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Speed Read: Tim Geithner and Larry Summers Preview the Summer's Hottest Regulatory Initiative!

PH2009061400912.jpgMy colleagues over on the editorial page had a nice coup today as Timothy Geithner and Larry Summers published a co-bylined op-ed previewing their coming financial regulation proposal. This is the sort of thing worth reading in full, but the quick version is that the administration is proceeding from five regulatory principles:

First, they say that the existing regulatory system was focused on the dangers to individual firms, while the new regulatory system will have to focus on the dangers to the system as a whole. The nightmare scenario, in other words, is not Lehman collapsing, but Lehman collapsing and bring the rest of Wall Street down with it. The administration plans to raise "capital and liquidity requirements for all institutions, with more stringent requirements for the largest and most interconnected firms." Oversight of large firms will fall to the Federal Reserve, and oversight of the risk posed to the whole system will go to a new regulatory council.

Second, the financial system has shifted away from traditional activities, like tending to my savings account, and towards newer products, like securitized loans. The administration plans to ... well ... it's not really clear. Derivatives contracts will be subject to regulation, but what kind of regulation, and by whom? We'll know more tomorrow, presumably.

Third, the administration thinks that consumer protections have not kept pace with financial innovation. The recent history of subprime mortgages, credit cards, annuities and much else suggest that financial companies have figured out how to overwhelm individuals. "The administration will offer a stronger framework for consumer and investor protection across the board." When I find out what that means, I'll let you know. (Worrying, Simon Johnson thinks it means that they're backing away from the Financial Products Safety Commission that Elizabeth Warren previously proposed. That would be a shame.)

Fourth, the government needs the legal authority and internal capacity to "resolve" -- that is to say, nationalize or otherwise take control of -- failing firms. That would end the era in which "the government is ... forced to choose between bailouts and financial collapse." Seems wise.

Fifth, the administration will "lead the effort to improve regulation and supervision around the world." If they say so, I guess.

So where are we? Sadly, it's still a devil-in-the-details sort of situation. I think most observers would agree that these are the correct regulatory principles. The question is how seriously the government takes them. Do we get an actual agency meant to protect consumers from financial chicanery, or just a couple of limp new rules? Are the capital requirements for large firms suitably stringent? And how aggressively do they increase as the size of a firm rises? How exactly do we plan to "reduce investors' and regulators' reliance on credit-rating agencies?"

In theory, we'll find all this out tomorrow, when Geithner gives his big speech. But this at least sets up a situation in which everyone is arguing over how to achieve the same goals. The question is less what we're trying to do then how we're planning to go about doing it.

Photo credit: AP Photo/Susan Walsh)

By Ezra Klein  |  June 15, 2009; 11:38 AM ET
Categories:  Financial Crisis , Financial Regulation , Solutions  
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I thought this op-ed was interesting, timely, and common-sensical. I far preferred this broad and limited outline to what the GOP put out last week. My hope is that the GOP comes around to the need to strengthen financial regulation for non-banks.

That said, I still hope that we use this opportunity to escew much of the Depression-era securities law that has no relevance today. Purchasers of RICs no longer need to be reminded that they might lose some money if they purchase them.

Posted by: Dellis2 | June 15, 2009 12:47 PM | Report abuse

You're right, it all sounds good but the devil is in the details. Specifically:

1) Why are they trying to consolidate bank regulation under the Federal Reserve, when historically that has been the least vigorous, most crony-ist regulator out there?
2) Will derivatives regulations be limited to simple disclosure requirements, and will there be a loophole for "custom" derivatives? If so, the whole process is basically meaningless.
3) What exactly will these consumer and investor protections be? Something beyond mandatory but non-binding shareholder votes on issues like CEO pay, I hope.

Posted by: csdiego | June 15, 2009 1:04 PM | Report abuse

Start my remarks by first the securitization of receivables.
Securitization is the sale of assets or property of a company be technically originator, through the issuance and placement of bonds.
The credit is sold to third parties, and reimbursement should guarantee the repayment of principal and coupon interest indicated the obligation. If your credit is bad, people who buy securitized securities loses the interest that is paid-in capital.
For most goods sold consist of receivables, however, may be real estate, derivatives or otherwise. Goods are sold to companies-vehicle and divided into classes according to the rating (AAA, AA, BBB, BB etc. .. until the shareholding), with a credit rating that is lower because the higher the level of subordination in return bond debt.

Risk on derivatives:
In finance, a derivative instrument is considered under any contract or a price based on market value of other assets (stocks, indices, currencies, rates, etc..). Derivatives have only recently reached an enormous spread worldwide thanks to globalization of markets and the simultaneous introduction of computers to calculate prices in sometimes complex relationship between them. There are structured products for every need and based on any variable, even the amount of snow fall in a given area. The main uses are: arbitrage, hedging and speculation (called hedging).
The variables underlying the derivative securities are those underlying assets and can have different nature and can be a, a, an index, a commodity like oil or even another derivative.
Derivatives are the subject of bargaining in many markets but especially all'over the counter, alternative markets to the stock exchanges themselves are created by financial institutions and professionals through telephone networks. These markets are usually not regulated.
I feel so absolutely necessary regulatory International:
First, the brokers are required to provide customers with adequate information so that they are reasonably able to understand the nature and risks of the investment service and of the specific type of financial instrument and therefore offered to take investment decisions by providing the necessary information. Such information shall include among other financial instruments and proposed investment strategies (including warnings about the risks associated with investments in such instruments or certain investment strategies) and the costs and associated costs.
Secondly, depending on the investment service provided (such as investment advice, execution of orders) the banks and investment firms are required to assess the appropriateness and adequacy of financial instruments according to of certain personal characteristics of the customer.
Third, when brokers execute client orders or acting on behalf of clients must comply with the obligation to pursue the best possible result.
In addition, financial derivatives instruments are considered complex, so some standards consider their specific characteristics. Specific requirements regarding the classification of customers, the vast majority of which is classified as "retail clients" and is entitled to enjoy all rights under the Directive. Customers are entitled to ask the banks and investment firms a different classification. More specifically, some retail customers and in particular small businesses have the opportunity to be classified as professional clients. However, since this involves the application of a less protective regime, the procedure and assessment for reclassification as a professional client should be strict. In the case of small businesses, an exception is considered valid if the investment firms adequately evaluate the experience and knowledge of the customer, given the nature of the operations or services concerned.
For now, considering my long, I do not want to tire the reader, I remain at your disposal.
Domenico Gori

Posted by: domenicogori | June 15, 2009 2:50 PM | Report abuse

WHY under the Fed..., you ought not need to ask.

They were "employees" under the Fed. They participated in the Fed's and USTreasury's efforts to cover IT all up, as in save their own, and their "friends", bacon.

While the "Separation of Powers" was the foundation of U.S., what economic and financial interests have learned is that the inter-twining, not the merger, and absolutely not the separation, of power..., is "The Way" to gain/use/preserve their power.

As Seth & Amy would ask of U.S.: "Oh, Really?

Leaving the Faux Foxes, & Business Newsies (which includes, does it not, CNBC), in charge of the hen house regulation of THEIR Banking System...?

Why, in God's name, would they want U.S. to have any control over them?
{that is not, exactly, a question}

Posted by: JGBellHimself | June 15, 2009 11:49 PM | Report abuse

Continuing with my work.
Credit Cards:
We know the credit card provision for expenditure to the customer before it is paid or other remuneration provided to the current account, because the currency debit is usually the end of this month.
The risk is that the customer spends more 'of funding available in the block of the current account and the block party Amex-Visa-Master Card and so on.
The alternatives could be two.
The microchip in the card, through which the banking system recognizes the effective capacity of the current account and thus inhibit, excessive costs (but in this case there could be a violation of privacy) or the best alternative, in my opinion , remain the pre-paid credit cards.
Non-Revolving Cards, but real credit card where before the money is paid.
The advantages of the second solution is tied to the fact that the risk to the company issuers of credit cards would be zeroed, and the risk of the bank.
Also, the advantage would be for the client, as spend according to his ability to income.
Of course this is a general principle.
Indeed, the score should be assessed according to a rating proportional to its financial capabilities.
Domenico Gori

Posted by: domenicogori | June 18, 2009 9:46 AM | Report abuse

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