Senate financial bill appears likely to keep Fed as regulator of big banks

Brady Dennis, Washington Post

Key members of the Senate banking committee are coalescing around legislation that would strip the Federal Reserve of much of its regulatory authority but would leave the central bank with oversight of the nation’s largest banks, according to aides familiar with the ongoing negotiations.

Under the plan, the Fed would continue to supervise only 23 bank-holding companies with assets exceeding $100 billion. Supervision of the nearly 5,000 banks below that threshold would fall largely to a proposed new regulator to be created by merging the Office of Thrift Supervision and the Office of the Comptroller of the Currency, aides said.

In addition, the Federal Deposit Insurance Corp. would take over regulation of more than 800 state-chartered banks that currently are part of the Federal Reserve System, according to the aides, who spoke on condition of anonymity because the talks are still ongoing and the provisions still could change.

Banking committee Chairman Sen. Christopher J. Dodd (D-Conn.) and freshman Republican Sen. Bob Corker (R-Tenn.) have been negotiating for weeks the particulars of a sweeping overhaul of the nation’s financial regulatory system and hope to have a draft within the next week.

Dodd’s initial draft of the bill last fall stripped the Fed entirely of its regulatory authority, leaving the central bank with the sole purpose of overseeing the nation’s monetary policy. The Fed’s prospects for retaining any oversight duties seemed uncertain at best, as committee members on both sides of the aisle heaped criticism on the agency for its failures in the lead-up to the financial crisis.

Read more here: http://www.washingtonpost.com/wp-dyn/content/article/2010/03/09/AR2010030903584.html

Smart Banks With Dumb Customers Don’t Exist

March 8 (Bloomberg) — Republicans and Democrats in Congress have been squabbling about whether the new financial consumer-protection agency should be housed within the Federal Reserve or as part of an independent body.

The new watchdog, wherever it goes, is the linchpin of the emerging financial-reform bill, and its premise is that greedy bankers exploiting dumb consumers essentially caused the credit crisis. Stop bankers from selling toxic mortgages and other harmful loans and we won’t have any more meltdowns.

Even though bankers were greedy, and many borrowers were naive, this is a simplistic way of viewing the financial crisis and one that misses its underlying cause. Since mortgage bankers make money from loans, it’s tempting to think of them as parasites that prey on customers. But there is no such thing as a smart bank with a dumb customer; if the loan turns sour, the banker was dumb, too. And in the mid-2000s, scads of them were.

Foreclosures by consumers heavily weighed on the economy, but what triggered the credit crunch was the failure (or near- failure) of the banks that issued (or acquired) the mortgages. In short, the root cause of the meltdown wasn’t that customers borrowed too much; it’s that banks lent too much.

This isn’t to deny that many subprime loans were exploitative, and that customers often didn’t understand repayment terms. Nor is it a bad idea to police banks, preventing them, for instance, from charging unreasonable fees.

Bank Self-Harm

Yet a sound economy needs healthy financial institutions. Rather than stop lenders from hurting consumers, the first priority should be to keep the banks from harming themselves. In the short run, solvency is often at odds with what consumers want (or with what they think they want). We should remember that for every mortgage customer that was hosed, others were willingly grabbing all the unsound mortgages they could get.

Before the bust, champions of the new consumer agency, such as Representative Barney Frank, were consistent advocates of more loans to subprime borrowers. That’s hardly surprising; it’s in the nature of folks to want more credit. As Warren Buffett once reminded a person in his employ, it’s the job of the banker to screen out loans with a low probability of repayment.

The aim of regulators should be to force banks to do what is in their own and society’s interests: to practice sound banking. No consumer watchdog can do this because systemic risk aggregates at the level of the lender. The surest solution is to limit the leverage of financial institutions. Regulators have already moved against dicey products such as no-documentation mortgages (“liar loans”), and ones in which borrowers get 100 percent financing. And well they should.

Read more here: http://www.bloomberg.com/apps/news?pid=20601039&sid=a2y1wcOYyFQc

Mom, Apple Pie and Mortgages

Robert Shiller, NY Times

FOR decades, the federal government has subsidized housing — particularly owner-occupied housing. This has been especially true during the continuing financial crisis, with Fannie Mae, Freddie Mac and the Federal Housing Administration propping up the housing market by issuing guarantees for investors on most new mortgages.

But what is the long-term justification for putting taxpayers on the line to subsidize homeownership? Is this nothing more than a sacred cow in American society — a political necessity because so many voters own homes and are mindful of their resale value?

In fact, there is much more to the history of subsidizing housing. While the crisis in the housing market shows that our current approach is far from perfect, there is a certain wisdom behind it, related not only to economic stimulus but also to the preservation of a sense of national identity. It’s important to remember this as we consider re-engineering our institutions as the crisis ebbs.

Federal subsidies for housing essentially began in the Great Depression with, among other things, the creation of the F.H.A. in 1934 and Fannie Mae in 1938. It all started for a simple reason: more than a third of all the unemployed were identified, directly or indirectly, with the building trades. At the time, there seemed to be no way to reduce unemployment without stimulating housing, and much the same is true today.

But consider what will happen once the economy is again operating at full capacity. Basic economics tells us that when Americans, over all, spend more on housing, they must ultimately spend less on something else. Why should housing consumption be better than other consumption, or investments that people might choose?

Read more here: http://www.nytimes.com/2010/03/07/business/07view.html

A Five-Step Guide To Real Financial Reform

Reid Cramer, Mother Jones

The next big battle in Washington—one that will heat up fast if the health care tussle is ever resolved—will be fought over reform of the financial sector. In recent weeks, President Barack Obama has gone on the offensive, calling for new restraints on Wall Street wheeling and dealing and vowing to veto weak legislation. In December, the House passed a robust package of reforms. The action has now shifted to the Senate Banking Committee, and chairman Sen. Chris Dodd (D-Conn.) has pledged to push a comprehensive package over the finish line before he retires at the end of the year. But it won’t be easy. The big banks and their lobbyists are vigorously resisting a rewrite of their operating rules and working hard to insert loopholes and exclusions that would gut the legislation. Obama can prevent that from happening by spelling out the benchmarks the legislators must meet to avoid his veto pen. The details of financial reform can be complicated. But it’s not hard to come up with the must-have provisions. Here are five that the White House should insist upon to make sure we get financial reform that works, not just window dressing.

1) Fix the big picture, not just individual firms.

We learned the hard way that the possibility of failure is an essential pillar of a stable financial system. When firms become “too big to fail,” they take excessive risks, crowd out smaller firms, and are costly to bail out—and the failure of one can threaten the whole economy. Successful financial reform would include a mechanism to survey the balance sheets of particular firms according to the risks they pose to others, not just to their shareholders or depositors. Currently, no single entity is assigned to ensure system-wide stability and detect excessive risk taking. There must be an agency with the authority to monitor threats to the marketplace and prevent the failure of any individual firm from having a cascading effect. Europe is on a path to create a Systemic Risk Board, comprised of the national central banks, to perform this function, and the United States ought to follow suit.

Read more here:  http://motherjones.com/politics/2010/03/obamas-financial-reform-do-list

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