Posts filed under “Regulation”
One of the friends of TBP on Capitol Hill sent a note yesterday about two important hearings before the House Financial Services Committee:
“Lots of interesting hearings coming up in the next month (next Monday is one on Too Big to Fail and one on Insider Trading by Government Officials). It’s a very critical month; Barney wants to get regulatory restructuring done by the end of July, so this is going to be an extremely heavy legislative session. This week has (among other things) hearings on the independence of the Federal Reserve and on derivatives on Friday (with Geithner). The links are below.”
Thursday at 2pm: Regulatory Restructuring: Balancing the Independence of the Federal Reserve in Monetary Policy with Systemic Risk Regulation
Friday at 10am: A Review of the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market
In the Thursday hearing on the independence of the Fed (or lack thereof), the star witness there will be Vice Chairman Kohn. Readers of TBP will recall our description of how nearly two decades ago Don Kohn helped to author the changes to the Federal Reserve Act (FRA) that allowed Geither to rescue AIG. You can read our views on same and our description of how Walker Todd tried to fight this change as an officer of the Cleveland Fed: ‘IndyMac, FDICIA and the Mirrors of Wall Street’, January 6, 2009
In terms of derivatives, a joint Financial Services-Agricultural Committee hearing will be held Friday. There may be over a hundred members of Congress and one witness: Tim Geithner. As many of you know, I have been very critical of Geithner and his pandering to Wall Street. I continue to believe that the loans to AIG are in violation of the FRA because they are not fully collateralized and thus not sell-liquidating.
I asked the HFSC to explain the rational for having Secretary Geithner as the only witness for the joint hearing on OTC derivatives:
“Why is Chairman Frank only inviting Geithner for the OTC hearing? Aside from the fact that he is a puppet of JPM/GS/SIFMA, he does not really understand the subject matter!”
A senior staffer replied: “Ha! Answer: because Geithner appears to have forgot what happened to Icarus, although that is a more-global problem for him than just this one hearing.”
I am working on written answers to questions from the Senate Banking Committee on OTC derivatives reform from the 6/22/09 hearing on same. I will post the questions and my responses later in the week.
We are seeing belated glimmers of understanding of the credit crisis from the White House. Still nothing on the Ratings Agencies, and Glass Steagall, and too little on Derivatives and leverage, but at least there seems to be some recognition on TBTF (see The End of Too Big to Fail ?). However, where there is…Read More
If this turns out to be true, it could be vey encouraging: “They are the biggest of the big — the Citigroups, the Goldman Sachses, the AIGs and other financial behemoths. The Obama administration doesn’t want so many around anymore. Financial regulations proposed by the president would result in leaner and simpler institutions that don’t…Read More
We have a bull market excess stupidity.
Now that I think about it, this could very well be the longest bull market in history, running as it has for several 100,000 years.
The latest manifestation of this intellectual failure is the new government proposals to ban or radically restrict short selling.
Of all the anti-free-market proposals out there, turning equities into a one way bet is by far the least defendable, most ignorant, most damaging to the markets we have seen.
“They have been reviled as the bad hats of Wall Street, nefarious traders who cashed in on the market collapse and, some insist, helped precipitate it. Now short-sellers, the market skeptics who correctly called last year’s downturn, are coming under even more unwanted scrutiny, this time from federal regulators. The Securities and Exchange Commission appears poised to reverse itself and reinstate rules that would make shorting stocks — that is, betting their prices will decline — somewhat more difficult.
Whether the S.E.C. will go far enough to satisfy the many critics of short-sellers is far from certain. The controversial role of these investors has divided not only the financial industry, but also federal regulators. As the S.E.C. considers its options, the debate is heating up. Hedge funds and big pension funds argue that short-selling is vital to modern markets. Such trading not only enables investors to hedge their risks but also to ferret out weak companies or, as in the case of Enron, outright frauds.”
Short sellers are the messengers, and they tell the story of fraud, over-valuation, and irrational exuberance. They also act as a good counter balance to the Street’s inherent cheerleading. Short seller Jim Chanos explains why the SEC should not further restrain Short Selling in some recent commentary (Letter tp the SEC is here).
One of the factors that the lawyers at the SEC don’t understand is the importance short sellers play in cushioning collapses. A brief excerpt from Bailout Nation:
“In September 2008, with the crisis in full ﬂower, [SEC Chief Christopher] Cox made shorting ﬁnancial stocks illegal. Apparently, he was unaware that ﬁerce market sell-offs often end with short sellers covering their positions, locking in proﬁts on their bearish bets. With short sellers out of the market, the downturn became even ﬁercer. From the market highs of October 2007, the S&P 500 and the Dow Jones Industrial Average were cut in half in 12 months. Much of the damage came after the no-shorting rule went into effect.”
Here is a chart of the S&P500, showing when the ban went into effect and the subsequent result. The ban did not cause the sell off, but it removed natural buyers from the process that could have cushioned the blow:
S.E.C. May Reinstate Rules for Short-Selling Stocks
NYT, July 2, 2009
SEC Should Not Further Restrain Short Selling
JAMES CHANOS, PRESIDENT OF KYNIKOS ASSOCIATES LP,
Thursday, July 02, 2009 at 06:11 PM EDT
Fascinating story in USA Today on the banking system our neighbors to the North enjoy: Our northern neighbor sometimes seems so similar to the United States that it’s hard to tell where the USA ends and Canada begins. Here’s one way: Canada is the place with healthy banks, taxpayers unscathed by megabillion-dollar bailouts and no…Read More
Last week, UBS announced a 2nd Quarter loss “due to restructuring charges.” The banking giant is raising $3.45 billion in a stock sale. Partly owned by the Swiss government (for years prior to the crisis, if memory serves), UBS was one of the biggest losers in the financial crisis. After a huge expansion into riskiest…Read More
The CRA brouhaha last year led the Orange County Register to run an analysis of “more than 12 million subprime mortgages worth nearly $2 trillion” in late 2008. What did their data based analysis discover? “Most of the lenders who made risky subprime loans were exempt from the Community Reinvestment Act. And many of the…Read More
Congratulations to the 5 lucky ducks who managed to capture the attention of the FDIC: “Five U.S. banks with total assets of about $1.04 billion were seized by regulators, pushing this year’s tally of failures to 45 as a recession drives up unemployment and home foreclosures. Community Bank of West Georgia, in Villa Rica, Georgia;…Read More
Yet another example of how the sub-prime market was a creature of the profit motive, and not government mandates. There is this fascinating little anecdote in Connie Bruck’s Angelo’s Ashes — about Angelo Mozilo’s experiences in Florida as a dark skinned NY Italian, and how that impacted his later venture into minority lending (early 90s)…Read More