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The administration has issued draft legislation granting the power to seize and unwind financial institutions deemed too big to fail. Why wasn't the proposed bill also introduced in Congress? Are they testing the waters, or could they not find a sponsor?
A PLAN!
Over the last couple of days, Timothy Geithner demonstrated that the administration does, indeed, have a regulatory reform plan. The plan’s overall design, as described in Treasury press release TG-72, identifies four goals:
• Control of systemic risk
• Protection of consumers and investors
• Elimination of gaps in the regulatory system
• International coordination
These goals are familiarly vague (Geithner avers they originate in a fuzzy speech the President delivered at the Cooper Union) until you consider what Geithner did next. He went before the House Financial Services Committee and carefully outlined concrete steps for controlling systemic risk:
1. A single regulator responsible for systemic stability
2. “Substantially” more conservative capital requirements for systemically important institutions
3. Registration of large hedge funds and their advisers.
4. A comprehensive framework of oversight and disclosure for OTC derivatives
5. New SEC rules to protect the liquidity of the money markets
6. A resolution mechanism for entities posing a systemic risk
Then he offered actual proposed legislation for step #6! The proposed “Resolution Authority for Systemically Significant Financial Companies Act of 2009” (RASSFCA?) is modeled on the FDIC’s resolution authority and is aimed at institutions that fall outside the existing FDIC regulation regime.
RASSFCA
First, although the administration's plan will probably make the Treasury Department the systemic risk regulator - the One Agency, if you will - much has been made of Geithner's refusal to identify the who will wield resolution power (Geithner Ducks Key Question, American Banker 2009 WLNR 5704049) it seems kinda obvious, doesn't it?
The proposed resolution authority bill creates a mechanism that would work this way: if, after a somewhat convoluted process of inter-agency wrangling, it can be shown that a covered institution is:
• in danger of becoming insolvent and
• its insolvency will have serious adverse effects on “economic conditions or financial stability” in the United States, and
• emergency action would mitigate those effects,
The Fed would be empowered to use a number of emergency action tools. The tools range from loaning money to placing the company in receivership so that it can be unwound (are you listening, AIG?). Insolvency is broadly defined. “Serious adverse effects” isn’t defined at all. Receivership terminates bankruptcy proceedings, the rights of stockholders, and in an emergency, Hart-Scott-Rodino.
Next?
One can only assume this is the first salvo in a legislative bombardment. Over the next few weeks, expect to see proposed legislation for each of the points on the list above. Regulation of hedge funds gets particularly in-depth treatment in recent releases, so maybe that's next?
Before Tim Geithner could get out even the first installment of his legislative masterwork, Congressional Republicans beat him to the punch by unveiling an all-in-one regulatory reform proposal called the Financial System Stablization and Reform Act of 2009 (FSSRA). On the 23rd, Susan Collins introduced FSSRA in the Senate (S. 664) and three days later, Mike Castle introduced it in the House (HR 1754).
The Council
FSSRA does a whole bunch of stuff, but the majority of the bill is devoted to creating the Financial Stability Council - a "systemic risk monitor for the financial system of the United States". The Council would be composed of the Secretary of the Treasury and the chairs of the Board of the Federal Reserve, the FDIC, the National Credit Union Administration, the SEC and the CFTC, and headed by a Chairperson appointed by the President.
The Council would review all regulatory actions from a slew of agencies with financial-system related oversight. It would also: oversee systemic risk policy (including capital and solvency requirements), consult with foreign regulators, and review "new financial instruments".
Other
FSSRA also:
* gives the CFTC the power to regulate credit default swaps,
* forces investment bank holding companies reorganize under the Bank Holding Company Act (wait, who are we talking about here?),
* directs the SEC to finalize rules designating central CDS clearinghouses, and
* abolishes the Office of Thrift Supervision (its duties get transferred to the Office of the Comptroller of the Currency).
The Corporate Counsel Blog reports that the SEC has updated the Compliance and Disclosure Guidelines for '34 Act rules with special focus on 10b-5.
The Senate Judciary Committee has issued a report (SR 111-10) on The Fraud Enforcement and Recovery Act of 2009 (S. 386, FERA). Follow this link to see conclusions and changes made.
People are understandably annoyed at AIG. Their conversion of bailout money into a personal windfall was ... surprising. Guest poster Mark Schwartz (our first!) argues that we can't understand the behavior of AIG executives because they inhabit a different reality.
-----------------------------------------------------------------------------The past several decades have seen a massive transfer of wealth from shareholders and rank and file employees to senior level executives. This shift has placed normal people and corporate managers in parallel realities. Like the Bourbons at Versailles, executives seem incapable of understanding what the little people are so exercised about. This problem didn’t start with AIG, or even the financial sector generally. By creating an expectation of kleptocrat-level compensation, the twin instrumentalities of bonuses and stock options shifted the frame of reference in the executive suite. Stock options were supposed to be the ultimate way to tie performance to compensation, but when performance lagged, ways were found (backdating, resets) to make sure pay did not.
So these days, when a company files for bankruptcy, immediately after voiding union contracts, executives award themselves retention bonuses. Retention bonuses for the structured finance group at AIG? When Nick Leeson lost seven billion dollars of Barings' money he got no bonus. He got prosecuted.
Adding further fuel to the fire, senior government regulators either grew up within this system or are so besotted by the larger-than-life folks they are supposed to regulate that they also seem unable to understand how this plays to the public. It is not that government officials knew about these AIG bonuses but rather, that they were caught off guard by the visceral fury of the American public. How, other than by drinking the Kool-Aid themselves, could they be surprised?
So far, Obama's appointees (And I like him very much) don’t seem to be breaking the pattern. Was Mary Shapiro's tenure at FINRA so stellar that she should head the SEC? Why not Andrew Cuomo? The only one I trust is Sheila Bair. She at least has her heart in the right place.
In response to a request from Congress, the Financial Accounting Standards Board has rushed out new guidance for interpreting the FASB mark-to-market accounting rule (FAS 157). The guidance takes the form of two proposed Staff Positions titled "Determining Whether a Market is Not Active and a Transaction is Not Distressed," and gasp, "Recognition and Presentation of Other-Than-Temporary Impairments." The comment period is open until April 1st so you'll need to hurry.
SEC Acting Chief Accountant James L. Kroeker has provided additional guidance in a recent speech.
WB Legal Currents has a useful outline of the toxic asset purchase plans and links to related SEC disclosure documents.
They also mention that one of the side effects of the rebirth of the MBS market will be that real valuations will be available for toxic assets. Mark-to-market + fire-sale prices may mean a balance sheet bloodbath for holders. Will holders keep their toxics in hopes of getting a better offer?
The Business Law Prof worries that hedge funds may use the program, buy credit default swaps and end up with zero exposure.
Two weeks ago, Reuters reported that the SEC was going to consider reinstating the Uptick Rule. Congress may beat them to the punch. On the 16th Edward Kaufman introduced S. 605 (C.R. S3121) which would require the SEC to reinstate the Uptick Rule. The bill has been referred to the Senate Banking Committee. S. 605 would also give long-term investors priority over short sellers, outlaw naked short selling and shorten the share delivery window to three days.
Just as the Treasury is reinforcing the value of a triple-A ratings through its toxic-asset purchase programs (this appears to be the moniker of least resistance. Make a note.) The SEC is planning to examine the way it approves and monitors credit rating agencies. Yesterday, the SEC announced the panelists for its April 15th credit rating agency discussions. Click here for details from the Securities Law Prof blog.
While we're on the subject, why is the Treasury making a prior triple-A rating a condition for its toxic MBS purchase program? Hasn't it been established that the credit rating agencies were at their most irresponsible when they rated these securities? What's the reason for this seemingly requirement-less requirement?
