Posts filed under “Regulation”

Regulating Big Firm Bad Behavior

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 their own.

Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.”

While this is important, the entire structure of the brokerage industry — incentivized to be long only and fully invested at all times — is what destroyed so many investors in 2008.

As we have noted in the past, this manifests itself in many ways — but most egregiously, in the Penalty Box. It is a very misaligned incentive system, one that penalizes brokers who did the right thing. Back in March ’09, I noted two Merrill Brokers who had put 75% of their asset base is in money market funds early in 2008. This pays essentially nothing to the broker — but preserves the clients capital. When 2009 rolls around, their manager calls them into his office, and says: “Bad news, boys. Your revenues dropped so much last year you are in the Penalty Box. As per your contract, your payout for this year is down to 25-30%.”

That is a horrific misalignment of incentives. And while a fiduciary obligation on retail brokers is an okay idea, if it is going to be remotely effective, IT MUST ALSO BE APPLIED TO THE BROKERAGE FIRMS ALSO.

The Penalty Box is “Exhibit A” as to why.




Big Firm Conflict of Interest: The Penalty Box (March 3rd, 2009)

Big Change in Store for Brokers in Obama’s Oversight Overhaul
WSJ, JUNE 19, 2009

Category: Finance, Investing, Regulation

Obama Reform Plan Fails to Fix Whats Broken

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

Category: Bailout Nation, Bailouts, Regulation

Draft of Financial Regulation Proposal

A recent draft of the plan to reshape financial regulation sent to members of Congress (via NYT) > click for PDF via NYT

Category: Bailouts, Politics, Regulation, Think Tank

Grassley on Financial Regulation Overhaul

Things have changed: A conservative GOP Senator approvingly discusses the new regulations coming from a Democratic President.

The Obama administration is expected to release tomorrow an overhaul for tightening regulation across the financial system. Sen. Charles Grassley, R-Iowa, discusses this upcoming release with CNBC.

Category: Regulation, Video

Sheila Bair vs. John Dugan

“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

Category: Bailouts, Credit, Politics, Regulation

Re-Regulating the Financial Markets

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

Category: Bailouts, Regulation

TARP Repayment vs Re-Regulation

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

Category: Bailouts, Credit, Regulation

How Congress Betrayed Investors to Help Banks

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

Category: Bailouts, Credit, Politics, Regulation, Valuation

Too Few Banks, Too Many Giants

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

Category: Bailouts, Credit, M&A, Regulation

Financial Overhaul Plan ?

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

Category: Bailout Nation, Bailouts, Credit, Derivatives, Regulation