Friday, June 25, 2010

Obama's Latest Folly: Financial Reform

It simply amazes me that politicians believe that any problem can be fixed by more regulation.  Uncle Sam is right in the middle of the Federal National Mortgage Corporation (Fannie Mae, or FNM) and Federal Home Loan Mortgage Corporation (Freddie Mac, or FRE) fiascos.  Senator Chris Dodd (D-CT) and Representative Barney Frank (D-MA), both beneficiaries of lavish campaign contributions, made sure that these two entities could operate in the most favorable possible business environment, that is, before their help led to the two firms' demise.

Then, of course, we have the cushy relationship between Goldman Sachs, aka "Government Sachs" (GS), and the entire Obama Administration.  Gotta be something in it for them!

The Securities and Exchange Corporation (SEC) completely ignored warnings about Bernie Madoff.  So now that we've established the government's expertise at regulating various aspects of investing, the answer is to regulate MORE??

Let's not forget the Federal Reserve (Fed).  Keeping interest rates way too low and for too long directly led to the twin asset bubbles:  real estate and tech stocks.  The solution?  Keep interest rates even lower and for longer!  See the logic?

The Financial Reform Bill was passed this morning.  The Obama Administration pushed hard for this legislation to "protect the consumers" that it has, thus far, been completely unable to do.  This is how governments think:  create a problem, then justify even more intervention to solve the very problem they created.  Think we have too much debt?  Issue MORE of it!  Regulations failing to do their job?  Create more bureaucracy and more regulations!  Simple.

Major provisions of the bill include:

New regulatory authority for federal officials to seize and break up large troubled financial firms without taxpayer bail-outs in cases where the firm's collapse could destabilize the financial system.  U.S. Department of Treasury would supply funds to cover the up-front costs of winding down the failed firm, but the government would have to put a "repayment plan" in place.  Regulators would recoup any losses incurred from the wind-down afterwards by assessing fees on financial firms with more than $50 billion in assets.

The establishing of a new, 10-member Financial Stability Oversight Council, comprising existing regulators charged with monitoring and addressing system-wide risks to the nation's financial stability. Let me guess.  Members of the council will be alumni of Government Sachs?

The so called "Volcker Rule" would curb propriety trading by the largest financial firms, though banks could make small investments in hedge and private-equity funds.  Of course, we should all expect "Government Sachs" to be exempted.  If they can't insider trade ahead of their clients, how are they going to make money?  Lend?  Nahhh!

Derivatives would be subject to comprehensive regulation, especially in the over-the-counter market, including the trading of the products and the companies that sell them.  However, the riskiest derivative trading operations would have to be spun-off into affiliates.

A new Consumer Financial Protection Bureau within the Federal Reserve will be created, with rulemaking and some enforcement power over banks and non-banks that offer consumer financial products or services such as credit cards, mortgages and other loans. The new entity will be staffed by alumni of "Government Sachs".  (Sarcasm intentional!)

The bill would also provide for a complete "sham" overview of the Fed, by mandating a one-time audit of all of the Fed's emergency lending programs from the financial crisis.  The Fed also would disclose, with a two-year lag, details of loans it makes to banks through its discount window as well as open market transactions - activity the Fed currently doesn't disclose.  I'm holding my breath.  (Sarcasm intentional!)

The legislation would set new size- and risk-based capital standards, including a prohibition on large bank holding companies treating trust-preferred securities as Tier 1 capital, a key measure of a bank's strength.  Since former capital requirements were set by Uncle Sam, naturally the new standards are likely to be just as effective.  (Sarcasm intentional!)

Larger banks would be subject to a special assessment to raise up to $19 billion to offset the cost of the bill.  The fee would apply to financial institutions with more than $50 billion in assets and hedge funds with more than $10 billion in assets, with entities deemed high-risk paying more than safer ones.

Let's not forget the credit-rating agencies!  The bill would establish a new quasi-government entity designed to address conflicts of interest inherent in the credit-rating business after the SEC studies the matter.  It would also allow investors to sue credit-rating firms for a "knowing or reckless" failure to conduct a reasonable investigation, a lower liability standard than the firms were lobbying to get.  Never mind that no one actually CARES what the Standard & Poor's and Moody's think.  We MUST regulate them!

What will be the effect of this bill?  Simple!  Whatever the bill was designed to accomplish, expect the opposite.  We can expect less systemic liquidity, a renewed credit crunch and either a obscenely profitable banking sector, or one that goes out of business!  The good news?  More employment, power and bonuses for all our friends at "Government Sachs"!

Marko's Take


  1. very informative articles.
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