Posts tagged financialreform
The Financial Crisis Inquiry Commission Final Report
……came out yesterday. Klein gives the crux of the findings:
The Financial Crisis Inquiry Commission has released its final report, which looks to “determine what happened and how it happened so that we could understand why it happened.” The full document — including the dissents from four of the Republicans on the panel — can be downloaded here. The transcripts of the hearings the committee conducted can be found here. If the thousands of pages in those two links seem like a bit much to you, the FCIC’s conclusions are here (pdf). This, I think, is the key takeaway:
We conclude this financial crisis was avoidable. The crisis was the result of human action and inaction, not of Mother Nature or computer models gone haywire. The captains of finance and the public stewards of our financial system ignored warnings and failed to question, understand, and manage evolving risks within a system essential to the well-being of the American public. Theirs was a big miss, not a stumble. While the business cycle cannot be repealed, a crisis of this magnitude need not have occurred. To paraphrase Shakespeare, the fault lies not in the stars, but in us.
Despite the expressed view of many on Wall Street and in Washington that the crisis could not have been foreseen or avoided, there were warning signs. The tragedy was that they were ignored or discounted. There was an explosion in risky subprime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red flags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.
The prime example is the Federal Reserve’s pivotal failure to stem the low of toxic mortgages, which it could have done by setting prudent mortgage-lending standards. The Federal Reserve was the one entity empowered to do so and it did not. The record of our examination is replete with evidence of other failures: Financial institutions made, bought, and sold mortgage securities they never examined, did not care to examine, or knew to be defective; firms depended on tens of billions of dollars of borrowing that had to be renewed each and every night, secured by subprime mortgage securities; and major firms and investors blindly relied on credit rating agencies as their arbiters of risk. What else could one expect on a highway where there were neither speed limits nor neatly painted lines?
We have the full doc up on Scribd. Unfortunately, Tumblr is jacked up right now, we can’t do direct coding and put it on the post as we usually do. Once it’s back to normal, we’ll add. It’s a beast. 700+ pgs. But they 19 days of hearings, thousands of pages of subpoena’d docs. Remarkable effort. Worth your time to at least glance over.
#GREATMOMENTSINBANKINGHISTORY #theyarewhowethoughttheywere #50hotones #godswork
Meet Basel III- Courtesy of the Brookings Institution
By November, banking regulators are likely to complete an international agreement that will determine how strong banks must be. Tough new rules on capital and liquidity are being negotiated through the Basel Committee on Banking Supervision (Basel Committee). The agreement, which is known as “Basel III” because it will be the third version of these rules, will have a large effect on the world’s financial systems and economies. On the positive side, newly toughened capital and liquidity requirements should make national financial systems — and indeed the global financial system — safer. Unfortunately, enhanced safety will come at a cost, since it is expensive for banks to hold extra capital and to be more liquid. It is beyond serious dispute that loans and other banking services will become more expensive and harder to obtain. The real argument is about the degree, not the direction. The banking industry argues that Basel III will seriously harm the economy. For example, the Institute of International Finance (IIF) calculated that the economies of the US and Europe would be 3% smaller after five years than if Basel III were not adopted. My own analyses, and those of other disinterested parties, generally suggest a much smaller cost that would seem to be considerably outweighed by the safety benefits. As the recent crisis clearly attests, severe financial crises can cause permanent damage to the world’s economy, imposing economic loss and emotional pain on hundreds of millions, if not billions, of people. It is worthwhile to give up a little economic growth in the average year in order to avoid these major impacts, as my work suggests would be the case. On the other hand, if the industry is right, the additional safety is probably not worth the cost and a more modest regulatory revamp would be preferable.
This paper explores the following questions about Basel III.
- What is Basel III and who is making the decisions?
- What is the timetable for Basel III?
- What are capital and liquidity?
- What are the current rules?
- What are the proposed changes from the current rules?
- What stays the same?
- What are the major areas of disagreement?
- Will the originally proposed changes or timetable be modified?
- What are the likely effects of Basel III?
How HAMP Alone Makes Elizabeth Warren The Only Choice For Consumer Protection
Mike Konczal over at Rortybomb:
There’s a debate going on about who should be nominated to run the Consumer Financial Protection Bureau at the Federal Reserve. One side says Elizabeth Warren, while another says someone from Treasury, likely Michael Barr.
At a quick glance you might not see a big difference. As Felix notes, Michael Barr is very strong on consumer finance.
But I think Warren would be a far superior choice. There are many reasons why, but I want to discuss a very specific one here that distinguishes her from anyone in Treasury. The biggest: she is a strong critic of HAMP, Treasury’s largest intervention into the massive foreclosure crisis hitting millions of regular Americans, and she demands accountability on behalf of the people.
HAMP As Failure
The Home Affordability Modification Program is widely considered to be a failure. Here is Shahien Nasiripour reporting on the latest numbers from June. They haven’t remotely hit their numbers that they were projecting, homeowners continue to suffer through a lack of modifications due to servicer problems and the overvaluation of the biggest banks stress-test approved books. I wrote here about how in 2007 the creator of the mortgage bond instrument in the early 1980s said there was going to be a major market failure coming. There was a need for a government action.
HAMP is so failed that it is a bit of a game among the financial bloggers as to who has the best write-up of how bad it is each month and what are the killer statistics proving it. I’m calling Stacy-Marie Ishmael over at FT Alphaville this month’s winner with BarCap vs HUD on HAMP.
Evidence shows that there are principal increases for 80% of the people who go through HAMP. That is the exact opposite of what you’d like to see! It lowers interest rates, but it also increases the length of the loan. And for those who don’t have principal reduction, there is a massively high redefault rate. People lose their homes anyway even after jumping through cumbersome hoops.
Predatory lending is hard to define, but a product that churns people deeper into debt where there isn’t an expectation that they can pay this debt should be considered predatory. And that is exactly how HAMP functions. Millions of people see HAMP as their interaction with the government, with what the government is capable of, and this creates disillusionment and discredits the liberal state in a profound way.
And Warren Demands Accountability
The Congressional Oversight Panel, lead by Warren, has been at the lead at making information public and bringing the complaints of the people straight to those in power. (It falls under her jurisdiction because HAMP uses TARP money.) When you see the fights on youtube between Warren and Geithner, the biggest ones, the ones that make Geithner cringe the most, it is about how HAMP isn’t working. Click through on that link to watch a video that gets straight to this. She demands accountability from the government and from the banking sector on the single most important issues facing Americans right now.
This is important. There’s pressure to be quiet, to hope that a quick housing and economic recovery will just make this whole foreclosure crisis go away. But Warren has demanded answers. COP released a report in early 2009 about the problems with HAMP, data collection and foreclosure, a report that still stands up. She’s done that at every step of TARP, but it matters here specifically for consumer protection.
And this is exactly how the CFPA should work. They fight to get good information disclosed to the public about how the banks and the Treasury department are failing the American people, reporters and wonks explain the information to the public, Treasury is held accountable. Treasury is currently working overtime to make HAMP work better; every month they are putting pressure where they can to make it better. That’s how a healthy government is supposed to work, but it can only be done if the tone is set by an outsider. And Elizabeth Warren is the one qualified with a proven track record in standing up to the banks and to the Treasury.
And as Steve Clemons wrote: “its about time that at minimum, the White House got a ‘team of rivals’ on economicy policy rather than just a ‘Team of Rubins.’”
Obama signs Wall Street Reform Into Law
Clearly, he’s no Carter. Maybe more like LeBron James. What if he joins the Heat?
New York (CNNMoney.com) - After more than a year of work and months of grueling debates on Capitol Hill, President Obama on Wednesday signed the Wall Street reform bill, the most sweeping overhaul of the financial system since the New Deal.
“These reforms represent the strongest consumer financial protections in history,” Obama said. “And these protections will be enforced by a new consumer watchdog with just one job: looking out for people – not big banks, not lenders, not investment houses – in the financial system.”
In a major signing ceremony at the Ronald Reagan Building in Washington, Obama was flanked by a number of lawmakers who worked on the legislation, including Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., the two committee chairmen who sponsored the bill.
From this month’s McKinsey Quarterly. Fascinating. Empirical confirmation that if you blindly trust equity research from banks axed to sell, you’re gonna get killed…..
A generation of overoptimistic equity analysts
McKinsey research shows that equity analysts have been overoptimistic for the past quarter century: on average, their earnings-growth estimates—ranging from 10 to 12 percent annually, compared with actual growth of 6 percent—were almost 100 percent too high. Only in years of strong growth, such as 2003 to 2006, when actual earnings caught up with earlier predictions, do these forecasts hit the mark.
The capital markets, by contrast, have been more realistic: except during the 1999–2001 market bubble, actual price-to-earnings ratios were 25 percent lower than those implied by the forecasts of analysts. To learn more about this research, read “Equity analysts: Still too bullish” (April 2010).
Pimco Sells Black Swan Protection as Wall Street Markets Fear
Excerpt below. Needless to say, Alamo is mega-long cheap vol, where we can find it.
Wall Street’s hottest new product is fear.
Almost two years after Lehman Brothers Holdings Inc.’s failure caused world markets to seize up, Pacific Investment Management Co. is planning a fund that will offer protection to investors against market declines of more than 15 percent. Morgan Stanley strategists estimate demand for hedges against such cataclysms helped drive as much as a fivefold increase last quarter in trading of credit derivatives that speculate on market volatility.
……..
The Pimco Tail Risk Hedging Fund 1 will be the first in a potential series of partnerships, according to a private placement filed with the U.S. Securities and Exchange Commission on June 23. The initial fund will be designed to protect investors from a drop of more than 15 percent in a benchmark index that Bhansali declined to identify.
ELVIS
Deutsche Bank is marketing a tail-risk hedging index that gains in value when investor expectation of stock-market volatility increases, according to material the bank sent to clients. The so-called Equity Long Volatility Investment Strategy, or ELVIS, uses derivatives called variance swaps linked to the S&P 500 that bet on the index’s volatility. Derivatives are contracts whose value is tied to assets including stocks, bonds, commodities and currencies, or events such as changes in interest rates or the weather.
We saw the lackluster results from GS this morning. I’m still a buyer. Volumes down across the board, so a letdown to be expected. Although, I’m shocked that they bet (and got burned) calling for lower vol. Seems like an uncharacteristically bad trade given the bipolar nature of the markets these days. I guess it couldn’t continue raining cash forever. In fact, now is an excellent time to have a subpar quarter. Internalize that little fee from the SEC, appear appropriately chastensed, and then goose Q3 earnings w/reserve and repo help, riding a “they’re back in business” narrative. Not that they ever left.
MudHens on deck tmrw. Will they break even?
SF Lunchtime Read: The New Yorker Profiles Paul Volcker
THE VOLCKER RULE
Obama’s Economic Advisor and His Battles Over the Financial Reform Bill
Very interesting, but it sounds like he got run over in the end.
Felix Salmon:
I like John Cassidy’s piece on Paul Volcker: it gives a great sense of how he’s managed to use his independence to great and important effect.
Certainly Volcker has achieved a lot since January 2009, when he refused to show up to support Treasury’s white paper on financial reform. Over the course of the rest of the year Volcker did a good job of distancing himself from the Obama Administration, and eventually, after Scott Brown won in Massachusetts, the Administration threw him a tasty bone.
The White House invited Volcker to come down for a meeting. On Christmas Eve, he had a long working lunch in the West Wing with Geithner and Summers, both of whom sensed that it was time for a policy switch. The financial-reform bill that had passed in the House in early December included an amendment from Paul Kanjorski, a Pennsylvania Democrat, giving the Fed the power to order individual banks to cease certain activities, including proprietary trading, if they were taking too many risks. Adopting Volcker’s proposal would go much further than that, and it would also serve an important political purpose. “We decided there was a way to do it that was O.K. policy and which had a bunch of tactical advantages,” the senior Administration official told me. “It would allow Volcker to align himself more fully with us. Because he was a little separate, people could project all sorts of things onto him… . They thought he was for all sorts of stuff he never was. That was damaging for the President, and it just wasn’t good strategy for us.”
The new language was quickly dubbed — by Obama himself — “the Volcker rule”, “thus associating the White House with a figure known for his independence and integrity”, as Cassidy puts it. There was lots of legislative jockeying thereafter, but the Volcker rule did manage to make it in to the final legislation, with some compromises.
This is surely a positive development, even if the rule has little practical effect. Cassidy happily parrots the official Goldman line that “at Goldman Sachs, proprietary trading accounts for about ten per cent of the firm’s revenues” — but that’s a completely made-up number, as far as I can tell. Goldman flacks were telling me straight-facedly a year ago that they had no proprietary trading at all; my feeling is that they upped their number from zero to 10% just so that it would be a little more credible, and so that they could claim to have made a substantive change when they drop it back down to zero again. The fact is that the majority of Goldman’s revenues come from its trading operations, and Goldman traders are using the bank’s own balance sheet to take positions. That looks and smells like proprietary trading, even if it’s covered by the fig-leaf that Goldman is acting on behalf of clients.
My guess is that any attempt to define proprietary trading is impossible, and that so long as broker-dealers have banking licenses, the Volcker rule will prove toothless. But it turns out that there’s more to Volcker than his eponymous rule: he’s managed to insert into the Dodd-Frank bill a brand new job at the Fed, as well.
[The] second vice-chairman of the Fed… will be explicitly responsible to Congress for financial regulation. “I think that might turn out to be one of the most important things in there,” he said. “It focuses the responsibility on one person.”
I like the idea of having a senior Fed official in Washington responsible for financial regulation. The job of president of the New York Fed has historically been the closest to that, but the New York Fed is prone to capture, and often thinks of itself as an intelligence-gathering operation, talking to the markets and acting as a conduit between Wall Street and Washington. That’s an important role, but it’s hard to wear that hat and the tough-regulator hat at the same time. So putting a tough regulator in Washington could well be very smart indeed — assuming, of course, that you pick the right person.
The problem, of course, is that the people in charge of financial regulation are, in Cassidy’s words, going to be “less independently minded men” than Volcker. People like Volcker are rare gems, and off the top of my head I can’t think of a great candidate for the second vice-chairman of the Fed, who would be able to muster internal support for tough crackdowns on profitable activities in the financial sector. The best I can come up with is Joe Stiglitz, but I don’t think he’s respected enough within the Fed. Any better ideas?
Lunchtime Read: Tim Geithner’s Ninth Political Life
Simon Johnson undresses Tim Geithner. 50 hot ones, comin at ya.
All jokes aside, if we don’t have the right people in place, it’s going to be a rough ride……
In modern American life, Treasury Secretary Tim Geithner stands out as amazingly resilient and remarkably lucky – despite presiding over or being deeply involved in a series of political debacles, he has gone from strength to strength. After at least eight improbably bounce backs, he might seem unassailable. But his latest mistake – blocking Elizabeth Warren from the heading the new Consumer Financial Protection Bureau – may well prove politically fatal.
Geithner was a junior but key member of the US Treasury team that badly mishandled the early days of the Asian financial crisis in 1997 and received widespread criticism (Life #1). He was promoted as a result and thereafter enjoyed a meteoric rise.
As President of the New York Federal Reserve from 2003, and de facto head of the government’s financial intelligence service, he completely failed to spot the problems developing in and around the country’s financial markets; nothing about this embarrassing track record has since stood in his way (Life #2). He subsequently became Hank Paulson’s Wall Street point person for one of the most comprehensively bungled bailouts of all time – the Troubled Asset Relief Program, TARP, which in fall 2008 first appalled Congress with its intentions and then wasn’t used at all as advertised (Life #3).
TARP and related Bush-Paulson-Geithner efforts were so completely and clearly unsuccessful in October/November 2009 that the crisis worsened and Geithner was offered the job of Treasury Secretary by President-elect Obama; the incoming team felt there was no substitute for “experience”. Nevertheless, he almost failed in the confirmation process due to issues related to his taxes (Life #4) and then stumbled badly with his initial public repositioning of the TARP (Life #5), which was going to buy toxic assets again but in a more complicated way (perhaps his most complete and obviously personal political disaster to date).
His next Great Escape was the stress tests in spring 2009 – it turned out, supposedly, that there was really no financial crisis. Most of the big banks really did have enough capital; all that had been missing was the government’s endorsement of this fact (this is the story, honest). If this seems too good to be true, look at the mass unemployment still around you and tell me if the financial sector really looks healthy (Life #6).
Life #7 was expended concurrent with the forceful arrival on the financial reform scene of Paul Volcker. The Geithner-Summers “financial reform” package from summer 2009 was weak to start with and weakened further as it was discussed in the House; the entire effort was rudderless. Volcker’s new proposals helped rescue the reform and restore momentum – but instead of (appropriately) discrediting the Geithner approach in the eyes of the White House, it actually helped the Treasury Secretary climb new pinnacles of influence. Go figure.
Life #8 is the blatant failure of the Geithner strategy to “just raise capital requirements” as the way to deal with distorted incentives and the tendency to take irresponsible risks at the heart of our financial system. Treasury insisted on “capital first and foremost” throughout the Senate debate this year – combined with their argument that these requirements must be set by regulators through international negotiation, i.e., not by legislation. But the big banks are chipping away at this entire philosophy daily through their effective lobbying within the opaque Basel process – as one would expect. The latest indications are that capital requirements will barely be raised in any meaningful sense.
Secretary Geithner likes to say, “Plan beats no plan” and in some positive interpretations this is the secret of his success. But it turns out that he had no plan really – the stress tests were a grand improvisation (ultimately implying scary sized government implicit guarantees), the initial financial reform proposals fizzled (the Volcker rescue was against Geithner’s wishes), and the much vaunted tightening of capital standards is completely illusory (doesn’t anyone in the White House read the newspapers?).
On top of all this, it now appears that Secretary Geithner will oppose Elizabeth Warren becoming the new chief regulator responsible for protecting consumers from defective financial products – despite the fact that she has led the way for this issue, on both intellectual and political fronts, over the past decade. The financial sector has abused many of its customers badly over the past decades. This simply needs to stop.
Throughout the Senate debate on financial reform, Treasury insisted that complex details regarding consumer protected need to be left to regulators – and thus the Geithner team pushed back against many sensible legislative proposals that would have tightened the rules. Treasury also promised – although in a nonbinding way – that the new generation of regulators would be an order of magnitude more effective that those who eviscerated whatever was left of our oversight system during the Bush years.
With his track record of survival, Geithner and his team apparently feel they can push hard against Elizabeth Warren and give the new consumer protection job to someone closer to their philosophy – which is much more sympathetic to the banking industry.
This would be a bad mistake – trying the patience of already exasperated Congressional Democrats. If the Obama administration can’t even complete the deal they implicitly agreed with Senators over the past months, this will set of a firestorm of protest within the party (and with anyone else who is paying attention).
Financial “reform” is already very weak. If Secretary Geithner gets his way on consumers protection, pretty much all of the Democrats efforts vis-à-vis the financial sector’s treatment of customers have been for naught.
Tim Geithner is sometimes compared to Talleyrand, the French statesman who served the Revolution, Napoleon, and the restored Bourbons – opportunistic and distrusted, but often useful and a great survivor with a brilliant personal career. In the end, of course, no one – including Talleyrand – proves indispensible. And everyone of this sort eventually pushes their luck too far.
If the Democratic leadership really wants to win in the November elections, they should think very hard about the further consequences of Mr. Geithner.
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