Like reversing the epigram in T.S. Eliot’s “Murder in the Cathedral,” Congress’s last temptation in financial reform is to “do the wrong deed for the right reason.” The credit rating agency liability concepts in both the House and Senate financial reform bills are “wrong deeds” in this sense.
A number of academics, industry bodies, regulatory agencies and Congress have been working on ideas to strengthen the securitization process. As we know only too well, rating agencies downgraded thousands of Triple-A residential mortgage-backed securities (RMBS), which, because of interconnected investor rating requirements, had a devastating impact on the financial system.
ORAL Testimony of Joseph R. Mason Before the House Financial Services Committee, Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises
While it is widely held that unprecedented monetary and fiscal policy responses of countries worldwide have been successful at preventing a worst case scenario repeat of the Great Depression, the combination of rising fiscal deficits and continued monetary policy accommodation has raised concerns about the sustainability of public finances and fears of inflation. As a result, the recent uproar about Greece’s fiscal woes and possible debt default are viewed by many as merely a “canary in the coal mine.”
While many have been struggling to cast the SEC v Goldman filing as a fillip to regulatory reform, it is not supportive of ninety percent of the regulatory reform currently before Congress.
Every financial crisis is initially fuelled by investment losses. This crisis is no different. It is important to realize, however, that those losses came from loans to people that could not (and many times still cannot) afford them. As revealed by the Financial Crisis Inquiry Commission, sometimes those loans were made with borrowers’ consent and sometimes they were not. The former is tantamount to borrower fraud and the latter to lender fraud. Both result inexorably in irreversible dollar losses.
Markets and the media seemed to largely dismiss last week’s NBER Business Cycle Dating Committee announcement that they cannot yet declare the recession tough. The Committee’s decisions, however, is important for two reasons. First, of course, the trough only marks a turning point whereby growth of any dimension follows. Second, while the dating of troughs typically occurs with a lag, that lag seems to be greater in recent years. Nonetheless, we are now entering the zone of uncertainty, where applying even the longest recovery announcement lags extends the recession beyond those of recent history.
Well, it’s earnings season again. One has to wonder, however, why anyone would believe the numbers being touted out quarter after quarter in the ongoing financial crisis. Already, there has been ample evidence of accounting forbearance, with explicit cooperation by FASB, the SEC, and the bank regulators. I argue that while such forbearance may be important for stabilizing bank conditions – albeit at a low level – it is dragging out the recovery for longer than otherwise need be the case.
Last week Henry Waxman, chairman of the House Committee on Energy and Commerce, and Bart Stupak, chair of the Energy and Commerce Committee’s investigative subcommittee, reacted to several corporate financial filings detailing the expected costs of complying with the new health care legislation with outrage. In a manner befitting the policeman who frequents the casino disingenuously declaring, “You mean there’s gambling going on here?” some in Congress appear not to have read the health care bill or the Congressional Budget Office evaluation of the financial effects of the legislation.
I have to say, Dodd’s proposed financial reform bill is an improvement over what was previously offered in both House and Senate. In particular, I like the attempt at clearly distinguishing between solvency and liquidity problems, as well as the publicity requirements surrounding emergency assistance facilities.
Crises are a period of rebirth. Indeed, nearly all securitized asset classes have experienced crisis at one time or another in their development and have responded by changing their securitization methods and contracts in response to the revealed weaknesses.
Despite all the wrangling in Washington, Davos, and elsewhere about regulatory overhaul, one holy grail remains: U.S. housing policy. Some maintain that while mortgages were present, they were benign without securitization and leverage, so that those latter elements are more the culprit than mortgage policy, per se. Others argue that mortgages could only have been benign in isolation from Federal housing policy, which consciously sought to push home ownership rates to historic highs.
By now you have realized that Federal Reserve policy has become highly politicized. While the media is placing you squarely in the middle of that development, I realize that the shift has been occurring since long before you were appointed Chair, and even Governor, as the Federal Reserve has found it worthwhile and expedient in the past two decades to work directly with Congress and the various Administrations on a number of key issues, ranging from housing policy to addressing financial markets hiccups to maintaining steady economic growth. Unfortunately, that era is over and the Federal Reserve will be responsible for some tough decisions.