How many people noticed that the new Geithner plan lays out proposals to...

[Godhumor]

Temporarily nationalize complex institutions if they are mismanaged? Regulate hedge funds? Add federal oversight to OTC derivatives and swaps? I understand a lot of people are not happy about costs associated with the economic mess right now, but the treasury is talking massive regulation of a lot of the institutions that got us into trouble. Highlights about the proposals:

On taking over institutions:
"Depending on the circumstances, the FDIC and the Treasury would place the firm into conservatorship with the aim of returning it to private hands or a receivership that would manage the process of winding down the firm. The trustee of the conservatorship or receivership would have broad powers, including to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution's contracts (including with its employees), and to deal with a derivatives book. A conservator would also have the power to restructure the institution by, for example, replacing its board of directors and its senior officers. None of these actions would be subject to the approval of the institution's creditors or other stakeholders." (Among other things, the trustee can step in, sell or keep whatever he or she felt was best for the company, completely replace the BoD, eliminate any necessary executives, void contracts and do so without stock or debt holder approval.)

Hedge funds (This has been a long time coming):
"U.S. law generally does not require hedge funds or other private pools of capital to register with a federal financial regulator, although some funds that trade commodity derivatives must register with the Commodity Futures Trading Commission and many funds register voluntarily with the Securities and Exchange Commission. As a result, there are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability. The Madoff episode is just one more reminder that, in order to protect investors, we must close gaps and weaknesses in the regulation and enforcement of broker-dealers, investment advisors and the funds they manage."

Derivatives and swaps:
"In our proposed regulatory framework, the government will regulate the markets for credit default swaps and over-the-counter derivatives for the first time." (This is just the first part of the proposals for the swaps, the others are well worth reading).

http://www.treas.gov/press/releases/tg72.htm

[FrenchieCat]

1. No one has noticed.......

I'm afraid.

They only notice what they don't like.

[Mithreal]

5. self delete

[LuvNewcastle]

2. Now that's change I can believe in.

[Kaleko]

3. Some kneejerkers don't bother to read the plan before

jerking off on DU. The fear of looking gullible is making everyone jittery around here.

[truedelphi]

4. Note the weaknesses -

First of all, the best thing to do would be to bring Glass Steagall back. And to undo the 1999 Banking Reform Act. Otherwise, you'll see countless hours spent trying to reinvent a wheel that will not even roll as efficiently as in the times before, back when Glass Steagall ruled. Instead, there will be numerous loopholes in doing an end run around the complexities of the new financial market, without the simple outright abolishing of certain aspects of the game.

And among the aspects that must be abolished is the Credit Default Swaps. They were the biggest part of the pronblem. And they should go.

Will this happen? No, of course not. Obama has made it clear that he is the banking industry's very good friend. The same ol' same ol' will go on just as before.

Much more would be accomplished in our society if the capital at the top went to provide for real production, not the endless shuffling, sales, and re-arrangement of financial instruments such as SIV's CDO's and Credit Default Swaps. The amount s of money that are taken away from legitimate business endeavors and instead offered to these artificial products is truly immense. But if it were to happen that these finanical instruments did not exist, the Big Players in the financial underworld would have to work by the sweat of their brow, and we all know they won't allow for that.

Meanwhile we will all have to work three times as hard.

[Mithreal]

6. Are there any signs Glass Steagall will be brought back?

It's ironic that other countries are interested in Glass Steagall.

UK bank crisis prompts interest in Glass-Steagall

LONDON - The global financial meltdown has whetted British interest in a remedy the United States discarded a decade ago: the Glass-Steagall Act of 1933, which prohibited retail banks from dealing in investments and insurance.

"There are good arguments in favor — to separate the utility functions of a retail bank taking household deposits and running the payments system from the casino trading of an investment bank, and good arguments against — the difficulty of maintaining a credible boundary between those institutions that are eligible to receive government support and those that are not," King said.

But ten years later, the dissent of Sen. Byron Dorgan, a North Dakota Democrat, has a certain ring: "I will bet one day somebody is going to look back at this and they are going to say: How on Earth could we have thought it made sense to allow the banking industry to concentrate, through merger and acquisition, to become bigger and bigger and bigger; far more firms in the category of too big to fail? How did we think that was going to help this country?"

"It is folly to allow core banks to be in a position where they can be brought down by exciting but highly risky investment banking activities," Lawson wrote in the Financial Times on March 15.

http://www.msnbc.msn.com/id/29755524/

[truedelphi]

7. I thought it most helpful when Rachel Maddow had Sen Dorgan on her show

The best thing to do (and legislatures almost always fail to do it) WHENEVER THINGS GO WRONG is to figure out what newer legislation did to older legislation, and to simply undo the newer stuff and bring back the old.

Instead, there is always all this handwringing (And I have seen a lot of it from Geithner and Congress critters supporting him) "Ohes, noes, we simply don't know how to return to a properly funcitoning economy. It is all such a big mess, and there seems to be no way to undo it."

Sidebar: After California hopsitals' management kicked out all the LVN's (licensed vocational nurses) as the LVNs cost a lot, then there were too many nursing assitants. Who although are valuable in their place, should not be running around a hospital floor trying to be nurses.

Eventually all the troubles this caused made the CA legislature go into "Ohes, noes it is all a mess - we don't know what to do!" mode. None of them ever sat down and jsut realizz=ed that "Hey we could bring the LVN's back" Instead they decided to spend some eighteen months fiugring out what colleg course work the nursing assistants should take (How about just making them go back to school and spend the additional six months being LVN's)

Anywaym, bureaucrats love to do all this whining, hand wringing and confabulating about how to solve problems.

[FrenchieCat]

9. What did the two acts in 99 and 00 that you mentioned

do to regulate Insurance Companies and Hedge Funds that became undone?

[truedelphi]

25. The ONE Act from 99 and 00 that I mentioned was signed into law by Clinton in

1999. It was called the Banking Reform act. It should be UNDONE, not kept in action.

So you misread me there. Re-read my post, and ask again.

The 1999 Banking Reform Act is what allowed almost every financial institution in this country to do the following to us poor people:

1) Install totally off the wall NSF charges. I call this price fixing, it is now impossible to find any bank or credit union in California that doesn't charge at least
$ 22 for a bounced check. You bounce a check, you pay $ 22 to $ 33 bucks a pop.
2) A "freeze" can be placed on your banking funds for just making a purchase. My household learned the hard way - never buy gas using the debit portion of the ATM card. Use only the "Credit" side. Otherwise, you can have up to $ 70 frozen against that $ 25 purchase. Then other checks and debit you write will bounce.

The 1999 Banking Reform Act is ponderous in its changes to banking laws, so ponderous and overwhelming that I cannot even tell you everything that it does. I have tried to research it by enlisting the help of liberal law groups on the East Coast, and they say they don't even know what it does. Our society is in mucho trouble when law firms that exist for the sole purpose of understanding how to help the poor with their relations with banks cannot fathom the implications of a new set of rules.

[Mithreal]

10. Thanks for the headsup, Here's a link for anyone else who wants to see it.

http://www.youtube.com/watch?v=Q_hbezbsJ8s

[FrenchieCat]

8. You may want something else,

but these regulations are solid and strictly concentrate on Hedge Funds and Insurance companies....which have been an equal part of the problems.

[truedelphi]

11. Your idea of solid and my idea of solid are two different ideas.

When I think of solidity I think of the man who once said "There is as much danger in siding with organized banking as with organized crime."

Maybe someday Obama will put down the Lincoln bios and reading up on this guy. Hopefully it will not be too late.

[LiberalFighter]

17. Don't forget to execute Phil and Wendy Gramm for causing Glass-Steagall Act to be rescinded.

[No.23]

23. Don't be too myopic in your prosecutorial zeal, please.

[truedelphi]

26. Plans to do so are in the works

Side note to the FBI - just kiddin' -- I don't even know where those two live, and imagine they have enough summer homes and winter ski palaces that locating them would be a bitch.

[LiberalFighter]

18. For those that don't know what are credit default swaps...

as explained on NPR last week...

They are side bets on when people will default on their loans. They were illegal until the Glass-Steagall Act was reversed.

[Statistical]

19. CDS weren't illegal and are useful. Naked CDS are the problem.

Simple version.

You own a bond. A Verizon bond, a Walmart bond, a GM bond. It pays you a nice interest rate however YOU are more concerned w/ the return OF your principle than the return on your principle.

I on the otherhand thing the company is solid and believe your fear is unwarranted.

I sell you a CDS. If the company defaults on the debt obligation I will pay you some (or all) of the principle.
I get a nice payment and you get piece of mind.
You trade a % of your interest income for protection if the company defaults.

Essentially it is trading the risk. Now most people didn't take out a CDS for 100% of the principle. The cost is directly related to the amount insured. Most organizations who are principle sensitive (PENSION FUNDS) would purchase CDS for 20%-50% of principle. So they would recover at least some of the principle.

The bad part:
At one time to purchase a CDS you needed to OWN the bond. That changed and you could purchased CDS without owning the bond. Now you have a financial motive for the company to fail. CDS became the bonus payout for short sellers. Buy CDS (very cheap), short stock, CDS rise sell some use $$$ to short stock more. Rinse & Repeat until company collapses.

On the flip side. Banks were allowed to over leverage. Banks had been required to maintain 10% fractional reverse = 10x leverage. Some of the shadow banks like AIG had 30:1, 40:1, even 50:1 leverage. So when companies started failing they were unable to payout CDS as promised.

There are legitimate uses to CDS. CDS enable companies that can accept a lower net interest in return for principle protection to purchase more debt. Companies like insurance companies, anuitity funds, pensions all have used CDS for decades. The difference is they had a LEGITIMATE use for them and they were sold by banks leveraged at MOST 10:1 not stupid 50:1.

[LiberalFighter]

21. Credit Default Swaps were invented in 1997

Credit Default Swaps were invented in 1997 by a team working for JPMorgan Chase. They were designed to shift the risk of default to a third-party, and were therefore less punitive in terms of regulatory capital.

Credit Default Swaps became largely exempt from regulation by the SEC and the CFTC with the Commodity Futures Modernization Act of 2000, which was also responsible for the Enron loophole.

[truedelphi]

27. Thank you for that explanation. Much obliged for it. n/t

[girl gone mad]

12. This was discussed last week on the economy forum.

Here's Yves Smith's http://www.nakedcapitalism.com/2009/03/treasury-to-seek-power-to-seize-non.html">astute take:

The Washington Post reports that Treasury will seek the power to take over insurers, hedge funds, and investment firms. Given the Treasury's reluctance to assume control over clearly insolvent banks (Citi assuredly, probably Bank of America), it seems curious indeed that it is asking to extend authority that it is patently reluctant to exercise.

Moreover, elements of this appear, to put it mildly, misguided. Insurers are regulated by states. Does the Treasury, in supplanting state authority, intend to put in place the needed supervisory apparatus? Does anyone at Treasury have the foggiest grasp of insurance accounting (which separately, is a bit of a mess)?

And AIG, poster child of insufficient regulation, was overseen at the parent level (which is where the black hole creating Financial Products unit sat) by the Office of Thrift Supervision (no joke), which is an agency of the Treasury! So the Treasury is acting like it needs more authority to prevent future AIG's when its own agency was responsible for the doomsday machine part of AIG.

And the hedge fund supervision bit probably means less than meets the eye. Even if a lot of them have operations in Fairfield County or Manhattan, a lot are domiciled in the Caymans or Luxembourg. You do need to observe certain forms to make sure the designation sticks (have local counsel, have annual meeting there, etc.) but after the Bear Stearns hedge funds screwed up on that front (setting up funds there but not taking other steps consistent with having them domiciled offshore), other funds may have cleaned up their act.

From the Washington Post:

The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document....

Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers.

Readers can correct me, but that looks to be utter rubbish. The OTS could have yanked AIG's license and sued it. The problem is not regulatory authority, the problem is the lack of a special resolution regime of the sort the UK has for putting big complex financial firms into receivership. Merely giving Treasury authority is insufficient without putting in place needed bankruptcy type provisions. That takes thought, and I guarantee that given how behind the eight ball and short staffed Geithner has been, the needed thinking hat not taken place. Back to the piece:

The administration's proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed's other responsibilities, particularly its control over monetary policy.

The government also would assume the authority to seize such firms if they totter toward failure.

Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit.

The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.

Yves again. Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is NOT, appearances to the contrary, to be able to put more firms into receivership. It is to get broader authority to bail them out.

______________________________________________________________________


Also, read this article carefully:

http://online.wsj.com/article/SB123802506167942421.html#mod=testMod">AIG Fights a Fire at Its Paris Unit

Has Geithner ever advocated imposing ANY restrictions on AIG? Regulatory seizure would trigger a default on CDS contracts written on AIG, and according to this article it would also trigger massive defaults on CDS contracts written BY AIG. So either Geithner doesn't know what the hell he's doing or this receivership proposal is just more smoke and mirrors. I'm more inclined to believe the latter.

[Political Heretic]

14. Oh wow I just read your links and there's even more reason for some concern!

More and more I feel like the main problem we have in Washington right now is a lack of political will to do what really needs to be done on this front.

Keep trying all the "answers" that will keep the elite happy, when the real solutions America needs right now aren't (I don't think) compatible with elite happiness. The elite are going to have to be unhappy for awhile in order to really get things back on a solid and stable footing...

[amandabeech]

22. The one problem I see with the analysis, is that Citi and BOA are bank holding companies, not banks.

Bank holding companies are frequently conglomerates that include brokerage houses, investment banks, mutual funds and fund management, and just about anything else, thanks to Gramm Leach Bliley. Citi and BOA are really banking conglomerates that include a basic bank.

The FDIC has authority to take over only banks, thrifts and credit unions. That means that it can only take over the banking operations, which are undoubtedly a wholly owned subsidiary of the overarching bank holding company conglomerate.

The FDIC has no authority to take over the brokerage, investment banking and mutual fund subsidiaries. The FDIC also has no authority to take over the overarching holding company, either.

The way I read Geithner's takeover plan is that he and Obama recognize that the U.S. government has no legal authority over the bank holding company conglomerates or AIG at this time. They need a new law.

I also read Geithner's belief that a new law is necessary is that they see that they might need to actually take these conglomerates into receivership, which is something that the TARP was supposed to prevent. In other words, either Geithner's listening to Krugman or the situation with the banking conglomerates, AIG and hedge funds is more serious than Geithner would lead us to believe.

Geithner has offered no details of his plan, if in fact a plan with details exists, so it is impossible to say authoritatively what exactly the government will be able to do.

I'll defer judgment on the plan until the devil shows up with the details.

[truedelphi]

28. Great information. Am throwing it onto my Hard Drive for

A long read.

Probably won't cheer me up, but good to have another name of another solid researcher into this mess.

[Political Heretic]

13. This is not necessarily a good thing. Here's why:

A really sobering analysis can be found here:

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=389&topic_id=5345808&mesg_id=5345808

I'm not posting this as proof-text. I'm not saying this guy is right and the things being proposed by the administration are wrong. I'm saying that its complicated, and the analysis given by Greider gives me a lot to think and worry about.

[progressoid]

15. How about just getting rid of derivatives instead.

[tbyg52]

20. Get rid of naked *anything* - if we're paying off *any* of those side bets, I'm angry. nt

[JVS]

16. If they are mismanaged?

:rofl:

[soothsayer]

24. Basically the crooks are giving themselves even broader powers to drive enemy firms out of business

and divvy them up and give them to themselves and their friends for pennies on the dollar---and it's all being done with our money!

Where are the plans to provide stiff oversight and to really examine all of the assets to see whether or if how toxic they are, like they did with the S&L debacle? There are no plans to do this because they want to hide the evidence of their criminality. We are being duped bigtime. It's highway robbery and we're sitting here like jerks doing nothing. (but what can we do? we do not live in a sovereign country with people who actually represent our will)

[girl gone mad]

29. That's one way of looking at it, no question. n/t