Lots of chatter about Sen. Chris Dodd’s financial reform bill floating around the blogosphere this week. Here’s a look at what three academics have to say about the issue.
- Proposed financial reform legislation is missing one big aspect: effective reform for ratings agencies, University of Oregon economics professor Mark Thoma writes. In particular, “the incentive to provide high ratings to encourage future business,” he says. True, part of the legislation is directed at the ratings agencies. “But it doesn’t get at the main problem, which is the incentive to tell its customers what they want to hear, i.e. the incentive to deliver higher ratings than deserved,” Thoma says. “For some reason ($$$???), the ratings agencies seem to be escaping the legislative and regulatory attention they ought to be receiving.”
- The bill is a “very modest step” in right direction, but it’s missing three key aspects to help prevent another Wall Street meltdown, writes former labor secretary and UC Berkeley economics professor Robert Reich. He says trading of all derivatives should be required on open exchanges, Glass-Steagall should be re-instituted in its entirety, separating commercial banks from investment banks and big banks should be capped at $100B in assets. “Wall Street doesn’t want these three major reforms because they’d cut deeply into profits, and it’s using its formidable lobbying clout with both parties to prevent these reforms from even from surfacing,” Reich says.
- The proposed bill misses one main thing: “the idea of a better, more intelligent and more accountable Congress,” writes George Mason economics professor Tyler Cowan. “The upshot is that bank regulation is a tough slog: it depends on the quality of the bureaucracy and the periodic attention of a somewhat responsible Legislature,” he says. “It is like a chess game whereby the private sector eventually finds a way around most of the binding regulations.” Too much attention is being placed on the new regulations, he adds. But “it’s the daily reality of regulation that matters and right now the US Congress simply isn’t up to the job.”
All right, I can get you a great deal of a piece of Irish real estate. If I scratch your back on this, you’ll scratch mine, right?
Wait, you’re not a U.S. Senator? Oh, I’m sorry, the deal’s off.
Okay, now, this really doesn’t have much to do with anything, but I saw a post on Henry Blodget’s Business Insider, about luxury Irish estates for sale. When I saw the picture for this the place, Kinnitty Castle, I recognized it immediately, because I’d actually been there.
And something tells me the story of Kinnitty Castle parallels the story of the great global real-estate bubble.
Let’s go back to 2002. I’m alone in Ireland on vacation (it was a great vacation, traveling alone, no itinerary, no plans, I’d bought a ticket on Aer Lingus and just flew into Shannon and winged it from there.) In Galway, I ran into two American girls, and one of them told me I had to try and stay at this great old castle out in the middle of nowhere, Kinnitty Castle. So after renting a car (and spending an hour literally going around the same block because I was so disoriented by driving on the other side of the road all I could do was make the same left-hand turn,) I headed east for my ancestral home of County Carlow. Kinnitty Castle was on the way.
- Is the economy ready to walk without the Fed’s MBS crutch? It’s possible, but keep in mind the Fed’s made it clear it’ll resume the purchase program if trouble ensues, John Curran says. “I doubt that a declining stock market alone would be trouble enough to trigger a restart of the program but a sinking economy certainly would.”
- The most important thing FCC’s National Broadband Plan should accomplish is increasing amount of wireless spectrum available for broadband Internet, writes Fred Wilson. “The fact is that wires, fiber, and cable aren’t going to get us where we need to go.”
- It seems homeowners are increasingly opting for strategic
defaults. At least that’s the sense from recent NY Times and LA Times stories, Calculated Risk says. “I’m not sure if walking away is becoming more common or if there is a bubble in walking away articles.”
- Palm’s situation is turning from bad to worse, as its 4Q may not be any better than its ugly 3Q, John Paczkowski notes.
- Number of single-family homes under construction has fallen off a cliff since the housing bubble burst. About 1 million were under construction in February 2006; today there are just 300,000. “The precipitous decline ended last summer, and housing construction has been essentially flat for several months,” Donald Marron says. “Perhaps housing construction has finally found bottom?”
- Our DJ colleague Brendan Conway wonders whether the party’s over for financial stocks.
- Sen. Dodd’s financial regulation bill is “tougher and better than I had expected,” Edmund Andrews writes on the Capital Gains and Games blog. “The big banks and Wall Street firms are already howling in protest. Front groups like the US Chamber of Commerce, which claim to be looking out for mom-and-pop businesses, are throwing everything they have at it.”
- PPI falls 0.6% in February, marking biggest drop in seven months and curbing inflation expectations, for now. Gasoline costs declined sharply.
- Fed’s faced its fair share of scrutiny for underestimating the financial crisis, but simply calling for change doesn’t mean much. “Let’s be practical. What other institution did a better job?” James Hamilton ponders. “Where in Washington today do you see an agency with the intellectual resources to get this right? Simply squawking that we need a change is not constructive leadership; it’s political finger-pointing.”
- Starbucks (SBUX) appears to be testing blueberry waffles in some markets, Starbucks Gossip blog reports, with Denver, Oregon and an area north of Seattle trying out the toasted items. Waffles could help increase those morning sales, too, especially at a price noted by several blog commenters: $2.50 per waffle.
Funeral Plans: Requires large, complex companies to periodically submit plans for their rapid and orderly shutdown should the company go under. Companies will be hit with higher capital requirements and restrictions on growth and activity, as well as divestment, if they fail to submit acceptable plans. Plans will help regulators understand the structure of the companies they oversee and serve as a roadmap for shutting them down if the company fails. Significant costs for failing to produce a credible plan create incentives for firms to rationalize structures or operations that cannot be unwound easily.
That’s one proposal in the Dodd bill , under the section outlining the Financial Stability Oversight Council. Asking the banks to come up with their own deathbed criteria sounds a sure fire way to get the banks to game the system.
What incentive, to use a popular term these days, is there for them to be honest? It reminds me of the stress tests, where the banks were given some very broad economic suppositions, and asked to determine how their operations would hold up under them.
Posted by Paul Vignaon March 15, 2010 Banks, Washington /
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UPDATE: Here’s the link to the committee summary. On first blush, I have to say it touches on all the big points (I personally don’t care where they house the protection agency, so long as they get the rest of it right.) It’s got provisions for moving derivatives to exchanges, for limiting the leverage banks can employ, for preventing the government from bailing out banks. It’s got a long way to go, but given Congress’ track record, this is a pleasant surprise.
Alright, kids, we’re coming up on the 2 p.m. press conference Sen. Dodd’s scheduled to unveil his big financial reform bill. You can expect to find a summary of the bill here. If history is going to remember for for anything other than a sweetheart deal on an Irish cottage, this is where he’s going to change those perceptions.
Without sounding too naive, I’m trying to keep an open mind about this thing. I’m not at all convinced that by the time this bill gets through the meat grinder, it’ll resemble anything like its original form, or will be very effective for that matter. But until I see it for myself, I’ll reserve judgment.
Keep in mind, with this bill we want to make sure that a couple of broad goals are met: are leverage limits set on the banks, are accounting holes addressed (ahem, we’re talking to you, mark-to-model,) is transparency addressed, as in the treatment of derivatives, is the problem and resolution of too-big-to-fail banks addressed.
And even if those goals are addressed, there’s still that meat grinder called “the process” to fear. Didn’t it all look so much easier back in the Schoolhouse Rock days?
I’m just a bill.
Yes, I’m only a bill.
And I’m sitting here on Capitol Hill.
Well, it’s a long, long journey
To the capital city.
It’s a long, long wait
While I’m sitting in committee,
But I know I’ll be a law someday
At least I hope and pray that I will,
But today I am still just a bill.
Tomorrow we’ll find out for sure what Sen. Chris Dodd has in mind in terms of financial reform, before he retires to his humble cottage on the wild, wind-swept Irish west coast. Early reports this weekend are encouraging, in that the Senate proposal appears to have more teeth than previously assumed.
But given the almost lock-step opposition from the GOP, its survival is still up in the air. And some of those teeth may yet fall out.
Senate Banking Committee Chairman Christopher Dodd (D., Conn.) is finalizing a bill to rework financial market rules that is expected to be tougher against banks than previously expected, people familiar with the matter said.
The biggest winner in the bill appears to be the Federal Reserve, which would see its powers expand considerably. Large financial companies, particularly big banks, could emerge as the biggest losers. They would face much higher scrutiny from bank supervisors and potentially face sanctions for violating consumer protection rules by an autonomous new division within the Fed.
The Fed kind of wins and loses. It gets the new protection agency, and the authority to monitor any financial institution with assets over $50 billion. But it currently overseas more than 5,000 banks of all sizes. Consumers kind of win and lose, too. The consumer protection agency will be created, but it would be housed within an institution that doesn’t exactly have a sterling record in regards to its regulatory and consumer-protection efforts.
The Times notes the bill includes provisions for regulating derivatives, and adds in some window dressing in the form of a few shareholder-friendly proposals, like a non-binding “say on pay” vote and the ability to nominate directors through proxy ballots.
The Volcker Rule doesn’t seem like it’s going to make it, but regulators will have some say over what kinds of activities regulated banks can engage in, if they threaten the bank or the economy.
There’s a long road to go here, and the details need to be hammered out. But we are getting relatively hopeful signs this weekend. It’s something.
Today we’re breaking down the retail sales figures for February, as well as the odds and prospects for financial reform. They ain’t bright, by the way.
- Potential candidates for Fed Board vacancies should be known to have anticipated the financial crisis in advance, have a pro-consumer stance and be willing to release AIG-related emails, Yves Smith says.
- In the next year or so, if we are to have a sustained recovery, I think we would be much better off with stingy banks, than with thrifty consumers,” Stephen Gandel writes.
- The notion that newspaper publishers should torch their print editions and just embrace the Web is “just plain nutty,” Newsosaur blogger Alan Mutter says. “It doesn’t take a certifiable Silicon Valley genius to see that no business can walk away from some 90% of its revenue base without imploding.”
- Jobless claims have been stuck at current levels for nearly four months, Economist’s Free Exchange blog notes. “The wait for the dip back to normal levels continues.”
- Google and retailers are teaming up to help customers find products.
- Consumer credit has contracted about 6% since the recession began, and banks’ lending standards are getting even tougher. “It will be interesting to see to what extent the tightening of standards for revolving credit impact overall lending,” writes Atlanta Fed’s Ellyn Terry.
- Latest AAII weekly poll shows surging bullish reading of 45.3%. “This has served as a fairly reliable contrarian indicator in the past as small investors tend to pile into stocks near the end of rallies,” Pragmatic Capitalist says.
- Is a housing bubble developing in China? Calculated Risk weighs in.
- Peter Boone and Simon Johnson say beware of the coming Greek debt bubble. Paul Krugman isn’t so sure.
- Sen. Chris Dodd will introduce his sweeping plan to overhaul financial regulations on Monday without any Republican support.
Everybody in Washington’s all fired up about this proposed consumer-finance protection agency and where it will be housed. Will it be independent? Will it be inside the Treasury? Or will it be inside the Fed? If you said, the Fed, you may win a t-shirt, because the latest reports have the new agency being housed within the central bank.
The Journal says lawmakers are close to a deal on that front, as well as new powers for the federal government to take the power to break up, large “systemically dangerous” institutions. “That plan tackles one of the most politically thorny flashpoints of the economic crisis: What powers should the government have to break up firms so it doesn’t have to resort to taxpayer-funded bailouts?” according to the Journal.
Watching this debate from a distance, I’m laughing so hard I just want to cry. This is what they’ve come up with? A Consumer Reports with the power to slap bankers on the wrist? The entire financial edifice came within hours of utter collapse, according to more than one account, and this is the response from Washington?
It still is not clear to me how any of these proposals will solve the problems that caused the financial crisis. Somebody tell me there will be rules preventing investment banking and prop desk operations from being under the government umbrella. That derivatives are going to be regulated. That capital ratios are going to be addressed. That accounting rules are going to be tightened.
If lawmakers feel they have enough agreement, Mr. Dodd could introduce his bill later this week and potentially hold a vote in his committee later in the month. If other lawmakers balk at agreements between Messrs. Dodd and Corker, it could make it tougher for them to pass legislation this year.
With any luck, this proposal will fall apart amid partisan wrangling, and a new bill that actually address the root causes will emerge. What is needed is a framework that ensures no bank gets too large to take down the system, that ensures the best way for banks to profit is by honest means, that restrains the worst impulses of individuals, and ensures they alone suffer the consequences if they stray.
Posted by Paul Vignaon March 01, 2010 Markets /
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Senate banking-committee members draft new bank rules.
As details of the Senate banking committee’s financial reform bill keep dripping out, it’s becoming clear that the central focus — and supposedly the source the holdup — is the creation of a consumer financial protection agency.
But all that means, as I said this morning on Fox Business, is that the things that really matter aren’t even on the Senate’s radar, and if that’s what this bill’s centerpiece really is, then this isn’t a financial reform bill at all.
Where’s the part about regulating derivatives? Where’ the part about splitting investment houses and prop desks from government-supported, deposit-taking commercial banks? Where’s the part about capital ratios? What about the ratings agencies? At this point, we must hope those elements are in the bill, but it seems, well, a bit fishy that nothing so far has been disclosed about their existence.
I keep hearing Denzel Washington in “Malcolm X” (and of course, I’m Malcolm said it first): you been had, you been took, you been hoodwinked, bamboozled.
Two years into the worst financial meltdown in our lifetimes, the best the Senate can come up with is an agency that’s going to scan mortgage offers to make sure they’re not overcharging borrowers. It’s like the meltdown of ’08 never happened. The bankers must be sitting back somewhere just laughing that they’re getting everything they wanted, Gary Hager, president of Integrated Wealth Management, with whom I was on Fox this morning, said. And he’s right, because what the banks want out of this bill is nothing.
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