Breaking New Ground with the New Dems?

The New Democrat Coalition is not especially new, but the recent changes resulting from the 2008 elections and the financial crisis have given it new prominence and increased importance in the House of Representatives. The New Dems may be the moderating force behind financial regulatory reform in Congress. Already, several of its centrist members helped stall the mortgage cramdown legislation that was scheduled for a House vote yesterday and is now pushed out to next week to allow for changes that can attract additional votes from moderates.

Founded in 1997, the New Democrat Coalition is “committed to enacting policies that encourage economic growth, maintain U.S. competitiveness, meet the new challenges posed by globalization in the 21st century, and strengthen our standing in the world.” With 67 Democratic House members, sixteen of whom are on the House Financial Services Committee, the coalition is taking on “regulatory reform of the financial services industry” through its Financial Services Task Force. It is chaired by Reps. Melissa Bean (D-IL) and Jim Himes (D-CT), who both have business backgrounds, and Himes is an alumnus of Goldman Sachs. The New Dems Chairwoman, Rep. Ellen Tauscher (D-CA), is a former investment banker who was one of the first women ever to hold a seat on the New York Stock Exchange.

The group just released its 21 principles for financial regulatory reform organized around the goals of efficient and effective regulation; market stability and transparency; and robust consumer and investor protection. One principle shows a willingness to reform the way in which mark-to-market accounting rules are applied, something that House Republicans have wanted to do for months. Perhaps the New Dems can help revive the bipartisanship that has been lacking in the House thus far this year.

New Democrat Coalition's 21 Principles for Reforming the Financial System (PDF)

Stress Test

The Treasury Department yesterday afternoon began to release some much anticipated details of the Obama Administration’s Financial Stability Plan first announced on February 10th—TARP re-branded. Yesterday was all about the Capital Assistance Program (CAP) and the related "stress test" that regulators will perform on the 19 largest banks, those with consolidated assets in excess of $100 billion. Treasury announced,

"The purpose of the CAP is to restore confidence throughout the financial system that the nation’s largest banking institutions have a sufficient capital cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers."

If the stress test shows that a bank needs a larger capital buffer, then the bank has six months to raise the necessary amount of private capital or access the CAP, which Treasury describes as "a bridge to private capital in the future." The CAP funds would be available to the bank immediately.

The administration stressed it wants to keep government ownership temporary and will encourage replacing the government’s stake with private capital. Additionally, the Treasury announced it would set up a separate trust "to manage the government’s investments in US financial institutions."  There were no further details about the trust, but Financial Reform Watch will continue to monitor this.

Treasury:  The Capital Assistance Program and its role in the Financial Stability Plan (PDF)

Treasury: Capital Assistance Program FAQs (PDF)

Treasury: Capital Assistance Program Term Sheet (PDF)

Federal Reserve/FDIC: Supervisory Capital Assistance Program FAQs (PDF)

The G20 Deadline

On both sides of the Atlantic, the looming deadline for the G20 Summit in London on 2 April is driving policymakers to come up with recommendations for global financial reform. The presentation of the de Larosiere “high level group,” which the EU commissioned and is headed by former French central banker Jacques de Larosiere, is now only a couple of days away from presenting its proposals for financial reform legislation. Expectations are that the proposals will be far-reaching. Observers regard the G20 meeting in Berlin over the weekend as part of the build-up of support for the proposals that many still may regard as controversial. The EU’s objective remains to create support for the proposals ahead of the G20 meeting.

At the meeting in Berlin, participants focused on the importance of transparency and accountability on the part of all financial market participants by affirming their conviction that all financial markets, products, and participants must be subject to appropriate oversight or regulation, without exception and regardless of their country of domicile. They agreed this is especially true for those private pools of capital, including hedge funds, that may present a systemic risk. The meeting therefore called for appropriate oversight or regulation of these sectors in order to prevent excessive risk-taking and also agreed that credit rating agencies should be subject to mandatory registration and oversight.

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Next Round of TALF Investments Focused on Consumer Debt

It appears the Federal Reserve will announce this week a substantial round of investments through the Term Asset Backed Securities Loan Facility (TALF) program in securitized credit card, auto loan, student loan, and other consumer debt. These investments will be from the initial TALF program allocation of $200 billion. The Fed is now turning its attention to the commercial real estate sector and they appear to recognize this is the next "shoe about to drop" as mortgage holders are unable to refinance in today's marketplace. We anticipate the next round of TALF investments—made available by increasing the facility up to $1 trillion—will include a focus on the commercial sector.

In addition to its efforts on asset-backed loans, the Fed is also working, in concert with Treasury, to reassure dubious investors and potential investors in the banking sector that no institutions are going to fail and that nationalization of banks is not on the agenda. Reports in today's media that the government is contemplating taking up to a 40 percent stake in Citicorp may not allay these concerns however.

Another development of interest over the weekend was the assessment of the economy that emerged from the nation's governors after they met separately in Washington on Saturday with Federal Reserve Chairman Ben Bernanke and with Mark Zandi of Moody' In the hallways of the National Governors Association conference and in pages of newspapers like the New York Times, one could see that the combined effect of the two briefings to the Governors was to intensify their sense that recovery will be a very slow process. The Times article appearing in the paper on Sunday, cited pessimistic assessments from Democratic and Republican governors alike. Public pronouncements by both the Fed and Zandi have been diverging in recent weeks, with the Fed indicating the economy will begin to turn around in the second half of 2009 and with Zandi saying that is not likely until late in 2010. One can infer from the articles that followed the meetings that the Governors gave somewhat more weight to the Zandi assessment.

Obama Proposes Plan to Help Homeowners

Congress was out of town when President Obama unveiled his “Homeowner Affordability and Stability Plan” this week, but that has not stopped key Members of Congress from weighing in on the plan and handicappers from starting to take odds on how reaction to the plan will affect other issues at play in the Capital.

Unsurprisingly, Speaker of the House Nancy Pelosi (D-CA) applauded the Obama plan and promised more relief, saying,

“Congress stands ready to complement the Administration’s efforts by acting on Judiciary Committee Chairman John Conyers’ legislation to reform our bankruptcy laws, so that judges can modify mortgages and responsible homeowners can stay in their homes.”

The Conyers’ legislation would alter bankruptcy laws so that judges could reduce or “cram-down” the mortgage principal and/or payments on a borrower’s primary residence.

Just as unsurprising was the reaction of Pelosi’s counterpart, House Minority Leader John Boehner (R-OH) who, along with House Minority Whip Eric Cantor (R-VA), sent a letter to the president with a list of  “key questions” about the plan. Their questions are compelling regardless of where people stand on the plan.

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Free Trade Tidings from the G7

While the results of the G7 meeting in Rome may have been disappointing to some, due to a communiqué light on substance, it can be argued it made a step in the right direction in combating protectionism. The communiqué included this statement:

"An open system of global trade and investment is indispensable for global prosperity. The G7 remains committed to avoiding protectionist measures, which would only exacerbate the downturn, to refraining from raising new barriers and to working towards a quick and ambitious conclusion of the Doha Round.”

 Another development at the meeting was the apparent softening of the German government's attitude about "bailouts" of euro-bloc nations needing to refinance debt. Whereas German Finance Minister Peter Steinbreuck said before the G7 meeting that Austria would have to solve its own problems, Steinbreuck's post-G7 statements appear to open the door for assistance to Austria as well as Ireland and Greece, who may also soon need help.

The EU states are now working hard to find a solution that would essentially be a preemptive de facto bailout, bearing in mind the legal limitations of the EU Treaty which has a "no bailout" clause. A common EU policy on state and bank bailouts would constitute a huge leap forward for EU integration.

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Question Time

Who appointed the G7 (+1) to its perch? The finance ministers for the main protagonists in World War II (1939-1945) met in Rome over the weekend to discuss the world economic crisis. Does a meeting of this nature that excludes India and China truly have a hope of wrapping its collective mind around the problems and their possible solutions?

Is ideology standing in the way of the most elegant solution to the U.S. banking crisis? Give former President George W. Bush his due: when the dimensions of the banking crisis became apparent to him, he scrapped a "market guy" ideology and poured taxpayer money into the banks. Is the Obama Administration willing to take what for them would be a similar ideological leap? Is their unwillingness to do so behind the complex public-private partnership at the center of the Geithner proposal to deal with troubled assets? Is there a similar reason behind the relatively light-handed approach Geithner would take to pushing the banks to resume lending?

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TARP in the Stimulus--Executive Pay Backlash

Buried in the American Recovery and Reinvestment Act (ARRA), which is making its final march through Congress on its way to the president’s desk, is a section imposing limits on executive compensation for Troubled Asset Relief Program (TARP) recipients. The White House and the Treasury Department announced new executive compensation restrictions last week, but Congressional leadership obviously believed there was a need to codify some of those rules and strengthen others.

Here is an overview of the legislative provisions that, when enacted, will apply to companies until they repay their TARP money.

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EU Infighting Over "Protectionist Steps and Statements"

The list of “make or break” events taking place in the EU and in the United States this week to address the financial crisis is long, and the number of disagreements over appropriate policy responses is even longer. In the EU, accusations of increased protectionism and other forms of unilateral action that will benefit some at the expense of others are flying.

The high price that the EU has to pay for not having a permanent and stand-alone Presidency became apparent again this week. A permanent EU Presidency would be more disconnected from the Member State Governments, as opposed to the current rotating six-month presidencies that are inherently biased on basis of national preferences. The Czech EU Presidency has summoned leaders to Brussels because of the rising risk of protectionism and economic nationalism. The Czech Prime Minister, Mirek Topolánek, reportedly cited in particular “protectionist steps and statements” on the part of French president Nicolas Sarkozy, a reference no doubt to his government’s recent announcement to provide new financing to French car makers. The call for a summit is only the most recent step in the political sniping between Paris and Prague and has been a feature of this Presidency even before it began, when President Sarkozy suggested that perhaps the Czechs should be bypassed in favor of the extension of the French term.

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Secretary Geithner's New TARP--The Financial Stability Plan

U.S. Treasury Secretary Tim Geithner today announced the administration’s new “Financial Stability Plan” but revealed few details beyond the plan’s overarching principles. The new plan aims to provide more capital for banks while holding them to higher lending and accountability standards, establish a public-private investment fund to deal with “troubled” assets, provide more assistance to homeowners and small businesses, and increase the transparency of the program in order to protect taxpayers.

After an unusual introduction by Senate Banking Committee Chairman Chris Dodd—presumably intended to underscore the administration’s dual commitment to the economic stimulus legislation intended to jump start the economy and fixing the financial system—Geithner described the current situation. He said credit markets are not working, which has led to serious business cut backs and resulted in a financial system “working against recovery.” Geithner criticized the government’s efforts thus far as “absolutely essential, but they were inadequate.”

Following the Treasury announcement, the stock market nose-dived all afternoon, with the Dow Jones industrial average dropping 4.6 percent and the Standard and Poor’s 500-stock index slipping 4.9 percent. Several financial analysts directly linked the market’s poor performance to the plan’s lack of detail, especially regarding the Public Private Investment Fund intended to leverage private capital with government financing. Some analysts contend that today’s announcement exacerbated the uncertainty plaguing the markets. When reporters questioned Geithner about filling in the blanks around the public private partnership, he responded that the administration does not want to release details until they are fully confident they have the right structure. He said they are very committed to bringing in private capital.

Here is a brief overview of the Financial Stability Plan:

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Is It Good Not To Be "Bad"?

While a formal announcement is still a day away, it appears the Obama Administration is backing away from the concept of a "bad bank" to take control of the bad assets of US banks. Instead, they will propose that price floors on assets would be set by the federal government as a means of inducing private investors to take control of the assets, manage them, and eventually sell them back into the marketplace.

In explaining the outlines of the proposal on Sunday, Lawrence Summers, the top White House economic adviser, indicated the administration had received a number of proposals from private equity firms, hedge funds, and insurance companies interested in asset management. He said that bringing private equity into the process would help limit the exposure of the taxpayer.

This approach—perhaps best described as a "mixed model"—puts the federal government in the guarantor position and would most likely involve federal oversight of the private firms' activities under the program. Some requirements might flow to the new asset managers as well. For example, a mandate or strong encouragement to restructure mortgage loans could well be a part of the deal for them.

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White House Cracks Down on Wall Street Compensation

Next week President Obama and Treasury Secretary Geithner will unveil the administration’s broad financial reform agenda—a strategy to get credit moving again—but yesterday offered a preview as they unveiled new restrictions on executive compensation. The announcement was in direct response to public outrage over the use of taxpayer funds to subsidize “excessive compensation packages on Wall Street.” The president railed against “lavish bonuses” and a “culture of narrow self-interest and short-term gain at the expense of everything else.” It will be interesting to see if this policy, which could affect compensation policies at industry-leading institutions, will result in a reduction and/or restructuring of executive compensation throughout the financial services industry. Even though the new policy appears intended to have just such a leavening effect on compensation, President Obama tried to reassure free-marketers by saying: “This is America. We don’t disparage wealth…and we believe success should be rewarded.”  But he went on to say that executives being rewarded for failure, especially with taxpayer money, is wrong.

The Treasury executive compensation reform guidelines fall into three categories covering:

  • all TARP recipients;
  • participants in a “generally available capital access program,” such as the Capital Purchase Program; and
  • institutions that receive “exceptional assistance,” such as Citigroup, Bank of America, and AIG. 
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What's After Davos?

If the World Economic Forum in Davos was supposed to be an indicator of the progress that politicians, regulators, and corporations can make in coalescing around a common, global, and coherent response to the crisis, then observers may be forgiven for being low on optimism at present.

The annual Davos events have become perhaps the most important gathering of world leaders and decision-makers that take place outside the sphere of traditional diplomacy and international organizations. Non-private gatherings, like the G20, normally lend themselves to more carefully coordinated and rehearsed declarations and conclusions for the governments involved. The Washington G20 meeting in November was widely regarded as a success in terms of the involved governments being able to agree on a common roadmap to address the financial crisis and also managing to communicate their agreement successfully. The value of such displays of unity cannot be underestimated when the deterioration in the economy continues to accelerate.

Davos, on the other hand, created an impression that the weakening economic outlook is putting a strain on states’ commitment to the Washington accords, putting in doubt the viability of the whole process. It will therefore be important for leaders to carefully manage the road to the G20 summit in London on 3 April, at which a large number of concrete and global measures normally should be adopted to tackle the crisis.

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TARP in Transition

Lest anyone think Congress was not giving the financial crisis enough time and attention, the House Financial Services and Senate Banking Committees are holding no less than six hearings on financial regulatory reform and oversight this week. Down the avenue, the Treasury Department is hard at work crafting plans to release the second half of the Troubled Asset Relief Program (TARP), also known as TARP II. Rumors have it that TARP II will require recipients to dedicate a percentage of the federal funds received to consumer, auto, student, and small business loans. The good “bad bank” or aggregator bank proposal also still seems to be in the works, and the Beltway buzz is that it will not emerge until next week. Perhaps the administration is waiting to see what this week’s Congressional hearings yield.

The General Accountability Office (GAO) just issued its second TARP status report and concluded that while Treasury is making limited progress implementing the recommendations of the last GAO report, there is much work to be done. GAO’s major criticism is that Treasury has no overarching TARP strategy, which is the source of most of the TARP’s other problems. Specifically, the report concluded: “While GAO does not question the need for swift responses in the current economic environment, the lack of a clearly articulated vision has complicated Treasury’s ability to effectively communicate to Congress, the financial markets, and the public on the benefits of TARP and has limited its ability to identify personnel needs.” The Office of Financial Stability (OFS), which oversees TARP, has hired only 38 of the approximately 131 staff members needed.

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