Wednesday, September 16, 2009

Rein In Risk? Clone AC the AG!

On the one year anniversary of the Lehman collapse, President Obama called on Wall Street to help him rein in risk and pass major financial regulatory reform legislation.
You almost could hear someone say, “Hey Mr. President, can I sell you a bridge and some land in Florida?”
The President’s not that na├»ve. He knows that he has to go through the motions and make a call for help to many of those who caused the very financial problems from which his Administration, the nation, and the world still are trying to extricate themselves.
Ask Wall Street not to take risks? That’s like asking the American public to stop driving, eating fatty, salty foods and drinking beer and soda.
Wall Street lives on risk and makes beaucoup bucks channeling and charging to manage that risk, sometimes failing dramatically. But that won’t stop them.

“The greater the risk the greater the reward” probably wasn't coined in Sunday school.

It’s understandable in the aftermath of what has happened financially to want to “reduce risk,” but some caution here.
Our country wasn’t founded nor developed by those afraid of risks. The risk takers managed and overcame the risks.
We need edgy entrepreneurs on Wall Street, Main Street, and any other street because innovation and creativity drive our nation’s businesses and the “business of the United States” should be business.

The federal government’s role to that dynamic is to regulate those risks, which it failed to do under President Bush and has yet to do under President Obama.

Recently the New York Times wrote about several major Wall Street firms exploring for creative ways to “monetize” the returns from death benefit insurance policies by buying them early from policy holders-- before the latter-- then securitizing them and selling them to investors.

Atta way Wall Street, no risk there!! What happens when our healthcare system works and all of those 70 year olds begin to living until they are 90 and those bonds don’t pay because Gram and Grampa haven’t croaked!!

Well, those issuing companies lose money, i.e. the market works!!

But I see nothing wrong with those companies—many of which wouldn’t self identify for the Times--investigating this new form of “securitizing receivables.”
The federal government’s response, whether a business wants to securitize mortgages, furniture or computer receivables, automobile and student loans, or life insurance payoffs should be stronger and better regulators, not banning the initiatives because of perceived risk.

Measure the risk, insure against it—both financially and socially—and then let the market work. Penalize those miscreants who break the law or violate the regulation.
I could argue that the President’s entire new regulatory regime is unnecessary, save a few small pieces, if he could find enough quality people to run the financial regulatory agencies now in place.
Calling on Wall Street to help “reg reform” is necessary PR, as will be the “Street’s” assurance to Obama that it will look objectively at all of the risk reduction proposals. (Gag, yak!!)

The President needs to get his own appointees to agree on his reg reform proposals, before he gets Wall Street to pick and choose new regulatory poisons.

The Fed, shilling for the big banks and “too big to fail” crowd, wants one thing. Shelia Bair, shilling for the small banks, wants something else. The Comptroller of the Currency, a Bush carryover appointment (John Dugan, a neighbor and a friend) argues a third thing. The SEC wants Wall Street securities action largely for itself. And Treasury doesn’t want to lose turf or standing to any of them.

The industry groups line up behind whichever government official gives their crowd the best seat at the table and then they go to their "friendlies” on the two financial services committees and buy most of those splintered votes, which is why omnibus regulation is always so tough to achieve.

Tougher and meaner regulators—with slightly enhanced powers—would be a better deal for the American public than a protracted show in the House Financial Services and Senate Banking Committees on these “fixing” issues, which have been around for years.

I may lose a lot of my friends with this next statement, but the type of federal regulator I have in mind……are individuals like Andrew Cuomo, New York’s Attorney General.

Now, I have made fun of Andrew for some time because of his incredibly large ego and his naked political ambition (not naked like his predecessor, though, thank God).
Cuomo’s press operation is next to none and if there was a market for it in the New York media, I am sure that his staff would put out a regular “The AG’s Bodily Function Reports.”

But whether he is running for Governor or President (King?), down the road, Cuomo has scared the hell out of the financial services industry and forced them to toe several lines he’s drawn. The public likes that about him.

There are various Obama regulators who could have taken the same tack and could have produced some of the same pro-public results, but they didn’t.

Cuomo’s record may be self serving, but it is a good "stand up to the financial powers" record. His actions have not been unlike my advice to the Obama Fed and Treasury appointees. Take a few prominent industry heads and bang them together or chop them off. They will notice it and so will their peers.

New regulatory schemes can be intellectually enticing, but until that happens, I am rooting for a few “Andrew Cuomo financial regulatory clones” to make federal financial regulation fearsome and respected not diluted and benign.

Maloni 9-16-2009


John M said...

In your first sentence, that would be "rein in", I believe.

What you've got parses fine, but I don't think it's what you meant ;-)

Interesting thoughts. Bringing law and order to the financial system is not going to be easy.

... and by the way, that slogan does come out of Sunday School, it's The Great Commission.

Bill Maloni said...

I meant to write "rain," :-).

You think writing effective legislation, especilaly in the House Financial services Committee, is a day at the beach?

I put the "Sunday school" comment in their just for you, knowing you knew the truth!!

John M said...

The truth can be a pain in the *$*#&

Check out my recent post " UBS & CDO Sales: Early Warning". The confounded lawyers are haggling over whether the bank's sales staff knew that Moody's had doubts about their bonds, when months earlier I'd blogged about one of their researchers who was expressing grave doubts on a video freely available on the web.

Looks like there are some things folks just don't want to know.

Bill Maloni said...

"Fire bad," is one response when you find your own hosue burning down.

It's not very effective, but it's a response!!

The Progressive Pragmatist said...

Gosh, it pains me to see any support for the embarrassingly self-serving egomania of Andrew Cuomo, but I understand your point.

P.S. Although not directly related to this post, here's a link to one of the best analyses on the future of the functions of the housing GSEs:

The Progressive Pragmatist said...

Full link:

John M said...

Prog Prag,

I agree wholeheartedly, indeed for all that my sympathies tend to lie in a somewhat different direction, I must say that article is perhaps the best-written piece that's come out of our blogging sector since Doris Dungey passed away.

To summarize, it's a very detailed technical defense of the market functions of Fannie and Freddie against the "career GSE-foes" I've been lately promoting (by writing out 9-yard long transcripts of their key seminars).

"VIEWPOINT: The Wrong Way to Think About the Fate of the GSEs", by Linda Lowell, HousingWire, September 17, 2009.

Bill Maloni said...

Thanks "PP" and John.

Bill Maloni said...

I wanted to add one more comment for those who care (and it might scare them). Just as she s Lowell found the GAO report empty, stodgy, and filled with old positions, you could count on one hand (and have a finger or two left over) the number of elected officials or staff on Capitol Hill who understand the TBA market or the mortgage securities market in general.

Yet that's who will have the pen when,
legislatively, they start rearranging the market players and structures.

John M said...


As you can see from this August 28th Doom post I've been worried about aspects of TBA for a long time.

I think it's particularly nasty that SIFMA blessed Re-remics going into TBA just before the Fed started gorging on agencies. I suspect that by now Ben and Timmie have secretly gotten themselves into such a tangle trying to avoid declaring an explicit guarantee on conforming MBS that they have no idea what to do next.

There's actually very little we agree on in this area, but I think I can name one thing where we have the same opinion -- the Fed will never evolve into a competent mortgage servicing shop ;-)

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