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Obama Administration unveils financial system overhaul

Discussion in 'BBS Hangout: Debate & Discussion' started by deepblue, Mar 26, 2009.

  1. deepblue

    deepblue Member

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    While we clearly needs better transparency and regulation on certain derivatives like CDS, a lot of the plan sounds like more power grabbing to me. Geithner is certainly using the oppotunity to go after hedge funds which weren't responsible for this mess. He talks about systemic risk, yet I don't see much in the plan to fix the biggest culprit of all, the rating agencys.

    simple steps is all we need
    1) Regulate CDS, keep tabs on the overall transaction, or just ban CDS unless you own the underlying assets.
    2) Change the way rating agency gets compensated for rating bonds.
    3) Enforce existing laws.

    link
     
  2. El_Conquistador

    El_Conquistador King of the D&D, The Legend, #1 Ranking
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    Good grief, this is scary. Geithner/Obama are NOT the right people to be making these huge changes. They are totally in over their heads. I just hope whatever they do is not irreversible.
     
  3. gifford1967

    gifford1967 Contributing Member
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    If tj is scared, I'm confident they're on the right track.
     
    1 person likes this.
  4. thegary

    thegary Contributing Member

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    we yet regret not electing that guru of economics -> JMac
     
  5. pgabriel

    pgabriel Educated Negro

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    I'm gonna guess Bernie Madoff could've used some regulation
     
  6. GladiatoRowdy

    GladiatoRowdy Contributing Member

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    I, for one, am relieved that Obama and his administration are doing such a fine job. Your histrionics of late have cemented my opinion of him and his team, as have the recent signs that the economy may indeed be turning around.
     
  7. El_Conquistador

    El_Conquistador King of the D&D, The Legend, #1 Ranking
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    Which part do you like the most? The record budget deficit that he has proposed, or the higher taxes?
     
  8. Invisible Fan

    Invisible Fan Contributing Member

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    I am biased in favor of Roubini's opinions...

    Dr. Doom Finds Promise in Obama’s Toxic-Asset Plan

    Nouriel Roubini, a/k/a “Dr. Doom,” is giving the Obama administration’s new plan to buy toxic assets the thumbs up.

    That may be surprising given how critical Mr. Roubini, the bearish economics professor at New York University, has been in the past regarding various government plans to fix the economy. But Mr. Roubini seems to have seen something he likes for a change.

    “My take is generally positive, with a couple of caveats,” Mr. Roubini told DealBook about the new plan. He said he liked that the government was finally stepping up to clear the toxic assets off the bank’s balance sheet and that private capital would come in to make a market for it.

    “Having five people bid on a toxic asset, rather than a clueless government, will ensure that the government doesn’t overpay,” Mr. Roubini said in a telephone interview. “People say, ‘the government is putting in 95 cents on the dollar, so why not put 100,’ to do it all by itself. It’s because private-sector participants have the incentive to get the best price.”

    It wasn’t all positive: Mr. Roubini said he did not like that banks have the option not to sell an asset after the auction concluded, as this would create confusion and frustration on the part of the buyers. He also said he believed the government should use its leverage over the banks to force them to participate, whether they wanted to or not.

    In an opinion piece scheduled to be published Wednesday in The Daily News of New York, Mr. Roubini and a fellow N.Y.U. professor, Matthew Richardson, argued that financial institutions should be pressured into participating because “they are the cause of the financial crisis.”

    “They took advantage of loopholes to avoid regulatory requirements, taking a huge bet on securities they were never meant to hold in the first place,” the two professors wrote.

    But unlike many critics of the plan, like Paul Krugman, a Princeton economic professor and columnist for The New York Times, who prefers full nationalization of the banks now, Mr. Roubini says he believes that the Treasury’s plan does not preclude nationalization. Rather, he said, it will help to clear the way to full government takeover of some troubled institutions.

    “I see the option of nationalization” and the one presented by the Obama administration “as being complementary,” Mr. Roubini said. He believes that the stress tests the government plans on conducting on the banks will reveal which are solvent and which are insolvent.

    In his view, those banks that are deemed insolvent will not participate in the toxic-asset plan and will be taken over by the government. Banks deemed solvent will be the ones that get to participate.

    Nationalization “is fully on the table for banks that are insolvent,” Mr. Roubini said.

    He cited Tuesday’s Congressional testimony by the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Timothy F. Geithner.

    “The most important thing is what Bernanke and Geithner said today about the need for an insolvency regime for systemically important institutions,” Mr. Roubini said. “You are going to need that not just for the A.I.G.’s of the world, but also the bank holding companies as they go into Chapter 11.”

    He added, “You are going to need that in shutting down, potentially, a bank like Citigroup.”


    We Need A New Insolvency Regime For Banks[/B]
    http://www.forbes.com/2009/03/25/ba...ions-columnists-insolvency-roubini_print.html

    Nouriel Roubini, 03.26.09, 12:01 AM ET

    Finally, after a year of delays, the Treasury secretary and the Fed chairman have agreed about the need for a new insolvency regime for systemically important financial institutions (bank holding companies and non-bank financial institutions). This new insolvency regime will allow government to take over in an orderly way--as opposed to a disorderly Lehman-like bankruptcy--insolvent systemically important financial institutions.

    This new conservatorship/receivership regime of insolvency could be similar to the one used to manage the orderly takeover of Fannie Mae and Freddie Mac. While banks have a receivership regime based on the Federal Deposit Insurance Corp. taking over insolvent banks and working them out in an orderly way, bank holding companies and non-bank financial institutions do not have such a conservatorship/receivership regime outside of Chapter 11 or Chapter 7 bankruptcy.

    That is why the government had to bail out the creditors of Bear Stearns and AIG, and why the collapse of Lehman was disorderly. We need an orderly system to wind down systemically important financial institutions and bank holding companies as many assets, credit default swaps and bonds of banks are at the holding-company level, rather than at the bank level.

    Suppose the government was planning to nationalize a large bank--say Citigroup, for the sake of argument--that was to be deemed insolvent after the appropriate stress test. While the FDIC could then take over the bank, the relevant bank holding company would not be under the FDIC receivership; it would instead go into a Chapter 11 or Chapter 7 bankruptcy. And the other non-bank components of such large financial institutions--its broker dealer, insurance companies, etc.--would also end up in Chapter 11 bankruptcy.

    So in order to orderly take over large, systemically important banks, the FDIC receivership model works only for the bank leg of the bank; it does not work for the bank holding company or for its non-bank financial arms.

    And certainly FDIC receivership does not apply to independent broker dealers and other non-bank financial institutions for which a disorderly in-court bankruptcy is the only option. An orderly wind-down of Bears Stearns or Lehman or AIG would have required a special receivership/conservatorship, as Chapters 11 or 7 would have pushed into automatic default the unsecured debt of these institutions and triggered a mess with their credit default swaps (CDS).

    That is why the government decided to bail out--at huge cost to the taxpayers--the creditors/counterparties of Bear Stearns and AIG; and when it decided not to bail out the creditors of Lehman, a global financial meltdown followed Lehman’s bankruptcy. This is also the reason why the government has been, so far, wary of nationalizing large, systemically important banks.

    A special insolvency regime would give the Treasury time to figure out whether the unsecured debt of the institutions should be worked out, and how it should be worked out; it also allows a more orderly workout of CDS and other credit derivatives issued by the financial institution.

    Thus, the signal given by Messrs. Bernanke and Geithner--of their support of a special insolvency regime for systemically important non-bank financial institutions--is very important. It will allow the orderly takeover/nationalization of large banks and the same orderly takeover of non-bank financial institutions.

    It is high time to pass legislation that enables this special insolvency regime. If such a regime had been in place a year ago, the expensive bailout of the creditors/counterparties of Bear Stearns and AIG could have been avoided, and the collapse of Lehman would have also been prevented.

    Similarly, today--as soon as the stress tests are done--some large and systemically important banks (and their holding companies and non-bank financial arms) will have to be taken over. To do it an orderly way, we absolutely need a special insolvency regime like the one we have for the bank arms of bank holding companies, and like the one we had for Fannie and Freddie.

    So to nationalize large insolvent banks--and minimize the fiscal costs and financial collateral damage and systemic risk of such a takeover--we need to pass such legislation immediately. The time for Congress to act is now.
     
  9. yeo

    yeo Member

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    Socialism here we come. Better dig out my dusty copy of Das Kapital again. Personally I don't think a little "Socialism with American charateristics" is such a bad thing.
     
  10. GladiatoRowdy

    GladiatoRowdy Contributing Member

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    Both, actually. I would personally consider pre-Reagan tax rates and believe that John McCain would also have been forced into record deficits, but anything that makes you squeal like a pig suits me just fine.
     
  11. Major

    Major Member

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    What exactly in the proposal is socialist?
     
  12. yeo

    yeo Member

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    Not Socialism per se, but there is no denying that we are heading towards more direct government intervention in the economy and that is Socialist in character.

    Like I said, I don't dislike Socialism. Unmitigated Capitalism died with the Great Depression. We are part Socialist already. What do you call Social Security?
     
  13. deepblue

    deepblue Member

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    What Madoff did was fraud, which is already illegal under current laws. This is not the systemic risk Obama/Geithner are talking about.
     

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