Obama's Explosion of Regulation

Obama began his war on private enterprise in America. His first target was to rein in pay across the private sector. Then came credit card companies. Now its a massive attack on the entire financial industry of our nation. Two days ago, “A New Foundation: Rebuilding Financial Supervision and Regulation,” running 89 pages in length and instituting the most far reaching regulation of our financial industry since at least the New Deal. Washington Wire condensed the report to the following:

For the regulation of financial firms, the proposal:

- Creates Financial Services Oversight Council, which would coordinate activities among regulators, replacing the President’s Working Group.

- Ensures that any financial firm big enough to pose a risk to the financial system would be heavily regulated by the Federal Reserve, including regular stress tests.

- Says the Fed will have to “fundamentally adjust” its current supervision to more closely watch for systemic risks.

- Allows the Fed to collect reports from all U.S. financial firms that meet “certain minimum size thresholds.”

- Gives the Fed oversight over parent companies and all subsidiaries, including unregulated units and those based overseas.

- Says the Treasury will re-examine capital standards for banks and bank-holding companies.

- Tells regulators to issue guidelines on executive compensation, with the goal of aligning pay with long-term shareholder value, including a re-examination of the utility of golden parachutes.

- Creates a new bank agency, the National Bank Supervisor, and kills the Office of Thrift Supervision. The new agency will look over national banks, including federal branches and agencies of foreign banks.

- Forces industrial banks, non-bank financial firms and credit-card banks to become more traditional bank holding companies subject to federal oversight.

- Kills the SEC program that supervised Wall Street investment banks.

- Requires hedge funds, private-equity funds and venture-capital funds to register with the SEC, allowing the agency to collect data from the firms.

- Subjects hedge funds to new requirements in areas such as record keeping, disclosure and reporting. The oversight would include assets under management, borrowings, off-balance sheet exposures.

- Urges the SEC to give directors of money-market mutual funds the power to suspend redemptions, and take other action to strengthen regulation of money-market mutual funds to prevent runs.

- Beefs up oversight of insurance by creating an office within the Treasury to coordinate information and policy.

- Kicks off a process by which the Treasury and the Department of Housing and Urban Development will figure out the future of mortgage giants Fannie Mae, Freddie Mac and the federal home-loan banks, which could include winding them down, returning them to the private sector or refashioning them as public utilities.

For the regulation of financial markets, the proposal:

- Brings the markets for over-the-counter derivatives and asset-backed securities into a regulatory framework, strengthens regulation of derivatives dealers and forces trades to be executed through public counterparties, such as exchanges

- Toughens the regulatory regime, including more conservative capital requirements and tougher rules on counterparty credit exposure.

- Strengthens laws designed to protect “unsophisticated parties” from trading derivatives “inappropriately.”

- Gives the Fed more power over the infrastructure that governs these markets, such as payment and settlement systems.

- Harmonizes the powers and authority of the SEC and CFTC to avoid conflicting rules relating to the same products or time-wasting turf battles over who should regulate what.

- Tells the SEC and the CFTC to deliver a progress report by September.

- Requires that originators, for example, mortgage brokers, should retain some economic interest in securitized products.

- Directs regulators to “align” participants’ compensation with the long-term performance of underlying loans.

- Urges the SEC to continue its efforts to improve the transparency and standardization of securitization markets and recommends the SEC have clear authority to require reporting from issuers of asset-back securities.

- Urges the SEC to strengthen its regulation of credit-rating firms, including disclosing conflicts of interest, better differentiating between structured and unstructured debt and more clearly stating the risks of financial products.

- Tells regulators to reduce their reliance on credit-rating firms.

For regulations protecting consumers and investors, the proposal:

- Creates a new agency, the Consumer Financial Protection Agency, with broad authority over consumer-oriented financial products, such as mortgages and credit cards. The new agency would work with state regulators.

- Gives the new agency power to write rules and levy fines based on a wide range of existing statutes.

- Proposes new authority for the Federal Trade Commission over the banking sector, in areas such as data security.

- Creates an outside advisory panel to keep an eye on emerging industry practices.
Says the new agency should play “a leading role” in educating consumers about finance.

- Gives the new agency authority to ban or restrict mandatory arbitration clauses.

- Improves transparency of consumer products and services disclosures.

- Says the new regulator should have authority to define standards for simple “plain vanilla” products, such as mortgages, which would have to be offered “prominently” by companies.

- Proposes the government “do more” to promote these simple products.

- Beefs up the agency’s power to regulate unfair, deceptive or abusive practices.

- Imposes “duties of care” that will have to be followed by financial intermediaries, such as stock brokers and financial advisers.

- Regulates overdraft protection plans, treating them more like credit credit-card cash advances.
- Promotes access to credit in line with community investment objectives.

- Strengthens SEC’s framework for investor protection by expanding the agency’s powers to beef up disclosures to investors, establish a fiduciary duty for broker-dealers who offer advice and expand protection for whistleblowers, including a fund that would pay for certain information.

- Requires non-binding shareholder votes on executive compensation packages.

- Requires certain employers to offer an “automatic IRA plan” for employee retirement, with investment choices prescribed by regulation or statute.

- Urges exploration of ways to improve participation in 401(k) retirement plans

To give the government more tools to manage crises, the proposal:

- Creates a mechanism that allows the government to take over and unwind large, failing financial institutions.

- Creates a formal process for deciding when to invoke this power, which could be initiated by the Treasury, Fed, FDIC or SEC.

- Gives authority to make the final decision to the Treasury, with the backing of other regulators.

- Gives the Treasury the authority to decide how to fix such a failing firm, whether through a conservatorship, receivership or some other method.

- Taps the FDIC to act as conservator or receiver, except in the case of broker dealers or securities firms, in which case the SEC would take over.

- Amends the Fed’s emergency lending powers to require prior written approval by the Treasury Secretary.

In the international sphere, the proposal:

- Recommends international regulators strengthen their definition of regulatory capital to improve the quality, quantity, and international consistency of capital.

- Recommends that various international bodies implement the Group of 20 recommendations, including requiring banks to hold more capital in good times to protect against downturns.

- Urges that national authorities standardize oversight of credit derivatives and markets.

- Recommends national authorities improve cooperation on supervision of globally interconnected financial firms.

- Recommends regulators improve the way firms are unwound when they straddle borders.

- Recommends strengthening the Financial Stability Board.

- Urges other countries to follow the U.S. lead and: subject systemically significant companies to stricter oversight; expand regulation of hedge funds; review compensation practices; tighten rules governing credit-rating firms.

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The Origins - and Foreseeability - of the Subprime Crisis

A big hat tip to Hot Air for finding the article below. It is from the September 30, 1999 New York Times discussing the changes Bill Clinton made to Fannie Mae that are the cause of today's sub-prime crisis. What makes this article even more valuable is the author's mention of how this plan to make sub-prime loans would likely come apart in a contracting economy, resulting in the need for a massive government intervention.

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This from the NYT in 1999:

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

. . . In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

Read the article. The motive of the Clinton administration cannot be faulted. The method employed, however, like all socialist programs that seek to give something for nothing, was tremendously destructive. Instead of attempting to work with minorities to bring them into compliance with loan standards and improve their credit worthiness, Clinton simply lowered the standards. Now we all get to pay for it, likely for years to come, both directly through taxes and indirectly through a weakened economy.

And with Obama, we stand a chance of electing our first true socialist into power. Add to that this fiscal crisis; the energy crisis we have self-created by refusing to exploit our resources, the looming bailout of the automakers, and I truly wonder what our country will look like come 2012. I am decidedly not optimistic.

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