As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."

Thursday, May 14, 2009

More From Populist Obama

I don't know if it's residual anger over the bondholder revolt or what, but the President does seem to be formulating some legitimate steps to regulate the financial industry. First off, he wants to deal with derivatives:

In its first detailed effort to overhaul financial regulations, the Obama administration on Wednesday sought new authority over the complex financial instruments, known as derivatives, that were a major cause of the financial crisis and have gone largely unregulated for decades.

The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.

As it is now, there are $70 trillion dollars exposed in the derivatives market, more than all the money in the world. Without the need to back up the exchange with capital ratios, these things happen. Traditionally, regulations like this hold for a few years until the Big Money Boyz figure out a way to get around them. But this would essentially stop dead the shadow banking system, a major element of the crisis.

And then we have the Big Kahuna: CEO compensation, and a real effort to limit executive pay:

Obama Administration officials are contemplating a major overhaul of the compensation practices in the financial services industry, moving beyond banks to include more loosely regulated hedge funds and private equity firms.

Federal policymakers have been discussing ways to ensure that pay is more closely linked to performance.

Among the ideas under consideration are incorporating compensation as a “safety and soundness” concern on official bank examinations as well as expanding the existing regulatory powers of the Securities and Exchange Commission and Federal Reserve to obtain more information.

Obviously the issue with regulation is who the regulators are. We had plenty of regulations on the books that could have mitigated the financial crisis, but the regulators looked the other way. I mean, the NY Fed apparently knew about the AIG bonuses when Tim Geithner was at the helm. So while I appreciate the attempt, I have to see some teeth out of the oversight before I believe it will solve the problem.

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