Category: regulation

Another Day, Another Obama Administration Capitulation

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Yep, this time it’s the CFPA:

The Obama administration is no longer insisting on the creation of a stand-alone consumer protection agency as a central element of the plan to remake regulation of the financial system.

In hopes of quick congressional approval of a reform bill, White House officials are opening the door to compromise with lawmakers concerned about creating a new bureaucracy, according to congressional and some administration sources.

President Obama’s economic team is now open to housing the consumer regulator inside another agency, such as the Treasury Department, though they still prefer a stand-alone agency. In either case, they are insisting on a regulator with political autonomy and real teeth so it can effectively enforce rules designed to protect consumers of mortgages, credit cards and other financial products.

(emphasis mine)

Let’s be clear on this: No one has any concern about a new bureaucracy. The banks want impunity to screw consumers, and members of Congress who want campaign donations from Wall Street, and White House officials completely captured by the finance industry, **cough** Geithner and Summers **cough**, are more than willing to do this.

If the CFPA is not independent, which means that they have the ability to craft their own budget, they will be subject to the tender mercies of someone like Timothy “Eddie Haskell” Geithner or Hank “Why the f%$# isn’t he in Jail” Paulson, and so will be largely ineffective.

SEC Adds Restrictions to Short Sales

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It’s pretty weak tea compared to the uptick rule, but it’s better than nothing:

The U.S. Securities and Exchange Commission curbed some bearish stock bets, ending a yearlong debate between individual investors and Wall Street with a solution that fails to satisfy anyone.

SEC commissioners voted 3-2 today to restrict short sales of a company’s stock once it falls 10 percent from the previous day’s closing price. When the 10 percent threshold is triggered, traders could only execute short sales for the stock at a price above the market’s best bid. The curb would be in place through the following day.

General Electric Co., Charles Schwab Corp. and more than 5,600 people who signed a petition sent to the SEC wanted a short-selling restriction that was always in effect, similar to the so-called uptick rule the agency abolished in 2007. Goldman Sachs Group Inc. and hedge funds Citadel Investment Group LLC and D.E. Shaw & Co. lobbied against a limit.

You only need to know who was for it, and who was against it, and go against the Vampire Squid.

Short selling has a role, but there needs to be a balance between what ever “price discovery” function it has, and the ability that it gives for people to create wild swings in prices for speculation.

Economics Update

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Well, Ben Bernanke went before Congress, and said that there needs to be an extended period of low rates to ensure that the recovery.

Of course, in terms of real estate, the question is whether or not the Fed continues its policies to keep mortgage rates low, and considering the fact that new home sales fell to the lowest level on record in January, and mortgage applications fell this week, with the purchase index hitting its lowest level since 1997, housing is still on life support.

For that matter, so is commercial real estate, with the architecture billings index falling in January.

In any case, Bernanke’s talk about continued low rates drove the dollar down, which in turn drove oil up.

Monopolies Are Strangling Our Economy

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Graphic Courtesy of the WaPo

In Washington Monthly, Barry C. Lynn and Phillip Longman argue that the increase in jobless recovery and stagnation is an artifact of the increasingly monopolistic marketplace that we encounter:

If any single number captures the state of the American economy over the last decade, it is zero. That was the net gain in jobs between 1999 and 2009—nada, nil, zip. By painful contrast, from the 1940s through the 1990s, recessions came and went, but no decade ended without at least a 20 percent increase in the number of jobs.

…………

But while the mystery of what killed the great American jobs machine has yielded no shortage of debatable answers, one of the more compelling potential explanations has been conspicuously absent from the national conversation: monopolization. The word itself feels anachronistic, a relic from the age of the Rockefellers and Carnegies. But the fact that the term has faded from our daily discourse doesn’t mean the thing itself has vanished—in fact, the opposite is true. In nearly every sector of our economy, far fewer firms control far greater shares of their markets than they did a generation ago.

Indeed, in the years after officials in the Reagan administration radically altered how our government enforces our antimonopoly laws, the American economy underwent a truly revolutionary restructuring. Four great waves of mergers and acquisitions—in the mid-1980s, early ’90s, late ’90s, and between 2003 and 2007—transformed America’s industrial landscape at least as much as globalization. Over the same two decades, meanwhile, the spread of mega-retailers like Wal-Mart and Home Depot and agricultural behemoths like Smithfield and Tyson’s resulted in a more piecemeal approach to consolidation, through the destruction or displacement of countless independent family-owned businesses.

It is now widely accepted among scholars that small businesses are responsible for most of the net job creation in the United States. It is also widely agreed that small businesses tend to be more inventive, producing more patents per employee, for example, than do larger firms. Less well established is what role concentration plays in suppressing new business formation and the expansion of existing businesses, along with the jobs and innovation that go with such growth. Evidence is growing, however, that the radical, wide-ranging consolidation of recent years has reduced job creation at both big and small firms simultaneously. At one extreme, ever more dominant Goliaths increasingly lack any real incentive to create new jobs; after all, many can increase their earnings merely by using their power to charge customers more or pay suppliers less. At the other extreme, the people who run our small enterprises enjoy fewer opportunities than in the past to grow their businesses. The Goliaths of today are so big and so adept at protecting their turf that they leave few niches open to exploit.

One of the points that I have made when I discuss the role of the large monopoly Telcos and how this effects the availability and price of broadband is that when a company gets large enough, it’s more profitable to keep out competitors than it is to improve the quality and efficiency of its process.

If one understands the nature of any corporation, which is that they are short-sighted sociopaths by design, this makes perfect sense: You can spend billions on innovation, or millions on locking out and/or buying up competitors.

Even Sci-Fi author Jerry Pournelle, who describes himself as being somewhere to the right of Attila the Hun, says that for the free market to function, aggressive anti-trust activities are essential. (No link, it was from his “Chaos Manor” column in Byte about 20 years ago)

H/t Kevin Drum.

Geithner Knifes Volker Rule

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Surprise, Geithner and his Treasury Department is giving the green light for Congress to gut the Volker rule, and allow federally insured institutions to gamble with our money.

Well, he never like Volker anyway:

The Obama administration lowered expectations Tuesday for the “Volcker rule” to curb risky trading by banks, emphasizing “limits” rather than an outright ban, as Congress shied from the original proposal.

The Treasury Department said in a statement that it supports “mandatory limits” on banks’ proprietary trading, in which they trade for their own accounts. The administration last month had called for an outright ban on such trading.

Seriously, the combination or regulatory capture and cowardice by the Obama administration is beginning to get to me.

Good News on the Broadband Front

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The Phone Company

When one compares broadband in the US and the rest of the developed world, we discover that that in the US we have higher prices, and lower performance, much like our healthcare system.

What is common in both is that markets are controlled largely by monopolistic,* and largely unregulated, for profit private companies.

Well, now it looks like the FCC will be ordering the large players to lease lines to their competitors:

AT&T Inc. and Verizon Communications Inc. would be forced to lease fast Internet lines to rivals providing Web services to small businesses under a proposal being weighed by U.S. regulators.

The biggest U.S. phone companies have told the Federal Communications Commission that opening access to lines they laid would curb their incentive to continue spending billions of dollars expanding high-speed service. The FCC’s decision “will significantly affect investment in fiber-based networks,” line- maker Corning Inc. said in a filing with the agency.

The idea, proposed to the FCC by computer-services company Cbeyond Inc., has support from the Small Business Administration, which said it could spur job creation. The plan would add to competition for business clients, who are also being courted by cable providers led by Comcast Corp. and Time Warner Cable Inc.

Players like AT&T and Verizon make much of their profits from doing business under either a monopoly of a duopoly environment, and this is a start to creating meaningful competition.

*Full disclosure: I have Verizon® Fios™., so I receive my connectivity from one of these, “monopolistic, and largely unregulated, for profit private companies.”

Signs of the Apocalypse, IMF Edition

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The IMF is coming out in favor of capital controls for developing nations:

International Monetary Fund economists, reversing the fund’s past opposition to capital controls, urged developing nations to consider using taxes and regulation to moderate vast inflows of capital so they don’t produce asset bubbles and other financial calamities. It said emerging markets with controls in place had fared better than others in the global downturn.

The recommendation is the IMF’s firmest embrace of capital controls and a reversal of advice it gave developing nations just three years ago. The IMF has long championed the free flow of capital, as a corollary to the free flow of trade, to help developing countries prosper. But the global financial crisis has prompted the fund to rethink long-held beliefs. It recently suggested the world might be better off with a higher level of inflation than central bankers now are targeting.

(emphasis mine)

I think that a lot of this has to do with the Asian financial crisis 13 years ago, and the fact that the only nation to implemented capital controls, Malaysia, was through the crisis with a lot less pain than their Asian neighbors.

It only took them 13 years, and an increasingly hostile response from the developing world, for them to get the message.

Well, it’s to their credit that it happened before some high level official visiting a 3rd world nation in crisis was actually lynched by an angry crowd, which puts them ahead of American investment bankers, Larry Summers, and Timothy Geithner, I guess.

Core Inflation Fell For the First Time in 28 Years

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Down 0.1% in January:

The cost of living in the U.S. rose in January less than anticipated and a measure of prices excluding food and fuel fell for the first time since 1982, indicating the recovery is generating little inflation.

The consumer-price index increased 0.2 percent for a fifth straight month, led by higher fuel costs, Labor Department figures showed today in Washington. Excluding energy and food, the so-called core index unexpectedly fell 0.1 percent, reflecting a drop in new-car prices, clothing and shelter.

And still, the Federal Reserve is full of people who are batsh%$ insane inflation hawks, and there are two seats open, but Obama has not bothered to appoint people who are, you know, saner, in what is clearly a deflationary environment.

Umm……Holy Crap?

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The Federal Reserve has just raised the interest rate on its discount window, an emergency lending facility used by banks, by 25 basis points, from ½% to ¾%, and shortened the term of the loans from 28 days to 24 hours. (The 28 days bit was an emergency measure, so the overnight duration is the pre-meltdown status quo)

This facility is used for short term lending, but it’s not frequently used, as generally, for overnight liquidity, etc., banks use the Federal Funds Rate, which dictates what rate banks use when they lend to each other.

The increase is on the difference between the discount window and the Federal Funds Rate. The discount window is more expensive, because its use is discouraged, the Fed prefers banks to deal in commercial money, not government money.

The Fed is saying that this does not represent a change in policy, and this is a small part of of the monetary picture, to be sure, but it is a tightening, and actions, as the saying goes, speak louder than words.

My guess, and my Federal Reserve Kremlinology is by no means authoritative, is that now that Bernanke has been safely confirmed by the Senate, he is looking toward creating an environment in which monetary policy can work.

Monetary policy, at least on the expansionary side of the equation, work now, because interest rates are below 1% and you can’t cut interest rates below 0%, at least not under the current regulatory environment.*

It’s called the “Zero Bound” problem, and I’m sure that Bernanke, as well as the whole Fed, wants to be back in a world where inflation and employment can be managed in both directions though monetary tools.

Krugman actually wants this too, he’s been clear on this.

I just think that this move is somewhat premature.

The full statement is after the break.

*Actually, you can, with inflation devaluing currency, as I have said many times, but raising inflation targets gives central bankers the hives.


Press Release
Federal Reserve Press Release

Release Date: February 18, 2010
For release at 4:30 p.m. EDT

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve’s lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.

Easing the terms of primary credit was one of the Federal Reserve’s first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC’s target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC’s 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve’s primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.
2010 Monetary Policy Releases

Last update: February 18, 2010

What Real Banking Regulations Look Like

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In the UK, the Financial Services Authority (FSA) has told banks that if their bonuses do not comply with regulations, the face the forfeiture of their banking licenses:

In an extraordinary ultimatum that has shocked some of the City’s biggest companies, the Financial Services Authority (FSA) told bank bosses that 60pc of all pay must be deferred, with no exceptions, even for those whose contracts conflicting with the edict.

Many of the global players have in recent weeks made representations to the City watchdog, in particular about pre-existing employment contracts that guarantee bonuses over a year or more. But their appeals have been met with the FSA’s toughest yet response.

One pay executive in a major bank told The Daily Telegraph: “The message came back that while the FSA agreed that it does not have jurisdiction over contractual law, it does have jurisdiction over issuing bank licences in London, and that we should go away and unwind the contracts.“

Bankers at Merrill Lynch are among the first affected. Those with pre-existing contracts were told about the FSA’s tough stance on Friday when their bonuses were agreed.

(emphasis mine)

This is very canny on the part of the FSA. They aren’t instructing banks to break contracts, which might create all sorts of problems with EU or WTO “free trade courts”, they are saying, “This is the rule, if you don’t comply, bye bye licens(c)e.”

If an employee refuses to modify their contract, it’s pretty clear that they are deliberately engaging in an activity which would cause the loss of their firm’s banking license, which in a sane universe is grounds for dismissal.

I wish that I lived in a country with meaningful banking regulations.

Goldman Sach Losing Profits from Trnasparency

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The big banks profit on this lack of transparency

As a result of moves by regulators to move Credit Default Swaps, it looks like the big banks are looking at a revenue stream drying up:

Goldman Sachs Group Inc. and JPMorgan Chase & Co. will find it tough to reproduce last year’s record trading revenue as the difference between bid and offer prices in credit markets narrows to the tightest in almost 18 months.

The CHART OF THE DAY shows how the gap between prices at which traders offer to buy and sell credit-default swaps on North American companies has shrunk to 6.1 basis points, from as high as 20.4 in October 2008 and 16.3 in March. Historically wide spreads on everything from derivatives to bonds, representing fees earned per trade, helped fuel the recovery in bank earnings.

Basically, this gap is the difference in buying and selling prices, and it is the investment banks that profit from large spreads.

It’s why they have been campaigning to keep financial instruments off of public markets. When buy and sell prices are public knowledge, the spreads between them shrink, and so do the banks profit margins.

That’s why they want carve-outs from requirements for public trades: It robs them of the ability to overcharge for their services.

The Robin Hood Tax Gains Support in the UK

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I Would Like to See This on US Television

It’s actually called a “Tobin Tax“, and the idea is that a tax of about 5 basis points (0.05%) on non-consumer bank transactions (otherwise known as “speculation”).

As was noted with the original Tobin proposal, this is actually very hard to evade, because they sales have to be settled something, and for any transaction of any significant size, this means only a few places, New York, London, Paris, Frankfurt, Tokyo, etc. settle (i.e.) pay.

If you moved from highly trafficked settling institutions to obscure ones, the costs of settling become much higher, and in fact will likely likely be much higher than 5 basis points.

There is an organization in the UK, the Robin Hood Tax campaign, which is lobbying for the idea, and produced the above video, which illustrates how it would work, and how it would benefit everyone except for the vampire squids* of the world.

In an interesting twist to all of this, the folks at the campaign put up an online poll, and some online entities spammed the poll to oppose the proposal.

I wonder who might have done this?

The Robin Hood Tax campaign alleged that a Goldman computer was one of two computers that allegedly “spammed” the internet poll with more than 4,600 “no” votes in less than 20 minutes on Thursday.

Technical staff for the Robinhoodtax.org.uk website said the “no” counter increased at a “dramatic rate” from 3.41pm.

The number of “no” votes jumped from 1,400 to 6,000 before campaigners – who are calling for the introduction of 0.05pc tax on banking transactions – tightened the site’s security.

Robin Hood’s security team claimed it traced the erroneous votes to two computers, one of which is allegedly registered as belonging to Goldman.

Goldman is saying that it has, “just received this information and is investigating fully,” which in the UK means busting which ever staff member is of Indian or Pakistani extraction, I guess.

In any case, the “Yes” vote is winning by about 9:1, 41488 to 4626.

I approve of their program, though I think that 5 basis points is too low. It should be at least 25 basis points (¼%).

*Goldman Sachs and their Evil Minions™

Speaking of Not Having Real Regulation in the United States

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It looks like one of the major changes in regulation of financial services firms, that they act in their clients best interest, a so-called fiduciary responsibility, as opposed to the current standard of “industry standard” behavior, which basically says that the only crime is to get caught.

Well, Tim Johnson, no doubt still suffering from the effects of his stroke 3 years ago, has decided to kill the fiduciary requirement, and send the idea to the SEC for a “study”:

Lobbying by insurers and banks including Morgan Stanley may result in the elimination of a proposed new standard that would make retail brokers more accountable to their clients.

Tim Johnson, the South Dakota Democrat in line to become the next chairman of the Senate Banking Committee, is circulating a proposal that would drop the so-called fiduciary standard for brokers from the panel’s reform package, according to a copy obtained by Bloomberg News. Johnson instead proposes that the U.S. Securities and Exchange Commission conduct an 18- month study to see if there’s need for a new broker standard.

Consumer advocates have pushed for the fiduciary standard, arguing that investors are misled by the adviser title used by thousands of brokers. Investors have difficulty distinguishing between investment advisers and brokers, and most see their brokers as advisers, according to a 2008 Rand Corp. study commissioned by the SEC. Without the fiduciary requirement, brokers don’t have the same accountability for their advice as investment advisers and have more leeway to sell financial products created by their own firms instead of seeking the best investment for the customer.

Not only is this bad policy, it’s bad politics.

Make the Republicans vote against a law that says, “Financial advisers must act in their client’s best interests,” if you push it, people will understand it.

Shelby Backs Down

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Remember when I wrote that Richard Shelby had placed holds on every single Obama nominee because he wanted his pork?

Well, he’s backed down, a little at least:

Sen. Richard Shelby (R-Ala.) has released his controversial “holds” on more than 70 pending presidential nominations, his office said Monday night.

Note that his holds directed at anyone, or anything that might have to do with the USAF tanker RFP, remain in place though.

Our Financial Crisis, Brought to You by the WTO

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There are a lot of people out there who think that free trade will always do all kinds of good things: It creates peace, it creates democracy, it keeps your daughter from dating the guy with the tattoos and piercings.

I’m not one of these people.

First, I think that we have yet to see an economy becoming a developed economy with a large middle class in a free trade environment, and second, I think that a bad free trade deal is worse than no, or a more limited, free trade deal.

Well it appears that on March 1, 1999, the United States signed onto a free trade deal that mandated the sort of reckless deregulation that has nearly destroyed out economy:

But the U.S. is not being sold out in a vacuum.

On March 1, 1999, countries accounting for more than 90 per cent of the global financial services market signed onto the World Trade Organization’s Financial Services Agreement (FSA). By signing the FSA, they committed to deregulate their financial markets.

For example, by signing the FSA, the U.S. agreed not to break up too big to fails. The U.S. also promised to repeal Glass-Steagall, and did so 8 months after signing the FSA.

Indeed, in signing the FSA and other WTO agreements, the U.S. has legally bound itself as follows:

  • No new regulation: The United States agreed to a “standstill provision” that requires that we not create new regulations (or reverse liberalization) for the list of financial services bound to comply with WTO rules. Given that the United States has made broad WTO financial services commitments – and thus is forbidden by this provision from imposing new regulations in these many areas – this provision seriously limits the policy [options] available to address the current crisis.
  • Removal of regulation: The United States even agreed to try to even eliminate domestic financial service regulatory policies that meet GATS [i.e. General Agreement on Trade in Services] rules, but that may still “adversely affect the ability of financial service suppliers of any other (WTO) Member to operate, compete, or enter” the market.
  • No bans on new financial service “products”: The United States is also bound to ensure that foreign financial service suppliers are permitted “to offer in its territory any new financial service,” a direct conflict with the various proposals to limit various risky investment instruments, such as certain types of derivatives.
  • Certain forms of regulation banned outright: The United States agreed that it would not set limits on the size, corporate form or other characteristics of foreign firms in the broad array of financial services it signed up to WTO strictures …
  • Treating foreign and domestic firms alike is not sufficient: The GATS market-access limits on U.S. domestic regulation apply in absolute terms; that is to say, even if a policy applies to domestic and foreign firms alike, if it goes beyond what WTO rules permit, it is forbidden. And, forms of regulation not outright banned by the market-access requirements must not inadvertently “modify the conditions of competition in favor of services or service suppliers” of the United States, even if they apply identically to foreign and domestic firms.

In other words, the problem isn’t just that Congress and the White House have sold out to the Wall Street giants.

The problem is also that the U.S. has signed WTO agreements that have given the keys to the too big to fails, and have neutered their regulators. Even if some politicians tried to stand up to Wall Street – or even if we “throw out all of the bums” currently in political roles – the U.S. would still be locked into the WTO’s scheme for helping the financial giants to grow ever bigger and to take ever-bigger and ever-riskier gambles.

Yet another reason to oppose the so-called “Doha” round, which promises to deregulate financial services even further.

What has gone on at the WTO is that it has been functioned as a prostitute for elements in our economy which do not produce tangible goods, finance, insurance, entertainment, patent holders, etc. at the expense of absolutely everything else in the economy.

It’s killing us.