Sen. Christopher Dodd (D, Connecticut), Chairman of the Senate Banking Committee, has offered legislation that would extensively revamp regulation of U.S. banks. Stacey Kapur, at American Banker, has a complete review of the proposal (here). This is a subscription service and, if access is not available, the article can also be found at Financial-Planning.com (here).

The Dodd reforms go far further than other proposals from the House Financial Services Committee, Chairman Barney Frank (D, Massachusetts) and the Obama administration. Some of the specifics:

John S. Reed, who was CEO of Citicorp for 14 years before the 1998 merger with Travelers (TRV) and then co-CEO of Citigroup (C) with Sandy Weill until Reed's retirement in 2000, says he was wrong. A Bloomberg (here) article by Bob Ivry quotes Reed.

Lawmakers were wrong to repeal the Depression-era Glass- Steagall Act in 1999, Reed said. At the time, he supported overturn of the law, which required the separation of institutions that engaged in traditional customer banking services from those involved in capital markets.

President Obama signed into law today an extension until April 30, 2010 of the home buyers' tax credit. Contracts signed by April 30 must close by June 30 to qualify. The new law has several provisions not in the existing law:

• Income limits have been increased to $125,000 for individuals and $225,000 for couples. These were formerly $75,000 and $150,000, respectively.
• Current home owners who have lived in their home for five of the past eight years are eligible for a tax credit of $6,250.
• Qualifying home prices must not exceed $800,000.
• First time home buyers continue to be eligible for an $8,000 tax credit.

U.S. Rep. Barney Frank wants to publish a list of shame. According to Alison Vekshin at Bloomberg.com (here), Frank wants to make public the name of any firm that is required to address capital requirements under the proposed new law. This is a change from Frank's original position which would have kept the names of challenged firms secret.

This is akin to the kiss of death. Immediately upon public exposure, the ability to raise capital will be compromised, just at the time when the firm is being required to do just that. Of course, keeping the names secret is withholding relevant information from investors. This is the "damned if you do and damned if you don't" scenario.

The UK is joining The Netherlands and Gernamy in forcing the break-up of banks that can't survive without government support. The Royal Bank of Scotland (RBS), Lloyds Bank (LYG) and Northern Rock wiil be broken up, according to an article at ft.com by Angelo Faiola (here).

This follows the news a day earlier that both Lloyd's and RBS have asked for £54 billion in additional government support between them (here).

From the 5-Min. Forecast (here) comes the following graphic:

With consumption constituting around 70% of the economy in recent years, a contraction of nearly 10% in real personal income less transfer payments is not supportive of economic growth.

Chris Morrison at bnet.com says that clean coal technology is in real trouble. The bottom line is cost; an estimate (from a report released Thursday by the pro-CCS Global Carbon Capture and Storage Institute) is is that costs will increase 78%, on average, for electricity from burning coal. Chris also says:

Nevertheless, everything could work out perfectly and clean coal could be spreading in 2030. By that time, CO2 concentrations in the atmosphere may be over 500ppm. That’s no problem if the climate change skeptics are right; if the 97% of climatologists who study climate change are right, that number would mean we’re in for some major upheaval.

Bob Willis, writing at Bloomberg.com, reports that Prof. Joseph Stiglitz, Nobel Laureate and Columbia University economics professor, is skeptical that the recession has ended. He cites the need for a GDP growth rate to be sustained in the range of 3.0% to 3.5% just to provide jobs for new workers entering the workplace. Growth has to be higher than that to bring back jobs for more than 8 million that have lost them in the current recession.

A contrary view comes from Jon T. Markham at MoneyMorning.com. Jon writes about a report from ISI (International Strategy & Investment) which gives data about a very robust global economic recovery. Some examples are third quarter GDP growth of 12% for China and more than 8% for Korea, and industrial production in Taiwan up 51% (annualized rate). Other booming economic reports are coming from Japan and Australia.

There are three articles at ft.com this morning warning about financial system troubles that remain unresolved. They are discussing distinctly different aspects of difficulties that could derail recovery. They are different, but for me they rhyme.

Loose Ends or Fundamental Change

A predator is prowling and the prey is you and your pension fund. An article by Greg Gordon at McClatchy.com (here) describes how Goldman (GS) sold $40 billion in AAA-rated mortgage securities in 2006-07 to unsuspecting buyers.

Here is an excerpt from the McClatchy article:

Many have tried to draw comparisons between the current market patterns and some notable past market experiences. None is better at doing this graphically than Doug Short (dshort.com). Here is his comparison of the current market (using the S&P 500) and two other famous (and catastrophic) bear markets.

There has been a lot of outrage about the the AIG bailout, but one particular aspect has been somewhat below the radar. Enter Matt Taibbi. Matt's latest expose at True/Slant (here) discusses the case of Stephen Friedman. The former chairman of the board of directors of the New York Fed bought more than 50,000 shares of Goldman Sachs (GS) stock following the takeover of AIG. In May, Friedman resigned from the NY Fed Board after it was disclosed by the Wall Street Journal that he had bought the stock.

Let's see, that's more than $2,500,000 capital gains as of October 2009. It has been more than a year, so Friedman is eligible for long term capital gains status, and Uncle Sam only gets 15%. After state income taxes, Friedman could net close to $2 million.

ING, one of Europe’s biggest financial groups, has announced a detailed plan of dismemberment. This has been forced on the company by the European Commission, as a consequence of ING needing a capital infusion in the financial crisis.

The process starts immediately, as soon as the plan is approved by the Commission, expected to occur within a month. A statement issued by ING on Monday contained the following:

David Viniar is CFO of Goldman Sachs (GS). On September 16, 2008, the day after the Lehman collapse, Goldman conducted a conference call. At that time, Viniar said, "I would tell you is, given the outcome at Lehman and whatever the outcome at AIG, I would expect the direct impact of our credit exposure to both of them to be immaterial to our results."

Saturday's New York Post article by Josh Kosman and Mark DeCambre (here) reveals that GS has filed a suit that claims a $2.5 billion contractual obligation to them by Lehman. Of course, they are not likely to have this claim honored. There are about $50 billion in bankruptcy claims against about $5 billion of Lehman assets. If they are apportioned a settlement, it will be about $250 million.

Alan Binder once proposed: "Economists have the least influence on policy where they know the most and are most agreed." This is part of what he called Murphy's Law of Economics. An editorial in The Washington Post (here) discusses why this sacred cow of inefficiency and waste seems to be off-limits in the current health care debate.

The fact that most economists agree that the current tax free status of employer provided "Cadillac" health plans is not good for the economy puts this right in the cross hairs of Murphy's Law, Binder version.

Some data is already out and there have been survey results and reported anecdotal evidence that, on balance, are upbeat. We will have a lot more information about whether housing market optimism is warranted by the end of the week.

Mixed Reports of Improvement for High End Home Market Awaits Data

It may seem to lack self-consistency, but foreclosures and pending sales both increased in the third quarter. In the face of this seemingly conflicted data, the Mortgage Bankers Association has come out with an optimistic forecast of significantly higher home sales quantities for 2010. All of these numbers do come together to paint a consistent picture. The only problem is that the picture is one of possible devastation.

Foreclosures

Calpers, the largest public pension fund, is being rocked by a "pay to play" scandal, according to Gwen Robinson writing at ft.com (here). Calpers is reported to have disclosed that a former board member received $50 million in fees for arranging the placement of investments that saddled the California taxpayers with potential losses. The origin of Gwen's report is a Wall Street Journal article by Craig Karmin and Peter Lattman available here (subscription required).

The WSJ article, as quoted by Gwen, specifically identifies Arvco Financial Ventures, headed by Al Villalobos, who served on Calpers’ board 1993-95. The implication is that this is only one of many investigations underway. The entire Calpers situation raises the question of how much fraud, deceit, double dealing and blatant ethical violations have undermined public pensions all over the country.

Well, Citigroup (C) just did. According to a report by Tracy Alloway at ft.com (here), Citi is selling its profitable Phibro trading unit to Occidental Petroleum (OXY) for as little as $250 million. That is the amount specified in an OXY press release (here). Phibro net earnings have averaged $372 million per year over the past five years.

A report by Richard Bove, analyst for Rochdale Securities and quoted by Tracy, indicates that the official announcement by OXY may be low on price as “private sources” are saying the price will actually be $450 million. Even at that price, isn’t a pay-back before taxes in less than 15 months a pretty good deal for the buyer?