McCain ad: “Enough is Enough”

From the NYT–almost 6 months ago on March 23, 2008 just after Bear Stearns collapsed:

WASHINGTON — As Congress and the Bush administration struggle to contain the housing and credit crises — and prevent more Wall Street firms from collapsing as Bear Stearns did — a split is forming over how to strengthen oversight of financial institutions after decades of deregulation.

The administration and Democratic lawmakers in Congress agree that the meltdown in credit markets exposed weaknesses in the nation’s tangled web of federal and state regulators, which failed to anticipate the effect of so many new players in the industry.

In Congress, Democrats are drafting bills that would create a powerful new regulator — or simply confer new powers on the Federal Reserve — to oversee practices across the entire array of commercial banks, Wall Street firms, hedge funds and nonbank financial companies.

The Treasury Department is rushing to complete its own blueprint for overhauling what is now an alphabet soup of federal and state regulators that often compete against each other and protect their particular slices of the industry as if they were constituents.

But the two sides strongly disagree about whether, after decades of a freewheeling encouragement of exotic new services and new players like hedge funds, the pendulum should swing back to tighter control.

One central battle is likely to be over tightening supervision of the risk-management practices of Wall Street investment banks and perhaps requiring them to keep higher cash reserves as a cushion against unexpected trading losses.

The Democratic proposals would subject Wall Street firms to the kind of strict oversight that banks have had for decades. If firms like Goldman Sachs and Merrill Lynch were required to set aside substantially bigger capital reserves, they would have that much less available for lending, trading and underwriting new securities.

Wall Street firms played a central role in packaging and financing trillions of dollars in high-risk home mortgages, and the losses tied to those mortgages are at the heart of the deepening crisis in the financial markets that has pushed the economy to the brink of a recession.

“You need regulation that is adequate to the scope of innovation and to the scope of activity,” said Representative Barney Frank, the Democrat of Massachusetts who is chairman of the House Financial Services Committee.

Mr. Frank said last week that Congress should consider creating a new regulator — or giving the Federal Reserve greater powers — to oversee all financial markets and intervene when necessary.

Mr. Frank, saying that government had failed to keep up with the explosion of new financial instruments, said regulators needed to re-examine capital reserves, risk-management practices and consumer protection without regard to whether companies were commercial banks, investment banks or nonbank mortgage lenders.

“You do it right, and it’s pro-market,” Mr. Frank said in an interview. “Right now, we have an investors’ strike going on, and restoring investor confidence is a top priority.”

But industry groups warn that heavy-handed regulation could dry up investment capital just when the economy needs it most.

“If we don’t tread very carefully on restructuring a very complex financial system, we might stifle the necessary animal instincts of a free market,” said Mark A. Bloomfield, president of the American Council for Capital Formation, a business advocacy group. “Every day, the cries of populism grow stronger and could trample good economic policy.”

Wall Street firms have also been major contributors to both political parties, and they are certain to oppose tough new restrictions. The Treasury Department appears torn.

On the one hand, Treasury officials say they are convinced that today’s regulatory system is fragmented and out of date. The Treasury secretary, Henry M. Paulson Jr., has talked about the need to re-examine capital requirements for financial institutions.

But both President Bush and Mr. Paulson, a former chief executive of Goldman Sachs, remain philosophically opposed to restrictions and requirements that might hamper economic activity.

jim m on September 16, 2008 at 5:47 PM

Here’s from the WSJ, Flenser. You’ll see actual mortages (as opposed to insuring mortgages) are only a small part of AIG’s problems:

Why is AIG in crisis?

1) CDS: Unlike most other insurance companies, AIG plunged into the market for credit default swaps, which are contracts that act like insurance by protecting investors against default in a range of assets, including subprime mortgages and corporate bonds. Swap buyers make regular payments to sellers like AIG, who in turn have to make payouts if a default or bankruptcy occurs. As the risk of default on the assets has increased, AIG has had to write-down the value of the protection it sold and post collateral to its counterparties.

2) MORTGAGES: AIG also has other businesses that are exposed to the troubled housing market, including a unit that makes mortgage loans to consumers and a unit that promises to make payouts to lenders if a borrower can’t pay the mortgage.

3) INVESTMENTS: Like any insurance company, AIG funnels premiums paid by policyholders into myriad investments aimed at generating profits to fund future claims. Amid the upheaval in the markets, some of those investments have fallen in value.

jim m on September 16, 2008 at 6:28 PM

“Individual” contributions means contributions by individual employees of the two companies. 95%+ of Obama’s contributions were from individual employees.

Most of the contributions to GOP types seem to be from Political Action Committees.

jim m on September 16, 2008 at 8:11 PM