Regulation? No Biggie, Banks Say

From Reuters to Bloomberg to the Wall Street Journal, the business press this morning takes a look at reactions to the administration’s proposed financial regulation overhaul, laid out yesterday in a Washington Post op-ed piece by Treasury Secretary Timothy Geithner and Lawrence Summers, director of the National Economic Council. The plan—which would raise capital and liquidity requirements for all banks; put controls in place on asset-backed securities “including a requirement that their creators retain some risk,” Reuters explains; and implement regulation of derivatives contracts and dealers—will be presented to Congress tomorrow. It would also give the Federal Reserve more power and would merge the Office of Thrift Supervision, regulator of savings and loans, with the Office of the Comptroller of the Currency, which oversees national banks, Bloomberg adds.

According to Reuters, bankers don’t seem to be sweating the proposed changes, which are the most drastic since those proposed during the Great Depression. In the wake of the announcement, they took care to not attack the plan, instead playing up the fact that the proposals were merely that, proposals, and said they were waiting to hear more details on Wednesday. Wayne Abernathy, executive director for financial institutions policy at the American Bankers Association, told Reuters: "Have we had enough say yet? No, but the process has really just gotten started.” In one WSJ story about the overhaul that focuses in on changes to the securitization industry, the paper reports that there are doubts that any of the changes will make a difference, as most are already in play or are on the table from other regulatory proposals. In fact, Bloomberg posits that banks’ willingness and ability to repay government loans may ease pressure for the changes to go through and will force the overhaul to take a backseat to more pressing issues such as health care reform and climate control.

In another story that leads the paper's What's New, the WSJ points out that the way the administration went about drafting the proposals is a departure from its previous approaches, with Congress being left with few of the initial details. In the case of health care and energy policy, for example, “the White House has left the fine print to be filled in by Congress.” The approach this time “reflects how some of the administration's most senior officials are personally invested in the finance overhaul. Others say the package only works if all the pieces are designed to fit together,” the Journal writes. The proposals were drafted by members of a regulatory team whose every idea was put through the ringer by Summers. During those meetings he became known for his ability to “shred and discredit any idea presented, forcing aides to scramble to defend their proposals.” And while it was a particularly onerous exercise, officials think it will make Wednesday on Capitol Hill go much smoother.

The WP turns its eyes westward with a report on the pitiful state of California’s economy. The administration has denied requests from California lawmakers to bail out the state, which has a $24 billion or so deficit, saying that it could set a precedent that would lead to other states requesting federal aid, too (um, Michigan). But with an economy larger than Canada's or Brazil's, California officials are harkening back to an all-too-memorable argument: “We are too big to fail.” No matter. After a series of meetings, Geithner, Summers, and another top White House economist, Christina Romer, among others, “have decided that California could hold on a little longer and should get its budget in order rather than rely on a federal bailout.” One such fix, according to Bloomberg, is a tax increase—a measure that is being talked up by the state’s Democrats who control the Legislature. A tax increase would take the place of budget cuts proposed by Republican Gov. Arnold Schwarzenegger that “would eliminate entire welfare programs and leave 1 million children without health insurance. Democrats yesterday proposed a new $15 automobile license fee and said they may consider a 9.9 percent per-barrel levy on oil produced in the state.” Officials told the WP that the administration would keep a close eye on California and might step in if the situation continues to worsen. But in that case, federal help would "carry conditions to protect taxpayers and make similar requests for aid unattractive to other states."

Stocks dove at the start of the week, taking their biggest plunge in a month. But the domestic sell-off was merely part of a larger global slide that sent the MSCI World Index down the most it’s been in two months, Bloomberg reports. The Dow fell 187.13 points, or 2.1 percent, to 8612.13. The S&P 500 fell 2.4 percent to 923.72, its lowest close in about two weeks. Leading the decline were commodity producers, as oil and metal prices fell. Oil futures declined Friday and Monday, dropping 2 percent to $70.62 per barrel. Prior to that, oil had reached $72.68 on Thursday—its highest level since October. “The drop in part reflected a rise in the dollar, which gained 1.5% against the euro,” the WSJ adds. The price on Treasuries also rose, sending the yield on the 30-year bond down to 4.54 percent. Analysts expressed little concern over the movements, saying the decline could easily be reversed.

However, economic data in the pipeline for this week could have “a greater impact on the market,” according to the Journal. “Reports on housing starts and manufacturing activity will provide clues as to whether the economy continues to stabilize. Consumer and producer-price index reports could shed light on whether inflation is starting to build, as some in the market believe.” Already, the National Association of Home Builders reported that confidence among U.S. homebuilders has fallen after being on the rise for two months. “A prime concern was the rise in mortgage rates that followed a recent sell-off in U.S. Treasurys,” the Journal says.

Finally, in a rare bit of good news for people deep in the red, the practice of settling credit card debt for substantially less than is owed has risen in recent months as more and more individuals face insurmountable bills, the New York Times reports. Indeed, officials say many credit card issuers have “revised internal guidelines to give front-line employees the power to cut deals with consumers. The workers do not even have to wait for customers to call and ask for a break.” However, only Bank of America (BAC) and American Express (AXP) admit to the practice, saying only that they decide on a case-by-case basis. Revolving credit, “a close approximation of credit card debt,” reached $939.6 billion in March. The Federal Reserve reported that 6.5 percent of credit card debt was at least 30 days past due in the first quarter of this year—the highest percentage since the agency began tracking the number in 1991. The amount being written off has also reached peak levels, the paper reports.