Posts filed under “Regulation”
So much for “not letting a crisis go to waste.”
The initial read on the Obama Regulatory plan was an enormous disappointment. Both supporters and critics who expected him to take a hard turn to the Left have been left either surprised or disappointed, depending upon their leanings.
To the pragmatic center, including your humble blogger, what stands out is the number of half measures and omitted actions that were viewed as necessary to prevent a replay.
Some very obvious omissions from the plan include:
1) No major changes for the ratings agencies!
This is a giant WTF from the White House. It implies that the team in charge STILL does not understand how the problem occurred.
The ratings agencies are not the only bad actors, but they are a BUT FOR – but for the rating agencies putting a triple A on junk paper, many many funds could not have purchased them, the number of mortgages securitized would have been much less, the insatiable demand on Wall Street for mortgage paper would have also been much lower.
Why is this important? If mortgages originators couldn’t sell a mass amount of loans, they would not have had the need to give a mortgage to anyone who could fog a mirror — and that means no Liar Loans, no NINJA loans, and no huge subprime debacle.
Better Solution: Take apart the ratings oligopoly! Eliminate the Pay-for-Play/Payola structure. Strip Moody’s S&P and Fitch from their uniquely protected status — they have proven they are neither worthy nor competent. Open up ratings to competition –including open source.
2) Turn Derivatives into Ordinary Financial Products: The Obama team does a series of minor steps for Derivatives, but they don’t go far enough.
Better Solution: Force derivatives to be traded like option/stocks, etc. (including custom one off derivatives) Trade them only on Exchanges, full disclosure of counter-parties, transparency and disclosure of open interest, trades, etc. REQUIRE RESERVES LIKE ANY OTHER INSURANCE PRODUCT.
3) If they are too big to fail, make them smaller.”
That is the famous quote from Nixon Treasury Secretary George Shultz, and it applies to the banks as well as insurers, Fannie & Freddie, etc.
We have a situation where 65% of the depository assets are held by a handful of huge banks – most of whom are less than stable. The remaining 35% is held by the nearly 7,000 small and regional banks that are stable, liquid, solvent and well run.
Better Solution: Have real competition in the banking sector. Limit the size for the behemoths to 5% or even 2% of total US deposits. Break up the biggest banks (JPM, Citi, Bank of America)
4) The Federal Reserve, Despite its Role in Causing the Crisis, Gets MORE Authority:
Under Greenspan, the Fed did a terrible job of overseeing banking, maintaining lending standards, etc. Why they should be rewarded for this failure with more responsibility is hard to fathom. It is yet another example of rewarding the incompetent.
Better Solution: Have the Fed set monetary policy. They should provide advice to someone else — like the FDIC — who hasn’t shown gross incompetence.
5) Require leverage to be dialed back to its pre-2004 levels. Have we even eliminated the Bears Stearns exemption yet? This was a 2004 SEC decision to exempt five biggest banks from the mere 12-to-1 prior levels. Note that all 5 are either gone, acquired or turned into holding companies.
Better Solution: 12-to-1 should be enough leverage for anyone . . .
6) Restore Glass Steagall: The repeal of Glass Steagall wasn’t the cause of the collapse, but it certainly contributed to the crisis being much worse.
Better Solution: Time to (once again) separate the more speculative investment banks from the insured depository banks.
All of which suggests that the status-quo-preserving, sacred-cow-loving, upward-failing duo of Lawrence Summers and Tim Geithner are still in control of economic policy. The more pragmatic David Axelrod and the take-no-prisoners, don’t-give-a-shit-about-Wall-Street Rahm Emmanuel have yet to assert authority over the finance sector.
“The overwhelming share of increased actual and projected costs for the fund have been caused by actual and projected failures of smaller banks, not larger ones.” -John Dugan, the comptroller of the currency > I don’t usually insert myself into personal disputes amongst regulators, but when one of them appears to be a bit of…Read More
National Economic Council Director Lawrence Summers laid out five principles for re-regulating the financial markets: 1. The government must have the authority to take over and liquidate failing nonbanking financial institutions. 2. Regulators must be able to make certain that financial institutions have enough capital to weather crises. 3. Regulated entities must not be able…Read More
Be sure to read Jack McHugh’s comments on the TARP repayment. He specifically asks: 1. With all the chatter about responsible regulatory reform, shouldn’t the rules governing bank conduct (e.g. leverage ratios, off balance sheet vehicles, etc.) be put in place before TARP repayments flow in? 2. Before TARP preferreds can be redeemed, shouldn’t the…Read More
This morning’s outrage comes to us via the WSJ, and it discusses how our elected representatives rolled over for their overlords, the bankers, in grateful genuflection to their largesse: Huge heaps of lobbying monies: “Not long after the bottom fell out of the market for mortgage securities last fall, a group of financial firms took…Read More
I have repeatedly mentioned Too Big To Succeed as a cause of the most recent crisis, but have you ever wondered HOW we got that way? One obvious suspect has been the easy M&A environment of the past 20 years. Instead of a very competitive market where mergers for sheer size sake is discouraged, the…Read More
Yesterday, I lamented that “So far, the Obama administration approach to bailouts has been to keep running Bush Economic Term III.” The reference was to the continuation of the Bush policies, by many of the same people involved in that prior, ruinous bailout approach. Soon, we shall find out if Team Obama’s “Change we can…Read More
Front page of the NY Times goes over the shameful behavior of banks — one of the primary causes of the entire crisis — using bailout money to pay lobbyists to maintain the regulatory status quo. Its yet another reason for why they should have been put into bankruptcy once they became insolvent. So far,…Read More