Abandon all hope ye who enter this diary because Obama and his economic team will not be coming to the rescue.
DavidD had a news item "Why Worry About New Regulations When We Don’t Enforce the Old Ones?" that made the point of what good are regulations if the regulators don’t do their job?
Financial reform legislation doesn’t address this issue and no one -meaning a politician- is saying anything about that.
And the modus operandi of Congress appears to be if existing law isn’t working, pass a new law. They never seem to consider whether their previous legislation was proper in scope but lacking in enforcement (guess they skipped a step with HCR and went straight to the ‘lacking in enforcement’).
So if we can’t count on regulators -and lots has been written about how the Fed, Treasury, SEC, OTS,etc. neglected their duty and how that led to the ‘financial meltdown’, so I won’t recount that here- then the only ‘reform’ that would mean anything would be the creation of a CFPA that was autonomous -NOT housed in the FED-, re-enact of Glass Steagall separating commercial and investment banking, an exchange that covered ALL derivatives traded between commercial entities and capital requirements so high that they make the cost of doing such business a very low margin business.
"The proposals that are now being considered, not only by the Obama administration in the US but also in Europe and elsewhere, include limits on the activities of particular types of institutions, trying to limit bank size and ensuring that derivatives trading occurs only in regulated exchanges with clearly specified margin requirements, rather than in over-the-counter (OTC) transactions that are completely unfettered.
These are all important and necessary changes. In fact, it is clear that without such changes, the economies of the core capitalist countries – and therefore the world economy – will continue to lurch from crisis to crisis, necessitating ever larger bailouts and leading to even greater damage to the citizenry. But the question is, are they feasible at all given the legally binding commitments made with respect to financial services liberalization by the US and several other WTO members?
The Annex on Financial Services already makes some crucial limitations on countries’ ability to be flexible on these commitments. The Annex applies to all WTO member countries, irrespective of the extent to which they have individually or collectively decided to make liberalization commitments in financial services.
The section on domestic financial regulation in the Annex makes the following point: "Notwithstanding any other provisions of the Agreement, a Member shall not be prevented from taking measures for prudential reasons, including for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by a financial service supplier, or to ensure the integrity and stability of the financial system. Where such measures do not conform with the provisions of the Agreement, they shall not be used as a means of avoiding the Member’s commitments or obligations under the Agreement” [emphasis added].
So, if countries have already made commitments to allow certain kinds of financial activities of foreign financial institutions, they cannot impose any prudential regulations (even when they are necessary for the stability and viability of the system) if they run counter to such commitments! "
"Closing down multinational financial firms is not easy. The collapse of Lehman Brothers caused about 92 subsidiaries to go into bankruptcy, of which only 20 subsidiaries were located in the U.S. and came under American jurisdiction. Even today, there are disputes about whether assets located in the United States belong to international subsidiaries." (While this article is old -2009- this point is still very valid and the article is from a ‘conservative think tank’)
"Reflecting the fact that there is no internationally-agreed regime for the liquidation of an insolvent multinational bank, the study group’s work revealed a number of areas in which uncertainty and a potential for conflict can arise in the closure and liquidation of a multinational bank."
Anybody remember BCCI?
Regulations for cross border banks (like Goldman,Citi,BofA,JpMorganchase,etc.) don’t exist; where in the pending legislation (large pdf) is such mentioned?
All that is mentioned about ‘international banking’(or ‘multinational banks’, MNB’s, another acronym you be seeing more of) is to get a study going that will have up to two years to be completed and must consider the ‘competitiveness’ of any recommendations that are put forth. And when it comes to the ‘dreaded’ "systemic risk determination (the rationale for all the bailouts):SEC. 203. SYSTEMIC RISK DETERMINATION – "Such recommendation shall be made upon a vote of not fewer than 2⁄3 of the members of the Board of Governors then serving and 2⁄3 of the members of the board of directors of the Corporation then serving." ; so 2/3 of the FED’s Board of Governors AND 2/3 of the Directors of the receivership corporation to be set up for liquidating an entity that is seen to be a ‘systemic risk’ must vote in unison.
Yeah, that’ll get done in a timely manner.
Gretchen Morgenson(NYTimes) weighed in on this subject this past Friday on Moyers Journal.
GRETCHEN MORGENSON: It’s so true. I mean, you all of the people who did not want to regulate derivatives are in positions of power. Larry Summers. You know, now Gary Gensler who is the head of the Commodities Futures Trading. I think he’s had a change of mind. And wants to really let you know, regulate these things. But, Timothy Geithner, our Treasury Secretary, was on the scene of all of this extreme growth and risk taking. Was running the New York Fed. Countenancing all kinds of risks that were taken at Citigroup, which was under his purview. You know, it’s troubling that we have the very same people who were really on the scene of this disaster. You just don’t get a sense that they are really and truly reformers in, you know, the true sense of the word.
GRETCHEN MORGENSON: Exactly. And the Fed, honestly, hasn’t had any pro-consumer DNA in its system since the early 1990s. It’s really not in that game at all. And so, to house an agency at– in the Fed, which was you know, the entity that was pushing for relaxing capital requirements at the banks. That did nothing to prevent these exotic mortgages from being made and dispensed, you know, in the billions and billions. So you know, I would be hard pressed to understand how that particular entity is really going to get religion, shall we say, on the consumer, you know, protection world.
The extent to which AIG had gotten into this business was a total shock to even the highest level of federal regulators in Washington. So, why are we not talking about putting these things on an exchange?
BILL MOYERS: Any evidence that this legislation being discussed this week in Washington contains that kind of reform?
GRETCHEN MORGENSON: Well, it doesn’t really contain, my bone to pick, major bone to pick with it is that it does not address too big to fail before it happens. There is some language about how we would unwind these entities. How we would pre– be better prepared. If they get too big, how we would be vigilant to watch for trouble on the horizon. But there isn’t a lot of talk about, "Let’s just not get in this position again. Let’s just never let these banks, these institutions get to be at the position or point where they can threaten the entire financial system." It’s more remedial than prevention. And that, I think, is a mistake.
BILL MOYERS: Yeah, why are we not talking about it?
GRETCHEN MORGENSON: We’re not talking about it, because these banks make enormous amounts of money facilitating those trades, creating these swaps for their customers, allowing them to trade, being the middle man. They don’t want, they don’t want transparency. They want opacity. They don’t want people to be able to see what these things are trading at, because at the moment they do then the spreads narrow, the profits come right out of that business. And this is an enormously profitable business for them.
BILL MOYERS: And could this business, unregulated, un– without transparency bring us down again?
GRETCHEN MORGENSON: Yes. Absolutely. Now, what they have decided to do, what has been proposed is to put them on clearing houses, to make these things trade through a clearing house of some kind, but not all of them, only the most simple. Now, none of these things is simple. But the most kind of what they call plain vanilla. And so, the more exotic things where I make an agreement with you to buy or sell something, some stream of income, those would not ever be done on a clearing house. So, you’re still going to have an enormous amount of this stuff trading really behind the curtain. And without the knowledge of very you know, any regulatory organization."
So does the Senate Banking Cmte. legislation address these necessary fixes(reforms)? Well , there’s a weakened CFPA housed in the FED; Glass-Steagall is NOT reimplemented; only ‘simple’ derivatives will be on an exchange, and the capital requirements being discussed are not high enough to make trading in CDO"s,CDS’s,etc. only marginally profitable. Nor is there language to address the inequity of hedge funds paying ‘carry interest’ instead of regular income tax on earnings.
So when they-politicians, the CMM, other ‘pundits’- tell you that the legislation will ‘end to big to fail’, call them for the liars that they are.
P.S. AFAIK, the repeal of the insurance industry’s anti-trust exemption that was passed by the House is still languishing in the Senate.