A Step Backward in Bank Regulations

-- Are We Human or Are We Dancers --A committee of central bankers and regulators from more than two dozen countries, including the United States, has disappointingly given in to lobbying by big banks and watered down important rules meant to strengthen the global financial system. The change will let banks include risky financial instruments like corporate bonds and mortgage-backed securities as part of their liquid asset reserves, which are meant to cover up to 30 days of cash outflows during crises. And the banks have until 2019, not 2015, to comply fully with easier standards. Each nation will decide when+how to implement rules. The committee unanimously rolled back the so-called Basel III rules that were adopted in 2010 to make them “more realistic,” said Mervyn King, the governor of the Bank of England. Banks argued requiring them to hold most of their liquid reserves as cash and the government securities would restrict their ability to lend to small businesses and consumers because they would have less money to lend. The problem is that the new assets defined as liquid are precisely those that banks found difficult to value and trade in 2008. Relying on them to provide liquidity during a crisis is a recipe for disaster, said Anat Admati, a professor of finance and economics at Stanford University. But the banks want to be allowed to hold more such assets because they are more profitable than cash or the government bonds, like 10-year Treasury notes, which were yielding just 1.86% a year on Wednesday. Big banks also know in a crisis they would likely receive emergency loans and capital from the central banks and their governments, so why tie up their reserves with assets that provide only modest returns? Coming 4 years after failure of Lehman Brothers, dilution of liquidity standards suggests the banks are again dictating policy in ways that will put the world at greater risk of another crisis. Policy makers in Washington and other capitals need to ask banking regulators to hold the line on very limited progress made so far. (source: Editorial – NYTimes – 10/01/2013)

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7 Responses to A Step Backward in Bank Regulations

  1. When Morgan Stanley’s top executives gathered in mid-September at the Gramercy Park Hotel in Manhattan to discuss strategy, some participants complained that the room was too small. Apparently, that was the point: James P. Gorman, Morgan Stanley’s chief executive, chose the cramped quarters to force discussion among the executives, said people briefed on his decision but not authorized to speak on the record. These days, it is the Wall Street firm that is finding itself a bit boxed in. Regulatory demands, weak markets and lower credit ratings have weighed on all banks, but perhaps more so on Morgan Stanley, the smallest of the big Wall Street firms. In the three years that Mr. Gorman, 54, has been at the helm, the bank has been progressively shrinking its business of trading bonds, commodities and other investments and expanding into wealth management. Now the storied company — whose take-no-prisoners trading desks have at times been rivaled only by firms like Goldman Sachs — is cutting even deeper, raising questions among some on Wall Street about whether it should spin off or ditch much of its trading business as its Swiss rival UBS has, a suggestion the firm eschews. Morgan Stanley is planning another deep round of cuts: 1,600 jobs, accounting for 6 percent of its support work force, and, more telling, 6 percent of institutional securities, which includes its once vaunted trading business. The planned cuts come just a week ahead of the release of fourth-quarter earnings, which are expected to show the gains the firm has made since the financial crisis in areas like stock trading, banking and wealth management but still will be weighed down by the diminished earnings power of its fixed income business. Whether the company can avoid shrinking further — and a number of analysts say that additional cuts will be needed — and revive the fixed-income trading business will have significant ripple effects in the financial world. While the strategy of cutting in some places and building out wealth management may lead to a more stable company, the retreat also means that the fixed-income trading business over all is becoming increasingly dominated by two Wall Street banks — JPMorgan Chase and Goldman — as well as by hedge funds and other investment firms that are more lightly regulated than banks like Morgan Stanley. Before the financial crisis, the fixed income division at Morgan Stanley, which was created by J. P. Morgan partners when Depression-era laws forced them to split banking from trading, was one of the firm’s biggest moneymakers. Now, it is a drain on operations, producing just 20 percent of its revenue but tying up roughly half of its capital. In recent years, the fixed-income department has not been able to make enough money to cover the cost to Morgan Stanley of this capital, according to people briefed on the matter but not authorized to speak on the record. The fallout can be seen in compensation: a year ago, 110 of the roughly 500 managing directors in sales and trading did not get a bonus, and that number is expected to grow next week when bonuses are handed out. Still, Mr. Gorman has received high marks from some on Wall Street for playing a difficult hand in the wake of the financial crisis. On Wednesday, he received a big vote of confidence when Daniel S. Loeb’s hedge fund told investors that it was taking a stake, saying that Morgan Stanley was “in the early innings of a turnaround.” Still, hobbled by the new realities on Wall Street, that turnaround has so far proved to be a Sisyphean task (…..)

    http://dealbook.nytimes.com/2013/01/09/deep-cuts-raise-questions-about-morgan-stanley/

  2. Professor Uziel Nogueira says: Contrary to the wish of many, Wall Street financial institutions– too big to fail — did not disappear in a big bang implosion. Au contraire, they have shown resilience, toughness and creativity to withstand the storm. However, the happy days of fun and money for nothing are long gone for current bank executives and employees. The big financial party of the new century did end four years ago. Morgan Stanley is a good example of how Wall Street survived the financial tsunami of 2009 while adapting and setting the foundation (downsizing and concentrating in core businesses) for future growth. Financial institutions will continue to make good returns for their wealthy investors in the coming decades, no doubt about it.


    The downside of the Wall Street debacle is the real economy. Main street was left devastated by the worst financial crisis since 1929.

    Millions of young Americans are unemployed and their future earnings greatly reduced. More importantly, US taxpayers were left behind holding the largest federal debt in history. Sooner than later, taxpayers will have to start servicing the federal debt with taxes increase and cut in social services. The days of the US living on a max credit card, financed by foreigners, are slowly but surely coming to an end.


    At the end of the day, US economy 2012 is a deja vu all over again of US economy circa 1932. Let’s hope, that at this time, there won’t be another major world war to solve economic problems.

    http://dealbook.nytimes.com/2013/01/09/deep-cuts-raise-questions-about-morgan-stanley/

  3. When Jim McCrery, a former Louisiana congressman, urged lawmakers last month to pursue entitlement cuts and tax reform, he was introduced on television as a leader of Fix the Debt, a group of business executives and onetime legislators who have become Washington’s most visible and best-financed advocates for reining in the federal deficit. Mr. McCrery did not mention his day job: a lobbyist with Capitol Counsel L.L.C. His clients have included the Alliance for Savings and Investment, a group of large companies pushing to maintain low tax rates on dividend income, and the Win America Campaign, a coalition of multinational corporations that lobbied for a one-time “repatriation holiday” allowing them to move offshore profits back home without paying taxes. In Washington’s running battles over taxes and spending, Mr. McCrery and his colleagues at Fix the Debt have lent a public-spirited, elder-statesman sheen to the cause of deficit reduction. Leading up to the fiscal negotiations, they set up grass-roots chapters around the country, met with President Obama and his aides, and hosted private breakfasts for lawmakers on Capitol Hill. In recent days, Fix the Debt has redoubled its efforts, starting a new national advertising campaign and calling on Mr. Obama and Congress to revise the tax code and reduce long-term spending on entitlement programs. But in the weeks ahead, many of the campaign’s members will be juggling their private interests with their public goals: they are also lobbyists, board members or executives for corporations that have worked aggressively to shape the contours of federal spending and taxes, including many of the tax breaks that would be at the heart of any broad overhaul. While Fix the Debt criticized the recent fiscal deal between Mr. Obama and lawmakers, saying it did not do enough to cut spending or close tax loopholes, companies and industries linked to the organization emerged with significant victories on taxes and other policies. “Some of these folks who are trying to be part of the solution have also been part of the problem,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities, a liberal-leaning advocacy group, and a former economic adviser to Vice President Joseph R. Biden Jr. “They’ve often fought hard against the kind of balance that we need on the revenue side. Many of the people we’re talking about are associated with policies that would make it a lot harder to fix the debt.” Sam Nunn, a former Democratic senator from Georgia who is a member of Fix the Debt’s steering committee, received more than $300,000 in compensation in 2011 as a board member of General Electric. The company is among the most aggressive in the country at minimizing its tax obligations. Mr. McCrery, the Louisiana Republican, is also among G.E.’s lobbyists, according to the most recent federal disclosures, monitoring federal budget negotiations for the company. Other board members and steering committee members have deep ties to the financial industry, including private equity, whose executives have aggressively fought efforts to alter a tax provision, known as the carried interest exception, that significantly reduces their personal income taxes (…..)

    http://www.nytimes.com/2013/01/10/us/politics/behind-debt-campaign-ties-to-corporate-interests.html

  4. Professor Uziel Nogueira says: Wikipedia: “The two greatest obstacles to democracy in the United States are, first, the widespread delusion among the poor that we have a democracy, and second, the chronic terror among the rich, lest we get it. ~ Edward Dowling, Editor and Priest, Chicago Daily News (28 July 1941)”.


    Reality check – US 2012. Business as usual?

    http://www.nytimes.com/2013/01/10/us/politics/behind-debt-campaign-ties-to-corporate-interests.html

  5. Treasury secretary nominee Jack Lew has spent most of his career in government, but during the financial crisis, he was embedded inside one of the country’s biggest banks as it nearly imploded. From 2006 to 2008, he worked at Citigroup in two major roles, a notable line in his résumé given that as Treasury secretary, he would be charged with implementing new rules regulating Wall Street. But Lew did not have just any position at the bank. In early 2008, he became a top executive in the Citigroup unit that housed many of the bank’s riskiest operations, including its hedge funds and private equity investments. Massive losses in that unit helped drive Citigroup into the arms of the federal government, which bailed out the bank with $45 billion in taxpayer money that year. The group had been under pressure to compete with similar units at other big Wall Street firms and, some analysts say, took on too many risks as it played catch-up. “The mismanagement of risk was comprehensive at that organization,” said Simon Johnson, an economist at the Massachusetts Institute of Technology. Details about Lew’s exact responsibilities at Citigroup, where he worked from 2006 to 2008, are scant. He declined to comment for this article. Lew’s first job at the bank was chief operating officer of Citigroup’s wealth management unit, which flourished under his watch. By the fall of 2007, the wealth management group handled $1.8 billion in client assets, up 34 percent from the year before, according to financial statements. More than 15,000 financial advisers and bankers worked under Lew. In January 2008, he switched to Citigroup’s alternative investments unit. A press release announcing his new position as chief operating officer of the group said he would “oversee coordination between the operations, technology, human resources, legal, financial and regional departments.” The memo stated that Lew also would be a member of Citigroup’s management committee, a group of senior executives who met regularly to discuss different parts of the bank’s business. During his 2010 confirmation hearings for chairing the Office of Management and Budget, Lew said his Wall Street experience was “as a manager, not as an investment adviser.” “Senator, I don’t consider myself an expert in some of these aspects of the financial industry,” Lew said in response to a question from Sen. Bernard Sanders (I-Vt.) about causes of the financial crisis.


    Sanders said in a statement Wednesday that although he applauds Lew’s public service, he worries about the number of economic advisers in the White House who have spent time on Wall Street. Michael Froman, deputy national security adviser for international economic affairs, also came from Citigroup’s hedge fund and private equity shop, known as the alternative investments unit. “In my view, we need a treasury secretary who is prepared to stand up to corporate America and their powerful lobbyists and fight for policies that protect the working families in our country,” Sanders said. “I do not believe Mr. Lew is that person.”

    The beginning of 2008 was a brutal time to be working at the bank and certainly at Citigroup’s alternative investments unit, which managed more than $54 billion. The group was hemorrhaging money just as Lew joined. In the first three months alone, it lost $509 million, according to SEC filings. By contrast, just a year earlier during that quarter, the unit made $222 million. “He stepped into the hedge-fund buzz saw,” said Mark Williams, a lecturer in finance at Boston University and a former bank examiner for the Federal Reserve. “His timing wasn’t the best.” Things continued to deteriorate the rest of the year. More than 50,000 employees, or one-seventh of Citigroup’s global workforce, were laid off in November. That year, the stock price dropped about 75 percent. Lew, meanwhile, was paid at least $1.1 million in 2008, according to financial disclosure statements. By the end of December 2008, Lew had lined up a new job: away from Wall Street and back in Washington as a deputy secretary of state under Secretary Hillary Rodham Clinton. Meanwhile, Citigroup’s alternative investments unit had become such a stain on the bank’s record that it was relaunched three years ago with a new name. It’s now known as Citi Capital Advisors.

    http://www.washingtonpost.com/business/economy/jack-lew-had-major-role-at-citigroup-when-it-nearly-imploded/2013/01/10/a913431e-5b6b-11e2-9fa9-5fbdc9530eb9_story.html

  6. (…..) In his book “The Moral Consequences of Economic Growth,” the Harvard economist Benjamin Friedman argues that periods of economic growth have been essential to American political progress; periods of economic prosperity were periods of greater social, political and religious harmony and tolerance.


    On Sunday, The Times’s Annie Lowrey wrote a piece quoting Friedman who wondered aloud whether we’re not now entering a reverse cycle, “in which our absence of growth is delivering political paralysis, and the political paralysis preserves the absence of growth.” I think he’s right and that the only way to break out of this deadly cycle is with extraordinary leadership.

    Republicans and Democrats would have to govern in just the opposite way they ran their campaigns — by offering bold plans that not only challenge the other’s base but their own and thereby mobilizes the center, a big majority, behind their agenda, to break the deadlock. If either party does that, not only will it win the day but the country will win as well. What would that look like? If the Republican Party had a brain it would give up on its debt-ceiling gambit and announce instead that it wants to open negotiations immediately with President Obama on the basis of his own deficit commission, the Simpson-Bowles plan. That would at least make the G.O.P. a serious opposition party again — with a platform that might actually appeal outside its base and challenge the president in a healthy way. But the G.O.P. would have to embrace the tax reforms and spending cuts in Simpson-Bowles first. Fat chance. And that’s a pity. As for Obama, if he really wants to lead, he will have to finally trust the American people with the truth. I’d love to see him use his Jan. 21 Inaugural Address and his Feb. 12 State of the Union Message as a one-two punch to do just that — offer a detailed, honest diagnosis and then a detailed, honest prescription (…..)

    http://www.nytimes.com/2013/01/16/opinion/friedman-obamas-1-2-punch.html

  7. Professor Uziel Nogueira says: Tom Friedman poses a NOVEL challenge to Pres Obama: “As for Obama, if he really wants to lead, he will have to finally trust the American people with the truth.” Doubtful that even a Ivy League fellow like Barack Obama will take such fascinating challenge. In the annals of State of the Union address is impossible to find any Pres telling the TRUTH to the American people. In fact, everyone is surprised when the Pres is candid about anything related to the welfare of the American people. Of course, Roosevelt in the aftermath of Pearl Harbor and Jimmy Carter during the energy crisis of the 70s are the only exceptions.

    http://www.nytimes.com/2013/01/16/opinion/friedman-obamas-1-2-punch.html

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