Anne T.
Team Building Retreats to Generate Bottom Line Boosting Strategies►Corporate Event Planning to Reward Corporate Teams
Should FDIC or the Federal Reserve Bank have the authority to shut down and take over non-bank financial institutions like AIG?
This was in the news today and Obama addressed it directly. It should stimulate an interesting discussion. Will this make the situation better or worse?
"Obama administration seeks powers to shut firms like AIG"
Reuters - "The Obama administration on Tuesday mounted a full-scale push for government authority to shut down troubled institutions like insurer AIG to avoid the need for future bailouts.
U.S. Treasury Secretary Timothy Geithner, testifying before lawmakers still fuming about big bonuses for executives at bailout recipient AIG, called on Congress for new powers to take over big non-bank financial firms that run amok.
Federal Reserve Chairman Ben Bernanke strongly backed Geithner in testimony before the same committee, and President Barack Obama took the case public during a televised news conference on Tuesday evening."
"Keep in mind that it is precisely because of the lack of this authority that the AIG situation has gotten worse," Obama said. "We should've obtained it much earlier so that any institution that poses a systemic risk that could bring down the financial system, we can handle, and we can do it in an orderly fashion that quarantines it from other institutions."
http://ca.reuters.com/article/topNews/idCATRE52N49J20090325
Clarification added March 25, 2009:
It seems that a lot of people have been asleep at the switch. It also seems that either:
- Glass-Steagall should never have been repealed or
- checks and balances should have been put in place at the time of repeal
"With the repeal of Glass-Steagall, eliminating separation between commercial banking and investment banking ... large commercial banks had their investment banking arms buying up huge amounts of these securitized loans and carry them off-balance (as toxic assets, again pretty much unregulated). The commercial banks were providing a lot of the funding for these loans ... but by a much more circuitous route (which bypassed much of the regulation that was put in place to prevent crises like we now have)."
Re: Just say no
Do you think that will work? If so what will fix the problem? It doesn't look like it will be self-correcting. I think the USA will eventually have banks equivalent to the Business Development Bank (formerly Federal Business Development Bank) in Canada. It certainly doesn't work perfectly but it does provide Government guaranteed loans to businesses that probably wouldn't qualify in the regular banking system. I know that a lot of Americans don't want it but I think that's where you're heading and it will come to the point that you have no choice. FYI, in Canada we also some mortgages that are Government guaranteed reducing risks to the banks. There were changes made to these "high ratio mortgages" last year to reduce the risk.
"The Government of Canada will no longer be guaranteeing high-ratio mortgages that have one or more of the following attributes:
- loan-to-value ratios above 95% (please see the mortgage glossary for the definition of loan-to-value)
- amortizations longer than 35 years
- interest-only mortgages
- applications where the credit scores of both mortgage borrowers are below 620 (therefore, at least one applicant must have a credit score of 620 or above)"
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Adrienne G.
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I think the mainstream media's interpretation of Geithner and Bernanke's appearance on Capitol Hill regarding AIG skewed the issue (surprise).
Geithner believes that the Federal Reserve is the entity best to deal with the regulation of non-bank, hedge fund, and capital entities like AIG. Bernanke has not stated outright that he believes the Fed should do such regulating.
I think Paul Volcker said it best today: "Any specific reform raises questions of how it fits with the whole system," he said, outlining the importance of respecting the current system and visualizing new regulatory framework in response to the economic crisis that deals best with regulatory bodies already in place.
Volcker would like to see a stronger regulatory body in the capital markets to prevent the illusion of a government safety net. Obviously someone understands "moral hazard" and the effect such a belief can have on the reckless activities of bank and non-bank entities.
We are certainly heading into dangerous territory - at least Volcker understands the complications of this.
The only real solution would be for the United States to climb into a time machine, reverse deregulation in the mortgage markets, create regulation where none previously existed in the creative financial instruments arena (due to Alan Greenspan's insistence that the then-exploding derivatives market was a "zero sum game"), and to untangle entities like AIG from the MBS game on an International scale.
Will it be self-correcting? Not at this point. And especially not if Geithner continues to push Bernanke to debase the dollar in a scramble to save institutions like AIG.
I believe that Bernanke understands what he is up against. Geithner is another story and I believe he will continue to push the envelope and force system-wide shocks based on poorly thought out "rescue plans" - he was never prepared for the job. For him to insist that the Fed, already charged with the duty of supervising the banking industry (and we all know how THAT turned out), would be the best agency to regulate non-bank entities proves just how clueless the kid is.
I ask you why Lehman was allowed to fail but AIG has been on life support since last fall?
Didn't Lehman pose a systemic risk? Or did Goldman Sachs (or other such institutions) not have enough material risk (as they did with AIG, which they CLAIMED did not exist when first questioned about their material exposure to AIG before the recipients of AIG payoffs were released) to warrant saving?
It is too late now for a regulatory agency like this to repair the damage but if the powers-that-be take Volcker's suggestion and look at the larger picture and the deficiencies that must be addressed when discussing the issue of regulation, certainly we can prevent a crisis of this magnitude.
Will that happen? Probably not.
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Lynn W.
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FDIC and Federal Reserve somewhat evolved to protect customer deposits ... which indirectly tended to influence and stabilize many other parts of the economic infrastructure. however in the latest crises, (mostly unregulated) non-depository institutions played a major role ... using securitization as source of funds.
Evil Wall Street Exports Boomed With 'Fools' Born to Buy Debt
http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a0jln3.CSS6c
from above:
The bundling of consumer loans and home mortgages into packages of securities -- a process known as securitization -- was the biggest U.S. export business of the 21st century. More than $27 trillion of these securities have been sold since 2001, according to the Securities Industry Financial Markets Association, an industry trade group. That's almost twice last year's U.S. gross domestic product of $13.8 trillion
... snip ...
With the repeal of Glass-Steagall, eliminating separation between commercial banking and investment banking ... large commercial banks had their investment banking arms buying up huge amounts of these securitized loans and carry them off-balance (as toxic assets, again pretty much unregulated). The commercial banks were providing a lot of the funding for these loans ... but by a much more circuitous route (which bypassed much of the regulation that was put in place to prevent crises like we now have).
this has CITI with still possibly one of the largest portfolios ($1.2T) of these off-balance toxic assets (after having sold off some amount last yr to pemco at 22cents on the dollar)
http://www.bloggingstocks.com/2008/11/28/stay-away-from-citigroup-c/
Part of the issue was that AIG played a major role in this circuitous transactions (involving $27T in securitized loans) ... resulting in the current crisis (with claims of lots of "systemic risk" and on the verge of taking down the global banking system). So if a duty is to protect the banking system ... and activities by AIG contribute to threat of taking down the banking system (which has been the justification for the AIG bailout) ... should they be allowed to run completely rogue or not?
Commodities Futures Modernization act has been implicated in both
ENRON and AIG.
25 People to Blame for the Financial Crisis; Phil Gramm
http://www.time.com/time/specials/packages/article/0,28804,1877351_1877350_1877330,00.html
from above:
He played a leading role in writing and pushing through Congress the
1999 repeal of the Depression-era Glass-Steagall Act, which separated
commercial banks from Wall Street. He also inserted a key provision
into the 2000 Commodity Futures Modernization Act that exempted
over-the-counter derivatives like credit-default swaps from regulation
by the Commodity Futures Trading Commission. Credit-default swaps took
down AIG, which has cost the U.S. $150 billion thus far.
... snip ..
Greenspan Slept as Off-Books Debt Escaped Scrutiny
http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=aYJZOB_gZi0I
from above:
That same year Greenspan, Treasury Secretary Robert Rubin and SEC
Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of
the Commodity Futures Trading Commission, to study regulating
over-the-counter derivatives. In 2000, Congress passed a law keeping
them unregulated.
... snip ...
one of the articles from the period mentioned that House passed the
bill ... and even before the copy of the bill was distributed in the
Senate, the Senate passed it unanimously.
Claim has been that a lot of the deregulation activity has been because of congressional contributions by financial industry. CSPAN show a couple weeks ago said that it was $250M in the session that passed Glass-Steagall and $2B in the session that passed TARP (last week news item was that it totaled $5B in the period). PBS program looking at some of it:
http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/
Clarification added March 25, 2009:
on the (unregulated) lending side (by non-depository institutions), nobody really cared about borrower qualifications ... since they would immediately turn around and sell them off (and it was no longer their problem)
The Man Who Beat The Shorts
http://www.forbes.com/personalfinance/global/2008/1124/042.html
from above:
Watsa's only sin was in being a little too early with his prediction that the era of credit expansion would end badly. This is what he said in Fairfax's 2003 annual report: "It seems to us that securitization eliminates the incentive for the originator of [a] loan to be credit sensitive. Prior to securitization, the dealer would be very concerned about who was given credit to buy an automobile. With securitization, the dealer (almost) does not care."
... snip ...
it was just how fast loans could be written to all comers ... and unloaded as (triple-A rated) toxic CDOs. no-documentation, no-down-payment, 1% interest-only payment (introductory) ARMs would be quite attractive to speculators since the carrying cost was less than real-estate inflation in many parts of the country (and they were planning on flipping before the rates adjusted).
Clarification added March 25, 2009:
quote from early 30s, Glass-Steagall (Pecora, senate banking) hearings:
BROKERS' LOANS AND INDUSTRIAL DEPRESSION
For the purpose of making it perfectly clear that the present industrial depression was due to the inflation of credit on brokers' loans, as obtained from the Bureau of Research of the Federal Reserve Board, the figures show that the inflation of credit for speculative purposes on stock exchanges were responsible directly for a rise in the average of quotations of the stocks from sixty in 1922 to 225 in 1929 to 35 in 1932 and that the change in the value of such Stocks listed on the New York Stock Exchange went through the same identical changes in almost identical percentages.
... snip ..
there is a correpsondance between the speculation in the real-estate market leveraging (ARM) loans from non-depository institutions and the speculation in the '20s stock market using broker's loans.
Clarification added March 25, 2009:
latest from today:
Banks’ Hidden Junk Menaces $1 Trillion Purge
http://www.bloomberg.com/apps/news?pid=20601039&sid=akv_p6LBNIdw&refer=home
from above:
So investors betting for quick solutions to the financial crisis could be disappointed. The tangled web that banks wove over the years will take a long time to undo.
At the end of 2008, for example, off-balance-sheet assets at just the four biggest U.S. banks -- Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. -- were about $5.2 trillion, according to their 2008 annual filings.
... snip ...
Clarification added March 26, 2009:
tv business news show just now discussing geithner congressional testimony ... pointed out that many of the members in congress were involved in the deregulation that played major role in allowing the current crisis (like the reference to senate so quick to pass commodity futures modernization act ... recipients of the $5b from the financial industry)
other items from today:
More than just repairs
http://www.economist.com/finance/displayStory.cfm?story_id=13394576&source=features_box_main
Geither urges quick action on regulation; Congress demurs
http://www.usatoday.com/money/companies/regulation/2009-03-26-financial-regulation_N.htm
Geithner Calls for ‘New Rules of the Game’ in Finance
http://www.bloomberg.com/apps/news?pid=20601087&sid=aembkwNWI0nU&refer=worldwide
Anthony R.
Modern Business for the Modern Environment
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Yes, let's not get the political coin of "banks/ non-banks in the way. It's just semantics for financial institution. AIG was basically insolvent and the impact to the economy would be too substantial. There's no question they should have been regulated. In a sense, what they did was an intentional abuse of the regulation to allow the distinction.
Perhaps we could sue them or let the government stir them up. I suggest we claim the risk and use the profits to pay off the national debt. There is way too much fear of corporate interaction with government. We've always had it, but just didn't see it. Why not embrace it and make it all public knowledge.
I'm not going so far as to seat corporations in office. I recently watched the Final Four and saw the piece on balancing corporate sponsership with NCAA standards for protecting students and principles of education. I think they can be balanced.
Besides, having a non-banking institution like AIG could prove useful for the government. I beleive the solution to the healthcare problems in this country could occur simply through the devisement of a federal healthcare finance organization. Could be useful for the retirement problem too.
Best,
Anthony Reardon
Nascent Dynamics ( ) Modern Business for the Modern Environment
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Nick C.
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Should they? There is a good reason to say yes. But in case of AIG and other insurance companies, it will require a constitutional amendment, as insurance regulation is the exclusive jurisdiction of the states...
Robert W.
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This is simply the first step toward nationalization and confiscation by this government. It's time to "Just say no" and maybe even take away some powers of the Fed and the government.
Max J. P.
Chief Technology Officer
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Governments must not have such power, but they should have brought forward principle regulation (not miniscule fonds or stock market rules) that would have avoided the situation we are in. To no allow such complex trading or to simply tax overly large financial institutions progressively to keep them at a size where they can fail without bringing down the markets.
More on my blog.
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Les D.
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While there may be some issues about "shut down's" and detailed regulation, the congress has responsibility to regulate the money supply and many ever expanding powers over interstate trade which says to me, the congress can grab a hold. Probably not in the founders (constitution writers) eyes, but money these days includes all the various M's, M1 currency, M2 adds demand deposits....Mx includes most of the derivatives exchanged.
At a different level, a slightly out of the box, congress could write tax laws focused on leverage (borrowing), uses of dollar denominated exchange and insurance products with out delegating this to the banker owned FED or the states. While we have several innovative financial goods messing the system today, we also have multiple issues from the past (Savings and Loan, Mergers....) that all hinge around risks amplified by leverage.
Such a radical approach, suggests rather than the FED, a great deal of authority would need to rest with the IRS, both for records tracking (transparency?) and for collection of a risk premium outside of the normal commercial channels.
Frank F.
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With financial markets so diverse and yet interlinked, yes, the central regulatory authorities must have absolute power over the entire sector -- and they must fearlessly exercise it.
Clarification added April 5, 2009:
Politics has absolutely nothing to do with this as central banks are independent of the governing party.
Andy A.
Supply Network Planning Manager at Sappi Fine Paper
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Some have said yes. Unbeleivably. A simple challenge. Assume for a moment that Newt Gingrich is president and that Thomas Sowell is treasury secretary. Do you feel the same? Or is it only OK if raging socialists and redistributionists are at the wheel?
Clarification added April 5, 2009:
Frank, that's laughable. This is all politics. This is nothing but a power grab by the executive branch, with an eye toward nationalizing banking, insurance, and the auto industry. Health care is next. Obama wants control of all of it. As Stuart Varney said, control, not influence. He wants the federal government to be the controlling shareholder so that the executive may decide who runs the place, how much they get paid, who they lend to, who they don't lend to, and how they react to the government's requirement for more borrowing and more taxation. Frank, I've read lots of what you've written, and I know you're not so naive as to believe that this is not purely political.
Michael G.
Life Coach
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No. The US government is not know to run anything efficiently. They will mess it up and when you throw in health care, we will all wish for the good old days of high insurance premiums, which will be preferable to year long waiting lists to see doctors.
