Will new regulatory super council learn the lessons of Lehman?

Introduction

After Bear Stearns fell apart in March 2008, the Securities and Exchange Commission and the Federal Reserve Bank of New York embedded teams within Lehman Brothers to gather information and monitor the company’s condition. The two regulators also agreed at the highest levels to share what they were finding with each other.

That didn’t happen.

The Lehman bankruptcy examiner later found that each agency was sitting on a vital piece of information, which, if shared with the other, would have shown that statements Lehman was making about the robustness of its liquidity were false. The examiner was also amazed to discover that the regulators couldn’t agree in hindsight about who was supposed to be in charge.

We bring this up because Friday will mark the first meeting of the Financial Stability Oversight Council, which was created by the Dodd-Frank law to address just the kind of institutional infighting and mistrust exposed by the Lehman collapse. The council is made up by the lords of regulatory Washington, including Sheila Bair, head of the Federal Deposit Insurance Corp.; Fed chairman Ben Bernanke; and Mary Schapiro, the SEC chairman. Treasury Secretary Timothy Geithner heads the council.

This is a more formalized version of the Lehman team, with an expanded purview and new powers. It is supposed to evaluate systemic risks in the banking system and break up cancerous firms. But already, before they council has even met, signs of the old divisions and mistrust are appearing.

The Wall Street Journal reported this week that jostling over new policies relating to the securitization market has already put the council at odds. On Sunday, Treasury officials asked regulators to urge the FDIC to delay any decision on new standards that would require companies to retain at least 5 percent of securitized assets, amid concerns that the rule could shut down the already weak market for securitized mortgages. The Journal wrote:

The email alarmed several regulators, people familiar with the matter said. The White House and Treasury generally avoid interjecting themselves in policy decisions at independent agencies. The FDIC had been working on the rule for almost a year.

Bair, Schapiro, and acting Federal Housing Finance Agency director Edward DeMarco pushed back against Treasury’s suggestion. And last Monday, the FDIC’s board approved the securitization rule with a 4-1 vote.

Was this tension part of the normal push and pull among Washington regulators? Or does it presage greater tensions down the road among the big personalities responsible for safeguarding the U.S. financial system?