Battle joined on consumer financial protection agency

The Obama regulatory plan has now been percolating through the financial world for two weeks, and the reaction has been mixed. Predictably, banks and mortgage lenders are placing top priority on killing the proposal to create the so-called Financial Products Safety Commission. The banks and their lobbyists are bracing for a big fight, unhappy with the extension of powers being discussed for the new regulator. The proposal delivered to Congress calls for stripping away all the consumer responsibilities that are currently assigned to existing regulators like the Fed, FDIC and OCC. Among the powers being discussed, the new agency could set standards for traditional mortgages and could restrict or prohibit certain types of mortgages.

Links:

• The collateral damage from lawmakers releasing confidential Federal Reserve emails could be a less open regulatory process as banks and regulators may share less information with eachother.
• The Supreme Court decided with New York 5-4 in Cuomo v. Clearing House Association. The decision affirms that New York's AG could demand mortgage data from federally chartered banks to seek evidence of discrimination under the state's fair lending laws.
• Morgan Stanley pulled in its risk-taking in 2009, and it's now seeing the downside of that strategy.
• There is some grumbling about the selection process for the job of Head of the NY Fed.
• The FDIC is seeking limits on the ability of private equity firms to buy up failed banks.
• Sometimes it's better to be lucky than it is to be good....
  

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.

Bank of America names Greg Curl CRO

Bank of America today replaced Chief Risk Officer Amy Woods Brinkley with Gregory Curl, a 31-year veteran of the Charlotte-based financial services giant. Curl most recently was global corporate strategic development and planning executive. He has been a key insider who has helped transform BofA from a regional bank to a global powerhouse. He had key roles in NationsBank's purchases of Bank of America (1998), Countrywide (2007), and Merrill Lynch (2008). Curl joined the NationsBank family when he was serving as vice chairman and COO of Boatmen's Bancshares which Nations acquired in 1996.

Brinkley, 53, has decided to retire, with the official line from BofA being that Ken Lewis and Brinkley "mutually decided that we needed a different approach to our risk management and it was a good time to change leadership." Brinkley has been a regular in lists of influential woman executives, and had made steady progression through the senior ranks at BofA. Brinkley joined NCNB in 1978 as a mangement trainee in the commercial credit department. She graduated Phi Beta Kappa from University of North Carolina at Chapel Hill.

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.
  

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.
  

Is Warren's Financial Product Safety Commission on Tap?

The Washington Post reports that the Obama Administration is actively discussing the creation of a regulatory commission that would have broad authority to protect consumers who use financial products as varied as mortgages, credit cards and mutual funds. The move would require legislation, and would centralize regulatory authority that is currently spread among a group of federal agencies. The proposal is sure to be opposed by financial services industry groups who will continue to argue that such regulation will crimp access to such financial products. Additionally, such a move could intensify political wrangling among existing regulators like the OCC, Fed and SEC as they battle to hold onto legacy powers.

The idea is believed to have sprung from a plan proposed by Harvard Law professor Elizabeth Warren, who now chairs the Congressional Oversight Panel for the US Government's financial rescue initiative. Warren wrote in a 2007 article in the journal Democracy called "Unsafe at Any Rate" that the government had failed to protect American consumers in their relationships with financial companies and that it was now time for a Financial Product Safety Commission.
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The Links:

• WSJ's Gordon Crovitz says that Geithner's focus on disclosure over regulation when it comes to derivatives constitutes smart reform.
• The FT says that the derivatives industry is girding for battle.
• Gillian Tett, author of "Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan was Corrupted by Wall Street Greed and Unleashed a Catastrophe" is out promoting her book. She thinks she has a sense of what Main Street thinks of Wall Street.
• Jamie Dimon speaks out about rules preventing US banks from hiring foreigners.

Please sir, I want some more (regulation)...

"We are looking at a world where the fist of government will be stronger than the invisible hand of the market"

--Mohamed El-Erian, Chief Executive Officer of PIMCO, 5/19/09

In El-Erian's May Outlook piece, he envisions a banking system that is a shadow of its former self. Regulation will be more expansive in form and reach, and the sector will be "de-risked, de-levered, and subject to greater burden sharing. The forces of consolidation and shrinkage will spread beyond banks, impacting a host of non-bank financial institutions as well as the investment management industry".

At GlobalRiskJobs and GlobalComplianceJobs, we can't help but nod in agreement when we hear things like this. We have been anticipating such an environment as the pound of flesh to be exacted in the wake of the Great Meltdown, and when high profile investors like El-Erian go on record with such comments, it sends the signal that the government is a long way from backing down from intnsifying the regulatory environment. Thus far, it seems there has been much talk and little action on the "new normal" that has been talked about. It appears that many banks, asset managers, and other finance companies are engaged in a game of personnel "chicken". They seem to know in their hearts that a new regime is coming that will require new bodies; professionals with the expertise and experience to help them comply with new legal and risk reporting requirements that will certainly be part of the this new environment. But, the overall trend appears to be one of wait and see. When are the requirements going to come? June? August? October? Why not hold out until the last minute and hire when the government imposed deadline is looming? Well, there are lots of reasons not to do that, first and foremost being the tone of the employment environment. When the deadline is looming, how many others will be in the same boat? Lots. And a basic understanding of supply and demand would tell one that when the talent market tightens one pays a lot more for that talent. Look no further than Sarbanes-Oxley for Exhibit A from the recent past. And, guess what else becomes a real issue? Retention of existing employees. Because, when there is a bid out there in the market and the phones start ringing it will make everyone wearing a risk or compliance hat a more valuable commodity.

The links:

• A new credit card reform bill was passed by the Senate and is on its way to President Obama.
• The Federal Reserve will include legacy assets for the first time in a $1 trillion program to revive credit markets, expanding the effort to commercial real estate securities issued before the start of this year.
• NY governor Andrew Cuomo sued two debt settlement firms for deceiving consumers and false advertising.
• Treasury Secretary Geithner said the government should not impose caps on executive pay.
• New fees proposed by the FDIC would hit big banks harder than small ones.
• The FT weighs in on Geithner's plans to regulate the derivatives markets.