Posts filed under “Regulation”
The Obama administration continues to demonstrate their lack of understanding about a) how derivatives work, and b) their role in the crisis and collapse.
The proposals to regulate derivatives are weak and ineffective. CDOs and CDS may be trading at healthy discounts to their notational value, but at least Wall Street is getting 100 cents on the dollar for its lobbying efforts.
“The multitrillion-dollar derivatives market, which currently isn’t regulated, enables financial firms to speculate on whether stocks, bonds, currencies and natural resources, among other things, will rise or fall in value. A particular type of derivative called a credit-default swap exacerbated the financial crisis and contributed to the collapse of American International Group, which made bets on derivatives it could not afford. Credit-default swaps, which are linked to the value of bonds, would be overseen by the SEC under the proposed agreement . . .
Obama’s proposal calls for derivatives to be traded through “central clearinghouses,” which would collect data about the market and require that buyers and sellers allocate enough money to cover any trades.
Gensler wants to go a step further and require that derivatives be traded on electronic exchanges, just as stocks are traded on the New York Stock Exchange and the Nasdaq. A derivatives exchange would offer the advantages of a clearinghouse but also provide public information about the pricing and volume of trades.
Non-standard derivatives would be exempt from much of this regulation. These are derivatives linked to highly complex investments, such as securities composed of mortgages and other kinds of debt. But Gensler and Schapiro said it would be important to be vigilant about policing this market.”
No no no!
This is simple, people! Repeal the CFMA to begin with, put ALL derivatives on exchanges, require transparency and reserves.
Broad Agreement Reached on Derivative Oversight
Zachary A. Goldfarb
Washington Post, June 23, 2009
I just love this info/chart porn: > Proposed Changes in Federal Regulation of the Financial Industry click for ginormous graphic via NYT > Source: Some Lawmakers Question Expanded Reach for the Fed STEPHEN LABATON NYT, June 17, 2009 http://www.nytimes.com/2009/06/18/business/18regulate.html
If they are too big to fail, make them smaller.”
-Nixon Treasury Secretary George Shultz about Fannie Mae and Freddie Mac
This Sunday NYT seems to be all about one of our favorite crisis whipping boys: The concept of TBTF — “Too Big to Fail.” There are numerous articles, stories, blog posts on this pernicious policy, including our own “Too Big to Succeed” meme (aka chapter 18: Too Big to Succeed? in Bailout Nation).
• Gretchen Morgenson asks: Too Big to Fail, or Too Big to Handle?:
Rather than propose ways to shrink these companies and the risks they pose, the Geithner plan argues instead for enhanced regulatory oversight of the behemoths. This suggests the taxpayer safety net will be larger after our national financial train wreck, not smaller.
More than two years after the crisis began, “too big to fail” remains “too problematic to address” with anything other than more souped-up regulation. Given that earlier efforts at policing these entities failed so miserably, why should anyone think that a new-and-improved regulatory approach will fare better?
• Eric Dash asks If It’s Too Big to Fail, Is It Too Big to Exist?:
Today, amid the wreckage of the gravest financial crisis since the Great Depression, bigness is one of our biggest problems. Major banks, the Detroit automakers, the financial basket case that is the American International Group — the only reason these giant, sclerotic companies are still standing is that they have been deemed “too big to fail.”
Or, more precisely, too big to be allowed to fail. Policy makers fear companies like these are so enormous and so intertwined in the fabric of the economy that their collapse would be catastrophic. Hence, all those multibillion-dollar, taxpayer-financed bailouts.
In its overhaul of financial regulation last week, the Obama administration proposed several measures to try to contain the biggest of America’s big banks. But it stopped far short of calling for the dismantling of those institutions.”
Paul Krugman gets meta on the idea — Too big to fail FAIL — and surprisingly argues that we can never eliminate TBTF:
“I’m a big advocate of much strengthened financial regulation. One argument I don’t buy, however, is that we should try to shrink financial institutions down to the point where nobody is too big to fail. Basically, it’s just not possible . . .
So I think of the pursuit of a world in which everyone is small enough to fail as the pursuit of a golden age that never was. Regulate and supervise, then rescue if necessary; there’s no way to make this automatic.”
I totally disagree — size is problem, for it not only creates companies too large to effectively practice risk management with, the mere size creates other issues. The fact that CitiGroup was able to get Glass Steagall repealed, but did so by forcing the government’s hand via a technically illegal merger is quite telling.
When companies get to be that large, their vast wealth buys influence and power and corrupts the political system. Despite the crisis caused by the banks, just look at how successful their lobbying effort was. Their enormous pushback effectively neutered any true regulation of the finacial sector.
I think that from now on, I will be referring to the President as Barack W. Obama — since he is adopting Bush’s economic policies, he might as well as adopt his middle initial.
Too Big To Succeed . . . (January 14th, 2009)
Obama Reform Plan Fails to Fix Whats Broken (June 18th, 2009)
In today’s WSJ, we learn of the proposed shift in standards for retail stock brokers — from “Suitability” to “Fiduciary:” “Buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of…Read More
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…Read More
“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