Friday, June 12, 2009

many fear the envisaged reforms will “Balkanise the Balkans”, as one financial lobbyist put it.

TO BE NOTED: From the FT:

Geithner’s plans for Wall Street regulation

By Edward Luce in Washington

Published: June 11 2009 20:50 | Last updated: June 11 2009 20:50

When Barack Obama’s administration first circulated its proposals to reform Wall Street regulation, at their core was a plan to consolidate Washington’s Balkan map of overlapping regulatory agencies. That idea underestimated the power of entrenched interests on Capitol Hill.

Tim Geithner, the Treasury secretary, will next week unveil revised plans, which are likely to include the creation of two new structures on top of the existing alphabet soup of agencies. These will include a “council of regulators” – likely to comprise the heads of the largest agencies – which will oversee the ­Federal Reserve’s new uber-regulatory role of overseeing systemic risk.

There is also likely to be a new agency to regulate consumer products, such as mortgages and credit cards. Far from simplifying Washington’s inefficient system of regulation, many fear the envisaged reforms will “Balkanise the Balkans”, as one financial lobbyist put it.

The reforms are similar to those Hank Paulson, George W. Bush’s last Treasury ­secretary, mooted in 2008. Even Republicans, who ­generally oppose tightening regulation, and who are likely to oppose the Treasury secretary’s proposal to increase the Fed’s formidable powers, are surprised by their minimalist nature.

Graphic of US financial system“There are powerful forces at work that want to preserve the existing system,” Richard Shelby, the senior Republican member of the Senate banking committee, told the Financial Times. “They want to do everything they can to keep things the way they are.”

Among the winners are the heads of the main committees on Capitol Hill, which will preserve their oversight of the various agencies. The Wall Street lobby groups, which have drastically stepped up their spending in Washington, are also breathing more easily. The more complex the system of regulation, the more their members can shop between regulators.

Scott Talbott, a senior figure at the Financial Services Roundtable, which played a key role in eviscerating a recent bankruptcy bill that would have given judges the power to write down mortgages, said the financial sector was mostly happy with the proposals.

Its principal objection was to the creation of a consumer regulatory agency since that would separate regulation of the product from the institution. “We are supportive of regulatory reforms to modernise the system to prevent this kind of crisis from ever happening again,” Mr Talbott said.

At the heart of Mr Geithner’s package will be the creation of a council of regulators to oversee the Fed. This represents a compromise between those who wanted the Fed to be the sole authority overseeing systemic risk and those who believed the Fed failed in its basic regulatory duties over the past decade.

The compromise suits the main figures on Capitol Hill, such as Barney Frank, chairman of the House financial services committee, and Collin Peterson, chairman of the House agricultural committee. Neither wanted to see a merger between the Securities and Exchange Commission and the Commodities and Futures Trading Commission, which their committees respectively oversee.

This way both committees will keep their core agencies and get to monitor the council of regulators. A second, key element, will involve the direct regulation of derivatives in which standardised contracts will be listed on an exchange, regulated by the CFTC, while strict disclosure requirements will be imposed on the more customised contracts.

Many institutions are lobbying to define standardised contracts as loosely as possible since the regulatory costs of putting contracts through a central clearing house are high. Gary Gensler, CFTC chairman, says the changes will be effective. “If this regime had been in place earlier we wouldn’t have had an unregulated affiliate of AIG. They might still have sold those products [credit default swaps] but there would have been less risk.”

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