(Update II: Hensling comment added.)

Experts react to the Obama administration’s proposed overhaul of financial markets…

Walter Hahn, real estate economist in Irvine
“It looks to me like the memories of the players in the financial system are very short and fading rapidly. Six months ago they were afraid that their companies would be gone and they would be out on the street. Now it looks like they are heading back to business as usual — playing the system to maximize their personal income and wealth — unrestrained greed all over again!”

“The best indicators of this attitude are comments to the effect that the economy and financial system are starting to recover — when both are a long way from any appreciable recovery — and the players’ rising tide of opposition to the administration’s plan for regulatory reform.  It looks like the financial businesses and people are going to fight regulation tooth and nail as they always have in the past. They don’t like any restraints on their ability to maximize satisfaction of their greed.”

“Also, many of the federal agencies now involved in financial regulation are fighting the proposed reforms in order to protect their turf and power and ego satisfaction. The proposed reforms would seriously reduce the power of some agencies, so they are fighting the reforms.”

“All of this is being played out politically in Congress via intense lobbying and large campaign contributions. Then there are most of the Republicans in Congress who are ideologically opposed to regulation. The politicians have even shorter memories of the economic and financial disaster perpetrated by 25 years of progressive deregulation and unrestrained greed capped by the mortgage catastrophe.”

“The foregoing indicates to me that very little actual financial system reform is likely to be passed by Congress, and the little that is enacted is unlikely to prevent another financial and economic recession within 10 years — hopefully less catastrophic than the present one. Two hundred-plus years of U.S. financial and economic system history demonstrate that unrestrained greed invariably triumphs and then explodes and collapses the systems.”

Jack Kyser, chief economist. Los Angeles County Economic Development Corp., which also tracks Orange County
“It would help prevent future fiascoes. But there will be a lot of push-back both from financial institutions, as well as regulatory agencies. Something will pass Congress, but it will be different.”

Al Hensling, United American Mortgage, Irvine,
“I am sure this is well intended, but based on results and performance of other government agencies in connection with trying to manage and provide oversight, the government has done a dismal job. That’s evidenced with what happened with the FDIC.”

“Really at this point I don’t know if more government intervention is really necessary. I believe what they might want to do is supply enough assets or resources to the agencies that are currently in place to allow them to operate efficiently.”

Kurt Eggert, law professor, Chapman University
“The Treasury plan to reform regulation has tremendous aspirations, though it would give enormous discretion to the newly created agency to fulfill those aspirations. One of its central concepts, that a single agency should be enforcing consumer protection in the financial industry, is important and should have been done years ago. One of the biggest problems we have had is that we have numerous federal agencies looking out for various financial institutions, but no one’s main job has been to protect the consumers of their financial products. And so federal regulators for too long turned a blind eye to bad loans and other consumer abuses because they did not deem them a threat to the soundness of banks and other financial institutions.”

“I am concerned that while the Treasury plan focuses extensively on loan origination, there is little about loan servicing and foreclosure prevention. A financial consumer protection agency should have as one of its main tasks overseeing the too-little regulated mortgage servicers that typically determine whether a borrower’s home is foreclosed. While regulating new loans is important, regulating what happens with all of the subprime loans made in the last ten years is also crucial. We have long needed better and more complete federal regulation of mortgage servicers, and this should be included in this new plan.”

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The Obama administration released details of its ambitious plan to retool oversight of banks and other financial firms. According to a release from the U.S. Treasury Department, the plan will:

• “Require that all financial firms that pose a significant risk to the financial system at large are subjected to strong consolidated supervision and regulation
• Increase market discipline and transparency to make our markets strong enough to withstand system-wide stress and the potential failure of one or more large financial institutions
• Rebuild trust in our markets by creating the Consumer Financial Protection Agency to focus exclusively on protecting consumers in credit, savings, and payment markets.
• Provide the government with the tools needed to manage financial crises so it is not forced to choose between bailouts and financial collapse
• Raise international regulatory s! tandards and improve international coordination”

And here are links to key documents.

For a white paper by the Obama administration on reform, CLICK HERE.

For a fact sheet on stronger supervision of all financial firms,  CLICK HERE.

See a fact sheet on regulation of core markets, HERE

Find details on consumer protection, HERE.

Details on managing failed institutions, HERE.

More on improving international regulation, HERE.

National Mortgage News reports:

The House Financial Services Committee has postponed a markup of a mortgage reform bill that bans certain types of yield-spread premium payments and requires lenders to retain 5% of the credit risk on subprime loans that are sold to investors. The committee had scheduled a Tuesday (March 31) markup session, but canceled it without explanation. Lenders that sell subprime loans will not be allowed to “directly or indirectly transfer the credit risk it retains,” according to the bill, sponsored by committee chairman Barney Frank, D-Mass., and fellow Democratic Reps. Brad Miller and Mel Watt of North Carolina. The sponsors want to crack down on compensation that might encourage mortgage lenders and brokers to steer borrowers into higher-cost loans. “Specifically, the new measure will strengthen restrictions on compensation paid to mortgage loan originators and brokers that is based on a loan’s interest rate and terms, often called a yield-spread premiums,” according to Rep. Miller. Marc Savitt, president of the National Association of Mortgage Brokers, said that he is OK with the language in the bill, noting that “this doesn’t ban yield-spread premiums outright” and instead “prevents people from making a couple of extra points” by putting consumers in higher-cost loans.

The latest banking/lending stories …

(Update: experts added.)

Treasury Secretary Timothy Geithner wants to bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. He also wants Congress to create a new systemic risk regulator with the power to force companies to boost their capital or curtail borrowing. Finally the government would be able to seize such companies if their failure poses systemic risk. Here are some reactions:

Edward Leamer, director of the UCLA Anderson Forecast
He said more regulation is definitely needed “to extend its reach into the shadow banking world that has caused so much damage.” Leamer believes Geithner is “on the right track” but also thinks now is not an ideal time to tackle such a complex task. “The best time to do regulation is not in the heat of battle but when the economy is more stable and you can think more clearly. Ideally we would have done regulation five years ago or do it five years from now.” He added that the current crisis is causing “political football” that can be seen over the issue of executive compensation. “Now it has become evil to make money.”

Timothy Canova, a professor and associate dean for academic affairs at Chapman University’s law school
Regarding a single independent regulator:
“I am skeptical that a single regulator or several regulators can effectively monitor and regulate such enormous financial institutions with their large complex organizations, diverse range of financial products, and significant political clout. “Too big to fail” firms are inherently ‘too big to regulate.’ Regulators lack both the administrative and political capability, which is why we should be speaking about adopting a new Glass-Steagall framework of regulatory firewalls to separate commercial banking and insurance from investment banking and securities. The federal government should start breaking up these financial giants and re-regulating them based on functional lines.”

“In addition, we need to re-think what we mean by regulatory independence. Certainly in the case of the Federal Reserve, independence from elected officials has contributed to the Fed’s capture by the private financial services industry and a very group-think mentality. There needs to be more transparency in regulation and regulators need to be made accountable to elected officials who are in turn accountable to voters.”

On the proposal for higher standards of capital and risk management for the biggest companies:
“In recent decades, as margin requirements were swept aside for commercial banks, thrifts, and mortgage lenders, this put more pressure on getting capital requirements right. We need to re-impose margin requirements and other selective credit controls on these financial institutions. In addition, capital and margin requirements should be extended to hedge funds and derivatives. At the same time, we may need to relax regulatory capital requirements on some bank holding companies for the short and medium-term to encourage banks to resume lending.”

On registration of large hedge funds:
“I support such registration, as well as greater disclosure of information about the investors in hedge funds. The public has a need to know when partners and investors in hedge funds use their political connections to manipulate the market and the policies of federal subsidies and bailouts. For instance, Larry Summers, now President Obama’s top economic advisor, was until recently a managing director of one of the nation’s largest and most successful hedge funds, D.E. Shaw & Co. Will D.E. Shaw be among the ‘private partners’ in the latest Treasury plan to purchase the toxic assets from banks at public expense? Will those private partners include hedge funds associated with Alan Greenspan, the Clintons, Robert Rubin, or former Federal Reserve officials, including officials close to Timothy Geithner? These are legitimate questions with profound significance to the integrity of our financial markets and political process.”

On Geithner’s call for a comprehensive framework of oversight of derivatives:
“By ‘a comprehensive framework’ for the OTC derivatives markets, it is now clear that Geithner is advocating for a clearing house to help bring some uniformity and standardization to certain derivative instruments like credit default swaps (CDS) to facilitate settlement and clearing. It’s worth noting that he could have largely achieved such an objective while he was president of the New York Federal Reserve Bank, but instead there were two years of foot-dragging and nothing was accomplished while the CDS market kept growing in size. This could have been avoided had there been a central exchange for the CDS market (as opposed to the more watered-down central clearing house) — an exchange with the authority to impose capital and margin requirements to contain the growth of the CDS market. ”

“Now the horse is already out of the barn. For instance, the CDS market is now larger than $50 trillion in face value and AIG alone has issued more than $1.5 trillion in CDS contracts. The taxpayer recently paid out more than $40 billion to cover AIG liabilities on its CDS contracts, mostly to 10 large banks, including several foreign banks, as well as some hedge funds in the shadows. We should not expect the taxpayer to continue paying off AIG’s gambling liabilities on derivatives bets. These CDS contracts should be considered unenforceable since AIG’s counterparties lack any insurable interest in the underlying assets.”

On new requirements for money-market funds to reduce risk of rapid withdrawals:
“I am in favor of some new requirements to reduce the risk of rapid withdrawals of money market funds. Perhaps this could be accomplished by extending time limits for ‘depositors’ to withdraw funds without incurring penalties. Perhaps margin and capital and reserve requirements should be used more aggressively for money market funds as well.”

Alan Fisher, executive director of San Francisco-based consumer advocacy group the California Reinvestment Coalition
“CRC is glad to see the Obama admistration take steps toward stronger oversight of the entire financial sector to help build a bulwark against a future economic crisis. It is critical that the entire financial sector be well regulated as the lack of regulation allowed the housing bust to open our economy to a wholesale crisis effecting every household. However, there are other elements needed for a plan to work of which I will list a few. … The Federal Reserve and other regulators enabled this crisis through benign neglect and preempting stronger state and local consumer protections. If it is the Federal Reserve or other federal regulators who will be the “regulator” in this new plan, how will the administration ensure that strong regulation takes place? Secondly, the administration should reinstate the protections from the 1930s, such as Glass-Steagall that made it more difficult to obfuscate between corporate entities. It was off balance sheet entities (CDOs, etc.) that allowed financial institutions to appear highly profitable when in fact they were in or on the edge of financial trouble. Lastly, the plan assumes that these financial monoliths that brought down the U.S. economy should be allowed to stand as they are. Can our economy afford to be held hostage by financial corporations that are ‘too big to fail?’ It is community banks that have fared well and served their communities well throughout this crisis and before. I would suggest that the financial institutions should be ‘right-sized’ so that they serve the customers better and don’t put our economy at risk. Their current size undercuts the healthy competition that is critical a thriving economy. The Obama administration needs to go beyond obeisance to financial corporations and take a stronger hand to ensure a positive future for our economy and people.”

Scott Simon, a managing direct at Newport Beach-based Pimco
He said derivatives should be regulated, but regulation needs to be applied “intelligently and reasonably.”

Jeff Lazerson, head of Laguna Niguel-based online loan broker Mortgage Grader
“All markets must have regulation to protect investors and taxpayers. The markets should have never been deregulated in the first place. Buying influence (lobbying) has ruined our country. That’s how the
derivative market was deregulated. Politicians have lost all objectivity. Lobbying needs to be banned with criminal sanctions toward the lobbyists and the elected officials that partake.”

The latest banking/lending stories …

Bloomberg reports:

U.S. Treasury Secretary Timothy Geithner said regulation of the U.S. financial system needs a broad overhaul to heal a crippling lack of confidence caused by the credit crisis.

“To address this will require comprehensive reform,” Geithner said in prepared testimony for a House Financial Services Committee hearing. “Not modest repairs at the margin, but new rules of the game.”

Geithner’s proposals would bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic risk regulator would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.

The Obama administration is counting on public anger over the taxpayer-financed rescues of American International Group Inc., Bear Stearns Cos. and other firms to help it win approval for the changes, which could be the most sweeping since the 1930s. Policy makers want to improve the oversight of the financial system now rather than wait until the crisis is over, administration officials said on condition of anonymity.

‘Conservative’ Regime

“We have a moment of opportunity now” and “we need to act,” Geithner said. He also called for new standards for executive compensation practices “across all financial firms.”

The administration’s regulatory framework would make it mandatory for large hedge funds, private-equity firms and venture-capital funds to register with the Securities and Exchange Commission, subjecting them to new disclosure requirements and inspections by the agency’s staff. The SEC would be able to refer those firms to the systemic regulator, which could order them to raise capital or curtail borrowing.

The strategy also would require derivatives to be traded through central clearinghouses. And it would add new oversight for money-market mutual funds to reduce the risk of a run on those funds after a shock like last year’s failure of Lehman Brothers Holdings Inc.

The Treasury chief also said regulators should consider new rules requiring banks to set aside extra reserves during boom times to build up a cushion for economic slumps.

“We need to examine our accounting rules to see whether, consistent with investor protection, we can require firms to build up loan-loss reserves that look forward and account for losses in downturns,” Geithner said.

The latest banking/lending stories …