Showing posts with label Financial Regulatory Reform. Show all posts
Showing posts with label Financial Regulatory Reform. Show all posts

Thursday, July 29, 2010

Section 342. Office Of Minority And Women Inclusion

Much recent attention has focused on Section 342 of the Financial Reform Bill (Dodd-Frank Bill). The section calls for the creation of Offices of Minority and Women Inclusion at all Federal financial institution regulatory agencies. While most blog comments on the Section have been negative, there has been a lack of accurate information about just what this section calls for and why.

Let's start with why. As we noted in 2003 and 2006:

"Envy, hatred, and greed have flourished in certain capital market institutions, propelling ethical standards of behavior downward. Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." (2003);

and

"Individuals and market institutions with the power to safeguard the system, including investment analysts and rating agencies, have been compromised. Few efficient, effective and just safeguards are in place. Statistical models created by the firm show the probability of system-wide market failure has increased over the past eight years. Investors and the public are at risk." (2006).

On April 22, 2009, we noted that "Commercial and investment banks used their size and money to..evade any meaningful effort to impose common sense and transparent risk controls in the public interest, known as regulation. Markets are ruled by two emotions: fear and greed, and these institutions got greedy, very greedy. They created financial products that served no real purpose, other than to generate profit for the bank. To keep customers (their only regulator) from understanding the bank’s true intent, they made these products horribly complicated. These products were, in part, simple bets. These bets were layered on top of each other until only the product designers had any hope of realistically estimating what little value actually existed in the products.

Commercial and investment banks came to act as if they understood that giving these products a veneer of social utility would help them hide their true motivation, so they tied a small fraction of these bets, now known as 'derivatives,' to subprime lending and passed the bundle off as the invisible hand of the free market at work. Subprime lending products allowed white banks to engage in highly negative and discriminatory practices. Such practices 'intentionally assigned black customers subprime mortgages while giving whites better rates.' " On June 24, 2009 Wells Fargo was sued by the City of Baltimore for "discriminatory and predatory lending."

As we said on March 14, 2009, quoting an article by Michael Lewis, "There weren't enough Americans with (bad) credit taking out loans to satisfy investors’ appetite for the end product. (Investment banks) used (financial bets) to synthesize more of them..they weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford..they were creating them out of whole cloth. One hundred times over! That’s why the (financial crisis) losses are so much greater than the loans."

None of the blogs we read on Section 342 mentioned these facts.

Section 342 is actually called for by Adam Smith, who said, in The Wealth of Nations that, "To promote the little interest of one little order of men in one country, it hurts the interest of all other orders of men in that country, and of all men in all other countries." The section seeks to broaden "one little order of men in one country" to include minorities and women.

What the section actually says.

Section 342 does not declare "that race and gender employment ratios, if not quotas, must be observed by private financial institutions that do business with the government." It does not insert "race and gender quotas into America's financial industry." There is no language in the section that would make either of these statements reasonable.

Section 342 calls for the development of "standards for—
(A) equal employment opportunity and the racial, ethnic,and gender diversity of the workforce and senior management of the agency;
(B) increased participation of minority-owned and women-owned businesses in the programs and contracts of the agency, including standards for coordinating technical assistance to such businesses; and
(C) assessing the diversity policies and practices of entities regulated by the agency."

The term "standards" is key. Here is what the legislation says about them: "The standards and procedures developed and implemented under this subsection shall include a procedure for (making) a determination whether an agency contractor, and, as applicable, a subcontractor has failed to make a good faith effort to include minorities and women in their workforce."

This seems reasonable. While "Section 342's provisions are broad" there is no reason to assume that they "are certain to increase inefficiency in federal agencies," unless you assume all women and minorities inefficient, a biased and bigoted assumption, to say the least.

Likewise, to suggest that "the federal government is moving from outlawing discrimination to setting up a system of quotas" or that "the only way that financial firms doing business with the government would be able to comply with the law is by showing that a certain percentage of their workforce is female or minority" is wrong. This is the kind of fear mongering heard after Brown v. Board of Education. It was wrong then. It is wrong now. No quotas are called for, and a firm can certainly comply with the law even without having a single women or minority of staff, assuming it has made a good faith effort to include minorities and women in their workforce.

We recently calculated that the dollar Section 342 potential for minority and women owned firms totals $136 million. To order our full Section 342 report, see: http://www.creativeinvest.com/pubs.html

Thursday, May 20, 2010

Financial Reform passes!

In another stunning victory for the Obama Administration, the US Senate passed the financial regulatory reform bill by a vote of 59-39 on Thursday night. (A summary of the legislation can be found on the Senate Banking Committee website.)

We are optimistic that this legislation will begin to address the "trust issues" that now dominate the equity marketplace. It was these "trust issues" that caused a 1,000 point intra-day fall in the Dow Jones Industrial Index on May 6. Until now, rational, fair or effective solutions to the practices that caused so much turmoil in 2007, 2008 and 2009 had not been enacted in any Western economy or market system.

Market mechanisms are simply stressed to the breaking point, given the sharp rise in transaction costs. Transaction costs increased as marketplace ethics decreased. Financial market institutions, recognizing that a decline in ethical standards eventually leads to a decline in trust and an increase in transaction costs, attempted to use financial innovation to deal with the ethics/trust issue. They did so via derivatives: these and other financial market "innovations" were designed to counter a growing lack of ethics in the marketplace. (This is why AIG Group was a key factor in the crisis: insurance policies they sold on financial transactions were supposed to eliminate the need to be concerned with unscrupulous (see Goldman emails) actors. These "insurance policies" proved ineffective, however, and only served to increase transaction costs further.) These increased transaction costs precipitated and caused global market failure in 2007 and 2008.

While we would not be surprised to see the market fall significantly over the next few weeks, markets will recover once transaction costs are lowered. Transaction costs will be lowered when ethical standards, and the trust that results from them, are increased. The financial reform legislation, championed by the Obama Administration and passed by both the House and Senate, is an attempt to do so. While additional legislation will be required, we think this a good first step.

Tuesday, April 1, 2008

Treasury Announces Intention to Implement Portions of Overhaul Via Executive Order

On a conference call with Assistant Secretary for Financial Institutions David Nason yesterday, Treasury Department officials announced that they will implement many parts of their plan to overhaul the nation's financial regulatory structure by executive order. This includes "streamlining the approval process for securities that contributed to the crisis now roiling Wall Street."

According to the Washington Post, "The Treasury's initiatives seek to sweep away the current patchwork of regulation over the coming decade in favor of three more powerful agencies to oversee banking, market stability, and consumer and investor protection."

Treasury officials also acknowledged that the plan is "silent on CRA," or the Community Reinvestment Act.

As Paul Krugman noted,

"Traditional, deposit-taking banks have been regulated since the 1930s, because the experience of the Great Depression showed how bank failures can threaten the whole economy. Supposedly, however, 'non-depository' institutions like Bear (Stearns) didn’t have to be regulated, because 'market discipline' would ensure that they were run responsibly.

When push came to shove, however, the Federal Reserve didn’t dare let market discipline run its course. Instead, it rushed to Bear’s rescue, risking billions of taxpayer dollars, because it feared that the collapse of a major financial institution would endanger the financial system as a whole.

And if financial players like Bear are going to receive the kind of rescue previously limited to deposit-taking banks, the implication seems obvious: they should be regulated like banks, too."

We agree that "if financial players like Bear are going to receive the kind of rescue previously limited to deposit-taking banks,they should be regulated like banks."

This includes CRA.

Monday, March 31, 2008

SEC Chairman Cox on the "Blueprint for Financial Regulatory Reform"

"Statement of SEC Chairman Christopher Cox Regarding Blueprint for Financial Regulatory Reform
FOR IMMEDIATE RELEASE
2008-53

Washington, D.C., March 29, 2008 — Securities and Exchange Commission Chairman Christopher Cox today issued the following statement regarding the Blueprint for Financial Regulatory Reform being proposed by the Treasury Department:

'Recent events have provided further evidence, if more were needed, that financial services regulation in the United States needs to be better integrated among fewer agencies, with clearer lines of responsibility. Just as systemic risk cannot be neatly parceled along outdated regulatory lines, the overarching objective of investor protection can't be fully achieved if it fails to encompass derivatives, insurance, and new instruments that straddle today's regulatory divides. The proposed consolidation of responsibility for investor protection and the regulation of financial products deserves serious consideration as a way to better address the realities of today's markets.' "

We agree. As we have said before, Cox is perhaps the best financial market regulator appointment made by this administration.