Financial Reform Movement in Retreat?

It looks like the Obama administration is tempering its ambitions for financial regulatory reform. It seems that the potential political brouhaha that would accompany a reduction in the number of agencies overseeing the financial markets would expend too much political capital. Instead, the administration will focus on securing broader powers for existing regulators to limit risk-taking. While the revamp of oversight will dramatically change the regulatory environment for finance, has the US missed an historic opportunity to completely overhaul the arcane regulatory framework of US finance? Possibly. It seemed as if the financial crisis presented lawmakers with a clear path to reworking the system. As time has passed and the global financial system has stabilized somewhat, the outcry for major structural change has become less loud. reform hawks will no doubt be disappointed by anything short of wholesale change to the system and will lament the loss of reform momentum.

The links:

• Te Obama administration wants Europeans to put their banks through much more rigorous public stress tests to ensure survival in a slipping economy.
  
• Deloitte & Touche released its 6th Global Risk Management Survey. The survey indicates that banks and other financial institutions continue to have significant opportunities to strengthen their risk management processes and tools.
• As plans for banks to leave TARP solidify, the WSJ wonders what to do about Citigroup.
• The 10 banks that got the green light to repay TARP include: Goldman Sachs, JPMorganChase, Morgan Stanley, American Express, Bank of New York Mellon, BB&T, Capital One, Northern Trust, State Street and US Bancorp.
• SIFMA Chief Executive Tim Ryan says that Wall Street accepts its share of responsibility for the crisis and intends to partner with the governments to overhaul the regulatory system.
• Morgan Stanley says there has been a fierce rally in leveraged loan CDO's.

The Future of "Too Big to Fail"

FDIC Chairwoman Sheila Bair addressed "Too Big to Fail" in front of the Senate Committee on Banking Housing and Urban Affairs. Bair urged lawmakers to consider a government regulatory framework to monitor global, systemic financial institutions thought to be “too big to fail.” Read the testimony here.

Stress Test results are out, and BofA's apparent need for $34B in capital has been this week's worst-kept secret. banks will need to raise at least $65B in new capital The WSJ has a helpful interactive graph comparing the 19 banks that were stress-tested. Also, WSJ's David Wessel explains what the stress tests will tell us about bank health.

Matthew Richardson and Nouriel Roubini write about a missed opportunity in the FT. The pair feel that insolvent banks should feel the wrath of the markets, asking "why keep insolvent banks afloat?" and invoke the concept of "creative destruction" first argued by Joseph Schumpeter. fellow Doom-and-Gloomer Nassim Nicholas Taleb calls the current global crisis "vastly worse" than the 1930s becaause the global financial system is so interdependent now.

The GAO criticized former SEC chairman Chris Cox and his regime for creating an atmosphere in which enforcement attorneys felt thay had been weakened in their ability to take action. New SEC chair Schapiro dicontinued Cox' "Pilot Program" which had instituted a pre-approval process for investigations.

Author Richard Posner writes that we should move the spotlight off the bankers for a bit and focus on goverment officials who failed in their role of assuring economic stability.

Regulators looking North for inspiration? Marie-Josee Kravis sets the record straight on why it wasn't regulation, per se, that has spared Canada's banks from the worst of the crisis. She credits prudent management, rather than regulation, which prevented the excesses that were commonplace in the U.S. banking environment.

Don't forget to visit GlobalComplianceJobs, the place for high profile regulatory and compliance career opportunities.

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.
  

Big Banks to be "Stress Tested"

More news on the regulation front. The Wall Street Journal is reporting that many banks will be subject to rigorous examinations to see if they are healthy enough to lend before they receive additional federal bailout funds. Federal regulators will likely require large banks to undergo a stress test to determine just how bad things could get in the worst case. The new oversight could take a step toward addressing longstanding disagreements among regulators about the health and viability of scores of institutions. Setting up a stress test could create a more objective set of standards and might also reveal the depths of the industry's problems. Keep in mind the theme that GlobalRiskJobs has been repeating for quite some time: regulation and reporting requirements will just keep getting stronger.

• Geithner will unveil the Obama Adminstration's bank rescue plan later today. He is expected to present a multi-faceted program to encourage financial institutions to lend again. A housing plan centering on mortgage modification and a "bad bank" public-private partnership will also be key areas. Bloomberg has a preview of the 11 am announcement.
  
• Nouriel Roubini had some strong words about regulation in the FT. He states that risk models fail because business lacks discipline to heed them, and thinks Basel II has failed even before being fully implemented.
  
• Also in WSJ, news of an emerging plan calling for issuers of pools of mortages to retain a slice of the securitization in order to keep some "skin in the game". Participants in the annual American Securitization Forum this week in Las Vegas are discussing different ways to buttress the market.
• The new SEC Chief pledged to crack down on fraud as she announced big changes at the commission. The WSJ thinks her central point has got it backward.
  
• Japanese corporate bond risk has risen to all time highs resulting from the pace of economic decline.
• We mentioned credit cards becoming a problem last week. NYT reports that private label cards are already showing signs of strain.
• Chris Hughes has some notes on the global nature of this credit crisis.
• DealBook reports that 8 big bank chief execs will descend on the Capitol via public transportation in order to get their public whipping from Barney Frank and the House Financial Services Committee.