Michio
16-03-2010, 16:39
Crazy week. Lehman... the Federal Open Market Committee is meeting today and some investors are betting they're going to start raising short term rates... this new bill...
The Wall Street Journal came out with an awesome summary of the new bill being proposed by Chris Dodd.
http://blogs.wsj.com/economics/2010/03/15/factsheet-senate-financial-regulation-bill/
http://www.reuters.com/article/idUSTRE62D1YI20100315
There are so many extreme changes in this. The reuters link focuses on the changes within the Fed, but after reading the WSJ article, it's clear that the new organizations and councils being created will be within the Fed and the Treasury, and it will be made up of members from both.
Not only that, but the Reuters article is implying that the Fed is becoming more independent due to its increasing power, but it's not. These new provisions require teamwork between the Fed and agencies within the Treasury. Although the Federal Reserve changes leadership internally and privately, it was never entirely a private bank like many exaggerate. The financial dynamics between the Fed and the Treasury are a two-way street.
And probably the hugest provision being proposed are the new regulations on derivatives. These OTC securities will now be regulated by the SEC and contracts have to be cleared by clearing houses. Mandatory margin will be imposed on uncleared contracts.
The over-the-counter derivatives market has exploded– from $91 trillion in 1998 to $592 trillion in 2008. During the financial crisis, concerns about the ability of companies to make good on these contracts and the lack of transparency about what risks existed caused credit markets to freeze. Investors were afraid to trade as Bear Stearns, AIG, and Lehman Brothers failed because any new transaction could expose them to more risk.It will now be a requirement for all banks with assets under $50 billion to be under FDIC supervision. This is either a good or bad idea. I remember the FDIC itself almost became insolvent mid last year because so many banks were failing and they almost ran out of money to cover deposits. However, they already thought of this, and they're putting a cap on debt guarantees for the bank itself unless they meet certain tests. This will prevent the FDIC from haemorrhaging like it did last year (hopefully).
Any bank and holding with assets over $50 billion will now be regulated by the Fed.
Hedge funds with assets over $100 million now have to register with the SEC and be subject to investment adviser rules. This is a great idea, because now their books can be made public. Previously, unregistered hedge funds operated privately and they didn't need to report to the SEC (why would you?)
This provision was also interesting:
Costs to Financial Firms, Not Taxpayers: Charges the largest financial firms $50 billion for an upfront fund, built up over time, that will be used if needed for any liquidation. Industry, not the taxpayers, will take a hit for liquidating large, interconnected financial companies. Allows FDIC to borrow from the Treasury only for working capital that it expects to be repaid from the assets of the company being liquidated. The government will be first in line for repayment.So now financial firms have to set aside money just in case they ever need to liquidate. The FDIC does have ... what amounts to a credit card with the Treasury. In case they ever run out of money, they can just borrow from the Treasury, however, if they did this for every single firm that went bankrupt and needed cash to cover depositors and creditors, arguably that ends up forcing taxpayers to "bail out" what were irresponsible firms.
So the FDIC needs reason to believe they will receive a repayment instead of dishing out money to everyone.
The bill also seems to impose new leverage limits that were unfortunately relaxed by Henry Paulson in the mid-00s. Somehow Paulson convinced the SEC to relax leverage limits on certain financial intermediary transactions, even though leverage limits are one of the most important tools we have to dampen excessive volatility (leverage is the definition of volatility). I didn't see any specific numbers mentioned though. 1:12 to 1:10 is generally regarded as a safe limit.
Politically, I thought it was strange Chris Dodd would be the one spearheading this whole thing. The same guy that was in bed with Countrywide and Fannie Mae/Freddie Mac and AIG is now going to be hurting his friends.
The Wall Street Journal came out with an awesome summary of the new bill being proposed by Chris Dodd.
http://blogs.wsj.com/economics/2010/03/15/factsheet-senate-financial-regulation-bill/
http://www.reuters.com/article/idUSTRE62D1YI20100315
There are so many extreme changes in this. The reuters link focuses on the changes within the Fed, but after reading the WSJ article, it's clear that the new organizations and councils being created will be within the Fed and the Treasury, and it will be made up of members from both.
Not only that, but the Reuters article is implying that the Fed is becoming more independent due to its increasing power, but it's not. These new provisions require teamwork between the Fed and agencies within the Treasury. Although the Federal Reserve changes leadership internally and privately, it was never entirely a private bank like many exaggerate. The financial dynamics between the Fed and the Treasury are a two-way street.
And probably the hugest provision being proposed are the new regulations on derivatives. These OTC securities will now be regulated by the SEC and contracts have to be cleared by clearing houses. Mandatory margin will be imposed on uncleared contracts.
The over-the-counter derivatives market has exploded– from $91 trillion in 1998 to $592 trillion in 2008. During the financial crisis, concerns about the ability of companies to make good on these contracts and the lack of transparency about what risks existed caused credit markets to freeze. Investors were afraid to trade as Bear Stearns, AIG, and Lehman Brothers failed because any new transaction could expose them to more risk.It will now be a requirement for all banks with assets under $50 billion to be under FDIC supervision. This is either a good or bad idea. I remember the FDIC itself almost became insolvent mid last year because so many banks were failing and they almost ran out of money to cover deposits. However, they already thought of this, and they're putting a cap on debt guarantees for the bank itself unless they meet certain tests. This will prevent the FDIC from haemorrhaging like it did last year (hopefully).
Any bank and holding with assets over $50 billion will now be regulated by the Fed.
Hedge funds with assets over $100 million now have to register with the SEC and be subject to investment adviser rules. This is a great idea, because now their books can be made public. Previously, unregistered hedge funds operated privately and they didn't need to report to the SEC (why would you?)
This provision was also interesting:
Costs to Financial Firms, Not Taxpayers: Charges the largest financial firms $50 billion for an upfront fund, built up over time, that will be used if needed for any liquidation. Industry, not the taxpayers, will take a hit for liquidating large, interconnected financial companies. Allows FDIC to borrow from the Treasury only for working capital that it expects to be repaid from the assets of the company being liquidated. The government will be first in line for repayment.So now financial firms have to set aside money just in case they ever need to liquidate. The FDIC does have ... what amounts to a credit card with the Treasury. In case they ever run out of money, they can just borrow from the Treasury, however, if they did this for every single firm that went bankrupt and needed cash to cover depositors and creditors, arguably that ends up forcing taxpayers to "bail out" what were irresponsible firms.
So the FDIC needs reason to believe they will receive a repayment instead of dishing out money to everyone.
The bill also seems to impose new leverage limits that were unfortunately relaxed by Henry Paulson in the mid-00s. Somehow Paulson convinced the SEC to relax leverage limits on certain financial intermediary transactions, even though leverage limits are one of the most important tools we have to dampen excessive volatility (leverage is the definition of volatility). I didn't see any specific numbers mentioned though. 1:12 to 1:10 is generally regarded as a safe limit.
Politically, I thought it was strange Chris Dodd would be the one spearheading this whole thing. The same guy that was in bed with Countrywide and Fannie Mae/Freddie Mac and AIG is now going to be hurting his friends.