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Five Problems Financial Reform Doesn’t Fix

As I mentioned yesterday, the Senate approved the historic financial reform legislation, and sent it to President Obama for a signature. Many experts are questioning the affect this bill will have on Wall Street, and earlier today I came across this interesting article from NewsWeek.com on the five problems the new legislation will not fix. Check out a snippet of the article below, or head over to NewsWeek.com for the full text.

“We would have loved to have something like this for Lehman Brothers," said Hank Paulson with a sigh, in a recent New York Times story. "There’s no doubt about it.”

Paulson was talking about the financial-regulation bill that the Senate passed today. And he’s right: the next time there’s a financial crisis, regulators will say a quick prayer of thanks to Rep. Barney Frank for giving them the power and information to quickly figure out what’s happened and how to respond. The legislation ushers derivatives out of the darkness and onto exchanges and clearinghouses, gives regulators the power to oversee shadow banks and take failing firms apart, convenes a council of superregulators to watch the megafirms that pose a risk to the full financial system, and much else.

But the bill does more to help regulators detect and defuse the next financial crisis than to actually stop it from happening. In that way, it’s like the difference between improving public health and improving medicine: The bill focuses on helping the doctors who figure out when you’re sick and how to get you better rather than on the conditions (sewer systems and air quality and hygiene standards and so on) that contribute to whether you get sick in the first place.

That is to say, many of the weaknesses and imbalances that led to the financial crisis will survive our regulatory response, and it’s important to keep that in mind. So here are five we still have to watch out for:

1. The Global Glut of Savings: “One of the leading indicators of a financial crisis is when you have a sustained surge in money flowing into the country which makes borrowing cheaper and easier,” says Harvard economist Kenneth Rogoff. Our crisis was no different: Between 1987 and 1999, our current account deficit—the measure of how much money is coming in versus going out—fluctuated between 1 and 2 percent of gross domestic product. By 2006, it had hit 6 percent.

Wall Street Bill Clears Crucial Senate Hurdle

Despite many doubts, the historical financial reform bill passed a major hurdle in the Senate today. 60 Senators voted in favor of the legislation, which gave it enough support to overcome a filibuster. According to Retuers.com, President Obama intends to sign the bill into law next week.

Senate leaders set a series of final votes for 2 p.m., with passage looking assured. President Barack Obama, who proposed reforms more than a year ago, has said he wants to sign the measure into law next week.

Republicans who largely oppose the measure could delay a vote until Friday evening, though they are unlikely to do so.

The House of Representatives has already approved the bill, which tightens regulation across the financial industry in an effort to avoid a repeat of the 2007-2009 financial crisis.

The 10 Missteps of Financial Reform

From MarketWatch.com:

In hopes to create a new and safer game, Washington has shuffled the deck with which Wall Street plays, but anyone who's gone back to the table after a big loss knows the score.

Same cards, same risks, and the house always wins.

There are a lot of good intentions built into the Dodd-Frank bill. Lawmakers have tried to create standards for mortgage underwriting, preserve and strengthen bank capital and move risky derivative exposure off the balance sheet and into the open.

The banks with the most to lose include Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. Goldman Sachs Group Inc. and Morgan Stanley.

If you had to boil down the complex bill's main flaw it's that it puts too much emphasis on regulators who have failed in their charged tasks. The Securities and Exchange Commission and Federal Reserve -- at least based on their track record -- are short on the kind of man and brain power required to successfully oversee Wall Street risks.

Without trained and well-paid regulators and without closing the revolving door, it's hard to feel hopeful about financial reform, as well-intentioned as it may be. And even with the best intentions, the bill leaves plenty of loopholes to exploit. Here is 1 obvious one:

1. The Volcker Rule. Intended to reduce bank risk, the rule curtails bank participation in proprietary trading, private equity and hedge fund investments -- businesses that arguably were tangential to the financial crisis. Don't believe it? Name one depository institution that teetered due to investments in these businesses.

Still no Wall Street bill debate in Senate

Once again, Democrats in the Senate have failed to come up with the votes needed to debate the Wall Street reform bill. Coming up only 4 votes short of the 60 votes required, this makes the 2^nd time in the 48 hours that an attempt to start a debate has failed. According to CNN, all 40 Republicans present in the chamber joined with two Democrats, Sen. Ben Nelson of Nebraska and Majority Leader Harry Reid of Nevada in voting against.

Reid's vote was a procedural move that allows him, under the Senate rules, to bring the bill up again this week.

The Democrats failed the first two times by 57-41. On Wednesday, Sen. Robert Byrd, D-W.Va., a prior "yes" vote, was absent, while Sen. Robert Bennett, who voted "no," returned from a two-day absence.

Democrats and Republicans still disagree about the way to go about preventing future bailouts, cracking down on risky bets and ensuring consumers have stronger protection.

Sen. Christopher Dodd, D-Conn., and Sen. Richard Shelby, R-Ala., have been negotiating differences on the bill, but have yet to come up with a final compromise.

Obama to Wall Street: 'Join Us' In Reform

Later today, President Obama is scheduled to give a highly anticipated speech on the topic of banking reform. According to the White House, the President wants Wall Street to know that he is not hoping to fight them, but work with them to reform the banking industry.

Obama will give the speech at Cooper Union in New York, and as this CNN Money article explains, he is going to proclaim his support for legislation in both houses of Congress aimed at reforming the banking industry. The President will reportedly claim the bills represent "significant improvement on the flawed rules we have in place today."

Obama said he's sure many of the lobbyists working to defeat the measure are acting on behalf of the Wall Street firms represented by members of the audience.

"But I am here today because I want to urge you to join us, instead of fighting us in this effort," said the president. "I am here because I believe these reforms are, in the end, not only in the best interest of our country, but in the best interest of our financial sector."

The speech has prompted some hand-wringing in the investment world this week. Senior officials in the Obama administration told CNN that top bankers have called the White House recently to express concerns about "how bad" the speech would be for Wall Street.

A Deeper Look at Obama's Plan to Tax the Banks and Wall Street

Obama first announced his plan to tax Wall Street and major financial institutions during his State of the Union address last month. The basic premise of his proposal is to impose a fee on financial institutions that received government money through the TARP program but have made little effort to repay the funds. Since the announcement, there have been plenty of articles written in support and opposition to the tax. To help my blog readers better understand Obama’s proposal, I decided to take a deeper look at his plan and have put together this entry explaining what I discovered.

Fee vs. Tax

During his State of the Union Obama referred to his plan as a “fee” on financial institutions. However, the proposal is actually a new tax, but since the word “tax” elicits such a negative connotation in the minds of most Americans the President intentionally used the word “fee” to help generate support for his proposal. Although the name does not affect the actual legislation, it doest make it more difficult for taxpayers to understand.

Bonus Abuse?

Obama explained that "if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need.”

The proposal definitely stems from the outrage being expressed by Americans in regard to the news stories of excessive bonuses being given to executives of financial institutions that received taxpayer money. However, the idea of targeting these banks specifically has created a lot of legal commotion. Many experts question whether the government should be allowed to institute this new tax, and have expressed concern about the long term effects of giving the federal government the power to levy a tax on one specific group of businesses.

Federal Revenue

In addition to pleasing taxpayers who are angry at banks for giving out large executive bonuses, the tax proposal would also generate a decent amount of federal revenue. Estimates say that the financial institution tax would generate nearly $120 billion over the next decade.

Wall Street Retaliation

One of the more common arguments against the bank tax is that when receiving TARP funds, the financial institutions were under the impression they had until 2013 to begin a repayment plan. However, Obama’s remarks in his State of the Union give the impression that these payments are already overdue.

Mounting Opposition

Although the Democratic leads in Congress have welcomed the bank tax, many Republicans are remaining silent on the proposal. However, financial institutions are already working to prevent the legislation. In addition to sending additional lobbyists to Washington, the largest institutions also have teams of lawyers working to argue that the tax is unconstitutional.

President Obama has already spoken out against the mounting opposition to his proposed bank tax. “Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee,” Obama asserted, “I suggest you might want to consider simply meeting your responsibilities.”

Financial Recovery

Perhaps the biggest question on everyone's mind surrounding the potential fee is whether or not it would help our country’s economic recovery or not. Many Wall Street executives have stressed that they are having a hard enough time recovering, and a new tax would only make more investors weary about spending their money.

Pass-on Fees

Although the popular sentiment among taxpayers is to let Wall Street pay for recovery on Main Street, many economists are predicting that the banks will just pass down the fees to consumers. These financial institutions are for-profit businesses, and will likely find a way to recoup any lost revenue due to new taxes from their customers.

Wall Street Chiefs Defend Compensation At Firms

From NPRNews.com:

Wall Street executives said Wednesday they underestimated the severity of the 2008 financial crisis and apologized for risky behavior and poor decisions. They also defended their bonus and compensation practices to a skeptical commission investigating what caused the collapse.

Americans are furious and "have a right to be" about the hefty bonuses banks paid out after getting billions of dollars in federal help, the commission's chairman told chief executives of four major banks, all survivors of the deepest and longest recession since the Depression.

As the hearings opened before the Financial Crisis Inquiry Commission, chairman Phil Angelides pledged "a full and fair inquiry into what brought our financial system to its knees."

The panel began its yearlong inquiry amid rising public fury over bailouts and bankers' pay.

'We Understand The Anger'

"We understand the anger felt by many citizens," said Brian Moynihan, chief executive and president of Bank of America. "We are grateful for the taxpayer assistance we have received."

With Bank of America having repaid its bailout money, he said "the vast majority of our employees played no role in the economic crisis" and do not deserve to be penalized with lower compensation. Moynihan said compensation levels will be higher next year than they were in 2008 — but not at levels before the financial meltdown.

Wall Street's Bonus Baby Steps

After U.S taxpayers sacrificed billions of dollars to bail out Wall Street, the rescued financial institutions promised to cut executive bonuses and extravagant business expenses. However, data shows that many of the same companies that we bailed out earlier in the year, are planning to give out hefty bonuses in the first few weeks of the New Year. As this story on CNN Money.com explains, many of the major banks in this country are showing no signs of reducing their executive bonuses.

Under pressure to prevent another meltdown, Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) have been cutting back on cash bonuses and insisting on so-called clawbacks -- arrangements that allow companies to reclaim past bonuses when there is employee misconduct.

Yet for all their supposed reform-mindedness, the banks show no sign of pulling the emergency brake on the great compensation escalator.

A year after taxpayers saved the finance industry from collapse, the big banks will hand out billions of dollars in bonuses in the coming weeks -- at a time where unemployment tops 10% and many people are still losing their homes to foreclosures. To say this rankles in some quarters is an understatement.

"There is a need to show restraint considering the unusual circumstances of the past year or so," said Tim Smith, a senior vice president at socially responsible investment firm Walden Asset Management in Boston. "That's what you're not seeing right now."

Continue reading at CNN Money.com…

Democrats Push $150B Stock Tax on Wall Street

From TheHill.com:

A House bill still being drafted aims to raise $150 billion each year to pay for new jobs.

Under a bill being drafted by Democratic Reps. Peter DeFazio (Ore.) and Ed Perlmutter (Colo.), the sale and purchase of financial instruments such as stocks, options, derivatives and futures would face a 0.25 percent tax.

The bill, a copy of which was obtained by The Hill, is titled the “Let Wall Street Pay for the Restoration of Main Street Act of 2009.”

Half of the $150 billion in tax revenue would go toward reducing the deficit, while the other half would be deposited in a “Job Creation Reserve” to support new jobs.

The job fund would be available to offset the additional costs of the 2009 highway bill and other legislation that creates jobs.

The Obama administration and congressional Democrats are looking for ways to create jobs after the nation’s unemployment rate hit 10.2 percent in October and job losses are expected to rise.

Pelosi: Wall Street Tax must be International

From Reuters:

Any tax imposed on financial transactions would have to take effect internationally to prevent Wall Street jobs and related business moving overseas, U.S. House Speaker Nancy Pelosi said on Thursday.

"It would have to be an international rule, not just a U.S. rule," Pelosi said at a news conference. "We couldn't do it alone, we'd have to do it as an international initiative."

The top Democrat's comments seemed to spell longer odds for the Wall Street tax, which some Democrats in the House of Representatives are proposing as a way to pay for job-creating legislation.

The tax, which could raise $150 billion per year, would tap into widespread public outrage at Wall Street in the wake of the financial crisis, but support is lackluster among key legislators.

"This is just something that is on the table, it hasn't been developed to a high priority. but it has substantial currency in our caucus," Pelosi said.

Treasury Secretary Timothy Geithner said on Thursday that he has "not seen a version of that tax that I think would be appropriate for our country."

House Panel Votes to Give SEC More Money, Power

In the latest move to end corruption on Wall Street, the House of Representatives Financial Services Committee voted this morning to give more power and funding to Federal regulators. They hope the additional funds will help agents prevent future abuses, such as the high profile Bernie Madoff scandal. Check out the following coverage of the new legislation courtesy of the Associated Press.

The 41-28 vote was the panel's latest move to try to rein in abuses on Wall Street. It would give the Securities and Exchange Commission new enforcement powers, including the ability to offer bounty money to tipsters on fraud cases and the power to bar violators of the law from employment in any securities-related industry.

The bill also would double the SEC's budget in the next five years.

Rep. Paul Kanjorski sponsored the legislation after leading the panel's investigation into the government's failure to uncover Madoff's massive fraud scheme for nearly two decades. Madoff was sentenced in June to 150 years in prison.

"In the last five years, there's been a significant change and a greater sophistication in the financial service industry than has ever happened in the history of mankind," said Kanjorski, a Pennsylvania Democrat. "So we're going to have to change fast."

The proposal was part of a broader effort by the committee to tighten rules governing financial institutions after last year's market crisis. The full House was expected to vote on the bill and related proposals in early December.

Wall Street Profits from Trades with Fed

From FT.com:

Wall Street banks are reaping outsized profits by trading with the Federal Reserve, raising questions about whether the central bank is driving hard enough bargains in its dealings with private sector counterparties, officials and industry executives say.

The Fed has emerged as one of Wall Street’s biggest customers during the financial crisis, buying massive amounts of securities to help stabilize the markets. In some cases, such as the market for mortgage-backed securities, the Fed buys more bonds than any other party.

However, the Fed is not a typical market player. In the interests of transparency, it often announces its intention to buy particular securities in advance. A former Fed official said this strategy enables banks to sell these securities to the Fed at an inflated price.

The resulting profits represent a relatively hidden form of support for banks, and Wall Street has geared up to take advantage. Barclays, for example, e-mails clients with news on the Fed’s balance sheet, detailing the share of the market in particular securities held by the Fed.

“You can make big money trading with the government,” said an executive at one leading investment management firm. “The government is a huge buyer and seller and Wall Street has all the pricing power.”

Report on Home Sales Gives Wall Street a Push

Some good news for the housing industry arrived today with the announcement that sales of previously occupied homes jumped 3.6 percent last month. According to the National Association of Realtors, “sales rose at a seasonally adjusted annual rate of 4.89 million last month, above the 4.84 million units analysts had been expecting. That further encouraged market hopes that housing, and in turn the overall economy, are recovering.”

Due to the good news on the housing front, the U.S. stock market also saw some improvements. According to the New York Times the down topped 9,000 today, the first time it has gone so high since January 2^nd. I’ve included a clip of their story on the topic below.

The Dow Jones industrial average was up 148 points or 1.7 percent. The Dow last closed above 9,000 on Jan. 2. The index had been up 24 points ahead of the report. The Standard & Poor’s 500-stock index gained 16 points, or 1.7 percent, while the Nasdaq was 32 points, or 1.7 percent, higher.

Stocks had already been rising after another batch of generally positive earnings reports.

Earlier, the Ford Motor Company surprised the market with a second-quarter profit of $2.3 billion, due mainly to a huge gain for debt reduction, while the drug maker Wyeth, the cigarette maker Philip Morris International and the candy maker Hershey all raised their profit forecasts.

A report from UPS, however, was less upbeat. The world’s largest shipping carrier said its second-quarter profit plunged 49 percent as sales tumbled. The company also issued third-quarter guidance below analysts’ forecast.

Also on Thursday, the government reported a bigger-than-expected rise in new jobless claims, though the report was distorted by the timing of auto plant shutdowns.

The Labor Department said the number of new claims for unemployment benefits rose by 30,000 last week to a seasonally adjusted 554,000 — above analysts’ estimate of 550,000.

However, total unemployment benefit rolls fell to the lowest level since mid-April.

Continue reading here…

Common Misconceptions About the Wall Street Bailout

With ongoing media coverage from every angle, the Wall Street bailout legislation has become a web of complicated myths and facts that can be difficult for the average taxpayer to untangle. In times like these we turn to political leaders to let us know what is going on and what they are going to do about it. Unfortunately, we are at the tail end of an election season and many of our leaders are more concerned about the election then fixing our economy. It hard to trust candidates fighting for your vote or leaders who waste time playing the blame game. To help out the readers of my blog sort through this web of facts, I have compiled this list of common misconceptions about the Wall Street bailout.

Myth: The bailout will only help Wall Street, not people living on Main Street

Reality: Although Wall Street has lost the trust of taxpayers, our economy depends on it. The bailout isn't made to directly "help" any one specific person, but to help maintain the lifestyle of all Americans. It means keeping your bank accounts, loans, small business, insurance, and job in place. It means keeping your life in place.

Myth: Nancy Pelosi's speech changed Republican votes

Reality: While Pelosi’s speech was a toe over the line and obviously attacked Republicans, it is still doubtful to me that it actually changed any votes. By the time congress was in session that day, they should have sufficiently reviewed the bill and already had their votes decided. While some Republicans and Democrats alike were upset by what Pelosi said, her words caused outrage—not the death of the first legislation.

Myth: Congress spent too much time passing the bill

Reality: While many were upset by the first bills failure, Congress was simply doing their job. It is their duty to review, re-review, and thoroughly discuss important bills. Hundreds of billions of dollars were on the table, and rash decisions were simply not the right way to go. I doubt anyone really wanted them to push the bill through without giving it the attention it deserved.

Myth: The entire economic crisis is Bush’s fault

Reality: While it'd be easiest to point the finger at a single person, the fact is the economic crisis been coming for longer than just eight years. Democrats and Republicans alike pushed changes to regulations that governed financial institutions. In addition, I would not solely blame improper loan companies or even the corporations that need bailing out. This is a deep-rooted crisis cause by dozens, if not hundreds of mistakes that have been made.

Myth: The bailout will provide immediate relief

Reality: While the country watches as more jobs are lost and the DOW continues to fall, they are wondering why the bailout is not working yet. The truth is that the U.S. Treasury Department needs to set up a system to distribute the funds, and it could take as long as six weeks before they get to that point.

Myth: Innocent taxpayers are paying for the bailout

Reality: What a lot of people do not realize is that their money is not being wasted. In exchange for the funds, the federal government will take partial ownership of the companies it bails out. Then will then be able to sell these shares in the future, possibly even for a profit! Additionally, by investing into companies it will assure a more sound American economy, which will benefit everyone who lives in this country.

Myth: Why bail them out? The sooner they fall, the sooner we recover

Reality: While this could work, the downside is that if it does not, we will all be in the hole. Unfortunately this country is not just relying on itself, and a pretty big chunk of our debt lies on foreign investors who are not very impressed with the situation. If those investors decide to pull their funds from American investments, then the economy could get much worse.

Myth: The bailout will reduce the value of the dollar

Reality: The U.S. dollar is on a flux, meaning that it is not going up or down... it is doing both. Even before the bailout this was the case, and it is not likely to affect inflation dramatically either way. The financial meltdown is a worldwide crisis, and the dollar has actually made significant improvements over foreign currencies over the past few weeks.

IRS eases tax rules on US firms with foreign units

From the Associated Press:

The Internal Revenue Service, seeking to make cash more available during the current credit crunch, has issued a rule making it easier for U.S. corporations to bring home money made by their foreign subsidiaries.

The IRS temporarily expanded a 1988 ruling allowing corporations to borrow money held by foreign subsidiaries without having to pay the 35 percent corporate income tax.

"We were recognizing that there were liquidity restraints for companies" during the current credit crisis, Treasury Department spokesman Andrew DeSouza said Tuesday. He said the action would make it easier for foreign subsidiaries to provide loans to their domestic parents.

The current rule allows a company's foreign units to make a tax-free loan to the company as long as it is repaid in 30 days. Over a one-year period, the company can have outstanding loans from its subsidiaries for up to 60 days.

The temporary rule change would allow the U.S. company to keep cash from a single loan for up to 60 days. In total, the company could have borrowed money for up to 180 days in a one-year period.

To avoid being subject to taxation, the money would have to be paid back and could not be used as distributions such as dividends.

Congress, as part of tax legislation passed in 2004, enacted a similar break giving corporations a one-time deduction of 85 percent on dividends received from foreign subsidiaries. That act, aimed at encouraging domestic investment, lowered the effective tax on qualifying dividends from 35 percent to 5.25 percent.

The IRS said in a recent report that 843 corporations took advantage of the deduction. It said that $312 billion in repatriated dividends qualified for the deduction, creating a total deduction of $265 billion.

Mortgage Crisis Slams Wall Street

According to CNN.com, the stock market had record drops today as Dow went below 11,000 for the first time in nearly two years.

“The Dow Jones industrial average (INDU) lost over 200 points, or 1.9%. The Standard & Poor's 500 (SPX) index and the tech-heavy Nasdaq composite (COMP) both fell at least 1.7%.

Fannie Mae (FNM, Fortune 500) fell around 30% and Freddie Mac (FRE, Fortune 500) fell 33%, adding to the weeklong battering for the government-sponsored mortgage backers amid worries about their ability to stay afloat.

As speculation grows about government intervention, Treasury Secretary Henry Paulson said Friday morning that the government is focused on assuring the health of the two companies. Fannie and Freddie trimmed losses on his comments, but remained deep in the red.

Lehman Brothers (LEH, Fortune 500) lost another 19% amid continued uncertainty about the brokerage's solvency since it reported a nearly $3 billion second-quarter loss last month. (Full story).”