Who's Most Guilty of Financial Malfeasance?

You may have heard Warren Buffett has said that he has no problem with the Goldman Sachs deal that has resulted in charges of client misrepresentation by the Security and Exchange Commission (and is being considered for criminal charges by the Justice Department).  As discussed in a previous article, I agree.  If not the banks, than who is most responsible for the financial meltdown?
1.  The Players  
The Quants
First, there were the "Quants," the quantitative analysts, fresh from Ivy League graduate schools, who prepared studies showing the extreme unlikelihood of all regions of the US housing market dropping in value at the same time.  As these were academically gifted young people with virtually no practical experience, I hesitate to lay blame here.
The Quants' Bosses
It started at JP Morgan.  The bosses, seasoned professionals, read the analysis, looked at the commercial banks' and thrifts' mortgage profits, and decided to get into the business.  The big question is, "Did they understand that the increase in demand that would result from broadening the real estate market would result in a crash?"  While the answer to this question is unknowable, there are two issues that may point to the truth.
The first, is the recent "Internet bubble."  Anyone could have seen that the amount of money that was invested in Internet stocks would have pushed their valuation to ridiculous levels.  Surely, an analogous investment in the real estate market would do the same.
The second, is the fact that the risk to increasing the number of real estate owners was mitigated by selling that risk to investors, instead of holding those investments on their books.
The Banks
Once JP Morgan entered the real estate business, it had to offer terms that would be more attractive to borrowers than commercial banks and thrifts.  So, underwriting standards were decreased.  So what if you didn't technically qualify for a mortgage?  A rising real estate market would allow you to sell your property at a profit, and a low "teaser" rate would result in low initial payments.  After five years, you'd be making more money at your job, wouldn't you?  Then you could afford the payments.
For banks and thrifts to compete, they, too, must lower their underwriting standards, or risk losing their loan portfolios to those banks that offered better refinancing opportunities.
So, we're off to the races.
The Borrowers 
The fact that borrowers were not required to prove their income did not force them to lie on applications.  Even if the borrowing terms were difficult to understand, people who earned $50,000 knew they could not afford a $500,000 house.
A lie is a lie.  Lies have consequences, and I am not in the camp that says, "Poor little borrowers didn't know what they were doing."
I don't think people are that stupid.
The Rating Agencies
Rating agencies are paid by the companies that generate the securities that they rate.  That is inherently insane.
If I have a security I want to sell to the general public and it's inherently risky, it is the job of the rating agencies to say "That is risky."
The problem is, if one agency declined to rate the security as "not risky," all the issuer had to do is take it to another and say, "Here's my fee.  See if you can rate this as 'not risky'."  And they did.
Packages of loans, geographically diversified in the US were sold to the general public as AAA - the same rating given to ultra-safe US Treasuries.  "Widows and orphans" could safely buy them.  Why?  Because, even if the underwriting standards were lax, there was good evidence provided by the Quants, verified by the Quants' Bosses (who paid big, fat fees for safe ratings), that a majority of the loans would be good, even if there were regional difficulties at times.
2.  Common Thread
If the Quants hadn't come up with the studies about the general safety of the US mortgage market, someone would have figured it out.  Maybe the Quants' bosses would have done it themselves, as they saw quarter after quarter of real estate lenders' profits.
Some percentage of borrowers have always lied on mortgage applications.  Underwriters catch some, but not all of them, but the number that squeak through the system were never significant.
But, this bubble could never have grown unless the issuers of laxly underwritten mortgages could have sold them to a "greater fool."  If they'd kept these mortgages on their books, the banks who lent the money would have had to acknowledge the losses.
That leaves the rating agencies.
3.  The Rating Agency Issue
There is no excuse for the ratings agencies giving AAA rating to risky securities.  Taking money to do so is effectively the same as taking a bribe.
Ratings agencies are charged with the responsibility of analyzing underlying securities and giving the public an easily understood way to know the level of risk they have.  This is the one place where, "I didn't know" isn't an excuse.  Maybe the Quants didn't know.  Maybe the Quants' Bosses didn't know.  Maybe the banks didn't know.
But the ratings agencies can't claim stupidity.  Rating securities is their reason for existing.  If they can't do that, they don't deserve to exist.
4.  Blame
Maybe the Quants should have known.  Probably the Quants bosses should have known.  Likely the banks should have know.  The borrowers should not have lied.  But, most definitely, the ratings agencies should have known.
So, the next time you hear that a security is rated AAA, what will you think?
It's time to hold the ratings agencies' feet to the fire.  Either rate securities by using generally accepted accounting principals or rename yourselves as, "Bribe Takers."
Perhaps a little something in this regard should be passed in Financial Regulatory Reform.  And, if it isn't, I wonder. 
Will it be because someone has been paid to ignore it?

Health Care Reform Meets Financial Reform

I. Health Care Reform - and Insurance

In response to President Obama's Health Care Reform address this week to a joint session of Congress, the Cato Institute recommended that, in order to help achieve the goal of cost control in comprehensive health care, "(p)eople should be allowed to purchase health insurance across state lines," noting that "(o)ne study estimated that that adjustment alone could cover 17 million uninsured Americans without costing taxpayers a dime." http://www.cato-at-liberty.org/2009/09/08/mr-president-here-is-our-answer/

Unfortunately, the insurance industry is regulated on a State level, so such across-state-lines purchase of health insurance is currently not possible.

II. Financial Reform - and Insurance

As I mentioned recently in the first of a four part Financial Reform legislative review series, http://womensfinancialplanning.blogspot.com/2009/07/obama-administration-financial.html State regulation of insurance companies makes regulatory oversight very difficult. That difficulty in regulating this industry contributed in large part to the financial meltdown that began last year, and continues today.

III. Health Care Reform Meets Financial Reform - with Insurance

Insurance regulation is again brought to the forefront as we discuss means to achieving bi-partisan support for the adoption of comprehensive health care reform in the United States, just as it was when financial regulation was being discussed. And, as this reemerges, we find Morgan Stanley CEO John Mack, who guided that institution through the recent financial meltdown, saying:

"I'm somewhat disappointed that we've lost a little of the steam about getting financial reform. We do need system-risk management." http://www.cnbc.com/id/32799393 Risk management, by the way, is just another way of saying 'insurance.'

These are complex times. There are complex domestic issues that require consideration on many fronts.

IV. Can We Do More Than One Thing At a Time?

It is not appropriate to say, "Since we've avoided the seizing up of the financial markets, now we can concentrate on health care." We cannot discuss the health care without discussing the insurance industry - and a large part of financial meltdown involved abuses from industry.

To date, no financial regulation reform has passed. Every US woman and man has a stake in this. It was with $180 billion of your money that insurance giant American International Group ("AIG") was bailed out, after having issued innumerable credit default swaps. What were those? They were unregulated promises by AIG to guarantee mortgage payments - for which they had no way of paying when the mortgages defaulted. In other words, AIG (and many others) collected fees for promises they made, but could not keep.

Thus, the insurance industry is at the heart of both the financial crisis and the health care debate. We must accept that both are critical components of our economic survival.

I have heard no compelling argument for keeping the insurance industry regulated at the State level. That is too complex from a regulatory perspective, and non-competitive from a health insurance perspective. Both sides of the political aisle seem to agree on that.

V. What Action Can You Take?

First, become acquainted with the issues. The administration's financial reform proposal is referenced and discussed at the link provided above in Section II. Whatever your opinion with respect to the version of health care legislation you support, it is likely, unless you own or lobby for an insurance company, that you support the free market competition that will result from the ability to purchase health insurance across state lines.

If you refer to Open Secrets, a non-partisan group referenced recently in an article by the Wall St. Journal http://www.opensecrets.org/lobby/top.php?indexType=c you will see that the two top industries spending the highest number of lobbying dollars to influence legislation are:

• Finance, Insurance & Real Estate $3.7 billion
• Health $3.55 billion

Remember that your Congressional representatives work for you, not lobbyists, and that it is you who pays for their health insurance, which is likely far superior to yours. To voice your opinion on Federal regulation of the insurance industry, here is a list of your representatives, with their email addresses http://www.visi.com/juan/congress/

As always, your comments and suggestions are most welcome.

Late Summer Economy

Summer is generally a time when capital markets languish, brokers vacation in the Hamptons, and there is little economic news. That is not the case in the Summer of 2009.
A fierce battle is being fought between the economic interests of those who have monetized health care - the pharmaceutical companies, the health insurers and health care providers like doctors and nurses - and millions of Americans who are teetering on the edge of economic insolvency because of our country's unsustainable rise in the cost of health care. The stakes are undeniably high, as are the emotions of those who argue both sides of the issue.
On one thing we can all agree. To fail to address this issue is to destroy the long term health of our economy.
In addition to that issue, however, we are also emerging from the worst recession since the Great Depression. Because financial markets ceased to function at the end of last year, an enormous amount of money was provided to commercial banks (and investment banks who changed their charters to avail themselves of this money) in order to prevent a financial disaster. This disaster was caused by securitizing and selling the risk of poorly underwritten mortgages, and the sales - and disastrous effects - were worldwide.
This problem began in the late 1990s, with the dissolution of the Glass-Steagall Act, that separated commercial and investment banking. It appears that we expect, however, that this decade long problem-in-the-making is solved immediately.
"What is taking so long?" is the predominant economic question.
We have, apparently, become a nation convinced that there are simple, quick solutions to everything.
We continue to face declines in manufacturing, rising unemployment, plummeting housing prices and a distinct lack of consumer confidence. On the bright side, inflation is almost non-existent, interest rates are at decade lows, and capital markets show unmistakable signs of predicting an end to our recession. We are working on financial reform and the excesses of the past seem, at least for the present, to have subsided.
It's a mixed bag. We will not suddenly pop out of this quagmire in a month or two. That is clear.
It is also clear that we will politicize economic issues. We will criticize the Economic Team, point to rising deficits, scream about banker's bonuses and wonder why we're not back to normal seven months from the inauguration of the new administration.
Yet, not one of these issues is directly relevant.
Rising deficits? Yes. Was there an alternative to a huge cash infusion into the economy? No.
Banker's bonuses? Yes. Are they a significant percentage of the "bailout money?" No.
What, then, should we be discussing?

1. Financial Regulation - Plug up the holes that caused excesses without unduly burdening the financial system
2. Long Term Employment Growth Policy - Some jobs, including much manufacturing, are gone forever. Reeducating the work force for long term employment is vital
3. Deficit Reduction and National Debt Repayment - Once we've stabilized the economy and gotten back to work (in about a year), we need to raise taxes. Yes, we all need to pay more taxes to reduce the current deficit and repay the national debt. It is as big a security issue as reliance on foreign oil.

There you have it. It's not a pretty story, but at least we're talking about the real issues.

As always, your comments are most welcome.

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?"

US

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 http://documents.nytimes.com/draft-of-president-obama-s-financial-regulation-proposal#p=1 I welcome your comments and discussion about any points in this proposal. And thanks, Kelly, for your suggestion to discuss this important issue.

President Obama's Financial Regulation Proposal - Part IV

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, II and III of the proposal were discussed in the two previous posts. Here's the third installment.

Creation of the Consumer Financial Protection Agency

The seven government agencies named in the prior post did not prevent or address financial problems adequately during the recent crisis. The administration has proposed the creation of the Consumer Financial Protection Agency as one solution. The creation of this agency was discussed in the prior post. In addition to this agency, the administration also seeks to create "resolution regime" for failing Bank Holding Companies and so-called "Tier 1" (too big to fail) Financial Holding Companies.

Resolution Regime

This "regime" will be led by the Treasury Department, and can act only after

• consulting with the President, and
• having obtained the approval of 2/3 of the Fed board, and 2/3 of the FDIC board (if the failing institution is a bank) or 2/3 of the SEC commissioners (if the failing institution is a brokerage firm)

This, with the previously discussed increased capital requirements for "too big to fail" financial institutions, is the solution proposed to avoid situations like those seen recently with AIG and Bear Stearns. Again, the Treasury is the "big boss" when institutions that are large enough to cause widespread financial harm are seen to have significant developing problems.

As the "big boss," the Treasury now must approve loans made by the Fed to such institutions.

Where's the doom and gloom?

MORE Power for the Treasury?

Many people, as discussed before, are uncomfortable with the Treasury Department in the position as the "regulator's regulator." Now, the Fed has to consult with Treasury prior to authorize lending practices related to "too big to fail" institutions.

In reality, the Treasury Secretary was consulted in every instance when action was recently taken by the Fed. This provision makes that practice mandatory.

More Power for the President?

The Treasury must consult with the President before initiating the resolution regime for failing institutions. Some worry that the President may take the initiative and pressure Treasury to take such action. Those who make such accusations fail, in my opinion, to consider that 2/3 of the Fed board and 2/3 of either the FDIC board or SEC commissioners must also approve taking such action. The checks and balances, in this case, seem to be in place to assure that the Executive Branch not have undue influence in making these decisions.

I look forward to your comments, and will address the final part of these proposals in the next post.

Obama Administration Financial Regulation Proposal - Part III

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 and II of the proposal were discussed in the previous post. Here's the second installment.

Protect Consumers and Investors

The Administration seeks to protect consumers against fraud and promote understanding of financial products, like credit cards, savings vehicles, mortgages, and the like. This goal is addressed through the creation of the CFPA (Consumer Financial Protection Agency), which is charged with the responsibility to ensure that consumer protection regulations are "written fairly and enforced vigorously." This new agency will have no jurisdiction over financial products governed by the Securities and Exchange Commission or the Federal Trade Commission, but both existing agencies will have new authorities and resources.

When non-traditional mortgage lenders entered the mortgage market after new mortgage securitization produces were developed by Wall St., the regulatory framework that protected consumers of banks and thrifts did not cover those new lenders. Countrywide Mortgage, for example, incented its sales staff to sell mortgage instruments that were not necessarily risk appropriate for borrowers. While other more traditional mortgage products were available, loan agents were encouraged by amount of incentive paid by product to sell Adjustable Rate Mortgages through "no-doc" (no, or low documentation required) programs that had high up-front fee structures.

And, with respect to credit card lending, certain "fine print" issues have arisen that clearly show that, if given the power to raise interest rates for situations unrelated to current repayment history (like applying for additional credit elsewhere), financial institutions can, and will, categorically raise expenses. In the past, this situation could have been rectified by the market, i.e., customers could merely close accounts with more onerous conditions and transfer them to institutions with more consumer friendly agreements. But, as credit lines froze, such alternative credit providers were unavailable.

The mission of this new Consumer Financial Protection Agency is to ensure that

1. Consumers have the information they need to make responsible financial decisions
   
   
2. Consumers are protected from abuse, unfairness, deception and discrimination
   
   
3. Consumers' markets operate fairly and efficiently with ample room for sustainable growth and innovation
   
   
4. Traditionally underserved consumer markets have access to lending, investment and financial services
   

The CFPA will be the "consumers' seat at the table" as regards the

• Truth in Lending Act
  
• Home Ownership and Equity Protection Act


• Real Estate Settlement and Procedures Act


• Community Reinvestment Act


• Equal Credit Opportunity Act


• Home Mortgage Disclosure Act


• Fair Debt Collection Practices Act

All those Acts were in place during the mortgage crisis. The Administration proposes to solve the lack of understanding by consumers that played some part in this crisis by creating another agency and ensuring a "consumer voice," noting that its mission is to provide "a floor, not a ceiling." This means that the Agency will represent minimum and consistent standard

Examples?

• No more "mandatory arbitration clauses."


• Requiring "plain English" disclosures.


• Holding brokers to a "fiduciary" as opposed to "suitability" standard.


• Holding companies responsible to clients, as well as investors.


• Require "non-binding" shareholder votes for executive compensation.


• Increase retirement savings incentives.

So where's the "doom and gloom" here, you ask? Well, it certainly isn't in the rhetoric.

ANOTHER Agency?

I add my voice to this groan. Government agencies are expensive, unwieldy and, judging from the number which existed prior to the crisis, ineffective. The fact remains that, even with those seven agencies listed above, the housing crisis ensued.

I hesitate to unilaterally cry, "Poor little consumer" in every case. Many borrowers who KNEW they couldn't afford a $400,000 house with a $50,000 annual salary, bought one anyway. I cringe at the thought that the we as consumers are too stupid to make up our own minds. Then, I look at my credit card statement, and pause. It's ridiculous. It's incomprehensible.

So, what's the answer? The fact is, it doesn't matter. The consumer has screamed to the top of Congress that every Tom Dick and Harry financial whatever has received a squillion dollar bail-out, and she the individual is left to mind her finances properly and pay her bills on time with no help. Consumer protection is going to be written in this proposal as a political reality.

It is my hope that we don't over-correct. It is my hope that we do not swing to the extreme of the so-called "nanny state," and attempt to hold everyone's hand, make doing business more costly, and become non-competitive in world financial markets. But, reality is reality and consumer protection is the current political reality.

As a matter of full disclosure, I come from the financial industry. As a matter of fuller disclosure, I spent years in "Regulatory Compliance," which was charged with the responsibility of taking recently promulgated regulation and integrating it into daily operations. I admit to reading regulations and thinking, "Have the persons who wrote this EVER been in an actual business?" I admit to seeing the regulatory pendulum swing wildly back and forth, and hating the tendency to over-regulate after a crisis. I predict that this legislation will be analogous to affirmative action, where administrations will use it as a political symbol as "pro-consumer" and "pro-business" stands that will result in its being more or less consumer friendly. It will undoubtedly, however, be expensive. Read on.

It Will Make Financial Institutions Less Profitable

Absolutely right. Between the increase in capital and liquidity requirements discussed in the prior post and the increase in regulation that will require new forms, new procedures, new training, etc., etc., banks will definitely be less profitable. And, since one of the stated goals of this new agency is to give access to traditionally underserved markets, i.e., the poor, non-English speaking residents, etc., the expenses inherent in this proposal will likely result in higher fees paid by the rest of us. Speaking for myself, I will pay higher fees in order that the most vulnerable of us not be subjected to the usurious rates charged by "payday loan" and "rent to own" firms, but I am speaking only for myself. Banking is going to cost more, just as health care will cost more as we insure the uninsured. This is a social, as opposed to business issue. If you think that the poor should not have access to basic financial services, this is not the time to voice your opinion. You're not in the majority

Non-Binding Executive Compensaton Shareholder Votes

Non-binding means that you are not bound by what I say. Non-binding votes by shareholders about executive compensation is a paper tiger. By this, the Administration seeks to let shareholders tell executives that they think they're getting paid too much, but stops before giving them any power to do anything about it. In some ways, I like this, as "capping compensation" is basically wage controls, and anyone who lived through the 1970's will tell you how well that worked out. Also, imagine the press you'll get if you're one of those executives. The 24-hour business channels will be all over you, forcing you to justify your compensation, and making you say why you should have your job. It's an interesting solution. I'm on the fence on this aspect of the proposal, but think public outcry a far superior recommendation than salary caps. We shall see.

That said, this part of the financial proposal has some potential land mines, and I'll be watching it very closely. Hopefully, we won't over regulate and make a bad situation worse.

Obama Administration Financial Regulation Proposal - Parts I & II

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.

Since there are five key objectives in this proposal (which is 87 pages long), I'll do this in a series that will include

• Supervision and Regulation of Financial Firms
• Regulation of Financial Markets
• Consumer and Investor Protection
• Government Tools to Meet Objectives
• International Standards and Regulation.

We'll start with the first two - Supervision and Regulation of Financial Firms and Regulation of Financial Markets. Please feel free to comment on this, and all subsequent articles.

Supervision and Regulation of Financial Firms

To fix a problem, it must first be properly defined. The proposal notes that leverage, or borrowing, by consumers and financial institutions alike, expanded dramatically during the housing bubble. This is an inarguable fact. People were borrowing more and more money against houses with prices that were rising at an unsustainable pace. Lenders were lending more and more money against these (and other) assets, with declining lending standards. Neither consumers nor lenders were prepared for the inevitable fall in prices. The root problem, however, was that no regulatory body had sufficient jurisdiction (or power) to address these problems.

The specific problems were:

• Capital and liquidity standards were too low
• The widespread effect that financial institutions would have on the entire financial system if they failed
• Splintered, fragmented regulatory bodies, none of which had responsibility or authority for the overall system
• Insufficient oversight for investment bankers (brokerage firms)

Capital standards are the required amount of money that must be put aside, and are based on assets. At its worst, some investment banks were leveraged 47:1. That means for every $47 dollars it had in loans, swaps, etc., it had $1 in actual cash. In other words, that would be like putting $8500 down on a $400,000 house, and thinking you had a sufficient down payment.

The second issue is"too big to fail," which basically means that, if that particular financial institution failed, it would severely damage the entire financial system. This type of systemic risk was present in AIG, a mammoth insurance company. Because of the number of credit default swaps (unregulated inter-financial institution agreements to cover loan amounts, if the borrower defaulted) and other risks assumed by the company, had the government allowed it to fail, the result would likely be catastrophic for, not only the US, but the world-wide financial markets.

Regulatory oversight for financial institutions was very like the issue that arose after 9/11, when the CIA, FBI and local law enforcement agencies in total may have had the intelligence to prevent the attacks, but had no inter-communication, and in some cases competing and proprietary interests. Insurance companies are state regulated, and every state is different. Banks are regulated by the either the Comptroller of the Currency or FDIC and the Federal Reserve Bank, thrifts, by the OTC, and investment bankers, by the SEC. There's no coordination. So, when investment bankers went into the mortgage business, the OTC had no jurisdiction.

And, speaking of the investment bankers, they were convinced that, since the overall housing market hadn't fallen for 50 years, it followed that a geographically diverse portfolio of mortgages would be safe no matter how little the down payment, whether income was verified, etc., etc. After all, an overall rising market would protect investors. They even convinced the rating agencies that reviewed their portfolios that they were right. The fact that this business needs more oversight could not be more apparent in hindsight.

So, the Administration proposes seeks to put the Treasury Department in charge. They'll be the "big boss" over all the other agencies, and have the authority to stop these problems before they become systemic. A Financial Oversight Council, consisting of the heads of supervisory agencies, will be established to identify such risks before the problems become too large, and agencies will be consolidated in order that responsibilities not overlap or compete, with the Fed responsible for implementing more stringent standards for the operation of these companies.

All financial institutions will have more stringent capital requirements and executive compensation standards. Capital requirements for reserves covering potential loan losses will be set by both accounting standards boards and the SEC.

Regulation of Financial Markets

The problem having been defined, the Administration seeks to address these issues through the following regulatory reforms.

• Strengthening of "firewalls" between banks and their affiliates to curtail conflicts of interest
• Closing loopholes in bank regulation (to prevent financial institutions from changing their charter from one type of bank to another to enable certain practices)
• Eliminating the thrift (the old "savings and loan") charter and unifying those institutions under the supervision of commercial banks
• Hedge funds will no longer be unregulated
• Insurance companies will be regulated on the federal, instead of state level
• The future of Federal "agencies" (Like Fannie Mae and Freddie Mac) will be considered
• Regulating "over-the-counter" instruments, like credit default swaps, derivatives and commodities
• Strengthen regulation of securitization markets (like "asset backed securities" that consist of mortgages)
• Tie compensation with long term performance
• Provide means to eliminate conflict of interest by the Rating Agencies

That's a synopsis of the proposals. So, where is the "doom and gloom?"

Too Powerful Treasury

First, many people feel that this proposal gives the Treasury too much power. I agree that the "regulator's regulator" is a powerful position. But, I have heard no one provide an alternative. In reading this objection by many authors, I have noticed a common thread. Generally, the objectors seemed more concerned about the current Treasury Secretary than the fact that Treasury is the agency in charge. After all, what is the alternative? The Fed? Another agency? I agree that, as with all complex issues, often the key players are more important than the structure in which they operate. But, that argument is fallacious in criticizing the structure.

Reinstate Glass-Steagall

Many feel that strengthening firewalls between banks and their affiliates is an inadequate solution, and want the Glass-Steagall Act, repealed under the Clinton Administration, to be reinstated. While that may or may not be a valid point, the fact is that those who recommend this action do not say how it will be accomplished. Since most investment bankers now operate under a commercial bank charter, would you require that the banks divest themselves of the investment banking portion of their operation? This would require a new board of directors, management team, central operation, etc. Who would pay for the additional expense this would require?

Government Has No Business in the Compensation Business

Many object to "capping" executive pay. I am one of these people. However, close reading of the proposals does no such thing. It ties compensation with long term, as compared with short term objectives. While I concur that this will be difficult, allow me a bit of pontificating. Short term financial goals can be achieved by taking action that is not necessarily in the best long term interests of a company.

As an example, lax underwriting standards for mortgages may allow people who really can't afford a home to qualify to buy one. When one significantly increases the demand for something, many more people are bidding on that thing, and the price goes up. That is called demand-push, and that pushes up prices. At some point, demand will level off. During the "push" prices - and profits - increase. If "everybody's doing it," and you are the company that is NOT, your profits are lower, and your stock is less valuable. However, your decision not to participate (if you survived), was in the long term interests of your company, your stockholders and the economy.

It's not going to be easy to change the short term profit motive, but it's worth a try.

Banks, Especially Multi-National Banks, Will Be Less Profitable

With stricter capitalization requirements, this is undoubtedly true. After all, if you're putting more money aside to cover potential problems, that money will not be earning what it would if it were invested. But, the profitability that was derived from participation in the unsustainable rise in housing prices cannot be considered "the norm." To compare properly regulated bank profits with those derived during the housing bubble is inappropriate when considering that the goal is long term sustainablility as compared with short term profitability.

These are the major objections I've seen raised and what I believe to be an appropriate response. Feel free, as mentioned before, to comment, and I'll do my best to answer.