Regulatory Squabbles Threaten Financial Reform

From MarketWatch.com:

The initial confrontation before the Senate Banking Committee didn’t come from the expected parties, Sheila Bair of the Federal Deposit Insurance Corp. or Treasury Secretary Timothy Geithner. It was between Geithner deputy Neal Wolin and the committee chairman.

The issue: Would Geithner be a good-faith participant with other regulators?

The answer was Geithner would, Wolin said. Moreover, he will head the council of regulators when it meets for the first time Friday. This seemed important to Sen. Christopher Dodd, D-Conn., who noted that the infighting and lack of communication between agencies was partly responsible for the regulatory breakdown that failed to forecast and address the financial crisis.

“There has to be a change in how we operate,” Dodd told the panel.

Committee officials and Treasury Department officials told MarketWatch that Geithner wasn’t invited, while Wolin was. They also said all of the agencies have been cooperating.

Obama Signs Wall Street Reform Into Law

As was expected, President Obama signed the new financial reform bill into law earlier today. The bill, which was over a year in the making, will be used to regulate financial institutions and protect the U.S. consumers and taxpayers.

"These reforms represent the strongest consumer financial protections in history," President Obama said. "And these protections will be enforced by a new consumer watchdog with just one job: looking out for people - not big banks, not lenders, not investment houses - in the financial system."

In a major signing ceremony at the Ronald Reagan Building in Washington, President Obama was flanked by a number of lawmakers who worked on the legislation, including Sen. Christopher Dodd, D-Conn., and Rep. Barney Frank, D-Mass., the two committee chairmen who sponsored the bill.

The new law attempts to shine a light on complex financial products called derivatives and immediately gives regulators stronger powers to break up financial companies that have grown too big.

Among its many provisions, the law also creates a new consumer protection agency which would set rules to curb unfair practices in consumer loans and credit cards.

Continue reading at CNN.com…

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.

'Too Big to Fail' Banks May Try to Get Smaller

From CNNMoney.com:

Wall Street appears to have beaten Washington to the punch.

While lawmakers enter the home stretch on regulatory reform with Thursday's Senate vote, the financial industry has already started to shake up how it does business ahead of the proposed new rules.

Just last week, Wells Fargo (WFC, Fortune 500) said it planned to shutter its more than 600 Wells Fargo Financial stores across the country and announced it was no longer going to make mortgage loans to people without stellar credit.

And on Tuesday, Citigroup (C, Fortune 500) said it had struck an agreement to transfer the management of part of its private equity business to outside parties StepStone Group and Lexington Partners.

Neither Wells nor Citigroup acknowledged that the moves were prompted by the proposed legislation which is expected to be signed into law by President Obama as early as next week.

Bank Tax Tossed from Financial Reg Reform

From Forbes.com:

Sen. Scott Brown, R-Mass., threatened to vote against financial regulatory reform if it included what he called a "$19 billion bank tax." That tax is now off the table, but what's in its place may not be much better for banks.

The conference committee that drafted the final version of the overhaul bill—the committee thought it had finished its work last week--reconvened Tuesday evening to find other ways to pay for the legislation. However, the group of lawmakers from the House of Representatives and Senate ended up scrapping the bank tax. Instead, the bill would prematurely end the Troubled Asset Relief Program (the $700 billion bailout program from 2008), using some TARP money to help pay for the financial regulatory overhaul. In addition, the reform bill will raise the premium that banks pay to the FDIC's Deposit Insurance Fund. Financial firms with less than $10 billion in assets wouldn't be subject to the increase.

Is this a better deal? Depends on how you look at it. Bank tax or no bank tax, banks will still end up paying. In a statement Tuesday evening, Edward Yingling, President and Chief Executive Officer of the American Bankers Association, described the premium increase as "yet another regulatory cost imposed on the many traditional banks that had nothing to do with causing the financial crisis." He says he's concerned about using FDIC premiums as a means to generate revenue for the federal government, particularly without any debate. He says the new proposal is still "a tax on bank capital."

The "bank tax" would have imposed fees--no more than $19 billion by 2015--on large financial institutions and hedge funds to help pay for Wall Street reform. The Congressional Budget Office estimated that while the fees would have amounted to about $18 billion, the measure actually would have brought in about $13.5 billion in revenue because banks would absorb some of the costs as business expenses.

U.S. Lawmakers Reach Accord on New Finance Rules

The Wall Street Journal reports that the financial reform bill may finally have enough support for a vote. The vote in each house is tentatively planned for next week. Journalist Damian Paletta reports that all Republicans in both the House and Senate are likely to oppose the reform.

So, what new limits does the banking industry have to look forward to?

• A provision that would prohibit banks for making risky bets with their own funds
• A limit on the ability of federally insured banks to trade derivatives
• New rules for how capital flows through our economy, from loans to more complex banking products
• New consumer-protection regulators within the Federal Reserve, with the power to break up failing companies and assign regulators to monitor financial risks.

Many lawmakers are disappointed that Government-controlled Fannie Mae and Freddie Mac remain a multibillion dollar drain on the Treasury and are left almost entirely out of this reform
According to the article, Democrats are counting on tougher regulations to keep our financial system stable, and prevent another economic meltdown.

Of course, this is all speculation until the votes next week. Read the entire article here.

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.

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.

Dodd to Offer Financial Regulation Bill Without G.O.P.

Fearing that reform was taking to long to come to fruition, Senator Christopher J. Dodd - chairman of the Senate Banking Committee – announced that he would unveil his own financial overhaul plan on Monday. However, what makes this announcement even more surprising is Dodd’s intention to unveil his plan was without negotiation with other members of the Republican party.

Mr. Dodd suggested that he was acting out of a sense of urgency. The House adopted a regulatory overhaul — a priority of the Obama administration — in December on a largely party-line vote. But bipartisan negotiations in the Senate have repeatedly faltered over several critical points, notably the creation of a consumer financial protection agency to regulate mortgages, credit cards and other products.

In an unusual turn, Senator Richard C. Shelby of Alabama, the ranking Republican on the Banking Committee, has found himself largely shut out of the negotiations, while another Republican, Senator Bob Corker of Tennessee, has been directly negotiating with Mr. Dodd.

At a news conference later Thursday morning, Mr. Corker called Mr. Dodd’s plan to proceed with a bill without further negotiations “very disappointing.”

Continue reading at NY Times.com…

20 Ways House, Senate Financial Reforms Differ

When the U.S Senate resumes this month they plan on getting right to work on financial regulation reform. However, according this Reuters.com article the legislation they are going to be considering will differ greatly from the bill that was approved by the House of Representatives. Reuters identified a list of the top 20 differences, which you can view below.

Resolution Fund

House bill creates $200-billion fund to help pay for Federal Deposit Insurance Corp (FDIC) actions to dismantle insolvent, non-bank financial firms.

The fund gets $150 billion from fees paid by firms with more than $50 billion in assets. Fee threshold for hedge funds is $10 billion. The fund can get $50 billion more if needed from Treasury borrowings.

Senate Banking Committee Chairman Christopher Dodd's bill, main vehicle for reform in Senate, covers FDIC actions with after-the-fact fees on firms with assets topping $10 billion.

Secured Creditor Haircut

In House bill, secured creditors in FDIC resolution actions may have up to 10 percent of their claims treated as unsecured claims. Dodd bill does not contain this so-called "haircut" provision.

FDIC Emergency Action

House bill allows FDIC to guarantee debts of solvent firms up to $500 billion, with approval of new systemic risk council, Treasury, president.

Dodd bill allows FDIC to guarantee debts of firms in receivership, with approvals from senior officials.

Continue reading at Reuters.com…