Geithner Running Point on Reform

Although healthcare reform seemed to be pushing ahead of financial reform in the political dialogue race, President Obama's Lehman Anniversary speech on Wall Street last week seems to have re-energized the movement somewhat. While GlobalRiskJobs and Risk Talent Associates are definitely seeing an increase in activity on the financial risk and compliance front, we definitely expected more to see more robust signs of recovery on the hiring front at this point in the year. One of the preconditions to a wholesale shift has always been a more intense regulatory/reporting environment, which we still believe will come, but things have been slow to develop largely because of the traffic jam in Washington. So, with Geithner's focus now moving from crisis manager to running the point on financial reform, we will see where it takes us. Geithner seems to have simplified the message, focusing on three key points that legislators should consider when enacting financial reform: 1) offer “substantial” new protections to consumers and investors, 2) make the financial system less vulnerable to crisis, and 3) protect taxpayers from having to bail out future crises.

Are some of the regulators past the point of fixing? Bloomberg commentator Susan Antilla wonders as much about the SEC in a recent piece. She looks at Judge Rakoff's beat-down of the SEC-Bank of America settlement as just the latest example of a regulator that needs an overhaul. Meanwhile, the SEC is seeking more power to oversee derivatives markets.

GlobalRiskBlog favorite Andy Kessler weighs in on bank pay controls in today's Wall Street Journal. Kessler argues that it was excessive leverage, rather than excessive risk that drove the financial system to the brink of disaster.

As the G-20 convenes in Pittsburgh, U.S. and European leaders remain divided on how much capital the world's largest financial institutions should keep on hand to meet unexpected losses. Most agree that a major lesson of the Crisis is that higher capital requirements are essential, and G-20 leaders hope to have an agreement on new standards by the end of 2010, with implementation by the end of 2012.

Congress has turned its attention to the Rating Agencies. New allegations by a recently departed Moody's analyst named Eric Kolchinsky have added fuel to the debate over the role and influence of credit ratings and whether recent reforms are sufficient to prevent a repeat of past missteps.

The FDIC is being criticized for its handling of many of the recent bank failures. A recent report about the failure of Colorado-based New Frontier Bank criticizes the agency and other regulators for not being aggressive enough in handling the brewing financial crisis.

And finally, the controversial filmmaker Michael Moore is back in the headlines with "Capitalism: A Love Story", a scathing look at the financial system through the lens of the Crisis.

Risk is Back! Sort of.

The New York Times has a special DealBook section today examining the current state of Wall Street one year after Lehman. In Sorkin's cover story, "Taking a Chance on Risk Again", he assesses the state of risk taking as the pendulum swings from refusal to take risk back toward the balanced middle. Where is the "critical point" on the risk spectrum? The usual discussion of VaR and its shortcomings takes place as Sorkin tries to capture the state of the market...Zachary Kouwe looks at the hedge fund fee model as the old standard of "2-and-20" is questioned...Risk is back in the bond market. But the robust high yield market is raising concerns...Harvard Professor William George just published "Seven Lessons for Leading in Crisis", a look at how the banking chieftains responded to the financial meltdown...The Deal Professor has an idea. You want to reduce hedge fund risk? Open them up to Main Street...And finally, it pleases GlobalRiskJobs to know that Gordon Gekko is back! Yes, it's true: Oliver Stone is remaking Wall $treet (1987) to focus on 2001-2008. Thankfully, Michael Douglas will reprise the Gekko role (post-prison), and the cast includes Josh Brolin Susan Sarandon, Frank Langella and Shia LaBeouf. Nouriel Roubini and Jim Chanos are technical advisors and Jim Cramer makes a cameo of course. Can't wait for that one.

Stiglitz says system worse than pre-Lehman

Nobel Prize winning economist Joseph Stiglitz says that little has changed in the year since Lehman and that system is on even shakier ground than it was before the collapse. “It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

(un)Happy Anniversary!

Well, we have begun to be treated to the first of what are sure to be dozens of pieces marking Tuesday's One Year Anniversary of the death of Lehman Brothers. Everyone should remember just how dire the global financial situation seemed in the wake of Lehman's bankruptcy. We at Risk Talent Associates and GlobalRiskJobs certainly remember, as like many who make their living in and around Wall Street, it was a time like no other. "Bulge Bracket" firms disappearing seemingly overnight, stock markets plunging, and of course, the layoffs. Yet, even in those darkest of days, we advised that things would indeed get better at some point, and job seekers needed to get up off the canvas and be ready for that time. Certainly, the first order of business was to use all means necessary to stabilize the system, but when that financial triage was finished, players (particularly regulators) would turn their attention to figuring out how to never let us get in that position again. As I stated in the blog last week, much of that push to reform has been bogged down in political wrangling, shifting of the topic to healthcare, etc. But, just as we start to doubt the Administration's resolve, Here comes President Obama to Wall Street to stoke the fire of reform by reminding us of where we were a year ago. Obama’s speech apparently will focus on the need to take the next series of steps on financial regulatory reform, enacting safeguards to ensure such a crisis doesn’t happen again. Let's hope he can jump start the process and push us through this period of "regulatory limbo".

As we consider the Lehman collapse a year later, there will be many arguments either way that letting Lehman fail was either the right/wrong thing to do. Joe Nocera of the NY Times had a good piece on Saturday where he reconsiders the Lehman failure. My own thoughts about this haven't changed much over the year. I believe that when a Bear Stearns failure became inevitable, the Powers-that-Be (Paulson, Bernanke, et. al.) decided they would give the U.S. banks and investment banks a "Mulligan". Against the pure capitalist philosophy of non-intervention, they rushed in to arrange the orderly sale of Bear to JPM. In its wake, the warning was given: the next guy wouldn't be so lucky. Whether that "next guy" was going to be Lehman, Merrill, Morgan Stanley or someone else (not Goldman of course, being too well-connected), it seemed pretty clear there was going to be some BIG financial institution that would become a lab rat for too-big-to-fail. Unfortunately for its employees and investors, lehman won the race to the bottom and the experiment was in full force. Everyone would find out just what happens and how far-reaching the repercussions are when one of these institutions fails. Well, the rest is well-documented and we can probably say the result was the ability of Paulson to light a fire under Congress and get the resources to fight the crisis. Step 2, however, is far from complete. We still need to figure out how to structure or regulate the system in a way that allows risk taking without the collateral damage that was clearly part of the Lehman failure. Maybe Obama can get that process back on track this week.

Feds locked in "Regulatory Limbo"?

Well, after a quiet end of summer at GlobalRiskJobs and the Blog, it's time to get back to business. I spent most of August in Europe, doing first hand due diligence on the effect of the weak dollar on American tourism. It really hit home in Switzerland, when I shelled out the equivalent of $11.00 for a Big Mac, fries and a Coke at rest area outside of Zurich. Ouch!

Back to the markets...

The summer was characterized by lots of talk but not enough action on the regulatory front. After nearly nine months of the Obama administration, we have been treated to lots of ideas about how the regulatory structure should/could/might look when the dust settles, but there has not been a ton of substantive change. It has been nearly a year since the collapse of Lehman Brothers, and the financial world is, admittedly, a different place. Real change on the regulatory front has not materialized, as efforts to remake the rules of finance have been stymied by infighting among regulators, pushback from banks, and opposition from lawmakers who are skeptical of increased government power and scope. Ironically, banks' appetite for risk has grown, with the Wall Street Journal reporting today that the daily VaR of the nation's top 5 banks was over $1B in the second Quarter of 2009, a record level. Geithner went to Capitol Hill with Obama's financial reform outline on March 26! There was a big sense of urgency at the time, but that was nearly six months ago. Geithner urged lawmakers to grant the authority for the government to take over failing financial institutions quickly, yet here we are. Is momentum for change fading? Or is the regulatory reform movement going to slowly and steadily work its way through the financial system...?

The links...

• Peter Wallison of the AEI says asking the Fed to monitor "systemic risk" is like asking a thief to police himself in this opinion piece from the WSJ.
• Goldman Chief Blankfein spoke in Frankfurt today and said anger over banker pay is justified, but overregulation would prove harmful to the markets.
• NY AG Cuomo is investigating the timing of Bank of America's firing of its former General Counsel, Timothy Mayopoulos.
• Dutch Banks (are there any left...?) agreed to bonus limitations.