How Much Regualtion DO We Want?

[Guest]

The news of the day will be a broad and deep proposal by the President to change the regulation of banks, financial institutions and financial products. I've heard that the list of proposed new regulations is 85 pages long!

So how much new regulation do we need?

I have mixed emotions on this, with no real good answer. I spent 25 years being a banker and dealing with bank regulators. In my case it was the guys from the Comtproller of the Currency.

On one hand, the amount of regulation that we had clearly did not protect us from disastrous results within and among our banks, insurance companies and financial institutions. One might conclude that significantly greater regulation is clearly necessary.

On the other hand, I've dealt with the top level of bank regualtors. They are bureaucrats and typically are not always the brightest bulbs in the box. For sure I can tell you that they couldn't, didn't and won't ever be successful regulating the kinds of fancy financial derivatives that Wall Street concocts on almost a daily basis. (They tried. Believe me when I say that none of the partners in the failed investment banks or the banks that remain on TARP life support wanted or expected what happened to occur.) The senior bankers themselves didn't understand the risks being created by the highly-educated junior bankers dreaming up these profitable products, why should we expect regulators to be able to understand and control such risks.

So I have a quandry. I know that some new and better regulation is called for to prevent a recurrence of the financial meltdown we're experiencing. But I'm also convinced that the government regulators are not smart enough to outwit a bunch of big bonus motivated 28-year olds who dream this stuff up.

The only idea I can think of is that of a financial institution chooses to engage in the creation and involvement in financial derivatives, then they should be required to maintain huge amounts of capital to support those positions. Instead of a required capital ratio of 8-10%, make it 50-60% on exposure to financial derivatives. That would definitely slow down the interest in trying to make a lot of money with financial products that no one understands.

The only problem with my idea is figuring out how much financial exposure an institution has created for itself with these derivative products. That was the problem in the recent financial meltdown--institutions discovered that they had tons of exposure when they thought they didn't have any. Of course, their regulators didn't realize they had any exposure either!

[Guest]

http://www.forbes.com/2009/06/16/obama-financial-regulation-business-washington-banks.html has the Forbes article on this subject.

One thing is for sure - it will take at least two, and probably five or more years once any law is signed in order to put any of it into effect. After the law is signed, there are still agencies to create, budgets for these agencies are authorized, and regulations to write and publish (which won't happen until the agencies are staffed). And even after the regulations are published, the staff has to be trained on what to do. So, as usual with the fed, this will move at the pace of snail.

[Guest]

I do believe it is time to rewrite some of these regulations and add some new ones but will be curious to see what is proposed.

I am concerned about what the oversight of these regulations will now cost. Can not help but wonder if it may be time to pass along some of this cost to the industry requiring the oversight???

[Guest]

...I am concerned about what the oversight of these regulations will now cost. Can not help but wonder if it may be time to pass along some of this cost to the industry requiring the oversight???...

I'm pretty sure that the Fed passes along the costs of both the operation of the Federal reserve Banks as well as regulation in the form of fees and the insurance premium they charge member banks for their deposit guarantees. I think recently there was some discussion of a fairly dramatic increase in those premiums in particular, but I can't recall how that ever turned out.

But you did raise an interesting question regarding OVERSIGHT.

I commented that I had little confidence that the bank regulators were smart and experienced enough to assess the actual risks being assumed by banks as the result of their participation or sponsorship of many of the more complicated financial derivative products. Those are people who make a living "regulating" and are trying pretty hard to understand the complexities they're dealing with.

But Congress has the responsibility of oversight of the Fed and/or the other federal agencies that regulate financial institutions. If I had little confidence that the bank examiners could figure out the risks associated with derivatives, I have NO confidence that the members of Congress on the finance committees have ANY ability to understand what they're dealing with.

What's scary is that it will be members of Congress who will take the carefully-crafted regulation proposal developed by the President and the Fed and change all the wording based on their political leanings and probably faulty understanding of the business and products they're supposed to regulate. It will be regualtions produced by a no-nothing Congress that we will expect to protect us from a recurrence of the financial meltdown on 2008. Scary.

[Guest]

I'm pretty sure that the Fed passes along the costs of both the operation of the Federal reserve Banks as well as regulation in the form of fees and the insurance premium they charge member banks for their deposit guarantees. I think recently there was some discussion of a fairly dramatic increase in those premiums in particular, but I can't recall how that ever turned out.

But you did raise an interesting question regarding OVERSIGHT.

I commented that I had little confidence that the bank regulators were smart and experienced enough to assess the actual risks being assumed by banks as the result of their participation or sponsorship of many of the more complicated financial derivative products. Those are people who make a living "regulating" and are trying pretty hard to understand the complexities they're dealing with.

But Congress has the responsibility of oversight of the Fed and/or the other federal agencies that regulate financial institutions. If I had little confidence that the bank examiners could figure out the risks associated with derivatives, I have NO confidence that the members of Congress on the finance committees have ANY ability to understand what they're dealing with.

What's scary is that it will be members of Congress who will take the carefully-crafted regulation proposal developed by the President and the Fed and change all the wording based on their political leanings and probably faulty understanding of the business and products they're supposed to regulate. It will be regualtions produced by a no-nothing Congress that we will expect to protect us from a recurrence of the financial meltdown on 2008. Scary.

The last paragraph about Congress is so accurate.

Whatever the good or bad was about regulations and oversight in the past, CONGRESS WAS AWARE AT LEAST TWO YEARS AGO using those "old fashioned" regulations that there was a problem and they IGNORED IT ANYWAY for political gain !

[Guest]

It will be regualtions produced by a no-nothing Congress that we will expect to protect us from a recurrence of the financial meltdown on 2008. Scary.

Had to comment on your reference to a no-nothing rather than a know-nothing congress. Was this intentional (brilliant) or possibly a Freudian slip to describe Congress as the Prez's lap dogs? They can't seem to refuse him much.

Back to subject --- in all the talk of bank regulations, are there any plans to reinstate Glass-Steagall? And VK, since you know the industry far better than I and most others, perhaps you can explain how the bipartisan repeal in '99 helped the financial situation deteriorate. Or am I way off on this one?



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[Guest]

The news of the day will be a broad and deep proposal by the President to change the regulation of banks, financial institutions and financial products. I've heard that the list of proposed new regulations is 85 pages long!

So how much new regulation do we need?

I have mixed emotions on this, with no real good answer. I spent 25 years being a banker and dealing with bank regulators. In my case it was the guys from the Comtproller of the Currency.

On one hand, the amount of regulation that we had clearly did not protect us from disastrous results within and among our banks, insurance companies and financial institutions. One might conclude that significantly greater regulation is clearly necessary.

On the other hand, I've dealt with the top level of bank regualtors. They are bureaucrats and typically are not always the brightest bulbs in the box. For sure I can tell you that they couldn't, didn't and won't ever be successful regulating the kinds of fancy financial derivatives that Wall Street concocts on almost a daily basis. (They tried. Believe me when I say that none of the partners in the failed investment banks or the banks that remain on TARP life support wanted or expected what happened to occur.) The senior bankers themselves didn't understand the risks being created by the highly-educated junior bankers dreaming up these profitable products, why should we expect regulators to be able to understand and control such risks.

So I have a quandry. I know that some new and better regulation is called for to prevent a recurrence of the financial meltdown we're experiencing. But I'm also convinced that the government regulators are not smart enough to outwit a bunch of big bonus motivated 28-year olds who dream this stuff up.

The only idea I can think of is that of a financial institution chooses to engage in the creation and involvement in financial derivatives, then they should be required to maintain huge amounts of capital to support those positions. Instead of a required capital ratio of 8-10%, make it 50-60% on exposure to financial derivatives. That would definitely slow down the interest in trying to make a lot of money with financial products that no one understands.

The only problem with my idea is figuring out how much financial exposure an institution has created for itself with these derivative products. That was the problem in the recent financial meltdown--institutions discovered that they had tons of exposure when they thought they didn't have any. Of course, their regulators didn't realize they had any exposure either!

I have the opinion that this round of regulation has nothing to do with regulation. It's all about POWER!

Yoda

A member of the loyal opposition

[Guest]

we can all take comfort in the fact that Frank and Dodd will be in charge of pulling it together as specifically pointed out by BHO in his speech.

Aren't these the same guys the prior admin was trying to get to recognize there was a financial problem brewing? Like in 2002-2005 era?

Can you say hypocrites???

btk

[Guest]

we can all take comfort in the fact that Frank and Dodd will be in charge of pulling it together as specifically pointed out by BHO in his speech.

Aren't these the same guys the prior admin was trying to get to recognize there was a financial problem brewing? Like in 2002-2005 era?

Can you say hypocrites???

btk

BTK...your point is what makes all this talking by the President just so difficult to accept !!!

[Guest]

we can all take comfort in the fact that Frank and Dodd will be in charge of pulling it together as specifically pointed out by BHO in his speech.

Aren't these the same guys the prior admin was trying to get to recognize there was a financial problem brewing? Like in 2002-2005 era?

Can you say hypocrites???

btk

Frank and Dodd????????????? Are you kidding me???:cus: I have to go lie down now....I think my blood pressure just went through the roof:MOJE_whot:

[Guest]

Frank and Dodd????????????? Are you kidding me???:cus: I have to go lie down now....I think my blood pressure just went through the roof:MOJE_whot:
That settles it. From here on out I'm going back to my original bank - Piggy! Let's see them "regulate" that!

[Guest]

The repeal of Glass Steagall was widely supported by the banks and bank holding companies who were prohibited from competing with the investment banks in a lot of businesses. The investment banks were permitted to lend money, but without any of the prohibitions and regulations that applied to the banks. The guy that steered Glass-Steagall's repeal thru Congress was Senator Phil Gramm of Texas, who later retired to become Vice Chairman of the United Banl of Switzerland, a post he still holds. Gramm also got legislation passed a year or so later which contained what is known as the "Enron loophole", and is thought to have permitted much of the activity which lead to the Enron liquidation to occur. Interestingly, Gramm's wife was serving on the Enron board at the time, and has been named as a defendant as having complicity in much of the business activity which resulted in Enron's failure.

Had Glass-Steagall remained in force, it is unlikely that the banks would have been involved and so badly effected as they were in the 2008 financial collapse. Interestingly, I saw one of the CNN financial reporters interviewed this afternoon regarding the proposal for new regulations proposed by the President. He was generally very favorable and commented that if these regulations been in force, it is unlikely that the bank failures that occurred would have happened. He also opined that the recession that we're experiencing would likely have been shallower and shorter than it's turned out. I found his commentary pretty encouraging.