October 29, 2020

Few Clues to Regulatory Goals of Fed Rivals

Mr. Summers and Ms. Yellen are now the leading candidates to head the Federal Reserve, and the winner is likely to spend far more time on financial regulation than previous Fed chairmen. Congress has greatly expanded the Fed’s regulatory purview; moreover, the central bank’s basic responsibility to try to keep the economy on an even keel, experts say, will require a much greater focus on ensuring the stability of the financial system.

The two candidates share similar views on many regulatory issues, according to a review of their public statements and interviews with friends and colleagues. Both forged academic careers as members of the economics counterculture that attacked the dogma of efficient markets. Both say they believe that markets require regulation to prevent abuses, ensure fair competition and prevent disruptions of economic growth.

But those meetings 15 years ago highlight a basic difficulty in predicting what kind of regulators they would be. Ms. Yellen, during her two decades in prominent public roles, has left few footprints on the era’s debates about the government’s role in the markets. Mr. Summers, in helping to shape the regulatory policies of two administrations, has taken positions that critics say amounted to not following his own advice.

For supporters of stronger regulation, it comes down to a choice between someone they do not know and someone they do not trust.

The overhaul of financial regulation that Congress passed in 2010 — known as the Dodd-Frank law after its two principal authors, Senator Christopher J. Dodd and Representative Barney Frank (both since retired from Congress) — amounted to an instruction manual for the creation of a new system. The construction process remains substantially incomplete.

The next head of the Fed faces controversial decisions, in particular, about what safeguards to impose on the largest financial institutions to make it credible that if they falter, they will be allowed to fail.

“There’s a huge plate of unfinished business where the Fed has lead — if not sole — authority and the next chairman could derail a lot of that, or water it down,” said Sheila Bair, who was chairwoman of the Federal Deposit Insurance Corporation during the financial crisis. “That’s why it’s important for the next Fed chairman to have a good focus on regulation.”

President Obama has said that he intends to nominate a successor this fall for the current Fed chairman, Ben S. Bernanke. The White House has said he is also considering a third candidate, Donald L. Kohn, who was Ms. Yellen’s predecessor as Fed vice chairman. While past Fed chairmen have been selected almost exclusively for their views on monetary policy, this time the White House is focused on the fact that it is picking a financial regulator, too.

Mr. Summers and Ms. Yellen declined to comment for this article. Both, however, have spoken in recent months about the need for stronger regulation. Ms. Yellen, in a June speech, detailed areas where she believed stronger regulation was required. Mr. Summers, in an April interview, made a similar point, although he did not discuss specific proposals.

“The world is moving in the right direction,” he told Maclean’s, a Canadian newsmagazine. “Whether it is moving rapidly enough, and aggressively enough, is a judgment we will have to make in the next several years.”

Mr. Summers and Ms. Yellen were academic stars before entering public service. Menzie Chinn, an economist and professor of public affairs at the University of Wisconsin, said that both were “at the forefront” of research undermining the idea that markets were self-correcting. By contrast, the former Fed chairman Alan Greenspan frequently argued that government regulation did more harm than good.

Article source: http://www.nytimes.com/2013/08/14/business/economy/careers-of-2-fed-contenders-reveal-little-on-regulatory-approach.html?partner=rss&emc=rss

Economix Blog: Simon Johnson: Volcker Spots a Problem

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Simon Johnson is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

On Monday, at the end of a long day of wrangling over technical details at the Federal Deposit Insurance Corporation’s Systemic Resolution Advisory Committee, Paul A. Volcker cut to the chase. The resolution authority created by the Dodd-Frank financial reform legislation was a distinct improvement on the previous situation, making it easier to handle the failure of a single large financial institution.

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Perspectives from expert contributors.

It does not, however, end the myriad problems associated with that most daunting and modern of phenomena: too big to fail.

At age 85, Mr. Volcker, the former chairman of the Federal Reserve, speaks softly and displays a razor-sharp mind. The room where the committee met was hushed as everyone leaned forward to catch his words. Mr. Volcker incisively observed that the general legal framework of Dodd-Frank, as currently being put into effect, definitely puts more effective powers in the hands of the Federal Deposit Insurance Corporation to handle the failure of what is known as a systemically important financial institution.

But the bigger issue is a point made by Mr. Volcker and others at the table. When big banks boom, they find new ways to finance themselves and, too often, regulators go along. The assets they buy look like a sure thing until the moment they collapse in value. This is the classic and future recipe for systemwide panic and potential collapse. The only solution to prevent this is to limit the size of the largest institutions and the activities they can undertake.

The F.D.I.C. has long had the powers necessary to handle the failure of a bank whose deposits it insures. It can take over such an institution, sell off the viable parts of its business and place the remainder in a form of liquidation, so that as much asset value as possible is recovered. Management and boards of directors are immediately let go (with no golden parachutes). Shareholders are typically wiped out – meaning that the value of their shares falls to zero, as it would in the case of bankruptcy. Creditors to the original company also suffer losses – with the full extent determined by how much value the F.D.I.C. can recover; again, a close parallel with bankruptcy, but the F.D.I.C. is in charge, not a bankruptcy court judge.

Sometimes this kind of F.D.I.C.-managed process is referred to as nationalization – in fact, that is the term the White House used to describe this option in early 2009, when it was proposed that Citigroup, Bank of America and other large bank-holding companies should go through a form of F.D.I.C. resolution. But nationalization is a complete misnomer and President Obama was poorly advised when he used the term.

The F.D.I.C. operates state-of-the-art bank resolution processes. Depositors typically do not lose access to their funds for even five seconds – and that includes all forms of electronic access. And the reason we want the F.D.I.C. to do this is simple: it prevents the kind of disruptive bank runs that previously plagued the United States and that helped make the economy of the 1930s so depressed.

The question for the modern financial world, however, is not so much how to handle the failure of small and medium-size banks with retail deposits. The specter that haunts us – in the form of Lehman’s bankruptcy and the bailouts provided subsequently to other large firms – is how to handle the imminent collapse of large nonbank financial companies.

The F.D.I.C. is now central to a process that can take any kind of financial company through resolution. The Federal Reserve and the Treasury are also involved, and safeguards are in place to prevent capricious action. These may sometimes delay action.

But the F.D.I.C. unquestionably now has the legal authority and practical ability to impose losses on shareholders and creditors of the holding company. It has also embarked on an ambitious outreach program to explain that the goal is to allow operating subsidiaries to keep functioning, in the hope of minimizing the disruption to the world’s financial system. (Big banks are now organized with a single holding company owning and controlling a large number of operating subsidiaries.)

No taxpayer money is supposed to be put at risk in this situation. Shareholders in the holding company will be wiped out. Creditors will find their debt converted to equity, typically involving a reduction in value. This new equity forms the capital base of the continuing company – meaning its obligations are restructured so that it is again solvent (meaning the value of its assets exceeds the value of its liabilities).

Creditors to operating subsidiaries would suffer losses only if there were not enough debt at the holding-company level – in other words, after reducing all that debt to zero (converting it entirely into equity), the company’s liabilities still exceed its assets.

Together with Sheila Bair, the former chairwoman of the F.D.I.C., and other colleagues, I wrote to the Federal Reserve Board earlier this year, impressing upon them the importance of ensuring there is enough debt at the holding company – relative to potential losses at the operating subsidiary level. I was disappointed to learn on Monday that the Fed is still a considerable distance from issuing even a proposal for comments on this important issue.

In addition to Mr. Volcker, among the other heavyweights at the table were Anat R. Admati of Stanford, Richard J. Herring of Wharton, David Wright of the International Organization of Securities Commissions and several experienced practitioners.

Big banks do not typically fail individually. More often, there are herds that stampede toward a particular issue or fad: emerging-market debt (1970s and 1990s); commercial real estate (United States, 1980s); residential real estate (United States, Spain, Ireland, Britain, 2000s); sovereign debt (Europe, 2000s).

These banks finance themselves with short-term wholesale money – creating the impression that this is safe, when in fact it is incredibly precarious (think Iceland in 1998 or the exposure of American money-market funds to European banks as recently as 2011.) In any truly dangerous boom, markets and regulators become equally infatuated with this new way of doing business – until it collapses.

Can the new resolution authority handle the next big wave of potential failures, whatever it might be? Probably not, even with the greater level of cooperation announced on Monday of the F.D.I.C. and the Bank of England, with an eye to handling cross-border resolution of difficulties between the two nations, which could be immense considering how our big banks operate.

If it is built well and works properly, a good resolution framework allows a company to fail, without socializing losses and without destabilizing the financial system. As a result, it will provide a level of market discipline that should lessen the herd mentality of taking on the kind of risks that create a systemic problem – and the next big wave of failures. But the primary lesson from F.D.I.C. planning and our discussions is this: no resolution framework can correct a systemic problem once it has occurred.

The United States needs multiple fail-safes. As Professor Admati has been arguing, we should rely on equity – not debt – to absorb losses in our financial system (see this comment letter). In addition, I stand with the original intent of the Volcker Rule and with the current position of Thomas Hoenig (the current vice chairman of the F.D.I.C.): in addition to stronger resolution powers and much more equity capital, the size of the largest financial institutions should be capped and the activities they can undertake limited.

Article source: http://economix.blogs.nytimes.com/2012/12/13/volcker-spots-a-problem/?partner=rss&emc=rss

Letters: Letters: Dodd-Frank’s Flaws

Opinion »

Letters: The Role of the Military

Readers respond to an Op-Ed about the unquestioning support of the military-industrial complex and its spending.

Article source: http://www.nytimes.com/2012/11/11/business/dodd-franks-flaws.html?partner=rss&emc=rss

Fair Game: One Safety Net That Needs to Shrink

Granted, the economic pain many are feeling now — the snail’s pace recovery, the stubbornly high unemployment — is foremost in voters’ minds. But given all we’ve gone through after the last binge in the financial industry, failing to confront the too-big-to-fail question is a serious oversight.

Many Americans probably think the Dodd-Frank financial reform law will protect taxpayers from future bailouts. Wrong. In fact, Dodd-Frank actually widened the federal safety net for big institutions. Under that law, eight more giants were granted the right to tap the Federal Reserve for funding when the next crisis hits. At the same time, those eight may avoid Dodd-Frank measures that govern how we’re supposed to wind down institutions that get into trouble.

In other words, these lucky eight got the best of both worlds: access to the Fed’s money and no penalty for failure.

Which institutions hit this jackpot? Clearinghouses. These are large, powerful institutions that clear or settle options, bond and derivatives trades. They include the Chicago Mercantile Exchange, the Intercontinental Exchange and the Options Clearing Corporation. All were designated as systemically important financial market utilities under Title VIII of Dodd-Frank. People often refer to these institutions as utilities, but that’s not quite right. Many of these enterprises run lucrative businesses, have shareholders and reward their executives handsomely. Last year, the CME Group, the parent company of the Chicago Mercantile Exchange, generated almost $3.3 billion in revenue. Its chief executive, Craig S. Donohue, received $3.9 million in compensation and held an additional $10 million worth of equity awards outstanding, according to the company’s proxy statement.

Make no mistake: these institutions are stretching the federal safety net. The Chicago Merc clears derivatives contracts with a notional value in the trillions of dollars. I.C.E. clears most of the credit default swaps in the United States — billions of dollars a day, on paper. No wonder they are considered major players in our financial system.

But placing them at the bailout trough is wrong, according to Sheila Bair, the former head of the Federal Deposit Insurance Corporation. In a recently published book, Ms. Bair wrote that top officials at the Treasury and the Fed, over the objections of the F.D.I.C., pushed to gain access for the clearinghouses to Fed lending.

The clearinghouses “were drooling at the prospect of having access to loans from the Fed,” she wrote. “I thought it was a terrible precedent and still do. It was the first time in the history of the Fed that any entity besides an insured bank could borrow from the discount window.” .

“The Treasury’s and the Fed’s reasoning was that since another part of Dodd-Frank was trying to encourage more activity to move to clearinghouses, we should provide some liquidity support to them,” she said in an interview last week. “Our argument back was, if you have an event beyond their control with systemwide consequences, then you have the ability to lend on a generally available basis. What they wanted was the ability to lend to individual clearinghouses.”

The clearinghouses have considerable clout in Washington. From the beginning of 2010 through this year, the CME Group has spent $6 million lobbying, according to the Center for Responsive Politics.

Did these players push for special treatment while avoiding other aspects of Dodd-Frank? Representatives of the Chicago Mercantile Exchange and the Options Clearing Corporation say no, noting that access to the Fed meant they would also be overseen by the central bank, in addition to the Securities and Exchange Commission or the Commodities Futures Trading Commission.

But the Fed’s involvement is not likely to be intrusive, because Dodd-Frank directed it to take a back seat to a financial utility’s primary regulator, either the S.E.C. or the C.F.T.C.

The CME said that it did not support Dodd-Frank’s designation of clearinghouses as systemically important, but once it received the designation, it believed the Fed should provide access to emergency lending. The O.C.C. echoed this point.

Whatever the case, the CME Group has argued that it should be exempt from the orderly liquidation authority set up under Dodd-Frank. This authority was designed to unwind complex and interconnected financial firms that could threaten the financial system if they failed. The law appointed the F.D.I.C. as receiver to resolve teetering entities. That authority is supposed to end the problem of institutions that are too big to be allowed to fail and also to hold their managers accountable.

BUT in a letter to the F.D.I.C. a few months after Dodd-Frank became law, the CME Group asked the F.D.I.C. to confirm that the exchange wouldn’t fall under that authority’s jurisdiction. It is not a financial company as defined by the law, the CME contended, and therefore should not be subject to the resolution process.

The F.D.I.C. has not confirmed the C.M.E.’s view on the matter. But it seems to be gaining traction among other regulators. At an Aug. 2012 presentation last August on resolving financial market utilities, Robert S. Steigerwald of the Federal Reserve Bank of Chicago noted that it was unclear whether a financial utility such as the Chicago Merc would have to be wound down as required under Dodd-Frank.

So these large and systemically important financial utilities that together trade and clear trillions of dollars in transactions appear to have won the daily double — access to federal money, without the accountability.

“Dodd-Frank should have been all about contracting the safety net,” Ms. Bair said last week.  “But this was a huge and unprecedented expansion of the safety net that provided expressed government support for for-profit entities. These financial market utilities are the new government-sponsored enterprises.”

Article source: http://www.nytimes.com/2012/11/04/business/one-safety-net-that-needs-to-shrink.html?partner=rss&emc=rss

Some Lenders to Students Face Greater U.S. Scrutiny

WASHINGTON — The Consumer Financial Protection Bureau is stepping up its scrutiny of nontraditional lenders to students at profit-making colleges and trade schools that have high rates of default, the newly appointed director of the bureau said Thursday.

The director, Richard Cordray, compared the practices of some parts of the student loan business to those of the subprime mortgage lending machine that contributed to the financial crisis.

“We’re seeing some of the schools anticipating as much as a 50 percent default rate on their students, yet they’re making those loans anyway,” Mr. Cordray said at a news briefing.

“We will be looking closely at those loans. We will be looking closely at the tactics by which they are marketed and making sure that the law is being followed,” he said.

Mr. Cordray was appointed the bureau’s director by President Obama last week during a Senate recess, after Republicans resisted bringing his nomination to the floor for a vote.

A memorandum from the Justice Department’s Office of Legal Counsel released Thursday concluded that Mr. Obama had the authority to make the recess appointment, an assertion that has been disputed by Republicans.

The consumer bureau indicated earlier that it was interested in the subject of predatory student loans. In November, the bureau and the Education Department issued a joint request for information from consumers on the private student loan market, a study that was mandated by the Dodd-Frank financial regulation law. The deadline for comments is Tuesday.

Mr. Cordray said Thursday that the bureau had already seen evidence of problems in the market for private student loans.

“One of the things we see and have seen is lenders who market loans for borrowers knowing that those borrowers are unlikely to be able to pay those loans,” Mr. Cordray said. “But they may have other incentives that lead them to make those loans nonetheless. We clearly saw that in the mortgage market in the run-up to the financial crisis, when that market got broken. We also see it, say, in student lending as well.”

Holly Petraeus, the consumer bureau’s assistant director for service member affairs, said in an opinion article in The New York Times in September that private, profit-making colleges often see members of the military “as nothing more than dollar signs in uniform” and use “aggressive marketing to draw them in and take out private loans,” producing higher than average default rates.

In response, the Association of Private Sector Colleges and Universities said on its Web site that Mrs. Petraeus’s claims were “not substantiated” and ignored that two-year profit-making colleges “outperform community colleges in terms of graduation rates three to one” while serving a larger percentage of at-risk students like single mothers, less-affluent students, older workers and military personnel.

Mr. Cordray said that the bureau recognized that many students needed loans and that it would focus on cases where students were being misled. “People who get steered into terrible loans will end up falling behind in life,” he said. “That should be of concern to this country.”

Article source: http://feeds.nytimes.com/click.phdo?i=61f55ebfa929e543bd492e20b97f4ec0

DealBook: New Limits on Commodity Trades Are Approved

Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, is a champion of the rule.Brendan Hoffman/Bloomberg NewsBart Chilton, a Democratic member of the Commodity Futures Trading Commission, is a champion of the position limits rule.

7:44 p.m. | Updated

A divided Commodity Futures Trading Commission has rebuffed a request from Wall Street to delay new restrictions on speculative commodities trading.

The commission’s decision, which was reached on Tuesday and announced on Wednesday, was split along party lines, with the three Democratic members voting to reject the request for a stay and the two Republican commissioners supporting the delay. The commission was likewise divided in October, when it adopted the so-called position limits rule, which would cap the number of futures contracts a trader can hold on 28 commodities, including oil and gas.

The Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association had asked the commission to stay the enforcement of the position limits while the groups pursued a legal challenge of the new rule. The two lobbying groups filed a lawsuit against the commission last month in the Federal Court of Appeals in the District of Columbia, a move that escalated Wall Street’s war against new regulations.

The commission’s adoption of the position-limits rule, which is expected to take effect in part later this year, was seen as a crucial step in the Obama administration’s effort to enforce the Dodd-Frank Act, the regulatory crackdown passed in response to the financial crisis.

“Congress was clear that we were to impose position limits promptly,” Bart Chilton, a Democratic commissioner who championed the rule, said in a statement on Wednesday. He added that the denial of the stay request was “a good step toward keeping the ball rolling, and getting these limits in place.”

A spokesman for the Securities Industry and Financial Markets Association said the decision would not affect the group’s broader legal challenge to the rule. “We disagree with the C.F.T.C.’s denial of the stay request and look forward to presenting the issue to the D.C. Court of Appeals,” said the organization’s spokesman, Andrew DeSouza.

In the lawsuit, the two lobbying groups accused the agency of failing to adequately assess the economic effects of the rule. They also said that Dodd-Frank left it to regulators to enforce position limits “as appropriate,” arguing that, in essence, no limits were appropriate. Mr. Chilton has called this argument “trying to dance on the head of a legal pin.”

The rule’s supporters say it will help protect consumers from speculative commodities trading. While the financial industry has increased its speculation in the futures market over the last few years, the prices of the underlying commodities have fluctuated wildly. In turn, energy costs and food prices have risen, pinching consumers at the gas pump and the grocery store.

Article source: http://feeds.nytimes.com/click.phdo?i=ddf28c4366c2825e6c5aa35367f0f0e5

Fed Proposes New Capital Rules for Banks

WASHINGTON (Reuters) — The Federal Reserve on Tuesday proposed new capital and liquidity rules for the largest American banks that would be rolled out in two phases and would probably not go further than international standards.

The plan issued closely follows statements the Fed has made in recent weeks to calm Wall Street concerns that United States standards might be more aggressive than those from other nations, putting American banks at a disadvantage.

The Fed said that both the capital and liquidity requirements in last year’s Dodd-Frank financial oversight law would be carried out in two phases.

The first phase would rely on policies already issued by the Fed, like the capital stress-test plan it released in November.

That stress-test plan will require American banks with more than $50 billion in assets to show they can meet a Tier 1 common risk-based capital ratio of 5 percent during a time of economic stress.

The second phase for both capital and liquidity would be based on the Fed’s adoption of the Basel III international bank regulatory agreement. That standard brings up the Tier 1 common risk-based capital ratio requirement to 7 percent, plus a surcharge of up to 2.5 percent for the most complex firms.

“They’re basically following the guidelines from Basel on the capital buffer,” said Gerard Cassidy, bank analyst at RBC Capital Markets. “There were really no big surprises.”

One area still unclear is how much the surcharge will be for banks that are above $50 billion in assets but are not designated as globally systemic.

“It looks like they are taking a pass on that,” said Joe Engelhard, a bank policy analyst at Capital Alpha Partners.

The KBW Bank Index of stocks was trading up 4.5 percent after the release of the Fed proposal, a slight gain over where it was beforehand.

The rules, once finalized, will apply to all banks with more than $50 billion in assets, including Goldman Sachs, JPMorgan Chase and Bank of America.

Most large United States banks already meet the Basel III requirements scheduled to go fully into effect in 2019.

The Fed is waiting on the Basel Committee on Banking Supervision to flesh out its own liquidity recommendations before setting out United States requirements, but the central bank said that initially it would hold American banks to a qualitative liquidity standard.

Under the Fed plan, banks would have to assess, at least once a month, what their liquidity needs would be for 30 days, for 90 days, and for a year, during a time when markets are under stress. They would be required to have enough liquid assets to cover 30 days of operations under these circumstances.

The proposals released on Tuesday are aimed at ensuring that financial firms have enough capital and liquid assets on hand to weather a future financial crisis. During the 2007-9 crisis, taxpayers put up $700 billion to bail out the financial system, partly through capital injections into banks.

The rules will be out for public comment until March 31, 2012, giving Wall Street time to argue that being forced to keep so much cash on hand it will hurt lending and the economic recovery.

Executives, including JPMorgan’s chief executive, Jamie Dimon, have complained that regulators are littering the financial landscape with rules, without properly analyzing their economic impact.

A Fed official on Tuesday said the agency does not have an estimate on how much the capital and liquidity standards will affect United States gross domestic product.

But he said the net benefit to the financial system outweighs the cost to Wall Street and any short-term decrease in credit availability.

The rules proposed will not only apply to the largest American banks. They will also cover any financial firm the government identifies as being important to the functioning of financial markets and the economy.

The government has yet to decide which nonbanks, like insurance companies and hedge funds, meet this standard.

The Fed said that when such companies were designated it might “tailor” the rules, which were drafted mostly with banks in mind, to better fit that particular company or industry.

The law also requires the Fed to write tougher standards for foreign banks with operations in the United States. Fed officials said on Tuesday they would release those proposals soon, and that they would apply to about 100 firms.

The proposed rules also try to limit the dangers of big financial firms’ being heavily intertwined. They would limit the credit exposure of big banks to a single counterparty as a percentage of the firm’s regulatory capital.

The credit exposure between the largest of the big banks would be subject to an even tighter limit.

Further, the Fed proposal requires banks to bolster their capital if it appears they are heading into trouble, such as being overexposed to risky assets.

The rule outlines four phases of this “remediation” process that a bank or other large financial organization would go through if it hits certain triggers signaling weakness.

If a bank does not bounce back after following through on requirements such as a capital increase, the regulators could then restrict dividends, compensation, or even recommend that the institution be seized and liquidated.

The Fed did not provide details about how much of the remediation process would be made public.

Article source: http://www.nytimes.com/2011/12/21/business/fed-proposes-new-capital-rules-for-banks.html?partner=rss&emc=rss

S.E.C. Rule Lifts Lid on Hedge Funds

WASHINGTON — Large hedge funds, the secretive private investment outfits that use extensive borrowing to magnify the returns of their portfolio bets, will be required to report detailed information on their holdings to federal regulators under a new rule adopted by the Securities and Exchange Commission on Wednesday.

The purpose of the quarterly disclosure is to give regulators the ability to monitor the risks that the funds pose to the overall financial system, something that officials at the Federal Reserve, the Treasury Department and the S.E.C. did not have during the financial crisis.

The data will not be public, however. It will be visible only to the regulators, including the Financial Stability Oversight Council, which was created by the Dodd-Frank regulatory law to oversee risks to financial institutions and markets.

For now, even the details of what the S.E.C. approved on Wednesday will be confidential. Because the new rules are a joint release with the Commodity Futures Trading Commission, the S.E.C. won’t make public the actual form that it approved in a public meeting until after the C.F.T.C. approves it.

The commodity commission is expected to vote “within the next week,” the S.E.C. said. One S.E.C. official said that might be as soon as Wednesday.

The data collection “follows the lessons learned during the financial crisis — lessons about the importance of monitoring and reducing the possibility that a sudden shock or failure of a financial institution will cascade through the entire financial system.” Mary L. Schapiro, the chairwoman of the S.E.C., said.

The commission, which currently has four sitting members, voted unanimously to approve the new rule.

Managers of funds with more than $1.5 billion in assets will be required to disclose aggregated information on how much the fund has invested in various asset classes, where investments are concentrated geographically, and how active the fund is in trading its portfolio.

In addition, large funds must disclose how leveraged their investments are — that is, the degree to which the size of the investments are enhanced using borrowed money — and how liquid, or quickly sold and converted into cash, they are.

Large funds will be required to report the information quarterly, within 60 days of the end of the quarter. They are not required to report “position information,” or details on individual investment holdings, however.

Nevertheless, the filings will provide an extensive peek inside funds whose trading activity can move financial markets, and whose risk-taking enables the funds both to book outsized returns and to suffer large losses.

Hedge funds with $150 million to $1.5 billion in assets will be subject to less extensive disclosures, as will private equity funds.

The new form has “substantial modifications” from the proposal that the S.E.C. released in February. That form drew broad complaints from hedge fund managers and at least one member of Congress, who said in comments filed with the commission that the requirements posed an unnecessary regulatory burden on investment managers.

They also expressed concern about whether the regulators will be able to keep the proprietary information confidential. Hedge funds closely guard their trading information and investment strategies.

If approved as expected by the C.F.T.C., the new rules will go into effect in mid- to late-2012, depending on a fund’s size.

Hedge funds will be required to provide some information to the public under new rules adopted by regulators in June.

Those regulations required limited disclosures, however, detailing only general information about a fund’s size, its largest investors and the fund’s “gatekeepers,” including its auditors, the brokerage firms that help to execute its trades and the marketers that service the fund.

This article has been revised to reflect the following correction:

Correction: October 26, 2011

An earlier version of this article stated incorrectly when large hedge funds would be required to report information on their holdings. The information is due quarterly, not annually, and within 60 days of the end of the quarter, not 120 days of the end of a fiscal year.

Article source: http://feeds.nytimes.com/click.phdo?i=6a2eaf14ee916092cf4dc1edaa89eb08

DealBook: Details Emerge on Draft of Volcker Rule Proposal

Jung Yeon-Je/Agence France-Presse — Getty ImagesThe Volcker Rule was championed by Paul A. Volcker, the former Federal Reserve chairman.

Federal regulators are planning to vote next week on plans to prohibit banks from making certain lucrative, yet risky trades, the latest step toward reining in risk-taking on Wall Street in the aftermath of the financial crisis.

As the Federal Deposit Insurance Corporation prepares Tuesday to vote on the so-called Volcker Rule, some clues have emerged on the details of the proposal. The American Banker on Wednesday published a document on its Web site that appeared to be the latest version of the proposed rules. The proposal spelled out the scope of the rule’s ban on proprietary trading — and its broad exemptions for more routine business practices that can be mistaken for riskier trades.

But the 205-page draft proposal, dated Sept. 30 and labeled confidential, left many details to be developed in coming months. Indeed, the draft posed dozens of questions for the public and the financial industry to address, leaving the window open for significant changes.

People close to the rulemaking cautioned late Wednesday that regulators could even make adjustments to the rule over the next week, before the F.D.I.C. votes on Tuesday. And three other federal agencies must also vote on the proposal for it to advance into a public comment period that will end in December.

Still, the F.D.I.C.’s vote will start what is sure to be a long fight over the minutiae of the Volcker Rule, a centerpiece of the Dodd-Frank financial regulatory overhaul and one of the law’s most contentious provisions. Major banks have railed against the rule, saying it will eat into profits without making the financial system much safer. Many lawmakers, however, see the rule as a way to prevent future bailouts of Wall Street, which nearly collapsed during the financial crisis.

Named after Paul A. Volcker, the former Federal Reserve chairman who championed the rule as part of Dodd-Frank, it would order banks to limit their investments in hedge funds and private equity shops. More significant, the Volcker Rule would prohibit federally insured banks from trading for their own benefit rather than for clients, a strategy known as proprietary trading. The rule, Mr. Volcker and Democratic lawmakers say, will prevent banks from using their own capital to place bets while the government guarantees their deposits.

“Financial firms have been engaged in high-risk high-jinks that have threatened the U.S. and worldwide economy and economic recovery,” Senator Carl Levin, the Democrat from Michigan who co-sponsored the Volcker Rule in Congress, said on Wednesday. “The Volcker Rule is essential to protect taxpayers from banks’ excessive financial risk-taking, conflicts of interest, and from the resulting billion-dollar bailouts. I look forward to reviewing the proposed rule and hope the regulators reject efforts to weaken the law.”

Banks have spent more than a year preparing for life under the Volcker Rule. Goldman Sachs was among the first major Wall Street firm to close its proprietary trading desk. JPMorgan Chase and Citigroup announced similar plans to spin off their desks, and Bank of America declared over the summer that its proprietary trading operation had closed.

But truly banning proprietary trading will take more than closing a few trading desks. The Volcker Rule exists in a gray area, where the line is often blurred between when a trade is proprietary or part of a bank’s routine market-making activity, which can include buying securities with an eye toward later selling them to clients.

Dodd-Frank provides several exemptions from the ban, including underwriting, hedging and market making. The draft proposal that emerged on Wednesday would exempt even more varieties of hedging than originally expected. This summer, noting the difficulty in detecting proprietary trading, a Government Accountability Office report painted the Volcker Rule as cumbersome and tough to enforce. At the time, Mr. Levin called the G.A.O. report “woefully incomplete.”

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S.E.C. Hid Its Lawyer’s Madoff Ties

But as a new report made clear on Tuesday, one top official received a pass: David M. Becker, the S.E.C.’s general counsel, who went on to recommend how the scheme’s victims would be compensated, despite his family’s $2 million inheritance from a Madoff account.

Mr. Becker’s actions were referred by H. David Kotz, the inspector general of the S.E.C., to the Justice Department, on the advice of the Office of Government Ethics, which oversees the ethics of the executive branch of government.

The report by Mr. Kotz provides fresh details about the weakness of the agency’s ethics office and reveals that none of its commissioners, except for Mary L. Schapiro, its chairwoman, had been advised of Mr. Becker’s conflict.

It says Ms. Schapiro agreed with a decision to keep Mr. Becker from testifying before Congress, where he would have disclosed his financial interest in the Madoff account.

Mr. Kotz’s inquiry also produced evidence that at least one S.E.C. employee had been barred from working on Madoff-related matters because of a conflict, suggesting there was a double standard at the agency.

The findings are another black eye for an agency that has tried to be more aggressive in recent years after failing to uncover the Madoff fraud. More recently, the S.E.C. has been criticized for routine destruction of some enforcement documents that might have been useful in later investigations.

The agency has also been criticized for its slow pace in writing new financial regulations mandated by the Dodd-Frank law and for the dearth of cases brought against individuals at major financial companies that were involved in the mortgage crisis.

Federal conflict of interest law requires government employees to be disqualified from participating in a matter “if it would have a direct and predictable effect on the employee’s own financial interests.”

Nevertheless, Mr. Becker “participated personally and substantially in particular matters in which he had a personal financial interest,” Mr. Kotz wrote in his report.

Though the referral was made to the Justice Department’s criminal division, it could be handled as a civil matter. A Justice Department spokeswoman declined to comment, other than confirming the referral.

Mr. Becker’s tie to the Madoff situation came from a Madoff account held by his mother, who died in 2004. Her three sons inherited the account and closed it shortly thereafter, with a $1.5 million profit, based on Mr. Madoff’s fraud.

Mr. Madoff carried out an enormous Ponzi scheme for more than a decade, costing investors more than $20 billion in actual losses. He is now serving a 150-year sentence in a prison in North Carolina.

Mr. Becker’s lawyer, William R. Baker III, said in a statement that the report confirmed that Mr. Becker had notified seven senior S.E.C. officials about his late mother’s Madoff account, including Ms. Schapiro and the agency’s designated ethics officer.

“The inspector general concluded that ‘none of these individuals recognized a conflict or took any action to suggest that Becker consider recusing himself from the Madoff liquidation,’ “ wrote Mr. Baker, a lawyer at Latham Watkins who worked at the S.E.C. for 15 years, working alongside Mr. Becker at times. He said the report contained “a number of critical factual and legal errors,” but declined to enumerate them. Mr. Becker left the S.E.C. last February.

Among the actions taken by Mr. Becker that were cited in the report were his efforts to influence the deliberations concerning how Madoff victims would be compensated, which could have had a direct impact on his financial standing. The report cited testimony from a witness who said that by early 2009, Ms. Schapiro indicated that most of the S.E.C. commissioners had agreed on a method that would give investors a claim to only the money they had put into their Madoff accounts. This might have meant the Beckers would be able to keep only around $500,000 of the $2 million withdrawn when the account was closed, Mr. Kotz’s report said.

This article has been revised to reflect the following correction:

Correction: September 20, 2011

An earlier version of this article incorrectly identified Luis A. Aguilar as a Republican. He is a Democrat.

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