Greg Ip

The Fed bypasses Congress

Bloomberg

[Greg Ip] TIM GEITHNER, the treasury secretary (left), has made overhauling finance a priority. Instead he faces delay. America has four federal bank regulators, including the Federal Reserve. Mr Geithner wants to increase the power of the Fed to oversee not just banks and their holding companies but any firm that might imperil the financial system. At the same time the Fed and the three other regulators would cede their consumer-protection duties to a new body.

Many in Congress are sceptical of making the Fed more powerful. They say it did too little to monitor banks’ behaviour in the lead-up to the crisis. Chris Dodd, chairman of the Senate Banking Committee, has now proposed merging the bank regulators into a single agency, stripping the Fed of its supervisory duties. This makes sense: the current set-up encourages banks to shop around for supervisors. But the proposal will be fought by regulators and by small banks which fear that big banks would capture the new agency.

Mr Geithner has also proposed compelling banks to offer “plain vanilla” products, such as no-frills credit cards. In the face of stiff opposition by bankers, Barney Frank, Mr Dodd’s counterpart in the House of Representatives, says he will not pursue this idea.

While Congress fiddles, the Fed is expanding its reach. It plans to supervise bankers’ pay practices more closely, as well as the “non-bank” lending subsidiaries of bank-holding companies. It may even use existing powers to limit banks’ positions in complex derivatives, says Karen Petrou, a consultant.

The original article is linked here.

Long marginalised, the CFTC reasserts itself under a new chairman

Bloomberg

This OTC derivatives market ain’t big enough for the both of us

[Greg Ip] WHEN Gary Gensler was named late last year to head the Commodity Futures Trading Commission (CFTC), the financial industry may have thought him an ally. After all, he had been a partner at Goldman Sachs and later served under Bill Clinton’s famously deregulatory Treasury secretary, Larry Summers. But a book that Mr Gensler coauthored in 2004 might have been a better guide to his predispositions. The cover of The Great Mutual Fund Trap shows a faceless banker playing a shell game. Inside, Mr Gensler warns investors that Wall Street is continuously trying to rip them off.

Barack Obama’s financial appointees have all tended to be pro-regulation, but few are as enthusiastic as Mr Gensler. Read the rest of this entry »

The original article  is posted here.

Barack Obama’s plan for regulatory reform is not bold enough

AFP

FINANCIAL regulation in America has two problems: there is both too much of it and too little. Multiple federal agencies oversee the financial system: five for banks alone, and one each for securities, derivatives and the government-sponsored mortgage agencies. They share these duties with at least 50 state banking regulators and other state and federal consumer-protection agencies. Yet all these regulators failed to anticipate and prevent the worst financial crisis since the Depression, because risk-taking flourished in the cracks between them. Toxic subprime mortgages were peddled by lenders with little federal oversight and shoved into off-balance-sheet vehicles. The greatest leverage accumulated in firms that avoided the capital requirements of banks.

On June 17th Barack Obama took aim at these weaknesses (see article). Read the rest of this entry »

The original story is linked here.

Should the Fed take up the cudgel as America’s regulator-in-chief?

BARACK OBAMA’S government is using the firestorm over American International Group to press a priority of its own: new authority to take over any big, troubled financial institution and a watchdog to look for risk in the entire financial system. But the controversy has also created a new obstacle for those plans. The most logical agency to fill those roles had been the Federal Reserve, but political support for that idea may have been hurt by its role in the bail-out of AIG.

That is the view of Barney Frank, the powerful chairman of the House Financial Services Committee, who suggested in an interview on Thursday March 19th that “The Fed has taken a bit of a hit over this AIG issue.” He argues that the “political case for the Fed as systemic risk regulator is going to have be rebuilt, re-examined. It has not changed my personal view of the Fed as the best possible [candidate] but it has substantially weakened their political position.” Read the rest of this entry »

The original post is linked here.

ALAN GREENSPAN’s defence of the Federal Reserve in the formation of the housing bubble restates a familiar argument—it raised short-term interest rates but long-term interest rates did not follow, and housing is most sensitive to long-term rates. His proof includes the fact that long-term rates were low worldwide, and that many countries had bigger housing bubbles than America. The housing bubble’s source must therefore be global.

I agree with this analysis but I don’t agree that it exonerates the Fed. Read the rest of this entry »

Economics focus

The spectre of nationalisation

There are ways for governments to revitalise banks without taking them over

Illustration by Jac Depczyk

IT IS generally easier to remove a kidney from a dead donor than a live one. When regulators in Scandinavia and America in the early 1990s started extracting the bad assets from their crisis-hit banking systems, it helped that the banks they dealt with were bust or in the government’s hands. Today, policymakers are trying to excise toxic assets from banks that are still, at least officially, private and viable. That is a much trickier proposition. Read the rest of this entry »

Barack Obama’s BlackBerry

Subject: Wall Street

Another look inside the president-elect’s BlackBerry, soon to be confiscated on security grounds

“FIRST the good news. While the recession is getting worse, the financial crisis that started it has been contained—for now. The government has had to bail out only one big financial institution in the past six weeks.

The bad news is that the Bush administration and the Fed had nothing resembling a consistent strategy. They crushed Fannie’s and Freddie’s stock holders. They saved Citigroup’s. Ad-hockery is costly: it keeps private capital on the sidelines for fear of being wiped out in the next Sunday night rescue. And the government is now on the hook for perhaps trillions of dollars of guarantees and new capital, in return for which it got no extra power to protect the system and the taxpayer in the future.

What we need, and soon, is a “resolution regime”, governing how the government may take over any big financial institution and sell, nationalise or close it. We do have such a regime for deposit-taking banks, but it’s flawed in two respects. First, huge amounts of money are sloshing around outside the banks. Second, the biggest banks have long since become so thoroughly intertwined with the financial system that they cannot be neatly closed down as our laws once envisioned.

Designing such a regime is going to be a lot harder than just saying we need one. How are we going to decide which institutions are so important that they must come under it? And any institution we do agree to cover will be seen as “too big to fail”, obtaining an unfair advantage over its competitors in their cost of borrowing.

Whatever we come up with, voters have a right to be sure that we never get into this kind of mess again. The inability of the Republicans to forestall or fix the crisis was the main reason you won (after your charm and brains, naturally).

At a minimum, we will need much tighter federal oversight of the non-banks, and that is going to be hugely unpopular with Wall Street (though a bit of squealing from them is no bad thing for voters to hear). This ought to be part of a broader overhaul of a financial regulatory system that everyone knows is a mess: we have seven agencies overseeing banking, securities and futures and they still allowed the banks to behave like lunatics and failed to spot Bernie Madoff’s Ponzi scheme. It took four years to pass the last overhaul. We don’t have that much time: the crisis could claim its next victim at any moment. We have to figure out, right now, how we will respond.”

Gramlich Says Ex-Colleague Blocked Crackdown On Predatory Lenders Despite Growing Concerns

By GREG IP

The original article is linked here.

Alan Greenspan was arguably the country’s most powerful financial cop in his 18 years as chairman of the Federal Reserve. But Mr. Greenspan’s regulatory record has received far less scrutiny than his management of the economy.

That may be changing. A former colleague says Mr. Greenspan blocked a proposal to increase scrutiny of subprime lenders under the Fed’s broad authority. That added scrutiny might have helped curtail questionable lending practices now blamed for soaring defaults by mostly low-income borrowers. Democrats in Congress are now turning up the heat on regulators, especially the Fed, for failing to do more to stamp out those practices, and the Fed appears increasingly likely to overhaul its approach.

Edward Gramlich, who was Fed governor from 1997 to 2005, said he proposed to Mr. Greenspan in or around 2000, when predatory lending was a growing concern, that the Fed use its discretionary authority to send examiners into the offices of consumer-finance lenders that were units of Fed-regulated bank holding companies. Read the rest of this entry »

Greenspan’s Legacy — The Deregulator: A Less-Visible Role For the Fed Chief: Freeing Up Markets — Greenspan Blessed Mergers And Blocked Regulation; Using the 1800s as a Model — Is Modern Finance Too Risky?

By Greg Ip

2836 words

19 November 2004

The Wall Street Journal

A1

English

(Copyright (c) 2004, Dow Jones & Company, Inc.)

[Second of Two Articles]

WASHINGTON — As Alan Greenspan approaches his last year as chairman of the Federal Reserve Board, he continues to draw praise for his most visible job: steering the economy by raising and lowering interest rates. But behind the scenes, the 78-year-old economist has had a big impact on American life in an entirely different role: pushing the government to stay out of financial markets.

Consider what happened in 2002, when Democratic Sen. Dianne Feinstein proposed new rules to govern how traders buy and sell contracts to deliver energy through financial instruments known as derivatives. Her move came after Enron Corp. and others helped send electricity prices soaring in California by manipulating that market. When she telephoned Mr. Greenspan for support, he declined, telling her the proposal threatened the multitrillion dollar derivatives industry, which he considers an important stabilizing force that diffuses financial risk.

Mr. Greenspan persuaded other Bush-appointed regulators to join him in a critical letter that Sen. Feinstein’s opponents wielded as a weapon on the Senate floor. The bill was narrowly defeated on a procedural motion. Sen. Feinstein reintroduced the proposal a number of times and at least twice Mr. Greenspan rallied fellow regulators to oppose it. “I believe it would have passed without his opposition,” Sen. Feinstein says.

In addition to thwarting the post-Enron impulse to regulate derivatives, Mr. Greenspan has helped remove Depression-era barriers between the banking and securities industries and has blessed mergers creating banking behemoths. He has implored regulators to keep their hands off hedge funds and other markets that are replacing banks as financiers of American business. Although the Fed is a major bank regulator, it has become a less intrusive one under Mr. Greenspan.

Click here to read the entire article.

Greenspan the deregulator PDF article

Manufacturers, Other Nonbanks Fund Ever More Business, With Little Supervision — GE Capital Rescues a Printer

By Greg Ip

2518 words

10 June 2002

The Wall Street Journal

A1

English

(Copyright (c) 2002, Dow Jones & Company, Inc.)

Last year started badly for Peake Printers Inc. Several firms whose annual reports it had expected to produce perished. Things got worse when Bank of America said the Cheverly, Md., commercial printer would have to repay a $3.2 million loan by year end.

Two other banks declined to lend. “They were trying to back off on printing businesses,” says Joseph Moran, Peake’s chief financial officer.

With the 125-employee firm’s survival at stake, Mr. Moran finally found an eager lender: General Electric Capital. Though Peake had to put up printing equipment, a building, accounts receivable and $1 million of the owners’ cash as collateral, it got the loan it needed.

The financial-services arm of General Electric Co. illustrates how nontraditional lenders are taking over from banks as suppliers of credit to big slices of the U.S. economy. Read the rest of this entry »