Obama Financial Regulatory Plan

The Obama Administration is moving to tighten U.S. financial regulation to prevent another banking and market crisis, below in a nutshell is what they are trying to accomplish.

My thoughts in Bold.


SYSTEMIC RISK REGULATOR

The Obama administration wants the Federal Reserve to monitor systemic risk in the economy, with the idea that it could head off future crises. No single agency is now
designated to do this.

This is a horrible idea. Why give more power to incompetent people who missed the entire crisis in the first place? The reason we have a credit crisis is because the FED totally overlooked Wall Street. They left interest rates low because that is what Wall Street wanted. The Fed has lost objectivity and is completely a political entity at the moment.

CAPITAL AND LIQUIDITY STANDARDS

The administration wants financial institutions to thicken their capital cushions to absorb losses when times are tough, and make themselves more liquid, or able to move quickly in and out of various holdings, "with more stringent requirements for the largest and most interconnected firms."

This is only implemented if markets get correct information on security pricing from institutions.

SECURITIZATION

The administration is proposing that asset-backed securities issuers face new reporting requirements, as well as a rule requiring originators, sponsors or brokers of securitized instruments to retain at least 5 percent of the performance risk in them.

This is good on the surface, as it makes financial institutions have skin in the game, but 5% is a ceremonial figure, there will always be ways in the forms of more complex derivatives that firms will employ to subvert this. 20-30 percent would have have cleaned up securitization, but it would surely hinder lending. I am on the fence on this one.

CREDIT RATING AGENCIES

Reliance by investors and regulators on credit-rating agencies would be reduced, under administration plans. The SEC is already considering reforms on potential
conflicts of interest at credit rating agencies. Final action is likely months .

I don't know where to begin? The credit rating companies completely failed the public. These companies also should have some skin in the game, they should be made to take stakes in the securities they monitor and rate.

CONSUMER, INVESTOR PROTECTION

A stronger framework for consumer and investor protection is being proposed by the administration. There is already legislation filed in Congress to set up a
Financial Product Safety Commission, similar to the U.S. Consumer Product Safety Commission, for products ranging from mortgages to credit cards.

Great!!! More useless uninformed government programs that do nothing. This is total fluff and waste of government money...there is something called "GOOGLE SEARCH". Try it, its great.

OTC DERIVATIVES

Oversight of over-the-counter derivatives would be imposed under administration plans, as well as unspecified "harmonizing" of futures and securities regulation, and stronger safeguards for payment and settlement systems. The administration has said it wants to process more trading through exchanges and clearinghouses, supervise dealers more closely, and make this opaque market more transparent.
The scope of OTC derivatives reform will be decided by definitions such as which derivatives are "standardized" and which are "customized," as well as which are moved through exchanges, which to central clearinghouses, and which are only subjected to increased disclosure.

Again..this is great if you have smart informed people who can sniff through the bullshit. Wasn't the SEC supposed to regulate Madoff? The ICE Exchange has already started clearing OTC CDS SWAPS so we will see how this goes.

The problem will be trying to distinquish between "standardized" and "customized". At the moment only standardized transactions will be monitored and cleared through central exchange.