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In Letter To Geithner, Schumer Encourages Administration Not To Give In To Perceived Political Pressure Against Aggressive Reforms

Senator Also Urges Administration To Consider Making Fed Systemic Risk Regulator; Says SEC-CFTC Merger Has Merit

WASHINGTON, DC—As the Obama administration prepares to submit to Congress its recommendations for reforming the financial regulatory system, U.S. Senator Charles E. Schumer (D-NY) released a letter Friday encouraging Treasury Secretary Timothy Geithner not to abandon plans to consolidate the patchwork of bodies overseeing the banking industry into a single, prudential regulator.
“It does not make sense for up to four different federal regulatory bodies to retain oversight over the safety and soundness of banks and bank holding companies in the United States. Retaining multiple regulatory entities preserves the regulatory arbitrage that allows institutions to pick the oversight scheme that benefits them the most, often at the expense of consumers and the health of the system overall,” Schumer wrote.
The letter comes in the wake of reports that, in the face of an anticipated political backlash from Capitol Hill, administration officials are considering softening some of their more aggressive proposals. Schumer said the administration should not let pass a “once-in-a-lifetime” opportunity to dramatically reshape the “alphabet soup of regulators.”
In addition to a single prudential regulator to oversee banks, Schumer said a separate entity, likely the Federal Deposit Insurance Commission (FDIC), could maintain an insurance fund and hold resolution authority to take over troubled institutions. In his letter, Schumer also urged the administration to continue to consider empowering the Federal Reserve to serve as a systemic risk regulator, even though some lawmakers and regulators such as FDIC Chairwoman Sheila Bair have expressed a preference for this role to be served by a council.
Further, Schumer expressed an openness to a merger between the Securities and Exchange Commission (SEC) and the Commodities and Futures Trading Commission (CFTC). But, Schumer said, if a merger is not possible, the SEC should be empowered to oversee all currently unregulated derivatives linked to securities.
Schumer also applauded the administration’s plans to include a proposal for a new consumer watchdog agency among its recommendations. Schumer is a co-sponsor of legislation, authored by Senator Dick Durbin (D-IL), that would establish just such a regulator.
Schumer also urged that the administration consider endorsing the proposals contained in the “Shareholders’ Bill of Rights” he introduced last month. The bill would, in part, give shareholders proxy access and an advisory “say on pay,” as well as require publicly traded companies to split the offices of CEO and Chairman of the Board.
A copy of Schumer’s letter to Secretary Geithner appears below.
June 11, 2009
Hon. Timothy Geithner
Secretary, Department of the Treasury
1500 Pennsylvania Ave. N.W.
Washington, D.C. 20220
Dear Secretary Geithner,
In recent days, there have been newspaper reports that the Administration is shying away from vital reforms of the financial regulatory system for fears of Congressional turf battles and ingrained private interests. I hope these reports are inaccurate. Our country has not experienced a financial crisis of this magnitude in over 70 years, and our fragmented regulatory system, a historical and haphazard legacy of that last crisis, proved incapable of identifying and preventing it.  The opportunity we have now to overhaul our alphabet soup of regulators is once-in-a-lifetime and must be matched by once-in-a-lifetime efforts by the Administration and Congress. 
I believe that the Administration and Congress should fight for a strong, singular systemic regulator, and should seriously consider making the Federal Reserve this regulator. However, if this regulator is to be overseen by a council, it must have a strong chairman and effective leadership in order to have the necessary characteristics of independence and integrity similar to those of the Fed.  A clear lesson of this crisis is that this systemic regulator must have the ability to oversee all firms that have a potential effect on the financial system.
Another lesson we have learned from this crisis over the last year is that there are too many prudential banking supervisors and that they all compete for the business of licensing banks.  The Administration should not back away from consolidating the banking supervision responsibilities under one agency. There should be one prudential banking supervisor with a separate regulator to maintain the insurance fund and resolution authority. It does not make sense for up to four different federal regulatory bodies to retain oversight over the safety and soundness of banks and bank holding companies in the United States. Retaining multiple regulatory entities preserves the regulatory arbitrage that allows institutions to pick the oversight scheme that benefits them the most, often at the expense of consumers and the health of the system overall.
As for market regulation, I commend the Administration’s plan to oversee the previously unregulated market of OTC derivatives.  The lack of regulatory authority over credit default swaps was a significant contributor to the AIG debacle.  It is necessary that gaps in regulatory oversight over existing and future products are eliminated.  One approach would be to combine the CFTC with the SEC and give that agency jurisdiction over all OTC derivatives.  However, if a merger cannot be achieved, at the very least there must be clear lines of authority and responsibility over currently unregulated products, and OTC products that impact the price of a security and equities markets should be regulated by the same regulator of those securities and equities markets—the SEC—while derivatives that impact the price of a commodity or commodities markets overall should be regulated by the CFTC.
In addition, I want to stress the importance of enhancing our corporate governance provisions.  I have proposed the Shareholders Bill of Rights (S. 1074), which I urge you to include in your regulatory reform framework.  It is vitally important that there be effective checks against poorly performing CEOs and that shareholders have more of a voice to hold management and boards accountable for their decisions.
Finally, but perhaps most importantly for millions of Americans who buy financial products, it is critical that we create a separate consumer protection agency. As a co-sponsor of the Senate bill creating the Financial Product Safety Commission, I strongly support the Administration’s reported intentions to create a commission to protect consumers of financial products. 
Thank you for your consideration of these issues. It is important that we take advantage of this critical moment to make long-overdue changes to this nation’s system of financial regulation. I look forward to working with you in the coming months to achieve these goals.
Charles Schumer
United States Senator
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