Treasury Secretary Henry Paulson has urged broad new powers for the Federal Reserve to demand information from Wall Street investment banks and said markets must be prepared for the fact that some firms can fail.

“We should quickly consider how to most appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene in order to protect the system, so they can carry out the role our nation has come to expect — stabilizing the overall system when it is threatened,” Paulson said in remarks prepared for delivery at a noon luncheon.

This comes on the heals of Treasury’s March release of its Blueprint for a Modernized Financial Regulatory Structure and The Fed’s March bailout of finance giant Bear Stearns.

“We must limit the perception that some institutions are either too big or too interconnected to fail,” Paulson’s said. “If we are to do that credibly, we must address the reality that some are … Whether it was (hedge fund) Long Term Capital Management in 1998 or Bear Stearns this year, our nation has come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk … But ... the Fed has neither the clear statutory authority nor the mandate to anticipate and deal with risks across our entire financial system.”

What This Means to Agents:  This is part of the Treasury’s overall Blueprint and at least focuses on the side of the equation that needs fixing. Given the current sub-prime loan debacle and ensuing problems, focusing attention on Wall Street investment banks makes sense.  Data was missing, but it was from the private equity financial markets that Treasury allowed to “run” in an unregulated manner.

Insurance Departments have plenty of information both individually and collectively (v/v NAIC) as to who and what in the business of insurance, and this is not a reason for Congress to move successful insurance state oversight to Treasury.  PIA remains adamantly opposed to the Treasury’s stated plans for the insurance industry, the one sector of the financial services industry that has not experienced problems this year.

June 24, 2008