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President Obama's Historic Overhaul of Finance Rules
firewaterword
SatchitanandaPais Vasco to San FranciscoRegistered User regular
SatchitanandaPais Vasco to San FranciscoRegistered User regular
This morning, the Wall Street Journal published an article describing the Administration's goal of enacting sweeping new regulatory changes, meant to dramatically increase the level of government oversight present in the American financial system. The document, titled “A New Foundation: Rebuilding Financial Supervision and Regulation,†seeks to rewrite the rules that govern almost all aspects of public financial institutions.
On a very high level, the goal is to mitigate the impact and reduce the likelihood of "booms" and "busts" occurring in the market. "Executive compensation and hedge funds would face more scrutiny. Bank regulation would be streamlined somewhat. Financial firms would be required to hold more capital."
WSJ.com's Washington Wire blog has done an excellent job parsing the document - you can find the entirety of that here. I'm going to list some of the items that caught my eye with some brief comments:
1. Creates a new bank agency, the National Bank Supervisor, and kills the Office of Thrift Supervision. The new agency will look over national banks, including federal branches and agencies of foreign banks. [On the face of it, a good thing I suppose - though I fear the transition process would be rocky at best].
2. Forces industrial banks, non-bank financial firms and credit-card banks to become more traditional bank holding companies subject to federal oversight. [This is a pretty big deal. While it happened in the past with Goldman Sachs and Morgan Stanley when the shit was really hitting the fan, this in my opinion signals the final death of the traditional idea of "Wall Street"]
3. Requires hedge funds, private-equity funds and venture-capital funds to register with the SEC, allowing the agency to collect data from the firms. [Rips away the curtain that previously obscured a lot of what went on in the upper tiers of finance].
4. Subjects hedge funds to new requirements in areas such as record keeping, disclosure and reporting. The oversight would include assets under management, borrowings, off-balance sheet exposures. [See above].
5. Requires that originators, for example, mortgage brokers, should retain some economic interest in securitized products. [Aimed at preventing another subprime meltdown].
Full disclosure - I'm still not totally up to speed with what the Administration is proposing. Ergo, I'll probably try to update this as I learn more - as well as to include an awesome bits of knowledge/opinion you fine people have. I know there are some smart finance/market people out there!
So what do you folks think? Is this a good thing? Should banking become "boring again?" Is the risk of potentially reducing the profitability of the finance sector worth the benefit of added security/safety?
On a very high level, the goal is to mitigate the impact and reduce the likelihood of "booms" and "busts" occurring in the market. "Executive compensation and hedge funds would face more scrutiny. Bank regulation would be streamlined somewhat. Financial firms would be required to hold more capital."
WSJ.com's Washington Wire blog has done an excellent job parsing the document - you can find the entirety of that here. I'm going to list some of the items that caught my eye with some brief comments:
1. Creates a new bank agency, the National Bank Supervisor, and kills the Office of Thrift Supervision. The new agency will look over national banks, including federal branches and agencies of foreign banks. [On the face of it, a good thing I suppose - though I fear the transition process would be rocky at best].
2. Forces industrial banks, non-bank financial firms and credit-card banks to become more traditional bank holding companies subject to federal oversight. [This is a pretty big deal. While it happened in the past with Goldman Sachs and Morgan Stanley when the shit was really hitting the fan, this in my opinion signals the final death of the traditional idea of "Wall Street"]
3. Requires hedge funds, private-equity funds and venture-capital funds to register with the SEC, allowing the agency to collect data from the firms. [Rips away the curtain that previously obscured a lot of what went on in the upper tiers of finance].
4. Subjects hedge funds to new requirements in areas such as record keeping, disclosure and reporting. The oversight would include assets under management, borrowings, off-balance sheet exposures. [See above].
5. Requires that originators, for example, mortgage brokers, should retain some economic interest in securitized products. [Aimed at preventing another subprime meltdown].
Full disclosure - I'm still not totally up to speed with what the Administration is proposing. Ergo, I'll probably try to update this as I learn more - as well as to include an awesome bits of knowledge/opinion you fine people have. I know there are some smart finance/market people out there!
So what do you folks think? Is this a good thing? Should banking become "boring again?" Is the risk of potentially reducing the profitability of the finance sector worth the benefit of added security/safety?
Lokah Samastah Sukhino Bhavantu
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They already did that in 2007. I'm guessing they are ether restating it or are modifying it somehow. That's already a law, and originators can go down hard if a defendant can prove in court that the loan was not given appropriately.
Maybe they are taking it out of the courts and giving it to a federal agency instead. Right now it's in the courts.
we also talk about other random shit and clown upon each other
Mm, I didn't put it up there, but that's included.
"Brings the markets for over-the-counter derivatives and asset-backed securities into a regulatory framework, strengthens regulation of derivatives dealers and forces trades to be executed through public counterparties, such as exchanges."
Like Iceland?
How do you mean? I was under the impression that most derivatives were brought to market to be gobbled up by the suckers...i mean 'investors'.
In any case, it's good to have a regulatory framework built up, even though the structured finance market is deader than disco at the moment.
Was that in the Predatory Lending Act? I thought the harshest thing in there was the whole "Hey mortgage banks, do some actual goddamn due diligence or we'll Eff you up".
There was a loan retention requirement as well? Thank God.
They were typically sold behind closed doors directly, so that there were no market prices, thereby allowing the sellers to jack up the prices. Many have advocated requiring that derivitives be traded in an exchange, so that people can follow prices.
What type of entities were buying in that back room scenario?
(I'd feel stupid about not knowing fuck all about the way structured finance operates, if it wasn't now clear that the people who created, sold, rated, and bought these products didnt know dick either)
This sounds different, though. Like if someone sells you on a loan then passes it off to someone else and you default on it, the entity that sold you in the first place gets burned.
Also, it made it so no one really had any idea what the full extent of the trading was and how much counterparty risk one was exposing oneself to. You have a bunch of stuff like Credit Default Swaps (CDS) where when the covered credit went bad no one knew exactly how big the explosion would be and who would be hit by it.
That's a situation ripe for paranoia once a downturn hits.
The way I understand this, and this could be off base, is that originators bundled a number of crap mortgages into tranches, then sold these to large investment houses like Lehman. Lehman's massive loss was a result of having held on to large positions in subprime and other lower-rated mortgage tranches when securitizing the underlying mortgages.
If someone can phrase this better, please do.
You're right - the plan, which is scarce on details right now, is going to congress where the specifics will be hashed out.
Something which, in itself, is quite smart, given how much congressmen hate being told what to do. That's actually believed to be one of the things that sunk Hill-care, as the Clintons gave their plan to congress fully written.
Well, there was more to it than just that but that is the basics of the collateralized debt obligation part of the problem. They would make a bunch of mortgages, combine them together into CDOs then split the them into tranches of different quality levels, and pass them off down the line while making a quick commission. The buyers of this crap kept gobbling it up, and the sellers made their money even if it the securities blew up later so they had incentive to push as much out the door as they could.
Then you combine that with CDSes, where to limit the risk some of the downwind buyers would buy what amounted to unregulated "financial insurance" on the CDOs, sold by your friends at places like AIG. Of course, AIG didn't cover themselves for what would happen if there was a downturn and they had to start paying out, so now Uncle Sam is left holding the bag.
It made them so much money selling them out in the first place, how could it go wrong?
I'd like the Obama administration to continue leveling the playing field. Next up, I hope: reforming energies futures. After that, imposing higher tax rates on job outsourcing.
You're actually really close to the mark. However, it wasn't the originators that tranched off the mortgages, it was the investment banks.
Looks like the fight is getting started already - the Administration wants to see corporate lenders register with the Fed as bank holding companies. This would effect any company with an ILC charter, so some examples would be Target, BMW, Macy's, &c.
The argument against this is that many of these companies would simply shut down their lending, as they would be unable to satisfy lending requirements, or unwilling to accept the increased regulation. This would potentially cut off substantial sources of consumer credit.
Interesting - what would you like to see done wrt energies futures? I don't want to put words in your mouth, but are you talking about a means to curb speculation?
That's what they are already doing. That was one of the biggest things that lead to the subprime crisis. These securitisers and originators were packaging these loans and then selling them off on Wall Street for profit. They didn't care if the person ever paid them back, it was Wall Street's problem.
In 2007, the law they passed said you can take them to court and after 2 strikes, the offending originator can lose their license.
I'm assuming that Obama wants to put that in the hands of a federal agency, rather than have it clog up the courts.
we also talk about other random shit and clown upon each other
Laugh at me if you want, but if this goes through it paves the way for the government to get its fat, sticky fingers into every aspect of your financial life.
The worst part is that there is enough hinting of good things to make people think "Oh, well it would keep us from potentially getting screwed from making terrible choices..." but at what long term cost?
Sup dude.
we also talk about other random shit and clown upon each other
Ron Paul; Keepin it Ro...Real ;P
But more seriously, the socialization of our financial system is one of the slipperiest slopes we could ever find short of just saying "Fuck it, lets just ask the government what we should do today!"
With the caveat that the nuts and bolts of the plan are not yet there, I don't think this is an unreasonable position to take. My pops, who was a banker almost all his life, will never miss a chance to bitch about the Community Reinvestment Act of '77. Without making this a conversation on the ethics of that specific legislation, I think a lot of people share your concerns Wulf.
I'll try to make some comments on it once I've had a chance to digest it.
Don't you mean China's money? Maybe the Feds should check with them before they make any decisions. This is why I'm seeing more and more Libertarians online lately.
TIMOTHY GEITHNER: I don't think that's a viable criticism, but let me do each of the pieces of that.
JIM LEHRER: OK.
TIMOTHY GEITHNER: In the financial sector, the financial markets require well-designed regulation. We did not have well-designed regulation. We had the worst financial crisis in generations because of basic failures in the design of regulation.
So our job is to get those better. And it's not going to require more of them; it's just going to require better design, more effectively applied, more broadly applied to contain risk, protect consumers.
In the financial sector, we've taken a very limited investment only where necessary. And you saw two weeks ago -- in fact, yesterday, we got $70 billion in capital back from some of the nation's major banks. We had another $70 billion raised by some of the nation's major banks from the private markets so that we don't have to be in there.
We are working as hard as we can to make sure we get out of those investments as quickly as possible because we do not want the government of this country in the business of running those private institutions. That's not good for the taxpayer, not good for the economy.
And the automobile industry, as well, again, exceptionally reluctant actors in that context. And we've had to take, for unavoidable reasons, an equity stake in those companies, but we're not going to get -- we're not going to run those companies. We're not going to get involved in day-to-day management. And we will get out of those as quickly as we can.
There were multiple factors involved with the subprime mortgage crisis but had Freddie and Fannie been better regulated, I can guarantee that the incident would have not been so horrible since banks would not have been so motivated to go through with the subprime mortgages.
You'll be happy to know you're not alone. From above:
The problem was that 'Big Government' wasn't involved. The shadow banks fell out of scope.
Do you have numbers on the Freddie/Fannie securities that defaulted? I've been trying to find that for a while.
This is the best representation I've been able to find so far - it's percentages though:
http://2.bp.blogspot.com/_w3H-jMj1X28/SfEmtrUE9pI/AAAAAAAAANs/3tdYYxL2Wzg/s1600-h/gse_nod_2009-03.png
The image quality is kind of crap, but it's readable. Edit - this comes from the Field Check Group's blog - it's massive, but you may be able to drill down and find what you're looking for there if you're so inclined.
Double Edit - I also found this report from the Federal Housing Finance Agency.
Basically. While the ultimate imperative for our time is finding other viable and sustainable sources of fuel and energy, I don't understand how you can have people entering the marketplace buying and selling an inelastic good who have no stake in the game. At least with stocks you're buying a small interest in that company, even if you're short-selling (another practice that needs reform). But how can we have people dictating the cost of our energies (or really, any other product future) that have no vested stake in that market? If you or your company has no hand in the production, distribution, or mass consumption of a product, there's no responsible reason to have any market control.
I think rational people will watch the situation until the economy has clearly improved then expect the government to exit if it hasn't already. I think the Republican hullabaloo about government take-overs is 1/2 generic distrust of democrats and 1/2 trying to seed discontent.
What long term cost do accounting rules incur, exactly?
How does the government not already technically (legally) have it's fingers in my financial life? What, am I expected to have a mess of under the table undeclared income lying around currently that will go away?
I'm quite happy with someone overseeing companies to make sure their books are actually true and accurate so the rest of us can make informed decisions on the market's health.
I'd say that they DO have a vested stake in the market though. By buying a future, you're assuming some of the risk in that market, so that the people doing production and distribution have a guaranteed steady profit. What you're talking about is essentially the same as banning insurance companies.
The market will "like" a concrete plan (even an unfavorable one) much more than the Underpants Gnomes ("Step 1: Steal Underpants, Step3: Profit... What's step 2?" for non-South Park fans) initiatives being put forth currently.
Business [successful] does not invest in a climate when they don't have any idea what happens next.
I'm all for a change to the system... it obviously didn't work... though there are so many variables that this current idea of pointing fingers at Congress, or Freddie Mac/Fannie Mae, or speculators, or back-room deals, or whatever the Buzz-Enemy of the week may be is very much responsible for the market's instability and pattern of tiny gains which are quickly sold off.