Would you support "real" financial reform?

[Texas Proud]

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.

 

[Gone4Good]

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.

 

[youbet]

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.

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.

 

[Gone4Good]

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.

 

[Gone4Good]

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.

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.

 

[Independent]

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.

 

[Gone4Good]

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?

 

[Gone4Good]

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.

 

[Independent]

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?

 

[Texas Proud]

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...

 

[Gone4Good]

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.

 

[Independent]

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.

 

[youbet]

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.

 

[Danmar]

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.

 

[Gone4Good]

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 . . .

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.”

 

[Danmar]

I know Julie Dickson. Ernest lady. The rules she refers to were indeed important but only a start in the process. Other point is that there are very few banks in Canada. Really only 6 big enough to worry about. The senior execs at each are on first name basis with the top regulators.

 

[Gone4Good]

Other point is that there are very few banks in Canada. Really only 6 big enough to worry about.

Which turns the whole "Too big to fail" notion on its head. Canadian banks are much larger (relative to GDP) than U.S. banks. And yet they didn't have as many issues . . . this time.

It gets back to the "will to regulate", which the U.S. generally lacks. Judd Gregg was on CNBC this AM worrying mightily about how impending financial regulation will stifle the industry and hurt its competitiveness.

I fear we're doomed to repeat this all over again.

 

[FinanceDude]

Which turns the whole "Too big to fail" notion on its head. Canadian banks are much larger (relative to GDP) than U.S. banks. And yet they didn't have as many issues . . . this time.

It gets back to the "will to regulate", which the U.S. generally lacks. Judd Gregg was on CNBC this AM worrying mightily about how impending financial regulation will stifle the industry and hurt its competitiveness.

I fear we're doomed to repeat this all over again.

If Canada is so great how come they don't have an immigration problem?

 

[Gone4Good]

If Canada is so great how come they don't have an immigration problem?

People are migrating to the U.S. because of our banking regulations?

 

[FinanceDude]

People are migrating to the U.S. because of our banking regulations?

Just threw that in there............comparing Canada to the US is the ultimate in apples and oranges. Canda has 23 million people and 6 major banks...........how is that comparable?

 

[Gone4Good]

Just threw that in there............comparing Canada to the US is the ultimate in apples and oranges. Canda has 23 million people and 6 major banks...........how is that comparable?

You'll have to explain why the size of the country makes it not comparable. Both have developed economies with developed financial institutions. I'm not sure why its apples and oranges.

 

[Danmar]

First of all we have 32 million people. Our banks are better managed and regulated(based on my first hand experience). We do have immigration issues but deal with them very differently than the US. We let those that meet our criteria in. About 250,000 are let in each year-a much higher percentage (I believe) than the US. This is not without some controversy but generally is well supported by the majority.

 

[Gone4Good]

Banks Falter on Rules Fight (WSJ)

Senate Democrats, resisting a last-ditch lobbying push from big Wall Street firms, are moving toward a sweeping revamp of financial regulation that would squeeze banks' lucrative derivatives-trading business.

Wall Street giants Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Morgan Stanley had been pressing hard in recent days to dilute provisions of the bill that would change the rules for derivatives trading. But the Obama administration, which has made this one of its priorities for the financial-regulatory bill, has pushed back hard and appears to be succeeding. That's drawing Republican complaints that the pending rewrite of the rules of finance will put the economy at risk.

Goldman, J.P. Morgan and Morgan Stanley have at least one common objective: To thwart or dilute proposals that would push trading in most derivatives onto exchanges or to "clearinghouses," which are middleman institutions set up to handle big transactions between banks.

Their main concern: Trading on exchanges or via clearinghouses could reveal more details about the pricing and structure of the deals, potentially benefiting rivals and clients, and in the process eating into profits.

 

[FinanceDude]

First of all we have 32 million people. Our banks are better managed and regulated(based on my first hand experience). We do have immigration issues but deal with them very differently than the US. We let those that meet our criteria in. About 250,000 are let in each year-a much higher percentage (I believe) than the US. This is not without some controversy but generally is well supported by the majority.

The USA has over ten times the GDP and 10 times the population of Canada. It is easier to manage a smaller economy than a larger one. California alone has a bigger GDP than Canada. It's not the same........

Your banks are probably better run, but I wonder if that would be the case if they had the VOLUME the US banks dealt with............

 

[Gone4Good]

Banks Decry Basel Mandates on Cash, Capital in Regulation Fight