Financial Regulations

rimrocker · Jun 17, 2009

I was waiting for something like this... we're long overdue for regulation of the consumer financial markets especially. Now, let's see how many Senators can be bought off to oppose it...

Obama Blueprint Deepens Federal Role in Markets
Plan to Overhaul Financial Regulation Focuses on Consumer Protection, Risk

By Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Wednesday, June 17, 2009
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/16/AR2009061601887_pf.html

The Obama administration last night detailed a series of proposals to involve the government more deeply in private markets, from helping to steer borrowers into affordable mortgage loans to imposing new limits on the largest financial companies, in a sweeping effort to curb the kinds of reckless risk-taking that sparked the economic crisis.

The plan seeks to overhaul the nation's outdated system of financial regulations. Senior officials debated using a bulldozer to clear the way for fundamental reforms but decided instead to build within the shell of the existing system, offering what amounts to an architect's blueprint for modernizing a creaky old building.

The White House makes its case for this approach in an 85-page white paper that describes the roots of the crisis. Gaps in regulation allowed companies to make loans many borrowers could not afford. Funding came from new kinds of investments that were poorly understood by regulators. Big firms paid employees massive bonuses, while setting aside little money to absorb potential losses.

"While this crisis had many causes, it is clear now that the government could have done more to prevent many of these problems from growing out of control and threatening the stability of our financial system," the white paper says.

The plan is built around five key points, according to a briefing last night by senior administration officials and a copy of the white paper obtained by The Washington Post.

The proposals would greatly increase the power of the Federal Reserve, creating stronger and more consistent oversight of the largest financial firms.

It also asks Congress to authorize the government for the first time to dismantle large firms that fall into trouble, avoiding a chaotic collapse that could disrupt the economy.

Federal oversight would be extended to dark corners of the financial markets, imposing new rules on trading in complex derivatives and securities built from mortgage loans.

The government would create a new agency to protect consumers of mortgages, credit cards and other financial products.

And the administration would increase its coordination with other nations to prevent businesses from migrating to less regulated venues.

President Obama is scheduled to announce the full plan today, ending months of political calibration and internal discussion and dropping the details into an already-heated debate on Capitol Hill. Congress is scheduled to hold its first hearings on the proposals tomorrow, and interest groups already are ramping up their campaigns. Congressional leaders say they hope to pass some version of the plan by year's end.

"Speed is important," Obama said yesterday in an interview aired by CNBC. "We want to do it right. We want to do it carefully. But we don't want to tilt at windmills. We want to make sure that we're getting the best possible regulatory framework in place so that we're not repeating the mistakes of the past."

The administration already has hammered out a number of compromises with key Democrats in Congress, in hopes of creating a proposal that can survive the challenge from competing interests such as hedge funds hoping to avoid regulation and consumer groups seeking even greater protections. But while the proposals sharpen the discussion about reform, they don't end it.

"With their proposals today, the administration has moved this critical debate from broad discussion to specific action," said Timothy Ryan of the Securities Industry and Financial Markets Association.

The administration's plan leans heavily on the Fed, expanding its role as the regulator of the nation's largest banks such as J.P. Morgan Chase and Goldman Sachs to include other giant financial firms, such as the insurance companies American International Group and MetLife. The agency, which has greater independence from the political process than other regulators, would have broad authority to impose special requirements on those companies, such as mandating that they set aside a larger percentage of their assets against possible losses than smaller firms. Such a requirement could limit large companies' appetite for risk, but also their profit and growth.

The plan calls for a council of regulators to consult with the Fed, including the Treasury secretary and the heads of the other financial regulatory agencies: The Securities and Exchange Commission, Commodity Futures Trading Commission, the Federal Housing Finance Agency and the agencies that regulate banks. A primary task of the council would be to recommend which large, globally interconnected firms are too big to fail and should be subject to more rigorous oversight. But the council will not have the authority to oppose decisions made by the central bank.

Agencies other than the Fed pressed for the creation of such a council, but its limited role is likely to disappoint them. Prominent Democrats and Republicans in Congress also have signaled that they are reluctant to increase the Fed's powers without imposing stronger limitations.

A second element likely to provoke fierce debate is the establishment of a Consumer Financial Protection Agency.

The agency would have broad authority to overhaul a tangled mess of federal regulations, such as the various laws that compel lenders to give mortgage borrowers a massive stack of paperwork at closing that includes several calculations of the true cost of the loan itself.

"Consumers should have clear disclosure regarding the consequences of their financial decisions," the plan states.

The agency also would have the authority to change the way that loans are sold. One idea highlighted by the administration is to require that lenders offer all customers standard "plain vanilla" loans, such as 30-year, fixed-rate mortgages with streamlined pricing. The sale of loans with more complicated terms would be subjected to greater scrutiny by the agency. It could even require that customers who take more complicated loans sign a waiver.

And the agency would have a mandate to increase the availability of financial products in lower-income communities and other underserved areas, in part by enforcing the Community Reinvestment Act, which requires banks to make loans everywhere that they collect deposits.

To carry out these responsibilities, the agency would be granted the same powers as the regulators charged with keeping banks healthy, including the ability to write rules, conduct examinations, and impose fines and other penalties.

Regulatory agencies and industry groups acknowledge failures in recent years. But they say the existing model remains the best way to protect consumers, arguing that the agencies can identify problems more easily because of their close engagement with firms. They also are concerned that a consumer agency could be overly restrictive, limiting access to loans and constraining the development of new types of accounts, loans and other financial services.

"This consumer protection agency would be deciding how people get to live as opposed to people getting to decide for themselves," said Kelly King, chief executive of BB&T, a large commercial bank based in North Carolina.

Consumer advocates say the current financial crisis is ample evidence of the need for a new approach.

"We've tried it the other way for years, and obviously it didn't work. That's how we got here," said John Taylor of the National Community Reinvestment Coalition.

Several ideas have been dropped as the administration picks its battles. The plan will not include a new way of regulating insurance companies at the federal level. The insurance industry, which is regulated at the state level, is deeply divided, and the White House anticipated a distracting fight. The administration instead plans to create an office in the Treasury Department to monitor the insurance industry.

Some of the largest insurance companies could still fall under the scrutiny of the Federal Reserve in its new role as a systemic risk regulator.

The administration had earlier backed away from a proposal to merge the two agencies that oversee financial markets, and to merge the four agencies that regulate banks. It still will seek to merge the Office of Thrift Supervision and the Office of the Comptroller of the Currency to create a single agency to oversee banks with national charters. It also will propose eliminating the regulatory category for thrifts, traditionally defined as banks that focus on mortgage lending.

Steve Adamske, spokesman for the House Financial Services Committee, said committee Chairman Rep. Barney Frank (D-Mass.) plans to launch hearings on the specific proposals next week, and to hold votes on pieces of the legislation as soon as July.

"We've been waiting for this for a long time," Adamske said.

The Senate is not expected to begin work on the reforms until fall.
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rimrocker · Jun 17, 2009

The NY Times on the same subject...

Obama Sought a Wide Range of Views on Finance Rules
By STEPHEN LABATON
http://www.nytimes.com/2009/06/17/business/17regulate.html?_r=1&hp=&pagewanted=print

WASHINGTON — President Obama’s plan to reshape financial regulation, which he will unveil on Wednesday, is the product of weeks of meetings among government officials, financial experts, lawmakers, industry executives and lobbyists, many of whom were invited to help the White House draft the proposal.

Mr. Obama told reporters on Tuesday that a “lack of oversight” allowed what he called “wild risk-taking.” He said it led to “very dangerous” conditions that imperiled the global economy.

But executives from an array of industries caught up in the financial crisis came to Washington over the last several weeks to make their case for how the new regulatory landscape should look. They came from big banks and small ones, insurance companies and stock exchanges, hedge funds and mutual funds, and were joined by officials from consumer groups and big labor — often with conflicting views.

Now, lobbyists who lost the initial skirmish inside the administration will head to Congress to try to influence the final product.

The plan the president will formally announce on Wednesday would give the Federal Reserve greater supervisory authority over large financial institutions whose problems pose potential risks to the economic system. It would separately expand the reach of the Federal Deposit Insurance Corporation to seize and break up troubled financial institutions. And it would create a council of regulators, led by the Treasury secretary, to fill in regulatory gaps.

In doing so, the plan seeks to give Washington the tools to police the shadow system of finance that has grown up outside the government’s purview, and to make it easier for regulators to head off problems at large, troubled institutions or take control of them if they fail.

“Unfortunately the growth of the nonbank sector as well as all the complexities and financial instruments outstripped those old regulatory regimes,” Mr. Obama said in an interview on Tuesday with The New York Times and CNBC.

Although it would strikingly reorganize the regulatory architecture, the president’s plan results from many compromises with industry executives and lawmakers, and is not as bold as some had hoped.

Mr. Obama seemed to acknowledge as much when he posed the question: “Did, you know, any considerations of sort of politics play into it? We want to get this thing passed, and, you know, we think that speed is important. We want to do it right. We want to do it carefully. But we don’t want to tilt at windmills.”

At the White House and the Treasury Department in recent weeks, some insurance companies sought a law that would enable them to get a single federal charter instead of multiple state charters. The insurers lost. Consumer groups argued against the banks in favor of a consumer financial protection agency with broad new authority to protect homeowners from unsuitable loans. The consumer groups prevailed.

The mutual fund industry successfully argued against a proposal by some banks — which are competitors to mutual funds — to give the Securities and Exchange Commission’s authority over mutual funds to the new consumer agency.

Hedge funds and dealers in derivatives sought to minimize the extent to which the government will intrude into their businesses. They partly won; the administration will leave many of the details of that authority to lawmakers and regulators. Savings and loan associations argued unsuccessfully against a proposal by the administration to eliminate federal savings and loan charters, which have been subject to less regulation than bank charters.

The administration, which has sought to reduce the corrosive influence of lobbying on policy making, actually encouraged the tussle by inviting executives, academics, former officials and others to the series of meetings overseen by the Treasury secretary, Timothy F. Geithner, and Lawrence H. Summers, the president’s top economic adviser. The meetings were often attended by their top aides: the deputy Treasury secretary, Neal S. Wolin, and Diana Farrell, a deputy director of the National Economic Council at the White House.

In the last two weeks alone, the administration has heard from top executives from Goldman Sachs, MetLife, Allstate, JPMorgan Chase, Credit Suisse, Citigroup, Barclays, UBS, Deutsche Bank, Morgan Stanley, Travelers, Prudential and Wells Fargo, among others. Administration officials also discussed the president’s plan with the top lobbyists at major financial trade associations in Washington.

The raucous process of overhauling a system that oversees the nation’s most influential and affluent corporate interests is not without precedent. In 1913, the year he signed the law creating the Federal Reserve in response to an earlier market panic, President Woodrow Wilson lamented to a friend about banking reform.

“There are almost as many judgments as there are men,” Mr. Wilson said. “To form a single plan and a single intention about it at times seems a task so various and so elusive that it is hard to keep one’s heart from failing.”

President Obama’s plan would not consolidate all the banking agencies into one, but it would take some of the existing agencies’ powers to oversee mortgages, credit cards and other kinds of consumer debt and give them to a new regulator, tentatively called the Consumer Financial Protection Agency.

The president, however, will ask Congress to merge the Office of Thrift Supervision, the beleaguered agency that missed problems at IndyMac, Washington Mutual and the American International Group, into the Office of the Comptroller of the Currency, a Treasury unit that supervises the largest banks.

The plan would impose tighter rules on banks that package and sell securities that are backed by mortgages and other debt. It would require that companies that issue mortgages retain at least 5 percent of them on their books to discourage companies from marketing unsuitable loans.

It would also require all advisers of hedge funds and private equity funds to register with the Securities and Exchange Commission and open their books to regulators. And it would impose new conflict of interest rules on the credit rating agencies.

The plan is largely the product of extensive conversations between senior administration officials and top Democratic lawmakers — primarily Representative Barney Frank of Massachusetts and Senator Christopher J. Dodd of Connecticut. The two lawmakers head the Congressional committees that will take the first crack at drafting the legislation necessary to make the plan work.
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MadMax · Jun 17, 2009

If you haven't read "The Cost of Capitalism" you should. Excellent read I'm just now finishing up.

insane man · Jun 17, 2009

i just skimmed the articles, but does it also discuss more transparency and oversight of the fed?

im all for strengthening regulations, but we need more transparency too.

deepblue · Jun 17, 2009

The consumer financial market was already regulated before this. Either way, the hard part is not trying to regulate products you know are bad, but find out which new products will turn bad before they actually do.

pgabriel · Jun 18, 2009

deepblue said:

The consumer financial market was already regulated before this. Either way, the hard part is not trying to regulate products you know are bad, but find out which new products will turn bad before they actually do.
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totally agree, however in the case of the credit default swaps that shouldn't have been so hard. you're writing insurance policies without assets backing them up.

rimrocker · Jun 18, 2009

deepblue said:

The consumer financial market was already regulated before this. Either way, the hard part is not trying to regulate products you know are bad, but find out which new products will turn bad before they actually do.
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Sort of. The mechanism for regulating consumer finance was the same as regulating the corporate side. The distinction between the two in the plan is a good thing I think.

Banks Brace for Fight Over an Agency Meant to Bolster Consumer Protection
By ANDREW MARTIN and LOUISE STORY
http://www.nytimes.com/2009/06/18/business/18consumer.html?pagewanted=print

When the economy was booming, banks doled out credit to consumers like candy. People who could never afford to live their dream found pay option adjustable rate mortgages and other easy-access loans just a signature away. Credit cards put the pain of payment off to another day — never mind the fees hidden in the fine print.

On Wednesday, President Obama proposed creating a federal agency that would require banks, mortgage lenders and credit card companies to provide consumers with a more nutritious diet, financially speaking.

But what is good for consumers may not always square with what is good for banks. And the banking industry — which says it stands to lose billions of dollars — is bracing for a fight as the administration’s plan to overhaul the way the industry is regulated heads to Capitol Hill.

Banks “are really dumbfounded by the scope of this agency,” Edward L. Yingling, the president of the American Bankers Association, said. “It’s not like the current regulators don’t have all the authority they need. You don’t have to blow up the system.”

The Consumer Financial Protection Agency is the brainchild of Elizabeth Warren, a Harvard Law School professor who has come to prominence on consumer matters after years of studying the rising toll of consumer debt. She argues that the banking regulators have an inherent conflict of interest between ensuring the safety and soundness of institutions and protecting consumers.

If the administration gets its way, the agency, a sort of Food and Drug Administration for financial products, would be empowered to tell banks to tidy up their offerings and make sure consumers have the information they need to make sound financial decisions, while being protected from scams.

It could, among other things, dictate standards for some products before banks could bring them to market, and push banks to favor plain vanilla loans over more exotic home loans, which could be required to carry warnings. Unfair terms and practices among credit card issuers would also be weeded out.

If Congress approved the agency, it would be the first time that consumers would have a seat at the banking regulatory table.

“The argument for doing that is you’ll have an agency that’s only focused on protecting consumers," said Donald G. Ogilvie, chairman of the Deloitte Center for Banking Solutions. “The argument against that is you’ll have an agency that’s only interested in protecting consumers."

But it also sets up a potential turf battle among the myriad agencies that are currently tasked with protecting consumers, including the Office of Thrift Supervision, the Office of the Comptroller of the Currency and the Federal Reserve, which the banks would like to see maintain this oversight.

Banking groups are concerned about the costs a new layer of regulation might impose, and the prospect of more examiners crowding into their banks.

“You are talking about an agency that is authorized to design financial products and, in fact, say that they must be offered first, over the banks’ own products,” said Mr. Yingling.

In an interview on Wednesday, Ms. Warren said the new agency could have implications beyond consumer protection. Protecting consumers from risky products ultimately protects the entire financial system, she argued.

“This crisis started one mortgage at a time,” said Ms. Warren, who, as the chairwoman of the Congressional panel that oversees government spending on the financial bailout, has the ear of many lawmakers. “The bad products that were sold household by household not only destabilized families. When they were sliced and diced and passed along through mortgage-backed securities, they magnified risk throughout the economy.”

The agency would most likely be harder on banks that profited from high-risk products, Ms. Warren said. But it may benefit banks that offer more consumer-friendly products that are “lost in the storm of advertising” for riskier products, she said.

While banks will lobby to water down the agency’s proposed powers in Congress, the devil will be in the details. One important question is how the agency would be financed. A spokesman for the Treasury said it would be paid for in part through “fees assessed on entities and transactions across the financial sector.” While he was not more specific, there could be conflicts of interest if, for example, banks paid fees directly to the agency to seek approval for their products.

Another issue will be the division between state and federal power. State attorneys general have often cracked down on mortgage fraud, high credit card rates, payday lending and other consumer financial protection issues that the new agency would take up. Mr. Yingling, of the American Bankers Association, expressed concern that financial companies might receive uneven treatment at the state and national level.

It may also be difficult to separate “consumers” from “investors,” leaving uncertainty about whether some financial products fall under the purview of the new agency or the Securities and Exchange Commission, which monitors many investor products. A spokesman for the Treasury said the S.E.C. would maintain its power over investor protection.

The president’s proposal resembles legislation introduced a few months ago by Senator Richard J. Durbin, Democrat of Illinois. He acknowledged the idea of an agency faced a fight on Capitol Hill.

“Never underestimate the banks,” he said.
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F.D. Khan · Jun 18, 2009

rimrocker said:

The NY Times on the same subject..."In doing so, the plan seeks to give Washington the tools to police the shadow system of finance that has grown up outside the government’s purview, and to make it easier for regulators to head off problems at large, troubled institutions or take control of them if they fail."
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Hate to break it to the NYT, but the Shadow banking system is DEAD!

rimrocker · Jun 18, 2009

F.D. Khan said:

Hate to break it to the NYT, but the Shadow banking system is DEAD!
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I seriously doubt it. That's what folks thought in the 1930's, yet zombie-like, it reappeared years later. We need to drive a stake through the heart before the full moon of Republicanism rises once again. This is a good step, but it is no silver bullet... all it really does is nail the coffin shut with a few short nails.

(How's that for mixing horror analogies?)

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