Showing posts with label Obama. Show all posts
Showing posts with label Obama. Show all posts

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.

Wednesday, July 15, 2009

Hearing on the Banking Industry Perspectives on the Obama Administration’s Financial Regulatory Reform Proposals(Jui-Kai Li)

On July 15th , the Full committee of the House Financial Services Committee held a hearing on the banking industry perspectives on the Obama administration’s financial regulatory reform proposals. Testifying were Steve Bartlett-Financial Services Roundtable, John A. Courson- Mortgage Bankers Association, Chris Stinebert- American Financial Services Association, Steven I. Zeisel- Consumer Bankers Association, Professor Todd J. Zywicki- George Mason University, Denise M. Leonard- National Association of Mortgage Brokers, Edward L. Yingling- American Bankers Association, R. Michael S. Menzies- Independent Community Bankers of America.

In his opening statement, Chairman Barney Frank explained that there are lots of opinions and complaints with regard to the Obama administration’s financial regulatory reform proposals. He believes that these opinions and complaints are important during the establishment of this new regulation. He anticipated today’s discussion from the banking industry perspectives could contribute to the better regulation. The testimony is summarized below and copies of the written statements are available on the committee’s web site at

The witnesses are the recognized voices on banking, securities, insurance companies and mortgage broker industry. Most of the witnesses support “the bold, comprehensive financial regulatory reform to strengthen the ability of our financial markets to serve consumers and support the economy.” said Steve Bartlett, President and Chief Executive Officer, The Financial Services Roundtable.

However, the witnesses also offered their opposing points on Obama administration’s proposal:

Consumer Financial Protection Agency

Most of the witnesses strongly oppose the establishment of the new agency. “We strongly oppose the creation of a separate, free-standing Consumer Financial Protection Agency” because in part he believes that “consumer protection and safety and soundness should not be separated.” said Mr. Bartlett.

“Establishment of a regulator along the lines proposed would worsen the patchwork of federal and state laws resulting in uneven protection and increased costs for consumers.” said John A. Courson, President and Chief Executive Officer, Mortgage Bankers Association. Also, he worried that the CFPA could not give enough attention to mortgage products. “Because the new regulator would not be solely focused on mortgage regulation and products, there is a very real danger that mortgage products may not receive sufficient priority.” said Mr. Courson.

“There is no evidence that consumer ignorance was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred.” said Professor Todd J. Zywicki, George Mason University Foundation Professor of Law and Senior Scholar, Mercatus Center at George Mason University. “I have no affiliation with the “banking industry” except as a customer.” said Mr. Zywicki.

Sophisticated, Customized Derivatives
“The Roundtable recommends that standardized derivatives are cleared through a regulated clearinghouse to provide more transparency and to reduce systemic risk within the industry. However, clearing sophisticated, customized derivatives should not be required because they allow flexibility for institutions to meet their customers’ needs.” said Mr. Bartlett.

The Authority of Federal Reserve Board
“We must emphasize, however, that the Board should not be an additional super-regulator. Rather, it should work with the prudential regulator in non-emergencies to address potential systemic risks. Moreover, the Board also should not publicly identify systemically significant institutions (“Tier 1 Financial Holding Company”), as proposed by the Administration; it should focus its priorities and focus on activities and practices across the entire financial system, not individual institutions.” said Mr. Bartlett.

“Further, requiring each Tier 1 FHC to comply with the nonfinancial activity restrictions of the Bank Holding Company Act does not address a cause of the current credit crisis or threat to the safety and soundness of the financial system.” said Mr. Bartlett.

Resolution Regime for Insolvent Nonbank Financial Institutions
“The Administration’s legislative draft, relies too heavily upon the FDIC to act as a receiver or conservator for such institutions…We also oppose funding such an authority with assessments of all systemically significant institutions.Furthermore, the FDIC's Deposit Insurance Fund, the Securities Investor Protection Corporation, and the state insurance guarantee funds should be retained and protected for their original intended uses.” said Mr. Bartlett.Clearly,there are concerns that under the requirement of the proposal the deposit insurance fund of FDIC will be jeopardized.

Restriction of the Activities of Financial Institutions

“The Roundtable supports increased regulatory oversight of the financial affiliates of commercial companies to assure that such finance companies continue to provide this much needed credit in a safe and sound manner, but cautions against proposals that eliminate or severely restrict the activities of such institutions.” said Mr. Bartlett.

Plain Vanilla Mortgage
“The proposed regulator has the potential to roll back the clock 30 years, when consumers only had plain vanilla borrowing options.” said Chris Stinebert, President and Chief Executive Officer, American Financial Services Association.

“However, mandating the offering of some type of “plain vanilla” mortgage product would have the impact of reducing consumer choice and increasing costs for consumers. A better approach would be to continue to improve and clarify the current effort to ensure strong underwriting by ensuring the ability to repay a loan by prospective consumers. Strengthening underwriting is a more effective approach than attempting to proscribe specific products for consumers.” said Mr. Bartlett.

“NAMB is worried about the unnecessary additional costs of developing new products, questionnaires, and opt-in disclosures that would likely be passed-on to consumers if institutions’ product offerings are overregulated.” said Denise M. Leonard, Vice President, Government Affairs, National Association of Mortgage Brokers.

Industrial Bank Charter
“We do not believe that the elimination of the industrial bank charter is warranted to benefit customers. To the contrary, it would be the worst time to eliminate the charter, as this would lead to further job loss.” said Mr. Stinebert.

The financial reform proposes that companies that own an FDIC-insured thrift, industrial loan company (ILC), credit card bank, trust company, or grandfathered depository institution are required to become BHCs. However, lots of conflicts of interest involved in the industrial bank charters. Bankers can use bank charters primarily to access payment systems and avoid state usury laws.

“The CFPA grants broad authority to impose fees and assessments on “covered persons.” NAMB is concerned that those regulated on the state level, such as mortgage brokers, may be forced to pay more to do business, which will place such entities at a competitive disadvantage and will ultimately increase costs for consumers.” says Ms. Leonard.

Thrift Holding Companies
“Thrift institutions have taken the lead in re-establishing economic growth – whether it is the thrifts that are lending to help rebuild New Orleans, or those that are leading community development plans from coast to coast to put Americans back to work.” said Edward L. Yingling, President and Chief Executive Officer, American Bankers Association.

On the other hand, the elimination of thrift holding companies may hurt the bankers's profits.Financial reform proposes to eliminate thrift holding companies because “significant differences between thrift holding company and BHC supervision and regulation have created material arbitrage opportunities. “

Wednesday, May 13, 2009

Financial Market Regulatory Proposals by the Obama Administration

The Obama Administration is gearing up to reform the financial marketplace. Today, two proposals were released. The first, according to the New York Times,"seek(s) new authority to supervise the virtually unregulated complex financial instruments, known as derivatives, that were a major cause of the market crisis.."

And, according to Reuters, the second proposal " industry compensation practices to discourage excessive risk-taking, which is considered to have sown the seeds of the current credit crisis."

The two proposals are linked and reinforcing. The derivatives reform play seeks to eliminate or regulate a key tool used by executives at financial institutions to justify large amounts of compensation. (Unless you can produce outsized returns via standard financial instruments, extremely generous pay packages are unlikely to be received.)

And, in case that fails, the compensation reform play says we will limit your compensation no matter what you do.

All in all, a very good day.

Thursday, March 26, 2009

Treasury Outlines Framework For Regulatory Reform

The U.S Department of the Treasury today proposed a new set of rules and regulations governing activities and firms in the financial marketplace. We applaud and fully support this effort. It follow a regulatory structure we first outlined in 1998, and expanded in 2007. As such we are hopeful.

The proposal consists of four broad outlines:

1. "Addressing Systemic Risk: large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime.

2. Protecting Consumers and Investors: clear rules of the road that prevent manipulation and abuse.

3. Eliminating Gaps in Our Regulatory Structure: clear authority, resources, and accountability for key functions. A substantive system of regulation that meets the needs of the American people.

4. Fostering International Coordination: ensure that international rules for financial regulation are consistent with the high standards in the United States. Launch (of) a new initiative to address prudential supervision, tax havens, and money laundering issues in weakly-regulated jurisdictions."

According to the NY Times, "The (Obama) administration would require that all standardized derivatives be traded through a regulated clearinghouse." We noted this need in our comments to the Senate, and are happy to see this made part of the solution proposed.

Further, we note that on June 18, 1998, in a letter to Betsy White, Senior Vice President at the NY Fed, we said:

"Finally, it is our continuing belief that the Federal Reserve Board should be designated a 'Superregulator,' with broad responsibility for overseeing the activities of banks, thrifts, pension funds, insurance companies, mutual fund companies, brokerage firms and investment banks. We note our belief that financial institution convergence, driven by recent advancements in financial and computer technology, requires the creation of such a 'Super-regulator.' "

We, and others, no longer believe the Federal Reserve independent or objective enough to serve as "Superregulator" or as "Systemic Regulator." They are, thus, unqualified for the role.

This role should be filled by an entirely new entity.

According to Treasury, "In the coming weeks, Secretary Geithner will present detailed frameworks for each of these areas." These will require careful review.

Friday, December 5, 2008

Advisory Board Member Howie Hodges mentioned

In an article on the Black Enterprise Magazine blog about the nomination of New Mexico Gov. Bill Richardson as Obama Administration Commerce Secretary, Creative Investment Research, Inc. Advisory Board Member C. Howie Hodges, "who was an assistant director for the department’s Minority Business Development Agency during Clinton’s first administration" noted that,

"Richardson had a very good strategic team and I have no doubt that he will put in place a very capable combination of savvy business people who will also have the political skills to help execute Obama’s mandate to create economic and job growth,' says Hodges, who is currently a senior vice president of One Economy Corp., a global nonprofit that delivers access to technology and content to low- and moderate-income households.

In addition, says Hodges, during the Clinton administration, the agency actively aimed to expand opportunities for minority and women-owned businesses in the private and international trade sectors. Under the leadership of the late Secretary Ron Brown, who died in a plane crash over Croatia, the agency led trade missions to several foreign nations for those businesses and helped them form strategic alliances with such major corporations as Disney, Kodak, and Lockheed Martin.

Because MBDA works with federal agencies across the board, adds Hodges, despite not having a direct appropriation, during the Clinton administration it was able to establish memorandums of understanding with various agencies to form joint ventures with cities and private-sector corporations and explore a variety of international trade opportunities. 'Everybody kind of honed in on what their agency could do to promote these very broad goals. Access to capital wasn’t just at SBA; it was at all of the federal agencies. Access to emerging markets wasn’t just through Commerce, it was also through Energy, which saw tremendous growth in working with minority and women owned businesses,' explains Hodges.

Under Richardson, Hodges believes that minority businesses should seek both increased access to capital, which is always a critical component to success, and access to markets and opportunity. Small business loans, expanded credit, encouraging venture capital companies and minority venture capital companies to invest in minority business will be paramount to the abilities of mid-tier companies’ to build capacity and start-up firms to create new business.

“When you look at job growth and taking our economy from a recession to one that’s growing, a lot of that growth is going to come from new businesses hiring people,” says Hodges.

The important role that green jobs and businesses, environmental sustainability, and energy efficiency will play in rebuilding the nation’s economy is another reason why he thinks Richardson’s past experience at Energy will be an asset in his new role. At the same time, he cautions, it would be unwise to underestimate the importance of technology, another area over which Commerce has oversight.

'Richardson and Obama’s administration need to look at creating a national broadband strategy to help America continue its global competitiveness that will enable it to provide a catalyst for economic growth and job creation,' says Hodges. 'MBDA has been underutilized and a lot will depend on the administration. If it has a priority and focus, the agency will.' "

Saturday, May 10, 2008

Obama - Socially Responsible Investor

According to

"For a couple in their mid-40s, the Obamas' investment holdings are arguably too conservative. One of the single largest chunks of their money (between $US150,000 and $US350,000 as of year-end 2006) was invested in the Vanguard Wellington Fund, which has about 65 per cent in stocks, 33 per cent in bonds, and 2 per cent in cash. Obama reportedly sold this fund after learning it was invested in Schlumberger, a French oil-field-services company that does business in Sudan. He put that $US180,000 in proceeds into the Vanguard FTSE Social Index Fund, a socially responsible fund that invests in large and midcap stocks. The Obamas had another $US100,000 to $US250,000 in Vanguard's Wellesley Fund, which allocates 60 per cent of its money in high-quality bonds. Considering the Obamas have more than 20 years to go before retirement, many financial advisers would tell them to be more aggressive and increase their stock exposure to 80 per cent of their portfolio."