The FinanSer

G7 creates the Global Ivy League of Banking

The Global Ivy League is the scenario of truth for the future banking markets. More globally harmonised regulation creates less innovation, but more security, amongst the major league players who we feel we can trust. Or rather, our politicians feel we should trust.

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American Financial Regulatory Reform Announced

The New York Times published the detailed proposals for Regulatory Reform for all American financial markets, from the Treasury on Saturday.  The aim is to:

• consolidate all the regulations and authorities for everything from banking to hedge funds and private equity into three powerful overseers: a new Prudential Financial Regulator, the Federal Reserve and the SEC (currently there are five);
• merge the SEC with the Commodity Futures Trading Commission, and reduce the powers of the SEC by giving the Federal Reserve overall authority for the financial markets;
• eliminate the difference between 'banks' and 'thrifts', and close down the Office of Thrift Supervision;
• create a national regulator for insurance firms, eliminating the powers of state authorities over insurers;
• avoid any new regulations being introduced, but ensure regulatory authorities exert and implement their authority; and
• give the Federal Reserve the power to swoop into any part of the industry at any time to perform spot checks, including detailed examination of internal bookkeeping for any institution that they consider could pose a risk to the overall financial system.

The last bit is quite radical, as the Fed had no power to do this before, and there is expected to be a long and protracted debate between Democrats and Republicans, Congress and the Senate, before this passes into law in 2009.

The full text of the Executive Summary is available here.   

Reuters also reports that the US and UK have agreed a joint banking watchdog, comprising senior treasury and regulatory figures from London and Washington, to develop proposals to monitor and regulate the banking system.

Department of the Bleedin' Obvious - Lending Created Crisis

Some totally obvious comments are coming out in the media today.

Take the UK’s new Chancellor of the Exchequer (the old one got promoted to Prime Minister) Alistair Darling who is headlined today as saying that banks “need to know who they're lending to, how much they're lending and what the risk is. Now, that's elementary banking, one might think, but there are times when going back to good old-fashioned banking may not be a bad idea.”

This headline is actually Mr. Darling ripping off an interview with Henrik Paulson a couple of weeks ago. Henry, Hank to his friends … as I said, Henry is US Treasury Secretary and was interviewed by CNBC a couple of weeks ago about the meltdown in subprime. 

A critical part of his commentary goes as follows:

“If a market turbulence is precipitated by economic weakness or by the credit quality of the corporate sector, it's one thing, but we have, again, strong economies, we have a healthy corporate sector, we have a healthy financial sector, major financial institutions, so the problems we're experiencing right now are coming from bad lending practices.“

Mr. Paulson is an ex-banker from Goldman Sachs and he met Countrywide, JPMorgan and Citi yesterday. After the meeting he came out and pretty much repeated the same mantra, but this time laying it firmly at the feet of his compatriots.

Interesting. 

Maybe it’s me or maybe I’m just getting old, but isn’t this all stating stuff from the Department of the Bleedin’ Obvious (DBO).

DBO states: “Previous financial crises have been caused by bad lending practices, such as the 1997 Asian Financial meltdown, and should not be repeated.”

DBO states: “Offer someone a mortgage at five times salary and they will be stretching themselves to pay it back.”

DBO states: “Interest rates can go up as well as down.”

DBO states: “A market that makes lots of money won’t last forever.”

DBO states: “Give a guy something he cannot afford and he’s unlikely to pay it back no matter how hard he tries.”

I could go on, but instead recommend that you read the one book that tells you what’s going on: “Extraordinary Popular Delusions & the Madness of Crowds” by Charles Mackay.

If you haven’t heard of it, the Amazon summary states:

“Why do otherwise intelligent individuals form seething masses of idiocy when they engage in collective action? Why do financially sensible people jump lemming-like into hare-brained speculative frenzies--only to jump broker-like out of windows when their fantasies dissolve? We may think that the Great Crash of 1929, junk bonds of the '80s, and over-valued high-tech stocks of the '90s are peculiarly 20th century aberrations, but Mackay's classic-shows that the madness and confusion of crowds knows no limits, and has no temporal bounds.”

In other words, people can be greedy and stupid.

Published in 1841, it shows why DBO applies as much today as it did 1,000 years ago. 

When you see a way of making money with no risks, you see the fool’s gold.

 

 

 

FSA Fall Short on Investor Protection -- WSJ

The FSA’s principle-based approach to regulation has won it a lot of favorable attention in the US. Leave it to the Wall Street Journal to weigh in with criticism for its failure to protect individual shareholders in the UK. The Journal sees the FSA as trying to protect the London marketplace rather than the individual investor and quotes Jim Cousins, a member of Parliament, saying the SEC would have been tougher in cases like the split-capital investment trusts.

The Journal story leaves a lot to be desired, focusing on one or two cases and quoting Cousins and a Harvard business prof—its comparison of the number of FSA staff at 2,700 while the US has 15 times as many in financial services doesn’t mention that includes 50 separate state insurance regulatory bodies, many of dubious value.

Nor does it look at the way the SEC in the past has chased after kids while ignoring the huge conflicts of interest in major Wall Street firms that Elliot Spitzer uncovered as New York’s Attorney General.

The differences between American and British regulation are getting a lot of attention as many in the US including Treasury Secretary Hank Paulsen argue for lighter regulation to keep New York competitive with London. See my blog review of commentary by Michael Bloomberg, Sen. Charles Schumer and skeptic Ben Stein—an economics writer perhaps better known for his role as the teacher in Ferris Bueller’s Day Off.

A lot of complex issues here and they deserve better treatment than the Journal’s story.

Tom Groenfeldt