FED vs. SEC, round 2

It seems as if the appetite to regulate the broker/dealers is not strong at the FED. Today Hank Paulson stepped back from the brink while he said that the Federal Reserve should ­bolster its supervision of investment banks while they access its emergency cash, he stopped short of calling for permanent regulation of the broker/dealers by the Fed. The FT reports:

Permanent regulation would be studied by the President’s Working Group on Financial Markets, including senior members of the SEC, the Fed, the Treasury and the CFTC.

Barney Frank, the Democrat who chairs the House Financial Services Committee, last week called for Congress to consider authorising the Fed to broaden its powers and act as a “financial services risk regulator”.

“To the extent that anybody is creating credit they ought to be subject to the same type of prudential supervision that now applies only to banks,” he said.

Congressional pressure on the administration and the Fed increased further when Max Baucus and Chuck Grassley, the senior lawmakers on the Senate finance committee, asked Mr Paulson as well as Ben Bernanke, Fed chairman, and Tim Geithner, president of the New York Fed, for more information on the sale of Bear Stearns to JPMorgan.

This reads to me as if the Senate sees the logic of giving the broker/dealers to the FED but the Treasury, and possibly the FED itself, is less keen to have a fight with the SEC.

In this context it is worth studying the SEC's letter to the Basel committee concerning the Bear. This is mostly concerned with liquidity risk, but it does include the following data on two Bear, Stearns companies capital requirements:

	BSSC Net Capital ($ billion)
	Required	Excess
31-Dec	1.26	3.38
31-Jan	1.30	2.92
14-Mar	1.27	>2.00 (estimated)

	BS&Co. Net Capital ($ billion)
	Required	Excess
31-Jan	0.56	2.71
14-Mar	0.58	>2.00 (estimated)

Am I the only one to be shocked by the absolute size of those numbers? Only a couple of billion required capital for a major broker/dealer? Surely it should be at least ten. I really wonder what BSC's capital requirement would be if it were regulated as a bank. Perhaps we will be able to see from the rise in JP's capital requirement. And I bet it will be a lot more than a couple of bucks.


Update. Just to contextualise the Bear's capital numbers above, I looked up the Tier 1 for a range of players. WaMu, for instance, has Tier 1 as of Y/E 07 of $22.4B. Credit Suisse is about $35B, Deutsche about $45B. Even recently maligned HBOS has about $48B. The Bear's 2006 Annual Report records it had net capital of $4.03B, or rather less than Deutsche's capital for operational risk alone. With capital that small, why on earth was the Bear rated single A?