Regulation with a capital R

( – promoted by buhdydharma )

According to the Washington Post today, the Obama administration is proposing sweeping new regulations for the financial services industry.

Treasury Secretary Timothy F. Geithner is proposing a sweeping expansion of federal authority over the financial system, breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit.

The Obama administration’s plan would extend federal regulation for the first time to all firms trading in financial derivatives and to companies including large hedge funds and major insurers such as American International Group. The administration also will seek to impose uniform standards on all large financial firms, including banks, an unprecedented step that would place significant limits on the scope and risk of their activities.

From the article, here’s a summary of the proposals.

The administration’s signature proposal is to vest a single federal agency with the power to police risk across the entire financial system. The agency would regulate the largest financial firms, including hedge funds and insurers not currently subject to federal regulation. It also would monitor financial markets for emergent dangers.

Geithner plans to call for legislation that would define which financial firms are sufficiently large and important to be subjected to this increased regulation. Those firms would be required to hold relatively more capital in their reserves against losses than smaller firms, to demonstrate that they have access to adequate funding to support their operations, and to maintain constantly updated assessments of their exposure to financial risk.

Hand in glove with this expanded oversight, the administration also is seeking the authority to seize these large firms if they totter toward failure (ed note: nationalization anyone?)…

The administration also wants to expand oversight of a broad category of unregulated investment firms including hedge funds, private-equity funds and venture capital funds, by requiring larger companies to register with the Securities and Exchange Commission. Firms also would have to provide financial information to help determine whether they are large enough to warrant additional regulation…

Geithner is calling for the SEC to impose tougher standards on money-market mutual funds, investment accounts that appeal to investors by aping the features of checking accounts while offering higher interest rates…

The administration’s broad determination to regulate the totality of the financial markets also includes a plan to regulate the vast trade in derivatives, complex financial instruments that take their value from the performance of some other asset.

Geithner is calling for the entire industry to be placed under strict regulation, including supervision of dealers in derivatives, mandatory use of central clearinghouses to process trades and uniform trading rules to ensure an orderly marketplace.

Overall, it sounds to me like if you’re “too big to fail” or you’re playing high stakes games with other people’s money, we’ll be watching and will move in to correct any risks we identify to the overall economy.

We’ll see how Congress reacts to these proposals. But according to BooMan, it will take more than just their cooperation.

Geithner and Obama did not decide to play small-ball with these proposals. They are going FDR-deep. The ultimate success of their plans (assuming they pass through Congress) will depend in part on their ability to convince foreign countries like Germany and Switzerland and the UK to impose similar regulations. I think that will be a huge part of Obama’s agenda at next month’s G20 summit.

 

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  1. I’ve been waiting to see. We’ve got a huge current mess to clean up. But the major contributor to all of this has been the lack of regulation on these systems.  

  2. vest a single federal agency with the power to police risk across the entire financial system. The agency would regulate the largest financial firms, including hedge funds and insurers not currently subject to federal regulation. It also would monitor financial markets for emergent dangers.

    Like with Homeland Security, I don’t see the advantage of creating one big agency to incorporate lots of smaller ones.  Why is a single agency any less vulnerable to being exploited than several small ones?  What makes us think it will be in any way more efficient?

    Geithner plans to call for legislation that would define which financial firms are sufficiently large and important to be subjected to this increased regulation. Those firms would be required to hold relatively more capital in their reserves against losses than smaller firms, to demonstrate that they have access to adequate funding to support their operations, and to maintain constantly updated assessments of their exposure to financial risk.

    A system with different rules for different firms in the same business seems really foolish.  It is another opportunity for regulatory arbitrage; you greatly enhance your position by being a firm just below the threshold for higher scrutiny while offering the same services as the more scrutinized firms.  That is why AIG is such a big deal; they were allowed to do things the investment banks couldn’t, so they were able to “profit” by behaving like an investment bank.

    What’s wrong with simple rules?  8 to 1 maximum leverage for everything in traded financial services.  Boom.  Now the only question is which firms are trying to increase their leverage beyond the allowed amount, instead of the wide range of means to game the system this suggestion allows.

    • Edger on March 27, 2009 at 2:42 pm

    Rchardson’s evaluation of Geithner’s plans?

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