Banking System Oversight

Robert Reich says the Fed already has all the tools it needs to regulate financial markets, but it hasn't used them effectively:

The Fed can already help subprime, Marketplace: ...As someone who was in charge of one of the biggest regulatory agencies in the federal government, I can tell you regulations themselves don't do squat. They have to be vigorously enforced. And that means setting clear rules, having enough inspectors, and knowing when vigilance is required.

So how to prevent another banking crisis that causes millions of families to lose their homes and investors to lose their shirts? The Federal Reserve already has the authority it needs to do this. The Federal Reserve Act of 1913, as amended, and the Bank Holding Company Act of 1956, give it power to monitor and regulate the entire banking system.

The problem here was it failed to use this authority. It wasn't even paying attention.

A few years back, when the Fed lowered short-term interest rates to 1 percent, money became so cheap the Fed should have known lenders would hand it out to almost any borrower who could stand up straight. Especially when lenders could immediately fob off the loans to middlemen who bundled them and sold them off again.

Big banks, hedge-fund managers, everyone looked the other way because the party was too much fun. And then when the Fed started raising rates, it should have known the party would be over -- and there'd be a mess to clean up.

But the Fed didn't -- and still doesn't -- pay enough attention to the effects of its rate settings on the practices of lenders and borrowers. It still doesn't have enough bank examiners who know what to look for. Still doesn't know how to oversee giant financial conglomerates whose deals are so complex even their own top executives don't understand them. Is even now disregarding the next banking crisis, which will be a wave of credit-card defaults.

Instead of pumping out new regulations, Congress should give the Fed the resources it needs to use the authority it already has. Confirm new Fed governors who will be vigilant in overseeing the banking system. And hold all Fed appointees accountable for doing the job they're supposed to do. ...

Comments

[ken melvin]

If ronnie didn't like a reg he would put an idealogical hack in charge and not fund it's enforcement. GW has taken this to a new level.

[paine]

this has the tiger by the tail

the fed is ground zero
for all bubble machines
and
if it makes em
it can brake em

[paine]

bobby
could have laid on the final indictment

the bubble was intended as same
known to end badly
leave egg on faces and blood on hands

a rube razzle from the get go
stamped
approved
at each stage of its arc to hell
by greenscum and gentle ben both

this is the financial equivalent of mass torture

a crime against humanity

[paine]

km

you got the gimmick babe

[wjd123]

Is the key to stopping the next financial mess to have enforcement of regulations or to make regulations easier to enforce?

The financial industry starts by creating special entities that no one can understand. They muddy the waters so no one can peer beneath the surface. When the dead bodies start floating to the surface all the entities it created start fingering the other guy. It then hopes that in all the confusion it can fob off its losses on society. Let society clean up the carnage that is now floating down stream while it works out the next intricate deal to transfer its risks to the next guy and ultimately society.

Why not? The financial industry has a compliant government that passes laws and regulations it doesn't enforce or couldn't enforce if it wanted to. For those government officials who might mention this fact, it can help insure their silence by sending them some money to help them stay in office. Get the right people in power and they will neuter the regulatory agencies to make muddying the waters that much easier.

I don't believe the way to stop this obfuscation where society ends up holding the muddy end of the stick is to get better trained regulators who can peer beneath the surface of the muddy waters, but simpler regulations so the waters won't be muddied. Regulators should be able to stop the guy with the stick in the water roiling up mud even if they don't know what he is hiding beneath the surface.

Governments first duty is to see that the needs of society are met and not the needs of the financial industry. Government can't do its job if it doesn't know what is going on, and under our present regulatory system it can't know what is happening. Governments inability to peer beneath the surface of the water makes it easier for the financial industry to plan their schemes where once again they can fob off their risk and liability on the rest of us.

If making regulations easier to enforce is over-regulating, than let's over regulate. Making regulations easier to enforce will not only act as a deterrent to would be schemers, but with simplicity comes a good measure of just desserts as investors bail out and the finger pointers find their stock value falls. CEOs with their stock options hate stock value to fall. Making it easier for regulators to do their job will have that initial effect.

[wjd123]

Is even now disregarding the next banking crisis, which will be a wave of credit-card defaults.--Robert Reich

It's good to be King. Not that I ever wanted to be King but being King allows me to do what I want to do, and what I want to do is evil to corporations. I'm particularly keen on doing evil to the financial industry.

So, you ask, what will be my first act as King, To save my subjects and their communities from the credit card pushers.

I'll declare a usury law. Set rates at no more than 2% over prime. And since I'm King, I'm going to decree that all existing loans be readjusted and that all money that has already been paid over my usury rate must go toward paying off the principle. That should clear up a lot of debt for my subjects.

A few of them will complain that my actions caused the credit card companies to tighten up on extending credit. That's the King intention.

The credit card companies will say that I'm forcing them to take actions that will slow the economy. Some political pundit will call me the nanny-King.

I'll reply, I'm setting the rules of the borrowing game that the King sees as fair and in the best interest of his kingdom and his subjects. Those who disagree will have to exist outside the King's law and suffer the consequence of the King's sanctions for doing so.

Besides, the King sees no reason why the economy will suffer, since he is merely transferring money from one entity to another. Think of his action as a tax break for my subjects. Republicans should understand. That is, except for the part where the break isn't at the expense of the King's Treasury but the profits of the credit card industry.

The King extends his condolences to those investors who were hurt by the King's decree. However, they knew the King's feelings toward the financial industry, and the King wishes them to be more vigilant when investing.

It's good to be King when you can do such sweet evil.

[wjd123]

Time to go to the daughter-in-laws house. Happy Thanksgiving Day everyone.

[calmo]

Such an inspiring little vignette King wjd123 (ok, this won't do "King wjd123" ...how about "King 123whatR we waiting...4". Ok, too cute.."King Wilfred"...too bloody staid, mon.)

I love the zound of this kazooRepublicans should understand. Similarly, water should run uphill...now that we are in America where we don't need to be pushed around by Old Country gravity...where we have command by God!
Ok, my next tourist destination: The Land of King wjd123...all credit cards gleefully accepted.

[Farrar Richardson]

I'm not so sure the Fed has all the power it needs to regulate at the level where the waters are muddied, that is, where CMO's and CDO's and the like are issued.

Somebody more familiar with regulatory law might clear that up ??/ Please chip in if you're not too full of turkey.

The Fed does have ample power to regulate down at the nitty gritty level, where the mortgage loans, credit card loans and other consumer loans are made.

It will take an army of regulators, however, and I don't see how you can avoid that, greed and imprudence being what they are.

I went into the detail of this in a comment about a month ago. Obviously Ben Bernanke didn't read it, or the mess would have been cleaned up by now.

Seriously, the Fed has a lot of power it hasn't used. The Fed or the Comptroller of the currency can send in the bank examiners just about whenever they want to. This is the kind of thing they should have done -

Say Countrywide, for example was refinancing its mortgages with Bank of America. To support their borrowings, they should have been sending BofA the basic element of every credit file on every borrower. Then when the examiners go in, a spot check of random files reveals whether BofA and Countrywide have been doing their job. If not, the examiners send for reinforcements who dig into every single file, and start bugging the lending officers for information. If the credit files don't show reasonably solid support, they classify the whole bundle as doubtful, which means that BofA would have to establish reserves, which would mean that heads would start to roll, or, at least that bonuses would be cut. And Countrywide's credit line would be blocked immediately.

But, you will ask, what will happen at that stage, if BofA has already sold the mortgages as CMO's without recourse? It seems to me that in order to avoid being sued for fraud or somesuch, BofA would have to take them back and substitute solid collateral.

Believe me a little moderately agressive bank examination could go a long way toward restoring the credit judgment of bank executives. And most of the doubtful credit that slipped by would be caught before the volume became unmanageable.

This sounds expensive, but you have to make the banks pay for it. Besides, only a few of the examiners need to be experts. Most can be trainees, getting good experience in accountancy and bank credit.

In fact, this kind of bank examination was standard procedure before St Ronnie.

Is the credit market now just too big for this sort of thing? Maybe so. But mightn't it be a good idea to shrink it a little?

[brennan]

To anyone with better sources...

One question I still can't get to is what the net gains and losses of this mortgage system were. Did banks profit 120 billion over the last 5 years, and then lost 40 this year? If so, how is this a disaster (except in the shortest term sense).

Likewise, how many people were able to buy houses over the past decade (due to low mortgage rates) as compared to those losing houses. Did 9 million get houses, and are 1 millio losing. If 8 million more people own homes, I sympathize, and want to help the 1 million who lost them (losing is often harder than never owning at all), but it is difficult to see why the system should change significantly.

DOes anyone have this information, or at least a useful pointer. This whole debate is too much like the a drawn out version of the daily Dow crisis on TV--a 300 point loss is something frightening, apparently. Even when the year to date increase is 6-7%. It seems a sad fact that journalism destroys perspective and history, and I don't have any sense of the right one in this case.

regards, and have a great holiday.

bp

[eclectic artist]

Reich points out that regulators already have the power to regulate home mortgage lending practices, by the Federal Reserve Act of 1913, and wjd123 calls for regulations requiring simpler loans. The Chief Executive Office of Astoria Federal Bank told me that an unscrupulous mortgage officer sells a huge package of mortgages to banks, which then—by one route—gets sold to a Wall Street investment firm, which in turn wraps them up as a security, which is then split fifty ways among more investors. It is difficult to trace and pin down responsibility on any one individual in this system, but suppose the federal bank regulatory agency, under the Federal Reserve, were to afford close scrutiny to a significant sample of the loans made by each mortgage officer. The movie "The Best Years of Our Lives" depicted an interesting loan applicant. The first challenge to regulation appears to be that assets and income should not be the decisive factors in judging creditworthiness. The subjective element can often overrule these factors, and it is an element that, for regulation, would require the federal regulator to sit in the loan officer’s place and interview the loan applicant. A and B are two applicants, both equally without assets, or current income in excess of needs. A is a confident, upright, clear-speaking individual who has been working in a promising field for a growing company under a charismatic manager who intends to move into a house near his company. This move will give him time to devote more hours to his work, in the energy field. B is a slouching, mumbling individual. He works in a junkyard in a demoralized atmosphere and wants to move into a new house because his wife has been nagging him. Numbers will not determine, a mechanical process will not produce, the better choices, to whom to lend and whom to reject.

[paine]

"Regulators should be able to stop the guy with the stick in the water roiling up mud even if they don't know what he is hiding beneath the surface. '

exactly right

black boxes need credit inputs
to blow bubbles
throttle the credit flow into
these closed end like markets
and no bubbles get self blown

[eclectic artist]

brennan wants to open doors to many research departments, which is like opening books in many research areas. Each new book provokes, in turn, many quests for more elaboration, greater detail and wealths of information. The common man won’t stand for it, as H.L. Mencken pointed out in “Newspaper Morals”, always seeking a villain, and the more powerful the villain, the greater the victorious feeling when the villain is defeated. You’re no longer a common man, faceless, nameless, standing holding a newspaper at a newsstand, when you’ve gotten in as deep as brennan obviously has. You are developing expertise, and need to keep reminding yourself of your own practical individual needs before thrusting further into areas of enormous study. Dozens of books answering questions about the mortgage industry have been published in the past few years, which would provide the context for further research about the current subprime mortgages meltdown. The individual must decide what perspective to take because the more expertise an individual’s research gets him without any official recognition of that expertise, the more discontent the individual is with the people around him, the very people he intended to help. Why didn’t they, as common citizens, do this research, too? At some point one could actually achieve the expertise of a Ben Bernanke, but without getting the doctorate degree and appointment to the federal reserve, it can feel frustrating: all that knowledge, and for what? To watch idly by as whatever villains continue to be subject to malignant personal forces? Time and space do not appear to allow the common citizen to put himself in the place of the mortgage loan officer, or the banker, or the investment firm on Wall Street, or the Federal Reserve governor, or chairman. All the knowledge from books provides a context for developing one’s own perspective, which can get forever nearer one or other of these personae on the mortgage banking stage, without ever providing for the ideal, the actual displacement. Consider that ideal. Suppose you read every page of "The Age of Turbulence" and got beyond the textbook and the technical manual knowledge. You actually know what colleagues at work want out of the chairman, what his friends and family expect, what his wife demands. If your knowledge were perfectly individual, and you were really ready to displace him, determinism theory asserts that you would decide exactly as that chairman decided. Greenspan says in his book that he could not have acted in 2006 to save the mortgage industry. He simply did not know that that many unscrupulous mortgage loan officers would go out there offering varying, adjustable rates to no-income, no-assets, no-employment individuals. That was Greenspan's line. Who would you be in his shoes?

[Farrar Richardson]

"That was Greenspan's li[n]e. Who would you be in his shoes?"

I would damn well be the guy who sent in the bank examiners. I got over Ayn Rand when I was 19.

[paine]

eclectic

what a pile of horse feathers

greenspan knew where the boat was headed
in 2003
he wrung his hands
over the ssa circa 2040
but missed
the iceberg dead ahead three years away
i f in doubt it
btw where's his warning on corporate defined bene plans
exploding
all around town
ALREADY

[Lafayette]

Brennan: One question I still can't get to is what the net gains and losses of this mortgage system were. Did banks profit 120 billion over the last 5 years, and then lost 40 this year?

It's scandalous

If you consider this in uniquely monetary terms, then sub-prime mess will be like the dot.com bubble. That is, it will take a number of years for the losses to be compensated by future gains.

Just like in the S&L scandal many years ago, there will be the vultures who will swoop in to repurchase the (now correctly priced) credit instruments. Those who packaged the SIVs will have to verify their risk and a more serious rating be given to them. But, after repricing, they WILL become interesting investment vehicles collateralized by property.

And life will go on. It will take some time to rate the SIVs. Because the credit risks were so finely atomized, all the loans in a given vehicle (and there could be hundreds and hundred if not thousands and thousands) must be reviewed and their true risk reassessed. Only then can these investment vehicles be correctly rated for risk.

In the meantime, the US is going to have a nice little recession just in time for the election period next year.

And, yes, at the risk of boring you, I must repeat that the nerds at the Fed were and are responsible for avoiding the mess - a responsibility that they failed miserably.

But, why should they care? They're not up for re-election. Two to three million families are going to be out of house and home - but NOBODY will be out of a job at the fed because of this mess. It's scandalous.

Why some nosy Senator is not calling for an investigation (Barak, where are YOUUUUUUU?) is the mystery of the day. Nobody wants to point the finger in Washington? My, my ... how they have changed character!

Makes one wonder why ...

[ken melvin]

Most edifying. Thanks to all you of good minds for sharing your thoughts.

Been on my mind some time that too much emphasis is being put on what an administration does and that we must begin to hold leaders responsible for what they should have done but didn't.

[Lafayette]

km: we must begin to hold leaders responsible for what they should have done but didn't.

Unbridled capitalism

Hear, hear! (British exclamation equivalent to the American "Right on [target]!")

Democracy is not something that "just happens". We cannot sit back, comforted by the perpetual repeated assurance that ours is the "Greatest democracy on earth!". It isn't.

It is rotten with plutocratic leadership that cares only about what is happening to the "bottom line" for a select few. And therein lies our problem of Income Inequality. The rest of us are considered "suckers". We are "not in the know"? Well, that's tough, "cuz it's a jungle out there".

Indeed, savage capitalism IS a jungle, if we let it be. Dangerously wild animals need proper cages, and still they are not "tame". But, at the very least, they don't hurt anyone.

Furthermore, nothing is going to change if WE do not exact that change. Being a democracy, we elect our leaders ... but if history is any guide, we don't get into the nitty-gritty (of policy) that will influence our lives.

We behave in a Pavlovian manner to media stimulation. Such as the useless "debate performances" at the level of a fourth-grade in elementary school. We elect people without ever knowing, really, what they will do once ensconced in the Oval Office.

Who would have ever thought lead-head would be stupid enough to invade Iraq and plunge the nation into its second quagmire in sixty years, costing us trillions of wasted dollars. And yet we reelected the dork.

We deserve better. Better than the charade that presently passes for an election campaign and is not more than pap for the masses.

We deserve the politicians we elect ... they are nothing more than a reflection of ourselves. Backed by vested-interest BigMoney, who want some cosmetic changes (to quell the agitation in the rank and file) -- but no alteration whatsoever to the capitalist method of income creation and its ultimate distribution.

What fools we are ... 8^(

NB: And this is no anti-capitalist diatribe. Capitalism is the best mechanism yet devised for allocating resources and generating riches. It is also one of the worst for distributing equitably that wealth -- particularly when unbridled. But, there, we have no one to blame but ourselves.