Thursday, March 27, 2008

The first two points of Obama's plan for Regulating Financial Institutions

I think these are right on the nose:

1. Provide the Federal Reserve with basic supervisory authority over any financial
institution to which it may make credit available as a lender of last resort. The Federal Reserve does not exist to bail out financial institutions, but rather to ensure stability in our financial markets. For that reason, it is essential to make clear that while the government may step in during times of crisis to prevent instability, financial institutions must play by the rules. Any institution that has access to the sacred trust of the American government when everything else goes wrong — the ability to use the Federal Reserve as the lender of last resort — must be subject to prudential oversight to ensure it is not taking excessive risks with the American taxpayer's money. Barack Obama believes that we should not give
access to the discount window or similar facilities as a favor to banks. It is entirely for the benefit of the American people and their interest in the safety and soundness of credit markets. The nature of such oversight should be commensurate with the degree and extent of contingent exposure for the Federal Reserve to specific institutions. At a minimum, it should include liquidity and capital requirements.

2. Capital, liquidity and disclosure requirements should be developed and strengthened for all financial institutions. Barack Obama believes that capital requirements should be reexamined and strengthened, especially with respect to complex financial instruments such as many of the mortgage-backed securities that lie at the heart of current problems. New standards for managing liquidity risk, which has been neglected in the past, must be developed and rigorously applied. And the events of the last year have also highlighted the need for more disclosure. Though transparency cannot rectify everything that has gone wrong, it is imperative that we enhance information flows to shareholders and counterparties of financial institutions in order to increase market discipline, as well as greater disclosure of off-balance sheet risks such as exposure to Structured Investment Vehicles. Finally, Obama believes we need to look into the issue of the rating agencies. This problem was illustrated in the subprime market crisis in which credit rating agencies
strongly rated subprime mortgage securities even as there were significant indications of large numbers of foreclosures and a weakening housing market.

Yes I am supporting the man--I have even done a (very) small amount of work for the campaign. But even if I weren't, I would be impressed with the level of sophistication that these points demonstrate. And as I have said in many previous posts, capital is THE crucial issue.


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