financial reform

S&P Has a Silver Lining - The Senate Banking Committee Reviews Their Methods

As Wall Street tanks, S&P's downgrade reverberations abound, our S&P labeled dysfunctional government, legislators are fighting back. Beyond the mealy mouthed put downs coming from the administration, the Senate Banking Committee is doing something a little more serious. The Senate panel is now probing S&P for possible violations:

The U.S. Senate Banking Committee is looking into the decision by Standard & Poor’s to downgrade the nation’s credit rating for the first time in history, according a committee aide briefed on the matter.

Senate Banking Committee Chairman Tim Johnson, a South Dakota Democrat, is gathering more information on the Aug. 5 decision, which has been criticized by Treasury Secretary Timothy F. Geithner and other officials in President Barack Obama’s administration, according to the aide, who declined to be identified because he wasn’t authorized to discuss the matter publicly.

Senate Banking Chair, Democrat Tim Johnson:

I am deeply disappointed in S&P’s decision to enter into the game of political punditry.

The thing is, the Senate already held hearings on the credit ratings agencies and they know how absolutely corrupt the system is.

HUH? or Help for Underwater Homeowners in the U.S.

We desperately need constructive vs. destructive solutions. Imagine the economic stimulus effect of 15 million hardworking, voting, home owning, American households with reduced debt service and tangibly increased expendable income over the next 5 years…

Tapping on the Walls of The Echo Chamber or “HUH?”

By On Porpoise

“The walls of the echo chamber can sometimes keep out fresh voices and new ways of thinking…”

— Barak Obama 11-26-08

Imagine this:

* Oval Office September 2010. Rahm Emanuel seated with President Obama.
* Emanuel: “Pardon me Mr. President – What the hell is that?”
* Obama: Pauses – listens intently – a “tap, tap, tap” is audible in the distance.
* Emanuel: “Dammit! They’re tapping on the walls of our echo chamber!”

In his NY Times column of September 5, 2010, Pulitzer Prize winning Princeton economist Paul Krugman yearns for the Obama administration to rediscover the virtues of “intellectual clarity and political will” – as prerequisites for proposing essential stimulus measures to reinvigorate the struggling U.S. economy.

Higher Capital Reserve Requirements for Banks

The Basel III rules just increased capital requirements for banks, from 2% to 7%.

Global regulators, aiming to prevent any repeat of the international credit crisis, agreed on Sunday to force banks to more than triple the amount of top-quality capital they must hold in reserve.

The biggest change to global banking regulation in decades, known as "Basel III," will require banks to hold top-quality capital totaling 7 percent of their risk-bearing assets, up from just 2 percent under current rules.

The rules may oblige banks to raise hundreds of billions of dollars of fresh capital over the next decade. Germany's banking association, for example, has estimated its 10 biggest banks may need 105 billion euros ($141 billion) of additional capital.

But to ease the burden on banks and financial markets, regulators gave the banks transition periods to comply with the rules. These periods, extending in some cases to January 2019 or later, are longer than many bankers originally expected.

But wait, some can hold off for up to 9 years! Believe this or not, many banks objected and it gets worse, it's total assets, not just capital capital. That includes derivatives:

Here Come The Lobbyists

Now that the window dressing called financial reform has passed, the lobbyists are marching on regulatory agencies (what a surprise):

Nearly 150 lobbyists registered since last year used to work in the executive branch at financial agencies, from lawyers for the Securities and Exchange Commission to Federal Reserve bankers, according to data analyzed for The New York Times by the Center for Responsive Politics, a nonpartisan research group. In addition, dozens of ex-government lawyers, who are not registered as lobbyists, are now scouring the financial regulations on behalf of corporate clients.

This is your classic stage two for corporations to destroy any prayer's chance of legislation in the national interest. First they move laws they wish to destroy into regulations and studies. Next up is to decimate the interpretation and implementation of those regulations and of course generate counter "studies", otherwise known as lobbyist white paper spin.

More Bad News on Financial Reform

Even more bad news on Financial Reform. The main players in the negotiations between the House and Senate versions are Chris Dodd, Barney Frank and Timothy Geithner.

The Wall Street Journal:

As a result, people who know them say, they are likely to show willingness to negotiate on parts of the bill they don't view as core, while being intractable on pieces they view as elemental.

That could mean easing provisions with strict limits on derivatives trading, proposed restrictions on fees banks charge retailers and even agreeing to allow auto dealers to be exempt from new lending rules.

Nice huh? Negotiations are supposed to be between the two houses of Congress only. The entire list of conferees is front loaded with corporate representatives. Not a single Congressional representative who was pushing for real reforms, such as the Volcker rule, Glass-Steagall, stronger derivatives reform was chosen as a conferee.

Financial Reform Bill Senate Conferees

The Hills is reporting the Senate Conferees for the Financial reform bill committee conference have been chosen.

They are:

Chris Dodd (D-Conn.) will be joined by committee members Sens. Tim Johnson (D-S.D.), Jack Reed (D-R.I.), Charles Schumer (D-N.Y.), Richard Shelby (R-Ala.), Bob Corker (R-Tenn.), Mike Crapo (R-Idaho) and Judd Gregg (R-N.H.).

Senate Agriculture Committee Chairwoman Blanche Lincoln (D-Ark.) will be joined by panel members Sens. Patrick Leahy (D-Vt.), Tom Harkin (D-Iowa) and Saxby Chambliss (R-Ga.).

The House has recommended conferees. They are, with Barney Frank:

House Speaker Nancy Pelosi (D-Calif.) that Rep. Carolyn Maloney (D-N.Y.), chairwoman of the Joint Economic Committee and a senior member on the financial panel, be named a conferee alongside the six subcommittee chairs.

The subcommittee chairmen are Democratic Reps. Paul Kanjorski (Pa.), Mel Watt (N.C.), Luis Gutierrez (Ill.), Maxine Waters (Calif.), Gregory Meeks (N.Y.) and Dennis Moore (Kan.)

Ratings Arbitrage - Letting the Credit Ratings Agencies off the Hook

An amendment just passed the Senate which allows regulators to assign a credit rating agency to evaluate asset based securities. To date, the ones hiring the credit rating agencies are the ones making up these fictional derivatives.

That said, we have this New York Times article reporting more investigations of banks, but this time trying to find evidence the poor little ole' credit ratings agencies were just played as suckers by the banks (cough, cough):

The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

Since ratings models were available to the ones creating the structured finance product, in this case, credit default obligations (CDOs), issuing firms could analyze the ratings methods to figure out where to hide the toxic, worthless crud contained within, yet still land a AAA rating.

Derivatives Reform is Under Siege!

This is astounding. We have former Federal Reserve chair, Paul Volcker, attacking the derivatives reform bill currently in the Senate.

The provision of derivatives by commercial banks to their customers in the usual course of a banking relationship should not be prohibited.

Really? Why is it then only 5 banks, Goldman Sachs, JP Morgan Chase, Citigroup, Morgan Stanley and BoA are 90% of the derivatives market? Yeah right, that's really helping Joe Blow in his small manufacturing business in Ohio. Oh yeah, Joe Blow, running his $20 million dollar part business is really busy trading derivatives to hedge risk in a global market. Right, and he's also hedging to control his energy costs. Uh huh. Show me the numbers on that claim! Even more importantly, Joe Blow is an end user. There is no reason he, as a banking customer, has to trade derivatives with that bank.

FDIC chair Sheila Bair also came out blasting on stopping banks from gambling with customers and taxpayer money.