Since the Bear Stearns bailout, most commentators in the US have assumed that the Federal Reserve’s action would eventually result in Fed regulation of investment banks – a superFed, as some have called it. But it was always assumed that this would occur through legislative action, as Congress considered whether to place the resources of the US government behind the investment banking industry, as those resources have been placed behind commercial banks.

However, on Monday, with the support of the Treasury, the Securities and Exchange Commission and the Fed signed a memorandum of understanding that, in effect, puts the key elements of a Fed regulatory structure – and implicit Fed backing for the large investment banks – into place. What this amounts to is a straightforward Fed reach for important new regulatory authority, an unprecedented step in which a weak SEC – chastened after the failure of Bear Stearns – has been complicit. It would be perfectly acceptable if the agreement covered only the emergency period the markets are now experiencing, but it has no time limit.