Senate Passes Ant-Fraud Measure

In a 92-4 vote, the U.S. Senate passed legislation giving the government more power to prosecute mortgage and financial fraud. The legislation would also create a commission to investigate the causes of the economic crisis. Some highlights:

• makes it easier to prosecute fraud in commodities futures trading - including options and debt derivatives.
• Authorizes $265 million over the next 2 years to hire more than 600 lawyers and investigators at justice department, SEC and other federal agencies.
• Extends anti-fraud law to cover private mortgage brokers and TARP recipients
• Examines the role of credit rating agencies.
  
• Creates a Senate committee to conduct its own investigation of the financial crisis.
  

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.

Regulators shift gears to focus on loan quality

As bank stress tests for "The 19" evolve, regulators are increasingly focused on loan quality, given the big disparity they are finding in underwriting standards at the banks. Subsequent to their initial due diligence, the feds have determined that lending practices have to be given at least as much weight as macro-economic scenarios in determining individual bank health. This is an important development because it makes it easier to separate vulnerabilities caused by bad management from those caused by factors beyond management's control. This criteria gives Geithner more leverage to make management changes at any banks coming back for more TARP cash.

G-20 moves forward on regulatory framework

The new era of finance is now dawning in earnest. Word from the G-20 meetings in London is that world leaders have agreed on a regulatory framework for countering excesses that led to the current global financial crisis. In particular, the group called for stricter limits on hedge funds, executive pay, credit-rating agencies and bank risk-taking. In addition, they pledged more than $1T in emergency aid to assist with collateral damage from the crisis. While countries will mainly be left to regulate their own markets and companies, the G-20 recognized a need for some global oversight by establishing a new Financial Stability Board to promote regulator cooperation and work with the IMF. Hedge funds defined as "systemically important" will be subjected to greater regulation and oversight. Pay and bonuses will be examined to create "sustainable compensation schemes". Accountants will need to improve valuation methods and creit rating agencies will need to meet a new code of standards.

Meanwhile, focusing back on the US, KC Fed President Thomas Hoenig endorsed the notion of the Federal Reserve becoming the regulator for systemic risk in US finance. In Geithner's recent proposal, such a systemic-risk regulator would have the authority to compel companies to boost their capital and curtail borrowing, as well as to seize companies get into trouble.

The Financial Stability Forum agreed to move towards creating stricter capital requirements for banks around the world, reversing their prior view of giving financial institutions more flexibilty in how they calculate reserves.

Ron Resnick, co-founder of financial consulting firm CounselWorks has an interesting piece on his views about government assumptions in the regulation of financial firms. He questions Treasury's new supervisory and regulatory foundation based upon the concept of "systemically important firms".

Summers: AIG Proves Regulatory Regime is Unsatisfactory

Get ready for a new front to open in the compensation wars. Last week, Reuters reported that Citigroup is writing bonus guarantees to attract traders in London. And once again, A.I.G. is at the center of the bonus battle with news that it will be making good on $165mm of bonus guarantees. The disclosure has, predictably, touched off a firestorm in the court of public opinion, with White House economist Larry Summers firing the first shot on CBS' Face the Nation Sunday. Yes, there is something outrageous about the poster-child for the credit crisis taking $170B of public funds to stay afloat and then paying out big incentive money to employees. But, what can be done? A.I.G. is in a unique position, to say the least. The government, concerned about systemic risk and the devastating market consequences of allowing the company to fail, feels like it must prop up the giant insurer. A.I.G. seems to understand this and, rather than deal with legal challenges to employment contracts, has decided to honor those deals. But let's think of it from an employees perspective. Let's turn back the clock to January 2008. You are a credit default swap salesman. Your space is one of the few seemingly robust parts of the credit market, and there is a healthy bid for your services. You are happy at Broker X, but AIG comes calling and blows you away with an offer. Of course, as is convention in the finance world, you aren't going anywhere without guaranteed money for, let's say two years. Why do you hod out for this? Well, you just never know what can happen, markets turn, bosses leave, things happen, and this is maybe that chance to have a some security for a couple of years. Now it is March 2009 and the world is an entirely different place. The move to A.I.G. was a big stinker, but you were smart to negotiate that guarantee because you are protected. God thing you paid that compensation lawyer big bucks to make sure it was all kosher. Management can come and ask you to take a decrease or defer some money, but why would you do that for a firm that may not be around next month, let alone next year? That's the way it works (worked?) on Wall Street. Are these contracts indeed bulletproof? Should A.I.G. and the government spend time, money and energy renegotiating these contracts? The answer is likely "no". But, what the government will do is add this situation as one more arrow in its regulatory reform quiver. By expressing outrage, the court of public opinion will tend to fall on the government's side, and if you look closely at Summer's remarks yesterday, he said "What the lesson is, is this: We don't really have a satisfactory regulatory regime in place." The drumbeat is continuing in the march toward a dramatic overhaul of the financial regulatory system. The regulatory reform train is finally starting to pickup speed. The Obama plans key points were revealed this morning, and they center around the Federal Reserve getting new powers to monitor and address broad risks across the economy. Also proposed are Changes to bank oversight, more transparency for inter-bank money flows, tougher capital requirements for big banks, and a consolidation of consumer protection enforcement.

The links:

• More bad PR for A.I.G. As if news that it paid guaranteed bonuses wasn't enough to keep the spin-doctors busy, the list of its counterparties that were streamed payments after bailout funds were received is out.
• A great profile of Thain's hubris by Greg Farrell and Henny Sender in the FT Weekend.
• Unhappy Anniversary Bear Stearns; it's hard to believe it's been a year since the powder-keg of Wall Street exploded. WSJ's James Freeman says there is still a lot we haven't figured out since then.
• The WSJ's Real Time Economics blog has a view on what to do first in avoiding another financial calamity.
• Paul Krugman says Europe's financial crisis could be way deeper than that of the U.S.
• Roubini says beware of the dead-cat bounce.
• The G-20 is split on hedge fund regulation.
  

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.

More on "Hire American"

The WSJ has a couple of good op-ed pieces continuing the debate about TARP and H1-B. The "Employ American Workers Act" (EAWA) which was folded into the stimulus bill is the culprit here. The Amendment was sponsored by Senators Grassley (R-IA) and Sanders (I-VT) and designed to prevent TARP fund recipients from hiring foreign workers if they laid off Americans recently. In "Turning Away Talent", the WSJ editors set the record straight on some misconceptions about H1-B statistics. They also warn that the U.S. will just drive much of the best talent away to, yup, foreign banks. Also in the WSJ, a trio of Dartmouth professors says that it is a terrible time to be rejecting skilled workers. They warn against such protectionist thinking in a global economy, but ask the more fundamental question, don't we want the best and the brightest fixing this mess, regardless of where they come from?