Financial Regulatory Forum

Post-election SEC could emphasize enforcement over rule-writing, says former chair

By Emmanuel Olaoye

WASHINGTON/NEW YORK (Thomson Reuters Accelus) - With the U.S. Congress still politically divided after the elections that returned President Barack Obama to office, the U.S. Securities and Exchange Commission is likely to take an enforcement approach to supervision rather than look to change conduct by writing new rules, former commission chair Harvey Pitt said.

A divided Congress, he said, would struggle to check an SEC that turned to enforcement actions to implement policies it saw as in keeping with the Dodd-Frank Act.

“If you’ve got a split Congress, effectively it means that Congress’s principal weapon (against a regulator) will be holding hearings … That is a lot less of a potent weapon than the notions that if Congress doesn’t like what you do, they may pass a law that curtails your ability to do what you’ve been doing.”

“In essence it enables a determined and aggressive regulator to basically move and not potentially fear being holed up by Congressional political actions. I think that’s how it will play out,” said Pitt, who heads Washington based consultancy Kalorama Partners.

Obama’s re-election was a boon to supporters of Dodd-Frank who want Wall Street firms to face tougher rules on risk taking, lending and consumer protection. Mitt Romney, his Republican opponent, had said he would repeal the ground breaking law if he was elected as president.

U.S. financial services can expect more Dodd-Frank in 2012, not less

By Rachel Wolcott

NEW YORK, Dec.16 (Thomson Reuters Accelus) – When congressman Barney Frank announced he would not seek another term, enemies were quick to predict the demise of the wide-ranging financial reform act that the Massachusetts Democrat penned with former Connecticut Senator Chris Dodd. These pronouncements are not just premature, but according to regulatory experts, probably wrong. Unless there is a real seismic political shift to the right after the 2012 elections, they say, the Dodd-Frank Wall Street Reform and Consumer Protection Act 2010 will survive, perhaps with a little tinkering, and firms had better be prepared to deal with it.

Dodd-Frank will only face a real threat if the Republicans take the White House and a majority in the U.S. Senate, while hanging on to the House of Representatives. Right now, with former House Speaker Newt Gingrich the latest to surge to the top of the Republican pack of presidential candidates, the likely outcome of November presidential elections is far from clear. If President Barack Obama, who signed Dodd Frank into law, stays in office, he can use his veto power to try to protect Dodd-Frank. (more…)

Four troubling things you didn’t know about financial reform

traderworriedThe following is by John Wasik, a columnist for and author of “The Audacity of Help: Obama’s Economic Plan and the Remaking of America.” The opinions expressed are his own.

On its surface, the financial reform package looks tough on banks and Wall Street. Yet for individuals, the protections are much less pronounced and highly diluted.

Granted, the massive, 2,300-page-plus Dodd-Frank bill may slow down some bank failures. It may even impede avaricious trading desks from tanking the global financial system. For average investors, though, it’s a pyrrhic victory at best. Here are four major problems:

The best way to handle risk: hedge funds


The following is a guest post by Sebastian Mallaby, the Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations and the author of More Money Than God: Hedge Funds and the Making of a New Elite. The opinions expressed are his own.

If only U.S. lawmakers were better acquainted with Jim Simons. If they understood this hedge-fund billionaire, the financial regulation now emerging from Congress might look different.

Simons is a poster child for the hedge-fund industry. His team of scientists in Long Island manages a black-box fund called Medallion, which has been up every year since 1990, usually posting gains of well over 50 percent. In several years over the past decade, Simons is said to have earned more than $1.4 billion—the amount, in today’s dollars, that J.P. Morgan accumulated during his entire lifetime. The legendary Morgan was known as Jupiter because of his godlike power over Wall Street. Hence the title of my history of hedge funds: More Money Than God.

How to reduce the risk of future black swans: eliminate issuer-paid ratings

The following is a guest post by Kenneth Posner, author of “Stalking the Black Swan: Research & Decision-making in a World of Extreme Volatility.” The opinions expressed are his own.

Recently, the U.S. Financial Crisis Inquiry Commission (FCIC) held hearings on the role of the rating agencies in the near-death  experience of the U.S. financial system, an important topic given the disastrous performance of mortgage-backed securities rated AAA by Moody’s and Standard & Poors.

The problem with the rating agencies is not their role, but the oligopolistic domination of the business by these two firms. This domination is a direct result of the “issuer-paid model” under which rating agencies are paid by the issuers of securities, rather than investors.

from DealZone:

The afternoon deal: Regulation overdrive

MOTOR-RACING-NASCAR/A joint Senate-House of Representatives conference committee convened at 2:15 p.m. EDT to begin merging competing bills from each chamber into what will be the biggest overhaul of the financial rules since the 1930s. Columnist John Kemp explains the simple conference process and the not so simple reality of merging the House of Representatives and Senate versions of the financial reform bill. The "base text" for the regulatory bill is here.

Not to be overshadowed by the financial regulation bill, the Commodity Futures Trading Commission said it plans to boost scrutiny of high-frequency trading, which now accounts for as much as half of all U.S. futures volume, and was fingered for its role in the May 6 stock market "flash crash." Get the details of the co-location proposal here.

The SEC approved new so-called circuit breakers. The rules will require the exchanges to pause trading in certain stocks across U.S. equities markets if the price moves 10 percent or more in a five-minute period.

from MacroScope:

Spitzer: NY Fed “an absolute sinkhole”

To say former New York Governor Eliot Spitzer is no fan of the Federal Reserve Bank of New York would be an understatement.

After arguing financial regulatory reform proposals being discussed in Washington fall short, he said:

"One institution needs to be completely overhauled: The New York Fed," he said.