As Congress, upon return from recess, takes up new financial regulation expect the discourse to heat up again, including intense lobbying from the banking industry and Wall Street. Below are several links worth reading in connection with the upcoming financial regulation debate.What story does the financial reform bill tell about what went wrong in the financial crisis?
Are capital requirements sufficient to deal with the “too big to fail” problem?
10 questions for those that propose to reform financial services.
Senator Bob Corker (R-TN) agrees that the "shadow banking" system is in need of better regulation.
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Firms are using outside compensation advisers to "approve" executive compensation in order to appease shareholders.
Is regulatory uncertainty the cause of a slow recovery?
Tiffany Smith
ReplyDeleteI do agree that financial reform should be the next major topic on the agenda. Efforts to increase the market stability for future generations, or particularly just mine. From what I gather, on the rather complex issue is that there are two basis principles afloat. On the first hand, some people argue that limiting the size of the biggest banks should be done and on the other hand the issue is regulating what banks do and not how big they get. While I do agree that this is an important topic, I do not see why there cannot be a bill that does both; limits size and regulates. But I guess that would mean getting politicians to agree upon something…
However, as a general comment, what I did not personally agree with was the U.S. government providing cash and guarantees to financial institutions, particulary BOA, AIG, Citigroup and some others. Doing this lead to one result, making taxpayers responsible for the losses. It's almost as if taxpayers get a double loss, we get taxed on the money we make but there are very few jobs for which we can be taxed. I guess one would argue if you don't have a job then you don't pay taxes. But it's just a double edged sword for tax payers in general.
Karen Lander:
ReplyDeleteRegarding the use of outside compensation consultants...
There is media attention for seemingly outrageous compensation to top executives. There is also some attention given to the disparity between such executive compensation and that of lower-level employees. The link to the Wall Street Journal article referenced reveals shareholder interest in having greater say about executive pay. In order to appease shareholders a new consulting business has been launched to evaluate levels of executive pay. Is this valuable information or a meaningless bit of public relations: a purchased stamp of approval from a group of financial guys? It seems to me a comprehensive approach might be most informative. Realistic analysis focussing on how the company distributes compensation at all levels of employment and how this translates into corporate success and market value for shareholders would be welcome to investors. Market and corporate analysts are able to perform this task. There is likely an appetite for for it. Relying on government to regulate our way out of the financial crisis, or clinging, insanely, to a deregulation model are not the only approaches to economic reform. It would be very interesting if shareholders and potential investors fueled a market for broad based information that shed light on the effects of compensation distribution in corporations.
Regarding Captial Requirements
ReplyDeleteWhen will we see reform and not just bailouts. The financial community was bailed out without regulations/restrictions to prevent future problems. As shadow banking is identified as a problem, there is still no regulation to prevent this cheap but non liquid credit. Another financial crisis in 6-8 years….why would it wait that long? We continue to throw good money after bad and allow the financial community to continue operating, after this financial crisis – just as it did before. The banks are continuing to grow in size, there is no required capital reserve cap, and leverage continues at an unacceptible level. The massive banks were generously bailed out, no reform or concessions won from the admistration – and the financial community is still in charge. How will the cycle stop – if we continue to allow the same actions – but expect different results. The cycle of crisis, bailout and mounting national debt will continue. When will the bank sizes be limited and the hard capital limits imposed to protect the American public?
I agree with Mrs. Randolf. We are in desperate need of economic reform. We need a reform that will enable the American taxpayers to trust a financial system that has failed them miserably in the past. Simply throwing money at a problem will not implement the kind of change that is necessary to stabilize our economy. Only legislative reform can ensure that this disaster will not happen again.
ReplyDeleteWe need to develop a set of laws that will prohibit banks from placing us in another economic crisis. Furthermore, we need legislation that will limit the size of banks to ensure that one bank, in and of itself, will not cripple our economic system if it’s practices are harmful to the economy. If our legislative branch can find a way to address both issues, our future will be more secure.
We need to develop a set of laws that will prohibit banks from placing us in another economic crisis. Furthermore, we need legislation that will limit the size of banks to ensure that one bank, in and of itself, will not cripple our economic system if it’s practices are harmful to the economy.
ReplyDeleteWhile you certainly make a noble point, this almost certainly won't happen. The real truth is that JP Morgan had one of its best years during the financial crisis. While many believe that these gains are ill-gotten - they aren't! Its JP Morgan's job to maximize profits. The problem is that they made those profits to a degree on the implicit guarantee that the government will bail them out, and everyone else, in a crisis. You can't put Humpty Dumpty back together again. So what do you do? One thing is for certain is that there is no public benefit from having huge banks. So you break them up. You re-install Glass-Stegall but with more bite to reach shadow banking. This isn't even remotely on the table - and probably is too drastic and certainly isn't politically feasible. So you try and give resolution authority to bank breaks up after they fail and not before (one of my favorite proposals is that banks will have to do periodic "fire drills" showing how they would break up their assets on the possibility they fail - a dry run of sorts). But regulatory capture is so bad and we rely so much on regulatory discretion there is no guarantee that it will have any effect. Sarbanes-Oxley sure hasn't stopped any problems that it was meant to (see Lehman). So what does that leave? I don't know but it means more than "holding banks accountable."
The pertinent question is not “if we need economic reform”, but rather what type of reformation that is needed? Many people are suffering from unemployment, foreclosures, and not to mention no healthcare. These factors have contributed to our economic state. Wars in Iraq and in Afghanistan have drained our banks accounts and have placed us in a historical debt larger than any deficit that I could remember. (I thought wars generate jobs) Everybody seems to have an opinion but does anyone have a solution. Maybe we should enact a New “New Deal” or try and give healthcare reform a chance. (It may generate millions of jobs, oh yeah not to mention employers may be able to hire more people due to the fact that they no longer have to carry a large portion of their employee’s healthcare coverage).
ReplyDeleteMr. Goodson raises an intriguing answer, to limit the size of banks. But is that the appropriate reaction? Would that not stifle economic growth by curbing expansion? I think you're hoping that having a lot of little banks would promote more competition and could therefore bring about more consumer satisfaction and protection. But I say not. Too many banks would burden an already inefficient regulatory system that is struggling to keep up. I think the Obama Administration is going to have to put on a different suit of armor and actually enforce laws already on the books and then do an exceptional job at bringing it to the limelight. Such attention helps to restore public trust, while deter future bad faith dealings.
ReplyDeleteMr. Goodson raises an intriguing answer, to limit the size of banks. But is that the appropriate reaction? Would that not stifle economic growth by curbing expansion? I think you're hoping that having a lot of little banks would promote more competition and could therefore bring about more consumer satisfaction and protection. But I say not. Too many banks would burden an already inefficient regulatory system that is struggling to keep up. I think the Obama Administration is going to have to put on a different suit of armor and actually enforce laws already on the books and then do an exceptional job at bringing it to the limelight. Such attention helps to restore public trust, while deter future bad faith dealings.
ReplyDeleteI think an important first step would be to apply tax principles to FAS 140. It seems correct to observe that respecting the transactions sanctioned by that rule only permitted certain companies on the brink of the chapter to take on even more debt and default, thus, contributing to the lack of liquidity in the credit markets.
ReplyDeleteFAS 140 governs accounting for securitizations, in which a lender sells the future proceeds from a loan into a pool of similar assets held by a special purpose entity and/or a trust. Those trusts then issue bonds, backed by the loan payments. Although the lenders in question typically continue to service the loans — collecting them and handling other transactions with the borrowers — securitization accounting requires that the lender make a "true sale" to the trust, so that it, and not the lender, is the owner of the future loan proceeds.
These transactions are consummated for balance sheet purposes only and, even within that limited purpose, debt financing expansion for otherwise inadequately capitalized companies. In my judgment, this is abusive. If a special purpose entity files a consolidated tax return with the company initiating the transaction, the "true sale" should be given non-recognition treatment, just as transfers between spouses are given non-recognition treatment by 26 usc 1041. Accordingly, the objective of the transaction (i.e., to "gross up" the companies' credit scores by representing accounts receivable as cash) should be given "non-recognition" treatment by credit rating agencies.
I would have to agree with Ms. Smith. It's almost as if taxpayers get a double loss due to the bailout of large financial institutions. There has to be a bettwe way to curb financial hurdles. I believe the Obama Administraton is doing its best to combat harmful financial downturns caused by banks. The only issue is whether the way, such as the Financial Reform, is the best idea posed. And will it reverse of further casue ecnomc turmoil. There are many theories that support both, but in reality we have to wait and see what will happen.
ReplyDeleteAs a former regulator in the financial industry, I’m very opinionated about financial reform. I think the one thing that has been bothering me most lately about regulation is that few of the rules are tried in court. Goldman Sachs is willing to face the allegation of the SEC in court because they are so large, but generally, companies are afraid to challenge the SEC or DOJ or other regulatory agencies when they charge a company with a rule violation. Left untested, Congress has free reign to amend the rules and make them even more severe. I think one of the problems with regulatory reform is that we are giving Congress too much power.
ReplyDeleteWhere do you start with regulations? It's like many have commented in the past about the tax code. It seems as if what needs to be done is to hit the giant delete button and start over. The problem with that, however, is that there are too many politics that goes behind creating legislation. The reason nothing gets done is that the lobbyist are effective at their job in representing large banking interests.
ReplyDeleteRegulation needs to be done, but I fear it's too little, too late.
Candace Cronan
ReplyDeleteFinancial reform is a must right now in our country. However, striking the balance between regulatory discretion and hard and fast rules is a difficult choice. But something has to change and the SEC needs to start being the agency they are holding itself out to be to investors and the public at large. At minimum, there needs to be more accountability especially considering all the things the SEC has let "slip" by.