The Federal Reserve's drastic measures to make loans available to struggling investment banks should come with increased tabs on a little-regulated sector of the financial industry, US Treasury Secretary Henry Paulson said Wednesday. ( dpa )
Paulson said that greater oversight and transparency was a logical consequence of gaining access to federal funds, which the US central bank has made available to investment firms in a bid to stave off a wave of bankruptcies sparked by the ongoing credit crisis.
Investment banks have reported billions of dollars in writedowns amid the plummeting value of mortgage-backed securities, leading the Fed earlier this month to open up loans at its discount lending rate, usually reserved for commercial banks.
The initiative gives non-depository banks access to federal money for the first time since the 1930s and came as part of a wave of recent measures by the Fed to shore up the sagging US economy, including cutting its key interest rate by 2 percentage points since the beginning of the year.
The government has come under fire from some quarters for bailing out Wall Street investors while not doing enough to help struggling homeowners facing foreclosure. Republican presidential candidate John McCain said Tuesday that it was "not the duty of government" to bail out irresponsible lenders.
Paulson defended the Fed's actions as a temporary measure taken in exceptional circumstances, which "should be viewed as a precedent only for unusual periods of turmoil."
The credit crisis has been sparked in large part by investors' eagerness to use leverage to bolster their returns on mortgage- related investments. Investment banks' assets far outstripped equity as a result, making them more vulnerable to a sudden downturn in the credit market.
Paulson said that access to central-bank loans has always come with "strong prudential oversight of depository institutions, which also has included consolidated supervision where appropriate."
"Certainly any regular access to the discount window (by investment banks) should involve the same type of regulation and supervision," he said.