Friday 25 June 2010

Major US financial reform agreed

President Obama: "We've all seen what happens when there is insufficient oversight"

The US Congress has all but finalised the biggest reform of US financial regulation since the Great Depression.

President Obama said the reforms would "hold Wall Street to account".

Legislators stayed up all of Thursday night for 19 hours of non-stop negotiations to reconcile separate versions of the bill that had been passed by the two houses of Congress.
Agreement was reached to impose strict limits on banks' ability to take risky speculative bets on markets.

MARDELL'S AMERICA

Continue reading the main story

It will be a political tool for Obama. He's trying to take the initiative after a difficult few months

Mark Mardell BBC North America editor Read Mark's blog in full

Speaking before the start of the G8 and G20 summits in Canada, President Barack Obama said he was "gratified" by the progress made by Congress.

Treasury Secretary Tim Geithner said the bill that had emerged was "strong" and described it as "the most sweeping set of financial reforms since those that followed the Great Depression".

US bank shares greeted the news positively, with Citibank rising 3% in early trading, Goldman Sachs was up 1.75% and JP Morgan 2.25%.

All-nighter

The debate only ended at 0540 Washington time (0940 GMT), with compromises reached on all major points.

The bill represents a second major legislative victory this year for President Barack Obama - following healthcare reform - and rode a popular backlash among American voters against Wall Street.

"We worry about big money," said Democrat Barney Frank, who headed the negotiations.
"I worry about big money having a corrupting influence, but it is reassuring to know that when public opinion gets engaged, it will win."

Volcker rules

The bill introduces the so-called Volcker rule - named after the former Federal Reserve chairman Paul Volcker, who proposed it.

Barney Frank

Chairman Barney Frank and colleagues stayed up all night negotiating

The rule is intended to ban banks from risky entanglements in the financial markets.
US banks will be barred from taking big trading bets on markets.

They will also be limited to investing a maximum of 3% of their capital in speculative businesses such as hedge funds or private equity funds.

The bill will also set up a powerful consumer financial protection bureau, with powers to clamp down on abusive practices by credit card companies and mortgage lenders.

It now has to be passed by both the Senate and the House. When asked whether this would happen, President Obama said, "you bet".

Sticking points

Analysis Continue reading the main story John Mervin, Editor, BBC World Business Report, New YorkMake no mistake, some on Wall Street feel they've dodged a bullet.

However much their revenues will be hurt by the new laws' provisions, things could have been much worse. Fuelled by deep public rage at banks that nearly destroyed the US economy, lawmakers seriously considered much more drastic action than this.

The Brown Kaufman amendment in the Senate would have limited the size and leverage of banks. Needless to say the giants of Wall Street were appalled at that prospect.

And who helped kill that amendment? The Obama administration itself. So it's worth bearing in mind that up to a point he has actually also been Wall Street's protector.

Mr Obama said the final bill "represents 90% of what I proposed when I took up this fight".
But concessions had to offered in order to win over Republican backing for the deal.

The US Congress is dominated by President Obama's Democratic party, which holds majorities in both houses.

However, following the death of Edward Kennedy last year, Republicans won his Massachusetts seat in the Senate, giving them a crucial blocking minority there.

Indeed, the 3% permitted investment in speculative businesses was a dilution to the Volcker Rule demanded by the new Massachusetts senator, Scott Brown.

Agreement was also reached on higher capital requirements for banks.
This means banks will either need to do less risky lending, or they will have to raise more money from shareholders to hold in reserve against loan losses, or both.

However, congressmen conceded a five-year transition period for banks to meet the new capital rules, and they exempted smaller banks - with less than $15bn in assets - from the rules altogether.

Swap limits

KEY PROVISIONS

Volcker rule: ban on banks' proprietary trading
Volcker rule: limit on banks investing in hedge funds or private equity funds
New Consumer Financial Protection Bureau
Credit Default Swaps trading moved onto exchanges
Banks to spin off certain swaps businesses
New capital adequacy rules for big banks in five years
New Council of Regulators to monitor systemic risks
Regulator powers to seize and resolve big troubled banks

Q&A: US bank regulation

Another major sticking point was a Senate proposal to ban banks from dealing in so-called swaps.
Swaps are a type of derivative - financial contracts once described by investor Warren Buffett as "financial weapons of mass destruction".

Under the Senate bill, banks would have been forced to spin this business off into separate affiliated companies, in order to protect them from losses.

But negotiators agreed to water down the Senate bill, exempting the biggest swaps markets - on interest rates and currency exchange rates - from the ban.

But banks will still be banned from dealing in credit default swaps unless they do so through the safety of a financial exchange.

This measure will severely curtail one of the most profitable activities of the big international banks when they do business in the US.

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What To Expect At The G-20

The largest countries, like China and the U.S., should lead by example.

Rebellion, Repression And The Red Shirts

Hatoyama Accommodates The U.S. On Futenma

China: Managing A Summer Of Discontent

The central focus at the G-20 will be to change the composition of world growth as recovery takes hold: current-account-deficit countries should save and export more and consume less while surplus countries should consume and import more. Some of the required measures will not be popular at home as they impact consumer and trade interests that are vested in the unsustainable status quo.

Yet with Europe a drag on world growth and the U.S. consumer no longer the engine a determined effort to rebalance is essential to take up the slack. What needs to be done?

The best strategy to ensure G-20 momentum is for the largest countries to lead by example. A credible medium-term plan of fiscal consolidation would make the United States the natural leader of the Mutual Assessment process. This is unlikely until after the November 2010 mid-term elections, however, when the bipartisan National Commission on Fiscal Responsibility's report comes due.

The Chinese authorities have a rebalancing strategy that includes nominal exchange rate appreciation, shifts domestic demand towards consumption and shifts job generation more towards labor-intensive production in services as well as manufacturing. They need to follow through. Unfortunately, the euro's recent depreciation against the dollar has put unanticipated pressures on exporters' margins. So has recent labor unrest. Further delay in nominal appreciation will be inflationary and renew international tensions.

The European stabilization fund and unprecedented central bank intervention have bought Greece time to restructure its finances. But serious questions remain about economic governance in the euro zone where deeper coordination is required to restore and maintain fiscal prudence. Clearly future economic growth will have to be sought by raising productivity through politically-difficult and long-delayed structural reforms in a slow-growth environment. Germany as the large surplus economy should stimulate domestic demand to facilitate such changes.

The G-20 co-chairs, Canada and South Korea, both have successes from which others can learn.

Few realize that Canada completed a major fiscal adjustment in the mid-1990s when it moved from a deficit of 8.7% of GDP to a small surplus helped by public support for consolidation, a growing world economy and a flexible exchange rate.

South Korea is a graduated emerging market economy which has recovered from severe crises a decade ago. Others can learn from South Korea's strategy to reduce export dependence through domestic investments in human capital, technology and a "Green Korea" strategy of energy conservation, clean energy R&D and energy efficient transportation.

Other East Asian economies could contribute more to global demand by reducing export incentives and increasing exchange rate flexibility; increasing domestic demand by deregulating services and encouraging green and other needed infrastructure projects; and supporting household consumption as the economies adjust by creating social safety nets.

None of these recommendations is a slam dunk because most imply painful macroeconomic and structural adjustments. But the G-20's credibility to restore global growth is on the line.

The outlines of a successful summit began to appear this past week as President Barack Obama, in a June 16 letter to G-20 leaders, committed to reduce the U.S. deficit to 3% of GDP by 2015 and stabilize the debt-to-GDP ratio. On June 19-20 the People's Bank of China committed to greater nominal exchange rate flexibility. Follow through is needed in both countries, and from the Europeans, or renewed global imbalances will threaten global stability.

If growth in the heavily-indebted advanced countries continues to be modest threats of protectionism and political pressures to turn back globalization will rise. Few have much room to maneuver in the face of still-high unemployment.

Thus, the second G-20 summit, and the first to take place in Asia in Seoul in November, may turn out to be extraordinarily fortuitous if President Lee Myung-bak achieves further progress by persuasion and example.

We cannot afford more of the deadlock and inertia of Doha and Copenhagen. To prod governments to act--and to prevent backsliding--the IMF's Mutual Assessment analysis should be published (the April 2010 World Economic Outlook provides a more general but no less urgent assessment). Name-and-shame tactics helped mute protectionist actions during in the heat of the crisis. Such tactics, or a high-profile independent wise persons group, may be necessary to rally public support.

The stakes for the G-20 are high. There must be forward momentum or its credibility and effectiveness will ebb away. And the burdens of global financial crises on future generations will only grow.

Wendy Dobson, a professor at the University of Toronto, is a former Associate Deputy Minister of Finance in Canada. Her most recent book is Gravity Shift: How Asia's New Economic Powerhouses Will Shape the 21st Century.

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Europe to focus on growth

Geithner tells Europe to focus on growth

Timothy Geithner says the world "cannot depend as much on the US as it has in the past"

Europe must focus on growth as well as cutting spending to reduce national deficits, US Treasury Secretary Timothy Geithner has told the BBC.

Speaking in Washington ahead of G8 and G20 meetings this weekend in Toronto, Mr Geithner said that world leaders must concentrate on the "paramount" challenges of growth and confidence.

He added the world could not rely as much on the US as it has in the past.

The European Union says securing growth "remains a priority".

The Group of Eight and Group of 20 rich and developing nations are assembling on Friday for three days of talks on how best to emerge from the worst financial crisis since the Great Depression.

But the Reuters news agency reported that world leaders at the meeting would admit that sickly public finances could hurt long-term growth.

'Hand in hand'

Many European governments, including the UK, have implemented severe austerity measures in recent weeks in order to cut debt levels.

UK Prime Minister David Cameron arrives in Toronto

In pictures: G8/G20 leaders arrive Cameron urges focus at G8 summit

UK Prime Minister David Cameron, who has arrived in Canada along with other leaders, said in an article for the Globe and Mail newspaper: "No-one can doubt the biggest promise we have to deliver: fixing the global economy."

"I believe we must each start by setting out plans for getting our national finances under control," he added.
Herman van Rompuy, the president of the European Council, said that the EU's key words this weekend would be "growth, confidence and medium term".

"The restoring of confidence in budgetary policies go hand in hand with effective growth strategies," he said ahead of the meetings.

Growth challenge

When asked if Europe faced the possibility of Japanese-style stagnation if it carries on with debt reduction policies, Mr Geithner said "Europe has the capacity to prevent that".

G8/G20 summits security map

But he added: "Europe can make a choice to put in place the reforms and policies that will provide the possibility of stronger growth rates in the future.

"This meeting gives us the chance to sit together and look at whether we've got a broad strategy across the country that's going to strengthen this recovery."

"Our job is to make sure we're all sitting there together to focus on this challenge of growth and confidence because growth and confidence are paramount."

Some commentators in Europe argue that austerity measures should only be introduced once strong growth has been secured in the wake of the global downturn.

This was a more widely-held position until the Greek debt crisis focused policymakers' minds on cutting debt levels.

The Greek crisis showed that governments with high levels of debt find it very difficult to borrow money from international investors, money that they need to service existing debts.

Common goals

In a letter to G20 leaders last week, US President Barack Obama warned against cutting national debts too quickly, arguing it would put economic recovery at risk.

Why we all want to be Canadian Canada row over $1bn bill

But Mr Geithner said the US and Europe "have much more in common than we have differences".

"We all agree that we have to restore responsibility to our fiscal positions. Everyone agrees that those deficits have to come down over time to a level that's sustainable," he said.

But he said that the US and Europe would take "different paths, at a different pace" in order to reach the common goal.

"It's going to require different things as we have different strengths and weaknesses," he said.
Mr Geithner said the US was not in a position to work out what were the best policies for European countries to pursue.

The treasury secretary said the US had laid out "very ambitious plans as well" to cut its deficit.
But he said the US was in a stronger position than many other economies to cut its debt levels.

"We're in the very good position of being able to deliver relatively strong growth rates [compared] to what we're seeing in other major economies," he said.

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