Financial Firm Regulation

"Only in the weird world of Washington are mistakes rewarded with major new responsibilities. After mismanging both housing loans and the dot-com mess, the [Fed] may now become responsible for supervising investment banks. ... History shows that the [Fed] is a poor supervisor and regulator. ... During the 1980s Latin American debt crisis, the Fed worked with the International Monetary Fund to hide losses of banks. This mistaken policy continued until management at Citicorp chose to writeoff its losses. Other banks followed. Later the Treasury negotiated a reduction in the debt and an end to the crisis. ... So what can taxpayers expect from an increase in the Fed's discretionary authority over investment banks? The likely answer is rescues, delays and lax supervision--followed by taxpayer-financed bailouts. Through its post-war history, the Fed has responded to the interests of large banks and Congress, not the public", Alan Meltzer (AM) at the WSJ, 16 July 2008.

"Financial companies are calling for greater coordination among central banks, stronger industry risk-management practices and beefed-up market monitoring as ways to restore confidence in the stuggling markets and prevent future crises. ... The recommendations are part of a 200-page report in which global finance companies have laid out specific actions the industry should take to aid troubled markets. ... Joseph Ackerman [of] Deutche Bank AG's board ... [said] 'We acknowledge that there were serious weaknesses in the business practices of a number of firms, which contributed significantly to broader problems in the financial-services industry and the economy as a whole. ' ... The IIF's report also urges central banks to continue to make use of new liquidity-boosting programs ... 'Having "permanent tools" intended to facilitate market liquidity would help ensure that liquidity-supporting measures are available when market conditions determine they are needed', the report said", WSJ, 18 July 2008.

"'Our regulators have been lax in their enforcement of existing capital rules,' says Daniel Alpert, managing director at Westwood Capital. Potential losses in this crisis are far larger [than in the S&L crisis], with estimates of $1 trillion or more being bandied about. ... If regulators wait too long to clean up the mess, the U.S. starts to resemble Japan in the 1990s, allowing 'zombie' banks to shuffle along, unable to raise capital or lend while the economy lingers in purgatory. ... Any taxpayer solution will only worsen already troubling fiscal problems. But that's the price for a system that--as New York University economist Nouriel Roubini and others put it--privatizes profits and socializes losses", WSJ, 21 July 2008.

"The events of the past few weeks leave U.S. policy makers at a crossroads in a long-running debate about how to police financial markets. ... 'What we have here is obviously very dynamic markets that have the ability to run circles around regulators and they have an incentive to exploit every possible opening there is for regulatory arbitrage,' says Raghuram Rajan, a University of Chicago economist who sounded alarms about he excesses building up in the financial system back in 2005. One of the most important, and least talked about, needs for overhaul, is making sure that bankers have the right incentives: for example, in their own compensation, to ensure they don't push their institutions to extremes", my emphasis, Jon Hilsenrath at the WSJ, 21 July 2008.

"Angelo Mozilo was in one of his Napoleonic moods. It was October 2003, and the CEO of Countrywide Financial was berating me for the [WSJ's] editorials raising doubts about the accounting of Fannie Mae. I had just been introduced to him by Franklin Raines, then the CEO of Fannie, whom I had run into by chance at a reception hosted by the Business Council, the CEO group that had invited me to moderate a couple of panels. Mr. Mozilo loudly declared that I didn't know what I was talking about, that I didn't understand accounting. ... Any editor worth his expense account makes enemies, and complaints from CEOs, politicians, and World Bank presidents are common. ... Raines reacted with immediate fury, denouncing us in a letter to the editor as "glib, disingenuous, contorted and irresponsible,' and that was the subtle part. He turned up on CNBC to say , in essence, that we had made it all up because, we didn't want poor people to own houses, while Freddie issued its own denunciation. The companies also mobilized their Wall Street allies, who benefitted both from promoting their shares and from selling their mortgage-backed securites, or MBS. The latter is a beautiful racket, thanks to the previously implicit and now explicit government guarantee that the companies are too big to fail. ... I also received several interventions from friends and even Dow Jones colleagues on behalf of the companies. But I was especially startled one day to find in my mail a personal letter from George Gould, an acquaintance about whom I'd written a favorable column when he was Treasury undersecretary for finance in 1988", Paul Gigot at the WSJ, 23 July 2008.

I agree with AM, a professor at Carnegie Mellon.

The report is nothing more than a plea for continued central bank support of investment banks. All the rest of it is cloaking rhetoric. What are the market conditions in question? Whenever the investment banks get overextended? Adopting this report means more inflation.

I agree with Roubini.

I agree with Rajan, see my 1 July 2008 post for a suggestion.

Was Raines indicted for securities fraud? Why ask? The SEC and DOJ are sick jokes. In April 2008, Raines settled with the SEC for peanuts, see my 27 April 2008 post. And the DOJ can incarcerate Craig Giles. What a country.