Showing posts with label Timothy Geithner. Show all posts
Showing posts with label Timothy Geithner. Show all posts

Wednesday, July 25, 2012

Geithner on the Hill

U.S. Treasury Secretary Timothy Geithner testified before the House Financial Services Committee this morning. Most of the questioning concerned the growing LIBOR scandal. 

Representative Mel Watt noted the declining number of African American car dealers and asked if there was anything Treasury could do, given its large holding of GM stock, to reverse this situation. Rather than giving a solution, the Secretary promised to get back to him. 

We suggested a solution as far back as 2008: there is nothing to stop Treasury from filing a shareholder resolution with GM on the matter. 

On LIBOR, Representative Scott Garrett (R-NJ) noted that "Geithner had four years, and meeting after meeting, to bring the LIBOR issue to Congress' attention and it just wasn't done."

Mr. Geithner appeared unflapped. He has, after all, done this before. He noted, in prepared remarks, that “The American financial system has regained its footing since the crisis of a few years ago but is still threatened by instability in Europe and uncertainty about taxes and spending at home ..." thereby missing the point once again. 

The financial system is not threatened by instability in Europe and uncertainty about taxes. It is threatened by growing levels of fraud and declining levels of ethical behavior within major financial institutions. 

Friday, July 10, 2009

Hearing on the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market (William Cunningham, Jui-Kai Li, Hsiu-Jui Chang)

At 10:00 a.m. on Friday, July 10, 2009, in 1100 Longworth House Office Building, the Full Committee of the House Agriculture Committee and the House Financial Services Committee conducted a hearing titled "A Review of the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market." Timothy F. Geithner, Secretary, U.S. Department of the Treasury, was the only witness.

The hearing began with a consideration of the risk to taxpayers from the over the counter derivatives market. According to Wikipedia,

"Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008)."

Upon opening of the hearing, the Chair of the Ag Committee stated that: "Government should not be the one to judge risk." Among other topics, members of the Committee and the Secretary discussed the fact that new regulation is being driven by the a recognition that the OTC market provides a broader set of investment options, but capital requirements and other protections need to be strengthened to better reflect the true riskiness of these options. The Secretary reiterated that this was the purpose of the proposal.

The need for international cooperation among regulators was discussed at several points. A recurring worry was regulatory arbitrage. Influencing this concern was the ability of new technologies, like the Internet, to act as a powerful disintermediation engine, thereby making it easier for OTC derivative market customers to move trading activity to the exchange that is the least regulated.

Another topic of discussion concerned standardized versus customized OTC derivative products or contracts. Note that the Financial Reform Plan released by the Obama Administration calls for the use of more "plain-vanilla" derivatives.

One Committee member suggest banning Credit Default Swaps (CDS) outright, but the Secretary rejected this suggestion, calling instead for higher CDS capital requirements.

The Obama Administration Stimulus Plan was discussed, with one Committee member saying that recent increases in the unemployment rate showed the Plan to be a failure. The Secretary countered by saying that decreases in unemployment lag increases in economic growth at this point in a recovery.

Several Committee members discussed the need for a central OTC derivatives clearinghouse. One member suggested the creation of an electronic clearinghouse. The Secretary suggested that this would increase transparency and make price discovery more efficient. The Secretary also noted that this increased transparency will require closer cooperation and coordination by the SEC and the CFTC, but no decision appears to have been made yet about merging the two regulatory bodies.

The only fireworks came when one committee members asked the Secretary to guarantee that today's derivative buyer will not be tomorrow's bailout recipient. The Secretary declined to offer any such assurance.

Tuesday, February 10, 2009

Plan to restore stability to "our" financial system

Today, Treasury Secretary Timothy Geithner introduced the Financial Stability Plan. Our comments below:

The main features are the creation of:

a. the Financial Stability Trust
b. the Public-Private Investment Fund
c. the Consumer Lending Initiative
d. the Foreclosure Prevention Plan
e. the Small Business Lending Initiative

The Financial Stability Trust is a "Capital Pool" designed to serve as a buffer to help absorb losses. (Funny, we proposed the same thing for community banks in an application we submitted to Treasury for New Markets Tax Credits. We were not, however, funded. Looks like we need to be, well, non-minority..and to have caused massive damage to the global economy in a thoroughly unethical way. But I digress..) This is a rebranding/repackaging of the current Capital Purchase Program (CPP). In fact, all bank investments made over the past few months will be held in the "Trust".

As part of this "Pool", banks over $100 billion will have to undergo a "Stress test". The good news: banking regulators will finally work together to carry out the "test". The bad news: the statistical models used to conduct these tests are biased and flawed. They did not, after all, prevent the crisis from occurring...

Public-Private Investment Fund. A fund to get private equity investors to take "bad" assets off the books of banks. Good news: well, none, really. Bad news: relies on the same broken private market mechanisms and entities (brokers and investment banks) that caused the problem. Public and private pension funds will be encouraged to participate...as if they haven't lost enough money already. Spreads the damage even wider. (Like opening the doors to Chernobyl.)

Consumer Lending Initiative. Repackaging/rebranding of a previously announced Fed initiative. Will now include Commercial Real Estate. Limits purchases to AAA securities. Good news: brings a previously announced initiative under this comprehensive umbrella. Bad news - relies on flawed and unethical rating agencies, extends into commercial real estate at exactly the wrong time.

All in all, we like this plan. Another reason to be hopeful.

We said in 2003, "Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." Unfortunately, we were right. And now, while the plan does not deal with the most critical issue, it is a very good first step: it builds on what was done recently and adds resources and rationality. The plan also restricts banks from paying dividends, repurchasing shares and buying other banks with the money. (Now, if we could only restrict entertainment expenses, we'd be all set...)