You say you want a Resolution ?

Robert Waldmann

I just read the pdf of Geithner’s new regulatory proposal.

Generally pretty mild I’d say.

Geithner is firmly of the view that firms should not be able to pick their regulators. He proposes a new regulator for “systemically important firms (rough definition like Lehman and AIG) which would decide which firms (including potentially even hedge funds if they are huge and leveraged) are systemically important. He likes procyclical capital controls which will be tighter than current except in crises and fall back to current in a crisis. He wants a central clearing system for OTC derivatives like CDS so regulators can know who owes what to whom. He wants more regulation of money market funds.

He doesn’t propose a ban on cash settlement CDSs. He doesn’t say that money market funds are clearly banks (they are FDIC insured at the moment for God’s sake) and should be regulated as such. Compensation reform is briefly mentioned but vanishes when he gets to general regulatory proposals (there are no specific proposals).

However, his last proposal isn’t so mild. He says we need a resolution authority for systemically important non depository institutions. Note he wants resolution not revolution. The resolution would be triggered by unanimous agreement of the Fed, the FDIC and the President. It could involve appointing a conservator (alternate title for this post conservatives against conservators) who would have pretty much absolute power including the power to abrogate contracts and who would not be subject to the creditors.

Wow. My guess is he’s establishing a bargaining position. Still you have to appreciate the rhetoric. “Resolution authority” conservator no hint of nationalization or socializing the means of production or seizing the commanding heights of the economy except for the bit about how that is exactly what he has in mind.

Longer notes (but really just read the pdf it is longer but better written)

My reading of

1. New regulator of all Systemically important firms. Definition roughly is Lehman and AIG were systemically important firms.
No cherry picking. (how ?). Capital controls tighter in non crisis loosen to like now in crisis so don’t amplify crisis. (I’d go for 2 lines with milder punishment for crossing more demanding line).

2. overnight loans (???) and OTC derivativs e.g. CDS must have central clearing so can keep track of who owes what to whom.

(note no ban on cash settlement CDS). Really pretty mild I tihink.

3. Hedge (& etc) funds with more than x under management must register with SEC and report. If leveraged and C systemic regulator may decide to regulate them.
(I don’t get it. I think this is for Europeans, who were talking about regulating hedge funds. Most are registered. Authority of systemically important firm regulator already there depending on leverage and well importance and not legal form).

4. Regulate money market funds more (I would declare them to be banks — they are FDIC insured now so why not ?)

5) we need a resolution. Conservatorship not socialism. Total power if FED, FDIC and POTUS agree. break contracts, ignore complaints of creditors. Take over, alll the way over. Give me powerrrrrrrr.

1. We can’t allow firms to cherry pick among competing regulators, and shift risk to where it faces the lowest standards and constraints.

2. global

3. Review Firms (incl investment banks, AIG Fannie and Freddie) acted like banks, but weren’t regulated as “depository insitutions” rather under weak prudential regulation and without access to the Fed discount window.

4. Lack authority to deal with failures of systemically important non bank financial institutions (I want power to nationalize)

5 systemic risk,

consumer and investor protection, regulation of dealing with regular people.

eliminating gaps, no cherry picking

international coord. FSF with G-20, IBRD and IMF. deal with tax havens.

6. Systemic risk

1) one regulator (but which ?) must prevent turf wars and concern for organizational charts to block this (how ?). Key is “systemically important” not “depostitory institution.” Hints at a definition.

2) Build up capital during good economic times. Look ahead and account for losses during downturns (cyclical capital requirements ? YES for “stystemic” firms) in any case stronger capital requirements.

c) regulate compensation to make sure it encourages focus on the long term. (odd mentioned in abstract but not on list)

3) (regulation of hedge funds, private equity funds, venture capital funds) register with SEC if have over threshold assets under management *and* if leveraged.

4) better trade on markets than OTC (so ? a wish is not a plan).

5) something on money market funds (how about declaring them to be banks ?)

6) give me power to nationalize.

7) for systemic firms aouthority to force “protective actions” before hit the line.

8) regulate settlement systems for key funding and risk transfer markets (overnight lending and CDS). Regulate key OTC markets as exchanges are regulated.

I So new systemically important firm regulator. No cherry picking. Procyclical Capital requirements

II) hedge funds (the word leverage has disappeared) . Systemic risk regulator could regulate them (seems idea would if huge and leveraged). All vague and scary and I don’t see why needed if don’t borrow.

III) CDS and other OTC All dealers regulated by systemic regulator. Will keep track of who owes what to whom by mandating a central clearling system.
Cash settlement CDS still allowed.

IV) Regulate MMFs more.

V) A resolution regime (nationalization is resolution not revolution).

(oh you say you want a resolution he he cause we’ve waited long enough).

Need OK by Fed, FDIC, SecTreas and Potus. If go to “conservator” (not socialism conservatorism) can repudiate contracts and not subject to OK of creditors. Won’t use FDIC funds.