Proposed banking reforms

Article on Obama's proposed banking reforms.

Some highlights:

The US government has announced a major reform of banking regulation to prevent future financial crises. The overhaul will require big banks to put more money aside against future losses to curb excessive risk taking. Consumers will get a special agency to protect their interests and regulate mortgages and credit cards.
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Peter Morici of the Smith School of Business at the University of Maryland described the changes as "a huge bureaucratic overreach that will prove ineffective and too costly".
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A new Consumer Financial Protection Agency will be created and the Federal Trade Commission will gain new powers to protect consumers, as well as more powers for the Securities and Exchange Commission, for the benefit of investors.

There will be more regulation of hedge funds, securitised debts and over-the-counter derivatives, all of which have been blamed for exacerbating the financial crisis and leading to a "culture of irresponsibility" that dominated Wall Street, said Mr Obama.

"Mortgage brokers will be held to higher standards, exotic mortgages that hide exploding costs will no longer be the norm, home mortgage disclosures will be reasonable, clearly written, and concise," said Mr Obama said.

And shareholders will be given more power to question executive bonuses.
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The reforms will enhance the power of the Federal Reserve to supervise and ultimately order the takeover of any financial institution in trouble. But central bank will have to gain Treasury Department approval before it can offer more credit to firms in "unusual and exigent circumstances." It was the inability of the US government to take over Lehman Brothers that threw the financial markets into turmoil in September last year.

A new council of regulators, the Financial Services Oversight Council is to be created to co-ordinate the supervision of the banking system. Meanwhile, one banking regulator - the Office of Thrift Supervision - will be abolished. And the Fed will lose some of its powers to regulate mortgages to the new Consumer Financial Protection Agency.

I still haven't heard enough to know whether these proposed changes will help much or whether they'll just add more bureaucracy - to say nothing of whether they'll have any chance of making it through congress intact. Thoughts?

It doesn't address the problem of banks funding their own regulators which seems to be one of the roots of the problem.


The White House has released its 88-page blueprint for financial-regulatory reform. The report makes clear that Washington does not want to eradicate its “too big to fail” approach to financial firms, but instead wants to formalize and expand it.

In the report, the Obama administration addresses a big problem. Bad financial firms have no way to fail without destabilizing the financial system and the economy.

The FDIC doesn’t have the authority to wind them down, as it does with depository banks. Bankruptcy is sometimes inadequate to address the systemic risks to the economy, as we saw in the Lehman Brothers case.

So the administration has jumped wildly from bailout strategy to bailout strategy in the cases of AIG, Bear Stearns, Citigroup, and others.

But “too big to fail” did its real damage well before the credit crisis started.

With a few exceptions, for a quarter of a century, the government has made it clear that when it sees a threat to the financial system, it will step in and protect the lenders, bondholders, and other creditors of financial firms, including the firms’ trading partners, from their losses.

Lenders, knowing that they have such government protection, have readily provided banks and investment firms with cheap money. Financial firms have used that cheap money and absence of skepticism to take reckless risks.

This lack of market discipline helped precipitate the credit crisis.

Now, Obama wants to strengthen the “too big to fail” policy.

Specifically, the administration proposes that the Treasury Department gain a new authority, with case-by-case approval from the Fed and the FDIC, to resolve a foundering firm “in situations where the stability of the financial system is at risk.” The Treasury, in “extraordinary times,” could establish a conservatorship for a failing firm, running the firm indefinitely.

Under its new power, the Treasury could “provide for the ability to stabilize a failing institution … by providing loans to the firm, purchasing assets from the firm, guaranteeing the liabilities of the firm, or making equity investments in the firm.”

The Treasury would also “have the authority to transfer the firm’s derivatives contracts to a bridge institution and thereby avoid termination of the contracts by the firm’s [trading partners].”

In other words, the White House would formalize the ad-hoc bailout policy that the government has followed now for more than a year.

True, in future bailouts, the White House would direct the Treasury to consider “the action’s cost to the taxpayers, and the action’s potential for increasing moral hazard.” (Moral hazard is the risk that protection now could encourage recklessness in the future.)

But nowhere in the document does the White House acknowledge that it must design a way in which lenders to financial firms can take their warranted losses in an orderly fashion. Many thoughtful people, including the University of Texas’s Jay Westbrook, former St. Louis Fed chief William Poole, and a trio of eminent economists have suggested elegant ways for that to happen.

Nor does the White House acknowledge that one of bankruptcy’s great benefits is consistency. Consistency allows lenders and other creditors to reasonably assess their prospects for recovery.

Nor does the White House acknowledge that the government's goal, in winding down a failed firm, should be to sell the firm's pieces to the private sector as quickly as practically possible.

This formalization of a lack of market discipline and consistency will overwhelm any of the reasonable regulations that the White House has suggested.

How? Means and motive.

Financial firms' shareholders and employees will continue to assume that they enjoy the prospect of limitless profits. The people and institutions who underwrite the risk-taking — the bondholders, lenders, and trading partners — will assume that they enjoy limited risks.

Beyond making this fatal error, the White House saves its proposals on the other foundation of financial reform for the future. The Treasury will report on how to limit borrowing at banks and other financial firms by December 31.

— Nicole Gelinas, a Chartered Financial Analyst charterholder, is a contributing editor to City Journal.

This sums up what I'm thinking quite well.

Al wrote:
It doesn't address the problem of banks funding their own regulators which seems to be one of the roots of the problem.

The more stuff like that I read, the more I'm surprised everything didn't fall over sooner than it did.

Ulairi wrote:
This sums up what I'm thinking quite well.

Agreed. We have something (1) super important/not allowed to fail and (2) in greedy, greedy hands. It's just a matter of time before some clever individual finds a new loophole and exploits it. Best case scenario is we pay off the bailouts before that happens.

Joe Nocera has a column up that implies that despite Obama's frequent invocation of the Great Depression, he's wimping out in a way that Roosevelt didn't.

In terms of the sheer number of proposals, outlined in an 88-page document the administration released on Tuesday, that is undoubtedly true. But in terms of the scope and breadth of the Obama plan — and more important, in terms of its overall effect on Wall Street’s modus operandi — it’s not even close to what Roosevelt accomplished during the Great Depression.

Rather, the Obama plan is little more than an attempt to stick some new regulatory fingers into a very leaky financial dam rather than rebuild the dam itself. Without question, the latter would be more difficult, more contentious and probably more expensive. But it would also have more lasting value.

If you can't push through major changes after an industry has had trillions in losses and allegedly brought the economy to the brink of collapse, what good are you as a president? What good is having a democratic congress? We could have gotten this kind of thing from Bush and the republicans.

Funkenpants wrote:
If you can't push through major changes after an industry has had trillions in losses and allegedly brought the economy to the brink of collapse, what good are you as a president? What good is having a democratic congress? We could have gotten this kind of thing from Bush and the republicans.

We could have? I seem to recall their motto was generally "Let the private sector fix itself". I guess they could have pushed through the removal of regulations. That would've qualified as a major change.

It looks like the public just could care less. It's not so much what the President proposes as how the population reacts via their Congressional representatives. If people don't put the heat on, it's not going to happen. The special interests will steamroller the changes with established, well-funded lobbyists, and we'll get the minimum possible to assuage the noisiest critics.

I am still trying to figure out what is so bad about having a nationalized bank? Similar the the German model. I am glad that most of Obama's plan is a roadmap for the year, not so much a quick fix.

KingGorilla wrote:
I am still trying to figure out what is so bad about having a nationalized bank? Similar the the German model. I am glad that most of Obama's plan is a roadmap for the year, not so much a quick fix.

I'm sort of with you on that.

On a similar topic, I am hearing a lot of stuff on tv and the radio regarding the dangers of "socialized healthcare". Considering open enrollment is coming up in two weeks and my group premiums have gone up 35% for no apparent reason, I might actually be willing to look at single payer or a gov't plan. I couldn't care less who owns the paper so long as I'm covered and it won't send me to bankruptcy to afford it.

I'm excited that hedge funds and derivatives will be regulated, but boy are clients going to be livid when these banks pass these charges through to their clients. the FDIC insurance passthrough fee levied on businesses is already pretty hefty.

I wonder if you'll start seeing these fees on personal interest bearing accounts as well.

KingGorilla wrote:
I am still trying to figure out what is so bad about having a nationalized bank? Similar the the German model. I am glad that most of Obama's plan is a roadmap for the year, not so much a quick fix.

The German model is potentially 1 Trillion Euros in the hole. They've just been glacially slow about admitting it.

As for the proposal, I think Obama continues to get bad advice from the same group of people who created this mess. It's discouraging. This proposal, while lacking in details, reminds me of when the Federal Home Loan Bank Board became the Office of Thrift Supervision. It ultimately gave the same bad actors more power.

There was a line from Obama in a CNBC interview: "Speed is important. We want to do it right." I don't believe that fast and careful go together well.

Robear wrote:
The special interests will steamroller the changes with established, well-funded lobbyists, and we'll get the minimum possible to assuage the noisiest critics.

That's how it already looks to me. Expensive regulation to cut out smaller, nimbler competitors, while giving larger banks extensive federal support. Who are we trying to help again?

Paleocon wrote:
KingGorilla wrote:
I am still trying to figure out what is so bad about having a nationalized bank? Similar the the German model. I am glad that most of Obama's plan is a roadmap for the year, not so much a quick fix.

I'm sort of with you on that.

On a similar topic, I am hearing a lot of stuff on tv and the radio regarding the dangers of "socialized healthcare". Considering open enrollment is coming up in two weeks and my group premiums have gone up 35% for no apparent reason, I might actually be willing to look at single payer or a gov't plan. I couldn't care less who owns the paper so long as I'm covered and it won't send me to bankruptcy to afford it.

If the banked are nationalized, or there is even a nationalized bank, the government controls the credit market, and itsofacto, controls the rest of the economy. The German model isn't a good one and I can write reems why it isn't good if you'd like to know more.

I'd love to see *one* (1) SINGLE un1t4ry solo solitary regulation agency for financial firms. No more pick and choose, no more weak sauce regulation a la carte.

Robear wrote:
It looks like the public just could care less. It's not so much what the President proposes as how the population reacts via their Congressional representatives.

True, but often in times like these you have politicians who manage to ramp up their own visibility by taking hold of an issue and charging ahead with it. The difficulty is that anyone who proposes strong regulation is branded a "populist" who is intent on destroying American prosperity, a narrative that our big corporate newshounds are more than happy to broadcast. It doesn't matter that there are plenty of mainstream economists and financial professionals who see a need for greater regulation in order to level the playing field between them and the greedy sharks out there and to prevent disaster. As long as something is done, the media will declare the problem solved.

Ulairi wrote:
Paleocon wrote:
KingGorilla wrote:
I am still trying to figure out what is so bad about having a nationalized bank? Similar the the German model. I am glad that most of Obama's plan is a roadmap for the year, not so much a quick fix.

I'm sort of with you on that.

On a similar topic, I am hearing a lot of stuff on tv and the radio regarding the dangers of "socialized healthcare". Considering open enrollment is coming up in two weeks and my group premiums have gone up 35% for no apparent reason, I might actually be willing to look at single payer or a gov't plan. I couldn't care less who owns the paper so long as I'm covered and it won't send me to bankruptcy to afford it.

If the banked are nationalized, or there is even a nationalized bank, the government controls the credit market, and itsofacto, controls the rest of the economy. The German model isn't a good one and I can write reems why it isn't good if you'd like to know more.

But our model utterly failed the entire world. I am not talking about miracles. But when you compare the economies of the US, UK, Canada, to countries with a nationalized bank, or recently nationalized banks, the situation is very different. I am specifically referring to joblessness in Germany, Switzerland, the foreclosure rates, loss of savings, retirement. Yeah their bank is 1 billion in the red. How many billion are our banks in the hole? I believe we taxpayers cut a 1 trillion dollar check.

And waht is so bad about the US government having greater control on the credit market? Short of utter global annihilation, how could they c*ck it up worse than Chase, Citi, and Wells Fargo have?

Because the status quo has utterly reamed the American people. But Germany also has other nutty communist ideas like a living wage, universal healthcare, high speed rail.

Not to mention that nationalizing banking, at least temporarily, is what the US government's experts have recommended when providing advise for struggling foreign nations. Why not take our own advise?

Dude, you are all over the board there KingGorilla. High speed rail? Employment rate? Health care?

This piece on Marketplace this afternoon just about sums up how I feel about the whole thing:

http://marketplace.publicradio.org/d...

THOMAS FRANK: Everyone agrees that the financial sector needs a regulatory overhaul in the aftermath of the recent disaster. But the reason our banking regulators napped through the housing crisis is not merely because of confusing jurisdictions. It's also because of the kind of people who were chosen for the job. They were asleep at the switch because industry wanted them to be sleep.

I liked one blogger's take who pointed to a 2004 decision by the SEC to exempt five biggest banks from the 12 to 1 leverage limit then in force, allowing them to leverage themselves up by 40 or so to 1. Is it so hard to put that back in force? Yes, if you are committed to restoring the status quo as it was circa 2007.

KingGorilla wrote:
Ulairi wrote:
Paleocon wrote:
KingGorilla wrote:
I am still trying to figure out what is so bad about having a nationalized bank? Similar the the German model. I am glad that most of Obama's plan is a roadmap for the year, not so much a quick fix.

I'm sort of with you on that.

On a similar topic, I am hearing a lot of stuff on tv and the radio regarding the dangers of "socialized healthcare". Considering open enrollment is coming up in two weeks and my group premiums have gone up 35% for no apparent reason, I might actually be willing to look at single payer or a gov't plan. I couldn't care less who owns the paper so long as I'm covered and it won't send me to bankruptcy to afford it.

If the banked are nationalized, or there is even a nationalized bank, the government controls the credit market, and itsofacto, controls the rest of the economy. The German model isn't a good one and I can write reems why it isn't good if you'd like to know more.

But our model utterly failed the entire world. I am not talking about miracles. But when you compare the economies of the US, UK, Canada, to countries with a nationalized bank, or recently nationalized banks, the situation is very different. I am specifically referring to joblessness in Germany, Switzerland, the foreclosure rates, loss of savings, retirement. Yeah their bank is 1 billion in the red. How many billion are our banks in the hole? I believe we taxpayers cut a 1 trillion dollar check.

And waht is so bad about the US government having greater control on the credit market? Short of utter global annihilation, how could they c*ck it up worse than Chase, Citi, and Wells Fargo have?

Because the status quo has utterly reamed the American people. But Germany also has other nutty communist ideas like a living wage, universal healthcare, high speed rail.

Not to mention that nationalizing banking, at least temporarily, is what the US government's experts have recommended when providing advise for struggling foreign nations. Why not take our own advise?

You might want to research at Germany's unemployment rate prior to the current economic climate and what it has been since. Germany has had a higher unemployment rate (on average) than the United States. A high speed rail won't work in the United States. The landmass is too large. In some areas like Milwaukee to Chicago or in the east coast, it makes sense. But, nation wide? Not at all.

May I ask where your research is coming from?

Ulairi wrote:
KingGorilla wrote:
Ulairi wrote:
Paleocon wrote:
KingGorilla wrote:
I am still trying to figure out what is so bad about having a nationalized bank? Similar the the German model. I am glad that most of Obama's plan is a roadmap for the year, not so much a quick fix.

I'm sort of with you on that.

On a similar topic, I am hearing a lot of stuff on tv and the radio regarding the dangers of "socialized healthcare". Considering open enrollment is coming up in two weeks and my group premiums have gone up 35% for no apparent reason, I might actually be willing to look at single payer or a gov't plan. I couldn't care less who owns the paper so long as I'm covered and it won't send me to bankruptcy to afford it.

If the banked are nationalized, or there is even a nationalized bank, the government controls the credit market, and itsofacto, controls the rest of the economy. The German model isn't a good one and I can write reems why it isn't good if you'd like to know more.

But our model utterly failed the entire world. I am not talking about miracles. But when you compare the economies of the US, UK, Canada, to countries with a nationalized bank, or recently nationalized banks, the situation is very different. I am specifically referring to joblessness in Germany, Switzerland, the foreclosure rates, loss of savings, retirement. Yeah their bank is 1 billion in the red. How many billion are our banks in the hole? I believe we taxpayers cut a 1 trillion dollar check.

And waht is so bad about the US government having greater control on the credit market? Short of utter global annihilation, how could they c*ck it up worse than Chase, Citi, and Wells Fargo have?

Because the status quo has utterly reamed the American people. But Germany also has other nutty communist ideas like a living wage, universal healthcare, high speed rail.

Not to mention that nationalizing banking, at least temporarily, is what the US government's experts have recommended when providing advise for struggling foreign nations. Why not take our own advise?

You might want to research at Germany's unemployment rate prior to the current economic climate and what it has been since. Germany has had a higher unemployment rate (on average) than the United States. A high speed rail won't work in the United States. The landmass is too large. In some areas like Milwaukee to Chicago or in the east coast, it makes sense. But, nation wide? Not at all.

May I ask where your research is coming from?

Nonsense. High speed rail is just faster rail. Which was built over 100 years ago in this expansive country. We have roads going here and there. We have airplanes and airports everywhere in this country. What is so special about high speed rail that it cannot work in this huge landmass.

BTW, about the banking regulations. They will work for now. There is a lot of thought that goes into them. But in 50 to 60 years people will forget again. There will always be a push against regulation by business interests. However, too much regulation has never led to a financial crisis. Only when we let leverage and debt get out of hand will we have another financial crisis.

But I think there are other types of problems that will hit us between financial crisis. Like peak oil, global warming, and Black Swans that we cannot even predict.

goman wrote:
Nonsense. High speed rail is just faster rail. Which was built over 100 years ago in this expansive country. We have roads going here and there. We have airplanes and airports everywhere in this country. What is so special about high speed rail that it cannot work in this huge landmass.

Cost per mile and popultion density. Note the things about the examples you cite, they are centralized around a few main hubs across the country and they already fill that niche in the market. Rail is dpendant upon population density to work effectively, and large portions of this country have really low population densities.

Nosferatu wrote:
goman wrote:
Nonsense. High speed rail is just faster rail. Which was built over 100 years ago in this expansive country. We have roads going here and there. We have airplanes and airports everywhere in this country. What is so special about high speed rail that it cannot work in this huge landmass.

Cost per mile and popultion density. Note the things about the examples you cite, they are centralized around a few main hubs across the country and they already fill that niche in the market. Rail is dpendant upon population density to work effectively, and large portions of this country have really low population densities.

Yeah but does not mean that there still is areas where we can do it.

IMAGE(http://avmedia.popularmechanics.com/video/maglev/maglev-b.html)

http://www.popularmechanics.com/tech...

This is something we need to do for the future of the USA. It should be a long range goal that should start now.

goman wrote:

Yeah but does not mean that there still is areas where we can do it.

IMAGE(http://avmedia.popularmechanics.com/video/maglev/maglev-b.html)

http://www.popularmechanics.com/tech...

This is something we need to do for the future of the USA. It should be a long range goal that should start now.


Given the Ulairi pointed out some of those areas (in the quote you replied to) and specifically mentioned several examples, I didn't feel the need to repeat that part explicitly.

KingGorilla wrote:
And waht is so bad about the US government having greater control on the credit market? Short of utter global annihilation, how could they c*ck it up worse than Chase, Citi, and Wells Fargo have?

You seem to be forgetting that those you named did nothing that the government objected to, and that giving mortgages to millions who couldn't afford them was a government diktat.

In short- they'll find a way.

Ulairi wrote:
You might want to research at Germany's unemployment rate prior to the current economic climate and what it has been since. Germany has had a higher unemployment rate (on average) than the United States.

Doesn't the US stop counting you as unemployed for only defined period whereas we in Europe count everyone? I don't think that has ever been a fair comparison. The number of homeless in American cities is something Europeans find appalling, for example. The sizeable prison population is another. Its easy to have low employment if you just toss the unemployed on the scrapheap.

I think I read a good article in the Economist addressing this argument. I'll see if I can find it.

Axon wrote:
Ulairi wrote:
You might want to research at Germany's unemployment rate prior to the current economic climate and what it has been since. Germany has had a higher unemployment rate (on average) than the United States.

Doesn't the US stop counting you as unemployed for only defined period whereas we in Europe count everyone? I don't think that has ever been a fair comparison. The number of homeless in American cities is something Europeans find appalling, for example. The sizeable prison population is another. Its easy to have low employment if you just toss the unemployed on the scrapheap.

I think I read a good article in the Economist addressing this argument. I'll see if I can find it.

Both the EU and the USA do not break from the ILO. Actually, the USA has far more detailed reports than the EU.

Axon wrote:
Doesn't the US stop counting you as unemployed for only defined period whereas we in Europe count everyone? I don't think that has ever been a fair comparison. The number of homeless in American cities is something Europeans find appalling, for example. The sizeable prison population is another. Its easy to have low employment if you just toss the unemployed on the scrapheap.

There are a number of different measurements that the U.S. uses. The two most important are U-3 and U-6. The only reason U-3 is important is because it is the "official" number. Note that U-3 does not include "discouraged workers", which are people who have stopped looking for a job. U-6 is the most accurate for comparison against older statistics and other countries, though of course be careful about different methods in different places.

One thing about rail is that it can effectively promote the natural re-population.

Upper Manhattan used to be all farms and pastures until they ran a subway line up there.

Searched for a relevant existing topic, this one seems okay.

CFPB orders Capital One Bank to refund $140 million to consumers