{"id":445,"date":"2010-06-25T12:58:00","date_gmt":"2010-06-25T16:58:00","guid":{"rendered":"http:\/\/www.intuitiveinvestor.com\/web\/?p=445"},"modified":"2018-08-18T17:45:53","modified_gmt":"2018-08-18T21:45:53","slug":"finally-a-financial-overhaul-bill","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2010\/06\/25\/finally-a-financial-overhaul-bill\/","title":{"rendered":"Finally a financial overhaul bill"},"content":{"rendered":"<p><span style=\"font-size: 16px;\">The big news this morning, and perhaps the biggest news since I started publishing the blog, is that a financial industry overhaul bill has finally been readied for Congress to vote on.\u00a0 I began the blog sending out a mini-manifesto to the e-<span class=\"goog-spellcheck-word\">ethers<\/span> calling for reform of the financial industry.\u00a0 A bill has finally been negotiated between the Senate and the House; passage is expected some time next week.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">What are the major details (partially excerpted from today&#8217;s Wall Street Journal)?<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Staunch the bleeding power.\u00a0 The bill gives the Feds the ability to seize, restructure and sell-off the assets of troubled banking institutions before they need an economy destabilizing\u00a0bailout.\u00a0 The US Treasury would finance the unwinding of the <span class=\"goog-spellcheck-word\">firm&#8217;s<\/span> assets, but the FDIC would run the process.\u00a0 Costs would be recouped by levying fees on financial firms with more than $50 billion in assets.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> I like this provision because I like preventative medicine.\u00a0 In the past, unless a bank failed, the Feds were pretty hamstrung in their ability to do anything about a failing institution.\u00a0 Effectively, this is like forcing an overweight, deep-fried <span class=\"goog-spellcheck-word\">Twinkie<\/span> eating, cardiologists&#8217; dream patient, to go on a diet before forcing healthy insureds to bail his ass out of a series of bad behaviors and decisions.\u00a0 Amen!\u00a0 In this case, financial firms bloated with bad loans will be forced to rid themselves of them before taxpayers have to bail their asses out.\u00a0 Amen!<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\"><span class=\"goog-spellcheck-word\">FSOC<\/span> &#8211; the establishment of the Financial Stability Oversight Council.\u00a0 The 10 member group would be composed of existing Federal regulators and is charged with monitoring systemic financial risks in the economy.\u00a0 It has the job of recommending to the Fed stricter capital, leverage and other rules for big financial firms whose practices directly affect the economy.\u00a0 Under extraordinary circumstances they would have the ability to disintegrate financial institutions.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> I am super pro this provision.\u00a0 From the beginning of the blog I have nagged and nagged that there was no one regulator or body that had transparency into the whole financial system.\u00a0 That meant that savvy financial firms crafted their business practices to skirt regulations and to avoid detection.\u00a0 Ugh!\u00a0 The power of this provision will be in the independence and courage of its members to actually say what they feel and then to act upon those feelings sans external pressure.\u00a0 Without independence they will just be the &#8220;rubber stamp&#8221; crew.\u00a0 Double ugh!<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">The so-called Volcker Rule.\u00a0 Ex-Federal Reserve Chairman Paul Volcker proposed a rule that has been included in the bill.\u00a0 The rule prevents banking firms from using depositor and public monies for proprietary trading.\u00a0 However, these institutions are going to be allowed to indirectly invest in riskier assets as they are allowed to invest monies in independently run hedge funds and other similar investments.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong>\u00a0 This kind of provision existed in financial legislation for almost 70 years in the Glass <span class=\"goog-spellcheck-word\">Steagall<\/span> act, but was eliminated at the insistence of financial institutions in search of new revenues.\u00a0 Why had this kind of law been in place to begin with?\u00a0 Because financial institutions had definitively screwed this same kind of trading up in the 1930s.\u00a0 It took around 10 years for them to do it again.\u00a0 Open message to regulators 80 years from now: Duh!\u00a0 Don&#8217;t ever rescind this kind of a rule.\u00a0 Obviously I am a supporter of this provision.\u00a0 I feel that deposits ought to be sacrosanct and only conservatively deployed in other investments.\u00a0 That these monies were invested in super risky, speculative, leveraged trading bets is despicable.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Regulation of derivatives (!).\u00a0 Now derivatives are going to have to trade on an exchange and with regulatory oversight.\u00a0 There will be capital rules imposed on derivatives traders to ensure that they are solvent.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> Again, from the beginning of the blog I decried that derivatives, one of the largest markets in the world were largely unregulated.\u00a0 Ugh!\u00a0 Oh, and did I mention that derivatives are also highly risky?\u00a0 God damn it!\u00a0 Haven&#8217;t we learned yet that Wall Street&#8217;s boys are the same as drunken, irresponsible, pyromaniac, greedy fraternity brothers?\u00a0 The ethics of most Wall Street firms boils down to: ANYTHING FOR ANOTHER DOLLAR.\u00a0 I am tired of it.\u00a0 Especially since these same little shits have taken home untold billions of dollars in bonuses over the years in exchange for&#8230;what?\u00a0 Nearly bankrupting the world economy.\u00a0 Nice job fellas.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Consumer Financial Protection Bureau.\u00a0 Run by the Federal Reserve, this group would oversee financial institutions larger than $10 billion in assets that provide financial products to consumers.\u00a0 The idea is to curb the abusive financial practices of credit card companies, mortgage lenders, check cash<span class=\"goog-spellcheck-word\">ers<\/span>, etc.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> I think this group is important.\u00a0 However, that institutions below $10 billion in assets are excluded is a semi-truck sized hole in the wall.\u00a0 Big institutions will just create hundreds of mini-companies to execute their policies.\u00a0 Ultimately, this is probably a toothless piece of the bill.\u00a0 I was long opposed to these sorts of consumer protection agencies.\u00a0 My thinking was that there was already full information disclosure in the form of contracts between consumers and financial institutions and that it was up to consumers to read these documents.\u00a0 However, I have a metaphor that has changed my opinion.\u00a0 Why does the government insist that speed limits are low around schools?\u00a0 That&#8217;s right, because even though every kid is taught to look both ways before crossing the street, kids sometimes forget to look even though their lives are in jeopardy.\u00a0 Yes, adults are older, however, many adults have less experience making major financial transactions than they do crossing the street.\u00a0 So a financial industry &#8220;speed limit&#8221; (i.e. a watchdog) is warranted in my opinion.\u00a0 I just wish this one had bite behind the bark.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Deposit insurance limits raised.\u00a0 The FDIC will now insure deposits up to $250,000.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> Yes.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Minimum mortgage underwriting standards.\u00a0 Now lenders are required to verify a borrower&#8217;s: income, credit history and job status.\u00a0 This piece of legislation also prevents payments to mortgage brokers (kick backs) for steering high-priced loans to lenders.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> Again, duh!\u00a0 How could these sorts of things not have been legally mandated before?\u00a0 In the long run this will do a tremendous service to the world.\u00a0 Why?\u00a0 Because as long as capitalism is all about profits there will be competitive pressures on banks to expand profits by doing things they have never done before.\u00a0 That&#8217;s why banks began looking the other way when lending money in the 2000s.\u00a0 Now that behavior is illegal.\u00a0 Thank God!\u00a0 This piece establishes massive security into the financial system.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Small limits on <span class=\"goog-spellcheck-word\">securitization<\/span>.\u00a0 Now folks who originate loans have to keep 5% of the risk of the loans they underwrite on their books.\u00a0 No more selling of the loan to a <span class=\"goog-spellcheck-word\">securitizer<\/span>.\u00a0 That is, no more &#8220;out of sight, out of mind&#8221; behavior.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> I think this is a good rule.\u00a0 However, 5% is a paltry amount of risk to be born by a lending institution.\u00a0 When your cousin asks to borrow money you are patently aware of the risks and so you are careful before lending.\u00a0 If you could just sell the obligation immediately and only have to retain 5% of that risk, you still are going to lend the money and probably still going to treat the lending of the money as if it was done with house money.\u00a0 This provision lacks teeth.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Oversight of credit ratings agencies.\u00a0 The SEC will have the ability to fine ratings agencies or <span class=\"goog-spellcheck-word\">de<\/span>-register them if they issue too many bad ratings over time.\u00a0 This proviso also gives the public the right to sue ratings agencies for &#8220;knowing or reckless&#8221; ratings.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong>\u00a0 I feel this is an excellent provision given one condition: the SEC must be fully funded.\u00a0 As I have said multiple times on this blog, the SEC has been intentionally underfunded for generations to limit their ability to do their jobs.\u00a0 Giving the SEC expanded powers is ridiculous when they are already underfunded to execute their current mandate.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Expanded shareholder powers.\u00a0 Now partial owners of businesses (shareholders) have the right to a non-binding vote on executive compensation packages.\u00a0 It also gives the SEC the right to grant shareholders access to a proxy to nominate their own directors.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> Back in the early days of the blog I wrote a post that talked about some of the insidious things corporations do to castrate shareholders.\u00a0 Most shareholders these days are big institutions like mutual funds.\u00a0 In the past they have not demonstrated much will power in corporate governance.\u00a0 Instead of fighting management when trouble was brewing (e.g. excessive pay packages, bad boards of directors, etc.) these owners would just sell their shares.\u00a0 In part this was done because the costs of fighting management were excessive.\u00a0 The high price of fighting was intentionally put in place by greedy bastard executives and their boards.\u00a0 Ugh!!\u00a0 Because the cost of fighting has been lowered, hopefully institutional shareholders will now bother to &#8220;show up&#8221; and assume the responsibility of a real owner of a business.\u00a0 Don&#8217;t hold your breath.<\/span><\/p>\n<ul>\n<li><span style=\"font-size: 16px;\">Hedge fund regulation.\u00a0 Now the SEC has oversight of the hedge fund industry.\u00a0 <span class=\"goog-spellcheck-word\">Hedgies<\/span> are now required to register as investment advisers with the SEC and to provide information on their trades.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-size: 16px;\"><strong>Analysis:<\/strong> Amen!\u00a0 I have been calling for this since the beginning of the blog.\u00a0 Finally we have almost complete transparency into the real goings on in the financial markets.\u00a0 However, I am extremely concerned with the SEC budget.\u00a0 Without more money the current limited SEC oversight is just going to be spread over more financial landscape.\u00a0 Barbarians will likely invade while the SEC isn&#8217;t looking unless more money for more guards is funded.<\/span><\/p>\n<p><span style=\"font-size: 16px;\">There are more provisions in the bill, but these are the ones that I feel are important.\u00a0 In general I rate the bill a 9 of 10.\u00a0 Nearly every single thing I have been insisting on for almost two years is now in place.\u00a0 Now let&#8217;s hope that Congress passes the damned piece of paper.\u00a0 Let us also hope that the SEC is better funded.\u00a0 If these things happen I am certain that SOLID foundations for economic growth have been established for at least another several generations.\u00a0 Amen!<\/span><\/p>\n<p><span style=\"font-size: 16px;\">Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>The big news this morning, and perhaps the biggest news since I started publishing the blog, is that a financial industry overhaul bill has finally been readied for Congress to vote on.\u00a0 I began the blog sending out a mini-manifesto to the e-ethers calling for reform of the financial industry.\u00a0 A bill has finally been [&hellip;]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[12,3],"tags":[],"class_list":["post-445","post","type-post","status-publish","format-standard","hentry","category-best-of-the-blog","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/445","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=445"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/445\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=445"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=445"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=445"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}