Regulatory Turf Wars Gaining Steam

Lots of buzz this week about future oversight of the financial markets. While GlobalRiskJobs and GlobalComplianceJobs have been anticipating significant changes in the regulatory landscape, the political landscape has thus far provided more of a speed bump to true reform than initially thought. The Obama Administration is (finally) expected to finish up a plan to present to Congress by the end of June, but the timetable for any reform plan to be approved by Congress looks like the end of this year. The Obama administration has been pushing a more radical reform agenda, while existing regulators naturally have sought to defend their existing turf. As a result, no firm regulatory structure has yet to emerge. The primary issue seems to be whether to reorganize the basic structure of oversight, or whether to implement new rules at existing agencies that would accomplish the same end. It would seem that, given the scope of this crisis, if there was ever a time where legislators and te public would be willing to accept a radical overhaul, now would be it. The adminsitration has had its hands full with the issue of bank supervision, and the Office of Thrift Supervision (OTS) which has come under fire for its seeming impotence in the AIG, WAMU and IndyMac fiascos is likely to be sacrificed first in the name of reform. Also on the table is a merger of the SEC and the CFTC, although House Financial Services Committe Chairman Barney Frank is not a supporter of such a move. Another political sticking point surrounds the idea of a systemic risk regulator. Treasury wants the Fed to become a financial market uber-regulator responsible for systemic risk, although many politicians and regulators are reluctant to concentrate so much power at the Fed. As mentioned last week, a new Financial Products Safety Commission has also been proposed, although Mary Schapiro naturally opposes any threat to diminish SEC power and lashed out against the idea. Another battle on the Hill is brewing between Frank and House Agriculture Committe Chairman Collin Peterson surrounding who will get authority to regulate credit default swaps. The Ag Committees in Congress traditionally oversee the CFTC and oppose any challenge to their authority.

The Links:

• The FT details some of battles being fought over bank regulation.
  
• Bloomberg's Alison Vekshin has written a good profile of FDIC Chief Sheila Bair.
• Wall Street is having its say in the battle over derivatives regulation. Banks want to preserve the intra-dealer market and raise barriers to new entrants to keep the OTC business as compartmentalized as possible.
• The FT believes regulatory authority in the US should be assigned by function, not product.
• EU banking regulators may get the power to overrule national banking authorities under new plans in the works as a response to the financial crisis.
• The WSJ comments on the derivatives PR war going on inside the Beltway.
  

What to do about 'Regulator Shopping'?

Thursday's NY Times has an editorial on "regulator shopping", investigating its role in the current financial crisis. The piece laments the fact that banks and finance companies were allowed to choose their own regulator and seemed to switch at will in order to find the most lax or favorable overseer. The editorial really takes issue with the "optional federal charter" proposal to regulate the insurance industry which would would allow insurance companies to switch to federal regulation if they had issues with state oversight (the current environment) in the future. There has been much outcry about regulator shopping and how it may have played one body off another in contributing to the crisis. So, if the Obama administration and Congress are serious about simplifying and streamlining financial product regulation and consumer protection, this would be a good time to step up.

----------

• William Poole examines "too big to fail" in the FT. He ponders whether bankers would rather face the discipline of subordinated debt or much heavier regulation from Washington.
• Is LIBOR signaling that risk in the banking system has abated? Michael Mackenzie explores the issue but still finds dislocation in some areas.
• S&P's threat to downgrade the UK from AAA upset the markets on Thursday.
  

Is Warren's Financial Product Safety Commission on Tap?

The Washington Post reports that the Obama Administration is actively discussing the creation of a regulatory commission that would have broad authority to protect consumers who use financial products as varied as mortgages, credit cards and mutual funds. The move would require legislation, and would centralize regulatory authority that is currently spread among a group of federal agencies. The proposal is sure to be opposed by financial services industry groups who will continue to argue that such regulation will crimp access to such financial products. Additionally, such a move could intensify political wrangling among existing regulators like the OCC, Fed and SEC as they battle to hold onto legacy powers.

The idea is believed to have sprung from a plan proposed by Harvard Law professor Elizabeth Warren, who now chairs the Congressional Oversight Panel for the US Government's financial rescue initiative. Warren wrote in a 2007 article in the journal Democracy called "Unsafe at Any Rate" that the government had failed to protect American consumers in their relationships with financial companies and that it was now time for a Financial Product Safety Commission.
------

The Links:

• WSJ's Gordon Crovitz says that Geithner's focus on disclosure over regulation when it comes to derivatives constitutes smart reform.
• The FT says that the derivatives industry is girding for battle.
• Gillian Tett, author of "Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan was Corrupted by Wall Street Greed and Unleashed a Catastrophe" is out promoting her book. She thinks she has a sense of what Main Street thinks of Wall Street.
• Jamie Dimon speaks out about rules preventing US banks from hiring foreigners.

Please sir, I want some more (regulation)...

"We are looking at a world where the fist of government will be stronger than the invisible hand of the market"

--Mohamed El-Erian, Chief Executive Officer of PIMCO, 5/19/09

In El-Erian's May Outlook piece, he envisions a banking system that is a shadow of its former self. Regulation will be more expansive in form and reach, and the sector will be "de-risked, de-levered, and subject to greater burden sharing. The forces of consolidation and shrinkage will spread beyond banks, impacting a host of non-bank financial institutions as well as the investment management industry".

At GlobalRiskJobs and GlobalComplianceJobs, we can't help but nod in agreement when we hear things like this. We have been anticipating such an environment as the pound of flesh to be exacted in the wake of the Great Meltdown, and when high profile investors like El-Erian go on record with such comments, it sends the signal that the government is a long way from backing down from intnsifying the regulatory environment. Thus far, it seems there has been much talk and little action on the "new normal" that has been talked about. It appears that many banks, asset managers, and other finance companies are engaged in a game of personnel "chicken". They seem to know in their hearts that a new regime is coming that will require new bodies; professionals with the expertise and experience to help them comply with new legal and risk reporting requirements that will certainly be part of the this new environment. But, the overall trend appears to be one of wait and see. When are the requirements going to come? June? August? October? Why not hold out until the last minute and hire when the government imposed deadline is looming? Well, there are lots of reasons not to do that, first and foremost being the tone of the employment environment. When the deadline is looming, how many others will be in the same boat? Lots. And a basic understanding of supply and demand would tell one that when the talent market tightens one pays a lot more for that talent. Look no further than Sarbanes-Oxley for Exhibit A from the recent past. And, guess what else becomes a real issue? Retention of existing employees. Because, when there is a bid out there in the market and the phones start ringing it will make everyone wearing a risk or compliance hat a more valuable commodity.

The links:

• A new credit card reform bill was passed by the Senate and is on its way to President Obama.
• The Federal Reserve will include legacy assets for the first time in a $1 trillion program to revive credit markets, expanding the effort to commercial real estate securities issued before the start of this year.
• NY governor Andrew Cuomo sued two debt settlement firms for deceiving consumers and false advertising.
• Treasury Secretary Geithner said the government should not impose caps on executive pay.
• New fees proposed by the FDIC would hit big banks harder than small ones.
• The FT weighs in on Geithner's plans to regulate the derivatives markets.
  

Taming the Derivatives Tiger

The Obama administration asked Congress yesterday to move quickly on legislation that would allow federal oversight of derivatives like credit default swaps. Geithner said the measure should require swaps to be exchange traded and backed by capital reserves. The adminsitration is also seeking repeal of of major portions of the Commodity Futures Modernization Act of 2000 which kept derivatives mostly unregulated (endorsed, incidentally, by then Treasury Secretary Larry Summers). The new measure would give regulatory oversight to the CTFC and the SEC. ISDA issued its own comments in the wake of the news.

Geithner also stated that the administration would be laying out a comprehensive proposal to overhaul the regulation of the financial system. A centerpiece to the plan will be eliminating the ability of companies to pick the most favorable regulator.

So, will moving derivatives to an exchange help prevent future meltdowns? TMX Group CEO Thomas Kloet believes it can.

The links:

• Paul Kanjorski, the chairman of an influential House subcommittee said the federal government, not the states, should have the primary responsibility for overseeing the insurance industry. he said Congress must address insurance activities as part of the broader overhaul of financial regulations.
  
  
• The SEC moved to impose new rules on money managers to safeguard client holdings in the wake of Madoff's $65B Ponzi scheme. SEC commissioners voted 5-0 today on a proposal to subject about 9,600 investment advisors to annual surprise inspections by independent auditors to make sure they have adequate procedures to protect client assets.
  
  
• The Federal Reserve may revise rules that currently favor the established credit rating agencies. The Fed currently only accepts collateral ranked by the major NRSROs (Moody's, S&P, Fitch) and is conducting its review as the number of NRSROs is increasing.
  

• R.I.P Bill Seidman. The former head of the FDIC and RTC died yesterday in Albuquerque, NM at the age of 88.

The Compensation Tug o' War

"This is not going to be about capping compensation or micromanagement. It will be about understanding what is the best way to align compensation with sound risk management and long term value creation."

--Obama Administration official, 5/12/09

There it was this morning on the front page of the Wall Street Journal. Above the fold. "U.S. Eyes Bank Pay Overhaul". Just when it seemed that focus on compensation limits had begun to abate, news comes that the Obama administration has begun serious talks about how it can change compensation practices across the financial services industry. Yes, you read that correctly. Not just at TARP recipients, but also at institutions that received no federal bailout money. This is new ground for regulators, although they do currently have the (rarely exercised) power to sanction a bank for excessive comp structures. President Obama and Geithner have been critical of the quarter-by-quarter mentality that pervades the financial services business, and Bernanke said the Fed was working on rules that would more closely align compensation with longer term goals. Recently, FDIC Chairman Bair said regulators needed to examine comp pratices in the mortgage industry. One former regulator thinks it is a bad idea to regulate banker pay. Former SEC chairman Arthur Levitt thinks it is a slippery slope to try and regulate banker pay, saying "it has never worked and it cannot work." So what is the right answer? How do you achieve the goal of aligning compensation with risk management and long term value creation?

Links to recent news:

• Hedge funds get behind registration plan. MFA President Richard Baker told a congressional hearing that the organization supports a regime that would subject the vast majority of investment advisers, including the largest and those considered most systemically relevant, to the SEC's registration requirements.

• The SEC's Elisse Walter said that Financial Advisors should be regulated under a unified umbrella, which would help harmonize regulation. Should RIA's have their own SRO?

• Stephen Morse, managing director and head of compliance, operational risk and information risk at Barclays Capital has been named Compliance Reporter's Compliance Leader of the Year.

• Banks are bracing for a credit card write-off storm.

• What is the future of US financial regulation? Rob Cox at BreakingViews has some thoughts on that question.

The Future of "Too Big to Fail"

FDIC Chairwoman Sheila Bair addressed "Too Big to Fail" in front of the Senate Committee on Banking Housing and Urban Affairs. Bair urged lawmakers to consider a government regulatory framework to monitor global, systemic financial institutions thought to be “too big to fail.” Read the testimony here.

Stress Test results are out, and BofA's apparent need for $34B in capital has been this week's worst-kept secret. banks will need to raise at least $65B in new capital The WSJ has a helpful interactive graph comparing the 19 banks that were stress-tested. Also, WSJ's David Wessel explains what the stress tests will tell us about bank health.

Matthew Richardson and Nouriel Roubini write about a missed opportunity in the FT. The pair feel that insolvent banks should feel the wrath of the markets, asking "why keep insolvent banks afloat?" and invoke the concept of "creative destruction" first argued by Joseph Schumpeter. fellow Doom-and-Gloomer Nassim Nicholas Taleb calls the current global crisis "vastly worse" than the 1930s becaause the global financial system is so interdependent now.

The GAO criticized former SEC chairman Chris Cox and his regime for creating an atmosphere in which enforcement attorneys felt thay had been weakened in their ability to take action. New SEC chair Schapiro dicontinued Cox' "Pilot Program" which had instituted a pre-approval process for investigations.

Author Richard Posner writes that we should move the spotlight off the bankers for a bit and focus on goverment officials who failed in their role of assuring economic stability.

Regulators looking North for inspiration? Marie-Josee Kravis sets the record straight on why it wasn't regulation, per se, that has spared Canada's banks from the worst of the crisis. She credits prudent management, rather than regulation, which prevented the excesses that were commonplace in the U.S. banking environment.

Don't forget to visit GlobalComplianceJobs, the place for high profile regulatory and compliance career opportunities.