Geithner and Summers Preview New Financial Regs

Tim Cavanaugh | June 15, 2009

Fresh off their victories in raising mortgage interest rates, pulling hundreds of billions of dollars in investment out of the private sector and failing to make sneaky end-runs around the president, Treasury Secretary Timothy Geithner and National Economic Council director Lawrence Summers are teasing their latest fool-proof scheme: an overhaul of U.S. financial regulation.

In an op-ed in today's Washington Post, the two long-time, extremely active participants in the financial bubble now have a five-point plan to ensure things continue to run smoothly. Like most five-point plans, this one contains seven points. Here they are:

1. Raise "capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms."
2. Subject "large, interconnected firms" to consolidated supervision by the Federal Reserve and give broad discretion to a council of regulators across the financial system.
3. Impose "robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies" and "require the originator, sponsor or broker of a securitization to retain a financial interest in its performance."
4. Subject all derivatives contracts and derivatives dealers to regulation.
5. Offer a "stronger framework for consumer and investor protection" against so-called predatory lending. 
6. Establish a "resolution mechanism that allows for the orderly resolution of any financial holding company whose failure might threaten the stability of the financial system."
7. "Lead the effort to improve regulation and supervision around the world."  

The legally required "some will say" graf dismisses the argument that overhauling the regulatory system should "wait until the crisis is fully behind us." The response is that these critics misunderstand the nature of the current "crisis of confidence and trust." Geithner and Summers promise they will be "reassuring the American people that our financial system will be better controlled."

This is horse pucky. The crisis in confidence and trust is the cure, not the disease. Banks are not lending because there are are too many bad risks out there. People aren't getting loans because they can't establish their creditworthiness. And the reason for that isn't some baloney about mass psychology or people needing to be protected from themselves. It's because about 20 percent of Americans have demonstrated that they must never be loaned money on any terms.

Lending at interest is among the most important inventions in history, on a level with the printing press and internal combustion in creating the comforts of the modern world. A substantial portion of Americans decided to piss all over that gift. Their government enabled them. Now it's looking to give them even more help -- along with bandaids like the requirement that MBS originators have to take part of the risk they package (a good idea, but one that's better imposed by sadder and wiser buyers of mortgage-backed securities than by the government).

But if the regulatory overhaul described above won't do much besides moving the next bubble to some other area of the economy, it will succeed in regulation's oldest, truest goal of propping up existing players and creating new barriers to entry for anybody who might challenge them. Rest assured that Goldman Sachs and JPMorgan Chase will make noise about how the new liquidity, reserve and reporting requirements are tough, challenging and a step in the right direction. Editorial boards will swoon that "even industry leaders agree" on the need for the new regs. Things will look a little different if you're not either owned by or on a first-name basis with the secretary of the Treasury. And if Tim and Larry get anywhere with point number 7, you won't even escape the new regime by fleeing to the Cayman Islands.  

Comments

Alan Vanneman|6.15.09 @ 2:04PM|#

"Lending at interest is among the most important inventions in history, on a level with the printing press and internal combustion in creating the comforts of the modern world. A substantial portion of Americans decided to piss all over that gift."

Oh, I get it. Capitalism isn't guilty, we are.

Fluffy|6.15.09 @ 2:11PM|#

I don't think either capitalism OR the borrowers are guilty.

The Federal Reserve is, and the Bush administration is, and the Congress is. Each of these groups were instrumental in creating the housing asset price bubble.

Every time you want to blame borrowers or say that they pissed on anything, keep this in mind: once an asset price bubble is created, opportunity costs attach to not participating in the bubble. This is particularly true for public companies - the public markets are quite efficient at punishing companies whose rates of return lag their industry average, so if everyone else is participating in an asset price bubble, you are compelled to do so also, because your other choice is to die.

It really pisses me off to see individuals holding the reins of the institutions that created this problem say, "Well, our plans would have all worked out if it weren't for those dirty speculators."

There is no system of regulation that will allow gross mismanagement of monetary and fiscal policy to not have real-world consequences. The bubble will just find the path of least resistance. We certainly shouldn't reward institutions that grossly failed, like the Federal Reserve and the US Treasury Department, with greater powers.

alan|6.15.09 @ 2:12PM|#

Oh, I get it. Capitalism isn't guilty, we are.

Yes, that would be the anthropomorphically sound argument.

Gimlet|6.15.09 @ 2:15PM|#

Pluperfect pic, Mr. C.

Gimlet|6.15.09 @ 2:17PM|#

8. Abolish the Federal Government

9. Profit

|6.15.09 @ 2:30PM|#

And the reason for that isn't some baloney about mass psychology or people needing to be protected from themselves. It's because about 20 percent of Americans have demonstrated that they must never be loaned money on any terms.

Only twenty per cent? You're in a generous mood, today.

|6.15.09 @ 2:43PM|#

Subject "large, interconnected firms" to consolidated supervision by the Federal Reserve and give broad discretion to a council of regulators across the financial system.

Just what we need:"Solomonic" ad hoc decisions handed down by a crack cadre of The Right People. That's exactly what the Constitution calls for,right?

classwarrior|6.15.09 @ 2:48PM|#

Other lessons that could be drawn :

1) Rating agencies that have proven so conflicted and wrong about CDOs that they should never be allowed to rate another security again.

2) Mortgage companies that knowingly gave loans to bad risks because they were quickly repackaged and sold them to investors enabled by ratings agencies (see #1 above) should never be allowed to do business again.

3) Corporate media economic pundits who missed an obvious housing bubble should be fired immediately for such incompetence. They won't of course, because they believe strongly in the market, you see. No eminance grise podiums for Alan Greenspan either.

No Name Guy|6.15.09 @ 2:57PM|#

Classwarrior

Re the ratings agencies. Don't ya think that going forward those that got burned won't blindly trust them (and even those that didn't get burned who learned from the loss of others). Kind of takes care of that "being allowed to rate" thing all by itself - without big suggar daddy Government doing anything.

Re Morgage compaines: Hmmmm.... again, as an investor with money to put to work, do you REALLY think, after the last few year, I'd hire folks to pass out MY money to unqualified borrowers? Yup.....no government intervention needed. Self regulating.

Let me fix number 3 for you - replace "corporate media economic pundits" with "government regulators".

Jordan|6.15.09 @ 3:05PM|#

3) Corporate media economic pundits who missed an obvious housing bubble should be fired immediately for such incompetence. They won't of course, because they believe strongly in the market, you see. No eminance grise podiums for Alan Greenspan either.

Austrian economists were warning of the housing bubble years ago, while Keynesian clowns like you and Barney Frank were still crowing about how sound our economy was.

Jozef|6.15.09 @ 3:15PM|#

Every time there's a new regulation, people find a way around it. And that way usually proves to be highly profitable, at first, precisely thanks to the fact that it is not regulated. That attracts lots of new investors, which end up owning a smaller share of the profits as the time goes by, until they realize they were late to the party, the bubble bursts, and people ask for regulation of the unregulated niche. Rinse and repeat over and over again. I, for one, welcome this new regulation. I intend to be among the first to enter new, unregulated areas, and bail out before the bubble bursts.

|6.15.09 @ 3:31PM|#

As U.S. stock markets plummeted last September, the Senate's No. 2 Democrat, Dick Durbin, sold more than $115,000 worth of stocks and mutual-fund shares and used much of the money to invest in Warren Buffett's Berkshire Hathaway Inc.

The Illinois senator's 2008 financial disclosure statement shows he sold mutual-fund shares worth $42,696 on Sept. 19, the day after then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke urged congressional leaders in a closed meeting to craft legislation to help financially troubled banks. The same day, he bought $43,562 worth of Berkshire Hathaway's Class B stock, the disclosure shows.


More here:

http://www.suntimes.com/news/1620776,CST-NWS-durbin13.article

|6.15.09 @ 3:32PM|#

Subject "large, interconnected firms" to consolidated supervision by the Federal Reserve and give broad discretion to a council of regulators across the financial system.

This sounds like they are nationalizing, in all but name, the "too-big-to-fail" banks. Now would you expect a profitable and successful bank under the fine supervision and regulation of this special council (star chamber)?
- Or do you expect that these banks will get a extra special lending rate from the Fed? Especially if they they are less than profitable under the 'Council's' supervision.
- Or do you expect they might make some big loans to some Chicago based slum lords or large democratic contributors? Sort of like in Zimbabwe. hmmm?
- Or, if under the 'Council's' fine supervision, these banks start tanking, will the American taxpayer be expected to bail them out ... since they're too-big-to-fail, dontcha know?

|6.15.09 @ 5:08PM|#

Maybe we can annoint this guy to the Banking Star Chamber:

WSJ.com - Activist Financier 'Terrorizes' Bankers in Foreclosure Fight

http://www.emailthis.clickability.com/et/emailThis?clickMap=viewThis&etMailToID=895344190

|6.15.09 @ 5:09PM|#

Better link for the article above:

http://online.wsj.com/article_email/SB124276441945635993-lMyQjAxMDI5NDEyNTcxNjU0Wj.html

|6.15.09 @ 7:19PM|#

I don't think either capitalism OR the borrowers are guilty.

The people who lied about income, etc, on their loan applications are guilty as sin. Those who simply failed to understand the terms of their mortgage are less guilty, but they must nonetheless face the consequences of their negligence.