systemic risk

The Federal Reserve to Limit Executive Pay

Maybe there is something to that Federal Reserve as super regulator proposal the Obama administration is talking about after all.

Imagine my surprise at this Wall Street Journal headline, Bankers Face Sweeping Curbs on Pay:

Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.

The Fed's plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks' corporate boards and executives.

Systemic Risk Insurance? How about don't let banks drive drunk!

In a paper The "Surprising" Origin and Nature of Financial Crisis: A Macro Economic Policy Proposal (obnoxious PDF big brother - be wary of this link, these bastards have this paper loaded with copy protections as well as image beacons, pretty stupid if it's supposedly a public document!)

The paper first identifies one of the main causes of the financial crisis as aggregate risk in systemically important financial institutions. Bloggerspeak translation: Derivatives, all of those asset backed securities, CDOs, and so on, which were put together like a house of cards, designed on faulty models and slapped with AAA credit ratings when they should not have been.

No Super Fed Says Barney Frank

Looks like a moment of sanity is emerging from the House Financial Services Committee. Chair Barney Frank is quoted as saying the Federal Reserve will not be given regulatory expansion powers, instead, a super council of existing regulatory agencies, including the Federal Reserve will oversee systemic risk.

The Obama administration’s plan to expand the Federal Reserve’s powers to oversee financial firms is failing to win supporters in Congress as some lawmakers back a proposal to give the responsibility to several regulators.

“It’s going to be shared authority,” House Financial Services Committee Chairman Barney Frank, whose panel will write the measure, told reporters July 21, without providing details.

Giethner's systemic risk plan

Bloomberg reports that:

U.S. Treasury Secretary Timothy Geithner said regulation of the U.S. financial system needs a broad overhaul to heal a crippling lack of confidence caused by the credit crisis.
Geithner’s proposals would bring large hedge funds, private-equity firms and derivatives markets under federal supervision for the first time. A new systemic risk regulator would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.