U.S. Treasury Secretary Henry Paulson on Thursday urged broad new powers for the Federal Reserve (Fed) to demand information from Wall Street investment banks and said markets must be prepared for the fact that some financial firms can fail. “We should quickly consider how to most appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene in order to protect the system so they can carry out the role our nation has come to expect—stabilizing the overall system when it is threatened,” Paulson said. In March, the U.S. central bank helped broker a takeover of Bear Stearns by J.P. Morgan Chase and guaranteed a $29 billion loan to facilitate the deal. The Fed said it acted due to concerns that a Bear Stearns bankruptcy could trigger a systemic financial collapse. It was the first time since the Great Depression in the 1930s that the Fed, which regulates commercial banks, had intervened to rescue a financial institution. Paulson said it was vital that the Fed has authority to obtain any information it needs quickly from investment banks. He also stressed that financial institutions should not believe that the central bank would rescue any troubled firm. “We must limit the perception that some institutions are either too big or too interconnected to fail,” Paulson said. “If we are to do that credibly, we must address the reality that some are.” “Whether it was [hedge fund] Long Term Capital Management in 1998 or Bear Stearns this year, our nation has come to expect the Federal Reserve to step in to avert events that pose unacceptable systemic risk,” Paulson said. “But … the Fed has neither the clear [legal] authority nor the mandate to anticipate and deal with risks across our entire financial system.”
