Wednesday, June 13, 2012

Phil Angelides calls for transparency

In a Reuters' article, Phil Angelides, former chairman of the Financial Crisis Inquiry Commission, called for letting in sunlight to overcome Wall Street's influence on Washington and to reduce the risk of the Too Big to Fail banks.

In a January 2011 report, the Democratic-appointed majority of the Financial Crisis Inquiry Commission (FCIC) found that the credit bubble and crash were not an inevitable part of a normal business cycle but resulted from a confluence of reckless bankers and feckless regulators. 
The crisis had been predicted, it could have been avoided, and once it started it could have been ameliorated if not stopped, the majority concluded in a report Angelides signed off on....
Regular readers will recall that your humble blogger predicted the crisis and has been proposing a blueprint, based on the Swedish model and ultra transparency. for how to ameliorate its impact since the crisis began.
But more alarming even than the majority’s findings is that the reforms the panel recommended are being beaten back by the same forces the report found had contributed to the crisis in the first place, Angelides said. 
Worse yet, financial firms that never owned up to operating under a model of keeping the gains but offloading the losses still play a disproportionate role in regulating themselves and could drag the U.S. and the global economies back into danger, Angelides said....
This is a direct result of Washington having chosen the Japanese model for handling a bank solvency led financial crisis.  Under this model, regulators lie about the true condition of the banks and allow the banks to continue operating as if nothing has happened.
U.S. regulators have the means to protect the economy from reckless financial practices, systemic shocks and inadequate oversight, but it is unclear whether they have the will to defy the influence finance has over its overseers.
Please re-read the highlighted text as it is far from clear that either the Republicans, who adopted the Japanese model under George Bush, or the Democrats, who confirmed the choice under Barack Obama, are capable of admitting they were wrong and changing tact.
“The world has changed but Wall Street has not,” Angelides said. “It was spared any consequences of its actions and any real rethinking of what it must do. Practices that brought this country to its knees are still very much alive.”...
This is the intended result from choosing the Japanese model.  
The biggest banks, by their actions that contributed to the crisis, “have made a very eloquent case for their demise,” Angelides said. 
Reforming them requires shedding light on and monitoring “disgraceful and dangerous derivatives,” and implementing a tougher Volcker rule, “with teeth,” he said. 
More recent evidence proves that the riskiest practices tend to be taken by systemically important banks with federal backing, and that practices found in one bank tend to exist in their peers, Angelides said.
Regular readers know that adopting the Swedish model with ultra transparency achieves Mr. Angelides' goals.  By requiring banks to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details, market participants can assess each bank's risk.

As discussed in the context of the Volcker Rule, in assessing each bank's risk, attention will be paid to each bank's derivative exposure.  To the extent these exposures are seen as risky, market participants will exert discipline on the banks to reduce this exposure.

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