Bernanke to Congress: Now's the Time

Fed Chairman Ben Bernanke urged Congress on Friday to enact legislation overhauling the nations' financial regulatory system to prevent a repeat of the banking and credit turmoil that created the financial crisis.

“With the financial turmoil abating, now is the time for policymakers to take action to reduce the probability and severity of any future crises,” Mr. Bernanke said in remarks to a Fed conference in Chatham, Mass.

The Fed has recently been moving to strengthen oversight of banks, and intensify consumer protections. On Thursday it announced a sweeping proposal to police banks’ pay policies to make sure they do not encourage top executives and other employees to take outsize risks.

But Congress needs to step in and close regulatory gaps and make other changes that only lawmakers have the power to make, Mr. Bernanke said.

At the top of Mr. Bernanke’s list: Congress must set up a mechanism similar to the FDIC to safely wind down big financial firms whose failure could endanger the entire financial system.

And, the costs for such a mechanism should be paid for through an assessment on the financial industry, not by taxpayers, the Fed chief said.

Moreover, Congress needs to set up better systems for regulators to monitor risks lurking in the financial system, he said.

The Obama administration has proposed such action as part of its revamp of financial rules. Its plan would expand the Fed’s powers over big financial institutions but reduce it over consumers. Congress, however, is leery of expanding the Fed’s reach because it and other regulators failed to crack down on problems that led to the crisis.

A House panel on Thursday approved a piece of the Obama plan, the creation of a federal agency devoted to protecting consumers from predatory lending, abusive overdraft fees and unfair rate increases.

Stay current on career opportunities in the ever-changing risk and compliance world by visiting GlobalRiskJobs and GlobalComplianceJobs.

Burning the Village in order to save it?

The WSJ has a strong Op-Ed piece this morning that takes a look at Federal tactics used to force BofA to complete the Merrill acquisition last December. They look at the BofA case and see Paulson and Bernanke forcing Ken Lewis to "blow up" Bank of America (maybe this is how Lewis earned his "mulligan" while Rick Wagoner caught one between the eyes...). Spreading systemic risk in the name of containing it....ordering the deception of shareholders, killing financial confidence in the name of restoring it...The Journal appears sympathetic to BofA and goes on to say that the Merrill-related bullying fundamentally increased systemic risk by "transplanting" risk from a Wall Street brokerage to one of the country's largest deposit-taking institutions. In addition, the WSJ states that Bernanke and Paulson undermined the transparency so vital to investor confidence in the capital markets. The collateral damage here seems to be the lukewarm response from most of the investor community and Wall Street to the latest federal initiatives like TALF and PPIP...For Caroline Baum's take on the same, check this out.

Here's word that Goldman Sachs is increasing risk taking at the fastest pace on the street. This should not be that surprising, although given Morgan Stanley's apparent pullback in risk taking, it is important. According to Bloomberg News, Goldman's VaR jumped 22% to $240 million in the 1st quarter - 2x that of Morgan Stanley. Consequently, GS reported 1st Quarter revenue of $9.4B to MS reporting $3.04B.

While the NYT reports Wall Street is unfazed by stress test details, many investors are simply waiting for the results to be released on May 4. Get the Fed white paper disclosing the stress test methodology at GlobalRiskJobs.

AIG: Stealth or Regulatory Incompetence?

In the last GlobalRiskBlog, quotes from Geithner and Bernanke which seemed to blame the AIG CDS fiasco on its ability to fly below the regulatory radar were prominently featured. This morning we read that such a notion is being disputed by one of their own! On Thursday, Scott Polakoff, acting director of the OTS (AIG's primary regulator) appeared before the Senate Banking Committee and agreed that the perception that London-based AIG Financial Products exploited a lack of supervision was incorrect. So what is it then? A 2007 GAO report said that OTS "lacked the needed expertise to regulate complex financial products like credit default swaps". Polakoff admits that some of the issues and problems at AIG were identified but steps taken were insufficient to head off disaster. Doesn't it always seem to work that way? A lack of urgency ultimately winds up blowing up in your face and upon reflection the problems seem so crystal clear. Think about 9/11 or consider baseball's battle with performance enhancing drugs. In a similar way, times were good and people were happy. Warnings went unheeded or were met with symbolic or half-measures. Yet, when disaster struck everything was reconsidered and the vigilance pendulum swung completely in the other direction. Naturally, it will be the same this time.

The links:

• US experts clash on who can monitor risk. While lawmakers seem to agree that the financial regulatory system is broken, they are not necessarily all in the same boat as to how to repair it.
• The Washington Post chronicles the Obama administration's quest to put a valuation on toxic assets at the heart of the crisis.
• Uh oh. Merrill Lynch says its risk officers discovered a trading "irregularity". Beleaguered chief Ken Lewis can't be happy.
• All sizzle and no steak? Paul Krugman is growing impatient with Obama and Geithner.
  
• The CDS market is killing Buffett and Immelt.
• In an obvious blow to Geithner, two picks for top jobs at Treasury have withdrawn from consideration. Deputy Treasury Secretary choice Annette Nazareth and International Affairs Undersecretary pick Caroline Atkinson have decided to stay put.
• Philly Fed President Plosser says the Fed needs a better roadmap to deal with crisis.
• Times Online has some good outtakes on the crisis from Mervyn King.
• Sen. Dodd is moving to allow the FDIC to borrow up to $500B from the Treasury.
• William D. Cohan has written House of Cards, the first of what should be many looks at the collapse of Bear Stearns. James Freeman reviews the book for the WSJ.
• And finally, just in case you missed it, the Daily Show's Jon Stewart proves once again that Hell hath no fury like talk show host scorned. His guns are blazing at CNBC in this video.
  

Closing the regulatory gap on AIG

"If there is a single episode in this entire 18 months that has made me more angry, I can't think of one other than AIG. There was no oversight in the financial products division. This was a hedge fund basically that was attached to a large and stable insurance company"

--Ben Bernanke, 3 March 2009

"AIG is a huge, complex, global insurance company attached to a very complicated investment bank hedge fund that was allowed to build up without any adult supervision."

--Timothy Geithner, 3 March 2009

At GlobalRiskJobs we take every opportunity to consider data points and anecdotes that support the expectation of a coming explosion in risk and regulatory career opportunities in the midst of digging through the various aspects of this global financial crisis. It looks like Geithner and Bernanke are providing us with more evidence. AIG continues to be propped up by the Feds as its CDS exposure threatens the company's viability and it is quickly becoming one of the more obvious albatrosses dangling from the Obama administration's neck as it tries to plow through the crisis. Bernanke went on to say that AIG "exploited a huge gap in the regulatory system", and in a world where every remark is scrutinized for hidden meaning, Bernanke's open slap of AIG is viewed by most as evidence that regulators plan further curbs on risk and concentration in the financial services industry. So, what is the new framework going to look like? Glass Steagall redux? Or maybe a simpler plan putting a conservative Federal Reserve firmly in charge of the banks is the way this plays out. Regardless, leverage has become the boogeyman in all of this so its a solid bet that banks will get harsh new limitations on leverage and risk taking. In addition, Sheila Bair at FDIC has questioned the Basel II model on the basis that it assumes banks internal quantitative risk measures are reliable, so expect a whole new regulatory framework for the banks to be constructed.

The links:

• Who says there are no second acts in real life? Some former Countrywide managers are making money buying up residential mortgage market detritus.
• The Treasury has released guidelines for TALF and Relief for Responsible Homeowners.
• Holman Jenkins rethinks the nationalization of Fannie and Freddie in this WSJ opinion piece.
• The WSJ questions increased FDIC insurance levies against banks at a time when most are receiving Federal funds in through the other end.
• In the face of regulatory reform discussions for the credit rating agencies, S&P called for global regulatory changes to eliminate conflicts of interest and require more disclosure of rating methodologies.
• Heard on the Street says TALF turns the Fed into a generous prime brokerage.
• The FT's John Plender wrote a fine piece dissecting the carnage in the investment world.
• The bank Nationalization Debate rages on.