As George Bush Might Say, "This is Ironical."

As I said in a earlier post, yesterday President Obama gave an interview on Bloomberg Television.  Here's some fascinating stuff concerning regulatory reform and "derivatives" from Bloomberg News.

The president today will announce his proposal for revamping financial regulation. Many of the changes must be approved by Congress, where jurisdictional and ideological clashes may shape the final legislation.

Crafted by Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers, the plan would put the Federal Reserve in charge of regulating companies whose collapse could damage the entire financial system. It would also create a new agency to oversee consumer financial products, such as mortgages and credit cards.

The proposal encompasses areas ranging from derivatives to executive pay to the mortgage-backed securities that helped fuel the housing boom and touch off the credit crisis.

“Derivatives are a huge potential risk to the system,” he said. “We are going to make sure that they have to register, that they are regulated, that you have clearinghouses.”

No offense Mr. President, but did anybody tell you who Larry Summers is or did you just do whatever Bob Rubin told you to do??  If you knew ANYTHING about Dr. Larry (and I'm not even talking about his $5 million payday from hedge fund DE Shaw where he was a "consultant") you would know that putting the phrase "revamping financial regulation" together with "crafted by Larry Summers" and then "regulating derivatives" is insane!!  Maybe the Prez needs a little history lesson.  This is from our blog a few months ago; 

With that out of the way, lets talk about yesterday's winner of the "Profiles in Courage" award from the JFK Library, former CFTC chief Brooksley Born.  One of our favorite readers was kind enough to dig up the original story of the battle that took place between Brooksley Born, Alan Greenspan, Larry Summers, Bob Rubin and Arthur Levitt.  Check this out from October 1998, right after the Long Term Capital collapse.  I wanted to cut out key excerpts but the whole article needs to be read.  You will see that Larry Summers CALLED FOR LEGISLATION blocking the CFTC from having any regulatory jurisdiction over OTC derivatives!  The "legal" issues that Born's opponents cited were the risks that a deep dive study into OTC Derivatives might result in the contracts being  treated like futures, which by law must trade on an exchange.  Fair enough, but I bet there could have been rational remedies for this.  The right answer was not to just ignore the risk or leave the product completely unregulated.  We had just come out of the LTCM disaster and the whole panic was systemic risk from OTC derivative products.  Sound familiar?  By the time this article came out, Born had been battling with Al, Bob and Larry for months.  You will see that she is conciliatory and really just wants the financial regulatory system to get its head around the potential risks of the products should they be misused.  From Bloomberg News;

    Washington, Oct. 1(Bloomberg) -- The head of the federal agency that regulates the U.S. futures markets expressed a new desire to regulate the $30 trillion over-the-counter derivatives
market following Long-Term Capital Management LP's losses.

Commodity Futures Trading Commission Chairman Brooksley Born for the first time said she is``getting notions'' about the type of rules that may be needed to prevent OTC derivatives use from disrupting the markets.  Her position puts her in opposition to Federal Reserve Chairman Alan Greenspan and Deputy Treasury Secretary Lawrence Summers, who today reiterated their opposition to a controversial CFTC review of the OTC derivatives markets even as key members of Congress asked the regulators to do a broad study.  Long-Term Capital's near-collapse ``confirmed fears I had'' about the OTC derivatives market, Born told reporters after a House Banking Committee hearing on the hedge fund.
   

Born said price transparency and disclosure would be her main goals in proposing any new rules, rather than regulation such as the Securities and Exchange Commission imposes on brokerages.``Too much is at stake now,'' she said.

                    Greenspan Comments

 The Federal Reserve Bank of New York helped organize 14 banks and brokerage firmsto take over Greenwich, Connecticut-based Long-Term Capital, which suffered as much as $4 billion in losses through highly leveraged bond and stock trades. Some of the trades involved OTC derivatives -- contracts tied to the value of securities, commodities, currencies or indexes.  Greenspan said Congress should prevent the CFTC from imposing rules on OTC derivatives, which a provision in the pending agriculture spending bill would do temporarily, even after the near-failure of Long-Term Capital.
   

 ``There is a very significant concern that the legal status of the OTC derivatives market would be subject to very severe legal challenges'' if the CFTC acted, Greenspan said at the banking committee hearing.
   

The comment came in response to a question from  Representative Maurice Hinchey, a Democrat from New York, about whether the CFTC should be allowed to proceed with a study of the OTC derivatives market it started in May. Derivatives dealers and rival federal regulators say the study jeopardized the industry by suggesting many contracts may be illegal. Three members of the five-member CFTC agreed to hold off on new rules for a year because of those concerns.

Summers said in a letter, dated yesterday, to House Banking Committee Chairman James Leachthat the need for legislation blocking the CFTC is greater than ever ``because it will reduce legal uncertainty with respect to certain OTC derivatives.'' Industry representatives have also objected to Born's attempt to draw a link between the hedge fund's problems and the need for more oversight of OTC derivatives.

WTF?  Time to wake up Mr. President!

Comments

[eric]

fine points gentlemen. Yeah, Larry Fink is smart. He keeps himself below the radar, much like Carlo Gambino!

[fletch]

Q: Does BlackRock now qualify as too big to fail?
Q: If so, who is now regulating Larry Fink and what's changed?
Q: If the Obama administration is really concerned about regulating (and reducing) systemic risk, shouldn't mergers like BLK/BGI be prevented in the first place?
Q: Is BLK not just today's most-favored (politically and otherwise) financial institution a la Citi, Countrywide, Freddie/Fannie, AIG, Moody's/S&P, Long Term Cap, etc etc in their heydey rise to prestige?

I'm sure somehow this is different..

[Strangebrew]

Here is a splendid little tie-in from yesterday's WSJ that brings together this post and the one before it. I think it's safe to say that Volcker was 100% a prop rolled out by Barry to make people like you feel better about pulling the lever for him and that you'll never see the 2 of them at a podium together again.

Moral Hazard and the Crisis
Volcker: Hedge funds don't need to be regulated like banks.

Editor's note: The following is from the keynote address by former Federal Reserve Chairman Paul A. Volcker to a meeting of the International Institute of Finance in Beijing, June 11:

Another important common concern is the "too big to fail" syndrome -- the presumption that an institution is so large or so inter-connected with counterparties that its creditors (possibly even shareholders) must be protected. One unfortunate consequence of the massive public assistance provided both banks and nonbanks in dealing with the present crisis is that moral hazard may, I am afraid, become more deeply embedded.

We can, and we should, take steps to limit the need and possibility of official "bailouts." One approach would be to set clear policy limits to access to the "official safety net." Deposit insurance and central bank liquidity facilities are properly confined to deposit-taking institutions. It is, after all, those institutions that remain the backbone of the financial system. They provide basic essential services, meeting the needs of households, businesses and other institutions for credit, for a safe and liquid repository for their funds, and for both everyday and complex payment services.

Historically, the need for continuity in those functions has provided the rationale for close government supervision and protection. In my view, it is unwarranted that those same institutions, funded in substantial part by taxpayer-protected deposits, be engaged in substantial risk-prone proprietary trading and speculative activities that may also raise questions of virtually unmanageable conflicts of interest.

Hedge funds and private-equity funds have an entirely legitimate role to play in providing liquidity and innovation in our capital markets. I do not believe they need to be so closely supervised and regulated as depository institutions. A presumption of government protection and support for financial institutions outside the "safety net" should be avoided. Nor by the same token should hedge funds or private-equity funds indirectly benefit from official support by sponsorship or ownership by a banking institution.

The possibility that failure of a large hedge fund or trading organization might present a systemic risk can be reduced by way of speeding timely resolution of troubled nonbanking institutions. Such authority already exists in the United States for insured banking institutions by means of appointing a "conservator" or "receiver" empowered to maintain continuity of services pending a more lasting resolution of a failing institution.

There is a growing international consensus that hedge funds and equity funds beyond some de minimus size should at least be required to register, with the implication of limited reporting requirements. There may be a few instances in which such funds become so large as to suggest official capital and leverage requirements would be appropriate. Hedge and private-equity funds are necessarily dependent on banks for credit and operational needs. Encouraged by supervisory and risk-management processes, such funds could be appropriately monitored and controlled through those banking relationships.

One other hotly contested matter deserves mention. There isn't much doubt that attempts to enforce strict application of mark-to-market accounting procedures has contributed to confusion, uncertainty and inconsistencies among financial institutions. There is a strong case for reviewing the application of so-called fair value standards to commercial banks, insurance companies and perhaps certain other regulated financial institutions.

The problem is not only the difficulty of measuring value in highly disturbed market conditions. More broadly, strict mark-to-market accounting -- entirely appropriate for trading operations and investment banks -- may introduce a degree of volatility in reporting incompatible with the basic and essential business model of banks, which inherently intermediate maturity and credit risks.

At the same time, we should demand international consistency and professional judgment in setting accounting standards. Both are today jeopardized. Political bodies in Europe or the United States or any other country are simply not the appropriate venue for reaching well-considered judgments that can be enforced internationally. Instead, we need a bit of patience as the International Accounting Standards Board carefully reviews the application of "fair value" to banks and those other institutions subject to close official scrutiny in reporting.

This has been a heavy talk after a splendid dinner in this Great Hall. My excuse is simple, you have a very long, very technical agenda, and I am delighted to be able to get a few words in first.

I appreciate your attention.