Bloomberg: New Bill takes on TBTFs

[Winehole23]

House Bill Taps Largest Firms to Pay for U.S. Financial Rescues (http://www.bloomberg.com/apps/news?pid=20601087&sid=aK6W08R_IrmU)

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By Robert Schmidt and Rebecca Christie
http://www.bloomberg.com/apps/data?pid=avimage&iid=iEeLRgbQCUXs

Oct. 28 (Bloomberg) -- Banks, hedge funds and other financial firms that hold more than $10 billion in assets would pay to rescue companies whose collapse would shake the financial system under draft legislation crafted by a U.S. House panel.



The House Financial Services Committee measure lays out steps for dealing with the biggest institutions and gives the Federal Reserve power to shrink firms that pose a systemic risk. The [URL="http://financialservices.house.gov/Title_I_discussion_draft_final.pdf"]bill (http://www.bloomberg.com/apps/news?pid=20601087&sid=aK6W08R_IrmU#), released yesterday, is a compromise worked out by the Treasury Department and Chairman Barney Frank (http://search.bloomberg.com/search?q=Barney+Frank&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), a Massachusetts Democrat.



The legislation “is a tough and sound response to too-big- to-fail,” said Michael Barr (http://search.bloomberg.com/search?q=Michael+Barr&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), an assistant Treasury secretary who has helped spearhead the Obama administration’s work to overhaul Wall Street rules. “It spells out the harsh consequences of failure while preserving the government’s ability to prevent a financial meltdown.”



The plan would shift the costs to rescue and unwind firms away from taxpayers who were forced to fund a $700 billion bailout last year after the near collapses of Bear Stearns Cos. and American International Group Inc (http://www.bloomberg.com/apps/quote?ticker=AIG%3AUS). Treasury Secretary Timothy Geithner (http://search.bloomberg.com/search?q=Timothy%0AGeithner&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) is scheduled to testify to the committee tomorrow and endorse the plan.



President Barack Obama (http://search.bloomberg.com/search?q=Barack+Obama&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) in a letter to Frank congratulated the committee for progress made on a “strong package” of financial regulations and urged the lawmaker to press ahead.



“Taxpayers simply must not be put in the position of paying for losses incurred by private institutions,” Obama wrote yesterday. “When major financial firms fail, government must have the ability to dissolve them in an orderly way, with losses absorbed by equity holders and creditors.”



FDIC, Federal Reserve



The measure differs in some ways from Treasury’s proposal issued in June. It gives the Federal Deposit Insurance Corp. more authority to resolve failing firms and it further restricts some of the Fed’s emergency powers. The legislation doesn’t detail which firms would be identified as too-big-to-fail, A similar bill hasn’t been drafted in the Senate.



Frank said yesterday that the $10 billion threshold will exempt smaller community banks (http://www.icba.com/) that wouldn’t trigger systemic risk, while broadening the cost to an array of money management firms.



“The purpose is to go to other institutions as well because they would get the benefits,” Frank told reporters after a committee meeting in Washington.



While banks and other companies were still digesting the legislation last night, the plan is likely to draw more support from the industry than other aspects of the Obama regulatory overhaul, such as the Consumer Financial Protection Agency approved Oct. 22 by the House committee.



‘Potential Failure’



“Potential failure is necessary to ensure truly fair and competitive markets,” said Rob Nichols (http://search.bloomberg.com/search?q=Rob+Nichols&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), president of the Financial Services Forum, a Washington-based trade association of financial services company chief executives. “We need the legal authority and procedural protocol for winding down even the largest, most interconnected, and complex entities.”
Under the bill, the Fed would oversee the biggest financial companies, known as Tier 1, and would hold the most power on a new council of regulators, officials said. The measure gives each major market regulator such as the Fed, FDIC, other bank agencies, the Securities and Exchange Commission and Federal Housing Finance Agency (http://www.fhfa.gov/) a seat on the council and some authority for monitoring systemic risk.



The draft gives the council powers to impose “heightened prudential standards” on financial holding companies deemed a threat to market stability. That determination could be made on a broad range of criteria, including the degree of a company’s reliance on short-term funding.



Shrink Firms



Once the decision to categorize a company this way is made, the Fed would have authority to impose leverage limits and dictate capital and liquidity requirements. The legislation would also give the Fed power to shrink firms, and “require the identified financial holding company to sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms” or to terminate some activity after a notice and an opportunity for a hearing.
“This would be an unprecedented step -- giving the Fed enormous power over the engines of capitalism in this country,” said Joseph Engelhard (http://search.bloomberg.com/search?q=Joseph+Engelhard&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), senior vice president at Capital Alpha Partners in Washington and a former U.S. Treasury deputy assistant secretary. “The power to break-up financial conglomerates is extraordinarily broad authority.”



Federal Reserve Chairman Ben S. Bernanke (http://search.bloomberg.com/search?q=Ben+S.+Bernanke&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said last week that he is open to the debate on whether regulators should restrict the size and scope of the biggest institutions.



‘Economic Value’



“My own initial take on this is that we can address these issues in a way that doesn’t destroy the economic value of large, complex, multifunction firms,” Bernanke said at a Boston Fed conference.



The bill gives the FDIC the power to resolve financial holding companies. The agency would use a new line of credit from the Treasury so it could fund any takedowns. The money would then be paid back by an assessment on “any financial company” with at least $10 billion under management.
The legislation also limits the emergency powers the Fed used during the crisis to bail out AIG and finance $29 billion in troubled Bear Stearns assets to facilitate the broker’s merger with JPMorgan Chase & Co. (http://www.bloomberg.com/apps/quote?ticker=JPM%3AUS)

(http://www.bloomberg.com/apps/quote?ticker=JPM%3AUS)
The measure would require the Fed to get written approval from the Treasury secretary and restricts the use of such powers to “broadly available” credit facilities, while prohibiting loans to specific individuals or companies.

[Winehole23]

The bad news: TBTFs become officially designated, not broken up; failures are paid for by a superfund which all the TBTFs pay into; and the FED gets almost all the regulatory power.

Punt to the shadow government.

[Winehole23]

I liked this part, though:



The bill gives the FDIC the power to resolve financial holding companies. The agency would use a new line of credit from the Treasury so it could fund any takedowns. The money would then be paid back by an assessment on “any financial company” with at least $10 billion under management.

The legislation also limits the emergency powers the Fed used during the crisis to bail out AIG and finance $29 billion in troubled Bear Stearns assets to facilitate the broker’s merger with JPMorgan Chase & Co. (http://www.bloomberg.com/apps/quote?ticker=JPM%3AUS)

(http://www.bloomberg.com/apps/quote?ticker=JPM%3AUS) The measure would require the Fed to get written approval from the Treasury secretary and restricts the use of such powers to “broadly available” credit facilities, while prohibiting loans to specific individuals or companies.

[Winehole23]

Deal Reached on Bank Crackdown (http://online.wsj.com/article/SB125667090769111065.html)

By DAMIAN PALETTA (http://online.wsj.com/search/search_center.html?KEYWORDS=DAMIAN+PALETTA&ARTICLESEARCHQUERY_PARSER=bylineAND)

WASHINGTON -- A deal between the Treasury Department and a key House Democrat would give the government sweeping new powers to police the country's largest financial companies, including the ability to seize and break up failing companies and order large firms to shrink.

A proposal circulated Tuesday by House Financial Services Committee Chairman Barney Frank (D., Mass.) would give the government multiple tools to crack down on companies that could pose a threat to the broader economy, part of an effort by the administration to prevent financial firms from becoming too big to fail.
More



Real Time Econ: Key Parts of the Draft (http://blogs.wsj.com/economics/2009/10/27/key-parts-of-financial-stability-improvement-act/)
Capital: Three Theories on Solving 'Too Big to Fail' (http://online.wsj.com/article/SB125668497563411667.html)
Real Time Econ: Change of Tune on Glass-Steagall (http://blogs.wsj.com/economics/2009/10/27/john-reed-on-glass-steagall-then-now/)



The proposal would require financial firms with more than $10 billion of assets to pay for the unwinding of a collapsed competitor. The measure would also give the Federal Reserve the power to direct any large financial holding company to sell or transfer assets or stop certain activities if the central bank determined there could be a "threat to the safety and soundness of such company or to the financial stability of the United States." This suggests the Fed would win new authority to order companies to shrink.

The proposal faces many hurdles, and it is unclear whether Senate lawmakers will agree to the new language. Centralizing this much power in the Fed could prove controversial, as many lawmakers blame the central bank for not doing more to prevent the financial crisis.

Nonetheless, it represents a milestone for the White House and an advance for President Barack Obama's effort to overhaul banking rules.

In addition, the proposal would set up a council of regulators to monitor potential threats to financial markets, although its powers would be relatively limited. The proposal would abolish the Office of Thrift Supervision, require companies to be liable for a portion of assets they securitize, and allow the Fed to force a financial company into bankruptcy under certain circumstances.

Decades of public policy encouraged firms to grow into financial supermarkets. During the recent financial crisis, the government bailed out several large firms at taxpayer expense, fearing their collapse could sink the economy or financial markets. Policy makers hope the new rules will discourage companies from growing too large and would cushion the blow if they collapse.

A future flashpoint: Which companies will have to pay for the collapse of one of their competitors? Initially, the costs of safely unwinding a failing firm would be borne by the Federal Deposit Insurance Corp., based on borrowing from the Treasury Department. But under the proposal, the FDIC would seek to recoup the money from banks with more than $10 billion of assets -- a category that includes roughly 120 U.S. banks. The FDIC would likely be able to also recoup money from broker dealers, insurers and possibly even hedge funds.

Robert Bench, a senior fellow at Boston University School of Law, said it could prove difficult to hit financial companies for funding during a financial crisis. "You are going to be going after the industry at a time when they may not have the money," said Mr. Bench, a former federal bank regulator.

The draft legislation Mr. Frank presented Tuesday aims to address what the Obama administration says are regulatory failings exposed by the crisis -- in particular, the lack of legal authority for the administration to take over a large, failing financial institution such as Lehman Brothers, which went bankrupt in September 2008.

Treasury Secretary Timothy Geithner and others have called for such authority since last year, but the idea has been opposed by some lawmakers on both sides of the aisle, who see it as entrenching the idea that some companies are too big to fail.

"Based upon what I've heard [Rep. Frank] say in the past, I'm still fearful that the plan will de facto designate certain firms as being systemically risky, which is a precursor to a taxpayer bailout," said Rep. Jeb Hensarling, a Texas Republican.

Rep. Brad Sherman (D., Calif.) said he also had reservations about Rep. Frank's proposal. Essentially, he said, the proposal says, "'We may be borrowing $1 trillion or more from the Treasury and using that to bail out the creditors and counterparties, and then somehow, some way -- perhaps over the next year or century or three centuries -- maybe we'll get that money back from the financial-services industry.'"

Mr. Geithner is scheduled to testify on the proposal Thursday.

Separately, the House Financial Services Committee voted 67-1 to pass a bill that would for the first time require advisers of hedge funds and certain other private pools of capital to register with the Securities and Exchange Commission. The committee approved an amendment setting the threshold for registration relatively high -- at $150 million in managed assets, compared with the administration's recommendation of $30 million.

[DarkReign]

Why is this so damn difficult?

There should be no such thing as TBTF, period. Ever, for any reason.

The country's financial health should not be under the care of private citizens with international investors of all colors interested only in their bottom lines.

Yet, this is the answer? A new tool of incredible power bestowed upon a non-government agency like the Federal Reserve (if I am reading that right)?

This is the problem with compromise. Some people seem to think compromise is a good thing....it certainly is when it comes to familial relationships. Not so much in financial or political circles in some cases (not all).

[DarkReign]

Seriously, what fucking planet am I on? Has everyone lost their goddamn mind?

All this paranoia hinges on my understanding that the FedReserve has (proposed) brand new powers.

[Winehole23]

Yep. Plus officially designated TBTFs.

[boutons_deux]

WEDNESDAY 28 OCTOBER 2009
Too Big to Fail: Why the Big Banks Should Be Broken Up, but Why the White House and Congress Don't Want to

Sunday 25 October 2009

by: Robert Reich | Robert Reich's Blog


And now there are five - five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called"talent," and raking in huge profits. The biggest difference between now and last October is these biggies didn't know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who's just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can't say no, the biggies will drive even faster now, taking even bigger risks.

What to do? Two ideas are floating around Washington, but only one is supported by the Treasury and the White House. Unfortunately, it's the wrong one.

The right idea is to break up the giant banks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big." Greenspan noted that the government broke up Standard Oil in 1911, and what happened? "The individual parts became more valuable than the whole. Maybe that's what we need to do." (Historic footnote: Had Greenspan not supported in 1999 Congress's repeal of the Glass Stagall Act, which separated investment from commercial banking, we wouldn't be in the soup we're in to begin with.)

Former Fed Chair Paul Volcker, whose only problem is he's much too tall, last week told the New York Times he'd like to see the restoration of the Glass-Steagall Act provisions that would separate the financial giants' deposit-taking activities from their investment and trading businesses. If this separation went into effect, JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. And Goldman Sachs could no longer be a bank holding company.

But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the "too big to fail" problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.

There should be an orderly process for putting big failing banks out of business. But this isn't nearly enough. By the time a truly big bank gets into trouble - one that poses a "systemic risk" to the entire economy - it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks techniques. And the pending failure will already have rocked the entire financial sector.

Worse yet, the Administration's plan gives the big failing bank an escape hatch: The receiver might decide that the bank doesn't need to go out of business after all - that all it needs is some government money to tide it over until the crisis passes. So the Treasury would also have the authority to provide the bank with financial assistance in the form of loans or guarantees. In other words, back to bailout. (Historical footnote: Summers and Geithner, along with Bob Rubin, while at Treasury in 1999, joined Greenspan in urging Congress to repeal Glass-Steagall. The four of them - Greenspan, Summers, Rubin and Geithner also refused to regulate derivatives, and pushed Congress to stop the Commodity Futures Trading Corporation from doing so.)

Congress is cooking up a variation on the "resolution" idea that would give the Federal Deposit Insurance Corporation authority to trigger and handle the winding-down of big banks in trouble, without Treasury involvement, and without an escape hatch.

Needless to say, Wall Street favors the Administration's approach - which is why the Administration chose it to begin with. If I were less charitable I'd say Geithner and Summers continue to bend over bankwards to make Wall Street happy, and in doing so continue to risk the credibility of the President, as well as the long-term financial stability of the system.

Wall Street could live with the slightly less delectable variation that Congress is coming up with. But Congress won't go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street's lobbyists and lackeys are all over Capitol Hill.

The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up - and soon.

[boutons_deux]

don't worry about the Fed.

Even with more police power, I've read that the Fed is absolutely not interested in policing and enforcement.

TBTF is effectively TBTC Too Big Too Control

[Winehole23]

If the draft legislation passes as written (which it may not), you and me still pay for the failures of the TBTFs if the bondholders and shareholders and counterparties cannot. Then their TBTF competitors pay us back on the installment plan.

Sucks for us, sucks for the survivors.

Plus, just try to take it from them during the financial fracaso.

[Winehole23]

Not gonna happen.