WASHINGTON - A top banking regulator says the government must do a better job of planning for the failure of a large investment bank after the near-collapse of Bear Stearns Cos.
Investment banks have looser government oversight than commercial banks, whose financial stability is more closely supervised. Since the swift decline and government-backed rescue of Bear Stearns in March, policy makers have debated whether investment banks should be subject to tighter controls.
Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., yesterday said the government should prepare contingency plans in the event a major investment bank fails. Regulation should more closely resemble that of commercial banks, which are subject to heavy scrutiny by the FDIC and other regulators, she said.
"The government cannot be put in the position of having to simply write a blank check when these institutions get into trouble," Bair said in a speech to the Exchequer Club, a group of lawyers, lobbyists, and trade association officials.
Continuing trouble at investment banks has been apparent this week. Lehman Brothers Holdings Inc. posted a $2.8 billion loss on Monday, and Morgan Stanley said yesterday that its quarterly profit dropped by 61 percent.
While Congress appears unlikely to tackle the thorny issue of overhauling financial regulations this year, initial discussions are getting started.
One possibility would be for the FDIC to run a failing investment bank after the Federal Reserve or Securities and Exchange Commission decided to shut it down, Bair told reporters. The FDIC has long done so for commercial banks, and has handled four bank failures this year.
At least one analyst questioned whether such change would be effective, given that hedge funds, overseas investors, and other financial players could elude US oversight. "It's a fundamentally absurd idea that Congress can ensnare everybody," said Bert Ely, a consultant in Alexandria, Va.
Lawmakers have expressed concern over the Federal Reserve-backed rescue of Bear Stearns as it came close to filing for bankruptcy protection. Bear Stearns was acquired by JPMorgan Chase & Co. in March, with loan assistance from the Fed.
Some Democrats questioned why the central bank put $29 billion at risk in the JPMorgan-Bear deal to protect Wall Street, while millions of homeowners face the risk of defaulting on their mortgages and losing their homes.
Bair defended the Fed's actions as necessary to shore up the financial system. "There is a playbook for the failure of a commercial bank . . . but there isn't any for the failure of an investment bank," she said. "The Fed had to invent one on the fly."