Financial Czar Actions and Reform Regressions

The government economic team is getting positive media feedback from their announcement that the appointed pay czar, Kenneth Feinberg, is restricting pay at big banks. The fact is, it applies to only seven banks, those which have not paid back bailout funds. The cuts will apply to the 25 highest-paid executives at AIG, Bank of America (BAC), Citigroup (C), General Motors Co., GMAC Inc., Chrysler Group LLC and Chrysler Financial. The cuts will not apply to Goldman Sachs (GS), Morgan Stanley (MS) and JPMorgan Chase (JPM). The WSJ reports that pay will be capped at $500,000, which will encourage more pay in stock to make up for loss of cash compensation. This gesture is one step towards appeasing an angry public, but hopefully not a distraction from the real amounts owed by all the biggest banks to the taxpayer nor a free pass for the late action on this.

In other regulatory reform news, the NYT reports:

Reaching a compromise on an issue that threatened to derail financial regulatory legislation, the House Financial Services Committee voted on Wednesday to give the federal government the power to block the states from regulating large national banks in some circumstances. The Obama administration had opposed any efforts by the federal government to pre-empt state officials from imposing more rigorous banking standards. A group of Democrats with close ties to the banking industry had sought a complete federal pre-emption, which would have the effect of sharply limiting any state regulation of banks.

The newly established U.S. Consumer Financial Protection Agency will act as a clearing house for bank loans, credit cards and other financial products, but it has been scaled back and watered down and will no doubt be rife with bureaucratic challenges. The agency will have oversight over major banks - those with more than 10 billion dollars in assets. It ended up with exemptions for a range of financial players as described in this next paragraph...

The committee exempted auto dealers, as well as credit, mortgage and title insurers, from CFPA oversight. Banks with less than $10 billion in assets -- which is the vast majority of U.S. banks -- and credit unions with less than $1.5 billion in assets won a partial CFPA reprieve..........In another change from Obama's proposal, the committee dropped a provision that would have required banks to offer "plain vanilla" products, like 30-year fixed-rate mortgages. It also softened an Obama provision that would have given state governments wide latitude to write and enforce consumer protection rules that are tougher than the CFPA's. States still could do that, under the committee's bill, but federal regulators could block state rules if they were found to "significantly interfere" with a national bank's business.

As for the derivatives legislation, a long time in coming, the House Agriculture Committee approved legislation bringing unregulated over-the-counter products, such as swaps, under federal oversight for the first time, but eliminated end-users from the legislation who use derivatives markets to hedge their price risk.

Given the severity of the societal risk and taxpayer indebtedness at stake, all of this is a start and better than nothing, yet is greatly lacking. If there is any doubt as to the motivating forces behind-the-scenes that determine the inadequate decision-making by our congressional leaders, answers can be found in the WSJ article, Wall Street Steps Up Political Donations, Lobbying. Doubt in addition to the foxes running the henhouse, that is.

Disclosure: No stocks or ETFs owned.

Comments

[ArtfulDodger:]

"U.S. Consumer Financial Protection Agency"

I'll surely sleep better tonight knowing there's another federal regulatory agency watching over the nation's finances.

Oct 24 12:25 PM