Financial Regulation Reform: A New Foundation

[I.J. Reilly]

On Monday Timothy Geithner and Lawrence Summers wrote an op-ed piece in the Washington Post giving a barebones structure of what the Obama administration would be presenting on Wednesday, their proposal for a new foundation to the American financial system. If you are interested, you can read the op-ed piece here (you must register with the WT to see it, but it's free).

On Wednesday President Obama laid out the plan in full. Here you can read about some of the reaction to the speech. Here, if you care to, you can read the full 101 pages of the plan.

I present here an outline of the plan, slightly modified in places for brevity's sake, taken from the pages of the full plan:

I. Promote Robust Supervision and Regulation of Financial Firms
A. Create a financial services oversight council
1. The purpose of this council would be to: facilitate information sharing and coordination, identify emerging risks, advise the Federal Reserve on the identification of firms whose failure could pose a systemic risk, and provide a forum for the resolution of regional disputes.
2. The Council would receive authority to gather information from any financial firm.
B. Implement Heightened Consolidation Supervision and Regulation of All Large, Interconnected Financial Firms
C. Strengthen Capital and Other Prudential Standards for All Banks and BHCs
1. Federal regulators should issue standards and guidelines to better align executive compensation practices of financial firms with long-term shareholder value and to prevent compensation practices from providing incentives that could threaten the safety and soundness of supervised institutions. In addition, we will support legislation requiring all public companies to hold non-binding shareholder resolutions on the compensation packages of all senior executive officers, as well as new requirements to make compensation committees more independent.
2. The accounting standard setters should review accounting standards to determine how financial firms should be required to employ more forward-looking loan loss previsioning practices that incorporate a broader range of available credit information. Fair value accounting rules should also be evaluated with the goal of identifying changes that could provide users of financial reports with both fair value information and greater transparency regarding the cash flow management expects to receive by holding investments.
D. Close Loopholes in Bank Regulation
1. Create a new federal agency, the National Bank Supervisor, to conduct prudential regulation and supervision of all federally chartered depository institutions, and all federal branches and agencies of foreign banks.
2. Eliminate the federal thrift charter.
E. Eliminate the SEC's Program for Consolidated Supervision
F. Require Hedge Funds and Other Private Pools of Capital to Register
G. Reduce the Susceptibility of Money Market Mutual Funds to Runs
H. Enhance Oversight of the Insurance Sector
I. Determine the Future of Government Sponsored Enterprises
II. Establish Comprehensive Regulation of Financial Markets
A. Strengthen Supervision and Regulation of Securitization Markets
1. Federal banking agencies should promulgate regulations that require originators or sponsors to retain an economic interest in a material portion of the credit risk of securitized credit exposures.
2. Regulators should promulgate additional regulations to align compensation of market participants with longer term performance of the underlying loans.
3. The SEC should continue its efforts to increase the transparency and standardization of securitization markets and be given clear authority to require robust reporting by issuers of asset backed securities.
4. The SEC should continue its efforts to strengthen the regulation of credit rating agencies, including measures to promote robust policies and procedures that manage and disclose conflicts of interest, differenetiate between structured and other products, and otherwise strengthen the integrety of the ratings process.
5. Regulators should reduce their use of credit ratings in regulations and supervisory practices, wherever possible.
B. Create Comprehensive Regulation of All OTC Derivatives, Including Credit Default Swaps
All OTC Derivatives markets should be subject to comprehensive regulation that addresses relevent public policy objectives: (1) preventing activities in those markets from posing risk to the financial system; (2) promoting the efficiency and tranparency of those markets; (3) preventing market manipulation and fraud and; (4) Ensuring that OTC derivitaves are not marketed innappropriately to unsophisticated parties.
C. Harmonize Futures and Securities Regulation
D. Strengthen Oversight of Systemically Important Payments, Clearing and Settlement Systems and Related Activities
E. Strengthen Settlement Capabilities and Liquidity Resources of Systemically Important Payment, Clearing, and Settlement Syetems
III. Protect Consumers and Investors from Financial Abuse
A. Create a New Consumer Financial Protection Agency
B. Reform Consumer Protection
1. Tranparency. the CFPA will be authorized to require that all disclosures and other communications with consumers be reasonable: balanced in their presentation of benefits, and clear and conspicuious in their identification of cost, penalties, and risk.
2. Simplicity. We propose that regulators be authorized to define standards for "plain vanilla" products that are simplier and have straightforward pricing.
3. Fairness.
4. Access. The agency should enforce fair lending laws and the Community Reinvestment Act and otherwise seek to ensure that underserved consumers and communities have access to prudent financial services, lending, and investment.
C. Strengthen Investor Protection
1. The SEC should be given expanded authority to promote transparency in investor disclosures.
2. The SEC should be given new tools to increase fairness for investors by establishing a fiduciary duty for broker-dealers offering investment advice and harmonizing the regulation of investment advisors and broker-dealers.
3. Financial firms and public companies should be accountable to their clients and investors by expanding protections for whistleblowers, expanding sanctions available for enforcement, and requiring non-binding shareholder votes on executive compensation.
4. Promote retirement security for all Americans by strengthening employment-based and private retirement plans and encouraging adequate savings.
IV. Provide the Government with the Tools It Needs to Manage Financial Crises
A. Create a Resolution Regime for Failing BHCs
B. Amend the Federal Reserve's Emergency Lending Authority
V. Raise International Regulatory Standards and Improve International Cooperation
A. Strengthen the International Capital Framework
B. Improve the Oversight of Global Financial Markets
C. Enhance Supervision of Internationally Active Financial Firms
D. Reform Crisis Prevention and Managment Authority Procedures
E. Strengthen the Financial Stability Board
F. Strengthen Prudential Regulations
G. Expand the Scope of Regulation
H. Introduce Better Compensation Packages
I. Promote Stronger Standards in the Prudential Regulation, Money Laundering/Terrorist Financing, and Tax Information and Exchange Areas
J. Improve Accounting Standards
K. Tighten Oversight of Credit Rating Agencies

I realize just having finished typing all of that up, that most of that was an exercise for my own good. If any of you wish to comment on these proposed regulations, please do. I just wore myself out typing all of this.

Also, Chris Dodd is an idiot (in reference to the fact that he is still the head of the Senate Banking Committee).

Edit: This chart gives a nice visual of all the mumbo-jumbo that I posted above. I always appreciate visuals.

[I.J. Reilly]

Just as a stylistic edit, I hate what vBulletin has done to the outline formatting that was part of my writings before I posted. It makes it harder to read.

[byu71]

I listened to parts of the testimony before the banking committee today.

To tell you the truth I think I would rather the markets run amuk and get corrected by market forces than give more and more control to Beaurocrats.

If these guys are so good, why didn't the Fed. step up prior to it becoming a crisis. They were part of the problem. Oh yea, Congress with more power. Titans of finance like Barney Frank and Cris Dodd. Oh wait, Chuck,"I represent N.Y. Shumer" is a brilliant guy.

Hey, I think there are too many bum buddies back on Wall ST. and often they really screw people. So your going to put the Fed. and other regulators over them. They will sucker them to death. Meanwhile trust me, these regulators will go after little fish and shut down legitimate operations.

The SEC worries about mutual fund churning while the whole financial system goes corrupt on steroids and they don't see it.

[Jarid in Cedar]

I listened to parts of the testimony before the banking committee today.

To tell you the truth I think I would rather the markets run amuk and get corrected by market forces than give more and more control to Beaurocrats.

If these guys are so good, why didn't the Fed. step up prior to it becoming a crisis. They were part of the problem. Oh yea, Congress with more power. Titans of finance like Barney Frank and Cris Dodd. Oh wait, Chuck,"I represent N.Y. Shumer" is a brilliant guy.

Hey, I think there are too many bum buddies back on Wall ST. and often they really screw people. So your going to put the Fed. and other regulators over them. They will sucker them to death. Meanwhile trust me, these regulators will go after little fish and shut down legitimate operations.

The SEC worries about mutual fund churning while the whole financial system goes corrupt on steroids and they don't see it.

Well said, especially the last paragraph

[I.J. Reilly]

Some of the proposals I listed above I think are good. Much of what I see above is unnecessary. I think while I was typing that all up I counted the creation of three new federal agencies. THREE.

I think the system is broken, but I don't think that the solution is to create more agencies and bureaus and committees that have only recommendation powers and have to work in conjunction with the rest of the bureaucracy that is the SEC, the FED, the OCC, and the FTC. Simplify, simplify, simplify. That is my mantra for management.

I don't know if you read this article in Wired or not BYU71, but it basically argues for a democratization and standardization of the information used in company financials, as reported to the SEC. I think that if these standardization practices were adopted then there would be much less need for the oversight of the federal government, since people would have the ability and incentive to scrutanize these companies themselves.

On a related note, do you have any experience working with XBRL filed documents? What is your opinion of them?

[Mormon Red Death]

Hey, I think there are too many bum buddies back on Wall ST. and often they really screw people. So your going to put the Fed. and other regulators over them. They will sucker them to death. Meanwhile trust me, these regulators will go after little fish and shut down legitimate operations.
(

Add in the revolving door effect and this looks bad....

In 4-8 Years Geithner is going to leave office and get a job at a bank that he regulated. Paulson was regulating banks he used to be CEO of... Not a good precedent.

[byu71]

Some of the proposals I listed above I think are good. Much of what I see above is unnecessary. I think while I was typing that all up I counted the creation of three new federal agencies. THREE.

I think the system is broken, but I don't think that the solution is to create more agencies and bureaus and committees that have only recommendation powers and have to work in conjunction with the rest of the bureaucracy that is the SEC, the FED, the OCC, and the FTC. Simplify, simplify, simplify. That is my mantra for management.

I don't know if you read this article in Wired or not BYU71, but it basically argues for a democratization and standardization of the information used in company financials, as reported to the SEC. I think that if these standardization practices were adopted then there would be much less need for the oversight of the federal government, since people would have the ability and incentive to scrutanize these companies themselves.

On a related note, do you have any experience working with XBRL filed documents? What is your opinion of them?

I am a real lightweight when it comes to documents. I don't buy individual stocks anymore so I don't read 10K's or Q's anymore. Prospectus's are just a nice way for lawyers to make money and cover the butt's of the issuer of the investment. I guess I am making excuses for being illiterate as to your question.

Believe me as far as regulation goes, there does need to be watching. Look at my posts over on CB from '06 and '07. I was howling that the hedge funds and stupid investment scams (financial products) were going to screw us. How come the briliant beaurocrats and regulators didn't see it coming. WEll, because their pockets get filled by them. NY and Illinois politicians get filled by them

The crackdown as always won't be on the big players, the Goldman Sachs of the world. It will be on the middle guys.

P.S. Thanks for the article, I will read it.

[byu71]

Add in the revolving door effect and this looks bad....

In 4-8 Years Geithner is going to leave office and get a job at a bank that he regulated. Paulson was regulating banks he used to be CEO of... Not a good precedent.

No kidding. Last night someone brought up the idea of proposing a regulator couldn't work for a financial entity for 5 years after leaving their post. Now that would be a heck of an idea.