Federal Reserve & Interest Rates

Later this week, Treasury Secretary Timothy Geithner will unveil his regulatory reform plan before Congress.  How much it will resemble his predecessor, Henry Paulson’s so called “blueprint for regulatory reform” remains to be seen.

Regulatory reform of the financial services industry could take quite some time, with the current emphasis by the administration on healthcare reform.  However long it takes, the outcome will likely see the Federal Reserve exert a firmer control on the economy.

We may see some of the broad powers that the Fed has already used during the financial crisis become more institutionalized.  Also, some of the powers that are currently under the control of the Security and Exchange Commission(SEC) may also pass into their control.

The Fed is expected to gain regulatory power over institutions that are deemed systemic risks to the rest of the economy.  The SEC received a black eye when it failed to spot serious flaws in a number of financial institutions, most notably Bear Stearns and Lehman Brothers.

Other agencies likely to gain increased regulatory powers are the Federal Deposit Insurance Corporation and the Office of Thrift Supervision.  While much of the focus lately have been on the nation’s largest banks, hundreds of smaller regional banks face difficulties and a number of them are expected to fail in the next few years.

Ultimately we could see a considerable rollback of much of the deregulation that has occurred in the previous two decades and it will likely shape the financial landscape for years to come.

After a months of trying to convert itself into a bank holding company, GMAC was able get emergency approval from the Federal Reserve last week despite it’s failure to achieve the capital levels required.  Now that it qualifies as a bank holding company, the Treasury was finally able to allocate bailout money from TARP funds to General Motors’ financing arm.

The Treasury Department today announced that it will purchase $5 billion in senior preferred equity with an 8% dividend from GMAC LLC as part of a broader program to assist the domestic automotive industry in becoming financially viable.

Additionally, the Treasury has agreed to lend up to $1 billion to General Motors so that GM can participate in a rights offering at GMAC in support of GMAC’s reorganization as a bank holding company. This commitment is in addition to the assistance previously announced for GM on Dec. 19.

The lack of available credit has been a major reason auto sales have fallen to their lowest levels in over two decades.  The infusion of $5 billion will help GMAC extend financing to prospective car buyers.

This continues the Treasury’s ongoing efforts to shift it’s primary focus to the consumer side of credit generation.  Consumer spending has taken a big hit this year with consumer confidence levels falling to a record low in December.

GMAC announced that it plans to offer zero percent financing for up to five years and has lowered it’s credit standards somewhat as it tries to stimulate sales.  It is likely GMAC will receive further help once the remaining $350 billion in TARP funds is released by Congress.