Friday, July 10, 2009

President Obama's Financial Regulation Proposal - Part V

A smart businesswoman in the Portland area asked for a synopsis of this proposal, saying, "It seems like everywhere we read doom and gloom doom and gloom. I would like to read some kind of balanced piece for once." Thanks for the suggestion, Kelly. Parts I through IV of the proposal were discussed in the three previous posts. Here's the fourth, and final installment.

Raise International Regulatory Standards and Improve International Cooperation

As we discussed previously, without international cooperation, money will move to countries with the most lax regulation and continue the type of high risk/high reward behavior that caused our current crisis. A good example is Stanford Financial, which is under investigation for defrauding investors, where the Texas founder operated freely in the Caribbean. Last April, the G-20 issued a declaration which included:
  1. Strengthening the 1988 "Basel Accord" to include financial institution capital requirements that are consistent throughout the world
  2. Define "capital" consistently, i.e., what can and cannot be used to substitute for cash in meeting capital requirements
  3. Define how leveraged a financial institution may be
  4. Set accounting standards that are similar throughout the world.

To improve oversight, the G-20 is working on contracts, to be available this Fall, to standardize and centralize the clearing of derivatives, e.g., credit default swaps, options, etc., as well as strenthening the oversight of all goals stated in the declaration.

So, where's the "gloom and doom?"


The US is pushing for financial reforms to address problems that we caused. This weakens our negotiating position for countries that object to more stringent financial requirements, at a time when they are weakened because of buying our Auction Rate Securities and the like.

Some countries are telling us to clean up our mess before telling them what to do. It's hard not to see their point.

Overall, these proposals are strong, having defined the root causes of the problems we face and providing logical, if sometimes politically based, solutions. The weaknesses in the proposal seem to be outweighed by the strengths. To attack the weaknesses without providing a superior solution IS politically based, and to fail to address these problems will all but guarantee that they are repeated.

The full draft of these proposals can be found at I welcome your comments and discussion about any points in this proposal. And thanks, Kelly, for your suggestion to discuss this important issue.

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