The Treasury Answers Fools' Questions

Yesterday, the U.S. Treasury reached out to Fools to hear our community's thoughts about investor protection and financial regulatory reform. October has been a busy month. So far this month, House committees have passed bills to:

And today, the House Financial Services Committee begins to consider a package of legislation that will:

  • Establish a fiduciary duty for brokers, dealers, and investment advisors.
  • Toughen oversight of credit rating agencies like Moody's (NYSE: MCO  ) and McGraw-Hill's (NYSE: MHP  ) Standard & Poor's.
  • Strengthen investor protection and disclosure.
  • Require registration of private pools of capital (i.e., hedge funds).
  • Establish a Federal Insurance Office to monitor all aspects of the industry.

You submitted a number of important and timely questions. Neal Wolin, Deputy Secretary of the U.S. Treasury, has provided answers below.

The Motley Fool: What provisions in today's investor protection bill should be of particular interest to the ordinary investor?

Neal Wolin: Thanks so much to the community here for your interest and for giving me a chance to post today. We think the legislation under consideration today, together with the rest of the President's proposed reforms, will go a long way toward making our financial system stronger and safer. Clearly, that's in everyone's interest. And there are two elements of today's investor protection bill that, I think, should be of particular interest to ordinary investors.

First, the Administration has worked with Congress to require that all investment professionals be held to the same high standard when they give investment advice. The old divisions between a broker-dealer who just executed trades and an investment advisor have broken down. The legislation under consideration today would require that both broker-dealers and investment advisors consider the client's best interest when giving advice. This is a simple standard, but it's not the law today.

Second, the Administration is fighting for disclosure of mutual fund fees prior to the purchase of a mutual fund. Some in the mutual fund industry are trying to weaken or strike this provision, but we're standing up for transparency. Mutual funds should not be allowed to hide the fees from investors when they make a purchase.

TMF: The usual rationale for having credit default swaps (CDS) is that despite their danger, they function like insurance. If that's the case, (a) why do we allow naked CDS, and (b) shouldn't CDS be regulated as insurance products?

Wolin: When used properly -- and when regulated properly -- credit default swaps can serve a number of valuable economic functions. For example, CDS allow financial institutions to hedge the credit risks in their loan books -- making the firms safer and enabling them to increase credit availability in the economy.

CDS markets also provide a valuable amount of transparency for the debt markets. CDS markets tend to be substantially more liquid than the corporate bond and ABS markets, and hence provide a much greater amount of more timely information about the credit quality of debt issuers and instruments. Accordingly, CDS are an important source of market discipline for firms.

The Administration's plan will provide a regulatory framework for CDS and other over-the-counter (OTC) derivatives that will enable our financial system to keep the benefits of CDS while significantly reducing the risks that unregulated CDS markets could pose to our financial system. For example, the risks created by CDS stem primarily from dealers and other major financial firms who sell the products but don't hold enough capital or collateral to meet their contractual obligations on the CDS. That's where AIG (NYSE: AIG  ) went wrong. And that's why we're proposing capital requirements and close supervision of all those firms that deal in CDS or are major participants in the CDS markets. Additionally, our proposals will push a substantial portion of the CDS market onto exchanges and into central clearinghouses. We are requiring unprecedented transparency -- so that regulators, market participants, and the public can follow the transfer of risks across the landscape of complex financial products.

TMF: Will all derivatives contracts be traded on a single, transparent exchange?

Wolin: The Administration has proposed, and two House Committees have now approved, legislation that would comprehensively regulate the over-the-counter derivatives market for the first time. These derivatives reform bills would require central clearing and centralized trading of standardized derivatives between dealers and major market participants, full regulatory transparency and substantial public transparency for all OTC derivatives, strong prudential regulation of all OTC derivative dealers and major market participants, and enhanced tools for the SEC and CFTC to prevent fraud and manipulation in the derivatives markets.

Under this regime, we would expect a significant migration of derivatives to exchanges or other transparent centralized trading systems. The proposed reforms do not, however, require derivatives to be traded on a single exchange. Competition among exchanges and other transparent centralized trading platforms should result in better service and lower prices for users.

TMF: On the issue of resolution, even if the government had the authority, seizing a Citigroup (NYSE: C  ) or an AIG in itself could cause the system to collapse. The problem isn't just authority. It is size and interconnectedness. Would a systemic regulator be empowered to ban instruments that are (a) unpredictable and (b) dangerous if they go wrong? Are there any financial products you think we should eliminate?

Wolin: The Administration has put forward a comprehensive and robust plan to address the problem of large, complex, and interconnected financial firms. Our plan includes several key elements: ensuring that any financial firm that could pose a threat to financial stability is subject to thorough supervision; imposing extra capital requirements on large firms and firms that engage in risky activities; building larger buffers throughout the financial system and in the critical nodes of the financial market architecture; and giving the government the tools to wind down failing firms in an orderly way -- imposing losses on management, shareholders, and creditors, but preventing the spread of contagion to the rest of the financial markets. Our plan will improve market discipline and reduce moral hazard by making the financial system safe enough and strong enough to withstand the failure of a major firm.

TMF: Many of our readers want to know what the major drawbacks would be to reinstating Glass-Steagall. We often hear that reinstating these historic regulations isn't practical. But why? What harm would it do?

Wolin: First of all, I think it's important to recognize that the recent financial crisis was not caused by the combination of commercial banking, investment banking, merchant banking, and insurance underwriting. In fact, some of the most spectacular collapses of this crisis were those of specialized firms, such as government-sponsored housing enterprises, monoline thrift organizations, monoline insurance companies, and stand-alone investment banks.

In addition, the financial distress at several of the diversified firms was not caused, at the core, by the combination of commercial and investment banking operations. Their problems stemmed more from poor credit underwriting in traditional lending activities.

It's also important to recognize that there are benefits to combining commercial banking and some forms of investment banking and other activities. Diversification can be a real strength. In addition, we should keep in mind that going back to Glass-Steagall would put American banks at a disadvantage internationally, where they have to compete with large universal banks on the European model.

We do, of course, think that it's critical that large, complex financial institutions be subject to strong regulation and supervision. And, by the way, supervisors can require asset sales or require firms to exit a line of business if the activity is determined to threatening to the firm's safety and soundness. We've advocated for higher capital requirements and stronger firewalls between banks and their affiliates. And we've also made clear that these firms must do a far better job of managing risk. They must hold sufficient buffers against the risks they take. If they don't, their shareholders and creditors must bear the losses.

TMF: What's the line between safeguarding consumers and permitting financial innovation? If one has to be sacrificed, which way do you prefer to lean?

Wolin: We shouldn't have to choose between safeguarding consumers and permitting financial innovation. The lack of clear rules in the past has made consumers victims of the wrong kind of innovation. The firm that could make its products look best by doing the best job of hiding the real costs won. For example, we had "teaser" rates on credit cards and mortgages that lured people in and then surprised them with big payment increases.

President Obama's proposal for a Consumer Financial Protection Agency will encourage innovation and restore consumers' control over their own financial decisions by creating and enforcing clear, common-sense rules of the road.

The best way to foster innovation is to set a level playing field for the whole market. The Consumer Financial Protection Agency will set ground rules and make sure that consumers get simple, transparent and accurate information. This will give families confidence that financial firms will play by the rules and treat them fairly. When consumers choose products and services that best suit their needs, based on clear and simple information, providers will compete to meet the real needs of American families.

What do you think? Will these proposals help protect investors and reform markets? Let us know in the comments box below.

The Motley Fool is investors writing for investors. Moody's is a Motley Fool Stock Advisor and a Motley Fool Inside Value recommendation. You can read about the Fool's disclosure policy here.


Read/Post Comments (48) | Recommend This Article (52)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 27, 2009, at 3:00 PM, wolfman225 wrote:

    Where do I start? I'm far from being an expert on Global finance, but there are several things I am leery of in this push for ever more gov't regulation and control.

    It's not simply that I am mistrustful of the Federal Government in general (and the current administration in particular), although that's part of it. I don't like the potentially chilling effect the proposed rules could have on the future of the US economy. One paragraph jumped out at me in this article.

    "We do, of course, think that it's critical that large, complex financial institutions be subject to strong regulation and supervision. And, by the way, supervisors can require asset sales or require firms to exit a line of business if the activity is determined to threatening to the firm's safety and soundness. ..... And we've also made clear that these firms must do a far better job of managing risk. They must hold sufficient buffers against the risks they take."

    REQUIRE firms to exit a line of business? So much for allowing innovation. As for "doing a better job of managing risk", wasn't that a driving factor in the creation of the CDS's in the first place? Institutions trying to mitigate the risk of the bad loans they were forced to accept?

    In trying to insulate against any and all risk, they are virtually eliminating any possibility for individual investors to gain. There can be no reward w/out at least some risk.

  • Report this Comment On October 27, 2009, at 5:06 PM, 129384648 wrote:

    Wolfman, I agree with you to some extent. There is definitely a fine line between regulation and stifling new growth. Although something absolutely has to be done, there is far too much greed at the top of so many of our financial institutions and corporations. Greed that encourages horrible and deceitful business practices. Some of these people are pure criminals. I'm not saying that the government is 100% trustworthy, but do you trust the banks and corporations any more than the government. Those institutions are governed by the pure greed of a few at the top.

    I don't think we need to lie cheat and steal in order to innovate, which is what has been going on for years at the expense of many others. I think "some" regulation and encouragement of honest business practices is exactly what we need.

    I agree that requiring firms to exit a line of business, is definitely too much government control, instead they should be penalized for bad practices much like they do to us when we default on a loan or a payment.

    That last section of the article made a lot of sense to me, a perfect example of deceitful business practices that need to be banned. Banks should not be able to try to intentionally deceive the consumer. The terms of credit cards, loans etc, should be very clear.

    --We shouldn't have to choose between safeguarding consumers and permitting financial innovation. The lack of clear rules in the past has made consumers victims of the wrong kind of innovation. The firm that could make its products look best by doing the best job of hiding the real costs won. For example, we had "teaser" rates on credit cards and mortgages that lured people in and then surprised them with big payment increases.

    The best way to foster innovation is to set a level playing field for the whole market. The Consumer Financial Protection Agency will set ground rules and make sure that consumers get simple, transparent and accurate information. This will give families confidence that financial firms will play by the rules and treat them fairly. When consumers choose products and services that best suit their needs, based on clear and simple information, providers will compete to meet the real needs of American families--

    Let's just hope we don't over-regulate now. There needs to be a good balance.. That will be the hard part.

  • Report this Comment On October 27, 2009, at 5:14 PM, majestik wrote:

    There is no real reform going on here. The elements for a revisitation of financial disaster are still present. Obama's consumer protection plan boils down to obfuscation amidst a grand exercise at bamboozling and scapegoating. The market is begging for reinstatement of the post 1933 stock market crash reforms which have worked as advertised for over 70 years.

    --keltys

  • Report this Comment On October 27, 2009, at 5:44 PM, rrloucks wrote:

    I thought there was to be some discussion on giving investors more control officer's salaries and perks e.g. some hope of truly independent boards in that regard.

  • Report this Comment On October 27, 2009, at 5:52 PM, raydanzx wrote:

    So what we have is the federal government saying they will protect us from the following: inability to read and understand, our own greed and among other things stupidity.

    Is more government control initiated by people who don't know and understand the financial market ever going to provide transparency? What does Obama's top aides know about any of this except take control of it.

    I would trust the most crooked on Wall Street before I would trust the federal government to design and implement any sort of positive changes in anything-let alone these markets.

  • Report this Comment On October 27, 2009, at 5:54 PM, Phizz101 wrote:

    In his fifth answer where he talks about what caused the crisis, he states "the most spectacular collapses of this crisis were those of specialized firms, such as government-sponsored housing enterprises,...". And has Congress owned up to their part in this or made any attempt to fix these institutions? I don't think so. They are still pressuring them to make high risk loans and have only insulated them from any market pressure by making them complete wards of the Federal Government.

    "To offend and judge are distinct offices, And of opposed natures." William Shakespeare

  • Report this Comment On October 27, 2009, at 6:04 PM, parcheymex wrote:

    I agree thoroughly with majestik. At the very base of the scandal which began in retail banking there is no

    stated review of the granting of undocumented mortgages wherein application failed for lack of prove

    that the customer or applicant was credit worthy. Any customer can apply for anything but the applicant bank carries the burden of proof that mortgage lending is underwritten by confirmed documentation: employment, level of indebtedness, income proof, etc., etc.,!! There is no option on these requirements.

  • Report this Comment On October 27, 2009, at 6:22 PM, Mthirsty1 wrote:

    I know very little about how the market works but i swore i heard someone say at the begining of the crash that investors had to wait until they recieved their stock before they could sell it 15 minutes later.The stock market used to be almost like a savings account if i am not mistaken.Would someone please explain to me how the market can go down 300 points one day and up 300 points the next day,and this happens over just a few words such as cosumer confidense is down and 2 days later consumer confiense is up.Is there someone that polls everyone on the planet every other day?

  • Report this Comment On October 27, 2009, at 6:45 PM, Dannysea wrote:

    I also am leery of greater control to what end? Nice platitudes, but the devil is always in the details, and the interpretation of day-to-day living.

    Right now, RIGHT NOW, these "monoline thrift organizations", (eg FRMAC and FNMAE) are again doing the $125% loan to value lending, the minority ratio is so low that those with car seizures, and foreclosures on their history are again getting loans, and all sorts of silliness.

    Obviously we are not only being forsaken in reality, by this Congress and White House at large, but leading us to believe more "Our Control" is going to be the answer.

  • Report this Comment On October 27, 2009, at 6:45 PM, Julia1234 wrote:

    mbhoch: Your comment-- "I'm not saying that the government is 100% trustworthy, but do you trust the banks and corporations any more than the government. Those institutions are governed by the pure greed of a few at the top." Not 100%, nope, not even 25%. Combining what you see as the pure greedy few at the top of these corporations with an overbearing (power hungry) Fed. Gov. can only make it a thousand times worse. Think favors, punishments, transfers of personnel back and forth and pointless bureaucracies. These types of people are one and the same. We can't be foolish (in the original sense) enough to actually believe these government bureaucracies will actually end up helping us, the actual producers. Please, realize these people are every bit the crooks you see the greedy few at the top as being. I agree with you that there is a problem with these few at the top but giving the gov. MORE control will only make things worse.

  • Report this Comment On October 27, 2009, at 6:53 PM, dwatson102 wrote:

    When someone says they will trust a greedy Wall Street manager over the government I am mystified. While there are multiple examples of ineptness and in some cases purchased behavior in Congress there is still a process for correction. It is called an election.

    Can one really imagine putting a billion dollars on the line at the Superbowl and then playing without referees and a rule book and trusting all will behave in the best interest of the fans. Then justifying that because sometimes the referees make bad calls.

    This anti-government diatribe all the time is just plain sillyand...not very useful.

  • Report this Comment On October 27, 2009, at 7:03 PM, TMFBrich wrote:

    Fools,

    The Private Advisor Registration legislation passed committee today:

    http://www.house.gov/apps/list/press/financialsvcs_dem/press...

    This would bring hedge funds, private equity, and other "private pools of capital" under a regulatory eye.

    -Brian Richards

  • Report this Comment On October 27, 2009, at 7:53 PM, maccdw wrote:

    Sounds like we're just going to forget the illegal flash-pricing by Goldman Sachs, along with the rating fiascos whereby Moody's & Fitch & S&P never looked under the covers on the gigantic tranches of liar loans ans still rated them "AAA"?

    Too big to fail equals too big to exist. But yet, taxpayers--who, BTW, are still to this very day off the debt from the S&L bailouts (Google Resolution Trust to jog your memory)--unwillingly paid hundreds of billions of our money to bail out these mega-failures, jst so we could watch them become even larger.

    I see nothing that will fundamentally corrects what is now out of line. And Wolin's comment that the co-mingling of investors' accounts with bank capital didn't have a big impact upon the crisis? What version is he reading from? The creation of the 5 mega investment banks in 2004--every one of which has since failed or been acquired--also brought about the raising of banks' leverage ceilings from 10-to-1 to infinity, courtesy of Chris Dodd and Barney Franks. (They both, of course, are still in the wheel house of the financiual system). We need to know what Mr. Molin et al intends to do to correct this.

  • Report this Comment On October 27, 2009, at 7:54 PM, realitytest wrote:

    Well, done TMF! That was a major public service. Your questions covered all the major points of supposed regulatory change, except perhaps for excessively sensitive areas, which might have risked closing the lines of communication for the future.

    I’d have liked otherwise to have a harder hitting interview, investigating topics such as shadow banking , the dubious continuing alliance with government and Wall Street, profiteering by the AIG bailout (far from complete) by beneficiaries of the banks’ bailouts.

    Likewise, there is the shameful issue of legislators ‘ profiting in their investments, by knowledge of pending legislation and other abuses of power, by behind the scenes collaboration between Washington and industry,

    Most of all. I'm disappointed by Obama’s failure to point a finger at the highest flying criminals (what they are ) and to impose any meaningful penalties, financial or in terms of moral accounting.

    I keep rereading Roosevelt’s first Inaugural Address and comparing it sadly with that of Obama - - not that he’s lived up to the spirit of his vague rhetoric there or during his campaign.. .

    The Great Change hasn’t quite happened, and no arguments about preserving “political capital” for one issue of the other, is a satisfactory excuse to me.

    But then I am not an utilitarian, but a believer in “Where there is no Vision, the people will perish". I don’t trust Washington now any more than I did before - except that it now appears to have an agenda which is less destructive and elitist than under Bush (but not enough!). And, of course, to present better overseas!

    TMF fulfilled its mission creditably, though.

    Realitytest

  • Report this Comment On October 27, 2009, at 8:00 PM, jerryguru69 wrote:

    On the whole, I was not impressed, nor do I feel safer as an investor. All of the proposals he Wolin mentioned are very reasonable, very logical. They also represent another dramatic increase in gov't power to little benefit: I fail to see how ANY of his ideas would have prevented the meltdown in Nov.

    "capital requirements and close supervision of all those firms that deal in CDS or are major participants in the CDS markets". Certainly interesting, but if ALL CDS' go down in value by a lot at the same time, would the backstop really work?

    "standardized derivatives between dealers and major market participants". The most shocking part was that financial executives were buying $B's of these things, but many admit that they really did not understand them. This requirement might, or might not, fix this problem.

    Most shocking, however, was that the cause of the problem is not addressed by anything Wolin proposes.

    1) FRE, FNM, C, AIG must be seized and liquidated forthwith. As long as they are alive, our current problems will not go away.

    2) Leverage. Rather than a complex new web of regulations, why not simply tell various financial institutions that their leverage is limited? Like: banks are 10-1, insurance is 20-1, and hedge funds are 30-1? And, by the way, hybrid financial institutions are not allowed?

    3) CDO ratings by Moody's and S&P. MBS' were rated "AAA", when in reality they were BELOW INVESTMENT GRADE. At the very least, these 2 institutions should be dissolved and newer, more honest institutions used instead.

  • Report this Comment On October 27, 2009, at 8:15 PM, madhat007 wrote:

    More Treasury Propaganda...dear Motley fools..are you kidding me? talk about the slant! Let's just give everything to the big banks that are left...there are so many unanswered questions that the whole thing is laughable..the media treats the escapades of the treasury like little kids! where are the grownups i guess it's just an indication of how lazy Anerica is and how stupid we have become! Why wasn't Leeman allowed to become a bank holding company..

    Goldman and Morgan Stanley were...is that because Goldman or should I say Government Sachs is sup;p;lying all our top official or that Morgan stanley helped Paulson manipulate the numbers at Freddie and Fannie so that they would have to get secrecy agreements from all the employess ..I s that the way the government tramples shareholds with distorting shareholder rights...Paulson mislead the Congress. and put a gun to our weak leaders that act like we have a surplus and we are some kind of economic superpower...when in fact all we know how to do now, is wait for the next psychic to come in an interpret fed policy at the next open market committee..Sound like the good old boys club...the fact is that bankers greed and insecurity lead to big banks buying off legislaters and repealing a natural process that had worked for 75 years.. It recongnized that banks and brokers are natural competitors..brokers dont get their deposits guaranteed! Banks just aren't doing good banking anymore and only know how to control the group of nine big banks are just tools of the fed!

    fools should look at what Treasury did to the GSE's they fabricasted the numbers while the treasury secreetary knew all along he was going to blame them for the crisis...then use the gses to park all the toxic assets and then give the taxpayers the big brown BAG! and ewveryone on the inside knew it!the only prob;lem is the Treasury secretary stole the money from investors and made worthless 40 billion of preferred stock while then giving giant handouts to the group of nine...Thank you Treasury for solving the very crisis you created..and now we give you more power Fools know better!!

  • Report this Comment On October 27, 2009, at 8:35 PM, KeitaiOtaku wrote:

    Everyone's so negative in their comments. Why?

    It appears to me that Mr. Wolin's comments are well thought out, reasonable, not radical, practical and achievable, and have can provide additional stability.

    Regulation of faulty industries, requirements for additional capital, and supervision of those companies that threaten our national security....

    Sounds good to me.

  • Report this Comment On October 27, 2009, at 8:37 PM, stan8331 wrote:

    Additional regulation certainly is needed, and most of what's being discussed sounds fairly reasonable to me. Better derivative transparency and reducing deceptive practices are positive, necessary changes. My biggest concern is that at the end of this process, we are likely to still be in a situation where we have business entities that are too big to actually fail without sending the whole system into chaos.

    The only way we'll know whether what we implement actually works is to SEE it work - to see institutions the size of C and/or AIG fail and get wound down without taking the whole financial system down with them. I fear it's just not possible...

  • Report this Comment On October 27, 2009, at 8:49 PM, audacitytohope wrote:

    At the risk of being simplistic I ask: who do we trust?It's a crisis in values. It's the breakdown of the social contract between people. It's a civilization screaming towards it's own destruction.Can't trust the cops? So we better trust the robbers?If the outlaws are running the town and we can't trust the sheriff then we are totally screwed!

  • Report this Comment On October 27, 2009, at 9:02 PM, radman99 wrote:

    Credit default faults swaps are a form of gambling. When one sits down at a poker game or casino one would hope that all of the players have the capital to honor there losses. Credit default swaps are no different, all of the players should be able to honor all of there losses or they should not be allowed to play the game. Regulation of credit default swaps is desperately needed.

  • Report this Comment On October 27, 2009, at 9:20 PM, owlbert wrote:

    I see he dodged the question on naked CDS. These should not be allowed, period!

  • Report this Comment On October 27, 2009, at 9:37 PM, thedofca100 wrote:

    >>Will these proposals help protect investors and reform markets?<<

    Of course they won't protect the investor since the AIGs, the WaMus, the Lehman Bros., will always find a new scam, a new way around the rules. There is no stopping their absolute greed.

  • Report this Comment On October 27, 2009, at 9:41 PM, DougScorpio wrote:

    Not only did he dodge the question on naked CDS, he failed to suggest any personal responsibility in those taking on debt/credit. The suggestion is that consumers have no fault in lending practices and are all innocent victims. G-d forbid that this administration hold their voters accountable for their behavior.

  • Report this Comment On October 27, 2009, at 10:51 PM, texascondor wrote:

    TMF,

    I read most of the comments that readers had before the meeting with treasury, and made a few myself. Looks like you took the easy way out and only asked the softball questions. And I really had hopes that something worthwhile would come out of this.

  • Report this Comment On October 27, 2009, at 11:54 PM, TMFBrich wrote:

    @texascondor:

    What questions did we not ask that you'd like to see asked?

  • Report this Comment On October 28, 2009, at 12:10 AM, PsycheDaddy wrote:

    I was against all new suggestions and told you that I didn't believe in socializing the stock market with government intervention. You got what you wanted.

    More government.

  • Report this Comment On October 28, 2009, at 12:20 AM, mountain8 wrote:

    In fact, some of the most spectacular collapses of this crisis were those of specialized firms, such as government-sponsored housing enterprises, monoline thrift organizations, monoline insurance companies, and stand-alone investment banks."

    "...the financial distress at several of the diversified firms was not caused, at the core, by the combination of commercial and investment banking operations. Their problems stemmed more from poor credit underwriting in traditional lending activities."

    How insulting!

    "..the recent financial crisis was not caused by the combination of commercial banking, investment banking, merchant banking, and insurance underwriting."

    Does he think no one reads financial sites. Of course this didn't cause it. But it started it, it incensed it, it fed the fire, and it led the way. And it still is about the only area where no advances have taken place. Reference e-trade which is doing wonderful IF IT WEREN'T FOR ITS EXPANDING INTO A BANKING INSTITUTE. Try GE who would BE MAKING WONDERFUL TURBINES, ELECTRICITY, APPLIANCES AND PROFIT IF THEY didn't want to be a bank too.

    We have enough crooked bankers. We have enough crooked politicians. Regulation won't do it. Pass laws, with strong enforcement and strong punishment. Freedom is wonderful but it's an ideal that doesn't work among humans. They don't know how to take care of themselves, they are all sheep among the wolves. They require sheppards. If the government doesn't work for us then they become the wolves by throwing in with BIG, too big to fail companies.

    Yes I'm just babbling, just as all this is just babble.

  • Report this Comment On October 28, 2009, at 12:25 AM, gesheddc wrote:

    I agree with maccdw: Too big to fail equals too big

    to exist. I too am worried about the further

    consolidations in the financial industry that have

    occured in this financial crisis. Unfortunately, anti-democratic influences seem to develop where there is insufficiently regulated capitalism, as the concentration of economic power too easily mutates into a concentration of political power. I mean, how is it that all these large lending institutions were given big amounts of bail out money, without conditions on salaries and bonuses being part of the arrangement? And is too big to fail really sometimes just "too politically inexpedient to let fail"?

  • Report this Comment On October 28, 2009, at 12:26 AM, mountain8 wrote:

    Here is a sane, sanitary comment. Does anybody realize that the total value of Derivatives in the market is around 40 years worth of Gross Domestic Product? Talk about fiat money.

    Does anybody realize that a small $1 Trillion bailout is worth $166 for EVERY PERSON IN THE WORLD? I'm guessing that all the world powers have put up over $2000 for every person in the world to try to fix the problem FINANCIAL INSTITUTES have caused.

    Don't these numbers bother anybody other than me? What's washington say about this?

  • Report this Comment On October 28, 2009, at 12:29 AM, mountain8 wrote:

    What too big to fail means is, "they pay too much of congresspersons income to let them fail." What would your congressperson do with that kind of cut in income if B of A failed?

  • Report this Comment On October 28, 2009, at 12:33 AM, mountain8 wrote:

    Check your history:

    Despotism nurtures greed and arrogance.

    Greed and arrogance nurture suffering.

    Suffering nurtures revolution.

    Capitalism nurtures greed and arrogance.

    Greed and arrogance nurture suffering.

    Suffering nurtures revolution.

    Revolution nurtures Despotism.

    See first stanza.

    There is no government that has ever worked. There will never be any government that will work because there are always two kind of people, controllers and followers. At the very least, anarchy teaches one to stand on his own two feet. Humanity is it's own worst enemy.

  • Report this Comment On October 28, 2009, at 12:42 AM, gesheddc wrote:

    People just need to use their vote to get any greedy

    sob's in Congress, out of Congress. People need to pay attention. Then we can all get some sensible laws passed to get control of the over-large, greedy corporations.

  • Report this Comment On October 28, 2009, at 1:10 AM, xetn wrote:

    How do you legislate doing away with moral hazard? Moral hazard is created by having an FDIC which is supposed to cover all bets by creating bank money via fractional-reserve loan/deposit creation with out regards to risk. (Some of this was mandated by ACORN and and the Community Investment Act, etc). A Fed that can create money out of thin air with out any supervision and acts as lender of last resort. This is the basis of to-big-to-fail. They (the Fed) simply bailed out all of its big banks members, while letting the smaller banks fail.

    Lets just face facts, the treasury is primarily run by Goldman Sachs.

    All government regulation protects one company/group and the expense of everyone else.

    At any rate, all the big banks, GM, Chrysler, the UAW and AIG were all covered by the taxpayers. We covered all their bad bets and will never be able to pay off those bailouts.

    Congress is and the administration are all paid for by GS, the pharmaceuticals and the defense contractors.

    Obama; "change you can believe in" is a complete lie as are all promises by politicians.

    Every country that has instituted a fiat currency has had its currency fail at some point all the way back to the Romans and probably earlier.

    Keynesians are a train wreck in process of killing the US economy and most of the developed world economies.

    When it becomes apparent that the economy is not going to recover, you can bet that the next step will be another war to divert the people's attention from the failure to just let the free-market work. That is the only solution that will ultimately repair the mess.

    I will not hold my breath.

    A truly free market economy would not allow fiat currency, would have a gold coin basis or a currency controlled by the government, no fraction-reserve banking which is nothing more that fraud, their would be no Fed, IRS, FDA, FTC, SEC, FDIC; in fact almost all of the ABC departments would not exist. We would not have over 77000 pages of government regulation that currently exists. You would have complete control of what you earn and it would be your responsibility to determine what investments you made and your responsibility for your mistakes.

  • Report this Comment On October 28, 2009, at 2:06 PM, d2mccarthy wrote:

    ...Franklin Raines, Barney Frank, Franklin Raines, Chris Dodd, Franklin Raines, oversight committees that seldom (ever?) meet and act, Franklin Raines, fraudulent bonus', Franklin Raines....go figure folks.

  • Report this Comment On October 28, 2009, at 2:08 PM, nicholas1964 wrote:

    We will never eliminate risk, but we can significantly reduce it by means of governmental regulation. If the taxpayer is to provide the safety net under institutions that are deemed too big to fail, then additional restrictions must be placed on them, such as the following;

    * Greater capital requirements

    * Limits on leverage

    * Imposition of larger fees paid to the FDIC on

    deposits

    * Limits on the type of executive compensation, that

    is, greater portion of non-cash remuneration with

    longer minimum holding times

    These are only the kinds of changes that would move us in the right direction. Knowledgeable people could come up with many ways to significantly reduce risk.

    The only other option is to limit the size of financial institutions so that none are too big to fail.

  • Report this Comment On October 28, 2009, at 2:16 PM, 7351jay wrote:

    The regulation of Hedge Funds is my priority. Huge amounts of capital that is unknown can and wreck havoc on a market. I think the Hedge Funds were primarily responsible for the oil price spike. When huge amounts of money are poured into a finite market, it is no longer a stable market. In the end some of the HF's fail and the members take a bath but the damage they do before collapse is catastrophic. I lived through the great silver price run. Many companies went out of business because of high silver prices, and in fact it changed for the better/worse the entire industry! Just to satisfy the greed of an individual.

  • Report this Comment On October 28, 2009, at 4:01 PM, jaketen2001 wrote:

    Neal,

    You know when you call a customer service agenty, and the dont help you, and then they say 'is there anything else i can do for you today' and you think toi yourself, 'you havent done anything for me yet, what do you mean something else'.

    That is what your conversation was like. If you were cribbing off of notepaper, it was embossed with GSs running diagonal all over the place on it.

    Ok. Let me explain hedging your bet when you make a loan. It is called INTEREST. If is a crappier loan loan you charge more INTEREST. You dont charge the same rate and then to hedge it go out and buy a CDS. What a load.

    And no required central exchange. Nice. Nothing. Billions of dollars out the door and the government is making suggestions to business but requiring nothing.

    What????? The crisis was not created buy the repeal of Glass-Segal? Ha Ha Ha Ha Ha Ha. That is not worth even commenting on.

    Dear President Obama

    Dear GS CEO Emanuel,

    I guess its one and done, huh?

  • Report this Comment On October 28, 2009, at 4:05 PM, jaketen2001 wrote:

    TMF

    Shame on you for softballing this.

  • Report this Comment On October 28, 2009, at 5:34 PM, CliffLincoln wrote:

    The rhetoric sounds plausible. The real question remains: how badly will it be butchered when the final vote has been cast?

  • Report this Comment On October 28, 2009, at 11:04 PM, starmangold wrote:

    I tend to side with the CEO's of Oil Companies and associated support industries: Just tell us what the new rules are so we can get on with playing the game. Oh, and one other thing. The Deputy Secretary's comment about failure of financial systems that lead to further collapse caused by "poor credit underwriting in traditional lending activities" is a fair summary. Translation: " Quit lending money to those who don't know how to handle it." Lets move on Fools.

  • Report this Comment On October 29, 2009, at 5:33 PM, jaketen2001 wrote:

    Ok, the repeal of Glass-Segal was absolutely at the core of this. If the investment banks and the commercial banks werent wound together, no one would have cared if all the investment banks would have failed. People felt compelled to rescue the banks because of the effect it would have on commercial/retail banking. That is why GS turned itself in to a commercial bank, and back (like a financial vampire sticking its tax payer sucking blood funnel in to anything that smells like money as someone wrote) to access government money during the bailout. How could the government even allow that?

    Starman, you do not understand. The easy credit was created by the massive institutions collateralizing any type of product that anyone could create. It was sucked up from the top, not pushed up from little rinky dink mortgage underwriters at the bottom. That is the rope a dope they want you to believe.

    Wall Streets next great thing is collateralizing viatical life insurance policies. Yum yum yum. So now, instead of just taking out bets on some 3rd parties ability to pay its debt (and then hindering its ability to pay it debt), its taking out bets on how soon actual people will really die (and then hindering peoples ability to ....). Because these are the great things financial innovation brings us.

    Washington does not get it. We do not need sophisticated financial instruments (read:scams) we need sophisticated manufacturing. These firms took out CDS and shorted BS and then killed it. The next things the places will be doing is taking out CDS on the Treasury and sticking a shiv in somehow.

    If TMF ever does a dog and pony show like this again I will never come back. This was supposed to be a different kind of a place.

  • Report this Comment On October 30, 2009, at 1:33 PM, pika68 wrote:

    Please, let's be totally honest about all this. The problem is not regulation, the problem was malfesence on the part of Congress to turn a blind eye to the regulator in 2004 that warned of the risk of failure and was told to leave it alone - Barney and Maxine said they did not see the problem. Later, members of Treasury were marginalized when their warnings of risky businees were ignored by the same people. Later still (2005) John McCain warned of the risky policies of Fannie and Freddie (then bankrupt).

    We need to put these people on trial for malfesence and send them to jail - that would send shockwaves through the "political community" force Congress to stop messing with our money for political gain (buying votes with high risk loans).

  • Report this Comment On October 30, 2009, at 4:38 PM, LessGovernment wrote:

    My Dear Neal Wolin,

    Reading your answers was like watching Dancing with the Stars, except there were no stars.

    TMF - Shame. What a bunch of powder puff questions and powder puff canned evasive answers.

    Chalk this up to an opportunity wasted.

  • Report this Comment On October 30, 2009, at 4:58 PM, robertf36009 wrote:

    Face the facts: Whenever debt is created risk of default is incurred it doesn't disappear when a CDS is purchased. All that happens is another layer of thievery is added to the economic structure. They (CDS) don't need to be regulated. They need to be eliminated altogether and the originator of the loan has to bear the risk, all of it, and remain adequately capitalized as was the practice before the creation of CDS.

  • Report this Comment On October 30, 2009, at 7:37 PM, elsiejay wrote:

    I can't read all of this too much. Lots of people here very little humility... A common thread about not trusting the government. Swell, but you are not suggesting that I shoud trust Big Businss!!!! I am not that dumb.

  • Report this Comment On October 31, 2009, at 1:12 AM, vegastar wrote:

    Is there any policing in a free market? The responses to this post make me wonder what kind(s) of a society we live in? Is greed the answer, if so I am out of here..

  • Report this Comment On November 01, 2009, at 4:32 PM, csguernsey wrote:

    I found the interview interesting but ultimately unsatisfying: there was "no there there". The other readers responses were interesting and ran from the libertarian / free market extreme to seething anger at the wall street elite - bring on the revolution! (just kidding!).

    No one can reasonably doubt that free markets require regulation and laws. Ironically, most of the damage was done to our financial system by people who really believed they had found magic ways to eliminate risk. Worried about a mortgage defaulting? Then buy a CDO with a broad-based basket of mortgages and a AAA rating. Worried about bond defaults? By a CDS as insurance - just don't ask the issuer how they would pay if you have a loss.

    Almost all of these extremes could have been prevented by reasonable regulation. It doesn't take a genius to figure out that a CDS contract should be required to have some form of reserve requirement, like insurance is required to have. Likewise, was it really so hard to see that nothing good would come out of giving mortgages to folks who had no hope of paying them off? It's true that regulations limiting loan-to-income ratios would have limited the spectacular rise in the real estate and CDO markets - but wouldn't it be better than the bust?

    Yes regulation can be cumbersome and legislators can be corrupt. However, history has shown that completely unfettered capitalism is an naive an idea as utopian communism: they don't work in the real world, I will believe in "change I can believe in": when I see meaningful steps to re-regulate the financial markets.

  • Report this Comment On November 02, 2009, at 6:24 PM, NoFearNoWay wrote:

    I kept looking the article over, but never saw anything that implicated the real criminals...that is the government reps that put the policies in place that allowed the problems to manifest in the first place. We keep swallowing the turds...produced by the same jerks that cause the problems. I want to see jail time for these law makers...then maybe we will have some real reform.

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