Re The $200 Billion Electric School Bus Bust Chris Goodfellow: Are we thinking rationally? The stunning extra cost to property…
Written by Diana Thebaud Nicholson // December 29, 2010 // Economy, Government & Governance, Investment, Politics, Public Policy, U.S. // Comments Off on U.S.Financial Reform
NYT Times Topics: Financial Regulatory Reform
Top Financial Stories of 2010: Foreclosures, Financial Reform, Bailouts
(Politics Daily) The Dodd-Frank bill does a lot of good things. It establishes an independent Consumer Financial Protection Bureau (being shaped by Harvard law professor Elizabeth Warren, who originated the idea), and contains measures designed to protect taxpayers against abusive mortgage and credit card lending practices. It attempts to prevent firms from becoming “too big to fail” by giving the government the power to close down large but shaky financial institutions whose collapse might take down the entire system (complete financial meltdown was the major fear in September 2008). It also establishes an “advanced warning system” in the form of a Financial Services Oversight Council to monitor future threats to the financial system, and it imposes restrictions on derivatives trading, which was a major factor in the 2008 crisis.
Despite these positive steps, however, the new law has some major omissions. It does not address the problem of Fannie Mae and Freddie Mac, the giant government-sponsored entities that the feds took over in 2008, nor does it deal with the long-standing preferences for debt financing, via the mortgage-interest deduction in the tax code, which encouraged consumers take on — and lenders to provide — more debt than they should have.
Elizabeth Warren: New Consumer Agency Is Frightfully Necessary — And Late
Haphazard and possibly illegal practices at mortgage-servicing companies have called into question home foreclosures across the nation. The latest disclosures are deeply troubling.
How to Derail Financial Reform
Progress is slowly being made to stabilize the financial system. And it’s clear that House Republican leaders want none of that.
(NYT) The legislation requires regulators to write hundreds of rules to put the law into effect. To their credit, regulatory agencies have begun that process with a sense of mission and depth of expertise that was missing in the years before the financial crisis.
In particular, the Securities and Exchange Commission and the Commodity Futures Trading Commission — which share the all-important regulation of the multitrillion-dollar derivatives market — have proposed rules that are tough and sophisticated. The new Consumer Financial Protection Bureau is ramping up. The Financial Stability Oversight Council, led by the Treasury secretary, will report in January on how to implement the “Volcker rule” to restrict proprietary trading by banks.
Borrowers as Prey, Again
(NYT editorial) The Fed has proposed a rule that would weaken important oversight of reverse mortgages. The proposal should be withdrawn.
The 2008 law prohibited “cross selling,” in which lenders required reverse-mortgage borrowers to use some of the loan proceeds to buy other financial products, such as annuities or long-term care insurance policies, that in many instances made no sense for the borrowers.
The Fed has proposed a much weaker prohibition that would allow lenders to sell financial products to reverse-mortgage borrowers as long as the purchase occurred at least 10 days after the loan was made. As the AARP and other advocates have pointed out, the proposal is at odds with both the 2008 law and this year’s Dodd-Frank reform law, which requires the new Consumer Financial Protection Bureau to study and update the rules for protecting reverse-mortgage borrowers.
Paul Krugman: Wall Street Whitewash
The financial crisis has provided a teachable moment, all right, but not the one first expected.
The bipartisan Financial Crisis Inquiry Commission was established by law to “examine the causes, domestic and global, of the current financial and economic crisis in the United States.” The hope was that it would be a modern version of the Pecora investigation of the 1930s, which documented Wall Street abuses and helped pave the way for financial reform.
Instead, however, the commission has broken down along partisan lines, unable to agree on even the most basic points.
12 November 2010
Fact Sheet on U.S. Financial Reform and the G20/Seoul Leaders’ Agenda
… The bill puts the U.S. at the forefront of global financial reform and promotes a race to the top so that all international financial firms face the same tough standards everywhere on a level playing field. The U.S. is working closely with the European Union and others to ensure that the G-20’s ambitious agenda for regulatory reform is implemented. Here in Seoul the G-20 reaffirmed that no firm should be too big or complicated to fail and taxpayers should not bear the cost of resolution; that all G-20 countries will put in place a strong national resolution regime that protects taxpayers; and that steps should be taken to ensure that large interconnected firms have a greater capacity to absorb losses.
Warren’s Candidacy Raises a Partisan Debate
Ms. Warren’s supporters regard her as the best person to represent consumers during [the work of overhauling financial regulation]. But they also crave the symbolic value of her appointment, which almost certainly would cause a partisan confirmation battle, as an affirmation that the White House is committed to imposing significant new restrictions on the financial industry.
Credit-Card Reform Succeeds in Ending Many Deceptive Practices, Pew Finds
(Bloomberg) “The good news is the market is much more transparent now and lots of the practices deemed harmful to consumers have gone away,” said Nick Bourke, director of Pew’s Safe Credit Cards Project, which began studying how the industry treats consumers in 2007. “There are still challenges.”
The Warren Drama: Another Missed Opportunity?
For the past several days, people who care about whether financial reform is to be real or sham have been following the drama of whether President Obama will name Elizabeth Warren to head the new Consumer Financial Protection Bureau. The Bureau is the best thing about the financial reform bill that Obama will sign later this week, and its prime architect was Warren, a folksy Harvard law professor who has become a well known and admired public figure championing reform. Financial Reform Coalition Endorses Elizabeth Warren To Head New Consumer Agency
Financial Overhaul Signals Shift on Deregulation
Congress approved a sweeping expansion of federal financial regulation on Thursday, reflecting a renewed mistrust of financial markets after decades in which Washington stood back from Wall Street with wide-eyed admiration.
The bill subjects more financial companies to federal oversight, regulates many derivatives contracts, and creates a panel to detect risks to the financial system along with a consumer protection regulator. It leaves a vast number of details for regulators to work out, inevitably setting off another round of battles that could last for years.
The bill expands federal banking and securities regulation from its focus on banks and public markets, subjecting a wider range of financial companies to government oversight, and imposing regulation for the first time on “black markets” like the enormous trade in credit derivatives. (Reuters) Long road to implement U.S. financial reform bill
Goldman Sachs settles with SEC
Goldman Sachs agreed to pay a lower-than-expected $550m fine to settle US regulators’ accusations it misled investors in a mortgage-backed security – a move that ends the highest profile regulatory case since the end of the crisis
Weighing the trade-offs
Less than three months after the Securities and Exchange Commission accused it of securities fraud, Goldman Sachs has settled the case for $550 million. Like any settlement, each side appears to have given a little bit, although the Street consensus is that Goldman got off too easily.
Can Tourre Get the Same Deal?
Mr. Tourre is not covered by the proposed settlement, and while Goldman will continue to pay his lawyer’s fees, it is now free to turn on him by making him the bad guy in the transaction. That will not be very hard to do, given the disclosure of the e-mails that Mr. Tourre sent while putting together the deal.
Mr. Tourre may hope he can get a settlement on the same terms as Goldman, but the S.E.C. is unlikely to let him off the hook with just a Section 17 violation that allows him to assert he was only negligent. As the architect of the C.D.O. in question, the commission will look for any resolution to involve a fraud claim under Rule 10b-5 because he was the one responsible for the disclosures. This is likely why he was not included in the settlement announced on Thursday.
A price worth paying
(The Economist) Goldman Sachs settled fraud charges brought by the Securities and Exchange Commission (SEC). Most analysts had expected the settlement talks to drag on for at least another couple of months.
The settlement does not cover other SEC probes of the firm’s practices—and there are thought to be several. (The Commission’s litigation against Fabrice Tourre, the trader at the centre of the case, also continues.) Goldman faces numerous lawsuits from investors and clients, too. The latest was filed last week by Liberty Mutual, an insurer that had bought Goldman-underwritten preferred stock in Fannie Mae, which is now virtually worthless.
More worryingly, Goldman’s business model is under pressure. Intense scrutiny of conflicts of interest, like the sort exposed in this case, will make it harder for the firm to act as adviser, financier and marketmaker for clients while at the same time investing aggressively for its own account. The provision in America’s financial-reform bill targeting conflicts in securitisations is aimed primarily at Goldman. A study finds that the banks’ supposedly miraculous contribution to economic growth has been more of a mirage
Scott Brown to Vote Yes on Financial Regulation Mr. Brown’s support makes it very likely that the bill will pass in the Senate.
Paulson Likes What He Sees in Overhaul
… he said he was frustrated that the legislation had focused little on policy, specifically housing policy. “The root causes of all this are housing policies — not just Fannie and Freddie,” he said, referring to the giant mortgage companies. “That hasn’t been dealt with.”
But he did not seem surprised by that development — or lack of. “There’s plenty of blame to go around — the banks, investors, rating agencies, regulators. But let’s not forget policy makers,” he said.
Simon Johnson: The Kanjorski Surprise – Now It Gets Interesting
The bank lobbyists, it turns out, missed one. They and their congressional allies were able to gut the Volcker Rule, the Lincoln Amendment, and almost everything else that could have had a meaningful effect on the industry. But they couldn’t get at (or didn’t sufficiently understand?) the Kanjorski Amendment. Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a “grave risk” to the financial system. See also Bloomberg
HSBC [offshore] account holders in America targeted as US justice department widens clampdown on tax evasion
The US government has begun a criminal investigation into whether clients of HSBC are evading tax by putting money in undeclared bank accounts in Singapore and India, widening a crackdown on offshore secrecy that began with a successful prosecution of Switzerland’s UBS.
Financial reform in America – A decent start
A somewhat clumsy bill is hardly a panacea, though it fixes some important things
(The Economist) The reform does make progress in three critical areas: regulatory oversight, derivatives and dealing with troubled banks that are too big to fail. Yet by itself, this bill, whose passage in the Senate is still not quite secure, is an incomplete remedy (see article). Much depends on how American regulators implement its provisions. Congress left several meaty matters for later, including the crippled mortgage giants, Fannie Mae and Freddie Mac. And even more is riding on how the Basel club of international banking supervisors compel banks to raise their buffers of capital and liquidity.
Start with what the bill gets right. Though the financial crisis was global, it originated in America’s uniquely fragmented financial system, overseen by a patchwork of federal and state regulators. Dodd-Frank missed its chance to eliminate that patchwork, but offers decent alternatives. It creates a council to advise regulators on emerging threats. It consolidates oversight of consumer financial products, from mortgages to credit cards, in a single agency. And big financial firms that aren’t banks can be yanked into the embrace of the Federal Reserve.
House passes landmark financial reform bill
(Reuters) – The House of Representatives on Wednesday approved a landmark overhaul of financial regulations but the Senate put off action until mid-July, delaying a final victory for President Barack Obama.
Governments Move to Cut Spending, in 1930s Echo
(NYT) The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s — starting to cut spending and raise taxes before a recovery is assured — and hoping today’s situation is different enough to assure a different outcome.
In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.
Volcker Rule May Give Goldman, Citigroup Until 2022 to Comply …
(Bloomberg) Goldman Sachs Group Inc. and Citigroup Inc. are among US banks that may have as long as a dozen years to cut stakes in in-house hedge funds and private- equity units under a regulatory revamp agreed to last week.
Rules curbing banks’ investments in their own funds would take effect 15 months to two years after a law is passed, according to the bill. Banks would have two years to comply, with the potential for three one-year extensions after that. They could seek another five years for “illiquid” funds such as private equity or real estate.
U.S. Financial Reform Bill Comes Down Easier On Wall Street Than Initially Planned
(Daily markets) The biggest Wall Street regulation overhaul since the Great Depression was approved after 20-hour House-Senate negotiations ended Friday. The legislation brings a dramatic shift in financial reform, but comes down easier on financial institutions than initially planned.
The bill, named the Dodd-Frank Act after Sen. Christopher J. Dodd, D-CT, and Rep. Barney Frank, D-MA, brings sweeping reforms to consumer protection, trading restrictions for big banks, and the regulation of financial products.
The Volcker rule — Bang or whimper?
A much-hyped reform may not have much effect on alternative investors
(The Economist) Legislators from the House of Representatives and the Senate this week continued the erratic process of reconciling versions of bills passed by each chamber. By the middle of the week, a number of differences had been ironed out, including the creation of a consumer-protection bureau housed within the Federal Reserve, the regulation of debit-card “interchange” fees and measures requiring firms that securitise loans to retain a portion of the risk. But the trickiest issues were still to come.
Among them was discussion of the “Volcker rule”, which was designed to restrict banks’ “proprietary” trading activities (bets made for their own account) and “sponsorship” of hedge funds and private-equity firms.
Simon Johnson: Tim Geithner and Larry Summers Need Paul Krugman To Replace Peter Orszag
(Baseline Scenario blog) The Washington Post put out one of the first lists of candidates who could replacement him. Senator Byron Dorgan would be a smart pick and some of the Post’s other suggestions could make sense. … the brilliant choice would be Paul Krugman – completely taking the wind out of the Republicans’ sails on fiscal deficits. Krugman has scolded them, in real-time and to great effect, consistently with regard to ruining the budget. And he has an important point – the Bush administration inherited a fairly sound fiscal position from the Clinton administration but squandered it thoroughly over 8 years.
Robert Wade*– U.S. Financial Reform: The roots of the problem go deeper
(Triplecrisis) … Without either of these changes – public ownership of big banks or removal of limited liability in finance – the existing push to give regulators more money, more information and more power is likely to be subverted by the political strength of the finance industry. As a taste of what may be to come, when the Senate passed the new finance legislation in mid May Wall Street executives expressed relief, convinced that it would not fundamentally change the way they operate. The bill is 1,300 pages long, with 300 pages devoted to derivatives alone, and it will be a long time before anyone other than Wall Street lawyers understands it.
My guess is that it will take two or three more Lehman or Greece-like crises to generate sufficient political consensus to move in either of these two directions. Don’t hold your breath.
*Robert Wade is professor of political economy and development at the London School of Economics.
Senate passes U.S. financial reform bill
Biggest tightening of Wall Street rules since the Depression
(CBC) The U.S. Senate passed landmark legislation on Thursday night to further regulate banks and Wall Street in what is considered the largest attempt to overhaul the U.S. financial system since the 1930s. The bill, which passed by a 59-39 vote, must now be merged with a House of Representatives version.
On Language: Quants
Regardless of how much blame the quants deserve for the current economic mess, their impact has been undeniable. From the early ’70s, math-minded academics began moving to Wall Street, designing complex models to assess risk and predict market movements. On their arrival, they were often called “rocket scientists” by traditional traders, a term of derision that belittled their lack of down-in-the-trenches business know-how.
The geeky glamour of the quant took a big hit with the financial downturn, beginning with the so-called quant crisis in the summer of 2007, when quant funds took a nosedive. “All I can say is, beware of geeks bearing formulas,” Warren Buffett memorably told Charlie Rose in October 2008.
Feisty Buffett supports Goldman, high on economy
(Reuters) – Warren Buffett on Sunday intensified his feisty defense of a controversial mortgage transaction marketed by Goldman Sachs Group Inc (GS.N), saying the investment bank’s behavior does not warrant public fury. Can Warren Buffett (and Andrew Ross Sorkin) Save Goldman Sachs?
Niall Ferguson: Uncertainty vs. Risk (Book Review)
At the time of writing, two bills exist. The measure devised by Representative Barney Frank and passed by the House last December would (among other things) set up a consumer financial protection agency and regulate the market for exotic financial contracts known as derivatives. It would also empower regulators to prohibit forms of compensation for financial executives that are deemed to encourage excessive risk-taking, and create a new resolution authority to manage bankruptcies of large financial institutions, backed with a $150 billion contingency fund.
Senator Christopher J. Dodd’s bill, unveiled in March, would also create a new entity to protect consumers, but it would leave the issue of executive compensation to bank shareholders. And its resolution contingency fund would be one-third the size of the one envisaged by the House bill.
Both these measures recall the old British sitcom “Yes Minister,” in which all crises elicited the following response from the clueless politician Jim Hacker: “Something must be done. This is something. Therefore we must do it.” As Richard A. Posner argues in “The Crisis of Capitalist Democracy,” Congress is rushing to devise remedies for a crisis we have not yet properly understood. Indeed, the House bill explicitly commissions studies of the causes of the crisis while at the same time legislating to prevent its recurrence.
13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
Book Review: Your Money, Their Pockets
(NYT) Seldom in our 230-odd years as a country have Congress and the White House had the fortitude to impose on American bankers and financiers a set of regulations sufficiently stringent to prevent them from pushing us into destructive panics and recessions. And once again Washington may be demonstrating its lack of backbone.
To put it bluntly, as this book does: the efficient-market hypothesis does not work. It never has. Markets are not self-correcting. Left to their own devices, bankers at the biggest institutions can’t seem to stop themselves from speculating with borrowed money until they inevitably crash the system.
Robert Scheer: Goldman Plays, We Pay
what is needed now is a profound populist commitment among those who elected Obama to demand he throw the money-changers out of the temple of democratic governance.
It is insulting to the spirit of populist revolt, which has been fundamental to the success of America’s grand experiment in democracy, that a fat-cat Republican-funded tea party revolt is now the vessel of popular anti-Wall Street discontent. That vessel ought to be our president, who campaigned as a champion of the common people.
Goldman Serves One Master Better Than the Others
(Bloomberg) — As Wall Street bombshells go, the lawsuit that the Securities and Exchange Commission filed against Goldman Sachs Group Inc. is about as big as it gets.
Who knew the folks at the SEC still had it in them to accuse a major Wall Street bank of fraud? And who could have guessed that Goldman’s canned explanation for its behavior during the subprime mortgage bubble — that it simply was serving clients’ needs — could come so unglued so quickly?
Goldman Sachs’s ‘Fabulous Fab’ Tourre Loses ‘Survivor’ Bet
(Bloomberg) — Goldman Sachs Group Inc.’s “Fabulous Fab” saw himself as the “only potential survivor” when the housing market began to collapse in 2007. Instead he became the only person named when regulators sued the firm for fraud.
Fabrice Pierre Tourre, the 31-year-old French trader accused by the U.S. Securities and Exchange Commission yesterday of misleading investors in selling securities linked to mortgages, saw the wreckage coming early on.
Goldman Sachs charged with fraud by SEC
(Reuters) – Goldman Sachs Group Inc was charged with fraud by the U.S. Securities and Exchange Commission over its marketing of a subprime mortgage product, igniting a battle between Wall Street’s most powerful bank and the nation’s top securities regulator.
Paul Krugman: Making Financial Reform Fool-Resistant
The Senate financial reform bill would create a system dependent on the good intentions of officials. That’s not something we can count on.
Paul Krugman: Financial Reform 101
Today, a brief guide to the debate over financial reform, which is a lot harder to follow than health reform was.
Pro-Business Lobbying Blitz Takes on Obama’s Plan for Wall Street Overhaul
Opponents of the financial regulation plans are spending tens of millions of dollars on lobbying. One group is calling the reform a $4 trillion “bailout” for big banks.