Below is an article by Tim Geintner and Larry Summers. I am not confident about their measures given their tough talk and weak actions thus far. Below are my comments as well:
A New Financial Foundation
By Timothy Geithner and Lawrence Summers
Monday, June 15, 2009
Over the past two years, we have faced the most severe financial crisis since the Great Depression. The financial system failed to perform its function as a reducer and distributor of risk. Instead, it magnified risks, precipitating an economic contraction that has hurt families and businesses around the world.
We have taken extraordinary measures to help put America on a path to recovery. But it is not enough to simply repair the damage. The economic pain felt by ordinary Americans is a daily reminder that, even as we labor toward recovery, we must begin today to build the foundation for a stronger and safer system.
This current financial crisis had many causes. It had its roots in the global imbalance in saving and consumption, in the widespread use of poorly understood financial instruments, in shortsightedness and excessive leverage at financial institutions. But it was also the product of basic failures in financial supervision and regulation.
I agree with the bolded part. At least theyre admitting that government failures.
Quote:
Our framework for financial regulation is riddled with gaps, weaknesses and jurisdictional overlaps, and suffers from an outdated conception of financial risk. In recent years, the pace of innovation in the financial sector has outstripped the pace of regulatory modernization, leaving entire markets and market participants largely unregulated.
That is why, this week -- at the president's direction, and after months of consultation with Congress, regulators, business and consumer groups, academics and experts -- the administration will put forward a plan to modernize financial regulation and supervision. The goal is to create a more stable regulatory regime that is flexible and effective; that is able to secure the benefits of financial innovation while guarding the system against its own excess.
In developing its proposals, the administration has focused on five key problems in our existing regulatory regime -- problems that, we believe, played a direct role in producing or magnifying the current crisis.
First, existing regulation focuses on the safety and soundness of individual institutions but not the stability of the system as a whole. As a result, institutions were not required to maintain sufficient capital or liquidity to keep them safe in times of system-wide stress. In a world in which the troubles of a few large firms can put the entire system at risk, that approach is insufficient.
The administration's proposal will address that problem by raising capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms. In addition, all large, interconnected firms whose failure could threaten the stability of the system will be subject to consolidated supervision by the Federal Reserve, and we will establish a council of regulators with broader coordinating responsibility across the financial system.
I definitiely think that capital adequacy standards would be a very good thing, I dont think the Fed needs this responsibility since the Fed helped fuel the bubble by manipulating the price of loans. That needs to be addressed as well.
Quote:
Second, the structure of the financial system has shifted, with dramatic growth in financial activity outside the traditional banking system, such as in the market for asset-backed securities. In theory, securitization should serve to reduce credit risk by spreading it more widely. But by breaking the direct link between borrowers and lenders, securitization led to an erosion of lending standards, resulting in a market failure that fed the housing boom and deepened the housing bust.
The administration's plan will impose robust reporting requirements on the issuers of asset-backed securities; reduce investors' and regulators' reliance on credit-rating agencies; and, perhaps most significant, require the originator, sponsor or broker of a securitization to retain a financial interest in its performance.
The plan also calls for harmonizing the regulation of futures and securities, and for more robust safeguards of payment and settlement systems and strong oversight of "over the counter" derivatives. All derivatives contracts will be subject to regulation, all derivatives dealers subject to supervision, and regulators will be empowered to enforce rules against manipulation and abuse.
Sounds good but Im not sure how they plan on requiring originators to maintain a financial interest in its performance, reduce reliance on credit-rating agencies (which are BS to begin with and def claimed that they are not to be taken seriously when the blame was being aimed). Additionally, you need CEOs at the top to maintain an interest in the long term viability of a company, otherwise they will find a loohole to exploit this rule.
Ill admit Im not an expert on securitization so someone else can chime in on this one.
Quote:
Third, our current regulatory regime does not offer adequate protections to consumers and investors. Weak consumer protections against subprime mortgage lending bear significant responsibility for the financial crisis. The crisis, in turn, revealed the inadequacy of consumer protections across a wide range of financial products -- from credit cards to annuities.
Building on the recent measures taken to fight predatory lending and unfair practices in the credit card industry, the administration will offer a stronger framework for consumer and investor protection across the board.
Again, sounds good, but previous efforts like allowing renogtiations of mortgages fell through. Some might be opposed to that in the first place, but if we are allowing to companies to file bankruptcies to negotiate their debts, people should also have that ability esp in the context of predatory lending.
As kind of an aside, if I were Ford Motor Co. Id be pissed that I set my company up right enough to weather this storm and move on, but my competitors who took leave of their senses get to be propped up by the government.
Quote:
Fourth, the federal government does not have the tools it needs to contain and manage financial crises. Relying on the Federal Reserve's lending authority to avert the disorderly failure of nonbank financial firms, while essential in this crisis, is not an appropriate or effective solution in the long term.
To address this problem, we will 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. This authority will be available only in extraordinary circumstances, but it will help ensure that the government is no longer forced to choose between bailouts and financial collapse.
Totally agree that the Fed is worthless in the face of a financial crisis. Their solution is too vague for me to expand on.
Quote:
Fifth, and finally, we live in a globalized world, and the actions we take here at home -- no matter how smart and sound -- will have little effect if we fail to raise international standards along with our own. We will lead the effort to improve regulation and supervision around the world.
If this were to happen, then China would have stopped lending us money a long time ago, which would have been a good thing since we wouldnt have been spending so much. Somehow I think this isnt where theyre going with this.
I think they just want global standards so that we dont scare off investment in the US. I say, if we did have capital flight, but a sustainable and healthy REAL growth rate, the speculative investment institutions can take their volatility elsewhere.
Quote:
The discussion here presents only a brief preview of the administration's forthcoming proposals. Some people will say that this is not the time to debate the future of financial regulation, that this debate should wait until the crisis is fully behind us. Such critics misunderstand the nature of the challenges we face. Like all financial crises, the current crisis is a crisis of confidence and trust. Reassuring the American people that our financial system will be better controlled is critical to our economic recovery.
By restoring the public's trust in our financial system, the administration's reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses. Now is the time to act.
Again, strong talk, but we actions so far. We'll see what happens.
__________________
"The strongest steel goes through the hottest fires."-Anonymous
"When you begin to believe nothing is heavy, all weights become light." -Rossbow
"Just remember, somewhere there is a little Chinese girl warming up with your max."-Jim Convroy
"It's a round hole, dammit. Everyone fits."--Anonymous Mod at Strengthmill
Sounds good but Im not sure how they plan on requiring originators to maintain a financial interest in its performance, reduce reliance on credit-rating agencies (which are BS to begin with and def claimed that they are not to be taken seriously when the blame was being aimed). Additionally, you need CEOs at the top to maintain an interest in the long term viability of a company, otherwise they will find a loohole to exploit this rule.
Ill admit Im not an expert on securitization so someone else can chime in on this one.
Keep in mind that spreading the risk through securitization also helped low income/high risk people buy houses. By forcing lenders to keep risk in house you're also forcing them to raise lending standards (700 FICO and 20% down). I'm okay with that and think that's how it should work, but I can promise that in 2 years we'll have Barney Frank on the hill once again complaining that banks aren't lending enough to low income/high risk people.
Higher lending standards also means the housing market will not recover for YEARs (how many people are responsible enough right now to have a 700 FICO and save a 20% down payment?). Again, I think this is how it should be, but we are living in an entitlement society where everyone deserves this and that regardless of their poor decision making.
Quote:
Originally Posted by GqArtguy
As kind of an aside, if I were Ford Motor Co. Id be pissed that I set my company up right enough to weather this storm and move on, but my competitors who took leave of their senses get to be propped up by the government.
And this is the 'moral hazard' that pundits keep talking about. Expand that out to individual houses. Your neighbor did something stupid so he gets out of his loan, but you did the right thing and are stuck paying more money. This is why all bailouts are bad. You can't have the government picking winners and losers.
__________________
"Only those who will risk going too far can possibly find out how far one can go." -- T.S. Eliot
"We are what we repeatedly do. Excellence, therefore, is not an act, but a habit."-- Aristotle
Dylan Ratigan shows how the current system keeps so much in secret, and how Goldman profits by betting on another banks failure.
__________________
"The strongest steel goes through the hottest fires."-Anonymous
"When you begin to believe nothing is heavy, all weights become light." -Rossbow
"Just remember, somewhere there is a little Chinese girl warming up with your max."-Jim Convroy
"It's a round hole, dammit. Everyone fits."--Anonymous Mod at Strengthmill
A year ago it was revealed to the American people that our banking system is a legalized Ponzi scheme in which bank and insurance CEOs pay themselves billions of dollars in personal compensation to lend and insure assets with money they don't have to customers who can't pay back the loans. In those dark days between the fall of Lehman Brothers and before the presidential election, we were often carried through that time by the small glimmer of hope that at least we would soon have a new leader who would hopefully fix this mess and punish those responsible.
Yet in the past 9 months, not only has the administration failed to fix anything, they have actually made things much worse for anyone who isn't a Wall Street banker. Therefore, we are past the point where anyone in power still gets the benefit of the doubt -- the process of taking back our country for all citizens must begin now. This is why I think we must ask if U.S. Treasury Secretary Timothy Geithner is still the right person for the job. It has become clear recently that, back in his previous role as New York Federal Reserve Governor, he unnecessarily gave billions of dollars of US tax money to banks and insurance companies with few strings attached. And it is now becoming clear that his lack of meaningful action is helping many of these same banks steal more by legalizing their most economically dangerous, socially destructive and self-enriching practices. Yesterday on NBC's Meet the Press, Secretary Geithner again endorsed House bank reform legislation that would allow, by my calculations, as much as 80%, or $475 trillion, of the bank's $600 trillion in crooked insurance schemes to still be held in secret. It was and is the secret risks held in this very market that led to our collapse in the first place, and that continue to pose massive future risk to the global economy.
Geitner also continued to employ the bankers' favorite and most ludicrous lie : that the taxpayer must somehow continue to pay executives at companies like AIG ungodly sums of money under the threat that, if we don't, somehow the taxpayer will never make their money back. Well let me tell you something, the taxpayer and our nation will never get back the lost wealth taken under these false circumstances and this colossal breach of fiduciary duty. The idea that we must somehow perpetuate this system with our tax money and the future wealth of our children goes against the very American ideal of failure, adaptation and innovation, not to mention of our democracy.
Also last week, the Treasury Secretary endorsed a piece of legislation that, instead of stopping a select few companies from profiting from the implicit taxpayer-guarantee of Too Big Too Fail, seeks to officially condone it. If the most prized skill in our society, economically, is the ability to lend and insure the most money without consequences, then our nation's people are doomed to lose everything in the world's largest ever betting parlor; and that is precisely the system this Treasury Secretary -- Tim Geithner -- is seeking to legalize and institutionalize in America today.
However, the smoking gun for Secretary Geithner comes from a recent Bloomberg FOIA disclosure regarding events from last November. It was then that New York Federal Reserve Governor Tim Geithner decided to deliver 100 cents on the dollar, in secret no less, to pay off the counter parties to the world's largest (and still un-investigated) insurance fraud -- AIG. This full payoff with taxpayer dollars was carried out by Geithner after AIG's bank customers, such as Goldman Sachs, Deutsche Bank and Societe Generale, had already previously agreed to taking as little as 40 cents on the dollar. Even after the GM autoworkers, bondholders and vendors all received a government-enforced haircut on their contracts, he still had the audacity to claim the "sanctity of contracts" in the dealings with these companies like AIG. None of us were in the rooms when these decisions were made, so I don't pretend to know if Mr. Geithner was the one lone, sane voice of reason fighting against mysterious forces or the primary proponent. However, I fail to see the reasoning for why we continue to rely on those who were in the room when these horrendous decisions took place to be the same people that we choose to deal with their aftermath. There are just certain situations that are not suited for continuity. The best analogy I can think of is that it would be like asking Al Cowlings to spearhead the Nicole Brown Simpson murder investigation under the premise that he knows the layout and the "players" best.
The fact is that there are people who understand all of the intricacies of finance and policy as well as Secretary Geithner, but whose allegiances to the taxpayer are much clearer. People like Elizabeth Warren, Neil Barofsky, Rob Johnson, and Senator Maria Cantwell just to name a few. To stop the theft from continuing, the most basic rules of capitalism need to be applied to our banks. And the future of our national wealth needs to be safeguarded by the US Government. The current custodian of America's wealth, Treasury Secretary Tim Geithner, is not doing a good job of either. The time for corrective action is now.
__________________
"The strongest steel goes through the hottest fires."-Anonymous
"When you begin to believe nothing is heavy, all weights become light." -Rossbow
"Just remember, somewhere there is a little Chinese girl warming up with your max."-Jim Convroy
"It's a round hole, dammit. Everyone fits."--Anonymous Mod at Strengthmill
The AIG payout still baffles me, considering, as was stated, other industries were forced to take less and give more than his buddies in banking. And "too big to fail" takes risk out of the risk/reward ratio. Letting one of the behemoths go under may be a cause of concern when some start to play with the risky investments. But how would you apply the tourniquet if a Goldman was allowed to die?
__________________
"A government big enough to give you everything you want is a government big enough to take from you everything you have."
I still can't figure out why Lehman Brothers was deemed expendible and went belly up, yet Goldman was rescued. Oh wait... not to raise favoritism, but.... favoritism.
Apparently, the U.S. government didn't have enough Goldman Sachs executives in key financial and regulatory positions, so the following happened this week:
A Goldman Sachs executive has been named the first chief operating officer of the Securities and Exchange Commission's enforcement division.
The market watchdog says Adam Storch, vice president in Goldman Sachs' Business Intelligence Group, is assuming the new position of managing executive of the SEC division.
The move comes as the SEC revamps its enforcement efforts following the agency's failure to uncover Bernard Madoff's massive fraud scheme for nearly two decades despite numerous red flags.
A Goldman executive as COO of the SEC's enforcement division. This is all consistent with the observation of Desmond Lachman -- previously chief emerging market strategist at Salomon Smith Barney and IMF deputy director -- regarding "Goldman Sachs's seeming lock on high-level U.S. Treasury jobs," which he cited as but one of the many "parallels between U.S. policymaking and what we see in emerging markets."
In October of last year, a Goldman Sachs Vice President, Neel Kashkari, was named by former Goldman CEO and then-Treasury Secretary Hank Pauslon to oversee the$700 billion TARP bailout. In January of this year, Tim Geithner hired a former Goldman Sachs lobbyist, Mark Patterson, to be his top aide and Chief of Staff. In March, President Obama nominated Goldman Sachs executive Gary Gensler to head the Commodity Futures Trading Commission, which regulates futures markets, even though (or "because") Gensler confessed to lax regulation during the Clinton administration over the very derivative instruments that caused the financial crisis. In April, Goldman hired as its top lobbyist Michael Paese, the top aide to Rep. Barney Frank on the House Financial Services Committee which Frank chairs.
There's also a nifty little PDF here of current and former positions of power in current and past adminitrations held by various Goldman alumni.
It all seems a bit too incestuous in the upper echelons of finance to be believed.
**ETA: and yes, I am aware that Goldman gave shitloads of money to Obama as a candidate. Obviously their investment in him is providing ample returns.
The AIG payout still baffles me, considering, as was stated, other industries were forced to take less and give more than his buddies in banking. And "too big to fail" takes risk out of the risk/reward ratio. Letting one of the behemoths go under may be a cause of concern when some start to play with the risky investments. But how would you apply the tourniquet if a Goldman was allowed to die?
Actually, with the clarity of hindsight, the AIG bailout is very understandable.
Quote:
Originally Posted by tkinsley
Let it bleed?
I still can't figure out why Lehman Brothers was deemed expendible and went belly up, yet Goldman was rescued. Oh wait... not to raise favoritism, but.... favoritism.
**ETA: and yes, I am aware that Goldman gave shitloads of money to Obama as a candidate. Obviously their investment in him is providing ample returns.
Gaithner, Bernanke and Paulson didn't know what to do or what would result. While this financial crisis has root causes that were similar to past events, it turns out that almost every financial panic is unique.
They forced a rescue of Bear Sterns to head off a panic. They let Lehman fail (9/15/08) in an effort to end the asymmetry of the moral hazard equation. The next day (9/16/08) they found out with the AIG downgrade and collateral calls that "panic" was the greater threat.
Goldman, like several other institutions agreed to take bailout money in an effort to stop the spread of the panic - e.g. did a bank not get federal money because it was okay, or because it was already doomed?
It looked (and still does) sloppy because it was.....they were making it up as they went along. They saved the system for now, yet introduced a larger threat via the rapidly growing debt.
Geitner Article on a New Financial Foundation
Linear Mode
