Welcome David, thanks so much for being here. So — what do you think of Geithner’s plan?

Welcome to Firedoglake!

Mr. Seide, thanks for coming. I love your proposal of combining the SEC and CFTC. How big a disaster will it be if Senator Sanders’ hold is ignored and Gensler is confirmed to head CFTC?

Thanks Jane.

To start, I think Geitner’s House testimony yesterday was refreshingly candid in his explanation of the causes for why “our system failed in basic fundamental ways.”

He then proposes the first part of what looks like an ambitious reform plan. Systemic risk is his first topic because that is the topic of the G20 summit taking place on April 2. More parts to follow.

Good afternoon, sir, and thanks for chatting at FDL today!

Any idea what this is about?

One of the nation’s chief bank regulators has been placed on leave pending the results of an investigation into his agency’s role in allowing several banks to falsify financial statements.

The Office of Thrift Supervision announced the sudden replacement of Scott Polakoff as acting director yesterday evening. The agency is a unit of the Treasury Department that regulates banks focused on mortgage lending.

Polakoff was removed while the department reviews findings by its inspector general about “certain actions taken by management” at the OTS, according to a Treasury statement. A spokeswoman declined to elaborate.

Welcome to the Lake, Mr Seide. In Geithner’s comments at Thursday’s hearing it sounded to me as if he wants to keep the financial sector pretty much as is with some minor “tweaking” of regulations. We’ve watched the unregulated free market concept crash and burn, why do these people want to continue with it? Besides the profit motive, that is. Or is it really that simple?

So how do you feel about the possibility of the systemic risk regulator being in the Fed?

I know the Financial Services Roundtable and the American Banker’s Association think the Fed is the best place, but that isn’t reassuring. The Fed already seems quite opaque.

david – do you think markopolos was wrong about schapiro? from the la times:

While the SEC is incompetent, the securities industry’s self-policing organization, the Financial Industry Regulatory Authority, is “very corrupt,” Markopolos charged. That organization was headed until December by Mary Schapiro, President Barack Obama’s new SEC chief.

Digg this post right here right now!

Welcome to the lake!

I would like to know what you think of Prof Coffee’s preference for “Twin Peaks” regulatory approach (such as that used in the Netherlands and Australia) to a Systemic Risk Regulator as opposed to the British model of the single Financial Services Authority/ single centralized regulator as favored by the British?

I heard Professor Coffee speak earlier this week and got the impression that he was really now leaning toward a Double Twin Peaks approach with one set of SSR/consumer protection agency for Banking and another set for other financial services.

The notion being that the FDIC’s consumer protection approach which favors depositors, does not really have an corresponding countrpart in other types of finacial services and so the consumer protection approach in those areas would be radically different.

What are your views?

Thanks for the question Jim.

I continue to believe that merging the CFTC and SEC continues to be a goal for an administration that wants to rationalize a fragmented regulatory system.

Jane,

SEC Chair Mary Schapiro also testified on the Hill yesterday, before the Senate Banking Committee. She had this to say:

“The SEC, as a strong independent regulator with market expertise, can perform its critical capital markets and investor protection functions without compromising the oversight of systemic risk. Even as attention focuses on reconsidering the management of systemic risk, investor protection and capital formation — both of which are fundamental to economic growth — cannot be compromised as a product of any reform effort. The SEC stands alone as the government agency responsible for both protecting investors and promoting capital formation for the past 75 years.”

Gary Gensler as head of the CFTC will fill a different kind of role. Gensler has no history with that agency and few ties to vested interests that might favor retention of the CFTC in its current form.

gensler was apparently also involved in getting the cfma passed which prevented the cftc from regulating cdss (and other financial otc derivates) and also included what came to be known as the enron loophole. from the wapo:

The House passed the bill Oct. 19, but then the legislation stalled. Gramm was holding out for stronger language that would bar both the CFTC and the SEC from meddling in the swaps market. Alarmed, SEC lawyers argued that the agency at least needed to retain its authority over fraud and insider trading. What if a trader, armed with inside knowledge, engaged in a swap on a stock? Treasury Undersecretary Gary Gensler brokered a compromise: The SEC would retain its antifraud authority but without any new rulemaking power.

So, I’m hearing that you think the SEC would be a better home.

I’m also interested in where you think the CFTC and the SEC should be merged. The CFTC is under the Ag Committee, right? I’m imagining you’ll pry oversight of that from their cold, dead hands. It’s full of Southern Blue Dogs that the administration has shown no stomach for crossing.

i don’t understand how combining the sec and the cftc rationalizes anything. consolidating all that regulatory authority instead of a very little bit of overlapping and distribution seems like it would just make it easier for the lobbyists i suppose. but it doesn’t make sense from a safety systems control pov. as ecahn might say – like having one circuit breaker on on the nuclear reactor core.

2002-The largest private financial fraud case in our country’s history began to uncover itself back in 2002, and no one heard of it.

Wonder why?

JPMorgan, Citi, Goldman, Merrill, Morgan were all involved in this scheme, for years and were found guilty of contributing to the largest financial fraud case in our history; the largest financial fraud case that just ended Dec 2008 and no one paid attention.

Credit Suisse LLC is pending with litigation with its involvement in this case.

The last trial before this case closed, even after the CEO stood trial, was James K Happ. The ONE AND ONLY acquittal James K Happ!

December 18, 2008 – THE COLUMBUS DISPATCH By Jodi Andes –Prosecutors’ case fell short, juror says, instead, they were more a belief that federal prosecutors had not done their job…

The SEC places Happ at CFO of Columbia Homecare prior to arriving at NCFE.

The years Happ was at NCFE were what the trial was focused on.

Guess what he did as CFO at Columbia? He used NCFE to finance HCA’s losing asset-homecare into a dumping ground, Medshares Inc in Memphis financed by NCFE.All the while Medshares was under multiple investigations for Medicare Medicaid fraud. Yet no one has heard of this case.

HCA never disclosed this divestiture to SEC. James K Happ was the ex-CFO of HCA-Columbia Homecare Group prior to arriving at NCFE and the only one not guilty.

One acquittal, James K Happ; the ex-CFO of the largest healthcare company in our country while he was there.

I continue to see the regulatory landscape divided between enforcement, on the one hand, and regulation onnthe other.

That could mean merging a variety of enforcement functions, now at different agencies, into one financial enforcement regulator. It would also mean giving the regulatory funtions to Secretary Geitner’s “Systemic Risk Regulator.”

There are other models available here too, such as the creation of a financial products safety commission. Though I also think there will be a push to simplify the regulatory landscape.

Teddy, do you remember Tabibi pointing out how, in the ‘new’ regulations during the Bush Admin, legislation was written that allowed an entity like Goldma,Morgan,AIG,etc. to choose who would regulate them? And that the ‘workaround’ for such entities would be to open a single ‘thrigt’ in Delaware which would allow them to select the OTS as the ‘regulator’ for themselves?

Welcome.
I will take a decidedly different POV on the “need” to reform the regulators – I believe the idea of merging the SEC/CFTC is a bad one for two reasons.

The first is what I call “the bureaucrat’s prime directive”: “Always act so as to preserve the existence of your job and budget, and expand them if possible, particularly if it’s at the expense of another (competing) agency.”

The second is the “One Big Factory” problem which was endemic to the old Soviet Union.

Merging the financial regulators will work both of these principles in a way that will make financial regulation less, not more effective. The One Big Factory will produce only what the bosses want and put a premium on satisfying the organizational boss, not the law. We see that in the Bushco SEC – the Bosses wanted no prosecutions of friends and supporters of the President and the System and we got that. Bernie Madoff is Exhibit A. But the paperwork was perfect. When there is more than one “factory”, they will compete with each other so as to ensure that competitive uncovering of wrongdoing by competing agencies will lead to the bosses not being able to squelch things too long.

Similarly, the Bureaucrat’s Prime Directive will drive that competitiveness. In a world where there is only one enforcement agency, the budget is assured. That means nothing has to get done to fulfill the prime directive and that guarantees nothing will get done (that dissatisfies the boss).

And don’t give me the issue of jurisdictional fights as “bad” – those only arise in the context of investigations. And that means – someone is being investigated by two agencies. What better deterrent to wrongdoing than that?

Please comment.

Whatever we do the Fed should not have any authority here. they are already sharing a group think with the banking industry. I am not sure that a team approach might not be best where the team members bring particular expertise to each institution be that banking, securities, insurance or whatever. Not sure I would feel comfortable with a bunch of jack of all.

One issue is that no one was looking closely at the derivative products undrelying the causes of the current crisis. Merger of resources can make for more effective regulation.

Hello, and welcome!

A guy I know is a finance lawyer, and his take is that the SEC is a mess because it is just not a prestigious place to work. It is filled with guys who begrudgingly suffer there for a couple of years so that they can get a better job doing compliance in the private sector.

His suggestion is to give SEC the equivalent of US Attorney status. He even said he would be satisfied if the SEC had actual dedicated US Attorneys in house. Make working for the SEC a prestigious career goal. Make being a high-profile regulator good for your status.

I was wondering what you think about that–is there the germ of a reform there?

All the regulations do not address the issues underlying the problem; simply stated CDS’s are not insurance or investments but gambling. My ‘proof’ for this is the specifically passed legislation exempting such from State gaming laws.

It would seem that simply rolling back all the deregulation of the last 30 years would seem to be the simplest solution. Even BofA’s Lewis is now calling for separation of ‘investment banking’ from that of depositary lending.

Scribe,

Part of the issue here is having people available who understand financial regulation as well the market, the industry, the financial product and the players. While it is relatively easy to find people who have some of those skills, it is harder to find people who meet all of those criteria. To my mind, that is where a larger institution — where one can draw on depper institutional knowledge — has advantages over a series of smaller agencies.

Mr. Seide – On the FDL sister blog Emptywheel right now, we are discussing deferred prosecution agreements, and specifically the one for AIG in which a chap by the name of James Cole from Bryan Cave has served as the “independent monitor” for the DPA. It is crystal clear that he did not do his job appropriately and that AIG was deceptive with him; effectively the whole fish was rotten on this. What is the recourse for this, and who will pursue it? Thank you in advance for any answers you may have.

I think the SEC is filled with very talented people at all levels, including many former Assistant US Attorneys.

The new chief of enforcement is a former AUSA, as was his predecessor. To your point about making the SEC more like DoJ, I think (speaking as a former AUSA) there are a variety of best practices that can be imported into the current SEC enforcement division.

I understand your position, but I believe the organizational dynamics I described above will, in a few years, win out over “combining expertise”.

A saner approach also relied (to some degree) on the presence and activity of private litigants suing for all sorts of different kinds of securities fraud (in the hope of a payday) and with their lawyers getting contingent fees only in the event of winning. While one may complain about “frivolous” suits (”Frivolous” being “any suit where the speaker is a defendant”.) the fact of the matter is that private investors looking for a payday is a more effective incentive not only to cutting down on fraud or the near occasion of fraud, but also in creating the kind of expertise (in the private law firms) that will not come to pass in a governmental organization where the pay is the same, win, lose or draw, week in and week out.

But, since the 1990s “reforms” cut back on private suits, we’ve started to lose that knowledge base and enforcement mechanism.

Geithner didn’t seem to think that the derivative products were the problem — when he endorsed naked credit default swaps the other day he indicated that he thought the important thing was that there was capital held against those positions.

You may be saying something different, though. I’m curious to know — how big a part of the problem were the bond ratings agencies, and their willingness to pass out AAA ratings like they were Pez when they never even looked at the mortgages backing these assets?

Then why not make several of the current agencies into a division of the DOJ

I think the current narrative of this story is: we’ve experienced (and are experiencing) “the perfect financial storm.” Lots of moving parts; lots of contributors.

There is an argument that the current Geitner proposal does not go far enough — Paul Krugman apparently says in today’s NYT just stop, no more securitizations. On the other hand, others continue to claim that the government should not be in the business of having its hand in the middle of private contracts and dealings.

Merger of resources can make for more effective regulation.

What is the evidence for that?

Paul Krugman apparently says in today’s NYT just stop, no more securitizations. On the other hand, others continue to claim that the government should not be in the business of having its hand in the middle of private contracts and dealings.

I don’t know about no more securitizations, there are retainage backed securities and present value discounting securities that are relatively safe bets and have an actual rationl market.

What I cannot see continuing are derivatives, they are little better than football betting pools.

There ought to be a difference between “investing” and just gambling.

One big point is that DoJ is an arm of the executive branch, whereas the SEC/CFTC are independent agencies created by the Congress.

Another is the issue of whether it is appropriate to merge civil and criminal authority in a single agency. There is a rich history of federal cases holding against combined exercises of such power.

Another is the issue of whether it is appropriate to merge civil and criminal authority in a single agency

Yet in a RICO case, the criminal division does the criminal case and the civil division does the forfeiture.

The law that set out the SEC seems adequate on its face. I think the problem (kind of like what gregg was saying) lies in the leadership. SEC needs more needlenose types and fewer people who regard it as an extened job interview to go represent the very entities they are supposed to regulate.

I understand the idea that “government should not be in the business of having its hand in the middle of private contracts and dealings”, but have to mention that that was the prevailing mindset prior to most financial scandals.

While not exactly analogous to the present situation (because contract law as we know it today was embryonic at the time), today’s situation strongly resembles the insurance scandals of the 1830s – a bunch of scammers writing policies of insurance, using state lines to duck, bob and weave away from what oversight they couldn’t outright buy off, lining their own pockets with the money and crashing the whole economy in the process.

We as a society accepted government regulation (and getting into private contracts, too) of the insurance business after that. And it was boring, stable, predictable, and profitable for 170 years – until we decided to stop regulating it.

I think there are many examples — I’ll take a simple one from US history. Back in the day when railroads were dominant (for instance 1850 to 1900), individual states regulated railroads — and did but inconsistently and with limited success. Federal regulation was enacted (in 1887 I believe) to eliminate the railroads ability to shop among the most favorable states for preferred regulation, and to follow a “divide and conquer” regulatory strategy. It arguably worked, at least for awhile.

A similar notion appears to be behind the Geithner proposals, but now we are talking about large financial institutions.

Not sure I see a difference between SEC/CFTC and FDA, FAA, Labor (OSHA) etc and their oversight/discipline roles.

There is an argument that the current Geitner proposal does not go far enough — Paul Krugman apparently says in today’s NYT just stop, no more securitizations. On the other hand, others continue to claim that the government should not be in the business of having its hand in the middle of private contracts and dealings.

then there is the argument that summers et al are doing to us what they did in russia (and elsewhere) – pay off oligarchs to get what they want. didn’t matter than 3 million people died because of their economic policies, and i see no evidence that they care what kind of suffering they cause here. well, so long as their friends get their bonuses.

i guess i just see what’s happening very differently than you do. but certainly can’t we agree that if ordinary people are going to have to pay the price, and not just in taxes, for what has made a very few people very wealthy, we ought to be able to have a say about their “private contracts and dealings?”

Much of the debate going forward is going to be what lots are calling “the devil in the details.”

For instance, exactly what is a “Systemic Risk Regulator,” who should control it (Fed, SEC, new independent agency, Treasury Department, etc.), and who should it regulate (e.g., just big companies who have lots of national and worldwide counterparties)?

Hi David thanks for the chat;
1. Industry likes the “invisible hand” and has powerful lobbies to keep it that way
2. Regulation to protect the investors…and the system…and ultimately the economy that is our livelihood cannot be kabuki.
3. Accountability…Keating got a little…Milken too but Enron/Anderson and that that followed not so much.
Paul Krugman outs it well in the NYT today…securitization should not be brought back to life. He is suspect of the regulations. Merkel of Germany with their safety net are not bailing out the banks. G-20 will demand real regulations on the CDO/CDS scams.
Your thoughts?

If you were master of space and time, what would you recommend?

My expectation is that we are likely to continue to see a “ramp up” of resources in this space, for the SEC, FBI, DoJ. With more cases being brought by these agencies.

I agree with looseheadprop that one of the major problems is swaps of all kinds, interest rate swaps included. Swaps are supposed to be insurance but are used for many other purposes by traders. None of those things does any good for anyone in the productive sector.

Would they be political appointees? If so, then you’ve got the Alberto Gonzales problem. If not, the Republicans will squawk about threats to the unitary excutive.

Does the SEC have any liability from investors in the Madoff scandal?

Last comment for me: I’m not getting that job anytime soon.

In any event, I have no perfect solution for this crisis. The good news is that the regulators are being more candid and seem to be trying. In some very big way, I think we all want their plan(s) to work — and the sooner the better.

Thanks much for the time! D

Thanks for joining us today – really appreciate your perspective.

Thanks for stopping by and for your input.

Thanks David

Thank you very much for chatting today — drop by anytime!

One issue is that no one was looking closely at the derivative products undrelying the causes of the current crisis. Merger of resources can make for more effective regulation.
reply

Thanks for coming by.

Derivative products come in many flavors. naked CDS contracts seem very problematic to me that they are tantamount to gambling. Older derivatives have the same problem when they’re naked – selling options can have unlimited levered risk, yet naked options sales have been justified for liquidity much as naked CDS and naked short sales are justified.

Standard options and short sales are pretty simple in comparison to some of the securitized financial products. Is the problem complexity? Insufficient capital requirements for complex derivatives?

Wow, sorry to miss this discussion! good, good stuff.

Would like to have asked whether:
– audit firms will also be assessed during a revamp of systemic risk, since they were one of the contributing moving parts;
– if a reevaluation of Sarbanes-Oxley reporting requirements might also be appropriate since exposures to excessive leveraging via CDSs and CDOs may not have been fully disclosed to shareholders;
– if legislation removing CDSs from insurance industry would be appropriate option since their use ultimately cost the system more than their value as as a tool for reducing taxes for participants; allowing CDSs to remain in the insurance industry only increases risk as well as need for regulation.

Just an observation or three.

I see an evolving regulatory apparatus that parallels banking. If the “too large to fail” institutions are down-sized to “regional” entities, we as the consumers will see a direct benefit. Thus, the regulatory entity would be regional in scope, as well.

As to where the regulatory apparatus is installed or cabinet-level functionality, is ultimately, a political decision, and really of no consequence.

Consequently, I see a twin regulatory apparatus, “banking” and “non-banking” and operating on a regional basis. And across America, there could even be ‘nine’ regulatory/”banking” entities. And a similarity for the “non-banking.”

And given the ‘need’ for 60 votes, Voinovich of Ohio will become the ‘decision-maker’ since he has the juice to cross the aisle and vote with the Dems.

Furthermore, the SEC could be dismantled and everything cleared through the ‘regional regulatory apparatus.” The same could be said with NASD, and other assorted self-regulated vehicles that are operating in today’s environment.

Jaango

David thanks for being here today. We really appreciate your time.

New post—>

“Industry likes to give us the middle finger of the “invisible hand” and has powerful lobbies to keep it that way.

Fixed it for you.

I really, really apologize for jumping in to challenge a guest’s statement after he’s left, but the quote selise highlighted,

Gary Gensler as head of the CFTC will fill a different kind of role. Gensler has no history with that agency and few ties to vested interests that might favor retention of the CFTC in its current form.

cannot be allowed to stand. While Gensler technically has no “history” with CFTC, in the sense of never working there, he most definitely has history with a company, Goldman Sachs, that had and continues to have a powerful vested interest in keeping CFTC toothless.

Moreover, while serving at Clinton’s Treasury Dept, he was fully on board with Rubin’s and Summers’s torpedoing of then-CFTC chair Brooksley Born’s attempts to scrutinize OTC derivative trading.

The issue of “vested interests that might favor retention of the CFTC in its current form” strikes me as a red herring. The key issue regarding the SEC and CFTC, whether merged or separate, is whether they’ll be manned by people with the authority and motivation to brutally regulate the private interests (I refuse to call them “industries”) under their purview. Bernie Sanders is SO right to be moving heaven and earth to keep Gensler out of contention for CFTC.

Again, Jane, I’m sorry if this appears to be a shot at your guest and friend’s back. I regret not being able to post this point in real time.

New Swopa post–>

Jane, and any pups still around here, you gotta see this! It’s in the NY Times so surely Obama and all the critters and the banksters will see it. Really lifts the spirit!

Merkel of Germany with their safety net are not bailing out the banks. G-20 will demand real regulations on the CDO/CDS scams.
Your thoughts?

America is different from European countries and we will not become more like them just because we were the source of *this* crisis. In many more cases we are the ones bailing out their bacon and they don’t see fit to reform to become entirely like us.

We should look at everything that’s gone wrong and regulate or ban dangerous things. The G-20 can watch how it’s done and watch our economy revive while theirs sits in the gutter.

Older derivatives have the same problem when they’re naked – selling options can have unlimited levered risk, yet naked options sales have been justified for liquidity much as naked CDS and naked short sales are justified.

Now THAT is interesting. I haven’t thought that all the CDSs were the immediate cause of our current crisis, but that the enabling of ‘destruction capitalism’ isn’t good. Perhaps it has been there for a long time, since options have been around.

Would we be better with no naked plays? Okay, stop snickering. I’m serious!