The primary lubricant of the financial system is confidence…
Restoring American’s belief in the financial and banking system will require years.
Americans must believe that the credit, investing and savings products offered to them represent fair dealing.
Elizabeth Warren is the best person to lead the new consumer financial protection agency.
I hope that President Obama does the right thing and appoints her.
Watch the full episode. See more Need To Know.
* * * A ten page summary of the Dodd-Frank Wall Street Reform and Consumer Protection Act
* * * The full text of the Dodd-Frank Wall Street Reform and Consumer Protection Act
* * * Davis Polk interprets the Volcker rule
Kudos to House Financial Services Committee Chairman Barney Frank on the level of transparency in the legislative process… good show…
A summary of where we are in the legislative reform process of the financial system.
[BTW: follow me on Twitter – cate_long — tweeting on the conference process)
From an email announcement from the House Financial Services Committee:
The Wall Street Reform Bill: Conference Update
Washington –Last week was a successful week for the House and Senate conferees for the bill to bring accountability to Wall Street. The bill creates a new consumer financial protection watchdog, ends too big to fail bailouts, sets up an early warning system to predict and prevent the next crisis, and brings transparency and accountability to exotic instruments such as derivatives.
The following is a summary of the many provisions agreed to during the House-Senate conference last week.
A list of House and Senate offers and counter offers can be found by clicking here, but please note that there are still open items in each title, and nothing will be final until the conference report is signed by the conferees at the end of this week.
The House-Senate conference will continue its negotiations on the Wall Street Reform and Consumer Protection Act tomorrow at noon in room SD-106, Dirksen Senate Office Building.
Title III
AGREED TO - THRIFT PROVISIONS
· Preserves the Thrift Charter
· Abolishes the Office of Thrift Supervision
· Transfers the Authority of the OTS mainly to the OCC
· Establishes a Deputy Comptroller for Thrifts at the OCC
· Clarifies Branching Authority of thrifts that convert to banks
· House Employee Protections as provided for in the House passed bill.
AGREED TO – New Offices of Minority and Women
AGREED TO – Deposit Insurance Reforms: Permanent increase in deposit insurance for banks, thrifts and credit unions to $250,000, retroactive to January 1, 2008.
The House and Senate conferees worked hard to today to reconcile their versions of financial reform. Agreement was reached on private funds, insurance regulation and the merger of bank regulators.
A sticking point was on Subtitle C of Title IX which covers credit rating agencies.
I’d like to recommend to Chairman Barney Frank and others that they propose a slight modification to section 5 related to removing the exemption for credit raters from Regulation FD.
The current legislative language requires the SEC to write rules that would require issuers to share material non-public information with all investors and market participants in a similar manner to the equity markets.
I’d suggest a more tailored approach for the fixed income markets.
This would be the requirement that an issuer disclose material non-public information to all Nationally Recognized Statistical Rating Organizations [NRSRO] if they disclose information to any NRSRO.
This sharing of issuer material non-public information with all NRSROs is called ”equivalent disclosure“.
This simple requirement would substantially reduce “ratings shopping” and empower all rating agencies to develop ratings on new issues. It would greatly negate the conflicts of interest that the issuer paid rating agency has by allowing other rating agencies equal access to information to develop an assessment of risk.
The SEC has already adopted this broadened disclosure requirement for structured finance products. The new disclosure regime went into effect on June 2.
We propose that the Congress adopt “equivalent disclosure” rules for all issuer communications with NRSROs.
Equivalent disclosure would require an issuer, or person acting on its behalf, to disclose material nonpublic information to all NRSROs if it discloses that information to one NRSRO. Equivalent disclosure would remove the issues associated with issuer selective disclosure primarily “rating shopping”.
The institution of equivalent disclosure would strengthen financial markets by ensuring that all NRSROs have adequate and equivalent information from issuers upon which to base their credit analysis.
Issuer disclosure would be required to all NRSROs that rate securities in the specific asset category (as outlined in the Credit Rating Agency Reform Act of 2006) for which the issuer has securities outstanding.
This broadened disclosure will increase the volume of information available to NRSROs and help unbind a market that has relied on the opinions of creditworthiness from a very small group of credit rating agencies.
This proposal does not alter the ability of NRSROs to have any form of business model that they choose. Issuers can continue to pay NRSROs to rate their securities. Issuers may likely continue this practice because of the bundle of services offered by the NRSROs to market participants.
Tomorrow the House and Senate conference committee is finalizing the language for credit rating agencies.
The push and shove is in full flight…
Senator Al Franken is promoting his amendment to establish a “ratings board” that will assign a specific rater (Nationally Recognized Statistical Rating Organizations [NRSRO]) to rate structured finance deals.
If adopted his amendment will have the effect of creating at least one independent rating for each structured finance deal. This would be very useful for less sophisticated institutional investors who don’t have in-house analytical staff. It would also be a useful check on the major raters.
The Minneapolis Star Tribune is reporting that House Chairman Barney Frank is proposing that the Franken proposal be studied and a report given to Congress on the implementation issues within a year. It sounds likely that a one year study will be written into the law. And the new board will come to life after a year.
Beyond the Franken amendment the House conference members issued some draft changes (page 11) today which incorporated specific language related to issuer disclosure to credit rating agencies. The language directs the SEC to rewrite the rules for issuer disclosure to raters under Regulation FD… this may be equivalent disclosure… yes it may…
House draft language…
SEC. 939B. ELIMINATION OF EXEMPTION FROM FAIR DISCLOSURE RULE.
” Not later than 90 days after the date of enactment 25 of this subtitle, the Securities Exchange Commission shall revise Regulation FD (17 C.F.R. 243.100) to remove from such regulation the exemption for entities whose primary business is the issuance of credit ratings (17 C.F.R. 4 243.100(b)(2)(iii)).
Federal Reserve Chairman Ben Bernanke gave a speech at the Bank of Japan on the importance of central bank independence and transparency…
Chairman Bernanke espoused a lot of platitudes… but the reality of the Fed’s actions is their deep entanglement with the administration, Congress and Wall Street…
I think we will be hearing more speeches attempting to justify the enormous powers of the Fed and the need to have minimal oversight as unemployment remains at exceptional levels and households continue to delever. The Fed will continue to develop and execute larger and larger efforts to prop up the economic system… they are sailing into the wind without a rudder…
For example Chairman Bernanke makes a stab at justifying the enormous expansion of their balance sheet to prop up the mortgage market and remove distressed assets from the banking system… by pointing to the income returned to the Treasury…
“…The issue of the fiscal-monetary distinction may also arise in the case of the nonconventional policy known as quantitative easing, in which the central bank provides additional support for the economy and the financial system by expanding the monetary base, for example, through the purchase of long-term securities.
Rarely employed outside of Japan before the crisis, central banks in a number of advanced economies have undertaken variants of quantitative easing in recent years as conventional policies have reached their limits. In the United States, the Federal Reserve has purchased both Treasury securities and securities guaranteed by government-sponsored enterprises.
Although quantitative easing, like conventional monetary policy, works by affecting broad financial conditions, it can have fiscal side effects: increased income, or seigniorage, for the government when longer-term securities are purchased, and possible capital gains or losses when securities are sold.
Nevertheless, I think there is a good case for granting the central bank independence in making quantitative easing decisions, just as with other monetary policies. Because the effects of quantitative easing on growth and inflation are qualitatively similar to those of more conventional monetary policies, the same concerns about the potentially adverse effects of short-term political influence on these decisions apply.
Have a look at this video to get an idea of the true fire of democracy…
Senator Jeff Merkley, of Oregon, uses his heart and soul to push back against the power of Wall Street…
Kudos to Senators Merkley, Harkin, Levin, Dorgan, Cantwell, Lincoln, Kaufman, Whitehouse and all others who have taken to the floor of the Senate to mount a battle against the oligarchy of Wall Street.
Where is President Obama? Where?
From FT Alphaville some comments from Tullett Prebon economist Lena Komileva on the similarities and differences between the growing Euro sovereign contengion and Lehman’s collapse…
Basically she’s saying it’s an order of magnitude bigger this time… or maybe two orders of magnitude…
~~~ “…The current episode of the global crisis is similar to the crisis mechanism that we saw during the “Lehman” phase:
o The market has become aware of a substantial pool of solvency risk in a part of the market that previously traded as “low-risk”.
o As was the case in late 2008, the confidence and liquidity drain experienced in the stressed part of the global financial system – in this case Eurozone peripheral sovereign and bank markets – has not been prevented by the excessive central bank liquidity flooding the markets…The liquidity crisis that has taken hold of the markets is once again driven not by a shortage of liquidity but by the collective desire for capital preservation of each financial institution in the market.
o Furthermore, the negative effects for bank’s collateral quality, liquidity and capital stemming from deteriorating Euro sovereign credit risk in the debt markets and fears about the euro’s collapse, have transmitted the contagion across every capital market and asset class around the world.
But, Komileva argues, that are some significant differences between the “Lehman shock” and current crisis, as far as they underlying drivers thereof are concerned:
The main point is that the imbalance between leverage and capital (or income), i.e. the insolvency risk, in the financial system is considerably worse, which can become the catalyst of a potentially unprecedented systemic shock.
· First, this is because risky governments in the Euro area traded as “risk-free” until recently, reflecting an enormous mispricing of solvency risk.
· Second, because the policy stabilisation mechanism of containing bank solvency risk through government guarantees and monetary liquidity has already been exhausted.
· Third, and most importantly, the current re-pricing of sovereign risk which started with Greece and has now spilled over to other governments, is potentially unstoppable because there is no superior capital structure in the policy mechanism.
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So buckle up friends… stay liquid… and let’s hold the Federal Reserve and Treasury accountable for any commitments made without authorization from Congress… cause some some giant wads of money are starting to change hands… and we need some accountability…
Congressman Mike Spence on the floor questioning the US’s bailout of Greece while we won’t bailout California… he raises an important point…
Conservatives and progressives worked together to support Senator Sanders in his quest to have the Federal Reserve audited.
Kudos to Senator Sanders. We took a big step forward in reclaiming our nation today.
~~~ “The Senate approved an amendment to the regulatory-overhaul bill authorizing a one-time audit of the Federal Reserve’s emergency-lending programs, and defeated a second proposal that would have allowed continuous inquiries.
Lawmakers voted 96-0 today for Senator Bernard Sanders’s proposal to let a congressional watchdog conduct an audit of every Fed emergency action since December 2007. The Senate rejected a measure from Louisiana Republican David Vitter that would have permitted unlimited reviews.
The Sanders amendment is closer to what Federal Reserve Chairman Ben S. Bernanke told legislators he would support. The Fed chief, during a February hearing, invited an audit of emergency loan programs, while raising concerns that broader audit authority could result in reviews of monetary policy.
From Washington’s Blog:
~~~ “On Tuesday, I wrote:
The Fed argues that an audit would interfere with its monetary policy decisions. [But] decisions about what toxic assets should be accepted by the Fed as collateral, how such assets should be valued, and who bailout funds should be given to are wholly separate from the Fed’s core monetary policy decision: raising or lowering interest rates.
[F]unneling hundreds of billions to foreign nations and foreign banks, accepting worthless junk from the too big to fails and marking it at unrealistic valuations, and doing the other things which the Fed has been doing recently are not core monetary functions. Congress never authorized these actions when they passed the Federal Reserve Act.
Therefore, the Fed’s actions must be made transparent and subject to the light of day.
Eliot Spitzer wrote an important essay yesterday explaining that what the Fed is really doing is controlling our country’s fiscal - as well as monetary - policy:
The Fed over the course of this crisis has demonstrated that its influence goes far beyond the issue of monetary policy.
In monetary policy—controlling the supply of money—the Fed is constrained by reasonably well-understood policy levers that have a macro impact, and its decisions are rather evident in short order. Now, in contrast, the Fed is engaging in fiscal policy—spending money—and in fact has become the single largest fiscal actor in the U.S. economy, dispensing hundreds of billions of dollars to private parties. In doing so, the Fed is picking winners and losers. Why Goldman but not Lehman? Why guarantee the debt of some companies but not others?
The Fed has enormous discretion in its decisions. It is entirely appropriate to demand that they be carried out with greater transparency and be subject to greater oversight.”~~~