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.

Multi-tasking during the Fire

"When firefighters are still struggling to extinguish the blaze, talking about fire prevention seems premature. The worst financial crisis since the Depression isn't over, yet it's time to put the best brains to work at restructuring the financial regulatory structure so we don't go through this again."
-- David Wessel, Wall Street Journal, 12 March 2009

At GlobalRiskJobs, we couldn't agree more. Yet, this crisis has legs, and I don't think anybody is really ready to declare that the end of it is near. But, it does seem as if the stirrings have regulatory discussion have begun in earnest this week. When government officials like Bernanke, and business commentators like Wessel begin to turn their attention to regulatory architecture, it is a good thing for the market for risk and compliance professionals. It means that what you have known was coming for the past year or more is beginning to materialize. For a long time, it appeared that the discussion would not begin to take place until the system was stabilized. Yet, the longer the pain goes on, the more apparent it is that discussions of real change on the regulatory front need to occur now. For awhile, things were held up by the natural turbulence of a massive government change-over. As the Obama administration settles in and appointments have been made, the executors have dug-in and begun to take steps. Be prepared for the pace to pick up.

The links:

• Bloomberg's Jonathan Weil writes that Moody's admission of its shortcomings in independence and integrity in federal court last week will prove extremely damaging to the Agency's public reputation.
• Bernie Madoff is ready to plead guilty. While he is ready to go down on his sword and face up to 150 years in prison on 11 charges, he's holding out on the conspiracy charge to avoid implicating others. The WSJ has a helpful primer on the Madoff case so far.
  
• Not in my lifetime? GE has lost its S&P AAA rating which the company had held since 1956 - the year of CEO Jeff Immelt's birth.
• Compensation consultant Johnson Associates believes Wall Street's longtime comp structure is going to change radically.
• The Oracle of Omaha has weighed in on suspension of mark-to-market debate.
• As MBA's enter the home stretch, the WSJ has a story on the state of hiring at London's banks. It's not pretty.

Bank Lending Picked Up in December

The first results of the US Treasury's new monthly bank lending report are out and they say that bank lending rebounded in December. Overall, loan origination and underwriting activity were weak in October and November, but picked up in December, fueled by falling mortgage rates. Read about the results here. Still no word on how much the shadow banking system is lending...

More news from around the financial world:

• Greenspan comes out in favor of bank nationalization and says U.S. needs to do more
  
• A few Congressional Republicans joined him in putting nationalization on the table.
  
• R. Allen Stanford is accused by U.S. regulators of running a massive ongoing fraud through his Houston-based Stanford Group Co.
• A former chief accountant for the SEC thinks Madoff investors may be able to hold their auditors accountable in the fraud.
• RBS feels the heat and gets Draconian on incentive comp.
  

The Securities Act of '09?

At GlobalRiskJobs we focus on professionals in the risk management and regulatory compliance communities. For quite awhile we have been anticipating that more intense regulation and reporting (and hence more demand for such professionals) would be the ultimate payback for all of the government money that has been used to stabilize the financial system. Well, since the Obama administration took office two weeks ago, it has been hard to miss the drumbeat of regulation and government oversight that has been getting louder. Alison Fitzgerald and Alison Vekshin of Bloomberg News have written a piece that consolidates that belief in a huge revision of securities laws. The authors anticipate the biggest overhaul of financial regulation since Roosevelt created the FDIC and the SEC in the 1930s. Pres. Obama is, in fact, discussing reregulation this week with congressional leaders, and topics include controls on unregulated hedge funds, new rules for executive pay and restricting naked credit default swaps. NYU-Stern professor Robert Engle suggests that this is a "major moment", a situation so unique that it offers the ability to make a huge impact. And Sen. Chris Dodd, Chairman of the Senate Banking Committee went on record yesterday as saying Congress will consider creating regulators to enforce consumer protections and monitor systemic risk as lawmakers rewrite the rules on Wall Street. In the House, Financial Services Chairman Barney Frank said he planned to start the overhaul with legislation that makes the Federal Reserve the systemic-risk regulator. And former Fed Chairman and current presidential advisor Paul Volcker said hedge funds and private equity firms should be required to register with the SEC to increase transparency. So it appears that public opinion has swung so far as to put EVERYTHING on the table. We've said it before but it bears repeating. New regulation means consulting jobs as companies seek help figuring out what it all means, and more new jobs when those consultants leave and the companies need people to keep up with those requirements.

A tour of the headlines today:

• Bernard Madoff rejected a fund's demand for an outside audit, saying his fund's strategy was so secret only his brother could do that. Linda Sandler reports.
• More color on the U.S. government pressure on BofA to complete the Merrill acquisition in the Wall Street Journal.
• A.I.G.'s securities lending business was also a key contributor to its demise, according to the WSJ.
• A WSJ editorial says that lost in the executive pay hoopla is a dangerous toxic asset guarantee debate.
• The SEC took a beating on Capitol Hill yesterday at the Madoff Hearing.
• The head of risk management at a hedge fund seems to have fallen down on the job.
• A 45% decline in syndicated loans in Europe is leading companies to pay higher fees to lock in bank loans years before they expire.
• The FT reports on details of Deutsche Bank's 4Q trading hit.
• A good story on being George Soros by Chrystia Freeland of FT.
  

The Season of Endless Losses

Doesn't it seem like the bank losses just keep coming out of nowhere? In the past, didn't banks just swallow hard, take the equity beating and move on? What's going on here? Well, it's different this time and the so-called Shadow Banking System is why. PIMCO's Bill Gross wrote about it way back in December 2007 in his monthly Investment Outlook, when he wrote that we were witnessing nothing less than a breakdown of a modern banking system that had become exceedingly complex. The piece was an interesting read back then, it is a stunning read now. Flash forward to the current day, where Forbes has a commentary written by NYU-Stern Professors Viral V. Acharya and Philipp Schnabel warning us to expect the shadow banking losses to keep coming. They cite the recent RBS ($41B) and State Street ($10B) losses as examples of losses that seem to come from out of the blue but are largely the product of off-balance sheet vehicles which were set up to arbitrage regulation. The commentary is adapted from a soon to be published book called Restoring Financial Stability: How to Repair a Failed System....A quick tour around the news outlets:

• Today's Wall Street Journal contains several good Op-Ed pieces as the stimulus debate continues. Former Vice Chairman of the Federal reserve Board Alan S. Blinder presents his economic wish list, former U.S. House Majority Leader Dick Armey thinks Washington could use less Keynes and more Hayek, and the inimitable George Soros thinks we can do better than a "Bad Bank".
• Early Madoff critic Harry Markopolos testifies at a Congressional hearing today. His written testimony has been released here. It's more blistering criticism of substandard performance by regulatory and enforcement bodies.
• Continuing yesterday's thread on "Bonus Outrage", early details today of a $500,000 cap on executive pay at TARP banks proposed by the Obama Administration. Also, check out Thomas Frank's WSJ opinion piece about the Wall Street bonus system.

Here Come the Regulators!

At GlobalRiskJobs we have long anticipated that the ultimate response to the global financial crisis is going to be much more intense regulation. Once the dust settles, the banks have been stabilized, the new administration gets its legs, etc. count on the rules of the game starting to change. Remember how Sarbanes-Oxley came about - it was a response to inadequate corporate audit procedures in the aftermath of Enron, Worldcom, Tyco, et. al. Expect something similar this time as it concerns Risk and Compliance.

Investment banks which are now partly owned by the U.S. Government must brace for regulation and risk reporting way beyond what they have experienced. And now, thanks partially to Bernie Madoff, hedge funds can likely expect similar treatment. A very good recent article in the Financial Times entitled, "Crackdown on hedge funds after Madoff affair" says funds should brace for more stringent requirements by investors and increasing regulatory scrutiny after the massive $50B Madoff fraud.

Lawsuits are being filed, due diligence procedures at funds-of-funds are being put under the microscope and Congress is on the case as well. Third party administrators and more regulation are all but a given in the new normal of high dollar asset management.

What does this mean for the risk or compliance professional? Logically, one would anticipate a slew of new opportunities as banks, I-banks and funds wake up to the new reality. In looking at SOX for precedent, think about the consulting teams that were assemble to assist in sorting out all of the new requirements. Consider the in-house teams at banks and I-banks that will be implemented to deal with the reporting they will likely face. And think of a more transparent - and more regulated - hedge fund world which will need to face scrutiny like never before, and consequently will have to appoint employees dedicated to facing that spotlight.

Massive change appears to be on the way. The only question is when it arrives. stay tuned to GlobalRiskJobs for all the opportunities and news as things progress.