Obama's Financial Overhaul: It's Big Alright

It seems the Federal Reserve may get some sweeping new powers out of the financial mess.

The plan calls for the creation of an eight-member financial services oversight council, which will be chaired by the Treasury Department and include the heads of bank and securities regulators. The council, which would maintain a permanent staff at the Treasury, will seek to fill gaps in supervision, coordinate data collection and coordination among bank regulators so that the Fed is aware of any emerging risks. It will replace the President's Working Group on Financial Markets.

I guess another layer of oversight won't be too bad for markets. At least all the heads of the regulatory groups will be on the same page when it comes to systemic risk coming from various sectors of the economy. These people better not be surprised by another bubble in the future.

The Obama administration will also seek to have managers of hedge-funds, venture capital funds and private equity funds, which have significant assets, to register with the Securities and Exchange Commission, so agency officials can examine their books.

One of these things is not like the others. What do venture capital firms have to do with hedge-funds and private-equity firms? They take pools of money and invest in high tech start-ups and have a 100th of the amount of money that hedge funds and private equity funds do.

Why does the SEC have to regulate small pools on start-up capital like this? All I can think of is so the Obama people can get in on the ground floor of any innovation by looking at the Venture Funds' books and then hopefully helping them reach their goals. In other words catch the next Google at the acorn stage instead of at the Giant Oak stage.

The Obama administration also endorsed the creation of a controversial process to unwind large, interconnected insolvent financial institutions whose collapse would cause a systemic impact to the markets. Conservative leaders on Capitol Hill oppose such an entity, preferring instead to revise the bankruptcy code to expedite restructuring through the Chapter 11 process.

There had to be some changes here or these mega-companies will always end up unwinding using taxpayer money and bailouts instead of some mechanism already in place. Hopefully it will just be financial companies because the idea of the Fed winding down any large company that "creates a systemic risk" will be scary.

The OTS will become part of the Office of Comptroller of the Currency to create a new new "National Bank Supervisor," that Obama argues will curtail the problem of financial institutions shopping for the regulator of their choice.

I think this should have been done decades ago. The idea that there were so many regulators doing essentially the same thing but under different names was asinine.

The CFPA (Consumer Products Safety Commission,) an independent agency, will write rules for banks and other institutions that limits what kind of mortgage products they can make available for consumers.

The proposal seeks to expand disclosure responsibilities by requiring lenders to define standard mortgage products and promote these along with all other legal products they choose to offer.

This should prevent another mortgage meltdown. Hopefully this group will make mortgages as easy to understand as any other consumer product. In other words give the home buyer as much information that they need as clearly as possible so they won't sign some document that they don't understand.

The senior administration official said Obama will call for issuers of complex mortgage-backed securities and other similar financial products to be required to have a 5% unhedged stake in the securities they market.

I guess this is the eat what your cooking provision. I think they should also put some mechanism in place that tracks the slices of mortgage and what security contains that slice. I mean Bloomberg would have the technological chops to do something like that.

Obama's proposal is expected to seek additional requirements for credit-rating agencies, considered a key contributor to the financial crisis because of their high ratings for a wide-range of securitized subprime mortgages.

Specifically, the proposal is expected to require agencies to differentiate between structured products, such as securitized mortgages, and unstructured debt products, such as corporate bonds. Details about risks associated with ratings, methodologies and non-public rating data will need to be disclosed in an easy-to-understand manner.

Credit rating agencies will also need to disclose their performance measures for structured products so buyers of ratings can better compare agencies. Finally, the proposal seeks to have regulators reduce their own reliance on credit ratings.

Now this is the reform that if enacted even 5 years ago would have stopped the mortgage market meltdown in its tracks. These agencies saying that a bundle of subprime mortgages were actually AAA just because they were mixed in with good mortgages was criminal. The idea that they made more money from grading these things was even worse. I would support the idea that these agencies are either folded into the FED or must work as nonprofit entities to avoid these kinds of conflicts of interest.

The official said there would be comprehensive regulation for credit default swaps, considered a key contributor to the financial crisis. He said that tailored CDS products sold on the opaque over-the-counter market will have higher capital standards and they will not be marketed to unsophisticated investors.

This is another thing that should have been enacted 5 years ago and I still marvel that a multi-trillion dollar market had no regulation at all.

The administration proposed the creation of an Office of National Insurance within the Treasury Department, which will seek to provide the department with information abut the insurance sector. The white paper also seeks the establishment of additional oversight for insurance holding companies and activities likely to pose systemic risks.

Hopefully this will supercede the 50 different insurance agencies and their stupid-assed requirements. Also having one regulator instead of 50 improves information gathering as far as insurance companies are concerned.