From a speech by Gary Gensler, Chairman of the CFTC, at Fordham University College of Business Administration, January 27, 2010…
~~~ “… The 2008 financial crisis left us with many lessons and many challenges to tackle. From addressing institutions that are too big to fail to reforming mortgage underwriting and sales practices, it is essential that the Federal Government take significant steps to prevent the next crisis. This morning, I will focus on the need for comprehensive reform of over-the-counter (OTC) derivative markets and, specifically, on the need to regulate the banks and other firms that deal in derivatives…
… In the last three decades, the over-the-counter derivatives marketplace has grown up, but it remains unregulated. From total notional amounts of less than $1 trillion in the 1980s, the notional value of this market has ballooned to more than $300 trillion in the United States – that’s more than 20 times the size of the American economy; the contracts have become much more standardized; and rapid advances in technology – particularly in the last ten years – facilitate more efficient trading. While so much of this marketplace has changed significantly, the constant has been that it is still dealer-dominated.
From the WSJ…
~~~ “Sen. Jeff Merkley (D., Ore.) last month became the first Democrat to oppose Ben Bernanke’s confirmation for a second term as Federal Reserve chairman. (The leading liberal against Bernanke, Sen. Bernie Sanders of Vermont, is an independent.) He’s been joined now by three other Democrats and a growing list of Republicans. We talked with him about how the Bernanke vote is shaping up among Democrats:
From where you stand, how does this nomination for Chairman Bernanke look right now?
A lot of folks have been coming up to me in the hall, saying that they want more information and that they’re seriously considering voting against him, or that they’re leaning towards voting against him.
Are they asking you for more information?
Some have. … The main points I’ve been making are that there are at least four major issues that happened in the course of the last eight years: expansion of proprietary trading, derivatives, the lifting of leverage and the failure to address the dysfunction in the [regulation of] mortgages — that is, the kickbacks, the yield spread premiums and the prepayment penalties. While not all of these were the responsibility of the Fed, very much in his role as chair of the Council of Economic Advisers, as a member of the Fed, as chair of the Fed, he was at the economic policy table and did not raise concerns about these major issues that had systemic impact.
We’re hearing that about 10 to 15 members are opposed from the Democratic side. Is that right?
I have not tried to tally folks, but there’s nothing in that number that I would react to and say that’s off base. But a bunch of folks have said they’re wrestling with it, or they’re leaning. I don’t know that 10 to 15 have in any public way said that they clearly are opposed.
Are the political ramifications of the Massachusetts election affecting the Bernanke vote substantially?
I don’t really think that’s what’s going on here. I think what’s going on is that folks are very aware that many of the policies we worked on this last year were addressing the potential plunge into a Great Depression — unemployment going up, major institutions on the verge of collapse that could have caused others to collapse. We did a lot to those stabilize financial institutions. We’ve got to pivot to fighting for the financial success of our families. … Here we have an economic policy leader, he did a good job with the fire hose this last year. But he certainly also — in his roles over the last eight years — he helped create the circumstances that set the house on fire. Is he really the person you want now to be the carpenter to rebuild the house?
Do you have any worries about how a Senate vote against Bernanke might influence financial markets here and abroad?
This is always raised in regard to nominations. I think one of the reasons folks have been hesitant despite Bernanke’s involvement in burning down our economic house has been not to upset Wall Street. But what is going to have the biggest impact in the long term: Having a person in economic leadership that has missed every significant systemic risk development, putting them in charge, or putting someone in charge who has the ability to see those risks and respond in an appropriate way, to lean into the wind?
Yup… this editorial sums up how America feels… President Obama time to swap that black hat for a white one… rein in the banks… start with insisting on Senate hearings on Glass-Steagall… make John McCain your partner on breaking up the big banks…
WASHINGTON (MarketWatch) — The people of this country have had it up to here with the way our leaders are running our country.
And while the election of Republican Scott Brown to the U.S. Senate seat held by the Kennedy brothers for nearly 60 years is clearly a repudiation of the Democrats’ leadership, Republicans shouldn’t get so smug about this victory. See full story on Brown’s victory in Massachusetts.
We are fed up with the lot of you.
You promised to change the way Washington works, but you didn’t do it. Your answers to our problems are inadequate, or they make things worse. As usual, you’re taking care of everyone but us. Despite the worst economic crisis in generations, nothing has changed.
This country is in trouble, maybe big trouble. Our economy doesn’t work for us any more. Jobs are hard to find, health care is hit or miss, and the idea of a comfortable retirement seems a cruel joke. We legitimately worry that we’re bequeathing our kids and our grandkids a life that’s going to be much tougher than ours.
We did everything we were asked: We worked hard, we invested in Wall Street, we took off our shoes at the airport, we bought a house, and we borrowed and spent until we couldn’t spend or borrow any more.
You don’t get it. We don’t care about your campaign donations. We don’t care about your political fortunes, or those of your party. We don’t care who posed nude, or who’s the better candidate. We don’t care about 60 votes. We don’t care about the big companies or the special interests who fear the future. We don’t care about Senate traditions, or what those idiots on TV say.
We care about results. Fix our problems, or get out of the way. We know our problems aren’t simple. We know the answers won’t come easy. But we also know that you don’t understand. If you did, you’d hide your faces in shame.
To the Democrats: We elected you to accomplish things for us, not to give you lifetime jobs. We gave you an overwhelming majority in Congress: Use it or lose it.
To the Republicans: It might seem smart in the short run to just oppose everything, knowing that the wheel will turn and that eventually the people will give the power and the mandate to you. But it’d be much better for us if you’d actually stand for something other than protecting your own hides, or getting your own cable show.
To the voters: You deserve better. Start demanding it.
— Rex Nutting, Washington bureau chief
*Source: Why do we trust the financial priests? BBC, Robert Peston, Saturday, 9 January 2010
“The Icelanders have risen up and humiliated their political class over its handling of the financial crisis, as I mentioned on Thursday.
But there’s nothing terribly unusual about their sense of powerlessness and alienation from the writing of the rules of the banking and finance game.
When it comes to how banks are allowed to behave, sovereignty over decision-making rarely rests with citizens.
Did anyone actually ask us whether we wanted our banks rescued to the tune of £1.2 trillion during and after the crisis of 2008?
If they had, we might have said no.
So perhaps it’s a good thing that politicians and central bankers simply did what they thought was best for us, without consulting – because if the banks had gone down, the contraction in our economy would have been far far worse than it turned out to be. Better to leave it to the experts, eh?
But hang on a tick: who actually got us into this mess in the first place?
It wasn’t the fault of ordinary citizens like you and me.
It was those self-proclaimed experts who allowed our banks to become too huge, too complicated, too addicted to taking crazy risks, and too poorly endowed with life-preserving capital.
BUENOS AIRES, Jan 8 (Reuters) – An Argentine judge blocked the president’s plan to use Central Bank reserves to pay public debt and ordered the bank chief’s reinstatement on Friday, deepening a dispute that has rattled financial markets.
Moments after a court ruled to reinstate former Central Bank President Martin Redrado, he returned to the bank, waving at television cameras. A day earlier, President Cristina Fernandez fired Redrado for opposing her debt plan.
Despite the court rulings, local media said an interim bank chief was taking steps to move $6.6 billion in foreign currency reserves to the treasury. “It’s like a science fiction movie,” a central bank employee told Reuters.
The conflict has highlighted persistent political instability in Latin America’s No. 3 economy just as Fernandez’s cash-strapped government seeks to charm investors and issue global bonds eight years after a massive default.
Argentine bonds, stocks and the peso closed down due to investor concerns over the strength of Argentina’s institutions ahead of a sovereign debt swap that is expected to launch later this month. [ID:nN08135180]
Fernandez urged opponents to let her govern and defended using part of the Central Bank’s $48 billion in reserves to service the nation’s debts.
“It’s much better to use the reserves than to take out loans with an interest rate of 15 or 14 percent. It’s common sense,” she said in a televised speech.
Opposition leaders have challenged her order for the central bank to transfer billions of dollars in foreign currency reserves to state coffers.
From the Financial Times and opinion piece by former US Treasury Secretary Nicholas Brady…
Refocus the regulatory debate on essentials
By Nicholas F. Brady
Published: January 4 2010 19:57 | Last updated: January 4 2010 19:57
There is an inexorable drive on both sides of the Atlantic to finalise new rules, regulations and laws to place the financial system on a sounder footing. But in their zeal to act, politicians and regulators are looking through the wrong end of the telescope. Too much attention is being paid to maintaining a status quo that allows banks to continue engaging in the full range of activities to which they have become accustomed – admittedly under a number of regulatory constraints – without dealing with the fundamental causes of today’s critical difficulties.
Policymakers are intent on announcing all manner of new capital requirements, leverage ratios, “living wills” and directives on risk management, while brushing aside warnings by both Mervyn King, the governor of the Bank of England, and former US Federal Reserve chairman Paul Volcker that our banking system is unsound. Mr King and Mr Volcker are not alone in their concern that we may now miss a unique opportunity to secure core reforms.
The Basel Committee on Banking Supervision – the key multilateral authority on setting financial rules – dumped an 88-page present on governments and banks just before Christmas and, true to form, its focus was on technical ratios designed to force banking stability. The US House of Representatives last month voted for regulatory reform legislation that is no better. The House fails to consider the distinction between things that are critical and things that are merely important. The same mistake seems likely from the European Union, which is in the throes of establishing three new regulatory authorities.
The safety and soundness of the financial system is indisputably essential; without it, we have nothing. The long history of financial collapses proves this point. While efficiency, creativity and credit availability are important, they cannot be allowed to trump safety and soundness.
Brilliant analysis from the Economist… this points the way for the new decade…
~~~ “THE air of immediate crisis is over. The monetary and fiscal doctors wheeled out the crash trolley and applied an electric shock to the global economy’s chest. The patient is recovering but is still rather too dependent on the drug of government support. The coming year will be dominated by a debate about how quickly that support can be taken away.
Two shocks have reduced the standard of living of Western economies. One is a terms-of-trade shift. Thanks mainly to China, the prices of the manufactured goods that rich countries sell have fallen; those of the commodities they buy have risen. The other is a “leverage” shock, in which the credit crisis has stopped people from borrowing to finance consumption.
In response to this second shock, governments have deliberately taken on the debts of the private sector. In most cases it has been assumed that governments have almost limitless capacity to assume such burdens. But you can see welfare states as national Ponzi schemes in which governments grant benefits and take on spending responsibilities, confident in the expectation that the next generation of citizens will pick up the bill.
Such promises have worked so far because of continued economic growth and rising populations. But with populations starting to fall in some countries, and the tax base shrinking in others, the strain is starting to show. The financial crisis has piled on further stress. Iceland, a tiny island state, was overwhelmed by the debts of its banks. Dubai has shown that the distinction between government debt and the debt of government-controlled entities can be a fuzzy one. Greece has been downgraded by two rating agencies, Fitch and Standard & Poor’s.
All this may lead to a turbulent year in the currency markets. The idea of the “law of volatility” is that you can control risks in some parts of the system but not in them all. A zero-interest-rate policy has supported risky assets, particularly equities, while quantitative easing, by allowing central banks to buy government bonds, has prevented massive fiscal deficits from pushing up bond yields.
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The New York Times
December 20, 2009
By ELIOT SPITZER, FRANK PARTNOY and WILLIAM BLACK
WE end this extraordinary financial year with news that the Treasury is in discussions with American International Group about selling the taxpayers’ 80 percent ownership stake in that company. The government recently permitted several banks to break free of its potential oversight by repaying loans made during the rescue. But with respect to A.I.G., the Treasury should not move so fast. There is one job left to do.
A.I.G. was at the center of the web of bad business judgments, opaque financial derivatives, failed economics and questionable political relationships that set off the economic cataclysm of the past two years. When A.I.G.’s financial products division collapsed — ultimately requiring a federal bailout of $180 billion — those who had been prospering from A.I.G.’s schemes scurried for taxpayer cover. Yet, more than a year after the rescue began, crucial questions remain unanswered. Who knew what, and when? Who benefited, and by exactly how much? Would A.I.G.’s counterparties have failed without taxpayer support?
The three of us, as experienced investigators and prosecutors of financial fraud, cannot answer these questions now. But we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade. Before releasing its regulatory clutches, the government should insist that the company immediately make these materials public. By putting the evidence online, the government could establish a new form of “open source” investigation.
Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story. In past cases of financial fraud — from the complex swaps that Bankers Trust sold to Procter & Gamble in the early 1990s to the I.P.O. kickback schemes of the late 1990s to the fall of Enron — e-mail messages and internal documents became the central exhibits in our collective understanding of what happened, and why.
“Dr. Bernanke is a dedicated and honorable public servant…however those factors in my mind do not outweigh my concerns on regulation and rebuilding the economy…
Dr. Bernanke’s approach helped set our economic house on fire. That fire has destroyed the jobs, the healthcare, the retirement savings, of millions of American working families.
Since then Dr. Bernanke has shown himself to be quite adroit with the fire hose, helping to put that fire out.
But as we look to the future, and we look beyond the stage of putting the fire out, I think we need to look to leadership that will be adept at rebuilding our economic house.”
Democratic Senator Jeff Merkley at the Senate Banking Committee hearing to vote on Ben Bernanke’s confirmation
From Systemic Risk the Clare Distinguished Lecture in Economics and Public Policy by Jean-Claude Trichet, President of the ECB organised by the Clare College, University of Cambridge, Cambridge, 10 December 2009
~~~ ” … However, macroeconomic stability has not been a sufficient condition for financial stability. It cannot eliminated systemic risk altogether. Macroeconomic authorities have therefore been frequently called on to provide remedial action, once booms have turned into busts. The aim of their action has been precisely to avoid the transformation of individual financial risks into systemic risk.
Ex post remedial action has often been activated as soon as the financial firestorm has threatened the stability of the economic system. But such action risks raising expectations that macroeconomic policy will always insure against tail risks, no matter how large. Expectations of this sort can contribute to an under-pricing of financial risk in subsequent phases of the financial cycles. They can encourage concentration of market positions in the financial scene.
At the same time, the instruments of counter-cyclical policy have been used so intensely – and more so from one financial cycle to the next – that authorities might have tested the extremes of their control procedures. I am borrowing here from dynamic control theory. Repeated attempts to fine tune a mechanical or electronic system after a shock sometimes leads to “instrument instability” that makes the system spiral out of manageable bounds.  Economic and financial systems, I suspect could have some structural similarities with physical systems, leading to the same kind of “instrument instability”.
Moral hazard and policy instrument instability pose questions to which we are not in a position to a firm answer at this point in time. I would like to see these questions studied and debated in eminent academic institutions like this….”