As I read through the various Congressional proposals to help struggling homeowners, I am of two minds: the cynic can almost see politicians drooling as they seize an opportunity to buy more votes in an election year (perhaps that stimulus check wont do the job), while the optimist hopes that lawmakers really do want to help.
I have expected officials to come up with a plan to assist homeowners who are under water on their mortgages. The issue gained more momentum after taxpayers helped to finance the J.P. Morgan-Bear Stearns deal. After all, if we were going to help an ailing firm, perhaps creating a way to support the masses is not so far-fetched. Still, unless the housing recession were to turn far uglier, it is unlikely that the government would actually buy mortgages. Instead, the Democratic plan would make available up to $300 billion in federally insured loans to help troubled owners (who meet stringent criteria) refinance adjustable-rate mortgages into more affordable 30-year, fixed-rate loans. The plan would not bail out everyone---speculators and those who are in trouble on vacation homes or investment properties would be out of the running for the re-fi chance. The taxpayer tab for this plan would be approximately $10 billion.
I have heard from plenty of homeowners who were patient enough to accumulate their 20% down payments and not bite off more than they can chew complain about any bailout plans. “Why should I have to pay for someone else’s financial mistakes?”; “How is this different than having the government bail out the dopes who bet big on the dot-com stocks?” and “Only with the pain of loss will people change their future behavior!” These are all valid points but it seems there is of course another side to the story. As Representative Barney Frank, (D-MA), the chairman of the House Financial Services Committee and the principal author of the leading Democratic plan said recently, “These are people who are guilty of having borrowed too much money for a home for themselves and their families. They didn’t shoot anybody. They didn’t rob anybody…they are guilty of not having anticipated that housing prices would drop.” (The cynic would pipe in at this point and add that many of these people are actually guilty of greed!)
But there are costs to society for letting homeowners fail--having millions of people enslaved to their homes is a negative for the entire economy. The reason is that if people are spending a lot to maintain their mortgages, then they have very little surplus to spend elsewhere, thus exacerbating the economic slowdown. For that reason, and perhaps mounting pressure, even the Bush Administration has capitulated on the issue.
While previously resisting the calls for bail out and promoting a hands-off approach to regulation, yesterday a representative of the Administration laid the groundwork for an alternative to the Democratic plan. Brian Montgomery, the commissioner of the Federal Housing Administration (FHA), said that his agency would start providing government insurance for some US homeowners who are under water on their mortgages and for some who are were late on three consecutive monthly mortgage payments—about 100,000 homeowners total.
The taxpayer cost of these proposals is not yet known. It is expected that this is among the first steps to expanded government assistance. It may not be a full-fledged rescue plan, but it sure is sounding a lot more like politicians of all stripes see the need to pounce on the housing issue. I expect to hear more as the “bail-tale” gathers steam.
Thursday, April 10, 2008
Wednesday, April 9, 2008
Doth he protest too much?
Former Federal Reserve Chairman Alan Greenspan is back in the news—this time he is putting a full-court press on his reputation, which has come under scrutiny of late. Interviews with the Wall Street Journal, CNBC and anyone else who would print his great defense have highlighted his basic premise: “I am now being blamed for things that I didn't do.”
To give Greenspan credit, he also noted “I was praised for things I didn't do," but of course he never bothered to say that when people called him “Maestro” or hailed him as “the greatest central banker who ever lived.”
Pity poor Alan—he has gone from Maestro to goat as the low rates during his terms and his Ayn Rand hands-off regulatory approach are now seen as the culprits of today’s financial mess. Like markets that can turn on a dime, so too can reputations. Some of us have been harsh in our judgment of the retired Fed chairman. At the end of his 18-year tenure in December 2005, I wrote the following:
Greenspan’s legacy is “being too generous when it came to asset bubbles. The Fed’s responses to a number of crises in the nineties helped to foster the stock market bubble…In response to the bear market, 9-11 and the ensuing recession, Greenspan once again relied on easy money to prop up the economy… The 13 interest rate cuts, all the way down to 1%, helped fuel a housing boom.”
But don’t just take my word for it--if you want to read an amazing analysis of the Greenspan legacy, check out the recently published “Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve” by William Fleckenstein and Fred Sheehan. (Full disclosure: Bill is a family friend.) Using transcripts of Greenspan's FOMC meetings as well as testimony before Congress, the authors present a scathing indictment of Greenspan’s Fed and show how the Maestro may have caused or exacerbated many of the economic calamities that occurred during his tenure. “Greenspan’s Bubbles” also shines a light on the political side of the Maestro.
And what could be more political than Greenspan’s elaborate reputational defense? According to the Wall Street Journal, “Mr. Greenspan says he doesn't regret a single decision.” Is he kidding? Who among us truly does not regret a single business decision? I might have changed my view of Greenspan if he had engaged in an honest discussion of what he did well and not so well over the course of eighteen years. Instead I am left wondering whether he doth protest too much.
To give Greenspan credit, he also noted “I was praised for things I didn't do," but of course he never bothered to say that when people called him “Maestro” or hailed him as “the greatest central banker who ever lived.”
Pity poor Alan—he has gone from Maestro to goat as the low rates during his terms and his Ayn Rand hands-off regulatory approach are now seen as the culprits of today’s financial mess. Like markets that can turn on a dime, so too can reputations. Some of us have been harsh in our judgment of the retired Fed chairman. At the end of his 18-year tenure in December 2005, I wrote the following:
Greenspan’s legacy is “being too generous when it came to asset bubbles. The Fed’s responses to a number of crises in the nineties helped to foster the stock market bubble…In response to the bear market, 9-11 and the ensuing recession, Greenspan once again relied on easy money to prop up the economy… The 13 interest rate cuts, all the way down to 1%, helped fuel a housing boom.”
But don’t just take my word for it--if you want to read an amazing analysis of the Greenspan legacy, check out the recently published “Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve” by William Fleckenstein and Fred Sheehan. (Full disclosure: Bill is a family friend.) Using transcripts of Greenspan's FOMC meetings as well as testimony before Congress, the authors present a scathing indictment of Greenspan’s Fed and show how the Maestro may have caused or exacerbated many of the economic calamities that occurred during his tenure. “Greenspan’s Bubbles” also shines a light on the political side of the Maestro.
And what could be more political than Greenspan’s elaborate reputational defense? According to the Wall Street Journal, “Mr. Greenspan says he doesn't regret a single decision.” Is he kidding? Who among us truly does not regret a single business decision? I might have changed my view of Greenspan if he had engaged in an honest discussion of what he did well and not so well over the course of eighteen years. Instead I am left wondering whether he doth protest too much.
Tuesday, April 8, 2008
$109 Million Reasons to be an Ex-President
I never begrudge someone the opportunity to earn a buck, despite the excessive pay scales in lots of industries (finance, sports, acting). And of course unless an individual is a higher-up at a publicly-listed corporation, it’s impossible to know what someone really makes. That is, unless you are running for the highest office in the land.
Succumbing to pressure, the Clintons recently released their tax returns for each year since leaving office. To say that post-Presidential life has been good to the former first couple is an understatement. The Clintons earned $109 million between 2000 and 2007, according to tax information released by Mrs. Clinton’s presidential campaign. While at first glance, I thought that the numbers seemed astounding, after breaking everything down, it all made sense.
It is important to remember that the Clintons came into the White House with essentially nada. In my experience, when people who come from nothing get a taste of making big bucks, they really go for it. Perhaps it’s fear-based—the “I’ll never live like that again” mantra (or in the Clinton’s case, “I will never beg for a legal defense fund again!”) that compels folks to push onward. Regardless, if lots of organizations were willing to pay President Clinton $250,000 per speaking engagement, I have a sneaking suspicion that he made sure that his booker kept him busy.
To that end, President Clinton earned $51,855,599 from speeches since leaving the White House. In addition to that amount, the Clintons raked in approximately $40 million from their books (his two, “My Life” and “Giving,” totaled $29.6 million and Senator Clinton’s “Living History” $10.5 million). You might think that just under $100 million would be enough for the dynamic duo, but there is one more income source to add: consulting income, or as I like to call it “the smoking gun” of these returns.
President Clinton performed “consulting services” to billionaire investor and supermarket magnate Ronald W. Burkle. Since 2002, the former president provided investment advice and rainmaking as a consultant. Let’s be clear that nobody believes that Mr. Burkle needed investment advice from Mr. Clinton. What he did need was access to power players both at home and abroad. Clearly Mr. Clinton could open doors in ways that nobody else could, for which he was paid handsomely. The tax returns indicate that Mr. Clinton collected at least $12.6 million since 2002, and possibly as much as $15.3 million, from his work for Mr. Burkle’s Yucaipa Companies.
So here is my question: just who expects something in return for that kind of activity, if Mrs. Clinton were to win the White House in the fall? The sad part of the Clinton tax returns is like so much in their past, they just did not need to enter those muddy waters. Couldn’t Mr. Clinton have delivered just 9 more speeches each year to raise the extra $15 million? That’s just one question for the candidate who claims that she can best represent the needs of the working folks in America.
Succumbing to pressure, the Clintons recently released their tax returns for each year since leaving office. To say that post-Presidential life has been good to the former first couple is an understatement. The Clintons earned $109 million between 2000 and 2007, according to tax information released by Mrs. Clinton’s presidential campaign. While at first glance, I thought that the numbers seemed astounding, after breaking everything down, it all made sense.
It is important to remember that the Clintons came into the White House with essentially nada. In my experience, when people who come from nothing get a taste of making big bucks, they really go for it. Perhaps it’s fear-based—the “I’ll never live like that again” mantra (or in the Clinton’s case, “I will never beg for a legal defense fund again!”) that compels folks to push onward. Regardless, if lots of organizations were willing to pay President Clinton $250,000 per speaking engagement, I have a sneaking suspicion that he made sure that his booker kept him busy.
To that end, President Clinton earned $51,855,599 from speeches since leaving the White House. In addition to that amount, the Clintons raked in approximately $40 million from their books (his two, “My Life” and “Giving,” totaled $29.6 million and Senator Clinton’s “Living History” $10.5 million). You might think that just under $100 million would be enough for the dynamic duo, but there is one more income source to add: consulting income, or as I like to call it “the smoking gun” of these returns.
President Clinton performed “consulting services” to billionaire investor and supermarket magnate Ronald W. Burkle. Since 2002, the former president provided investment advice and rainmaking as a consultant. Let’s be clear that nobody believes that Mr. Burkle needed investment advice from Mr. Clinton. What he did need was access to power players both at home and abroad. Clearly Mr. Clinton could open doors in ways that nobody else could, for which he was paid handsomely. The tax returns indicate that Mr. Clinton collected at least $12.6 million since 2002, and possibly as much as $15.3 million, from his work for Mr. Burkle’s Yucaipa Companies.
So here is my question: just who expects something in return for that kind of activity, if Mrs. Clinton were to win the White House in the fall? The sad part of the Clinton tax returns is like so much in their past, they just did not need to enter those muddy waters. Couldn’t Mr. Clinton have delivered just 9 more speeches each year to raise the extra $15 million? That’s just one question for the candidate who claims that she can best represent the needs of the working folks in America.
Monday, April 7, 2008
Tax Time
With a week to go, it’s probably time to kick you in the tush to get going on your tax prep. The good news is that you still have an entire week to get this done. The bad news is that if you were hoping to get help with your returns from a tax preparation professional, you may need to go on extension—they are swamped and unlikely to get your return filed unless someone owes you a big favor. With time ticking, here are some tips to help you along.
Can I do it myself? It’s to prepare your own returns these days. Check out programs like Intuit’s Turbo Tax (turbotax.com), H&R Block’s TaxCut (taxcut.com) or you can go directly to irs.gov to e-file your return. The IRS has now partnered with a number of commercial preparers to offer free online tax prep as well as e-filing for taxpayers with adjusted gross income (AGI) of $50,000 or less. To find out more about free online filing, go to taxadmin.org.
Standard Deduction or Itemize: This is the first decision you have to make before you file. For many taxpayers, taking the standard deduction may seem like the easiest path to finishing your return. (If you are married filing jointly, the standard deduction for 2007 is $10,700; $5,350 for singles.) But 2002 research from the Government Accounting Office showed that over two million people (about 2% of the total number of filers) may have paid nearly a billion dollars more than they needed to in taxes, because of a failure to itemize. It’s likely that if you are paying mortgage interest, make charitable donations or live in a place with high property taxes, itemizing may make sense. Do a quick tally of the deductions to determine if the total is greater than the standard deduction available to you. You may find that itemizing allows you to save dollars.
If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2007, the itemized deduction phase-out begins at $156,400 ($78,200 if married filing separately).
New Mortgages or Re-financings: If you obtained a new mortgage or refinanced in 2007, don’t forget to deduct origination fees or any points (points are prepaid interest that people often pay lenders upfront to reduce monthly payments) that you paid. For a new mortgage, buyers can generally deduct all the points they paid in the year that they assumed the mortgage. BUT, the rules are different when you have refinanced an existing loan. On a re-fi, points are written off over the life of the loan. For those of you who are serial re-financers don’t forget to take your old points as an itemized deduction.
Moving Expenses: Many taxpayers will be able to write off moving expenses if they relocated to a new job that is at least 50 miles from your old house than your old job was. You can claim this even if you do not itemize other deductions.
Home Office: This is one of those deductions that the IRS loves to pounce on in an audit, so be careful how you claim it. The rules are that the home office must be your principal place of business, not a back up for when you don’t feel like commuting. Also, the office must not be used for anything else, even if it’s just a corner of your “great room.” If you pass the first test, then you need to calculate what percentage of your house your office equals. The number can be determined by square footage or number of rooms. You can then apply that percentage to your overall housing costs, including mortgage interest, utilities and upkeep. Don’t forget that when you sell your house, all of those juicy business deductions, including depreciation, must be recaptured as taxable gain.
Certain medical expenses: Qualified medical costs must exceed 7.5% of your AGI before they become deductible. While that’s a high benchmark, millions of Americans are hitting it.
Retirement Plans:
Some savings had to take place prior to the end of the calendar year (usually employer-sponsored plans like 401(k)s,) while others can help you right up until the tax filing deadline.
IRAs: Limits on IRA and Roth contributions for 2007 are $4,000 or $5,000 if you are over 50. You can make an IRA contribution up to tax filing.
Carry-forward losses: After you net out the short-term and long-term investment gains and losses for 2007, you still may have losses left over. If you still have losses, you can use $3,000 of those losses against your ordinary income. To see if you have carry-forward losses, pull out last year’s tax returns.
AND DON’T FORGET…
Tuition and fees deduction, Hope, life and tax credits, student loan interest deduction. The rules are confusing on all of these education plans, but take time to read them – it may save you money!
Can I do it myself? It’s to prepare your own returns these days. Check out programs like Intuit’s Turbo Tax (turbotax.com), H&R Block’s TaxCut (taxcut.com) or you can go directly to irs.gov to e-file your return. The IRS has now partnered with a number of commercial preparers to offer free online tax prep as well as e-filing for taxpayers with adjusted gross income (AGI) of $50,000 or less. To find out more about free online filing, go to taxadmin.org.
Standard Deduction or Itemize: This is the first decision you have to make before you file. For many taxpayers, taking the standard deduction may seem like the easiest path to finishing your return. (If you are married filing jointly, the standard deduction for 2007 is $10,700; $5,350 for singles.) But 2002 research from the Government Accounting Office showed that over two million people (about 2% of the total number of filers) may have paid nearly a billion dollars more than they needed to in taxes, because of a failure to itemize. It’s likely that if you are paying mortgage interest, make charitable donations or live in a place with high property taxes, itemizing may make sense. Do a quick tally of the deductions to determine if the total is greater than the standard deduction available to you. You may find that itemizing allows you to save dollars.
If your adjusted gross income is above a certain amount, you may lose part of your itemized deductions. In 2007, the itemized deduction phase-out begins at $156,400 ($78,200 if married filing separately).
New Mortgages or Re-financings: If you obtained a new mortgage or refinanced in 2007, don’t forget to deduct origination fees or any points (points are prepaid interest that people often pay lenders upfront to reduce monthly payments) that you paid. For a new mortgage, buyers can generally deduct all the points they paid in the year that they assumed the mortgage. BUT, the rules are different when you have refinanced an existing loan. On a re-fi, points are written off over the life of the loan. For those of you who are serial re-financers don’t forget to take your old points as an itemized deduction.
Moving Expenses: Many taxpayers will be able to write off moving expenses if they relocated to a new job that is at least 50 miles from your old house than your old job was. You can claim this even if you do not itemize other deductions.
Home Office: This is one of those deductions that the IRS loves to pounce on in an audit, so be careful how you claim it. The rules are that the home office must be your principal place of business, not a back up for when you don’t feel like commuting. Also, the office must not be used for anything else, even if it’s just a corner of your “great room.” If you pass the first test, then you need to calculate what percentage of your house your office equals. The number can be determined by square footage or number of rooms. You can then apply that percentage to your overall housing costs, including mortgage interest, utilities and upkeep. Don’t forget that when you sell your house, all of those juicy business deductions, including depreciation, must be recaptured as taxable gain.
Certain medical expenses: Qualified medical costs must exceed 7.5% of your AGI before they become deductible. While that’s a high benchmark, millions of Americans are hitting it.
Retirement Plans:
Some savings had to take place prior to the end of the calendar year (usually employer-sponsored plans like 401(k)s,) while others can help you right up until the tax filing deadline.
IRAs: Limits on IRA and Roth contributions for 2007 are $4,000 or $5,000 if you are over 50. You can make an IRA contribution up to tax filing.
Carry-forward losses: After you net out the short-term and long-term investment gains and losses for 2007, you still may have losses left over. If you still have losses, you can use $3,000 of those losses against your ordinary income. To see if you have carry-forward losses, pull out last year’s tax returns.
AND DON’T FORGET…
Tuition and fees deduction, Hope, life and tax credits, student loan interest deduction. The rules are confusing on all of these education plans, but take time to read them – it may save you money!
Friday, April 4, 2008
Florida Correspondence
I have been in Orlando and West Palm Beach Florida this week. When preparing for the vacation, I thought that I would see row after row of empty condo units and foreclosure signs. The reality is not exactly matching up with my dire expectations.
I know that my experience is not necessarily indicative of larger trends, but still, it was interesting to see what was supposed to be the nexus of the housing recession for myself. We started in Orlando, where there was tremendous growth during the housing boom. I asked some of the locals about real estate and they reported that there were lots of problem areas but that things appeared to be a little less ugly. Sure, there were stories of phenomenal incentives by builders, but there was also some anecdotal evidence that buyers were out again armed with low mortgages and looking for a bargain.
We visited one development in Orlando to check out the situation first-hand. Celebration is a Disney community in Orlando which looks about as close to the movie “Pleasantville” as anything I have ever seen. The perfectly manicured lawns in front of the well-kept homes should have been the first tip-off. The homeowners in Celebration would not allow the nasty realities of a housing recession to infect them. I should disclose that my brother-in-law left Long Island three years ago and now lives in Celebration full time, so I tease him incessantly about these facts. He told me that houses are still selling in Celebration and that prices have actually remained pretty firm. This proves that there is still a robust market for people who want to live in a sanitized community.
So where was the sub-prime stuff? Where was the evidence of the housing crisis? As we were leaving Orlando, I asked the hotel parking attendant where I could find the bad stuff and he pointed me in the direction of a line of condos in the distance. He said, “I am not sure that anyone ever moved in to those places, but they’re mostly empty right now.”
As we drove from Orlando to West Palm Beach, there was more evidence of the boom and bust—abandoned projects with equipment that appeared to be frozen mid-stream and hundreds of condo units and housing developments with huge signs advertising “new, low prices!” When we neared the East Coast and the ocean-side resorts, there were fewer signs, but the drive convinced me that the housing situation probably has more room to go before we are out of the woods. It many ways, it was far worse and slightly better than I thought it would be.
I know that my experience is not necessarily indicative of larger trends, but still, it was interesting to see what was supposed to be the nexus of the housing recession for myself. We started in Orlando, where there was tremendous growth during the housing boom. I asked some of the locals about real estate and they reported that there were lots of problem areas but that things appeared to be a little less ugly. Sure, there were stories of phenomenal incentives by builders, but there was also some anecdotal evidence that buyers were out again armed with low mortgages and looking for a bargain.
We visited one development in Orlando to check out the situation first-hand. Celebration is a Disney community in Orlando which looks about as close to the movie “Pleasantville” as anything I have ever seen. The perfectly manicured lawns in front of the well-kept homes should have been the first tip-off. The homeowners in Celebration would not allow the nasty realities of a housing recession to infect them. I should disclose that my brother-in-law left Long Island three years ago and now lives in Celebration full time, so I tease him incessantly about these facts. He told me that houses are still selling in Celebration and that prices have actually remained pretty firm. This proves that there is still a robust market for people who want to live in a sanitized community.
So where was the sub-prime stuff? Where was the evidence of the housing crisis? As we were leaving Orlando, I asked the hotel parking attendant where I could find the bad stuff and he pointed me in the direction of a line of condos in the distance. He said, “I am not sure that anyone ever moved in to those places, but they’re mostly empty right now.”
As we drove from Orlando to West Palm Beach, there was more evidence of the boom and bust—abandoned projects with equipment that appeared to be frozen mid-stream and hundreds of condo units and housing developments with huge signs advertising “new, low prices!” When we neared the East Coast and the ocean-side resorts, there were fewer signs, but the drive convinced me that the housing situation probably has more room to go before we are out of the woods. It many ways, it was far worse and slightly better than I thought it would be.
Thursday, April 3, 2008
Paulson: A Reg-u-lar Guy (Part 2)
Treasury Secretary Henry Paulson is making a splash with his proposals to overhaul the nation’s financial regulatory system. He was immediately attacked by some, lauded by others. Before passing judgment, it’s time to understand exactly what is being considered.
The most controversial part of the plan is the escalation of the Federal Reserve into a “super-cop”, charged with identifying and avoiding a crisis in advance, with the overall goal of keeping the financial system stable. After the Fed’s participation in the Bear Stearns deal, it is now clear that the central bank has de facto changed its role in the financial system. With the shift from commercial banks to investment banks, Mr. Paulson's notes that the new agency “would have broad powers so they could go anywhere in the system they needed to go to preserve that authority.”
The next area of the Paulson plan that is causing turf battles is the call for a combination of market oversight between the Commodity Futures Trading Commission (CFTC), which regulates futures, and the Securities and Exchange Commission (SEC), which regulates securities such as stocks and bonds. This is a thorny proposal, because the SEC is "rules based," which means that it sets regulations that institutions must follow, while the CFTC is "principles based," setting broad parameters under which the regulated entities try to operate. It looks like Paulson favors the CFTC approach to enhance global competition, but this idea ran into criticism almost immediately, as officials from both agencies will be unwilling to cede power or control.
On the banking side, Paulson would like to eliminate various bank regulators, by shutting down the Office of Thrift Supervision, which has oversight of savings-and-loan institutions, and folding those responsibilities into the Office of Comptroller of Currency, which has oversight of national banks. Additionally, the Treasury wants to study whether the Federal Reserve or FDIC should have oversight of state-chartered banks. Again, any proposal to shutter or reduce the responsibilities of an agency will be met with howls.
Finally, Paulson wants to overhaul the insurance industry to create a federal regulator over the insurance industry, which has to deal with 50 different state regulators with 50 different sets of rules. Many are unwilling to strip states of power and the lobbyists from consumer groups are already claiming that states do a better job. This one is likely to face a major uphill battle.
In the end, who knows what portions of this plan will actually turn into lasting changes in the financial regulatory environment? That being said, at least the conversations are starting and for that, Paulson deserves some credit as a reg-u-lar guy!
The most controversial part of the plan is the escalation of the Federal Reserve into a “super-cop”, charged with identifying and avoiding a crisis in advance, with the overall goal of keeping the financial system stable. After the Fed’s participation in the Bear Stearns deal, it is now clear that the central bank has de facto changed its role in the financial system. With the shift from commercial banks to investment banks, Mr. Paulson's notes that the new agency “would have broad powers so they could go anywhere in the system they needed to go to preserve that authority.”
The next area of the Paulson plan that is causing turf battles is the call for a combination of market oversight between the Commodity Futures Trading Commission (CFTC), which regulates futures, and the Securities and Exchange Commission (SEC), which regulates securities such as stocks and bonds. This is a thorny proposal, because the SEC is "rules based," which means that it sets regulations that institutions must follow, while the CFTC is "principles based," setting broad parameters under which the regulated entities try to operate. It looks like Paulson favors the CFTC approach to enhance global competition, but this idea ran into criticism almost immediately, as officials from both agencies will be unwilling to cede power or control.
On the banking side, Paulson would like to eliminate various bank regulators, by shutting down the Office of Thrift Supervision, which has oversight of savings-and-loan institutions, and folding those responsibilities into the Office of Comptroller of Currency, which has oversight of national banks. Additionally, the Treasury wants to study whether the Federal Reserve or FDIC should have oversight of state-chartered banks. Again, any proposal to shutter or reduce the responsibilities of an agency will be met with howls.
Finally, Paulson wants to overhaul the insurance industry to create a federal regulator over the insurance industry, which has to deal with 50 different state regulators with 50 different sets of rules. Many are unwilling to strip states of power and the lobbyists from consumer groups are already claiming that states do a better job. This one is likely to face a major uphill battle.
In the end, who knows what portions of this plan will actually turn into lasting changes in the financial regulatory environment? That being said, at least the conversations are starting and for that, Paulson deserves some credit as a reg-u-lar guy!
Wednesday, April 2, 2008
Paulson: A Reg-u-lar Guy (Part 1)
I needed a day to digest the sweeping regulatory changes that were introduced by Treasury Secretary Henry Paulson before writing about it. With the benefit of a good night’s sleep (and a day of Florida sun) I am ready to say: Bring it on!
The changes put forth by Paulson, the former head of Goldman Sachs, intend to update rules that have been in place since the aftermath of the Great Depression. The current framework for financial regulation is based on a structure that includes:
o Five federal depository institution regulators in addition to state-based supervision
o One federal securities regulator and one futures regulator, with additional state-based supervision and self-regulatory organizations with broad regulatory powers
o Insurance regulation is almost wholly state-based, with over fifty different regulators
There is near universal consensus that the current system has not kept up with the pace of innovation of financial markets, but fixing it is not easy. That’s why as soon as Paulson spoke on Monday, the vultures were out, saying that (in particular order): the plan stinks, we don’t need more regulation; the plan is good theory, but can’t be put into place because political jousting won’t allow it. As soon as all of the negatives were swirling about, I started to think that maybe something good might come of this.
Paulson noted that the optimal regulatory structure needs to attract capital based on its effectiveness in promoting innovation, managing system-wide risks, and fostering consumer and investor confidence. The Treasury report presented a series of short, intermediate and long-term recommendations for reform of the US regulatory structure.
Nobody seems to dispute the short-term actionable items, the least controversial of which includes modernizing the President’s Working Group on Financial Markets (“PWG”)—this group was formed in the aftermath of the 1987 crash and includes heads of the Treasury, the Fed, the SEC and the CFTC. Another short-term idea that is likely to be supported is the creation of a new federal commission which will evaluate, rate and report on each state’s system for licensing and regulating the mortgage origination process. Tomorrow I will delve into the more controversial parts of the Paulson regulatory overhaul, which will take months, perhaps years to put into place.
The changes put forth by Paulson, the former head of Goldman Sachs, intend to update rules that have been in place since the aftermath of the Great Depression. The current framework for financial regulation is based on a structure that includes:
o Five federal depository institution regulators in addition to state-based supervision
o One federal securities regulator and one futures regulator, with additional state-based supervision and self-regulatory organizations with broad regulatory powers
o Insurance regulation is almost wholly state-based, with over fifty different regulators
There is near universal consensus that the current system has not kept up with the pace of innovation of financial markets, but fixing it is not easy. That’s why as soon as Paulson spoke on Monday, the vultures were out, saying that (in particular order): the plan stinks, we don’t need more regulation; the plan is good theory, but can’t be put into place because political jousting won’t allow it. As soon as all of the negatives were swirling about, I started to think that maybe something good might come of this.
Paulson noted that the optimal regulatory structure needs to attract capital based on its effectiveness in promoting innovation, managing system-wide risks, and fostering consumer and investor confidence. The Treasury report presented a series of short, intermediate and long-term recommendations for reform of the US regulatory structure.
Nobody seems to dispute the short-term actionable items, the least controversial of which includes modernizing the President’s Working Group on Financial Markets (“PWG”)—this group was formed in the aftermath of the 1987 crash and includes heads of the Treasury, the Fed, the SEC and the CFTC. Another short-term idea that is likely to be supported is the creation of a new federal commission which will evaluate, rate and report on each state’s system for licensing and regulating the mortgage origination process. Tomorrow I will delve into the more controversial parts of the Paulson regulatory overhaul, which will take months, perhaps years to put into place.
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