Being Critical of Obama's Wall Street Reform...

[Veretax]

I like Obama. I give him high marks for coming into a bad situation and significantly improving it. I think most of the critics of his Presidency is baseless so far... I'm willing to give him the benefit of the doubt on most issues. Wall street reform is another example of where I would diverge from Obama's prescribed solution...

I would break them up.....

Why should the government be allowed to break banks up? I fail to see the logic in this to be honest. Oh and I'd be very interested in hearing what you think "Obama" has done since coming into office that is so great.

[Fergasun]

I don't believe people can talk about this unless they've had an opinion formed 2 months ago. By that I mean, we are clearly at the place with financial reform where the talk the past week and quotes, etc whatever the news media is saying does not get at the depth of the discussion.

1) Rules were in place with the bank reforms in 1991 (FIRREA or FDICIA?)... its called "prompt corrective action". Even recently Greenspan when he was Fed Chair repeated, "there is no too big to fail, simply it'll take a long time to liquidate"... this was during Congressional hearings. The regulators had the job to ensure banks were significantly well capitalized. Again, in testimony I recently read regarding some Bank reform Greenspan was very perceptive in talking about how banks can lose value quickly and burn through their reserves.

2) The AIG bailout is flat out unconstitutional. I'm not sure about Bear Stearns deal, but I'm fairly certain that Congress has approved bailouts in the past (like the airlines, like the car companies in the past, like NYC). I think it is straining to say that AIG was "regulated" at the federal level, simply because AIG-FP fell under the OTS.

3) I like the Volker Rule; although that has become to mean many things. The true Volker rule is meant to limit the size of banks. I'm not sure we'll get this due to the "international competition" red herring.... I know some members of Congress have been talking about how our banks can't compete unless they are allowed to get big and economies of scale. Whatever.

4) I'd like to know why derivatives can't trade on exchanges. We allow stocks, we allow options; why not allow other derivatives sales? Is it because the banks don't want people to see how much profit they are making? I think this is the case. Putting them through a clearinghouse is *intentionally obscuring* the market transparency that we want as far as stocks, etc. Something is very fishy about this.

5) I haven't paid attention to the derivatives stuff over the past couple of weeks; but I'm hoping that we have no loopholes for derivatives trading. I know some people have said; "legitimate companies need customized derivatives". But why can't those trade on the exchange and be reported? It doesn't matter if they are traded infrequently; its the information that is valuable. I don't want any exceptions; I want all derivatives on the clearinghouse. Brooksely Borne who fought against changes to derivatives regulation 10 years ago said repeatedly "no exemptions"; listen to her!

6) I think some very smart people need to start figuring out some way of setting up "Wain Street"... Wall Street + Main Street. Right now I think it is BS how much political power the banks have; its almost like they have "main street" over a barrel.. quite frankly I'd rather put a bullet in the head of main street, take down wall street, and set up "wain street". Main street doesn't *need* wall street... but the institutions on Wall Street have their roots everywhere. Wall Street banking and finance is a tax on everything we do.... (segue since point 7 is bleeding into this point).

7) I could care less about the numbers in my bank account, etc, value of homes, value of cars ,etc. We need to start looking at what "adds value" to America; things that are truly "productive". Wall Street is not; the innovations on Wall Street over the past 10 years contributed greatly to *capital misallocation* Blowing a bubble in putting a roof over our heads was a value-sucking proposition and stole from productive activities; having so many people whos jobs and productivity depending on house values go up is not good for America. Why are we angry over health care costs, but not housing costs (okay, well its because 60% of Americans own a home... but don't own health care companies which profit)? We should work on reducing those costs, so capital can go towards things like alternate energy, innovation, manufacturing and other things that are actually *true value* to America and Americans. At the heart of my hatred for Wall St. is this; they suck value from the economy in the name of "adding value"... and then act like the kings and when we bail them out it is like a double-tax.

[TheLongshot]

Well, I just got an E-Mail from USAA, telling their members to call their congressmen so that organizations like USAA are exceptions to the Volcker Rule. Digging a bit deeper as to why, they claim because they are an insurer as well as a bank that being restricted like that would hurt the insurance part of the business, where they invest premiums to cover future claims.

[JMS]

1st... Later you call the GOP "irrelevant"... I didn't have to actually read the Original Post before I had already determined this thread was probably filled with political bias/"hackery"... The phrase "modus operandi" comes to mind.

To be clear, they are irrelivent by choice. They have incredible disipline relative to the democrats which is usually a good thing... But it's working against them under a Democratic Majority. Republicans have taken to just voting against and filibustering anything Obama want's to do. Now they say because they oppose it, and that's what they should be doing. But that also makes them irrelivent, like in the healthcare debates. They take themselves out of the process, rather than trying to work with the Dems to make bills they don't like a little better, they pick their marbles up and leave. That's why they are irrelivent. self inflicted wound. I don't think I'm saying anything controversial there.

2nd... I'm interested in actually seeing the reform before commenting on it... The action that has been taken is nothing but an extension of GWB. Much of those bank-bailouts happened prior to Obama coming into office...

Well I started this thread to hear what folks have heard and understand about Obama's proposal. Bush did indeed pass and spend about half the first stimulus package. But Obama here is talking about permenant "reform". It's something over and above what Bush did. Bush was acting to fix a one time crisis. Obama is coming around after the crisis is over and trying ot avert future issues.

3rd... The Administration really loves the word "reform"... Not quite as much as they love themselves.

Whatever that means.... I think "reform" is discriptive of their motivation. I don't think it has positive or negative connotations for how sucessful their efforts will be.

[zoony]

As someone who did an internship w/ JP Morganyears ago, there is some validity against over-regulating derivatives, in particular in regards to currency markets. If regulations on things like currency swaps and futures drives up their cost, this will hurt global businesses significantly. On the other hand, if we completely dismantle many of the mortgage swaps that fueled the bubble, as well as force more transparency in that regard, I'm all for it.

There was plenty of transparency. Just that the CDO's were so complicated nobody knew what they were.

Hell- the ratings agencies gave the subprime garbage AAA status. And they're the experts.

When the Fed and congress relaxed minimum reserve requirements for banks who had their defaults insured through AIG and other insurance companies, noone had enough foresight to realize we would then need to more heavily regulate the insurers since they were then indirectly responsible for billions of dollars much of which was insured through taxpayer funds.

There was no relaxing of reserve requirements for CDS... it is a completely unregulated market.

Instead, the American mega-banks became the worst offenders of quick nd dirty profit churning.

no arguing that

[JMS]

I don't believe people can talk about this unless they've had an opinion formed 2 months ago. By that I mean, we are clearly at the place with financial reform where the talk the past week and quotes, etc whatever the news media is saying does not get at the depth of the discussion.

Where is the fun in that?

1) Rules were in place with the bank reforms in 1991 (FIRREA or FDICIA?)... its called "prompt corrective action". Even recently Greenspan when he was Fed Chair repeated, "there is no too big to fail, simply it'll take a long time to liquidate"... this was during Congressional hearings. The regulators had the job to ensure banks were significantly well capitalized. Again, in testimony I recently read regarding some Bank reform Greenspan was very perceptive in talking about how banks can lose value quickly and burn through their reserves.

In the 00's the amount of capital banks were required to have on hand was substantially reduced, likewise the restrictions on what business savings banks could do were lifted. This allowed for the merger of the investment and savings banks. Basically the foxes guarding the chickens. This facilitated many mergers in the banking industry, which lead to too big to fail institutions which nobody was concerned about until 2008.

The AIG bailout is flat out unconstitutional. I'm not sure about Bear Stearns deal, but I'm fairly certain that Congress has approved bailouts in the past (like the airlines, like the car companies in the past, like NYC). I think it is straining to say that AIG was "regulated" at the federal level, simply because AIG-FP fell under the OTS.

(1) You are in a minority thinking the AIG bail out was unconstitutional.(2) Just because congress didn't regulate something doesn't mean they can't, or can't bail it out if they think it's in our interest.(3) The office of thrift supervision (OTS) is also the primary regulator of banks and savings and loan associations... Congress has bailed both of those out before too. OTS is part of treasury dept isn't it?(4) Most of our regularoty laws are decades old... Some dating back to Teddy or Franklin Roosevelt. Derivatives that AIG was playing with are much newer than that, and not very well understood. It's hard to regulate derivatives because any commodities market can sell them, and commodities are global today.

I like the Volker Rule; although that has become to mean many things. The true Volker rule is meant to limit the size of banks. I'm not sure we'll get this due to the "international competition" red herring.... I know some members of Congress have been talking about how our banks can't compete unless they are allowed to get big and economies of scale. Whatever.

My understandingis most European banks are too big to fail. The problem is they are also heavily regulated. Our banks want the best of too worlds... they want to be too big to fail necessitating the government to bail them out, and they want to repeal all the regulations..... To my mind it's an either or situation. America did well in the 20th century when we had hundreds of banks competing for business and a wall between investment and savings banks.. It's only been in the last few years we changed that. Now they are saying we can't go back cause it's anti compeditive.. whatever indeed.The real issue is the banks have the deepest political pockets and neither party wants to go against that.

I'd like to know why derivatives can't trade on exchanges. We allow stocks, we allow options; why not allow other derivatives sales? Is it because the banks don't want people to see how much profit they are making? I think this is the case. Putting them through a clearinghouse is *intentionally obscuring* the market transparency that we want as far as stocks, etc. Something is very fishy about this.

The deal is derivatives are more like commodities than stocks. We can force companies to register with stocks to raise money... But everybody in the workd buys and sells derivatives today. Folks are paranoid if you slap regulations on them the markets will go off shore.We're less concerned about stocks, because there is added value bing on Nasdaq or NYSE. That's not true of derivatives..

[Fergasun]

In the 00's the amount of capital banks were required to have on hand was substantially reduced, likewise the restrictions on what business savings banks could do were lifted. This allowed for the merger of the investment and savings banks. Basically the foxes guarding the chickens. This facilitated many mergers in the banking industry, which lead to too big to fail institutions which nobody was concerned about until 2008.

I don't disagree with this, however the intent of the bank reforms in the 90s was clear; PCA was meant to forestall these issues. However the regulators intentionally ignored PCA.

(1) You are in a minority thinking the AIG bail out was unconstitutional.(2) Just because congress didn't regulate something doesn't mean they can't, or can't bail it out if they think it's in our interest.(3) The office of thrift supervision (OTS) is also the primary regulator of banks and savings and loan associations... Congress has bailed both of those out before too. OTS is part of treasury dept isn't it?(4) Most of our regularoty laws are decades old... Some dating back to Teddy or Franklin Roosevelt. Derivatives that AIG was playing with are much newer than that, and not very well understood. It's hard to regulate derivatives because any commodities market can sell them, and commodities are global today.

I've looked at this and case law. I'm convinced a Federal court would rule that the AIG bail out would require explicit approval from Congress, based on case-law. If we bailed out *only* AIG-FP, it might be different; simply because one "toe" of AIG is regulated like a bank doesn't make them a bank. No one has brought this up because it would be embarrassing to admit.

The deal is derivatives are more like commodities than stocks. We can force companies to register with stocks to raise money... But everybody in the workd buys and sells derivatives today. Folks are paranoid if you slap regulations on them the markets will go off shore.We're less concerned about stocks, because there is added value bing on Nasdaq or NYSE. That's not true of derivatives..

Wait a minute on this. There are certain commodities whose futures are traded on regulated markets, for instance I buy options on a regulated market (Chicago Board Options Exchange). We have stock exchanges; the whole point is to bring price transparency and reduce spreads. I don't understand the fear of not reporting derivatives trading publicly. It seems like it is intentionally done to obfuscute some of the transparency we like on the stock exchanges. One could've argued years ago that making stocks trade on an exchange was a bad idea for the same idea. Simply because it doesn't trade nearly as much doesn't mean the data shouldn't be publicly available. I don't trust clearinghouse since its basically owned by the banks; and I worry the clearinghouses will get into problems.

With respect to bailouts; we're always going to bail out the banks. We had the S&L issue in the 80s, which launched a bunch of reforms to ensure "this never happens again", I want to say there was a banking crises in the 90s (Mexican peso and asian?) but I don't think they hit us nearly as hard. to require reform.

The point of the true Volker rule is that it really limits the size of the banks so if they fail they are not going to require a bailout. This is the only way to avoid bailouts, even if we have a fund....

[JMS]

I've looked at this and case law. I'm convinced a Federal court would rule that the AIG bail out would require explicit approval from Congress, based on case-law. If we bailed out *only* AIG-FP, it might be different; simply because one "toe" of AIG is regulated like a bank doesn't make them a bank. No one has brought this up because it would be embarrassing to admit.

Correct me if I'm wrong, but didn't Obama use part of the Bush stimulus money to bail out GM and Chrysler? It wasn't necessary for it to be used on Banks was it? Why do you think Bush bailing out AIG was thus outside the scope of the TARP fund?

As I recall they were originally going to use the money to buy up toxic assets. When they started just gifting the money to the banks, whether they needed the funds or not, it was a suprise to congress...

Wait a minute on this. There are certain commodities whose futures are traded on regulated markets, for instance I buy options on a regulated market (Chicago Board Options Exchange). We have stock exchanges; the whole point is to bring price transparency and reduce spreads. I don't understand the fear of not reporting derivatives trading publicly. It seems like it is intentionally done to obfuscute some of the transparency we like on the stock exchanges.

I agree that derivatives are a huge problem. I also agree their needs to be some sort of accountability on the derivative markets. The fact that AIG could issue so many derivatives and not only threaten itself but also threaten the global economy when they guestimated the risks wrong seems to be to support this.

As for regulated commodities... I'm not familiar with them.... Probable commodities based upon some limited controlled market. Take oil for instance... there is an oil commodity market in NY, Texas, Chicago, London, and Saudi. There are probable a half dozen more. If we regulated ours, folks would move to the off shore markets and their is nothing we could do about it.... that's the fear anyway...

One could've argued years ago that making stocks trade on an exchange was a bad idea for the same idea. Simply because it doesn't trade nearly as much doesn't mean the data shouldn't be publicly available. I don't trust clearinghouse since its basically owned by the banks; and I worry the clearinghouses will get into problems.

I think being on the NYSE or even NASDAQ had more benifits than liabilities. sure you had to put up with regulation, but a wider and richer invester was considering your stock because the investors valued the infrastructore... That's why companies wanted NYSE offerings. At least for Stocks. In order to raise money... The deal is derivatives isn't a way to raise money... It's more a tactic to offset risk. Thus all you really care about is whether the company issuring the derivatives has deep enough pockets to pay up if something goes down. You don't need a broad group of potential investors, you just need one.

With respect to bailouts; we're always going to bail out the banks. We had the S&L issue in the 80s, which launched a bunch of reforms to ensure "this never happens again", I want to say there was a banking crises in the 90s (Mexican peso and asian?) but I don't think they hit us nearly as hard. to require reform.

Sure we are going to bail out the banking industry if it fails, But idealy if you have many smaller banks and you enforces antitrust laws; they won't all go belly up at the same time like occurs when you have 4 deregulated monster banks all tied together through shaddy deals.

The point of the true Volker rule is that it really limits the size of the banks so if they fail they are not going to require a bailout. This is the only way to avoid bailouts, even if we have a fund....

Exactly.... and I would argue if we have more smaller banks we don't need the fund... If they go belly up; let them. We already insure the depositors.

[JimboDaMan]

There was plenty of transparency. Just that the CDO's were so complicated nobody knew what they were.

Hell- the ratings agencies gave the subprime garbage AAA status. And they're the experts.

I don't know that they were THAT complicated. I'm not a finance professional, and so the entire structure of these instruments is confusing to me. But, from what I understand, each CDO had as its foundation a real live collection of bonds that bundled real live mortgages, and the composition of those mortgages was available for anybody who bothered to do research. Mighta been a little work, but for guys investing billions of dollars is that really too much to ask? Instead, most just relied on the AAA ratings without looking closely at what they were buying.

One would hope that the ratings agencies looked into these things. Some of the CDOs were composed of almost 100% interest-only, stated-income, first-year-teaser rate loans that were 100% guaranteed to fail. The ratings agencies, like everybody else on Wall Street, were making money hand over fist on these things and had absolutely no incentive to rate them honestly.

Maybe its just hindsight now, but it doesn't seem to me that this is too complicated. More like inherently dishonest, and crying out for regulation.

[zoony]

I don't know that they were THAT complicated.

They were. And not trying to be an ass about it, but it really isn't even up for debate

There were roughly 25 people who shorted the market. 25. Not a typo. 25 people. In the world.

....

[DixieFlatline]

Honest question....why is a Financial Reform bill not even addressing one of the major reasons we're in this mess.....Freddie Mac and Fannie Mae? I haven't seen any references to this bill where we're looking to improve how they are run.

[JimboDaMan]

They were. And not trying to be an ass about it, but it really isn't even up for debate

There were roughly 25 people who shorted the market. 25. Not a typo. 25 people. In the world.

....

Oh, I realize the club was really small. But to its members, the problems were blindingly obvious.

Again, maybe hindsight makes things clearer. But every one of these things was ultimately based on something tangible. Had to be, else who could say who gained and who lost? The contents of those tangible things was available to those who looked. I'm not saying these were simple, just that they were not impossible to dissect. Not trying to be an ass about it either, but I'm not sure we're talking about geniuses among the people who went long - and I don't know that THAT is open to debate. How bright of a guy bets billions on something he doesn't understand?

[JimboDaMan]

Honest question....why is a Financial Reform bill not even addressing one of the major reasons we're in this mess.....Freddie Mac and Fannie Mae? I haven't seen any references to this bill where we're looking to improve how they are run.

They could use some fixing, but they were just a cog in the machine.

[DixieFlatline]

They could use some fixing, but they were just a cog in the machine.

I don't know about that. They are just as big as some of these banks that 'are too big to fail'. Otherwise, we would have let them go under.

[boobiemiles]

I like Obama. I give him high marks for coming into a bad situation and significantly improving it. I think most of the critics of his Presidency is baseless so far... My own criticism of him would be he's not been bold or divergent enough... I realize he's shackled to an intransigent minority party, and a fractured majority party; so I mostly excuse these shortcomings too. I'm willing to give him the benefit of the doubt on most issues. Wall street reform is another example of where I would diverge from Obama's prescribed solution...

Obama's plan as I understand it is to force the banks to keep more money on hand to make them more secure.. Which was the law anyway before bush changed it. Then Obama also wants the banks to contribute to a common fund which will bail them out if they go down again. Finally he wants the authority to move in earlier to intercede if one bank threatens to take down several others....

Here is my problem... Seems to me like superficial changes to over-rule the market... Where is the responsibility? Wall Street rewards handsomely risk takers, where is the penalty when those risk takers failed...

We bailed out these banks because responsible people in both parties agreed that they were "too big to fail". After Obama's changes they are still too big to fail. Only now they have a fund to prop them up if/when they fail; rather than the US tax payer... Until that fund is depleted, then it's back on us.

I would break them up..... Let the market place continue to reward risk takers, and let the market place crush them if their risks turn bad. I don't mind regulations which strengthen the industry like requirements to hold a percentage of capital in reserve internal to the company. I do mind a collective fund which is supposed to bail everybody out and diminish the downside of risk taking through collective burden sharing. How can you have risk without the down side, which includes losses?

I am sorry, but you have to look at it from both sides. I think it's a master stroke. See people are sheep, they want, and want and will follow something that appeals to simple logic. If you look at this from a higher ground, you give the banks what they need to start lending, and help protect the public (namely the tax payers) from a financial crisis. It's a good step in the right direction. I feel the government has to step in and stop the idea that greed is good. They way the financial industry was, it was like players calling balls and strikes.

[JMS]

Honest question....why is a Financial Reform bill not even addressing one of the major reasons we're in this mess.....Freddie Mac and Fannie Mae? I haven't seen any references to this bill where we're looking to improve how they are run.

Fannie and Freddie weren't going out and trying to maximize profits. they were carrying out Congress's wishes...

Here is how it worked...

From 1999-2006 global investment capital doubled. In 2006 the largest borrower in the world ( us government) said we are only paying 1% interest on our T-Bills. This sent the money managers out into the marketplace looking for new investment vehicles to put their money. They were all looking to keep the mighty momentum going....

They identified the sub prime morgage market a vehicle which gave them the potential to do this. They were unconcerned about the risk of making loans to poor folks because (a) the housing market was solid, ( they purchased derivatives to offset the risk of loss.... only sub prime morgages didn't exist because there was no infrastructure to sell them, whole sale them, finally bundle them up and create the massive bulk packages the money managers wanted to buy. So the money managers went to Congress and asked them to allow Fannie and Freddie to basically create the middle teir of the market. Fannie and Freddie act as the whole salers for normal home loans, it made sense to everybody they should be the clearing houses for the new subprimes.. The republicans went along because Big Business was asking and the market is never wrong. The democrats went along because it had the potential to fund minority and poor folks housing.... Banks went along because they had the potential to make billions on consulting, financing, and packaging these new bonds. Everybody was happy...

Banks started selling the loans... Fannie and Freddie started buying them up and repackaging them to the money managers. the money managers buying up the packaged loans... and everybody laid off the risk via derivatives sold by AIG....

Only AIG and the money managers fundimentally misunderstood the risks they were taking. When the market collapsed the derivatives which were supposed to bail them out were owned by an overleveraged AIG. They were worthless. The only entity solvent enough to bail out AIG and some of the big banks was the federal governemnt... Even so the big money managers lost trillions.

[JMS]

I am sorry, but you have to look at it from both sides. I think it's a master stroke. See people are sheep, they want, and want and will follow something that appeals to simple logic. If you look at this from a higher ground, you give the banks what they need to start lending, and help protect the public (namely the tax payers) from a financial crisis. It's a good step in the right direction. I feel the government has to step in and stop the idea that greed is good. They way the financial industry was, it was like players calling balls and strikes.

Here is the problem.... the government hasn't stepped in and stopped the idea that greed is good. The government stepped in and gave the greedy buckets of cash and absolved them of their sins...

I don't have any problem with risk taking or greed as long as you are willing ot pay the price. The banks didn't pay the price for their mistakes, we did. Now they want to institutionalize a fund to bail them out when it happens again. I say break them up and if they fail let them fail.

How can anybody think risk taking is acceptable if everybody belongs to a collective risk fund? You can't take away the penelties for risky behavior and not limit the risky behavior and expect it to not accelerate.

[Taylor4Life]

Well, I just got an E-Mail from USAA, telling their members to call their congressmen so that organizations like USAA are exceptions to the Volcker Rule. Digging a bit deeper as to why, they claim because they are an insurer as well as a bank that being restricted like that would hurt the insurance part of the business, where they invest premiums to cover future claims.

Did you send their template letter to your senators? I did...

Regardless of whether I agree or disagree with the Volcker rule, I sure wouldn't like an increase in my insurance premium. It seems to me that punishing USAA, who had absolutely no hand in the CDS debacle, would be quite unnecessary.

On the other hand, if one believes that some form of sweeping financial regulation is absolutely necessary, than it's hard to say that certain firms should be exempt only because they've been good boys and girls. But on this one, I'll go ahead and vote according to my pocket book's best interests.

[Fergasun]

Correct me if I'm wrong, but didn't Obama use part of the Bush stimulus money to bail out GM and Chrysler? It wasn't necessary for it to be used on Banks was it? Why do you think Bush bailing out AIG was thus outside the scope of the TARP fund?.

Did i say GM and Chrysler were also constitutional? Totally unconstitutional. I don't understand why, but the courts have ruled no one has standing to challenge. I truly believe all the TARP money spent has been done so in an unconstitutional way, that includes the money spent to buy bank equity. Again; I have no idea why someone can't challenge this in court, but the courts have denied both Indiana Pension funds and a group in Texas (and Chrysler BK went to the Supreme Court). (Will respond to more points later).