Former Fed Chairman Paul Volcker and Jacob A. Frenkel (Group of 30) released a new report,
The Structure of Financial Supervison: Approaches and Challenges in a Global Marketplace
The attached paper recommends a restructuring on financial market supervision called Twin Peaks.
Both Presidential campaigns have mentioned major structural and regulatory reforms of the financial systems. Volcker is advising Obama and please note, the other paper authors, many are from surviving financial institutions and yes, yet once again, Goldman Sachs is represented.
Four separate approaches to market regulation are identified. They are:
I. Institutional Approach
The Institutional Approach is one in which a firm’s legal status (for example, a bank, broker-dealer, or insurance company) determines which regulator is tasked with overseeing its activity from both a safety and soundness and a business conduct perspective. (China, Mexico)
II. Functional Approach
The Functional Approach is one in which supervisory oversight is determined by the business that is being transacted by the entity, without regard to its legal status. Each type of business may have its own functional regulator. (Italy, France)
III. Integrated Approach
The Integrated Approach is one in which a single universal regulator conducts both safety and soundness oversight and conduct-of-business regulation for all the sectors of financial services business. (UK, Germany)
IV. Twin Peaks Approach
The Twin Peaks approach, a form of regulation by objective, is one in which there is a separation of regulatory functions between two regulators: one that performs the safety and soundness supervision function and the other that focuses on conduct-of-business regulation. (Australia, The Netherlands)
What is most interesting is the United States is the exception to any of the above structures. It appears the cause is the Gramm-Leach-Bliley Act
The Financial Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (GLBA), repealed provisions of the Glass-Steagall Act that restricted the ability of bank holding companies to affiliate with securities firms and insurance companies.
GLBA substantially modernized the U.S. financial services industry, but it made only incremental changes to financial services regulation. As a result, U.S. financial conglomerates can now operate in virtually all areas of financial services, but the regulatory structure remains largely institutional.
Attempts to address functional regulation under GLBA, whereby the regulator that is responsible for the activity will supervise that activity, were minimally successful, because the provisions of the Act were subject to numerous exceptions that were highly negotiated in the legislative process
and immensely difficult to implement.
In other words the regulations were repealed plus your classic lobbyist loopholes were strewn about the place making ineffective US regulation (Yes that's my interpretation). Translated further, free for all or the worlds largest gambling casino is our current system.
Credit Default Swaps (CDS) are also mentioned in this report:
There has also been explosive growth in the credit default swaps market. When ISDA first began surveying this activity at year-end 2001, the total outstanding notional amount of credit default swaps was $918.9 billion. By year-end 2007, it was $62.2 trillion—a growth of nearly 37 percent in the second half of 2007 alone. Securitization products, which are structured to finance assets such as mortgages, credit card receivables, and auto loans, became enormous businesses for financial services firms during this period.
Asset-backed securitizations, mortgagebacked securitizations, collateralized loan obligations, collateralized debt obligations, and other structured products came to represent an ever-larger portion of the credit business. Particularly over the past several years, when interest rates were relatively low, the securitization business fueled the market by providing increasingly esoteric products that satisfied the aggressive appetite for higher-yielding securities.
Unfortunately, it is now apparent that there were serious flaws in the creation of some of these products, including inadequate mortgage underwriting practices and insufficient historical data, contributing to overly optimistic financial modeling used by the firms that structured these products, and by the credit rating agencies that rated them. It also appears that increased reliance was placed on credit rating agencies and that independent credit analysis by many market participants was severely wanting.
Considering Volcker is advising Obama, one can bet they are looking at this twin peaks regulatory reform being recommended. It appears the current Fed are also recommending this.
Now, good thing or a bad thing, frankly this is all way over my head. But, considering just how much bad regulation, financial structures can affect our lives, I think we should start paying attention to this now to garner public exposure.
America cannot have yet another time bomb. A great mystery cannot crawl out, wreaking havoc. The middle class is in a regulatory red room, enter a backwards talking midget dancing ...the words decoded mean taxpayer funded trillion dollar bail out that doesn't even work.