WASHINGTON — Though the Obama administration's regulatory reform plan to give the Federal Reserve Board many long-sought powers quickly caught critics' eyes, even supporters began asking Thursday whether concentrating so much new authority in the central bank could backfire.
Under the plan, the Fed would get responsibility for overseeing risks to the financial system as well to all large financial companies and every holding company.
But with such sweeping power would come great expectations, Fed veterans said.
"They're going to get blamed for stuff that goes wrong," said Douglas Landy, a former lawyer at the Federal Reserve Bank of New York who is now a partner at Allen & Overy LLP. "It just seems like an almost impossible task."
Randall Kroszner, a former Fed governor, agreed. "There has to be a realistic expectation of what it means to be the systemic risk regulator," he said. "No institution can truly be all-seeing and all-knowing... It is unrealistic to assume that any institution could possibly fulfill the goal of never a financial crisis, never a financial glitch."
Fed Chairman Ben Bernanke, like other top regulators, was consulted on Obama's plan, but its chief architects were Treasury Secretary Timothy Geithner and National Economic Council Director Larry Summers. Both men are very close to the central bank and its top officials (Geithner is a former president of the New York Fed).
In addition, Patrick Parkinson, the Fed's deputy of research and statistics, was detailed to the Treasury to help write the reform plan.
Sources said even some insiders are concerned.
"There are those who have apprehension because no agency, no regulator is ever going to be able to identify all emerging crises and head them off," according to one former Fed official, who requested anonymity. "By definition this authority will give whoever gets it higher odds of preventing financial crises. But there's no guarantee, and there's not a guarantee that the Fed will head off all these crises."
The Fed has long had aspirations of being a kind of uber-regulator, and if the administration's plan is enacted, that goal would be realized.
The central bank got close in 1999 with enactment of the Gramm-Leach-Bliley Act, which deemed the Fed the "umbrella" regulator of financial companies and required "functional" regulators like the Securities and Exchange Commission or the Office of the Comptroller of the Currency to provide any information the Fed requested.
But in testimony Thursday, Geithner insisted that authority did not go far enough, arguing those limits tied the Fed's hands.
Many observers have also questioned whether the Fed might emerge as a less independent central bank once the dust from the current crisis settles.
A top concern is a provision in the plan requiring the Fed to get written permission from the Treasury Department before using its emergency lending powers.
"What are we, in high school?" asked another source familiar with the Fed. "Requiring a written permission slip seems at odds with the definition of lender of last resort."
Geithner also acknowledged Thursday that new powers would likely mean more "involvement" with Congress.
Still, getting permission from the Treasury would not have prevented the Fed from using the power during the current crisis since the central bank already was conferring with the administration each time it invoked the authority.
But Ernest Patrikis, a former general counsel at the New York Fed who is now a partner in White & Case LLP, wondered what would happen if the central bank were to encounter a less cooperative Treasury secretary.
"If we ever had a time when the Fed chairman and the Treasury secretary were at odds, it wouldn't be good for the country," he said.
Still, speaking to reporters Wednesday, Summers rejected the notion that curbing the Fed's emergency powers eats into its independence.
"Lending to an institution that you don't supervise … is an inherently political act," he said. "For the Fed to engage in that act solely on its own accountability would be to become more engaged in politics. By assuring it's done in conjunction with the Treasury, … you are respecting the independence of the Fed."