House Could Vote Friday on Financial Overhaul

The bigger they come, they harder they.....get hit? The giant banks could be the biggest losers in Congress' efforts to overhaul financial regulation. A populist groundswell in the majority Democrat House of Representatives has led to the addition of amendments that are unfriendly to the largest financial institutions. The bill seems to be going way beyond what the White House envisioned when it sent its proposal to Congress last June. The House bill contains much of what the White Hose wanted: powers to take over/break up large companies, new consumer protection rules, tougher regulation of derivatives, executive pay limits. The Senate bill differs considerably, so real change may not be imminent.

Some of the highlights aimed at policing the Big Banks:

• Regulators would be able to block healthy banks from certain practices or mergers, and even order a bank to shrink if it posed systemic risk.
• Financial companies with more than $50B of assets wold have to pay into a $150B fund to deal with future collapses of large financial institutions.
• The government would be able to order certain large banks to split off their commercial bank from their investment bank if regulators are concerned.
• Large banks would have to submit to consumer compliance exams from a new Federal Agency, while many small banks would be exempt.
  

What to do about 'Regulator Shopping'?

Thursday's NY Times has an editorial on "regulator shopping", investigating its role in the current financial crisis. The piece laments the fact that banks and finance companies were allowed to choose their own regulator and seemed to switch at will in order to find the most lax or favorable overseer. The editorial really takes issue with the "optional federal charter" proposal to regulate the insurance industry which would would allow insurance companies to switch to federal regulation if they had issues with state oversight (the current environment) in the future. There has been much outcry about regulator shopping and how it may have played one body off another in contributing to the crisis. So, if the Obama administration and Congress are serious about simplifying and streamlining financial product regulation and consumer protection, this would be a good time to step up.

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• William Poole examines "too big to fail" in the FT. He ponders whether bankers would rather face the discipline of subordinated debt or much heavier regulation from Washington.
• Is LIBOR signaling that risk in the banking system has abated? Michael Mackenzie explores the issue but still finds dislocation in some areas.
• S&P's threat to downgrade the UK from AAA upset the markets on Thursday.
  

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.

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