Pelosi to Wall Street: "Party's Over". House passes financial overhaul.

The U.S. House of Representatives today passed the Wall Street Reform and Consumer Protection Act, 223-202. The House tightened rules for derivatives and created powers to break up large financial firms that threaten the economy, despite opposition from Wall Street and Republicans. Also included was the creation of a Consumer Financial Protection Agency and stronger oversight of hedge funds. The bill also ends a ban that shielded the Federal Reserve from audits of its monetary policy decisions. The House failed to add language for mortgage "cram-downs". Passage of the House bill moves one step closer to achieving the White House objectives for financial reform. The focus now shifts to the Senate, where lawmakers lack a schedule for action on a bill.

House bill proposes ban on naked CDS

House Financial Services Committee Chairman Barney Frank said "naked" credit default swaps may be banned in the overhaul of derivatives industry oversight. House Agriculture Committee Chairman Collin Peterson (D-MN) said he is helping draft the legislation which would ban credit-default swaps where the investor doesn't own the underlying debt. Under the current proposal, market makers would be exempt from the ban. As much as 80% of the $26T CDS market is traded by investors who don't own the underlying debt.

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.
  

Bailout Weekly: AIG loses $62B and gets a 4th course at the trough

Anyone remember how much aid A.I.G. asked for way back in September? Well, we are a long, long way from September 16, 2008 when the U.S. government extended the insurance giant a two-year loan of up to $85B in exchange for a 79.9% stake. Less than a month later, those bailout loans were increased to $123B, then to $150B in November, which included a new $40B government investment. So, here we are in March 2009, and AIG is bellying up to the TARP trough for $30B in rescue funds in a reversal of the initial plan. Last fall, the government was acting as short term lender trying to help AIG get through rough times with some "tough love". It looks like Geithner has changed the parenting philosophy by relaxing loan terms and giving more access to TARP rescue funds - now standing at $70B. Yes folks, that is 40% more than Citigroup has taken so far. What does it all mean in the context of "too big to fail"? It appears that the Feds are still trying to their arms around the deep aftershocks any kind of AIG failure would have on the financial system and beyond. It's all about buying more time and keeping the newly vigilant rating agencies at bay.

More news of interest on this snowy Monday:

• Hedge fund D.E. Shaw is reacting to Madoff, et. al. by planning to step-up its due diligence by appointing 3rd party administrators to verify investments.
  
• A Treasury audit report blames an aggressive growth strategy, nontraditional loans and insufficient underwriting for the demise of IndyMac Bancorp last summer.
• The Bank Stress Test is found to be lacking in this piece by David Reilly, and the NYT questions some of the test's assuptions in this Op-Ed.
  
• FT says and FDIC on steroids might be the answer.
• Barney Frank on bailouts.
• S&P sees more losses for subprime securities.
• More on nationalization in the NY Times Magazine.
• Is the crisis spawning new regulation for the European Union?
• Bloomberg's Caroline Baum thinks some banks need to fail to clean out the system. Former Treasury Secretary James Baker writes in the FT that we need to heed the lessons learned from Japan in the 90s and kill off some zombie banks.
  

Stress Test will Empower Regulators

In the aftermath of Geithner's layout of the bank rescue plan, federal banking regulators are descending upon the 18 biggest US banks with a set of new more stringent criteria with which to stress test the banks for long term health. NYT's Eric Dash wonders if regulators could become the new arbiters of American finance. The new scrutiny may go a long way toward determining which banks succeed long term, and which wind up being nationalized or allowed to fail. And regulation is sure to be a hot topic at the upcoming G-7 meetings in Rome. The Financial Stability Forum will likely propose new global standards on bank capital rules and for regulating off-exchange markets.

More news:

• The HBOS whistleblower saga continues. Read the full text of the Moore memo here.
• Speaking of whistleblowing, WSJ's Aaron Lucchetti wonders why Wall Street is reluctant to blow the whistle on the likes of Madoff.
  
• Bank CEO testimony on Capitol Hill had its moments. Evan Newmark thinks the CEOs showed their sales chops at least. It looks like Congress needs a lesson in the shadow banking system to understand who is not lending. Bloomberg's Caroline Baum imagines the tables being turned and CEO's questioning Barney Frank.
  
• Keep an eye on RBS as a model for the future of banks with big government ownership. If the the UK wants the balance sheet reduced, where do you think it's going to come from? Not the domestic market...
• At least one firm thinks investment grade debt looks attractive.
• Shareholders rise up and the Fortis deal is voted down.

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