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Financial Reform Discussion

Old 04-26-10, 10:08 AM
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Financial Reform Discussion

Thought I would start this thread seeing as this is the legislature's topic du jour, or maybe de la semaine to be more accurate.

I'm still trying to figure out the proposed reforms in Congress, as usual the mainstream media is more interested in the political game than the substance of the bill so I'll have to do some digging.

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I rarely agree with Krugman, but I do with his piece today:

Berating the Raters
By PAUL KRUGMAN
Published: April 25, 2010

Let’s hear it for the Senate’s Permanent Subcommittee on Investigations. Its work on the financial crisis is increasingly looking like the 21st-century version of the Pecora hearings, which helped usher in New Deal-era financial regulation. In the past few days scandalous Wall Street e-mail messages released by the subcommittee have made headlines.

That’s the good news. The bad news is that most of the headlines were about the wrong e-mails. When Goldman Sachs employees bragged about the money they had made by shorting the housing market, it was ugly, but that didn’t amount to wrongdoing.

No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.

What those e-mails reveal is a deeply corrupt system. And it’s a system that financial reform, as currently proposed, wouldn’t fix.

The rating agencies began as market researchers, selling assessments of corporate debt to people considering whether to buy that debt. Eventually, however, they morphed into something quite different: companies that were hired by the people selling debt to give that debt a seal of approval.

Those seals of approval came to play a central role in our whole financial system, especially for institutional investors like pension funds, which would buy your bonds if and only if they received that coveted AAA rating.

It was a system that looked dignified and respectable on the surface. Yet it produced huge conflicts of interest. Issuers of debt — which increasingly meant Wall Street firms selling securities they created by slicing and dicing claims on things like subprime mortgages — could choose among several rating agencies. So they could direct their business to whichever agency was most likely to give a favorable verdict, and threaten to pull business from an agency that tried too hard to do its job. It’s all too obvious, in retrospect, how this could have corrupted the process.

And it did. The Senate subcommittee has focused its investigations on the two biggest credit rating agencies, Moody’s and Standard & Poor’s; what it has found confirms our worst suspicions. In one e-mail message, an S.& P. employee explains that a meeting is necessary to “discuss adjusting criteria” for assessing housing-backed securities “because of the ongoing threat of losing deals.” Another message complains of having to use resources “to massage the sub-prime and alt-A numbers to preserve market share.” Clearly, the rating agencies skewed their assessments to please their clients.

These skewed assessments, in turn, helped the financial system take on far more risk than it could safely handle. Paul McCulley of Pimco, the bond investor (who coined the term “shadow banks” for the unregulated institutions at the heart of the crisis), recently described it this way: “explosive growth of shadow banking was about the invisible hand having a party, a non-regulated drinking party, with rating agencies handing out fake IDs.”

So what can be done to keep it from happening again?

The bill now before the Senate tries to do something about the rating agencies, but all in all it’s pretty weak on the subject. The only provision that might have teeth is one that would make it easier to sue rating agencies if they engaged in “knowing or reckless failure” to do the right thing. But that surely isn’t enough, given the money at stake — and the fact that Wall Street can afford to hire very, very good lawyers.

What we really need is a fundamental change in the raters’ incentives. We can’t go back to the days when rating agencies made their money by selling big books of statistics; information flows too freely in the Internet age, so nobody would buy the books. Yet something must be done to end the fundamentally corrupt nature of the the issuer-pays system.

An example of what might work is a proposal by Matthew Richardson and Lawrence White of New York University. They suggest a system in which firms issuing bonds continue paying rating agencies to assess those bonds — but in which the Securities and Exchange Commission, not the issuing firm, determines which rating agency gets the business.

I’m not wedded to that particular proposal. But doing nothing isn’t an option. It’s comforting to pretend that the financial crisis was caused by nothing more than honest errors. But it wasn’t; it was, in large part, the result of a corrupt system. And the rating agencies were a big part of that corruption.
From the beginning I've been continually bewildered as to how little attention the raters role in the financial meltdown is given by the media. They were key to the crisis and it's likely that without their cooperation it may not have ever happened.

Unfortunately, even Paul seems to be grasping to put forth a solution. Making them civilly liable for the ratings they provide to potential buyers is a no brainer, and that's about all the current Senate bill does in this area. There should be criminal penalties for cases like this, where fraud was clearly occurring. The House bill goes further, but from what I've read it basically just tells the SEC to do something about it without giving a clear solution to implement.

Last edited by wmansir; 04-27-10 at 03:19 PM.
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Old 04-27-10, 02:04 PM
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Re: Financial Reform Discussion

Based on the response to this thread I again have to wonder just how widespread the public's "anger at Wall Street" is.
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Old 04-27-10, 02:08 PM
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Re: Financial Reform Discussion

Grrrr. Wall street. Blech.
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Old 04-27-10, 02:55 PM
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Re: Financial Reform Discussion

It is actually a very good point. The CEO's of the rating agencies should be strung up by their toes.
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Old 04-27-10, 03:04 PM
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Re: Financial Reform Discussion

Originally Posted by wmansir View Post
Based on the response to this thread I again have to wonder just how widespread the public's "anger at Wall Street" is.
I don't think it's that. I just think that most people see more financial regulation as an inevitability, even if the GOP plan to put up some sort of token resistance.
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Old 04-27-10, 03:12 PM
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Re: Financial Reform Discussion

I have zero energy to try and argue for Wall Street banks and their supposed 'competitiveness'. I will say, however, that I'm quite concerned with the new regulations proposed for angel investors. Lately new revisions seem a bit friendler, but if the original language is allowed to stand it could quite seriously hamper startups from finding new capital.

I think people truly underestimate how much job creation is done by companies that didn't exist 5-10 years ago.
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Old 04-27-10, 03:14 PM
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Re: Financial Reform Discussion

Fed created, legislators said they would create a depression.

16 years later, a depression.

We study the situation and decide one of the more important ways to prevent this from occurring again is the prevent banks from consolidating into megabanks that could destabilize the economy. Glass-Steagal is passed.

Ups and downs for decades, ebbs and flows. Fed-created inflation and deflation.

Finally the rich have put in decades of work and corruption,and they are feeling froggy, they amazingly get Glass-Steagal repealed. Banks have an orgy of consolidation, they grow to massive mega banks.

9 years later, a depression.

I can't believe we're thinking of regulations on Wall Street and banks. It's socialism.
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Old 04-27-10, 03:52 PM
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Re: Financial Reform Discussion

My expectation that "reform" will be a joke. If you look at the close ties the Obama administration has with Goldman Sachs, there is little doubt in my mind that Goldman Sachs will author the reform.

The big banks will write the new rules, and the Democrats will play it up like they've just stood up to Wall Street, just like they "stood up" to health insurers, pharmaceutical companies and big tobacco.
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Old 04-27-10, 03:55 PM
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Re: Financial Reform Discussion

I suspect the same RT.
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Old 04-27-10, 04:01 PM
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Re: Financial Reform Discussion

The GS stuff sounds a lot like Boiler Room
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Old 04-27-10, 04:49 PM
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Re: Financial Reform Discussion

The Glass-Seagal bogeyman as an explanation for this crisis seems to me, a classic example of a narrative fallacy - as explained by Nassim Taleb.

I have no doubt that hyper-conglomeration made the effects of the downturn felt more severely, but to simply say that we had A and then we repealed A and that led to B is such an oversimplification that its almost guaranteed to lead towards ineffective reforms.
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Old 04-27-10, 07:11 PM
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Re: Financial Reform Discussion



I can understand you being aware of narrative fallacies, you just posted one.
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Old 04-27-10, 09:04 PM
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Re: Financial Reform Discussion

I'm laughing at these Senators.

Yes, they are right. It is unethical and immoral to sell securities to clients while at the same time shorting those securities. But it was YOUR job, Mr. and Mrs. Senator, to regulate these banks.

Goldman Sachs - like any other publically traded corporation - is in business to maximize revenues and the return to their shareholders in any way possible which is legal. It is the board's responsibility to do so.

Do I believe GS should be able to play both sides of the bet? No! But it's up to you Congress to do something about it. Unfortunately, it's in "hindsight."
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Old 04-27-10, 09:09 PM
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Re: Financial Reform Discussion

Oh and Carl Levin could not understand (or more likely he chose not to) why Goldman received taxpayer funds via AIG rather than their insurance. AIG did not default! The insurance company isn't going to pay a dime unless AIG defaulted. If the government did not bail out AIG they would have defaulted and Goldman would have received an insurance payment instead of taxpayer funds. Now, was there a conflict when Paulson bailed out AIG knowing money would be funneled to Goldman? Possibly but only if there was some penalty to Goldman if they accepted the insurance payment which I don't think there was.
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Old 04-27-10, 09:32 PM
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Re: Financial Reform Discussion

Financial reform should take the form of stronger anti-trust laws that break up too-big-to-fail companies and prevent them from reforming.

And after that, if a company fails, the government lets it die.

But what we'll get is "reform" that ensures these companies will live forever.
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Old 04-27-10, 11:35 PM
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Re: Financial Reform Discussion

Originally Posted by Sean O'Hara View Post
Financial reform should take the form of stronger anti-trust laws that break up too-big-to-fail companies and prevent them from reforming.

And after that, if a company fails, the government lets it die.

But what we'll get is "reform" that ensures these companies will live forever.
Add car companies to that as well.

And as long as we are talking about "too big to fail" I think we should cap the total number of publicly funded employees to no more than 10% of the population, inclusive of state, local, and feds. No idea what that ration is currently, but I'll bet it has been awhile since it went down.
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Old 04-28-10, 12:04 AM
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Re: Financial Reform Discussion

Capitalism is proving itself to be a failed business model. Those calling our current crisis a "depression" need to crack a history book and look at what life was like during the real depression. This isn't even in the same hemisphere as depression.

Wall Street bitched and moaned far worse when the FDIC was introduced. As much as Wall Street likes to think, it is NOT their money. Regulate now or watch the next collapse.

Reform will not happen until "Too Big to Fail" is a thing of the past.
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Old 04-28-10, 01:49 AM
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Re: Financial Reform Discussion

Originally Posted by Tsar Chasm View Post
Capitalism is proving itself to be a failed business model.
Capitalism is fine, but we don't really have a lot of that around anymore. We have Corporatism. Very different.

And what is a better model? Everything else that has not done as well as capitalism?
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Old 04-28-10, 07:53 AM
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Re: Financial Reform Discussion

I really get upset when people offer suggestions with no thought behind them. Everyone in Washington keeps insisting that to fix the financial markets we need more rules and regulations and a lot more bureaucracy. My idea is that all we need is for the alphabet soup to start doing their job.

Investing in publicly traded companies should be a level playing field. We should all be able to read an annual report, other public filings or press releases and narrow our investments to companies that are having real increases in their sales and earnings. The problem is the alphabet soup did not do their job. Financial statements and press releases were worthless.

Who is the alphabet soup? I'm talking about CEOs, CFOs, CPAs, CFAs, SEC and of course S&P. All these people had a fiduciary responsibility to make sure that the press releases and public filings on publicly traded companies fairly represented the true financial results of the companies they were responsible for.

Over the weekend it was reported that a Moody's analyst and a Merrill Lynch investment banker exchanged emails that negotiated fees and the resultant ratings of securities. Higher ratings and higher fees should not be negotiated. A higher fee for a higher rating is a bribe in my book. If this report is true I think the prosecutors at the SEC should be sending out some applications to become a cell mate for Bernie Madoff.

Any of the alphabet soup that traded their fiduciary responsibility to the investing public for financial gain whether it be a higher salary, more profitable stock options, higher fees or continued employment needs to lose their jobs and receive an indictment. What they have done was not negligence it was out right fraud.

I don't want another committee or more rules, I want the current rules to be enforced. Those that broke them need to go to jail.

Mr. President, you can't give back to the investors the money they lost so how about some satisfaction of knowing that if you broke the rules you will be prosecuted and jailed. Send out the warning. Let's see some pink slips at the SEC and some indictments sent to the rest of the alphabet soup.
http://articles.moneycentral.msn.com...x?post=1747101
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Old 04-28-10, 09:40 AM
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Re: Financial Reform Discussion

Originally Posted by Tsar Chasm View Post
Reform will not happen until "Too Big to Fail" is a thing of the past.
Isn't that what the Sherman Antitrust act is for?
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Old 04-28-10, 09:41 AM
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Re: Financial Reform Discussion

http://thehill.com/blogs/on-the-mone...rm-legislation

A financial regulatory reform bill has at least one supporter outside of Congressional Democrats, Lloyd Blankfein, the head of investment bank Goldman Sachs.
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Old 04-28-10, 09:49 AM
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Re: Financial Reform Discussion

Originally Posted by Venusian View Post
Isn't that what the Sherman Antitrust act is for?
No. U.S. Antitrust law prohibits certain actions taken to gain or maintain a monopoly, but does not prohibit monopolies per se. And "too big to fail" is a different (but related and overlapping) problem from monopolization.
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Old 04-28-10, 09:52 AM
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Re: Financial Reform Discussion

Originally Posted by JasonF View Post
No. U.S. Antitrust law prohibits certain actions taken to gain or maintain a monopoly, but does not prohibit monopolies per se. And "too big to fail" is a different (but related and overlapping) problem from monopolization.
So you can have a monopoly as long as you dont get it or maintain it in shady ways?
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Old 04-28-10, 10:04 AM
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Re: Financial Reform Discussion

Originally Posted by Venusian View Post
So you can have a monopoly as long as you dont get it or maintain it in shady ways?
That's basically correct, with the added wrinkle that mergers of companies above a certain size need to be approved by the government and they won't approve mergers if they determine the merger would be anticompetitive. But if you grow to monopoly without engaging in any of the practices the law prohibits, then there's no problem.
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Old 04-28-10, 10:14 AM
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Re: Financial Reform Discussion

Originally Posted by JasonF View Post
That's basically correct, with the added wrinkle that mergers of companies above a certain size need to be approved by the government and they won't approve mergers if they determine the merger would be anticompetitive.
And we know how well that worked with, oh, say Clear Channel.
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