that go under.

There are a number of lawmakers who have argued in recent days that Bair needs to do exactly that, step up and take charge.

Many of those same people are also of the belief that Congress doesn’t need to be overly inolved, saying that is the job of Bair and others.

We’ll see if the regulators continue to stay engaged, or remain on the sidelines, paralyzed by political fear.