Treasury Secretary Henry Paulson gets tough

Intro Hello. I'm Bernard Hickey with daily briefing from interest.co.nz... Today, we'll look the latest fallout on global capital markets from the Bear Stearns collapse. Now the Federal Reserve wants to have much deeper oversight investment banks. And we'll compare America's housing market with New Zealand's and ask the question: Is our market going to fall as much as America'? Story 1 But firstly we look at the latest announcement from the US government about the global credit crunch. 10 days ago the global financial system stood on the precipice of a complete meltdown. The likely bankruptcy of Bear Stearns threatened to infect the banks it had dealings with in the massive markets for credit default swaps and other bond type instrument. Essentially the US Federal Reserve stepped in to rescue the global financial system from a meltdown. It took drastic action. It did things it hasn't done since the 1930s. Firstly it engineered the sale of Bear Stearns to JP Morgan for $2 a share, when it had been trading at $60 a share only a few days earlier. Then it opened its discount window to investment banks. This means it offered to lend them valuable and safe treasury bonds in exchange for the mortgage backed securities that the investment banks wouldn't trade with each other. This was unprecedented. Previously the Fed only opened this window for federally insured deposit taking institutions, which means banks. Now it started lending to brokers too. It hasn't done that since the depression. But there's a price to pay for that and now its coming. Increased regulation. Treasury Secretary Henry Paulson said overnight in a very interesting speech that the Fed would need to have much more oversight of investment banks. He says it is already working closely with the SEC, America's financial regulator, to hunt through their books for signs of stress and failure. That should be a revealing exercise. So what does it mean for us? I suspect it means investment banks will become more careful and less imaginative with their sales processes and products. That could mean fewer fancy instruments that in the short term have the effect of lowering interest rates globally. We'll see. Investment banks and brokers aren't regulated by our Reserve Bank and we don't have a situation similar to Bear Stearns. But should we? I'm sure the Reserve Bank is reading that speech from Henry Paulson very closely.

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YouTube | March 27, 2008