Since early 2008, the European Union has moved more forcefully to reform the securitization industry than has the United States. Both political entities have received enormous "push back" from the financial services industry and their legions of lobbyists. From Senator Dick Durbin (D-Ill) to Representative Colin Peterson (D-MN) to the European Union's Charlie McCreevy to Professor Simon Johnson, influential legislators, regulators and scholars have been quite explicit about the amount of lobbying the sell side has generated against financial services reform and its influence over Congressional legislation.

Despite that push back, the EU passed the amendments to the Capital Requirements Directive last May that included two major reforms for securitization: first, originators must retain a 5% interest in the securitization; and second, purchasers must know what they own without relying upon third party due diligence (i.e., ratings companies). The former provision appears to have made its way into the financial services regulatory reform movement in the U.S. The latter provision fired off a powerful salvo in the direction of Wall Street and brought the Transparency Wars into a new phase as it focused on the need for better loan-level detail than the industry standard methods provided.

After digesting the latest salvo in the transparency wars, I find myself in the unusual and uncomfortable position of criticizing the FDIC. I do so with great regret. I am a fan of Ms. Bair as she has effectively navigated through the minefields of this continuing credit crisis.

One week ago, the FDIC waded knee-deep into the one of these minefields with the intention of striking "a middle ground" between "those who want to eliminate securitization completely and those who want little change." [Bloomberg, FDIC Seeks to Toughen Rules on Banks' Securitizations, December 15, 2009] Ms. Bair is further quoted as saying that she "look[s] forward to eventually finalizing strong, common-sense standards."

When Paul Volcker challenged a room of bankers to provide a single shred of unbiased evidence that financial innovation has led to economic growth, he gave a powerful voice outside the U.S. administration to a concept that is gaining credence throughout the world.

Eight months ago, Charlie McCreevy as the EU commissioner for internal market and services stated in a New York Times interview that "there is no doubt that some of the so-called innovation in financial products was more about opaqueness and about trying to turbo-charge risk to deliver maximum returns for the seller while transferring concealed layers of risk to the buyer." [emphasis added]

Four weeks ago, Goldman Sachs CEO Lloyd Blankfein wrote a most intriguing article for the Financial Times. Entitled, "To avoid crises, we need more transparency," Mr. Blankfein distills the two most important lessons from the financial crisis and in so doing, helps to clarify that mischaracterizing the problem leads policy makers to treat symptoms and not the underlying disease.

Mr. Blankfein's first point is that "the systemic regulator must be able to see all the risks to which an institution is exposed and require that all exposures be clearly recognised." [bold emphasis added] With this definition of transparency, Mr. Blankfein relegates to the world of opacity anything less. In this he echoes the position of Paul Volcker and the Group of Thirty in a most valuable January 2009 report on financial stability.

It was nice to see FDIC Chairwoman Sheila Bair endorse the Financial Services Oversight Council (FSOC) as the systemic regulator and also endorse as its head an independent director with long-term appointment. Readers might want to review my June 19th post on this matter, which can be found here.

The recent report of third-quarter GDP increasing 3.5% was initially met with bullish enthusiasm . . . for one day. But when the number was analyzed further, it became clear that almost all of the increase was due to one-time adjustments in large part the resulting from government programs and stimulus.

"It was the best of times, it was the worst of times. It was the age of wisdom, it was the age of foolishness." - A Tale of Two Cities, Charles Dickens

This decade's credit bubble, nicely captured.

Ever since Chairman Bernanke favored horticulturists this spring with his perspicacious observation of the "green shoots" of recovery, the financial media have been focused on when and how the Federal Reserve would formulate its exit strategy from the near-zero interest rate environment. The bond market has been particularly keen on divining the timing of such an action.

Lost in the discussion of the interest rate exit strategy is the quandary facing the Fed and Treasury of finding the other exit strategy. As discussed on December 23rd and December 26th of last year, the government has been quite active implementing emergency measures to stabilize the financial system and to prevent a disastrous economic decline. By and large, that appears to have been somewhat successful. We have not entered Great Depression II.

The Campaign Against Transparency

The campaign being waged by some against the recently passed amendments to the European Union's Capital Requirements Directive is as much an attempt to influence U.S. initiatives regarding transparency in securitization as to water down the EU requirements.

Why Is Securitization Necessary?

The world has been without a functioning securitization market since the summer of 2007. During this period, world industrial production has closely tracked the decline of the 1930s fall. This according to recent research by Barry Eichengreen of UC Berkeley and Kevin O'Rourke of Trinity College, Dublin. This web link can be used to view the updates of their April 2009 work.

When viewing the "mother of all financial crises," one whose solution threatens vast profitability by entrenched elites, it is sometimes necessary to go beyond the normal press stories (whose writers are often beholden to compromised sources) and seek out truth elsewhere.

In the May-June issue of Foreign Affairs, Richard Katz has an excellent discussion of the current crisis, which he formulates as a credit crunch, first and foremost. That will come as little surprise to those who understood the implications of the frozen securitization market.

Much has been made of the proposed increase in Federal Reserve power to discharge the role of systemic risk regulator. Senators don't particularly like it and commentators such as Elliot Spitzer and Dean Baker have offered that the real problem is that existing authority, which was sufficient, was not used.

Perhaps a compromise is in order.

While the Obama initiative for restoring financial stability will come under Congressional scrutiny for most of its regulatory overhaul, the portion dealing with securitization will likely be buried in the depths of the Securities and Exchange Commission.

In a fitting win for the financial elite, meaningful change in this area most likely will not be forthcoming and the buyers will stubbornly remain on strike.