Obama's Banking Proposals

[Uzzy]

Obama pushes new bank regulation (http://news.bbc.co.uk/1/hi/business/8473294.stm)

Well well, it seems he's decided to be himself, and actually try and do something. The proposed new regulations seem to be a return to the principles of the Glass-Steagall Act, with no bank being allowed to get too big to fail, and limits on what banks can do. Looks pretty good to me, and from a UK perspective, it's interesting to see that Osborne wants to take similar measures if elected. Thoughts? (http://news.bbc.co.uk/1/hi/business/8473294.stm)

[Darat]

Can you point me to Osborne's proposals?

[tyr_13]

I'm no expert, but so far I think these are good rules. Specifically,

His proposals also include a ban on retail banks from using their own money in investments - known as proprietary trading. Instead, banks would be limited to investing their customers' funds.

...seems like a damn fine idea.

I'd like to seem more specifics though.

[Francesca R]

The aim of limiting system wide risk of losses which risk calamitous feedback onto society is a good one. But this misses the mark widely IMO since it contains no leverage caps on the firms that will take risk. Instead it consists mostly of unworkable but populist regulatory woo.

The timing and the forceful language is presumably a response to the MA special election.

Can't write more today (mobile).

[Francesca R]

Except--Regarding UK (Myners) interest in this:

From: @guardiannews
Sent: 21 Jan 2010 21:49

UK considers Obama-style banking revolution http://bit.ly/8BrQbt

sent via twitterfeed
On Twitter: http://twitter.com/guardiannews/status/8042919007

[Tsukasa Buddha]

It doesn't address the investment companies and Fannie and Freddie who were the actual causes of the crisis.

Not that I don't agree with it, but it is kinda overselling it to say it will prevent future crises.

[MattusMaximus]

I like what I'm seeing so far. Gobama! :D

[Uzzy]

Can you point me to Osborne's proposals?

I can point you to the BBC article saying he backs these reforms and wants to see them here. Tories back Obama's bank reform plans. (http://news.bbc.co.uk/1/hi/business/8473590.stm)I've had a look at the Banking Policy Draft Paper (http://www.conservatives.com/%7E/media/Files/Downloadable%20Files/PlanforSoundBanking.ashx?dl=true) (PDF) thing on the Conservative website, and it might mention it, but it's wrapped up in economic language. Either way, it's from 2009.

[Darat]

I can point you to the BBC article saying he backs these reforms and wants to see them here. Tories back Obama's bank reform plans. (http://news.bbc.co.uk/1/hi/business/8473590.stm)I've had a look at the Banking Policy Draft Paper (http://www.conservatives.com/%7E/media/Files/Downloadable%20Files/PlanforSoundBanking.ashx?dl=true) (PDF) thing on the Conservative website, and it might mention it, but it's wrapped up in economic language. Either way, it's from 2009.

So lets see they "back" Obama's reforms, reforms that have not moved from being a speech... yep sounds consistent with Tory policies to date!

[Uzzy]

Not to worry Darat. Labour will probably have the same proposed reforms, and at least this time they can justifiable claim not to have nicked them from the Tories (unlike every other proposal they have).

[Darat]

Not to worry Darat. Labour will probably have the same proposed reforms, and at least this time they can justifiable claim not to have nicked them from the Tories (unlike every other proposal they have).

Hmm... you seem to think I was commenting in support of Labour, I wasn't, I was commenting against the lap-dog way the Tories have apparently jumped on a speech from Obama before any actual proposals have been made. Being against the ludicrous focus-group led, populist tripe that has come from the Tories since the start of the year is not supporting the Labour party, it is attacking the Tories.

[Francesca R]

Labour will probably have the same proposed reformsLabour is not likely (correctly IMO but not for correct reasons) to agree with forcing firms to break up and shrink. That might require Lloyds Banking Group to de-merge. Wonder what they might call the other bit . . . .

[Francesca R]

Labour is not likely [ . . . ]Further to this, Mervyn King (Bank of England guv'nor) called for separating securities trading from retail banking, and for breaking up big banks in a speech made last October:

In other industries we separate those functions that are utility in nature – and are regulated – from those that can safely be left to the discipline of the market. The second approach adapts those insights to the regulation of banking. At one end of the spectrum is the proposal for “narrow banks”, recently revived by John Kay, which would separate totally the provision of payments services from the creation of risky assets. In that way deposits are guaranteed. At the other is the proposal in the G30 report by Paul Volcker, former Chairman of the Federal Reserve, to separate proprietary trading from retail banking
(Page 6)

http://www.bankofengland.co.uk/publications/speeches/2009/speech406.pdf


The Treasury had already published a white paper in July which recommended other approaches, but specifically did not recommend doing this, and argues:

The crisis has shown that banks can fail and pose a systemic threat whether they are big or small, simple or complex. There is no evidence that insulating the deposit-taking business of banks from other activities (particularly trading) would have made them less likely to fail during the recent crisis or that the systemic impact of any failure would have been reduced. Furthermore, there would almost certainly be losses in efficiency as well as significant difficulties in implementing and enforcing workable limits, both domestically and internationally
(Page 18)

http://www.hm-treasury.gov.uk/d/reforming_financial_markets080709.pdf
After King's speech, Alistair Darling publicly disagreed (http://www.ft.com/cms/s/0/601f382a-be7f-11de-b4ab-00144feab49a.html) again.

I've posted about this before and my view is aligned with the UK government on that point (until they change their mind ;) ), and it was pretty apparent to me at the time as an "insider" that separation of activity would have had no impact on any of:

Northern Rock (was not prop trading)
Bear Stearns (was not a bank)
Lehman Brothers (was not a bank)
Washington Mutual (was not prop trading)
Wachovia (was not prop trading)
AIG (was not a bank)

[Francesca R]

Oh and here's George Osborne last Oct in the FT story linked in previous post:Mr Osborne said Mr King’s speech was “powerful and persuasive”, although a future Conservative government would only break up banks into retail and “casino” operations in the unlikely event that all other major countries did the sameIt got a bit more likely yesterday, but this also suggests that an incoming Tory government is not going to act in a hurry.

Of course they could ratchet up the promise if they thought they'd get elected on it.

[Drysdale]

OK, I'm honestly asking this because I dont understand Obama's policy on the bank bailouts. He made remarks about fining the banks that took bailout money.

Now,from what I understand nearly all those banks paid that money back.

Soo,why the fines?

And what happened to the money they paid back?
Why the talk about borrowing/printing even more money?

[Francesca R]

OK, I'm honestly asking this because I dont understand Obama's policy on the bank bailouts. He made remarks about fining the banks that took bailout money.

Now,from what I understand nearly all those banks paid that money back.

Soo,why the fines?The administration wants to tax banks because:

1--Not all the money (http://www.financialstability.gov/latest/tg_12092009.html) from the "TARP" asset exchange has been recovered. Banks have mostly repaid it (at a profit to the program) but most or all of the program's investment in AIG, GM, Chrysler is outstanding. Also TARP money ended up being used for mortgage modification assistance for home owners.

2--It can't really tax the other recipients right now. Banks repaying fast, reporting profits, and paying bonuses to staff mean they can "afford it".

3--Banks and other institutions benefited from other government action (guarantees, Federal Reserve lending and asset purchases) for free. It is not so terribly unfair to ask them to pay for someone else's rescue.

4--It probably pays political dividends to bash Wall Street since there is much public anger (misguided) that banks ever got bailouts and still more (not so misguided) that they are back in rude health already.

And what happened to the money they paid back? It reduces the federal government's deficit/financing needs.

Why the talk about borrowing/printing even more money?You need new legislation for new fiscal stimulus. The government is constrained (http://www.gpo.gov/fdsys/pkg/PLAW-110publ343/pdf/PLAW-110publ343.pdf) in what it can use TARP funds for. It can't simply "recycle" it without going through congress etc.

[FarmallMTA]

Some aspects of Obama's plan (the Volcker aspects) look good. Others, like exceptional taxation are simply poor policy dressed up in populist rags. The statist philosophy of the Obama administration defaults to taxation out of hand. In this case, without any consideration of effect on savings interest rates paid by banks to consumers or of loan interest rates paid by the consumer. The former will decline, the latter will rise. It becomes a tax on the customers of the banks, not the banks.

YOU'RE going to be taxed by the Obama Bank Tax plan. Not the banks, ultimately.

The taxation will be the first part to be cut to shreds by lobbyists and conservatives, both D's and R's. Thank God for that.

The splitting up of financial institutions could, just could, be a good move IF it's handled right. But when Nancy Pelosi and Harry Reid get their hands on it the results will be pretty bad. So it looks like another long fight.

[Francesca R]

Why would splitting financial firms be a good move exactly? I have not seen any convincing argument about that.

[quixotecoyote]

Why would splitting financial firms be a good move exactly? I have not seen any convincing argument about that.

The sound bite version:

Banks too big to fail? Make 'em smaller!

[Francesca R]

Yes I have heard that one. As I said though, I have not heard anything convincing.

Plus according to Obama's speech and Rep Frank's interview and other stuff, there are no plans to make any existing banks smaller. It is more about not letting them do own-account trading nor run their own alternative/illiquid funds (undefined yet)--at the same time as being a chartered deposit taker. That's the main proposal that, I think, is regulatory woo.

[WildCat]

Yes I have heard that one. As I said though, I have not heard anything convincing.

Plus according to Obama's speech and Rep Frank's interview and other stuff, there are no plans to make any existing banks smaller. It is more about not letting them do own-account trading nor run their own alternative/illiquid funds (undefined yet)--at the same time as being a chartered deposit taker. That's the main proposal that, I think, is regulatory woo.
And, of course, at the same time they're planning on further empowering and enriching Goldman-Sachs with the idiotic "cap and trade" proposal.

This is all smoke and mirrors to fool the masses.

[Drysdale]

The administration wants to tax banks because:

1--Not all the money (http://www.financialstability.gov/latest/tg_12092009.html) from the "TARP" asset exchange has been recovered. Banks have mostly repaid it (at a profit to the program) but most or all of the program's investment in AIG, GM, Chrysler is outstanding. Also TARP money ended up being used for mortgage modification assistance for home owners.

2--It can't really tax the other recipients right now. Banks repaying fast, reporting profits, and paying bonuses to staff mean they can "afford it".

3--Banks and other institutions benefited from other government action (guarantees, Federal Reserve lending and asset purchases) for free. It is not so terribly unfair to ask them to pay for someone else's rescue.

4--It probably pays political dividends to bash Wall Street since there is much public anger (misguided) that banks ever got bailouts and still more (not so misguided) that they are back in rude health already.

It reduces the federal government's deficit/financing needs.

You need new legislation for new fiscal stimulus. The government is constrained (http://www.gpo.gov/fdsys/pkg/PLAW-110publ343/pdf/PLAW-110publ343.pdf) in what it can use TARP funds for. It can't simply "recycle" it without going through congress etc.

Maybe I'm dense which is very possible but that does'nt seem smart.
In essence you're going to penalize the instituions that are upholding their agreement to pay it back while giving it in some cases to their competitors who are'nt being penalized.

What's to stop them from eventually just saying hell with it and folding?
Then who's going to support them? Us the taxpayers.

If AIG,Chrysler, etc cant be competitive why not put them up for bids via the free market instead of the taxpayers continuing to foot the bill?

[Francesca R]

Yes they are "penalizing" banks. There is a lot of public support for that and they like public support.

The government would not get a sensible price (or one at all) for AIG or the auto firms right now so dumping them would crystallize a chunky taxpayer loss and trigger off all the secondary economic nasties those rescues were designed to prevent too. That would be bananas and the attack adverts would write themselves.

[corplinx]

Santelli had some good comments on this. He mentioned creating capital requirements for financial derivatives. However, this makes too much sense and doesn't have an appeal that you can "dupe the hicks" (thanks Hitchens) with.

If the government forced financial services institutions to break off the investment banking into a separate sector, guess who benefits? Goldman Sachs. They would be basically the sole large player.

The problem with this plan, is that it seems to have been written on a napkin shortly after Brown won and delivered to try to ride the populism coattails. It fails. On many levels.

Part of me thinks this is Obama channeling Bush/Rove. He proposes something that he knows won't happen (hello Mr. 41!) just to use it as a wedge issue. That's the best excuse I can come up it with for this... idiocy?

Why is the President even standing there talking about bank reform? That's not even his job! Frank comes out later and basically says "you are fools" but drawn out into saying "it might be feasible over the course of 5 years or something".

I think Obama's poll numbers would do better if he chastised congress over the poor quality of the health bills, and asked for take two. That's what Brown did. People aren't worried about what "big corporations" did five years ago. They are worried about what government is going to do to them right now. These guys just don't get it, don't want to hear it, and think so little of everyone that they think things like this will just get AMENs.

[FarmallMTA]

Why would splitting financial firms be a good move exactly? I have not seen any convincing argument about that.

The size of the bank is not so much the problem as the agglomeration of functions under a corporate "banking" umbrella. The Financial Times had a fairly good summary of that issue, thus:

http://www.ft.com/cms/s/0/1705ff00-0774-11df-915f-00144feabdc0.html?nclick_check=1

The Obama administration has adopted the “Volcker rule” (http://www.ft.com/cms/s/0/eaa7dc64-06c2-11df-b426-00144feabdc0.html) and proposed (http://www.ft.com/cms/s/0/44f593ee-06a7-11df-b426-00144feabdc0.html) that walls be built around the proprietary trading party enjoyed by US banks, especially the large and the complex ones, so that when the party catches fire, it does not spread to commercial banking activities such as payments and settlements and lending to the real economy.

The original Glass-Steagall Act was the financial firewall of it's day. The world has changed so the firewall should change to prevent overheated collapse due to the tension between risk and yield within banks.

That's the rationale that the Obama administration should be using, and what they should be constraining the bank overhaul to. Unfortunately, we're being subjected to trite and silly populist bashing of the financial sector by know-nothings. That and the idiotic exceptional tax proposal.

[corplinx]

The size of the bank is not so much the problem as the agglomeration of functions under a corporate "banking" umbrella. T

The problem is not the size or function. The problem was capital/leverage.

Think about this....

What if AIG, had only issued swaps that they had the capital to cover? If that was the case, and we hadn't needed to bail out AIG, then Goldman Sachs and other banks that bought swaps wouldn't have needed any federal assistance directly or indirectly. They system would have "just worked". When it became apparent that predatory/shady lenders like the Sandlers and Countrywide had put billions of toxic assets into the security pool, only banks like Citibank would have been in trouble, who:
A. didn't have enough capital to cover it
B. didn't buy default swaps

Other banks, were only in trouble because the swaps they bought in good faith from AIG were in trouble. We complain about GS getting so much money indirectly through AIG, but that was actually a sign of sanity.

Capital, leverage, business 101. That was the problem. If AIG had stopped issuing swaps because they didn't have the capital to cover them, that would have had created a disincentive for investment banks to keep the demand for mortage backed securities high.

(and to top it all off, it was the London unit of AIG, so much for "wall street fat cats", don't you love phony populism?)

[FarmallMTA]

The problem is not the size or function. The problem was capital/leverage.

Think about this....

What if AIG, had only issued swaps that they had the capital to cover? If that was the case, and we hadn't needed to bail out AIG, then Goldman Sachs and other banks that bought swaps wouldn't have needed any federal assistance directly or indirectly. They system would have "just worked". When it became apparent that predatory/shady lenders like the Sandlers and Countrywide had put billions of toxic assets into the security pool, only banks like Citibank would have been in trouble, who:
A. didn't have enough capital to cover it
B. didn't buy default swaps

Other banks, were only in trouble because the swaps they bought in good faith from AIG were in trouble. We complain about GS getting so much money indirectly through AIG, but that was actually a sign of sanity.

Capital, leverage, business 101. That was the problem. If AIG had stopped issuing swaps because they didn't have the capital to cover them, that would have had created a disincentive for investment banks to keep the demand for mortage backed securities high.

(and to top it all off, it was the London unit of AIG, so much for "wall street fat cats", don't you love phony populism?)

I see your point and agree that rational operations would be self-constraining. I would also agree that the regulation is not needed IF government distortions of the capital markets were greatly reduced. Freddie Mac and Fannie Mae politically-driven irrational exuberance helped fuel the whole bond market/hedgefund/CDO/Swaps market.

When you've got Barney Frank and Chris Dodd and Teddy Kennedy and assorted asshat Republicans driving insane policies down the markets... brace yourself for unintended consequences. CaCa in, CaCa out.

Show me minimization of government intrusion and I'll show you better functioning capital markets, generally. Interesting how the Bank Regulation proposal by the Light-Skinned-No-Negro-Dialect Dude doesn't say a word about Freddie Mac and Fannie Mae. They're the ones that need regulation or outright abolishing more than any other entity.

[Francesca R]

The size of the bank is not so much the problem as the agglomeration of functions under a corporate "banking" umbrella.The combination of functions is not "the problem" either IMO. Certainly not just because they say it is. See post 13.

If you could ring-fence risky trading from utility banking that easily, then:

(i) Northern Rock, WaMu, Wachovia would not have needed public rescues
(ii) Lehman going bust would not have mattered so much
(iii) AIG could have been allowed to go bust as well.

Also Merrill Lynch would not have needed to ask BofA to buy it, Lloyds/HBOS would not have beem rammed together, and of course, FNMA and FHLMC would have been fine.

Proposing ineffective remedies is dangerous because it confers the ideas that (i) legislators know what they are doing and (ii) everyone can relax.

The "correct" fix is not easy, but involves leverage restriction IMO and is better approached by first snuffing out regulatory woo.

[corplinx]

The combination of functions is not "the problem" either IMO. Certainly not just because they say it is. See post 13.

If you could ring-fence risky trading from utility banking that easily, then:

(i) Northern Rock, WaMu, Wachovia would not have needed public rescues
(ii) Lehman going bust would not have mattered so much
(iii) AIG could have been allowed to go bust as well.

Also Merrill Lynch would not have needed to ask BofA to buy it, Lloyds/HBOS would not have beem rammed together, and of course, FNMA and FHLMC would have been fine.

Proposing ineffective remedies is dangerous because it confers the ideas that (i) legislators know what they are doing and (ii) everyone can relax.

The "correct" fix is not easy, but involves leverage restriction IMO and is better approached by first snuffing out regulatory woo.

http://en.wikipedia.org/wiki/Wachovia#Golden_West_Financial
Wachovia was actually bitten by a risky aquisition was it not? They bought the leading toxic lender in California.

[Francesca R]

That's correct, but "dodgy home loans" is little to do with proprietary trading, hedge funds and private equity, so it would be free to do that again as far as I can tell.

[FarmallMTA]

While Barney Frank's NOW favorably disposed to abolishing Fannie Mae and Freddie Mac

http://www.philly.com/philly/business/Will_Congress_abolish_Fannie_Mae.html

The replacement of them by this gaggle of clowns is likely to be even worse. I suppose we could be hopeful, but don't go overboard on it. This will be interesting.

[Francesca R]

Fannie and Freddie existed to subsidise mortgage rates. Since they were taken over the Federal Reserve has been accumulating their bonds because, presumably it was feared that rates would rise anyway otherwise. That is supposed to end in a month anyway. I don't see how F&F can be "abolished" without increasing them more. So if the government does not want that then it has to do something like subsidise loan originators, which will add to the fiscal deficit.

It has always been a unique US way of subsidising home ownership. Some countries have provided tax relief on mortgage interest instead. Others don't do anything these days.

[Ziggurat]

The replacement of them by this gaggle of clowns is likely to be even worse.

From despair.com (http://despair.com/government.html):
http://site.despair.com/images/dpage/government03.jpg

[Francesca R]

Looks pretty good to me, and from a UK perspective, it's interesting to see that Osborne wants to take similar measures if elected.Slight change of tune (http://online.wsj.com/article/SB10001424052748704878904575031494073773442.html?m od=WSJEUROPE_hps_SECONDTopStories).

In an interview at the World Economic Forum annual meeting in Davos, Mr. Osborne said he didn't advocate a return to the Depression-era Glass-Steagall Act, which separated investment and commercial banking. "I fully understand that modern universal banks need to offer their customers investment-banking services," he said

[corplinx]

"I fully understand that modern universal banks need to offer their customers investment-banking services," he said

That really puts it in perspective doesn't it?

It's sort of like a restaurant putting up a sign that says "we won't give you margarine with your dinner roll" instead of "we serve no trans-fat".

[Francesca R]

Is it? Not really sure what that means.

Anyway it's a shame that posters who said (in this thread) that the proposals in the speech were good have not said what is actually good about them. It's almost as if it just "feels so right, it can't be wrong" to folks.

[BeAChooser]

http://www.humanevents.com/article.php?id=35478


TARP Hasn’t Cured Financial Crisis

… snip ...

While the financial sector appears to have rebounded from its fall 2008 crisis, many tasks the Troubled Asset Relief Program (TARP) sought to undertake remain unfulfilled, leaving another possible financial crisis ‘within a two, five, or ten years time.’
The conclusion comes from the latest quarterly report released by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) on Jan. 30, 2010.


In fact, Barofsky, the special inspector general, told Congress that the governments bailout has created a risk that the US could face a WORSE meltdown in the future. He said the bailout has encouraged more risk-taking because bank executives, who are still receiving massive bonuses, figure the government will come to the rescue the next time they run into problems. He said the key to preventing future crises is to reform Fannie Mae and Freddie Mac, create and improve loan underwriting and supervision of banks. Well the Republicans tried during Bush's administration and democrats stopped them. Let's see if Obama has really brought any meaningful *change* in their attitudes. We can *hope* so.

Also, the report outlined 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption. Let's see if Obama's DOJ acts on any of them, especially where they involve democrats or friends of Obama.

[joobz]

leaving another possible financial crisis ‘within a two, five, or ten years time.’
or 15 or maybe 20 or perhaps 21 or what about 35 year.... Well, something bad could happen at sometime and if does, it's TARP's fault!

[corplinx]

He said the bailout has encouraged more risk-taking because bank executives, who are still receiving massive bonuses, figure the government will come to the rescue the next time they run into problems.

Which is it? Either the banks are frozen and not lending any money or they are engaging in reckless risk taking because they receive obscene bonuses for doing so.

Like a bad conspiracy theory, the stories seem mutually exclusive.

Lets look at the failures up/down the chain:
1. the government by proxy underwrote bad loans in order to create "the ownership society" (which comically, has resulted in much less ownership it seems)
2. Seizing this, shady lenders like Golden West and Countrywide go on a junk loan binge. Mortgage debt, which was a historically a stable low risk investment, was bought heavily after the tech bubble burst and money needed to go somewhere "safe" and profitable.
3. AIG issues AAA rated swaps for these securities, without proper leverage/capitalization, setting up an almost zero risk proposition for the investment banks, thus encouraging the investment banks to further leverage into that market
4. The credit markets freeze after Lehman and other banks fail. Most people forget that TARP wasn't really for "bailing out" failing banks. It was to unfreeze the credit markets.

The proposed financial regulations don't fix the garbage in/garbage out problem in (1). They don't fix the capitalization problems in (3). Also, if (4) even happens again, we're back to TARP like programs that try inject money into the largest national banks to unfreeze the credit markets.

It's a gnomish regulation bill.
1. Bank fees + Bank breakups + Derivatives Market
2. ????
3. End of the boom/bust cycle

Its offensive in its stupidity. They think "too big to fail", "wall street fat cats" and other slogans make good sound bites, so we try regulating things that make it sound like we are dealing with the sound bites. This is even more offensive since the president himself has laid out the failures up and down the chain in the past himself but has fallen back on this faux-populism stuff recently. I liked the rational/analytical Obama instead.