Mission: Regulation Innovation

On a mission to provide a new level of financial services safety, prevention and consumer protection, Treasury Secretary Timothy Geithner has presented a slew of changes to the current regulatory agencies, all with the goal of creating greater economic stability.

There are a few major changes that highlight the new administration’s goals.  The first would be to give new powers to the Federal Reserve to monitor the largest American companies deemed “too big to fail.”  This new capability on the part of the Fed is designed to prevent companies from having to be bailed out, or fail, both of which are dismal.  Under the new plan, the Federal Reserve will be responsible for regulating and supervising at-risk companies, which will likely include not only major financial institutions, but also holding companies and other large commercial institutions.

Read More About Innovation in Regulation

Credit Cards Come Under Gov’t Scrutiny

In a showdown between the federal government and credit card issuers, president Barack Obama meets with executives from 14 credit card issuers today, including American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services, and JPMorgan Chase, to discuss concerns over practices such as raising interest rates on existing credit card balances.

A congressional panel was expected to approve a bill mid-week that would curb high credit card fees and penalties imposed by many banks that have benefited from the federal government’s financial bail-out program. The proposals are similar to sweeping rules adopted by US federal regulators in December. These rules take effect in July 2010, but the bill’s approval would accelerate their implementation, forcing the country’s banking industry to forgo billions of dollars of annual interest payments sooner. The pro-consumer bill is an important test of the political will of Democrats who are pushing for US financial regulation reform.

What’s your view on credit card policies? Should there be strict new disclosure standards for credit card lenders? Should pricing practices that expose borrowers to unforeseen costs be prohibited?

G20 and Beyond: “Signs of Green Shoots Raise Hopes”

At the site of the G20 Summit, the Financial Times of London reports that “Scattered signs of green shoots in the global economy are raising hopes that the recession could bottom out later this year, paving the way for economic recovery in 2010.”

However, the signs remain tentative. Economists warn that recessions rarely proceed in straight lines and false dawns are common before recovery finally takes hold.

Surveys of business sentiment round the world, particularly in the manufacturing sector, suggest conditions are less bad than they were a few months ago although still bad by historical standards.

In the US, economists point to surprisingly solid retail sales, which suggest consumer spending grew by more than 1 per cent in the first quarter. US home sales look to be bottoming, although house prices remain in rapid decline at least on some measures.
Learn more about when the recesssion will end

AIG Agrees to Break Itself Up

The Financial Times reports that AIG will announce a radical plan to break itself up after 90 years as a global insurance conglomerate by ceding control of its two largest divisions to the US government in exchange for a $30 billion-plus lifeline.

“We are breaking up AIG but we are trying to do it in a way that preserves value for the taxpayer, the employees and the businesses,” said a person close to the plan, which was revealed by the Financial Times last week.

People close to the situation said the authorities, which already own 80 per cent of AIG, would get a controlling stake of 70-75 per cent in American International Assurance (AIA) – AIG’s large Asian operations – and American Life Insurance Company (Alico), a global life insurance business. The structure is aimed at giving the government a better chance to recoup taxpayers’ money when the two businesses are sold or listed.

AIG will also securitize $10 to $15 billion of cash flow from its US life insurance operations and sell the bonds to the government, insiders said. In return, the government will cancel most or all of the $37 billion it is owed from AIG as part of a $60 billion credit line it extended in November. The authorities will also lower the interest rate on the rest of the loan, saving AIG $1billion a year. And the government will provide a $30 billion standby equity line – a promise to buy preferred shares in AIG – that it can tap if needed.

Financial Fitness Sought Through Bank “Stress Tests.”

The US Treasury has made it mandatory for banking institutions with more than $100 billion in assets to undergo “stress tests” which will be partly used to determine whether the banks need additional capital from a new program that could provide additional monetary reinforcement.

The stress test, a kind of financial fitness workout,  is based on a hypothetical scenario in which the economy shrinks 3.3 per cent this year and barely grows next, with unemployment averaging 8.9 per cent this year and 10.3 per cent in 2010.  The idea is to look at how banks would hold up under such a stressful scenario.

Troubled US banks will have six months to raise capital from either the market or the US Treasury if the government’s stress tests determine they need to bolster their balance sheets.

“US government ownership is not an objective” of the program,” Treasury said. “However, to the extent that significant government stake in a financial institution is an outcome of the program, our goal will be to keep the period of government ownership as temporary as possible.”  Treasury secretary Tim Geithner and Federal Reserve chairman Ben Bernanke both said the alternative of regulatory seizure and outright nationalisation of weak banks was not the best way forward.

A senior administration official said the hope was that by strengthening the big banks pre-emptively they would make this adverse scenario less likely.

Survey: More than a million Pennsylvanians lack health insurance

A survey released Thursday by the Pennsylvania Department of Insurance estimates the number of state residents without health insurance has topped 1 million — or about 8.2 of the state’s population.

The last health insurance survey conducted in 2004 found that 7.5 percent were uninsured.

Meanwhile, the U.S. Senate got ready to approve a bill today that provides health insurance to about 11 million low-income children, paving the way for President Obama to claim an early legislative victory and collect a quick down payment on his campaign pledge to guarantee care to every American child.

What’s your opinion on closing the gap for America’s uninsured?  Would you like to lower your own heath insurance premiums?
Learn more about the health insurance gap

Inauguration Sensation

When TIME magazine named Barack Obama the 2008 Person of the Year they did so for a host of reasons that cut across the fabric of American social and political life.   When the Financial Times also choose Obama as Person of the Year they recognized his practical, bipartisan approach and his selection of a top-notch cabinet as being vital signs for an economic recovery.

“Everything Mr Obama has done in public life so far suggests an instinctively bipartisan figure. Often compared with Franklin D. Roosevelt, whose “first-class temperament” enabled him to chalk up a historically productive first 100 days as president, almost nobody can recollect Mr Obama even raising his voice,” they cite.
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A Silver Lining?

Despite the dark clouds that have cast a shadowy pall across America’s countryside, there are fleeting signs in the sky that something may be twinkling on high and the economy is not quite as dismal as we all may dread, or, at least, that the storm front shows imminent signs of clearing.

As the year rolls to an end, the dollar has actually increased in value compared to foreign currencies like the Euro and the Yen.  This is rather remarkable considering how much money the Fed is printing and the bundle of billions sliding down the chimneys of our temporarily credit-frozen banks.  One of the biggest concerns of the bailout thus far has been inflation (the lessened ability to purchase goods at the same price) but if the dollar continues to increase in value, American’s will be able to buy more with every dollar which will help the economy even more.

Discover more promising signs for economic recovery

G20 Marks Shift In Economic Power

Nothing is harder than to determine the historic significance of events when they are happening. Yet the meeting of the heads of governments of the Group of 20 in Washington at the weekend looks as historic as the crisis it responds to, according to the Financial Times. It might even prove the one bright light in the gathering darkness.

Historically, world economic summits have been comprised mostly of the world’s leading democracies (the US and the UK for two), but for the first time, countries like India and Brazil were welcomed to this convocation. Recognizing the global economy is expanding, the need to meet with the leaders of rising powers was more pressing than normal and displayed the gravity of the situation.

The G20 leaders said they would require regulators to set up “colleges of supervisors” to monitor global banks and said ministers would report back by March 31 on issues such as strengthening of the credit derivatives markets and review of financial sector pay schemes, with further reforms to follow. Read more about global solutions to the economic crisis

A New Chief Executive has been Hired

Yesterday, Barack Obama was elected to become the 44th President of the United States, with at least 349 electoral votes and about 52% of the population. Given the protracted length of the political campaign season, the American people have at least some idea of the policies that will shape the economic landscape over the next four years. Clearly, with change as a mandate, it is safe to say there will be some fundamental shifts ahead in our economic outlook. At the same time, new initiatives will be constrained by a large national deficit.

The expectation of greater cohesiveness in political circles and the notion of heightened government regulation may instill the necessary confidence to stimulate the lending and spending of money in the current economic environment. The steps a government takes are also reassuring to outside investors such as the refuge international investors have found in a strengthening U.S. dollar.

Will the Obama presidency be able to turn around the economy, and how quickly?  Will investments in a national transportation infrastructure and alternative energy programs be part of the greening of America? And how might the U.S. government and president Obama buttress the automotive industry to save energy, jobs and the economy? What’s your view?

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