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Geithner, Barr Speak on Regulatory Reform
In a speech at New York University on Monday, Treasury Secretary Timothy Geithner said the government would move quickly to implement reform in the financial sector. Geithner outlined five
principles to guide work going forward: 1) a "speedy" implementation process; 2)
full transparency and disclosure during the regulatory process; 3) the elimination of rules that "do not work"; 4) allowing financial institutions to continue innovation that is necessary for economic growth; and 5) the creation of a level playing between international financial centers.
Geithner also stressed that financial institutions need to hold more capital to create a "safe and sound" financial system. Geither said,
"We are going to make sure that financial firms hold a lot more capital than they did before the crisis. We want the new requirements to be set so that we could face a crisis of this severity in the future without the government having to step in and provide emergency life support. The major banks will be required to hold enough capital so they could withstand losses similar to what we saw in the depths of this recession and still have the ability to operate without turning to the taxpayer for help."
On Wednesday, Assistant Treasury Secretary Michael Barr reiterated Geithner's call for regulatory reform in a speech to the
North Carolina Chamber of Commerce in Charlotte. Barr reiterated a number of the same points Geithner made days earlier, but also hailed the creation of the Consumer Financial Protection Bureau, which he noted,
"[W]ill create a level playing field for all providers, regardless of their charter or corporate form. It will ensure high and uniform standards across the market. It will focus on ensuring financial literacy for all Americans. It will end profits based on misleading sales pitches and hidden traps, but there will be profits made on a level playing field where banks and nonbanks can compete on the basis of price and quality. "
Barr spoke on the importance of creating a level international playing field and creating regulatory architecture that allows for continued financial innovation and growth.
Senate Passes Legislation on FHA Premiums
On Wednesday, the
Senate approved legislation allowing the Federal Housing Administration (FHA) to raise the annual insurance premiums. The Senate changes allow the FHA to raises premiums to 155 basis points from 55 basis points, the maximum annual premium for loans originated with loan-to-value ratios (LTVs) above 95%. The legislation also increases to 150 basis points of the insured value of the loan the maximum FHA rate for FHA loans with LTVs below 95% and gives the FHA flexibility to lower the up front insurance fee.
Separately, the Senate also cleared a bill raising the FHA’s multi-family lending guarantee capacity by $5 billion to ensure FHA remains in the business through the end of the year. The President is expected to sign the bill sometime next week, as the legislation has already been approved by the House.
Senate Budget Committee Hears Testimony on State of US Economy
On August 3, several economists testified before the Senate Budget Committee on the state of the U.S. economy. Richard Berner, Chief U.S. Economist, Morgan Stanley, testified that risks to economic recovery are mortgage credit availability and housing demand. “Unfortunately HAMP has shrunk”, he argued. He declared that a new “earned principal forgiveness” initiative in HAMP, and the short refinance program through the FHA, could help decrease foreclosure risks.
Berner also argued that “mortgage regulatory reform is essential to restore the health of housing finance”, remarking how the housing market currently lacks liquidity.
Simon Johnson, Professor, Sloan School of Management, testified that consumption has not rebounded since the crisis, and that the global economy is facing a sovereign debt crisis. He agreed with Berner’s economic forecasts, and said that a rate of 4% in global growth will continue over the short term.
Chairman Kent Conrad (D-ND) argued that loose fiscal and monetary policies, along with a policy of deregulation, guided the U.S. into housing, commodity and energy bubbles. Johnson said while some of the issues that led to the financial crisis were addressed in the Dodd-Frank bill, the final reforms are not enough. At the same time, Johnson was skeptical about the Basel discussion and how it will reform the financial system.
Ranking Member Judd Gregg (R-NH) said the global increase of capital requirements for the financial sector is constraining credit availability. Johnson said that recent studies have found the capital increase doesn’t affect credit supply as feared, since there are ways to increase capital, making the financial system safer without affecting credit supply. Johnson also argued that the Basel III capital requirements won’t have a significant impact, and the banking system will comply easily with the requirements.
Sen. Carte Goodwin (D-WV) said states’ local finances are in trouble and face increasing risk of default.
Sen. Mark Begich (D-AK) noted the importance of reforming the tax system as in the Wyden-Gregg “Tax Fairness and Simplification Act of 2010” (S.3018). Berner agreed and argued that the bill provides certainty in the tax system and would broaden the tax base and collect more revenue. Johnson said that the discussion of a global financial tax proposed by the IMF, which will be later addressed in the G20, could be another tax-raising measure.
Sen. Bill Nelson (D-FL) asked the witnesses about the effect of the stimulus bill. Naroff argued that it is hard to establish how the economy would have fared without stimulus, but it is hard to disagree that it has had an important impact. Berner and Johnson agreed that it would have been better to have a larger part of stimulus spending in areas such as infrastructure, rather than providing direct aid to state and local governments.
House Financial Services Committee Announces Post-Recess Hearings
On Wednesday, House Financial Services Committee (HFSC) Chairman Barney Frank (D-MA) announced that the Committee will hold a hearing in September in order to explore concerns raised about the provision of the Wall Street Reform and Consumer Protection Act, which provides some exemption to the Securities and Exchange Commission regarding the Freedom of Information Act (FOIA).
According to a HFSC press release, the provision of the new law which addresses this issue was originally requested by SEC Chairwoman Mary Schapiro and by former SEC Chairman Christopher Cox. In the Senate, Senator Chris Dodd (D-CT) and Senator Richard Shelby (R-AL) included the provision in a manager’s amendment which was not adopted in the Senate, but which became part of the base text of the bill before it went to the conference committee. In a press release, Frank said,
“Given the serious questions that have been raised about the impact this provision could have on access to important information about financial transactions, I will hold a hearing of the Financial Services Committee when Congress returns in September. I will convene the hearing on September 23rd. This should provide ample time to take corrective legislation action if it is needed.”
The Committee previously announced plans to hold hearings on the implementation of Basel III, though no date has been set.
Senate Passes State Aid Bill, House to Return Briefly Next Week
On Thursday, the Senate passed a State Aid bill by a vote of 61-39 that gives $26 billion in aid to states and schools, $16 billion of which will be directed to Medicaid programs around the nation as the House prepares to return during its recess to cast votes on the legislation.
Speaker Nancy Pelosi (D-CA) announced Wednesday that the House would be called back into session, to which Colin Peterson responded,
“I don’t know how they’re going to pass it. I haven’t really checked with people, but there are a lot of guys who aren’t going to vote for it.”
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***Congress will be in recess until Monday, September 13***
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