Opening Bell: The Return of Regulation

Big Ben wants more authority over the Street; more trouble for Credit Suisse; a run on IndyMac?; etc.

Federal Reserve Chairman Ben Bernanke said he would extend the emergency-loan program created for Wall Street during the Bear Stearns crisis and called for more power to oversee the investment banks.

The Wall Street Journal, New York Times, and Financial Times all front the news, which the Journal says indicates “continuing worries about the financial system and the economy” and which the NYT says shows the Fed thinks the crisis will continue “deep into 2009.”

Bernanke also proposed that the Fed get greater regulatory power over Wall Street in exchange for its lending. The Journal notes that the amount borrowed per day from the emergency loan program has fallen sharply since March, a good sign about the health of the investment banks.

The Journal cites a source at the Treasury Department saying the department is worried about so much power going to the Fed.

The Fed’s direct bank supervision, coupled with its authority as the lender of last resort and its overall responsibility for financial-market stability, concentrates a lot of power in one entity, this person said. The concern is that the Fed, as an individual regulator, might have an incentive to keep a firm from failing, even if failure is the most appropriate option.

The Times says the Fed will put out new rules regulating subprime mortgages and other “exotic” home loans.

A criminal investigation for securities brokers

The Journal on C1 reports that the fallout from the collapse of the auction-rate securities market, which has launched dozens of civil actions, has spurred its first criminal investigation.

The paper says one of the U.S. Attorneys in New York is looking into whether two ex-Credit Suisse brokers lied to investors about their investments, saying they were backed by safe student loans when in fact they were backed by collateralized debt obligations that included subprime mortgages. The bank found out about it and suspended the brokers, who later resigned—and went straight to Morgan Stanley. The Journal says they were fired on Monday but Morgan Stanley “declined to elaborate.”

The WSJ, which wrote about the two in October, says brokers were given incentives to put clients into the auction-rate securities—long-term loans that were intended to behave like short-term ones through regular auctions and were sold by Wall Street as “safe as cash”—with commissions, which they didn’t get for putting them into safer money-market funds.

To run, or not to run

IndyMac Bancorp, the mortgage lender that Monday said it would lay off more than half its workers and stop writing most new loans, either faced a run on the bank yesterday or didn’t, depending on whether you believe the Journal or the Times.

The Journal says “Some depositors have been pulling out their money over the past two weeks, but there has been no sign of general panic,” while the Times says:

On Tuesday, IndyMac, one of the nation’s largest independent mortgage lenders, faced what amounted to a run on the bank. As depositors rushed to withdraw money, IndyMac’s share price, already in a free fall, spiraled even lower.

But the Times doesn’t say anymore about the matter in its C3 story.

The Los Angeles Times reports that IndyMac said withdrawals had been increasing since late June, but it visited several offices yesterday, which were “calm.” But it has several graphs on the at-least-partial panic.

At the Arcadia branch, Joseph Gadoury, 43, said he had one account left with IndyMac after liquidating about $60,000 in certificates of deposit last week. He said he had shut the CD accounts after seeing dozens of anxious customers withdrawing their money.

“If the Great Depression looked like something, it’s got to look like what I saw that day,” said Gadoury, who manages a computer parts business. “It was a terrible sight.”

If cows made credit ratings

The Journal and NYT on C1 expand on the FT’s report yesterday that the Securities and Exchange Commission found “serious shortcomings” and conflicts of interest with the credit-ratings agencies.

The Times quotes from an analyst’s 2007 e-mail included in the “blistering” SEC report. It’s the Quote of the Day:

“It could be structured by cows and we would rate it,” an analyst wrote in April 2007, noting that she had only been able to measure “half” of a deal’s risk before providing a rating.

Here’s one from 2006:

“Let’s hope we are all wealthy and retired by the time this house of cards falters.”

Any hope the credit-ratings folks had to survive the credit crisis with their very profitable business models intact just died.

Sale or Bury

Steve & Barry’s, a department-store-sized shopping mall “anchor” will file for bankruptcy protection today, the Journal says on B1 and the Times on C1. It’s talking to Sears about a “bailout or partial sale.”

The papers say it’s bad news for mall owners because it could be forced to close all of its more than 270 stores. It’s also bad news for the 16,000 or so employees, most of whom will lose their jobs.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.