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Old 03-31-2010, 09:25 PM   #121
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TX has such a real-estate fiasco in the 80s that it's real-estate lending laws became very, very conservative. And as such we avoided most of the problems of the recent real-estate bubble.

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Old 04-01-2010, 08:42 AM   #122
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If you put top people in the SEC who are willing to enforce the law, a lot of these shenanigans will be curtailed. If you put top people in the SEC who feel that "hands off" is the best approach and ignore warnings - well, then, no one is minding the store.
This looks to be one of the shortcomings of the Senate regulation. It sounds like they are laying out some broad guidelines and leaving a lot of leeway for regulators to interpret the rules. This probably makes sense in some cases, but certainly runs the risk that we'll see looser and looser rules as time goes by.

One area in particular that could use some explicit language is for capital requirements. The House bill set a maximum leverage at 15:1, whereas the Senate bill leaves that to be determined by regulators. I'd like to see our financial reform be as idiot proof as possible so that it will still work when we get the inevitable idiot regulator in charge. 15:1 sounds pretty idiot proof to me.
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Old 04-07-2010, 08:16 AM   #123
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And so it begins. It appears the public campaign against financial reform will use both revisionist history and ridiculous assumptions . . .

The Dodd Bill: Bailouts Forever

The cliff notes version of the article is that we don't need the "Dodd Bill", or any other bill apparently, because bankruptcy for large financial institutions works just fine.

In the "revisionist history" camp falls the notion that Lehman's bankruptcy was anything but a disaster for the financial system and the economy. That a bankruptcy court is capable of dealing with the estate is little consolation when bankruptcy perpetuates the cascading failure of financial firms.

In the "ridiculous assumption" camp is the notion that some future administration will act differently than the prior one when confronted with an imminent financial collapse. If anti-interventionist President G. W. Bush and Treasury Secretary Hank Paulson came 180 degrees on the question of financial bailouts, who can reasonably expect some future president to come to a different conclusion when faced with the same circumstances?

The precedent is set. The future is clear. Large financial institutions will be bailed out if the stability of the financial system is at stake. That is true regardless of what happens, or doesn't happen, in the legislature. Making strong declarations, under sunny skies, that "From this day forward, we will not bail out any financial firm" rings hollow and will surely prove untrue when storm clouds gather again. What we need now are not false declarations but strong rules to prevent the kind of reckless behavior that makes bailouts necessary.
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Old 04-07-2010, 08:53 AM   #124
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And so it begins. It appears the public campaign against financial reform will use both revisionist history and ridiculous assumptions . . .

...and this thread has now come full circle. Obviously, Congress knows what is best, no need for public input or dissent.
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Old 04-07-2010, 08:56 AM   #125
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...and this thread has now come full circle. Obviously, Congress knows what is best, no need for public input or dissent.
I thought I was providing both public input and dissent.

Or is it only dissent against the government that counts?

I'll just add that Peter Wallison, from the American Enterprise Institute, isn't arguing against a specific reform in as much as he is arguing against reform at all. And that seems to be where we're heading in this debate. A full frontal assault against doing anything. It actually sounds familiar.
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Old 04-07-2010, 10:25 AM   #126
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G4G...

Do you really think that any rules done now will still be in place in 50 or 100 years? Just like the last time... memory fades... people ask 'why do we need this regulation here anymore... nothing like that can happen now'... and over time it gets reversed...


Anybody who says 'it will never happen again' is lying... because NOBODY can be sure that it will not. It might not happen in our lifetime, but it WILL happen again.


As for regulation... I forget who I saw this weekend talking about it... but the best thing that I can think of is MONEY... make the banks have more capital. If they want to be an investment bank... make then have 30% capital... or 50%. Heck, if WE want to buy stock on margin that is what we have to live with. Why not them?

If they want to do normal banking... then a capital ratio of 15% or even 20%... they can still make a good return even with that amount of capital.

Anything else IMO is window dressing....


OH... BTW, why not charge some of the top management of some of these firms with a crime per Sarbanes Oxley If there were supposed to be teeth in this law, then this is where it should bite.... if it does not, then get rid of that also as it is worthless.
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Old 04-07-2010, 01:55 PM   #127
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Do you really think that any rules done now will still be in place in 50 or 100 years?
I don't know. But I'm a heck of a lot more concerned with the next 5 to 10 years than I am with years 50 to 100.

And I agree 100% with you on the need for more capital. But to impose that requires substantive changes to our regulatory system. We need to bring the "shadow banking system" under the regulatory umbrella so that they'll be subject to the same restrictions as deposit taking institutions. The WSJ article linked above takes issue with one piece of that . . . the ability of the government to wind down financial institutions in the same way they do now with banks.
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Old 04-07-2010, 04:52 PM   #128
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Not a bad article. The authors recognize the need for regulation and reform but want to minimize the impact of political clout and hair-triggered government intervention backed by a $50B fund.

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the Dodd bill "reinforces the expectation that the government stands ready to intervene on behalf of large and politically connected financial institutions at the expense of Main Street firms and the American taxpayer. Therefore, the bill institutionalizes 'too big to fail.'"
I'd like to see the Dodd bill contain more regulatory reform and less preparation for future bailouts.
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Old 04-07-2010, 05:13 PM   #129
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the Dodd bill "reinforces the expectation that the government stands ready to intervene on behalf of large and politically connected financial institutions at the expense of Main Street firms and the American taxpayer. Therefore, the bill institutionalizes 'too big to fail.'"
While I understand and share the desire to banish "too big to fail" forever from the landscape, wishing doesn't make it so. If you want to hold up bankruptcy as an alternative to a resolution authority you have to explain how future administrations will be prohibited from bailing out large firms. It is simply not credible to say "we're not going to bail them out anymore" because when the poo hits the fan, you absolutely know they will.

And what's worse, the market knows they will. Saying grimly "we're going to let them fail" will not change those assumptions. So the moral hazard exists nonetheless. But if we follow Wallison's advice we'll have done nothing to contain that moral hazard . . . except wished really, really hard that it didn't exist.

Wishing is typically not a good strategy.
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Old 04-07-2010, 05:17 PM   #130
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What I find interesting though is how little dissent this has garnered. I wonder if that reflects a true consensus. Or is it simply because the loyal opposition hasn't revved up the talking point machine yet.
It took a few weeks but it looks like the talking point machine is starting to inform the troops.

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I'd like to see the Dodd bill contain more regulatory reform and less preparation for future bailouts.
From the NYT

One of the more public campaigns against the Democrats’ reforms does not come from Wall Street, however. It comes from an obscure, Republican-leaning group that is seeking to cast the plan as a boon to Wall Street.

The group, the Committee for Truth in Politics, has spent an estimated $5 million on advertising against the proposals, according to the Campaign Media Analysis Group, which monitors political advertising. The ads portray the financial reforms — misleadingly, the administration says — as a $4 trillion bailout for big banks.

The group’s membership and financing have been kept secret, and it has refused to divulge its donors; it is suing the Federal Election Commission, claiming the rules for disclosure in political advertising are an unconstitutional impediment to free speech.
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Old 04-07-2010, 07:20 PM   #131
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I'm an outsider to these firms. But it seems that if we can enforce anti-trust laws, we can also find a way to break up "really big" financial institutions. It also seems that we can slice off stuff that's not lending/borrowing based (like trading for customer's accounts) to keep them simple.

That said, I can see the point about a resolution fund suggesting that they can't fail. You need some sort of rule that says nobody gets to use the fund until after the stockholders are wiped out and the bondholders have taken a substantial haircut.
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Old 04-08-2010, 07:12 AM   #132
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You need some sort of rule that says nobody gets to use the fund until after the stockholders are wiped out and the bondholders have taken a substantial haircut.
But how do you stop a run on the financial system if the only choice available is to wipe out investors?

One idea actually contained in the Dodd bill is to require banks to carry "contingent capital". This is debt that, by its terms, can be converted into equity by regulators when a firm gets into trouble. While "contingent capital" isn't a panacea (nothing is) I think it is a good tool for regulators to have in their tool kit . . . along with much higher capital requirements, more stringent regulations, and yes, resolution authority.

But its interesting that nobody alleging that the Dodd legislation is a "bailout bill" mentions things like "contingent capital" or other requirements actually contained in the bill. Why might that be?
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Old 04-08-2010, 08:00 AM   #133
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On bailouts and banks

Traditional banks fund themselves primarily with deposits. We've learned through painful history that when financial panics hit, depositors run for the exits causing liquidity crises and collapse at the affected bank. Even otherwise healthy banks can be rendered insolvent in such a panic. To prevent these runs the Federal government decided it would guarantee deposits (i.e. most of a bank's short-term liabilities). But guaranteeing deposits creates a moral hazard. To contain that moral hazard, deposit taking institutions are highly regulated and the guarantor (FDIC) has the ability to take control of, and unwind, troubled institutions. This system has worked well for 60+ years.

The shadow banking system doesn't fund itself with deposits. It funds itself with public debt, including short-term REPOs. We've learned through painful history that when financial panics hit, the funding sources of the shadow banking system are just as susceptible to runs as is true with deposit taking institutions. The solution to the shadow banking system fragility seems like it should be the same as what has worked so well for traditional banks.
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Old 04-08-2010, 09:11 AM   #134
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I think agree with that. I said something like it in an earlier post. When you say shadow banks should have the "same" system, do you think we should have something like deposit insurance for shadow banks?
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Old 04-08-2010, 10:20 AM   #135
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I think agree with that. I said something like it in an earlier post. When you say shadow banks should have the "same" system, do you think we should have something like deposit insurance for shadow banks?

I do not... this is one of the problems IMO... I want the people who invest in these shadow banks to KNOW that they can lose money... so they demand a higher return if that institution starts to get out of line...

I can go along with the 'contingent capital' idea.... this is similar to the bankruptcy laws... if you wipe out the shareholders, the bondholders usually become the owners... so we can have a law that allows the gvmt to come in and say 'you are insolvent', wipe out the shareholders... make ALL debt part of the new equity and keep the firm going... so anybody who lends money to them KNOWS up front that this might be an equity investment if things do not work out...


This sounds good to me... with a requirement of higher capital to begin with... again, 35% to 50% capital if they want to be 'playing the market'... throw in an additional 35% or so with the debt and you have a firm that can not go under... or at least need a government bailout...
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Old 04-08-2010, 01:01 PM   #136
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I think agree with that. I said something like it in an earlier post. When you say shadow banks should have the "same" system, do you think we should have something like deposit insurance for shadow banks?
I don't think we'll do that explicitly. But the problem is that we've already done it implicitly. And now we have to do what we can to neutralize that implicit guarantee.

When folks talk about "bailouts" they forget that depositors are creditors to the banks. In every bank failure since 1934 the majority of short-term bank creditors have gotten "bailed out". The system has worked because we put pretty tight controls around what the banks could do.

Practically speaking, I don't know how you could extend the same system of guarantees to short-term creditors of the shadow banking system, or whether you'd even want to. I might think on that a bit, but it will be wasted effort because we're never going to do it.

I think the best we can hope for is to perpetuate the fallacy that we're not going to bail out any of the "shadow banks" while simultaneously regulating them like we will. The Dodd bill moves in that direction. Simply pretending that we're going to let everyone go bankrupt, however, does not.
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Old 04-09-2010, 08:44 AM   #137
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Somehow, it seems that "bank panics" involve people losing near-cash rather than long term investments. That is, the economy gets hit harder when people lose money in checking accounts than money in long term bonds. The money supply shrinks.

If it's possible to distinguish between long and short in shadow banks, than the gov't can say it will bail out the short term creditors, but not the long term. This is hard. Maybe the contingent capital idea is the best way of getting at it. Require that the contingent debts are fairly long term, so creditors are clear that they can't get out by simply not renewing short term loans.

I know that this time around the investment banks claimed that they were doing such complex stuff that the regulators couldn't possibly know the right amount of capital, and the regulators agreed. Somehow, it seems that argument has enough credibility that it is going to come around again. One counter to it is to keep pushing for simpler institutions. Hence the other half of my post.
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Old 04-09-2010, 11:16 AM   #138
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I think the best we can hope for is to perpetuate the fallacy that we're not going to bail out any of the "shadow banks" while simultaneously regulating them like we will. The Dodd bill moves in that direction.
Actually the Dodd bill is lacking in movement in that direction.
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Old 04-11-2010, 08:45 AM   #139
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I've had some experience with 3 bank regulators: Canada (mostly), US and UK. Both the US and UK regulators were always obsessed with applying a mish mash of detailed rules. The Canadian regulators were more concerned with big picture issues (obviously there were rules but these were viewed in a more flexible way). Canadian regulators have ultimate power as all Canadian Banks are incorporated under a direct act of Parliament but again this power is used judiciously. Needless to say which system worked best. I would recommend the US put a system in place that stengthens the regulator rather than the regulations. This would include reducing the number of indepenent agencies involved. Regulations can usually be gotten around if the incentives to do so are big enough.
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Old 04-11-2010, 01:21 PM   #140
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Here's a lengthy FT article on why Canada's banking system fared better than others. The thrust of it is that regulators actually regulated the industry. They had tough standards and the banks were held to them. The country didn't participate in the "race to the bottom" of financial regulation for competitive reasons.

But here's what the head of Canada's OSFI, Julie Dickson, said . . .
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But Dickson believes it is rules and not individuals that account for her sector’s survival. She points to three specific restrictions: capital requirements, quality of capital and a leverage ratio. “We had a tier one capital target of 7 per cent going back to 1999,” she says, referring to the proportion of the bank’s equity considered to be of the highest grade. “We also paid attention to quality of capital, so 75 per cent of that tier one had to be in common shares [as opposed to preferred stock, which is considered a hybrid of equity and debt]. And our leverage ratio [of debt to equity], of 20 to 1, was very important, we think.”
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