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Banks Bracing to Fight against Strict Government Regulations

Since October last year, the nation’s largest banks were holding marathon telephone sessions every day amid the darkest economic crisis. As the momentum for the
financial regulatory overhaul gathered in Washington, Wall Street was gearing up for the fight. Bank executives knew that their once profitable credit-default swap and other types of derivatives will be reined in by the government. Originally designed to minimize risk, it pushed the economy on the brink of collapse.

The nine largest institutions involved in the derivatives market – Bank of America, Citigroup, JPMorgan Chase, and Goldman Sachs – formed the CDS Dealers Consortium after they came into an agreement on November 13. The lobbying organization was created merely a month after five of its members got the government bailout fund.

The consortium even hired an influential Washington power broker to oversee their agenda. Edward J. Rosen, from the Cleary Gottlieb Steen & Hamilton Law Firm, previously helped stopped the regulation in the derivatives market more a decade ago. Now, the confrontation between legislators and Wall Street promises to be a repeat of what happened in the past.

But the fight today is no longer about whether regulation is required or not. It is easily apparent that the public will demand nothing less than stricter regulation in the financial industry. At the core of the argument will be how much regulation is really necessarily. From every front, this is a very difficult question to answer. Every party has their own agenda they want to push.

Those who want more regulation will state that early warning signals are necessary to prevent catastrophe in the financial market. For example, industry giant American International Group, had received over $170 billion in taxpayer money because of its gaping derivatives losses. Meanwhile, the banks are concerned that if the regulations become too tight, economic growth and innovation will be stifled.

In the end though, the argument will come down to two things: disclosure and transparency in the markets. Legislators want an open exchange – akin to the stock market. On the other hand, banking institutions unsurprisingly want some of its financial products to be privately traded in clearinghouses where less disclosure is required. Only time will tell which party will get its way.

Credit Card Act – Weekly Round-Up

The Senate has passed a new credit card legislation designed to stop abuses in the industry. Consumers will particularly benefit from this measure because of unfair rate increases, provisions in small print, and fee traps will no longer be permitted. In addition, there will be greater accountability required in the credit card industry.

If you have been burned by a credit card company in the past, you can relax. With the new measure, you can start using your credit card again without fear that you will be mercilessly charged penalties, finance charges, and other types of fees without your previous knowledge or consent.   This week’s round-up of blogs focus on posts that talked about the new credit card measure and how it will affect your finances.

Jim Manzi @ National Review Online wrote an interesting article titled “Credit Cards Don’t Kill Credit Ratings, People Do“. Essentially, he cited the reasons why bad credit should be attributed to individuals, not financing institutions. It is still an individual’s own responsibility to oversee their personal finances by determining how much they can afford to spend. Credit card companies are simply the medium that lets them borrow money.

Jennifer Freeman @ Think Glink wrote a short blog post “Credit Cards: Changes in New Credit Card Legislation“. Here, she discussed about what the average consumers can expect from the new bill that has been passed. The blog post was particularly inclined towards outlining the benefits of the new legislation. At the end, she posed a question about what readers think will happen with this law being implemented.

Ismat Mangla @ CNN Money outlines the effects of the newly revised legislation on credit cards for the ordinary consumer. The post entitled “What Credit Card Legislation Means to You” was especially helpful in identifying the areas in which the law will make the most impact on your life.

Bart Narter @ Celent Banking Blog stated his musings about the new credit card legislation in his post “Credit Card Legislation“. His blog post gives an unbiased view about how this law will affect the banking industry and consumers alike. While consumers will benefit from exorbitant penalty fee, credit card companies will suffer because they cannot appropriately penalize irresponsible cardholders. The blogger calls for a compromise.

Big Banks Ready to Repay the Bailout Money

After months of severe economic downturn, lay-offs, and high foreclosure rate, it hardly seems possible but a significant number of US banks will pay back the bailout money they previously received from the government. After regaining some level of financial stability and some of their old swagger, the nation’s largest banks now want to pay back billions of dollars back to the taxpayers.

Very few people in Washington and perhaps those from the financial industry themselves expected such a quick turnabout. Most legislators believed that banking institutions will need to rely on the government’s help for years because the subprime crisis and their other troublesome assets were dragging them down. But now, a number of banks say they will repay the government by year’s end.

Two weeks after the stress test results came out, several banks including JP Morgan Chase, Morgan Stanley, Goldman Sachs, Bank of New York Mellon, and US Bancorp, and State Street have talked with regulators about repaying part of the $700 billion rescue package they received. Regulators are trying to identity when the banks should be allowed to return the bailout money and whether such measure will leave these institutions vulnerable in case another crisis occurs in the near future.

A few details have emerged about these developments. For example, it is believed that regulators will not let any major bank repay first because it will give some institutions “bragging rights”. Instead, the Federal Reserve will organize the banks into a group that is ready to pay first. The Treasury Department will be assigned to handle the repayments.

For many ordinary Americans, the repayment scheme is a welcome development. After several months of multi-billion dollar bailouts that are given to the financial industry, auto industry, and other industries, the breathing space this will allow is good for the economy. However, it is also important to recognize that repayment the bailout now carries some risks.

Right now, many major banks have plugged crippling losses but the industry is still vulnerable. The continuing troubles in real estate as well as the high number of credit card defaults will surely be felt by the banks. In addition, if the government allows the banks to pay back the bailout money so soon, they will cede authority over the same institutions that caused the economic crisis.

Financial Overhaul: Will It Solve the Problems?

Everyone is aware that today’s current financial system is problematic and the Obama administration is now trying to do something about it. Last Wednesday, the government sought to gain more authority over the financial instrument referred to as derivatives. These derivatives played a significant role in the collapse of the financial market following the huge drop in home prices.

Trying to right the wrong, the administration has encouraged Congress to pass on a legislation that will permit federal oversight on the previously deregulated industry. It will enable the government to oversee various types of instruments including the credit-default swap which nearly caused American International Group (AIG) to collapse until the government bailout.

Treasury Secretary Timothy Geithner said the proposal will require derivatives to be traded on clearinghouses that are backed by capital reserves. This works similar to the capital cushions banks are required to have for when a borrower can’t make good on a loan. These, along with the new rules will be most costly for all parties including the dealers, the buyers, and the issuers. Despite its expensive price tag though, this move will force a majority of derivatives to be traded out in the open. This reduces the role of the banking system that has surrounded them in the past.

According to Geithner, the “financial crisis was caused in large part by significant gaps in the oversight of the markets”, the proposal aims to clean up the system. If it pushes through, the trading of derivatives will become more transparent. Regulators will also be authorized to limit the number of derivatives an institution is allowed to sell or hold.

In addition, the Obama administration wants to repeal important portions of the Commodity Futures Modernization Act which was implemented in the December of 2000. Previously, it was backed by Democrats and Republicans alike with heavy lobbying from Wall Street.

Fortunately, the proposed change is well-received in Congress, for the Democrats in particular. The move has long been expected. In fact, experts in the financial industry even say that it is inevitable because everyone understands that changes need to happen. Steven Elmendorf said that “the only question is how the change happens.” From the looks of things, it seems like everyone is about to find out.