The Alternative Investment Consultancy

06.04.2010

After having successfully signed the Obamacare Package with 22 different pens, including a one-
time retention because of formal errors, and the barely recognized, but all the more remarkable
Student Loans reform, Obama´s and Washington´s attention is now refocussing on the overdue
financial market reform. Today´s PS Commentary provides an overview on the current state of
the reform debate.

For those who want to read up on the healthcare reform details, please find readable links below:

 Ad Cost/Benefits (CBO Report)

 Ad Effects on prevention
 Ad Cost reduction
 Ad Coverage extension
 Ad Immediate effects in 2010
 Ad Historic reform dimension

Now, back to the US FinReg. Since the G20 summit in April 2009, during which the process of a global regulatory reform
was kicked off, the world listened to many speeches, but saw little action.

In the meanwhile, this much is clear. Germany wants to hold on to a consolidated universal banking system, even if the
crisis clearly highlighted how susceptive German saving banks and Landesbanken are to politicial intervention. A break-
up, a la Volcker rule, is out of the question for Merkel. The UK is desperately looking for ways to protect the city from a
loss of importance. During the last business cycle, London made its way up to the world´s most important financial
centre, but lost its competitive edge in the recent 24 months. Right now, London and New York are leading the Global
Financial Centre Index head to head. Due to the continued dominant economic position of the financial industry, UK
faced an overproportionally fierce recession. The crisis highlighted how much the UK government bets on Canary Wharfs
well-being and offshore commodity revenues, instead of pushing for innovating the declining industrial competitiveness.
Media and markets were wrongly enamored by the admittedly awkward, but economically insignificant Greeks. The UK
should be added to the PIIGS acronym. Let‘s call them PIIGUKS.

For all Austrian readers. Although the Austrian banking system disappeared from international headlines after the
„Krugman spike“ in April 2009, the system´s fragility has not changed since. Volksbanken implosion, Hypo-Alpe-Adria
criminal case, swaying Raiffeisen conglomerate (incl informant farce) have not yet opened the eyes of the Austrian
citizens to how much risk the dependence on a nepotistic system, in combination with an overextended regulatory
framework can mean for an economy. Canada serves as an example, showing how the risk of a concentrated banking
market can be managed adequately, by applying transparency and functioning regulatory agencies. In a conversation
with a portfolio manager last week, he stated (o-tone): „If Austria were not in the Eurozone, we would top-rank it on our
list of short-worthy countries.“ Excursus finished.

Over the past year I insistently wrote about the necessity (here, here and here), to anchor the TBTF ( incl Too
Interconnected To Fail-TITF) issue as a lynchpin of an overdue banking reform. Since last autumn a growing number of
renowned central bankers are repetitively insisting on the same. Mervyn King, Paul Volcker, Richard Fisher and Thomas
Hoenig articulated their preference, to either break up system-relevant banks or to limit their service range in a way that
minimizes the exposure of public liability in case of a crisis. The senators Bernie Sanders and Ted Kaufman agree to the
same.

www.panthera.mc
 The Alternative Investment Consultancy
06.04.2010

The Obama Administration understands the necessity to priorize the TBTF/TITF issue. In one of his recent Dealbook
columns, Andrew Ross Sorkin reports about chatting with Tim Geithner over cookies in his office across from the White
House. During this conversation, Geithner stated that TBTF/TITF, together with the regulation of derivatives and the set
up of a Consumer Protection Agency, remain the core pillars of the White House´s FinReg plans. For Geithner, increased
minimum capital requirements (in % and quality of assets) offer the best possible lever to address the issue.. Geithner in
the original:

“We don’t know where the next crisis is going to come from,” Geithner told me. “We won’t be able to
foresee it. We’re not going to pre-empt all future bubbles. So we want to build a much bigger cushion
into the system against those basic human limitations. I don’t want a system that depends on
clairvoyance or bravery.” He added, “The top three things to get done are capital, capital and capital.”

To be fair. Despite all intervention attempts of lobbyists, US politicians and experts have pursued an intense debate
about an adaequate form of FinReg since early 2009. President Obama, Tim Geithner, Chris Dodd, Barney Frank and Ben
Bernanke are congruent in their causal pronouncements. The same is true for their advised goal. Now it´s time to
consolidate the divergent implementation proposals and synchronize them in an international context.

The recent US debates led to the following bill drafts:

In the Senate - the ´Dodd Plan´. Mid March, after meandering negotiations with the Republicans, Senator Chris Dodd
(D), Chairman of the Senate Committee on Bnaking, Housing, and Urban Affairs, presented his draft bill „Restoring
American Financial Stability“. He suggests a rather toothless collection of reform steps, which leave the final decision on
specifications (ie exact level of tier 1 capital requirements) with institutions like the Fed. As Ezra Klein pinpoints, the
Dodd plan sufficiently addresses the information deficit, but gets hesitant when it comes to strong, regulatory actions.
On a wide range of issues and proposed implementation recommendations, Chris Dodd‘s positions are alinged with the
ideas of the White House. Even the resolute figther for an independent Consumer Protection Agency, Elisabeth Warren,
basically agrees to Dodd´s plan. But it simply doesn´t reach far enough.

Dodd knows that the core of his paper is too weak to carry a TBTF solution over the finish line, after Republicans and the
banking lobby launch the expected full frontal attack. Almost simultaneous to the presentation of his plan, Senator Ted
Kaufmann (also D) published his ideas on how a reform should look like. He addresses the issues brisk and
uncompromisingly (ie restore Glass-Steagall, repeal the Commodity Futures Modernization Act, support the Volcker rule)
and could become the White Knight of the Democrats. It now needs inner-party alignment under the supervision of the
White House. Mike Konczal, fellow at the Roosevelt Institute, summarizes appealingly, which passages of the Dodd Plan
need to be reinforced :

 Hard limits related to both size caps relative to GDP and leverage ratio must be specified in the bill. This will put a
floor to the difficulty of resolution and the damage to the economy.
 The Volcker Rule should be accepted outright, rather than through the Financial Stability Oversight Council decision.
 The Bureau of Consumer Financial Protection must have full rule-making authority over non-bank lenders, including
auto lenders.
 The Bureau of Consumer Financial Protection must keep its lack of preemption over state regulation.
 The derivatives section should be included to require all standardized derivatives to trade on an exchange with
clearing, keeping with the original financial regulatory reform language introduced by President Obama in June09.
 The Financial Stability Oversight Council should not have the ability to alter the derivatives rules, override the Bureau
of Consumer Financial Protection or change other regulations by a vote.
 Early remediation requirements should be defined as to intervene earlier in the event of financial decline for a large
systemically risky financial firm with a rule written by Congress.
 There should be more focus on investing in high end, internationally focused position monitoring for large
systemically risky financial firms.
 In the light of recent scandals, there should be extra language included that targets fraud in accountancy and
directly addresses issues of off-balance sheet reform.

www.panthera.mc
 The Alternative Investment Consultancy
06.04.2010

In the House, Barney Frank, Chairman of the House Financial Service Committee, presented his bill proposal already at
the end of 2009. By that time, Frank and Obama intended to put it to the vote before Xmas. Due to the increasing
domestic weakness of the president a concensus developed to process the long reform agenda of the White House step-
by-step. The healthcare reform was chosen as the higher priority. Today we can assume that Frank´s plan will be worked
into the inner-party negotiations between Dodd and Obama.

If the statements of Paul Volcker and Robert Gibbs are to believed, a final FinReg plan will be negotiated between the
Senate, the House and the Administration by the end of May. I consider this timetable as highly ambitious. The high
pace is understandable, as, in parallel to the domestic discussions, the international negotiations regarding a
coordinated approach are fairly advanced. At the G20 Summit in London (Apr09), it was decided to use a „Basel vehicle“
as the implementation platform. Since, Basel III is negotiated by the G20 members and industry experts. In December
2009, the Basel Committee on Banking Supervision presented its first draft (“Strengthening the resilience of the banking
sector“). On April 16th 2010 an evaluation deadline is set for feedback on the draft. For the second half of 2010 it is
scheduled to run scenario´s on the agreed core parameters. If the USA wants to see a strong handwriting of its own
ideas being part of Basel III, it is urged to clarify its domestic preferences.

As aptly expressed by a business newspaper.

We Are Living in Financial Times.

written by ©
Markus Schuller www.panthera.mc