Mercury news is reporting Administration calls for giving Fed more powers.



Treasury Secretary Henry Paulson says the government must move quickly to give the Federal Reserve more powers to regulate the financial system. Paulson said today that the central bank's powers should be expanded in the wake of the near collapse earlier this year of Bear Stearns, the giant Wall Street investment firm.



He said there was a need to consider quickly how to give the Fed the power it needs to obtain information from investment banks and the responsibility to intervene to protect the overall financial system. His comments were provided by the Treasury Department as excerpts from a speech he was to give later in the day.

Fed At Fault

Uncertainty Principle Corollary Number Two:

The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Fed Is Cooking The Books

Flip through the footnotes to the Fed's latest annual report, and you'll come across an open secret. The Fed doesn't follow normal accounting rules, as promulgated by any of the major standard-setting boards. Rather, the Fed writes its own, in a document called the Financial Accounting Manual for Federal Reserve Banks.



If you ever wanted to design an accounting regime to help a bank cook its books, the Fed's would be perfect. This doesn't exactly inspire faith in the U.S. financial system, at a time when a good example might help a lot.



Imagine if there were no rules specifying when a bank must bring an Enron-style special-purpose entity onto its own balance sheet. The Fed's accounting manual has none. Now picture an accounting system where a bank never had to recognize losses on any securities it holds, as long as it continues holding them. That, too, is the Fed's policy.



JPMorgan Chase & Co., which completed its purchase of Bear Stearns this month, will lend the Delaware entity $1 billion and absorb the first $1 billion of any losses. The Fed is on the hook for the rest. The central bank has hired an outside company, BlackRock Inc., to manage the sale of the assets over the next 10 years. The proceeds will go back to the Fed and then, if anything is left over, to JPMorgan after the Fed is paid.



If the Fed were a normal bank, it probably would have to put the Delaware special-purpose entity's assets and liabilities on its own balance sheet, under the Financial Accounting Standards Board's rules. The reason is that the Fed will bear most of the risk of losses. Under the Fed's 161-page accounting manual, however, there's no such requirement. That's because the manual doesn't have any rules on the subject. The Fed hasn't said yet what it will do.

