Sunday, November 1, 2009

Financial Stability and Improvement Act of 2009

The Financial Stability and Improvement Act of 2009, otherwise known as draft legislation for the “Too Big Too Fail” institutions, was proudly unveiled last week by Treasury and the House Financial Services Committee. Here’s the meat of what it proposes:

Creation of another (?!) Council, this one the Financial Services Oversight Council, which first identifies financial companies and activities that pose a threat to systemic stability, and then monitors them. No really – without other elaboration as to how to identify or effectively achieve any of that, this is what the draft legislation proposes. This Council, evidently, has a massive data-gathering responsibility (data generated by various federal financial agencies), and has the ability to name concerns for federal action.

A fairly aggressive approach to holding company regulation. Specifically, the draft legislation removes Gramm-Leach-Bliley Act restrictions on federal power (specifically, this would allow various federal agencies to regulate). Background: Gramm-Leach-Bliley, alternatively known as the Financial Services Modernization Act of 1999, rolled back Glass-Steagall (1933) in part. But a big part. Glass-Steagull said investment banks are investment banks, and commercial banks are commercial banks, and insurance companies – very big surprise – are insurance companies >> keep your buckets separate. Gramm-Leach-Bliley, among other things, allowed these separate actors to consolidate. So one bank could offer all variety of financial services, and voila, usher in the dawn of the financial service industry.
  • Following presumed enactment, no further commercial companies will be allowed to own banks, industrial loan companies ("ILCs"), or any specialty bank charters.
  • Thrift holding companies would be subject to fed supervision, and such charters would be reserved for entities focused on mortgage lending.

The draft legislation has a very federal bankruptcy code-type idea. The draft legislation contains language that provides for wind-down activities. Specifically, “that shareholders and unsecured creditors bear the losses, not taxpayers.” The draft legislation delegates the FDIC with this wind-down responsibility, and costs are to be provided for by the failed company (presumably priority above the creditors; *yay* lawyer drafters). VERY INTERESTING: if the company actually does not have enough money to wind-down, a “Resolution Fund” will pay the deficit. This fund is created by “assessments on all large financial firms” (later defined as companies with assets of $10 billion or more).

Not as interesting: there are new organization models; ie., the Treasury Secretary must approve any Fed effort to provide liquidity; and banking regulators and the SEC have to come together to write rules requiring creditors (or securitizers where the loan was not originated by the creditor) to retain 5-10+ percent of any credit risk associated with loans for securitization (is it me, or was that the rule right there?).

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