When I was in the UK earlier this year, I saw a very senior financial regulator speak. In the Q&A session, someone asked him to comment on US financial reform. His reply was tantamount to “Wake me when it’s over,” and it was clear his expectations were low.
One source of frustration is that the legislative battle over reform, which went through elephantine labor to produce, at best, a mouse, has gotten most of the media attention, while important fights on the regulatory front are largely hidden from view. By happenstance, two ongoing battles got a wee bit of attention tonight, and both appear to be suffering the same fate as the financial reform bill: measures that were not strong enough to begin with are being beaten back by the industry.
The Financial Times discusses tonight about how dealers are pushing to water down a key SEC securitization reform. The SEC proposed eliminating the rule that allowed issuers to sell asset backed securities to “sophisticated investors” privately, subject to much lower disclosure requirements, a move we’ve advocated.
It’s important to note that while “asset backed securities” covers instruments backed by credit card receivable and auto loans, the market that went really off the rails was the so-called private label residential mortgage backed securities market, meaning non Freddie/Fannie/Ginnie/FHA mortgage securitization market. It is suffering what amounts to a buyers’ strike. In the first quarter of 2010, 96.5% of the mortgages issued were government backed. So making the market safer for investors would seem to be the first order of business, otherwise they will not come back into the pool.
However, the American Securitization Forum, which serves the interests of the sell side (it nevertheless tries to promote the fiction that it also cares about buyers) is fighting this modest and sensible measure. And look at the rubbish they are trying to peddle:
The American Securitisation Forum, which represents buyers and sellers of securitised transactions, fears the SEC moves would shut down debt markets providing hundreds of billions of dollars of capital.
Yves here. This is utter tripe. As we’ve noted, the biggest asset backed market IS effectively shut down. And why, pray tell, would better disclosure “shut down” other sectors of the market? The costs will not be materially different. Does the ASF understand that its assertion could be construed to mean “if people understood these deals, they wouldn’t buy them”? I would love to see how the ASF supports this sweeping, counterintuitive claim. Well, we do have this part:
Private markets such as the $300bn sector for asset-backed commercial paper used by banks for short-term funding could become too expensive to use if costly public disclosure requirements are required, said Tom Deutsch, executive director of the ASF.
Yves here. Any return to safer practices will mean more costly, less widely available credit. A shrinkage of credit is a feature, not a bug. But the debt pushers like the ASF will never admit that. And this part is funny:
The ASF will suggest sophisticated investors should be redefined as managing somewhere between $100m to $1bn of securitised assets in order to be able to buy in the private market.
“A lot of counties, cities and small pension funds may only have five, 10 or 50 million dollars invested [in securitised assets],” Mr Deutsch told the Financial Times.
Yves here. Yes, it will be a real tragedy if towns in the Arctic circle, Australian town councils, and hapless German investors can no longer be stuffees of subprime bonds and collateralized debt obligations.
On another front, Bloomberg reports that Basel III rules are being cut back:
European banks, rattled by investor uncertainty about their ability to withstand a sovereign-debt crisis, are poised to win a reprieve in Basel, Switzerland, this week as regulators from 27 countries shape new capital rules.
A push to water down stringent standards proposed last year by the Basel Committee on Banking Supervision, and to allow more time to implement them, is led by France and Germany, according to bankers, regulators and lobbyists involved in the talks. Representatives from the U.S. and the U.K., who have sought to rein in risk-taking, are willing to compromise on how capital is defined to reach an agreement at a committee meeting that begins tomorrow, the people said.
Another concession may involve granting transition periods of up to 10 years to ease concerns of some member countries that their banks and economies won’t be able to bear the burden of tougher capital requirements until a recovery takes hold. As a result, the amount of capital European banks will be forced to raise in the next two years won’t be as much as investors fear.
The argument is: banks can’t be asked to bolster their capital bases until they have a real recovery. But the lesson that the IMF drew from 124 financial crises is that forbearance (which is what his amounts to, letting banks run with lower capital levels than they need) is a bad idea:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.5 Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.
Yves here. But why pay any attention to history when those bankers seem SO sincere?