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http://www.theatlantic.com/business/archive/2010/05/6-big-changes-the-fdic-intends-for-securitization/56622/
The FDIC is using regulatory power to make changes in securitization. The proposals currently stand in a 45 day comment period but many speculate no changes will be made. Do you guys think that the necessary changes have been made as far as their regulation limits go? Or do you think more needs to be done?
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I definitely think that not enough changes have been made yet. The proposed changes as of right now must have banks moaning and groaning at the idea of them coming to fruition. Something like the 5% skin in the game is a great idea. Make the banks more vulnerable to suffering losses in the short term rather than failures in the long term. Also, giving rating agencies a profit based incentive to kick out ugly loans will only help to keep banks more accountable for their actions. I'd be happy if 1 of the 6 "Big Changes" took place.
ReplyDeleteI feel that the proposed changes are a great start, but more could be done. I especially like loan level disclosure and mortgage bond complexity limitations. I feel that these will allow consumers to fully understand what they are investing in. Therefore people will no be able to justify faulty investments by claiming ignorance. Providing investors with data on every loan in a securitized pool and limiting mortgage securitization structures to six tranches may ensure that consumers are more informed about what they are purchasing. Hopefully, investors will also learn from the current financial crisis that ignorance is not bliss.
ReplyDeleteIt may just be an irrational sense of pessimism setting in over me at last (I held out hope as long as possible) but I don't see these things doing much. The rules, on their face look great! All of them address problems that led, directly or otherwise, to our current circumstances. My pessimism derives from the fact that the smarter guys in the room are always going to be sitting on the bank's side of the table. What that means, to me, is that no matter the rule, no matter how airtight it ends up being, the banks are going to find loop holes. While I really do like these rules, the real answer to my mind, is the Johnson and Kwak (and many many others) suggestion of limits on the size of banks and financial institutions. That way, when (note: not "if") the banks break the rules they can't hurt the rest of us again.
ReplyDeleteThere clearly hasn't been enough done if the banks were able to get back all that they lost and then acquire even more power and influence. I think further disclosure with CDOs and other securities is a great idea, but as we have seen, so many of these things can be created in a purposefully convoluted way that makes it so they may look one way but are actually something totally different.
ReplyDeleteI really like these regulations a lot. I think they address a number of serious problems that led to the crisis including:
ReplyDelete1) Mismatched incentives for rating agencies
2) iBanks selling investments they know are bad (a la Abacus)
3) Banks weren't willing to modify mortgages because they were bundled into CDOs.
I think we are starting to realize that we need to get away from the days of deregulation because clearly that didn't work out too well for us. These are a great start for regulation but we need more and I think more will come as long as the banks don't flex their power and money and try to stop them.
ReplyDeleteI agree with Jared, it is nice to see that positive steps are being made to adjust our current system. I think the rating compensation provision is a very beneficial change. The agencies compensation ties with the investment banks obviously created skewed incentives. Creating incentives based on asset performance over a five year period is a signifcant change.
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