Forte Financial Blog

Obama and McCain on Regulation (American Banker)

The American Banker features two "insider perspectives" on the regulatory approach of Presidential candidates Obama and McCain:

Obama on Regulation
According to Daniel Tarullo, economic adviser to Obama

• The presumptive Democratic nominee backs a detailed list of programs aimed at protecting consumers and clamping down on lending practices, from an interest rate cap on high-cost loans to a foreclosure prevention fund paid for by lenders.
• Sen. Obama's $10 billion foreclosure prevention fund, designed to help troubled borrowers sell their home or restructure an unaffordable loan, would be funded by penalties on lenders who commit fraud. He envisions new disclosures that would help borrowers compare mortgage products, and he would confront mortgage fraud by beefing up reporting, increasing funding for enforcement, and raising fines.
• Prof. Tarullo said financial institutions should not fear an Obama presidency, since the candidate would consider the trade-offs involved in any policy choice. Bankers "may or may not agree with a position" taken by Sen. Obama, "but they can be assured that he will have an understanding of the costs and benefits of any particular approach," the adviser said.
• Sen. Obama also would create a public-private commission of experts to warn Congress and the White House about emerging systemic risks in the markets.
• Prof. Tarullo also discussed what Sen. Obama has not said; to ensure credit does not dry up, the candidate has been careful to advocate a moderate approach to imposing higher capital standards on nonbanks.
• "The fact that he focused" on regulatory reform and "talked about things that one normally doesn't see presidential candidates talk about reflects his commitment toward change" in the regulatory system, the adviser said. "I frequently find, and not just with bankers but with people in industry generally, that one of their biggest concerns is that the position they're in in the markets is not understood by regulators or political figures or others. As I have learned with Sen. Obama … he is both an incredibly voracious consumer of information about all things, including the economy, and a very quick study."

McCain on Regulation
According to Douglas Holtz-Eakin chief economic adviser to McCain

• Sen. McCain believes it is important to wait until the credit turmoil is better understood before committing government resources...Whether as a result of caution or a focus on other issues, Sen. McCain's financial services platform is less detailed than that of Obama
• The candidate has said he would like to create a Justice Department task force to investigate potential mortgage abuses and help state attorneys general in their investigations of lending practices.
• McCain also would expand the government's ability to guarantee student loans, because the credit crunch has reduced such financing.
• According to Mr. Holtz-Eakin, the candidate opposes government programs to help consumers trying to buy homes out of foreclosure — programs generally seen as a tool for affordable housing and for avoiding a buildup of vacant properties — because they could wind up encouraging foreclosures.

Read more (subscription required for American Banker):

Obama and Regulation, an Insider's Perspective
Foreclosure fund, bankruptcy reform among his proposals
American Banker
Wednesday, June 4, 2008
By Joe Adler

McCain and Regulation, An Insider's Perspective
Eyes mortgage-abuse task force, FHA role; a go-slow approach
American Banker
Thursday, June 5, 2008
By Joe Adler

Inching Toward IFRS

Just as the payments infrastructure begins to address globalization and the need for seamless international transactions (SEPA, SWIFT, IAT - see previous posts here), the regulatory bodies are inching toward international accounting standards as opposed to separate, domestic accounting rules (more on IFRS vs. US GAAP). 

Christopher Cox, head of the SEC, wants a "public policy oversight body" for International Accounting standards to help make the International standard consistent with Sarbanes-Oxley.

Learn more:

• Wall Street Journal
• CFO Magazine: Financial Executives to Chime In
• CFO Magazine: All Sides Warm to IFRS as Global Standard

Moral Hazard and Fed Lending to Securities Firms

The debate over the Federal Reserve's actions to address financial panic intensified yesterday as Jeffrey Lacker, Richmond FR Bank President, warned against the danger of encouraging further risk taking:

Excerpt from Bloomberg

``The danger is that the effect of the recent credit extension on the incentives of financial-market participants might induce greater risk taking,'' Lacker said in a speech to the European Economics and Financial Centre in London. That ``in turn could give rise to more frequent crises,'' he said.    

Lacker urged that the central bank now ``clearly'' set boundaries for its help to financial markets. In an interview yesterday on the themes of his speech, Lacker said even those new boundaries may not be believed by investors unless a financial firm fails ``in a costly way.''    

The remarks are the strongest warning by an official about the consequences of the Fed's aid to securities dealers, the first lending to nonbanks since the Great Depression. While other regulators have focused on tightening investment-bank oversight in exchange for the lending, Lacker said there's a case for ``scaling back'' the new programs.

Full text of Lacker's speech in London

More coverage in The Wall Street Journal

Economist Special Report on the Future of Banking

I was so preoccupied with NACHA Payments 2008 that I almost missed this special report from The Economist on the future of banking. The emphasis is investment banking and the credit crisis, rather than payments, but it is very interesting nonetheless.

[excerpt from The Economist, emphasis mine:]

Modern finance is under attack. Yet the banking system has done much better than it is given credit for

BANKS have endured a brutal nine months since credit markets froze in August. Losses and write-downs already total $335 billion; many of their best businesses have disappeared. In developed economies, almost all banks are facing economic and regulatory headwinds that will cut revenues and jobs. Yet the biggest danger facing Western finance is not a fall in its earning power but a loss of faith in how it works.

Read more in the The Economist special report on banking:

• Banking's crisis
• Securitisation and its flaws
• Managing risk
• Accounting standards
• Paying the banker
• Banking management
• Regulators and the cycle
• Spain's better way
• The future of banking
• The next crisis
• Audio interview

Crisis Timeline: Roadmap of Fed Action Over Last 8 Months

Today's American Banker features a timeline of the Federal Reserve's actions since August of last year.  Graphical representation makes the impact of opening the discount window to investment banks really stand out (blue bars).

 
A Crisis Timeline
American Banker (subscription required)
April 9, 2008

Funny: Market Madness Fed Rate Cut Bracket

from the St. Louis Post Dispatch, via What I learned Today

Meanwhile, up on Capital Hill the regulators were busy defending their actions, receiving coverage everywhere:

• CNBC Video: Financial All Stars on Capital Hill
• Wall Street Journal
• Bloomberg
• The New York Times
• American Banker

Who needs VISA?

(via PaymentsNews)

In anticipation of VISA's IPO (scheduled for later this week, as if the market isn't crazy enough) Adam Levitin, a professor at Georgetown Law, has a thoughtful post outlining a payments future no longer dominated by the card networks, one in which the needs of merchants, consumers, and banks are more balanced.

The Visa IPO, along with the 2006 MasterCard IPO and the end to MasterCard and Visa's dual-exclusivity rules, which prohibited banks that issued MC/Visa cards from issuing Amex or Discover cards, is setting the stage for a major reconfiguration of the payments world in the next decade. These changes could have far-reaching effects for consumers, merchants, and banks because of potential shifts in the way payment networks will compete with each other.

Levitin discusses the threat Interchange and the anti-liability motivation for VISA's IPO. Countries worldwide have already moved against Interchange and merchant restraints, and States and regulators in the US are getting started.

He goes on to ask the question: who needs VISA? And argues that consumers and merchants don't. Banks do - but any one of the large issuers could go out on their own and be bigger than AmEx or Discover.  He explains that VISA exists today because of federal banking regulations in the 1960s and 1970s that prevented multi-state banking. Of course, those regulations are no longer and now there are a handful of large, powerful national banks.

What would the world look like if banks started breaking off from the big 4 networks and becoming stand-alones? There's a whole post or two to write about that, but here's one thing to consider: the basis for competition in the payments field might switch. Payments networks need to balance demand from merchants, consumers, and banks. Currently the dominant strategy is to cater to banks, which means catering to consumers in the form of rewards that are extracted from merchant fees. But if a network isn't competing to sign up issuer banks, perhaps the incentives change. This might lead to the development of real value-added services for merchants (data mining, e.g.) or to more meaningful product differentiation (not just variations in rewards programs) for consumers. In short, shaking up the structure of the payments field might encourage payment companies to do a little more thinking outside the box.

Read the whole post here.
Read Adam Levitin's bio here.

Spreadsheet Compliance Audit Tools

For those of you that still rely on spreadsheets - and there are more of you than care to admit it, I know - CFO Magazine has a round up of spreadsheet auditing tools here.

Softer SOX?

Knowledge@Wharton weighs in on the ongoing discussions to soften the impact of Sarbanes-Oxley, particularly the onerous demands of section 404. The article summarizes arguments in favor of and against SOX and concludes as follows:

For all the talk about protecting investor rights, some officials wonder how much attention investors are really paying to the issues.

At an April 12, 2006, meeting of the SEC's advisory committee, co-chairman Herbert Wander noted that "...most of the comments we received [regarding modifications to Section 404] were from issuers. I think that was to be expected. We received 14 from professional groups and trade organizations; and the big-eight [sic] accounting firms all submitted comments. I frankly was disappointed by the lack of professional investor comments. There were a few, but not really very many. Perhaps that's a message that we should think about -- that their lack of comments may mean something."

Read more:

Will the SEC Embrace a Softer Sarbanes-Oxley?
Knowledge@Wharton (free registration)
April 18, 2007

More from Oxley: The PCAOB for started "all the problems" with the Sarbanes-Oxley Act

Former congressman Michael Oxley continues his media tour. In this interview with CFO Magazine he blames the PCAOB for starting "all the problems" with the Sarbanes-Oxley Act. See my previous post for highlights from Oxley's interview with the International Harold Tribune early last month.

Oxley: I'm Not Happy with Sarbox
by Stephen Taub
CFO.com
April 06, 2007

SEC Environmental Disclosures?

CFO.com reports that a diverse group of institutional investors, government treasurers and controllers, and corporations is calling for federal legislation and SEC clarification to help address global warming.

Excerpt from story at CFO.com:

"Global warming presents enormous risks and opportunities for U.S. businesses and investors," said Fred R. Buenrostro, chief executive officer of Calpers, in a statement. "To tap American ingenuity and drive business to a leadership position in the low-carbon future, we need regulations to enable the markets to deploy capital and spur innovation."

Companies in sectors such as electric power, oil, and automotive may face high financial risks from carbon-reducing regulations if they are not prepared to act, according to the group. Insurance companies and businesses with infrastructure in places vulnerable to extreme weather events also face financial exposure.

Climate change presents significant economic opportunities, the group also maintained, for those businesses that invest in new technologies and products to save energy and reduce greenhouse gas emissions.

The group's call for action included:

• leadership by the U.S. government to reduce the 1990 levels of greenhouse gas emissions 60 percent to 90 percent by 2050, to avoid widely forecast "worst case scenarios"
• a national policy that includes, whenever possible, mandatory market-based solutions, such as a cap-and-trade system, that establish an economywide carbon price, allow for flexibility, and encourage innovation
• realignment of national energy and transportation policies to stimulate research, development, and deployment of new and existing clean technologies at the scale necessary to achieve those greenhouse gas reductions
• clarification from the Securities and Exchange Commission of what climate-change disclosures should be included by companies in their regular financial reporting

Read more:

Will the SEC Demand "Green" Disclosures?
Stephen Taub and Dave Cook, CFO.com
March 21, 2007

404 Compliance Back at Square One?

CFO.com reports that CFOs think the revised SEC and PCAOB standards for internal controls won't change anything because they cancel each other out.

Mismatches between the internal-controls proposals of the Securities and Exchange Commission and the Public Company Accounting Oversight Board will keep compliance with Section 404 of the Sarbanes-Oxley Act overly burdensome and costly, CFOs think.

In letters to the SEC and the PCAOB commenting on the regulators' proposed revisions to their guidelines, senior finance executives say the tone and wording of the rules are too different to accomplish their main goal: to get senior top corporate management and audit firms on the same page in assessing and attesting to a company's internal controls over financial reporting.
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The SEC and PCAOB released their proposed standards for public comment on December 19 and December 20, respectively. Before the comment deadline of February 26 for both, the regulators had each received more than 150 letters. One-fifth of the responses for AS5 — as the PCAOB's proposed new auditing standard for independent auditors is informally known — came from finance executives. The SEC and PCAOB have yet to say when they will announce the next steps for their proposals.

CFOs used words like "disconnect" and "significant gap" to describe the relationship between the SEC's proposed 404 corporate guidance and AS5. Because the suggested standards aren't aligned, some executives predicted, auditors will ignore the regulators' push to have them focus on the highest-risk areas.

Instead, some of the CFOs said that to meet the PCAOB's requirements, audit firms will continue to take the overly conservative approach that has been widely blamed on the existing auditing standard, AS2. Many, however, had hoped the revisions would lead to cheaper auditing bills and more leeway for the use of professional judgment.

Read more at CFO.com

CFOs: 404 Compliance Back at Square One
Sarah Johnson
CFO.com
March 12, 2007

Oxley: "But it was not normal times"

They say hindsight is 20/20. 

Michael Oxley, co-sponsor with Paul Sarbanes, of the infamous Sarbanes-Oxley bill recently retired from congress and took questions from at a dinner for accountants in Paris. He expressed his regret over the consequences of his legislation.

As reported in the International Herald-Tribune:

Was Oxley aware, his questioners asked, that the law that he and Senator Paul Sarbanes, a Maryland Democrat, rushed onto the books five years ago after the collapse of Enron and WorldCom had contributed to a sharp decline in listings on U.S. stock exchanges? And, knowing what he knows now about the cost and effects of the law, would Oxley — who retired in January after 25 years in Congress — have done it any differently?

"Absolutely," Oxley answered. "Frankly, I would have written it differently, and he would have written it differently," he added, referring to Sarbanes. "But it was not normal times."

Oxley goes on to characterize the mood in congress in the wake of the major accounting scandals in late 2001 and early 2002.

"Everybody felt like Rome was burning," Oxley, 62, recalled during an interview after the dinner in Paris. "People felt like they were getting cheated. It was unlike anything I had ever seen in Congress in 25 years in terms of the heat from the body politic. And all the members were feeling it."

Until that moment, a bill to tighten corporate controls had been languishing in the Congress for years, held back by lobbying by big business. But suddenly, the impetus was there, and the firestorm led Oxley, then head of the House committee that oversees America's financial services industry, to quickly push forward a solution based on that measure to calm the hysteria of voters.

At the same time, Sarbanes was pushing through an even tougher version of the bill in the Senate, adding a requirement that companies conduct internal and external audits of their financial controls. That measure, known as Section 404, rang alarm bells among U.S. companies and foreign ones that feared it would exact punitive costs for good governance.

Oxley said he felt at the time that Section 404 could spell trouble. But in the summer of 2002, with pressure also mounting from the administration of President George W. Bush, there was no question that the bill needed to be pushed through, however imperfect.

"The president called Paul and I down to the White House almost immediately after the Senate passed its bill, 97 to 0" on July 15, Oxley recalled.

"I remember it was in the Cabinet Room and you could see the pressure he was under because the Democrats were pressing his relationship with 'Kenny boy'" — a reference to Kenneth Lay, the chief executive of Enron, who had sought help from the administration to avoid a bankruptcy filing in the weeks before the giant energy trading company collapsed.

"The president basically said, 'Get this wrapped up,'" Oxley said. The House and Senate quickly agreed on a new draft, and Bush signed the bill into law on July 30.

Lessons learned?

Beware of hasty decisions in reaction to an unsettled "body politic" - or unsettled members of your board, your senior staff, or your department.

Thanks to businesspundit.com for pointing me to this article:

Spotlight: Michael Oxley
By Liz Alderman
International Herald Tribune
Published: March 2, 2007