Ostrich Oversight? - Michael Hirsch/NationalJournal

[WillyT]

Ostrich Oversight?
Financial oversight council seems intent on soothing public
By Michael Hirsh
Wednesday, November 24, 2010 | 6:49 a.m.

<snip>

The stagecraft was impressive. The new Financial Stability Oversight Council held its second meeting Tuesday behind a large horseshoe-shaped table in the opulent Cash Room, the Carrara-marbled heart of the Treasury Department.

Four American flags backed up the elite council's chairman, Treasury Secretary Tim Geithner, as he declared that he and his fellow members had “begun to build this council into a lasting institution.” To Geithner’s right sat Federal Reserve Chairman Ben Bernanke; to his left, Sheila Bair, head of the Federal Deposit Insurance Corporation.

But there was a jarring disconnect as soon as Geithner turned to the first order of business, the mortgage foreclosure crisis. Outgoing Assistant Treasury Secretary Michael Barr delivered a report on the “widespread and inexcusable breakdowns” in the system, saying that regulators were expected to complete their “on-site field work” by the end of the year and to draft a report by late January.

What's odd is that many of the council members have already been saying for weeks that the mortgage mess posed no grave threat to the financial system. And Barr, in a short interview with National Journal after the meeting, said there was little ”evidence” thus far that the untold number of mortgages with erroneous and often fraudulent documentation could cause another financial meltdown. He echoed Phyllis Caldwell, head of Treasury’s homeownership preservation office, who told the Congressional Oversight Panel last month that "at this point in time there is no evidence that there is a systemic risk.”

Yet the Congressional Oversight Panel itself recently issued a report warning about just that possibility. "Clear and uncontested property rights are the foundation of the housing market," the report said. "If these rights fall into question, that foundation could collapse." Former Sen. Ted Kaufman, D-Del., the chairman of the panel, said the effects of the mortgage imbroglio were still unknown, but “if investors lose confidence in the ability of banks to document their ownership of mortgages, the financial industry could suffer staggering losses."

The disconnect points to a deeper conflict for the new council. On the one hand, its purpose is to monitor "systemic risks'' in the financial system and deal with them before it's too late. At the same time, though, the council consists largely of banking regulators, who have labored for decades to maintain confidence in banks and prevent panics.

The eagerness with which FSOC members sought to reassure the public about foreclosure problems—even before its own report is complete—may be evidence of a fatal flaw in the design of the council, according to some critics.

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More: http://www.nationaljournal.com/economy/ostrich-oversight--20101124

:kick:

[DCKit]

1. And when the shit does hit the fan (and it will)....

The same bunch will be telling us "nobody could have seen this coming."