Financial Reform: Don't Abandon It to Regulators
Since the beginning of the financial crisis, the government has become the nation's biggest mortgage lender, guaranteed nearly $3 trillion in money-market assets, restructured two car companies, taken equity stakes in almost 600 banks and lent more than $300 billion to the life-insurance industry as well as a variety of other companies. The government is now also responsible for "compensation practices" in many of those companies.
Last week the president unveiled his plan for financial regulatory reform with a profusion of promises. But the Obama plan ignores the source of the problems and instead picks some wrong solutions, mostly in the form of enhanced regulatory oversight.
The plan makes bailouts a permanent modus operandi. Tax-payer funds will now be available to any financial holding company, including insurance and consumer finance companies.
Meanwhile, the plan does not deal with the rating agencies. They aided and abetted the financial collapse by providing AAA ratings to questionable securities that were used to drive us into this mess.
And the Obama plan does not offer a mechanism to track leverage, which is the most dangerous and crucial factor in this crisis. Instead, the same regulators who missed the signs of the current crisis will receive added powers to prevent the next one.
But regulators pored over CitiGroup's books for decades and failed to detect its excessive leverage and sloppy credit standards, or prevent its demise. Why would they now do a better job for AIG?
Nor does the plan seriously address the government-sponsored mortgage companies, Freddie Mac and Fannie Mae. They were the single largest source of funding for the subprime market, with a 40% market share at the peak. Those two companies alone amassed hundreds of billions in losses and were at the heart of the storm engulfing our economy. They also had hundreds of dedicated regulators specializing in their mortgage business, but to no avail.
More disclosure is not an adequate solution because a big part of the problem was the Federal government's determination to extend the benefits of home ownership to low income families. The Federal Housing Administration, in pushing unsustainable mortgages to people who put up almost no equity, led to loose lending and the dangerous abundance of capital that broke our financial system.
And while the President mentioned compensation as a key cause of the crisis, his plan makes no reference to how he plans to change it.
As for hedge funds, I believe regulation and oversight will be beneficial for the hedge fund industry. My firm, Wellcap Partners, first registered with the SEC in 2005. But despite all the talk these last few years about the risks of "secretive, unregulated" hedge funds, they did not create systemic risks. While thousands of hedge funds lost hundreds of billions of dollars last year, and many have shut down, it was the big regulated entities such as commercial and investment banks that brought the house down.
This is because prime brokers, without any impetus from any regulator, simply wouldn't let hedge funds lever up excessively. Also, in contrast to banks who are focused on short term deals and do not have their own capital at risk, in most funds the managers have a meaningful slice of their net worth in the fund. That guarantees a different mindset.
Increased regulation and oversight of financial institutions, in itself not a bad idea, cannot be done in a manner that reduces their discipline and self reliance. We cannot create more institutions that are "too big to fail". Those institutions will enjoy lower funding costs, which in turn will allow them to gain market share and become even more insulated, powerful and dangerous.
More importantly, our financial system cannot be trusted again to regulators or the Federal Reserve Bank, in the futile hope that they are able to save us. This is a task well above their pay grade.
Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.
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Well said, Alan. More scrutiny and examination by the same old crowd that got us into this mess will not fix anything. They will think everything is just fine, according to their extreme Miltion Friedman capitalism theories.
What we need are real people in there representing the interests of the common man.
We need fresh eyes and ears scrutinizing these fincancial instruments and markets they have created.
We need to bring fairness and credibility back into financial investment systems.
The old Milton Friedman theorists need to sit down and be quiet. They have had their way and brought our country to the brink of ruin. They lost. Get over it.
Lets rebuild a new one that works for ALL the PEOPLE.
I have been posting a similar message to this site for a long time now.
Alan, maybe you have more cred and can get through to these people.....one can only hope.
In the end, Congress must craft the law. We must relentlessly force them to do it. I do not profess that their job is easy or to be taken lightly.
Okay - reform can't be left in the hands of the regulators, but I notice there is NO suggestion of tin whose hands it should be left. Politicians? The managing partner of Wellcap? Criticising without suggesting an alternative is just carping.
Whatever happened to Sarbanes-Oxley? Wasn't that supposed to protect the country from further financial scandal after the Enron scandal? Oh well, at least it created lots of jobs with good wages and benefits for accountants.
Nope...it only raised the costs of doing business. The usual outcome for government meddling.
While American's suffer ,Obama is making sure Goldman Sach's is well taken care of. What a system! When Goldman implodes the taxpayer foots the bill. When they make money they pay out millions in bonuses. Since when is Goldman Sach's (a high priced gambling house) necessary to the financial well being of America? Obama's financial reforms are a joke written by paid wall street flaks like Larry Summers and Tim Geithner.
Most of America would agree with you if the MSM had the guts tofocus on several issues at a time rather than taking the one-a-week approach. Areally excellent discussion of the Obama suck -up to the folks that put him in office can be read here.An excerpt follows:
Instead of Real Financial Reform, Obama’s Plan capitulates to Wall Street
By Prof. Michael Hudson
URL of this article: www.globalresearch.ca/index.php?context=va&aid=14048
Global Research, June 22, 2009
The story is worse than just “Pres. Obama labored, and brought forth a mouse.” He is morphing into Joe Lieberman in reaching across the aisle for Republican support – and no doubt future campaign contributions from the financial sector. There also is a touch of Boris Yeltsin in sponsoring a financial “reform” disturbingly similar to what advisor Larry Summers backed in Russia – relinquishing government power to a banking elite (the notorious “Seven Bankers” in post-Soviet Russia). The Financial Regulatory Reform proposal promotes Wall Street’s “product,” debt creation, at the expense of the economy at large, and lets financial chieftains continue to self-regulate the debt industry – and by the way, to keep all their gains from the past decade’s worth of fraudulent lending, scot-free.
Well I have few problems with all this. First, it is hypocritical for liberals to be railing against government handouts. Government handouts is what you guys are all about. There should no handouts to anyone or anything.......it is patently unconstitutional to effect nay transfer of wealth using the public's money. It funny how you guys try to defend this by arguing that it provides for the general welfare. Is it really providing for our welfare when double digit inflation is the result???? Is it really providing for our welfare when bailouts encourage a company to operate the same way as what got it into trouble in the first place (ie: GM)? Is it providing for the general welfare when welfare payments to the "poor" do nothing but sap their initiative to achieve self sufficiency?
The so called third way is still socialism and it has turned out to be a total disaster.
There were regulations. They just didn't work. Mostly because the regulated paid the salaries of the regulators. That's a huge problem, conflict of interest, mafia culture or whatever your want to call it.
What we need is something that works and leaving ethics to people who don't have a conscience should not be the option.
We have to have something, we may not want to call it "regulations" but whatever we choose to call it, it has got to work and it has got to be able to restore trust. We need people to trust our system.
Does that not suggest that the concept of government regulation is fundamentally flawed?
I am all for a few well placed rules in certain businesses to keep the playing field level but when the stack of rules is 85000 pages then you just know you created something wrong. No one can absorb such a complicated system of contraints.
That doesn't mean that government is fundamentally flawed. What it does suggest is that democracy is fundamentally flawed as, undoubtably, the regulated have had a hand in creating those 85000 pages of regulations. I'm sure that not a few of the regulations are there to punish or limit competitions. The courts are often used for that purpose,too.
Alan,
No matter how you slice it, dice it..YOU live in a different world. That your hedge fund is doing okay..is great..GREAT for those with what I'm guessing have a net worth of at least $10,000,000. maybe more... I'm on the silly retail side...gosh..my clients can open an account with a couple thousand (and yes..I tell them to go to Scottrade or something..as my "firm's" new FEES...kills small accounts...it is disgusting)..I digress.. I don't like BIG government..but even worse is MEGA Corporations..I swear..I've had better service at the DMV than I get from my co's back office. The inefficiency could be compared to a 400 story skyscraper..loses cost effectiveness after...oh...120 floors. BUT..we NEED Glass-Stegall BACK...we NEED the wharton MBA's who created CDO's...traded OTC..impossible to mark to the market..as THEY are the market..we need them in jail for selling snake oil...period
I believe you are an honest person..but you cannot know what it's like in the trenches.. Obama has disappointed me on this front...naive to the incestuous nature of "Wall Street Masters"... What say..we get rid of MARGIN accounts.if you want to buy 100 shares of U S Steel or Apple...you pay for the whole thing.....volume would go down, specialists would not make millions.. we'd get used to it.. We must learn ..(where can I send a resume :-)
Well stated. Why don't we get rid of Margin accounts?
It is called protecting the ones you LOVE, Wall Street!
We are in for another FAKE Economy based on massive Debt Building by the FED Reserve!
How did America go from the #1 Creditor Nation to the #1 Debtor Nation? FED DEBT! It is how the R1CH EL1TES transfer Our Wealth to their pockets!
Andrew Jackson beat the Banks and lived to 78 years! We need that kind of Determined Strength NOW to Reform the FED as Reps. Paul and Kucinich are both saying!
Stricter regulation is key to financial reform and no amount of finger-pointing will ever change my mind. Yes, regulators missed vital information. Yes, Fannie & Freddie were a big part of the problem. But regulators could not do anything about areas that were not regulated. The removal of regulations is responsible for the biggest problems.
Fannie and Freddie "the heart of the storm". NO, more like a sideshow.
Yes, just the horses at the track, it's the derivatives Gambling that is the heart of the storm: Investment insurance: Credit default Swaps.
Facts: Took Bush-WallSt just 5 Years to Create Housing Crisis (graph-watch Video)
Graph= http://www.mortgagecalculator.org/images/us-subprime-mortgage-market-growth.png
2002=Video: Younger Bush Pushing "EASY Loans" on Minorities
2002=Bush Video: http://www.youtube.com/watch?v=kNqQx7sjoS8&feature=related
2002=Bush Enlisted Investment Banks issue "EASY SURE FAIL" Mortgages
2002=Bush Proclaims Enlisted Fannie/Freddie to buy Garbage Mortgages
2002 FED+Bush Admin=high priority on "financial innovation"+Bush"s "ownership society"
2002 FED=Used housing boom to prop up economy after 2000 market collapse
2002 FED governor=warned: lenders breeding fast-growing risky mortgages
2002 FED examiners=investigate mortgage lenders of WSBanks
2003+2004=FED analyst: deteriorating lending standards+higher defaults+ foreclosures
2003+2004=FED encourage development of alternative mortgages=sub-prime loans+ adjustable
2004=Comptroller Curr (OCC) used 1863 law=prevent enforcement state predatory lending laws
2004=OCC=prevent enforcing consumer protection laws against Big Banks
2004=Link: http://www.nakedcapitalism.com/2008/02/spitzer-bush-administration-blocked.html
2007=FED+FDIC+OCC=issue guide=No new loans to poor after 'teaser' rates expire 2-3 years
2007=FED+FDIC+OCC=Block Half of Subprime borrowers from refinancing=Insure Casino Bets
2007=FED decisions=too late to tame industry"s excesses=Help Banks win Casino Bets
2007-2009=20-30% Subprime didn't meet Refi thresholds,But 70-80% would without new rules
2007-2009=2 million teaser-rate loans expired without refi http://www.bloomberg.com
2002-2008=Graph of Housing Bubble showing straight up line 2003-2007 (below)
2007=Bubble fed by "Easy SURE FAIL" Mortgages BURST creating CRISIS
2008=Greenspan=saying FED ill-equipped to investigate deceptive lending=False
2009=Greenspan consulting gig PIMCO
Research:CarolAB
You forgot to mention that Dodd and Frank and many others were encouraging "home ownership for all"....it was not just Bush.
I still say the FED was the biggest contributor to this (and you seem to agree - look how many times "FED" appears in your post). None of this happens without cheap money.
Corporatists want to believe too much "government" caused their problems. The whining about Freddie and Fannie is proof Wall Street and corporate politicians are still drinking the Koolaid.
Prove to me too much government didn't cause a lot of these problems.
Fannie and Freddie controlled 40% of all mortgage activity. Are you trying to say that they were not an 800lb elephant in the room? Please explain you position in detail....what is your view on what caused this?
Alan,
Great insights.
Regards,
The White Paper may not be the solution to all problems. But this post is a step backwards.
And you misinterpret the White Paper. One of its key innovations is the setting up of mechanisms which enable the regulator to let ANY 'tier 1 financial holding company' (meaning too big to fail player) fail in an orderly fashion.
This is not a means to infuse taxpayer money ad lib. This is a means to make sure the impossible choice that arose for Bear Stearns and Lehman Brothers and AIG does not repeat itself.
He never mentioned the White Paper. I am glad someone here has read it and made the connection. Thank you, DoA.
I was suspicious of this article because he seemed to be making sense. After your description of the white paper, I understand that he is back to his old position.... Leave Me Alone To Do Whatever I Want... again.
Once again you missed the whole point of Alan's piece.
Please support HR 676 and S 703. These are the single payer option bills in the house and the senate. Call your representative and demand they support it. tell your friends to do the same. This is it. It is crunch time. The only way to make our voices heard is to use them.
http://www3.capwiz.com/c-span/home/ this will allow you to write all your representatives in one email.
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