“Harvard had it right”
Sunday Night Futures
11 hours ago
A blog promoting a community-based perspective on the laws and regulations that govern the financial services industry.
“Harvard had it right”
“We have seen dramatic changes in the U.S. and global financial system over the past 25 years, and we are now in the midst of another wave of innovation in finance. The changes now underway are most dramatic in the rapid growth in instruments for risk transfer and risk management, the increased role played by nonbank financial institutions in capital markets around the world, and the much greater integration of national financial systems.
These developments provide substantial benefits to the financial system. Financial institutions are able to measure and manage risk much more effectively. Risks are spread more widely, across a more diverse group of financial intermediaries, within and across countries.”
"I have found a flaw," said Greenspan, referring to his economic philosophy. . . . "I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms."
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.
"I would have liked the Fed to be a leader" in cracking down on predatory lending, Mr. Gramlich, now a scholar at the Urban Institute, said in an interview this past week. Knowing it would be controversial with Mr. Greenspan, whose deregulatory philosophy is well known, Mr. Gramlich broached it to him personally rather than take it to the full board.
"He was opposed to it, so I didn't really pursue it," says Mr. Gramlich, a Democrat who was one of seven Fed governors.
“What steps did you take, if any, to address the risks of the derivatives markets? I do not mean efforts to improve the functioning of the markets, such as the central clearinghouse, but the systemic risks of the products and markets more generally.”
“The New York Fed oversees the Fed’s Large Financial Institutions regulation. Therefore, as President of the New York Fed, one of your most important responsibilities is regulating and preventing the collapse of systemically important banks. And that has been your job since 2003, which means it was your job to watch those institutions during the time they acted most irresponsibly and made the decisions that eventually led to our current crisis. All one has to do is look at the near-total collapse of Citigroup to see that you failed at that job. Why did you fail at that job and why should that not disqualify you from overseeing the entire financial system?”
“What, if any, decisions on interventions by the Federal Reserve or the Treasury during the current crisis did you disagree with at the time? And were there any such decisions that you did not participate in?”
“During your time at the New York Fed, have you disagreed with any of the monetary policy or regulatory actions of Chairman Greenspan or Chairman Bernanke? If so, please explain.”You can read 102 pages of Geithner’s mostly non-responsive answers to the Senators on the Finance Committee here. It won’t be comforting.
“The systemic risks of the derivatives markets were a major focus of my work while I served at the New York Fed – not only to make the infrastructure of those markets more mature and more robust, but also to make sure the institutions at the center of the derivatives markets were managing their risks more effectively. In addition to working directly with the firms that represented almost all of the volume in these markets, I engaged lead regulators from the U.S. and around the world – from the SEC, Switzerland, Germany, France, the United Kingdom, and Japan – to encourage these firms to have a better sense of the risks they were exposed to in credit derivatives as well as their risks from a broad range of other complex financial products. These efforts, I believe, helped make the system stronger.
Nonetheless, we will have to take a broad look at the framework that surrounds derivatives and incentives created for institutions that participate in these markets.”
“There were systematic failures of risk management and supervision across the financial system, and addressing these failures will require comprehensive changes to financial regulation here and around the world. As President of the New York Fed, I led a number of initiatives to strengthen the financial system ahead of this crisis. Those efforts were important and effective in addressing many of the weaknesses at the center of past financial crises, and they helped limit the damage caused by the present crisis. But those efforts were inadequate.”
“The decisions over this period often had to be made quickly, and on the basis of much less information than one would like to make public policy judgments of this magnitude. With time we will be able to look back and undertake a more meaningful assessment of these judgments, and doing this carefully and thoroughly will be a critical part of designing a system that will be more robust and less vulnerable to the type of situation in which we find ourselves.”
“As Vice Chairman of the Federal Open Market Committee, I helped shape and supported the monetary policy decisions by the FOMC under Chairmen Greenspan and Bernanke. I also helped shape regulatory policies over this period, although those policies are the responsibility of the Federal Reserve Board.”
"The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal Act"), Pub L/ 103-328 (1994), codified at 12 U.S.C. 1842(d), provides that the Board may not approve any application for the interstate acquisition of a bank if consummation of the acquisition would result in the applicant controlling more than 10 percent of the total amount of insured depository institutions in the United States."
"Bank of America, with total consolidated assets of $1.7 trillion, is the largest depository organization in the United States measured by deposits, controlling deposits of approximately $711.7 billion, which represents approximately 10.04 percent of the total amount of deposits of insured depository institutions in the United States . . . .On consummation of the proposal, Bank of America would remain the largest depository organization in the United States, with total consolidated assets of approximately $1.9 trillion. Bank of America would control deposits of approximately $773.4 billion, representing approximately 10.91 percent of total amounts of deposits of insured depository institutions in the United States."
"Countrywide Bank is chartered as a federal savings bank under the Home Owners Loan Act. 12 U. S. C. 1461 et. seq. Section 2(c)(2)(B) of the BHC Act exempts federally chartered savings associations and savings banks, as defined by section 2U) of the BHC Act, from the definition of "bank." As a result, Countrywide Bank is not a "bank" for purposes of the BHC Act and the nationwide deposit cap contained in the BHC Act. Therefore the provisions of the Riegle-Neal Act prohibiting the Board from approving an application to acquire a bank if consummation of the acquisition would result in the applicant exceeding the national deposit cap do not apply to the present notice to acquire Countywide Bank and the other nonblank [sic] subsidiaries of Countrywide."
At least 30 banks since 2000 have escaped federal regulatory action by walking away from their federal regulators and moving under state supervision, taking advantage of a long-standing system that allows banks to choose between federal and state oversight, according to a Washington Post review of government records.The moves, known as charter conversions, highlight the tremendous leverage that banks hold in their relationships with government supervisors.The financial crisis has pushed regulatory reform high up the agenda of the Obama administration and congressional leaders. Timothy F. Geithner, the Treasury secretary nominee, sounded the theme at his confirmation hearing yesterday, calling for a "stronger, more resilient system."Some regulatory experts say that eliminating the opportunity to switch regulators is critical to strengthening oversight. [my emphasis]
"Well-designed financial regulations with strong enforcement are absolutely critical to protecting the integrity of our economy."
The latest wave of credit market innovations has elicited some concerns about their implications for the stability of the financial system, concerns similar to those associated with earlier periods of rapid change in the financial markets. Will the most recent credit market innovations amplify credit cycles, contributing to "excessive" lending in times of relative stability, and then magnify the contraction of credit that follows? Will they introduce greater volatility in financial markets? Will they create greater risk of systemic financial crisis?These concerns have been heightened in some quarters by the problems currently being experienced in the subprime mortgage sector. It will take some time before the full implications are understood and the full impact can be assessed. As of now, though, there few signs that the disruptions in this one sector of the credit markets will have a lasting impact on credit markets as a whole.Indeed, economic theory and recent practical experience offer some reassurance against both these specific concerns and more general worries about the implications of credit market innovations for the performance of the financial system. . . .
"Mr Geithner has been involved in just about every flawed bailout action of the previous admininstration," Bunning said. "He was the front-line regulator in New York when all the innovations that recently have brought our markets to their knees became widespread."He went along with the flawed monetary policy decisions of Alan Greenspan and Ben Bernanke...and he stretched the law beyond recognition to bail out Bear Stearns," Bunning added.