Federal Reserve 'Embeds' Employees In Banks

The Regulator Down the Hall ... Fed and Comptroller of Currency Bolster the Ranks of Staffers 'Embedded' at Nation's Biggest Banks ... Memo to employees at big Wall Street banks and securities firms: Be careful what you say on the elevator. You might be surrounded by regulators. As part of a push to prevent another financial crisis, the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency are increasing the number of examiners who go to work every day at the companies they regulate. Much like reporters assigned to a military unit during war, these regulatory "embeds" get unprecedented access to financial firms such as Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley. – Wall Street Journal

Dominant Social Theme: Regulators always get it right.

Free-Market Analysis: Is there any justification for this? The dominant social theme "embedded" in the above article is clear: More efficient regulatory endeavors will reduce the kind of financial crises that have been prevalent throughout the history of modern capitalism. Only more and better government regulation is the answer.

Of course, the regulatory answer to big businesses excesses has not worked in the past and there is no reason why it will work in the future. Every regulation is actually a price fix that further distorts the marketplace and transfers wealth from producers to those who do not know how to produce. Nonetheless, this dominant social theme rolls on. Every time there is a financial setback, the US government and its adjunct enforcer the central bank (Federal Reserve) gains more power. This goes for the rest of the Western world, too.

Now regulations are not enough. Regulation is to be abetted by physical presence. But will it really help if Federal Reserve employees work in the same building as the banks they are supposed to regulate? According to the Wall Street Journal, these embedded regulators will be much more focused than previous regulators. They will eat lunch at the company cafeteria and have unprecedented exposure to company paperwork. Here's some more from the article:

It's not a small program either and includes up to about 150 regulators "scattered across banks and securities firms overseen by the New York Fed." That total will double by this fall, according to a person familiar with the situation. As a result, groups of 15 to 20 regulators per company will swell to as many as 35 people. Other banks with on-site New York Fed supervision include Bank of New York Mellon Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, J.P. Morgan Chase & Co. and UBS AG. ...

The on-site reviews are thorough and can produce friction between the bank examiners and their subjects, according to bankers and regulators. The Fed's latest how-to "Commercial Bank Examination Manual" is 1,808 pages long, and examiners have the power to "review all books and records maintained by a financial institution." In addition to policing the rules, Fed examiners should "identify vulnerabilities early enough to head off major problems," says Daniel Tarullo, a Federal Reserve governor ...

Regulators are also pushing examiners to challenge chief executives and boards of directors. "It should be a drop-by relationship," says Sarah Dahlgren, who took over the New York Fed's financial-institution supervision group in January after leading a team that monitored the New York Fed's loan to insurer American International Group Inc. The No. 1 embed at each firm is expected to meet with the CEO at least once a month. Michael Brosnan, an OCC official overseeing supervision of large U.S. banks, says the agency is "increasingly involved in governance and oversight" of the 15 largest banks.

Again, the point to keep in mind when contemplating what is taking place is that every regulation is a price fix and every price fix distorts the economy and produces an impoverishing wealth transfer. Half of America is on one form of government dole or another now; fifty million are on food stamps. When is it enough?

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