New potential regulatory structure to be unveiled this week:
President Barack Obama is expected Wednesday to propose the most sweeping reorganization of financial-market supervision since the 1930s, a revamp that would touch almost every corner of banking from how mortgages are underwritten to the way exotic financial instruments are traded.
At the center of the plan, which administration officials are referring to as a “white paper,” is a move to remake powers of the Federal Reserve to oversee the biggest financial players, give the government the power to unwind and break up systemically important companies — much like the Federal Deposit Insurance Corp. does with failed banks — and create a new regulator for consumer-oriented financial products, according to people involved in the process.
The plan stops short of the complete consolidation of power that some lawmakers have advocated. For example, it will allow several agencies to continue supervising banks. It also won’t place specific limits on the size or scope of financial institutions, but it will make it much harder for large companies to be so overleveraged that they threaten the broader economy.
If you thought the screaming over the non-TARP Chrysler lenders was loud, I’m imagining this will provoke the mother of all hissy fits. Sadly, I didn’t see anything in the WSJ write-up that seemed to address the role the ratings agencies played in this current disaster.
Those of you who understand this stuff, what do you make of the report?
Jon H
Does it end the practice of regulator shopping, that let financial companies pick the least-competent agency to be their regulator? (ie, AIG picking OTS which knew nothing about insurance and was generally lax anyway)
Mr. Poppinfresh
To answer your question, John: it’s not quite far reaching enough, but it’s waaaay more than I was expecting Obama to deliver given his performance lately on doubling down on major Bush screw-ups.
So, not a bad start.
arguingwithsignposts
I don’t want the federal reserve having any regulatory power, since it is only a quasi-governmental agency with no oversight from anyone. Congress has no control, the president has no control, the judiciary has no control.
why would we give regulatory power to a central bank?
palm/face
PeakVT
I don’t like the idea that there will still be multiple regulators for the banks, since regulator shopping was a big problem. And I don’t like giving the Fed actual regulatory responsibility given it’s bizarre public-private nature. It should be charged with analysis and given the ability to extract whatever data it needs from even the most secretive hedge fund. But the regulatory authority should be lodged in the executive branch.
Here’s the take from Baseline Scenario.
Johnny B. Guud
I agree with Geithner’s assertions that the innovations in the industry have outpaced the developments of the appropriate regulatory agencies to police them. The most blatant example is the unregulated derivatives market, although I’m sure I’m oversimplifying the matter.
But I have to be cynical of anything this crowd is doing.
Since the crash of 1929, politicians have made plenty attempts to “overhaul” regulatory oversight of the financial system—-mostly by passing more and more legislation, with their names attached, and patting themselves on the back for doing so. And they usually make some nice coin for themselves in the process (though, the sheep usually find out about these things after the fact).
It’s akin to rearranging the deck chairs on the Titanic, to use a worn-out phrase. These crises happen every decade or so, and each time the politicians come in, on their white horses, saying it isn’t fair—-wink, wink—-and that only they have the answers.
It’s really just fluff, because the political class in Washington on both sides of the aisle, are too deeply entrenched in and benefit greatly from, Wall Street.
Elroy's Lunch
With this White House it’s hard to say what the plan will look like. They play their cards very close to the chest. As mentioned earlier, if it is just to merge OTS with OCC then it would appear to be nibbling around the edges of the problem.
Regulator shopping might stop because the types of banking charters might consolidate. Right now banks can be nationally chartered (OCC) or state chartered (local state regulators and FDIC or FRB). There’s also the distinction between banks and S&L’s (OTS) which is where much of the focus has been of late.
Sweeping changes would be to move all supervisory responsibility to one regulator, preferably not the Fed, thus negating the ability to choose a charter/regulator. That would be big change. Merging the S&L charter with the bank charter is smaller change.
As far as regulators like OTS not understanding the insurance business with AIG that is very true but they’re not required to. For example, GE has a large (well, used to…) financial segment of it’s overall business but it’s regulators don’t examine their jet engine building function or the part that makes refrigerators. Just the part that owns a bank.
Honestly, probably none of the regulators could have made sense of what AIG was doing.
Comrade Sock Puppet of the Great Satan
Sounds like a good thing to set the banks up as the default regulator for the big financial institutions, to reduce the regulator dating game (listen to a Planet Money podcast on this, where they compare banks selecting regulators to finding dates on Craigslist),
Walker
This is true. Which is why the success of regulatory reform depends on one (easy to observe) feature: how heavily it restricts leverage.
Leverage ratios need to be rolled back so low that bankers are playing the limbo. Other than that, as far as I am concerned, they can be as creative as they want.
Janet Strange
John – have you listened to the This American Life episode from a couple weeks ago, The Watchmen, about the ratings agencies and the plethora of regulatory agencies? I learned a lot.
The Sphynx
You’re right here John, any plan that doesn’t address the extremely suspect incentive structure of the ratings agencies is likely not going to be enough
Mnemosyne
What year did we have a major economic crisis during the 1940s, the 1950s, and the 1960s?
anon
janet strange, hhs, ’66??
had an old classmate by that name.
Sorry if you are a youngster offended as being taken for an oldster.
Zifnab
@Jon H:
Geitner, Tester, and Collins hit on this last Tuesday in a Senatorial subcommittee meeting. I believe Collins has a bill up to stop the practice, but I don’t know where it stands in terms of effectiveness or odds of getting passed.
Brian J
I’d like to see them push for stronger controls on compensation. I’m not for limiting how much people earn, necessarily, just changing the way they receive this money. A lot of people are saying that the pay structure where the rewards were immediate but any pain delayed was a primary motivation for financial types to dive into risky deals. Maybe I’m simplifying this too much, but if the incentives are more properly aligned, people would be more willing to inquire whether free money has finally appeared.
I’m not sure of the legal or logistical obstacles that this would entail, however.
Raenelle
One of the problems with turning it up to 11 on everything is that this hissy fit will look just like every other Republican tantrum.
Roger Moore
@The Sphynx:
There’s one bit in the plan that could help in that department without requiring reform of the ratings agencies: requiring the sellers of securitized products to keep some of the final mix on their own books. It gives the people putting the securities a strong incentive not to game the system, since they’ll be taking a hit if they get it wrong. I don’t think that’s a complete alternative to reforming the ratings agencies, but it’s a nice backstop if the raters get too cozy with the companies they’re rating.
BenA
This is a shitty monday. I spilled hot coffee on myself FOUR times before I got into work. Krugman’s freaking out, Iran is freaking out, Obama’s putting the foxes in charge of the hen house (but with flexibility) and my bills suck.
I’m leaving work early and getting tanked. It seems like the only responsible thing to do. Now that’s fucking going Gault (in which case my brother has been Gault for decades.)
liberal
@arguingwithsignposts:
Agreed.
TR
I’ll wait to see how much the Weekly Standard hates it, and then let you know.
AnotherBruce
Then let’s go back to what worked in the past, raise the marginal tax rate on say, $10,000,000 to 70%. And have taxes on dividends mirror the income tax rate.
Does this seem too radical? It probably is for these times, but I’ll tell you what else is radical, it’s radical that the top 5% of earners have as much wealth as the bottom 90%. There has been a radical transfer of wealth in this country over the last 30 years, it’s time to transfer it back.
Brick Oven Bill
There are twelve regional Federal Reserve banks. The most consequential of these is in New York. Each regional Federal Reserve bank has nine-member board of directors, two thirds of whom are appointed by the MEMBER BANKS. The other one third of the directors are appointed by the Executive (i.e. Tim, installed by the Bankers as New York Fed Chief in the above process, with his Goldman Sachs lobbyist Chief of Staff).
So Obamaās sweeping new reform is to have the banks regulate themselves. This is a new, creative, bold idea.
The Fed was launched in 1913, to provide a āflexible currencyā, meaning that the money supply could be expanded or contracted to even out the economic bumps. When they started out evening out the economic bumps, pork chops were $0.22/lb.
The Fed is just another tax on the American people imposed by a system of bankers for bankers and should be abolished. Sully Sullenberger should regulate the banks.
JGabriel
Jane Coale @ Top
At least until the health bill is unveiled …
.
Brian J
@AnotherBruce:
I’m not sure that’s really necessary, if there are other ways to do it. I remember reading some comments by economist Raghuram G. Rajan, who took a lot of heat a few years ago for questioning the new ways financial markets were operating. Very simply put, he says the incentives should mask the risk, so that the perverse system we have now doesn’t continue but so that people who actually deserve the big rewards they get keep getting them. I believe I remember reading some suggestions from him on how to do that, but maybe not.
In any case, what he says seems to make sense. It may seem unnecessary or even outlandish, but I don’t have any problem with big compensation packages for people who actually deserve them. Of course, a lot of people who don’t deserve them get them, but it seems like we can fix that without destroying the motivation to make a lot of money in the first place.
Don’t get me wrong: I’m all for higher taxes on the rich, but I don’t think your particular suggestion is the way to go. It seems like there are better, and perhaps easier, ways to go about accomplishing the same goal. Perhaps what this guy is suggesting is a lot easier said than done, but I don’t think that should prevent us from trying.
Brian J
I had a similar day yesterday, not so much in events, although I did burn and cut myself yet again (I’m the sort of person who will cut himself opening a box of diet soda but not using a butcher knife to cut food) but definitely in mood. I’m usually not driven to the sort of tension that makes me want to slap friends and family, but yesterday, I was close. I’d try to sleep it off, but my caffeine addiction won’t let me.
Bill H
I watched a talk on Cspan2 yesterday by Gillian Tett, author of Foolās Gold. She presented the initial drive of the CDO and CDS as an innovation to reduce risk and allow greater amount of lending; good ideas that turned bad only because they ran amok. Throughout the discussion, at no point did anyone question either basic goal; that too much lending was a poor idea, or that removing the risk from lending was a bad idea.
Part of the reason for sub-prime lending was that the people who initiated the loans were not going to be stuck with the loss, they were mere brokers, creating the loan and then selling it off to others and creating more loans. They had no reason to care whether the loan would be repaid or not, so they had no motive to assure the credit-worthiness of the borrower. So how is redicing the risk of lending a good idea? It clearly results in creating loans that will be defaulted. When a loan defaults, somebody is going to take a loss.
And yet we do not question the principle of “securitization” which is a process of increasing the amount the underfinanced instutions can increase the amount they lend and decrease the risk of their lending. We say that we need to maybe “regulate” the way those instruments are traded after they are created, but don’t question whether they should be created at all. Idiocy.
Sinister eyebrow
Since WW2 you have recessions in the US during 1945, 1953, 1958, 1960-61, 1969, 1973-75, 1981-82, 1990-91, 2001 and 2007 to present.
So it’s more like a recession every 5-7 years. What there hadn’t been from 1929 until 1981 was a financial panic/major crash. 1980 saw the Reagan dereg of the S&Ls. Following that, there was the huge S&L debacle of 1981. So now were back to the pre-1929 cycle of speculative bubbles and financial industry shenanigans that occured in the absence of solid regulation. Every 10 years or so, look for a financial panic far more extensive and dangerous than the post WW2 recessions. You can also exclude the 1973 recession from a normal business cycle just like the 1945 recession, both being the result of a shift in labor (market flooded with returning Vets) and economic focus following the end of a very long/large war (WW2 and Vietnam).
I expect that the end of the Iraq War would have a negative impact on the economy as well, although not nearly what Vietnam did given the lower number of deployed soldiers and retooled industry involved in Iraq.
DFH no. 6
And so, here we see B.O.B. making perfect sense. Ain’t Monday mornings great?
Dude, are you like a real-life Dr. Jeckyll and Mr. Hyde? They could do a show about you on the Discovery Channel or something.
Anyway, not the best solution for regulating financial institutions, but likely a fairly pragmatic one (politically-speaking) as has been Hopey-Changey’s wont so far.
I’m with TR above: we’ll see when The Weekly Standard chimes in, and whatever they don’t like, those will be the good parts.
Also, as has been mentioned here and elsewhere, rather than selectively trying to limit executive pay (good in theory since shareholders are unable, practically speaking) the better thing to do is hefty increases in the marginal income tax rate at various levels. Bump it up a bit at $500K and then $1million, then really go to town at the $5 milliion, $10 million, and $25 million marks (topping out between 50-60 % or so — I’m not a bolshevik!). Marginal tax hikes shouldn’t end at $250K.
I’m seeing mine bump up at $250K (though probably not next year with the construction downturn and all) and the wife and I are neither going Galt (I suspect no sane person actually is) nor is it even really a problem (3% on dollars above $250K — where are my teabags? Gotta hang some teabags from my hat).
I’m guessing it would be the same for the really rich motherfuckers. Instead of a net-worth of, say, $60 million, someone would maybe end up with $50 million or something. Yeah, cry us all a fucking river. There are dues to be paid for this lovely country club we have here called the US of A — much more for the Premium Members.
DecidedFenceSitter
I don’t know a lot but I’ll link to this from Baseline Scenario.
Key conclusion?
AnotherBruce
One thing that I’ll point out is that it’s the surest, least painful way to reduce the deficit. After all, the government has been borrowing from social security funds for years, and it has been the wealthy that have benefited the most because their taxes were lowered. So I think that it’s fair that they should have to bare the burden for lowering our deficits now.
arguingwithsignposts
@DFH no. 6:
Scares teh shit out of me that he’s in agreement with my earlier comment.
TenguPhule
And then we had inflation. What part of that did you miss?
JFCNTZYM, BOB. At least take some real economic classes instead of peddling retreads of what you find on the internet.
Brick Oven Bill
Do not feel bad TenguPhule. President Obama walks into glass doors too.
Brian J
That’s true, but income tax rates that, even if they are marginal, could do some, well, things that some on the right consistently warn us about. I doubt an increase of three percent is going to make happen what they warn about, but a doubling of the top marginal rate would almost certainly bring us a lot closer to that point. Of course, if there were no other ways to bring in more revenue, I’d probably be on board, but why not focus more, at least at first, on pollution and vice taxes, and on limiting some deductions and credits? If they bring in sizable amounts of revenue and limit or at least do not encourage harmful activity, isn’t that a win-win situation?
Of course, this is beside the point, but it’s still a worthy topic.
Perry Como
Yes, let’s give the Federal Reserve more power. Those fuckers have been fisting the cookie jar and look where it’s gotten us.
Brachiator
Let’s see what it looks like on Wednesday. I haven’t had much chance to look at a lot of the summary news items.
But as a prelim … As a couple of other posters have noted, I am not sure about the enhancements to the powers of the Fed. They are not really organized to do a lot of oversight, nor do I think that they would find the prospect appealing. This is not what they do or how they think. And their independence from Treasury and even from the White House makes this aspect of the proposal troubling.
I’m also not too hot about the part of the plan that would “create a new regulator for consumer-oriented financial products. I like the idea, but I am not hot on the new layers of bureaucracy implied in this aspect of the plan.
Yep. I agree with you here.
Another Bruce – Then letās go back to what worked in the past, raise the marginal tax rate on say, $10,000,000 to 70%.
Tax policy is not quite the same thing as financial markets policy. Even so, I’m not sure that a high marginal tax rate really “worked” in the past, and it certainly didn’t do much to transfer wealth back to whoever you think most deserve it.
I think you mean to say, tax dividends as ordinary income.