Saturday, May 24, 2014

Financial Crisis, Over and Already Forgotten

Financial Crisis, Over and Already Forgotten

New York Times - ‎May 22, 2014‎
Michael S. Barr, a law professor at the University of Michigan who was an assistant Treasury secretary when the financial crisis was at its worst, is working on a book titled “Five Ways the Financial System Will Fail Next Time.” The first of them, he ...


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Michael S. Barr, a law professor at the University of Michigan who was an assistant Treasury secretary when the financial crisis was at its worst, is working on a book titled “Five Ways the Financial System Will Fail Next Time.”
The first of them, he says, is “amnesia, willful and otherwise,” regarding the causes and consequences of the crisis.
Let’s hope the others are not here yet. Amnesia was on full view this week when the House Financial Services Committee held a hearing on “the dangers” of financial regulation. Mr. Barr, who helped write the Dodd-Frank financial overhaul law, was the sole witness who thought it made sense for regulators to study the asset management and insurance industries.
In his opening statement, the chairman of the committee, Representative Jeb Hensarling, a Texas Republican, proclaimed “it is almost inconceivable that an asset manager’s failure could cause systemic risk.” He also saw no danger to the system from insurance companies, which are “heavily regulated at the state level.”

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Representative Jeb Hensarling of Texas, chairman of the House Financial Services Committee. Credit Joshua Roberts/Reuters

My request for an interview with Mr. Hensarling was turned down. I would have asked him about Long-Term Capital Management and the American International Group. The first, a money manager, caused a crisis when it failed in 1998; the other, an insurance company, had to be bailed out in 2008.
That hearing was part of an attack on the Financial Stability Oversight Council, known as FSOC (pronounced “F-sock”). That group, established by the Dodd-Frank law, is headed by the Treasury secretary and includes the heads of eight financial regulatory agencies, and is supposed to coordinate the work of all of them. The council has the authority to designate large nonbank financial institutions as “systemically important,” and thus allow the Federal Reserve to require them to have more capital.
So far the council has identified three such institutions, A.I.G., GE Capital and Prudential. The Fed has yet to actually impose regulations on them, so we really don’t know much about the effect of such designations, but that has not kept both the mutual fund industry and the insurance industry from lobbying heavily.
They do their best to leave us with the impression that the only asset managers around are plain-vanilla mutual fund companies. Hedge funds, like Long-Term Capital, are studiously ignored.
FSOC also has the authority to suggest that one of its regulatory members act on an issue it sees as systemically important. It has done so on money market mutual funds, but so far the Securities and Exchange Commission has not acted.
It is far from clear that FSOC is going to try to impose any regulation on large mutual fund companies, but the council is gathering information on them and asking questions of them. That seems to have outraged the industry and its friends in Congress.
The campaign against FSOC has been innovative in its arguments. The mutual fund industry says that designating a fund manager as systemically important could raise its costs. Those costs could be passed on to fund investors, who are taxpayers, and so would amount to a taxpayer bailout.
At a conference this week, Mary Miller, an under secretary of the Treasury, tried to be reassuring, emphasizing that no decision had been made on new designations. “We have a responsibility to understand the risks that may arise from all corners of the market and how those risks might be transmitted to the broader financial system,” she said. “And we have a responsibility to develop tools to mitigate those risks.” 
At the committee hearing the next day, Mr. Hensarling made it clear he was not reassured. He said FSOC should “cease and desist” any consideration of further designations “until Congress can review the entire matter.”
Sheila C. Bair, the former chairwoman of the Federal Deposit Insurance Corporation who now heads the Systemic Risk Council, a group that pushes for effective financial regulation, says she has seen this show before.
“It’s just like Brooksley Born and the derivatives industry,” she told me. Ms. Born, as chairwoman of the Commodities Futures Trading Commission in the Clinton administration, had the temerity to suggest that the C.F.T.C. should look into regulating over-the-counter derivatives. The industry went crazy, and she received no support from the White House or from fellow regulators at the Treasury, the Fed or the S.E.C. Congress responded by passing legislation to bar the C.F.T.C. — or any other regulator — from doing anything about derivatives.
At the time, the argument was that there was no need to regulate the derivatives markets because the main players in them — banks and brokerage firms — were already regulated.
Had a regulator been paying attention to the derivatives markets, would we have gotten such amazing financial instruments as synthetic collateralized debt obligations, which put together the worst parts of bad mortgage derivatives? Would someone have noticed the gambling in credit-default swaps that almost destroyed A.I.G.?

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Sheila Bair, a former F.D.I.C. chairwoman, says she thinks congressional attacks on a regulator are intended to intimidate it. Credit Alex Wong/Getty Images

We don’t know, of course, but what we do know is that Wall Street felt free to invent and exploit any product it wished. If financial engineers called a product a swap, that made it a derivative and exempted it from regulation.
Ms. Bair says she thinks the attacks on FSOC are intended to intimidate it, both from designating any more firms as systemically important and from acting again on money market funds if the S.E.C., as expected, fails to pass any meaningful regulation. She sees the very existence of such funds as a regulatory failure, arguing that they should either have floating net asset values, as normal mutual funds do, or be required to maintain reserves, as banks are.
Money market funds often lend money to financial institutions, and a number of them were damaged when Lehman Brothers failed in 2008. Some fund sponsors stepped in to bail out their funds, fearing damage to reputations, but one did not.
The Reserve Fund “broke the buck,” meaning investors could not withdraw their money without losses. The money market fund industry was saved from a run by the prompt action of the Treasury Department, which guaranteed its assets.
Congress later barred regulators from ever mounting a similar bailout.
Now, amnesia, or perhaps we should call it, as Ms. Bair does, “revisionist history,” has persuaded some people that there is no threat of anything similar happening.
The hearing this week was on a bill proposed by Representative Scott Garrett, a New Jersey Republican and chairman of the capital markets subcommittee, that would change the way FSOC operates. No longer would the heads of the agencies be voting based on what they thought was wise, as the law now requires.
Instead, they would be voting as representatives of their agencies, and no vote at FSOC could be taken until the issue was debated and voted on at each agency, including the S.E.C., the C.F.T.C. and the Fed’s Board of Governors. Each agency head would have to vote as his or her members directed.
In addition, at any FSOC meeting, members of all of the agencies could take part in the discussion. Even if the meeting was being held in private, it could be attended by up to 83 legislators — the 61 members of the House Financial Services Committee and the 22 members of the Senate Banking Committee. If staff members from the FSOC member agencies assembled for a meeting, the Financial Services and Banking Committee staffs would also have to be invited.
That would seem to be a recipe to hamstring FSOC, but members of the committee see it as a matter of openness and fairness. “I’m discouraged by the council’s lack of bipartisan voices and think that FSOC would be well served by a more inclusionary and collaborative operating model,” Representative Ed Royce, a California Republican, said after the hearing.
Mr. Hensarling has other concerns. He fears we have “ceded U.S. sovereignty over financial regulatory matters to a secretive, unaccountable coalition of European bureaucrats.”
That is a reference to the Financial Stability Board, an international agency with representatives from every continent save Antarctica, which seeks to coordinate international financial regulation. Some of its members think the insurance industry needs more regulation than it now receives in the United States.
One part of the campaign against FSOC has been the contention that designating financial companies as systemically important would, in the words of Mr. Hensarling, “move institutions from the nonbailout economy to the bailout economy.”
In his testimony, Mr. Barr argued that the reverse was true. “Regulating systemically important firms reduces the risk that failure of such a firm could destabilize the financial system and harm the real economy,” he said. “It provides for robust supervision and capital requirements in advance, to reduce the risks of failure. And it provides for a mechanism to wind down such a firm in the event of crisis, without exposing taxpayers or the real economy to the risks of their failure.”
Correction: May 22, 2014
An earlier version of this column omitted one institution among those that the Financial Stability Oversight Council has designated “systemically important.” GE Capital, in addition to A.I.G. and Prudential, has been so designated.
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Financial Crisis, Over and Already Forgotten

Once again without "Something like the Glass Steagle Act:


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    The term GlassSteagall Act usually refers to four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations ...
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