Geithner was up today giving testimony on Financial Regulation Reform, that is much needed at a House Financial Services Committe hearing. The plan is not completely known in terms of the detail, but there are some heavy hitters including more regulation for Hedge Funds and credit default swaps. More below the fold.
New York Times
First, we need to establish a single entity with responsibility forThis would create one agency that would regulate all the financial institutions, subjecting them to the same rules. In Geithner's own words,
systemic stability over the major institutions and critical payment and
settlement systems and activities.
“Financial products and institutions should be regulated for the economic function they provide and the risks they present, not the legal form they take,”2.
“We can’t allow institutions to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.”
Second, we need to establish and enforce substantially more conservativeWhat Geithner wants to do, is that when companies become so big, like AIG, BoA, Citi, etc that them failing would have devastating consequences on the economy, the Federal Government will be able to regulate them even more strictly, including much stricter capital requirements.
capital requirements for institutions that pose potential risk to the stability of the financial system, that are designed to dampen rather than amplify financial cycles.
Third, we should require that leveraged private investment funds withCurrently, Hedge Funds, private equity funds, etc are a free roaming beast. Yes, SEC overlooks their funding, but not really their operations. Under the new rules, they would have to register the SEC and provide information on, "how much they borrow to leverage their investments as well as information about their investors and trading partners."
assets under management over a certain threshold register with the SEC to
provide greater capacity for protecting investors and market integrity.
Be ready for a BIG fight on this one folks. Hedge Funds don't want any sort of oversight, they want to be able to manipulate the markets for their profit (like Cramer did).
Fourth, we should establish a comprehensive framework of oversight,I don't know much about derivatives market, but I have read people posting that deregulation of the derivates market back in 1999 was not such a hot idea. As per the NYT, this means:
protections and disclosure for the OTC derivatives market, moving the
standardized parts of those markets to central clearinghouse, and encouraging further use of exchange-traded instruments.
The administration would require that all standardized derivatives be traded through a regulated clearinghouse. Traders would be required to provide documentation on their collateral and borrowings. They would also be subject to new eligibility requirements, and their trading and settlement practices would be subject to new standards.What I also know is that just reading this, there is going to be some hardcore lobbying and hardcore fighting to get this passed through. If anybody wants to elaborate on this, you are welcome to do so.
Fifth, the SEC should develop strong requirements for money market funds to reduce the risk of rapid withdrawals of funds that could pose greater risks to market functioning.Lets just look at what happened in September 2008.
On Monday, September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy. On Tuesday, September 16, 2008, Reserve Primary Fund, the oldest money fund, broke the buck when its shares fell to 97 cents, after writing off debt issued by Lehman Brothers. On the same day, BNY Institutional Cash Reserves, which was not a money fund, but a securities lending fund run by BNY Mellon, also broke the buck – its NAV fell to 99.1.cents – also due to Lehman holdings.I had to look that up on good old wiki, http://en.wikipedia.org/...
The resulting investor anxiety almost caused a run on the bank for money funds, as investors redeemed their holdings and funds were forced to liquidate assets or impose limits on redemptions: through Wednesday, institutional funds saw net outflows of $173 billion to $2.17 trillion, a withdrawal of over 7%.Retail funds saw net inflows of $4 billion, for a net capital outflow from all funds of $169 billion to $3.4 trillion (5%). The lack of retail outflows is attributed to the lag required for individuals to open a new account, to transfer their funds out and retail funds expected significant withdrawals the following week. On Thursday, September 18, 2008, Putnam Investments’ Prime Money Market Fund, a $15 billion institutional fund, announced that it was liquidating, due to redemption pressures.
And sixth, we need to establish a stronger resolution mechanism that givesThis seems similar to the 2nd point, where the government has better tools to cope with failings of institutions like AIG. Lets remember one thing about AIG, we probably would not have been in this situation if the government had the authority to take over AIG like it has with banks.
the government tools to protect the financial system and the broader economy from the potential failure of large complex financial institutions."
But reliaze one thing, CONGRESS has to give the government authority for all this, CONGRESS has to pass the bill to implement these rules.
So, get ready for a big fight when all this hits the House and the Senate.