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.
  

U.S. Regulators Issue Joint Statement. Markets Tank.

As reported here in yesterday's blog, US regulators took the unusual step of issuing a joint statement to ensure the investing public knows they will be stress testing banks. President Obama is looking to clear up the stench around U.S. banks by subjecting them to reviews and trying to revive liquidity in the market for their toxic assets. The Wall Street Journal thinks the joint statement bothered the equity markets. Stress testing will begin tomorrow for 20 of the largest banks to determine which ones will need government capital injections to survive. The potential downside of "opening the kimono" in this way is that bringing banks' problems into the public spotlight is that it could intensify investor concerns rather than quell them. Citigroup continues to be the big bank "guinea pig", as officials struggle with how much more aid they can or should provide the behemoth as the nationalization debate continues to rage and shareholders worry about being completely wiped out. Former FDIC Chairman William Isaac joins the chorus against nationalization in this WSJ Op-Ed piece. Isaac was responsible for nationalizing Continental Illinois Bank in the 1980s, so he knows of which he speaks. The NYT's Eric Dash reports that at least a partial nationalization seems inevitable for Citigroup. A third injection would give the U.S. 40% ownership in Citi and likely the ability to exert more influence over the bank. Across the pond, the UK's experience with RBS which has led to a 68% ownership stake in the Scottish bank is being looked upon as a sort of model. Key management has been replaced and the the government seems to be controlling lending and strategic decisions. A key question being asked in all of this is "what's the exit strategy"?

And now for the links:

• A story on regulating the Shadow Banks in breakingviews. Political momentum for regulating these entities seems to be gaining steam in advance of April's G-20 meetings in London. Thekey question will be, "what is appropriate oversight?"
  
• PIMCO's Bill Gross thinks nationalization would be a huge mistake in his latest Investment Outlook. Gross says that if you think letting Lehman fail was a mistake, just watch what nationalizing Citi and BofA would do...
  
• What exactly is nationalization? The WSJ has a helpful primer.
  
• "Black Swan" author Nassim Nicholas Taleb says that the current banking crisis will be harder to end than the Great Depression. Taleb goes so far as to say that, for him, the real "black swan" event would be for the markets to emerge unscathed and return to normalcy.
• Here's one way to manage risk: Amex is paying potential deadbeats to go away.
• Morgan Stanley is closing its Chicago prime brokerage unit.
• Geithner's "bad bank" plan may need to provide low-cost financing to distressed asset investors.
• NPR's Jim Zaroli walks us through a bank stress test.
• Is there a dangerous bubble brewing in investment grade corporate bonds? At least one analyst thinks so.
• S&P thinks proposed Basel changes will cut risk taking.
  

PIMCO's Gross: Stop the decline in asset prices

At GlobalRiskJobs we always look forward to the first of the month when PIMCO's Bill Gross publishes his monthly Investment Outlook. So, it was a great treat to receive his February piece a few days early. The manager of the World's Biggest Bond Fund (WBBF) says policy makers must stop declines in asset prices in 2009 to revive the economy and curb rising unemployment. While realizing that you can't bailout everybody, Gross points to commercial real estate and the retail sector as two segments that must stabilize before confidence returns. Gross also suggests that TARP's focus on the banks is important but too one-dimesional. He also urges the government to address the so-called "shadow banking system" where deleveraging has continued to weigh on home prices.