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Financial Reform Destined To Fail, Top Federal Reserve Official Says

WASHINGTON -- Reforms instituted after the financial crisis to prevent future taxpayer-funded bailouts are bound to fail and will likely be weakened within the next few years, the Federal Reserve's longest-serving policy maker predicted Monday.

The stark warning, offered by Federal Reserve Bank of Kansas City President Thomas Hoenig, who's been warning about the rise of too-big-to-fail banks for more than a decade, comes as international regulators finalize plans to increase supervision of and toughen requirements on the world's largest banking organizations as a reaction to the global financial crisis. Rather than break up big banks, politicians decided to simply subject them to more oversight.

Yet debate rages as to whether the requirements are too tough, or not tough at all, and whether regulators will have the backbone to follow through on their commitments. Republicans in the U.S. House of Representatives are trying to dismantle the domestic financial reform law passed last year; banks are screaming that lending will dry up, inhibiting the anemic U.S. recovery; and on the global level, regulators from some countries where large banks dominate the national economy (and thus enjoy overt taxpayer backing) are trying to weaken international accords.

For Hoenig though, the choice is clear when it comes to what to do with the financial institutions that caused the most punishing downturn since the Great Depression: break them up into pieces that regulators can understand and provide a backstop to entities engaged in the so-called real economy -- but allow those dabbling in more risk-laden activities to fail.

The Obama administration and Congress chose the alternate route in passing the Dodd-Frank financial regulation law. To Hoenig, they made a mistake.

"Following this financial crisis, Congress and the administration turned to the work of repair and reform," he said during a Monday speech in Washington. "Once again, the American public got the standard remedies -- more and increasingly complex regulation and supervision."

"The Dodd-Frank reforms have all been introduced before, but financial markets skirted them," he continued. "Supervisory authority existed, but it was used lightly because of political pressure and the misperceptions that free markets, with generous public support, could self-regulate."

Regulators will lack the will to wind down failing companies deemed systemically important financial institutions, or SIFIs, Hoenig said. The power to force large firms into liquidation was the centerpiece of the Obama administration's plan to reform the financial system in the wake of the crisis and Great Recession.

"I just can't imagine it working," Hoenig said. Speaking of the difficulty of forcing a large, complex firm like Citigroup or Goldman Sachs into bankruptcy-like proceedings, the Midwesterner admitted that if he were the one ultimately making the decision, "I would be inclined to bail them out."

"One of the difficulties in terms of supervision of these SIFIs is they are so horribly complex their directors don't understand it, their management don't understand it, and the supervisors certainly can't deal with all the issues," Hoenig said.

The second part of the administration's plan -- forcing large financial firms to hold more capital as a buffer against the kind of debilitating losses that led policy makers to bail them out -- also will inevitably come up short, as bankers will likely game the system once the economy rebounds.

An international consortium of bank regulators hammered out an agreement over the weekend that requires the world's biggest banks to hold extra capital beyond the requirements faced by their smaller international competitors. SIFIs would be required to hold up to 2.5 percentage points of extra capital as a proportion of their risk-weighted assets, for a total buffer of 9.5 percent.

"I don't have any faith in it at all," Hoenig said in response to a question at an event hosted by the Pew Financial Reform Project and New York University Stern School of Business. "It will be co-opted within three years of the recovery."

"The resistance ... is ferocious," Hoenig said of the banking industry's objections. "Once the economy turns around and these institutions are thought to be sound again, we will start to erode these capital requirements, just as we have in every instance in the past."

Bankers argue that increased capital requirements will impede lending, though academic research tends to refute that assertion. "It's almost propaganda," Hoenig said of bankers' reasons for objecting to tougher standards.

Proponents of the measure say bankers are simply objecting because the more capital firms are forced to hold, the lower their earnings will be in relation to their equity. U.S. bankers say they'll be at a disadvantage relative to their foreign counterparts. Hoenig called that assertion "nonsense."

Others argue that bankers are simply concerned about their bonuses, as shareholders will likely call for lower pay packages as a result of lower earnings.

SIFIs must be broken up and simplified, Hoenig said, not just to avoid the inevitable weakening of standards and reemergence of timid regulators, but also because they're un-American.

"I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism," Hoenig said. "They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril."

Hoenig, who became president of the Kansas City Fed in 1991, will step down this October due to the Fed's mandatory retirement policy.

by Anonymousreply 4601/14/2013

You cannot regulate banks that own the regulators.

by Anonymousreply 107/22/2012

Iceland let their banks fail and they're doing fine.

by Anonymousreply 307/22/2012

George Carlin explains why.

by Anonymousreply 407/22/2012

R2's link is Libertarian drivel.

by Anonymousreply 507/22/2012

[quote]The stark warning, offered by Federal Reserve Bank of Kansas City President Thomas Hoenig

He could very well be correct for all I know, but understand that this guy is a regular on CNBC and Fox Business, and no matter what the subject is, his response is always that the sky is falling, and the end of the world is upon us.

by Anonymousreply 607/22/2012

Cantor’s Office Wrote Loophole into Congressional Insider Trading Bill

Remember when Congress applauded itself recently for creating insider trading laws for members of Congress. Well, they also built in a loophole.

CNN is reporting that House Majority Leader Eric Cantor’s office wrote a loophole into the House version of the Stop Trading on Congressional Knowledge Act (STOCK) by exempting Congress members’ spouses and children from having to report stock market transactions.

The Senate version of the bill requires these transactions be reported within 45 days by both its members and their families. But a memo from the Office of Government Ethics, which oversees all federal executive branch employees, used the House version, telling them spouses and children were not subject to the rule.

The law, which bars members of Congress from trading stocks based on information they get for work purposes and requires them to register any stock transactions over $1,000 within 45 days, was signed into effect in April.

by Anonymousreply 707/22/2012

Agree with R5.

by Anonymousreply 907/22/2012

You mean giving reckless speculative bankers massive amounts of free taxpayer money to gamble without imposing controls will end badly?

by Anonymousreply 1407/27/2012

[quote]CNN is reporting that House Majority Leader Eric Cantor’s office wrote a loophole into the House version of the Stop Trading on Congressional Knowledge Act (STOCK) by exempting Congress members’ spouses and children from having to report stock market transactions.

Scum.

by Anonymousreply 1809/25/2012

These posts are too long, too much to read, they're HURTING MY EYEBALLS!!!

by Anonymousreply 1909/25/2012

Amen, R16.

As R18 points out, they are exempt from insider trading laws. How convenient.

by Anonymousreply 2009/26/2012

We are past the point of new regulations.

It is time to start seizing assets.

by Anonymousreply 2109/26/2012

Reinstate Glass-Steagall, and force the big banks to break up. It worked before, it'll work again.

by Anonymousreply 2309/26/2012

R22, that's a naive and dangerous plan. Sorry, but that's what mental-midgets like Libertarians (arrested development!) spout. It falls in the category of "a little knowledge is a dangerous thing". And shows an amazing lack of comprehension of how fiscal and monitary policy are different.

by Anonymousreply 2409/27/2012

[quote]No gold standard, necessarily, but allow anyone to create a currency and allow merchants and people to choose which currency they will accept. With POS systems, such conversions would be easy.

You do understand that a) we used to do that and b) there's a reason we don't do that anymore, right? And that your proposal is not only really, really stupid, it wouldn't do a damn thing to deal with the problem of financial reform? Just checking.

R23 has it exactly right, by the way. No need for nonsensical "solutions" that would simply make things worse.

by Anonymousreply 2509/27/2012

[quote]No gold standard, necessarily, but allow anyone to create a currency and allow merchants and people to choose which currency they will accept.

you sound deranged. No post-industrial society could survive that.

by Anonymousreply 2709/27/2012

[quote]your ignorance of economics is staggering.

ROFL.... Coming from you, that's a compliment.

[quote]The gold standard was abolished because it prevented the empire from waging total war.

No, dear, it wasn't. I'm sorry, but you don't get to rewrite history to suit your little obsessions.

[quote]By printing money, they could push the pain into the future. Now the chickens are roosting and the middle and lower classes are paying the price.

Dear heart, you do realize that morons like you have been predicting economic Armageddon for nearly 100 years? And that you have always been wrong? And that you are just as wrong this time as you were when you first predicted it here several years ago? Sorry to disappoint you, but out here in the real world we aren't going to see hyperinflation and we aren't going to see an economic meltdown, no matter how much you stamp your feet and hold your breath until you turn blue.

[quote]Learn some real economics before exposing your ignorance.

ROFL.... Oh, the irony....

[quote]If I walked into a store with a credit card attached to a gold account, and paid for my stuff and the owner wanted dollars, they could convert it at the POS. You obviously have no idea what I'm talking about.

Dear heart, we know *exactly* what you're talking about and what you're advocating. It's still a stupid, unworkable idea, and it will not do a damn thing to effect financial reform, which is why we're laughing at you. Fortunately, it also has zero chance of ever taking place, primarily because it's a stupid, unworkable idea.

by Anonymousreply 2909/28/2012

What's really funny about you, R28, is that you've been proved wrong over and over and over again in this forum and you just never learn. You always get your ass handed to you, your predictions never come true, and yet you continue to insist that everyone here is ignorant of economics and only you are of the one true faith.

That economic Armageddon and hyperinflation not happening? Oh, well, that couldn't be because your economic faith is wrong. No, no, that's because it's just around the corner. No, really. Any day now it's going to happen. And then we'll all be sorry and you'll be vindicated.

Gold prices not climbing to ten times their current value? Oh, well, that couldn't be because you're a moron who doesn't know anything about economics and who can't recognize a classic bubble and who doesn't know anything about the historic price of gold and its value as an investment. No, no, that, too, is just around the corner. Any day now it's going to happen. And then you'll be rich and we'll all be sorry.

by Anonymousreply 3009/28/2012

Anyone who wants to follow how ignorant R30 is can click here.

by Anonymousreply 3309/28/2012

[quote]was the only one here that said (in 2004) that the housing bubble was going to burst

No, dear, you weren't, as it didn't take much expertise to recognize that we were in a bubble. Quite a few bloggers, economists, and ordinary people recognized this, including me.

[quote]Things are 100x worse now

No, actually, they aren't, since you can't get "100x worse" than a complete financial meltdown.

[quote]Why do people like you defend the big banks?

We don't. Pointing out that you're full of shit and don't know what the hell you're talking about is not the same thing as "defend[ing] the big banks," no matter how much you'd like to pretend that it is.

[quote]she defends the Federal Reserve counterfeit schemes and bailout of the big banks.

ROFL.... You can't deal with what I actually write so you have to simply make shit up? Do feel free to actually conduct a real debate anytime, dear. I'm right here, and always ready to debunk whatever drivel you care to post. Alas, you are wholly unable to participate in such a debate so you're stuck with these lame insults.

[quote]Anyone who wants to follow how ignorant [R30] is can click here.

By all means. I stand by what I wrote on that thread, as well as this one. Nor have you been able to come up with a single bit of data, logic, or reason to contradict anything I wrote.

This always goes the same way, dear. You always get your ass handled to you because you're full of shit and really don't know what the hell you're talking about. Oh, well... you're amusing, so that's one thing in your favor.

by Anonymousreply 3509/28/2012

ROFL.... You got half of your old threads shut down because you spammed. It looks like you didn't miss a single thread. Let's see if we can get this one shut down too, dear.

What's hilarious is that you actually think that bit of drivel applies to anything in the real world today!

by Anonymousreply 4301/14/2013

Seizing the assets of the rich, is becoming the only solution.

by Anonymousreply 4401/14/2013

Tim Carney spots the press release just put out by Mehri & Skalet. It says in part:

After nearly three years at the Department of Health and Human Services—as the first Director of Obamacare insurance implementation, as Senior Advisor to the Secretary, and as a Regional Director—longtime insurance regulator and plaintiff’s attorney Jay Angoff is returning to DC-based Mehri & Skalet, PLLC as a partner, where he will lead the firm’s insurance and healthcare practice.

“Working at HHS has been immensely rewarding, and I’m pleased with the progress that has been made in implementing the Affordable Care Act,” said Mr. Angoff of his departure from HHS. “I look forward to returning to Mehri & Skalet to help make sure the law is enforced. The Affordable Care Act has given health insurance policyholders new rights, and will give them even more in 2014; it is critical that we defend those newfound rights.”

Carney writes:

Is it relevant that the man who helped craft Obamacare’s regulations on insurers will now make lots of money by suing insurers based on those regulations?[...]Think about the incentives at play here: If you are a lawyer working for the government, and you shape the laws in such a way as to make lawsuits easier, you are then making yourself more valuable to a potential future employer.

This is what WaPo had to say about this crony tool:

In April 2010, after a year-long congressional fight, President Obama victoriously passed a sweeping overhaul of America's health-care system. Then, the president needed to find someone to actually implement it.  That person is Angoff. A class-action litigator who specialized in making big insurers pay out, he made his name as insurance commissioner of Missouri and now heads the office created to implement the big reforms smoothly and keep insurance companies honest.

by Anonymousreply 4501/14/2013

Jack Lew, President Obama's nominee for treasury secretary, is a revolving-door K Streeter and Wall Streeter who pocketed a near-million-dollar bonus from Citibank three months after taxpayers bailed out the failed financial titan. ---

In June 2006, Lew joined Citigroup, one of the five largest banks in America, where he worked under fellow Clinton alumnus Robert Rubin. In January 2008, Lew became chief operating officer of Citi Alternative Investments.[...] ome of Citi's "alternative investments" under Lew were tied inextricably to politics. For instance, Citi had a division dedicated to "green" investments that could only be profitable with the right regulations and subsidies. CAI invested in highly subsidized cellulosic ethanol, demand for which came from federal law requiring gasoline blenders to buy it.

GreatPoint Energy was an investment partner with Lew's unit. The company's business was coal gasification, and GreatPoint lobbied for climate change legislation that would drive demand for this process. Lew's unit also tried to make money from investments in greenhouse gas credits, which only have value if the government constrains greenhouse gas emissions. ---

In autumn 2008, Wall Street began to crumble, and so Washington stepped in with a string of taxpayer-funded bailouts. The U.S. government funneled tens of billions of dollars in emergency aid to Citi, soon buying a huge share in the company. Absent the Troubled Asset Relief Program, Citigroup would likely have collapsed.

On Jan. 15, 2009 -- three months after Congress passed TARP and in the midst of a stock market collapse -- Lew received a payment of $944,518 from Citi, according to his personal financial disclosure forms. Because the Treasury was covering Citi's losses in order to save the failed bank from liquidation, that was, in effect, a check from taxpayers to Lew, days before he entered the Obama administration.

by Anonymousreply 4601/14/2013
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