The Re-Regulation of the Financial Services Sector Market Analysis
Westwood Capital, LLC
March 17, 2008
With much hand-wringing and chest-thumping, legislators, members of the administration and central bankers have been making daily pronouncements on the failures of banking and securities regulation, in anticipation of a still unknowable future. As we await first-quarter financial results, accompanied by yet another round of asset write-downs and credit impairments, it’s obvious the mortgage and lending disaster has morphed into a full-scale banking and financial services emergency that requires swift action to prevent a recurrence.
The situation stems not from a lack of regulation, in contrast with the anything-goes mortgage lending industry, but from a failure to rigorously apply, enforce and/or maintain regulatory safeguards developed on the heels of past crises. As well-meaning pundits call for new regulatory frameworks, and the laissez faire crowd even promotes greater reliance on industry self-regulation, we should review how preexisting regulations were not applied as originally intended.
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Who Should Bear the Cost of Bailing Out Our Financial System?
Westwood Capital, LLC
March 17, 2008
With ample finger-pointing over The Bear Stearns Companies Inc. ("BSC") bailout several weeks ago, let's consider several tools the Federal Reserve Bank could have employed in connection with transactions that occurred and future rescues, should they prove necessary.
The following measures reduce taxpayer burden by shifting bailout costs to the troubled institution's shareholders:
- Risk escrow facilities;
- Market insurance premium transfer; and
- Rights offerings.
On March 16, the Federal Reserve Bank executed an agreement with JPMorgan Chase & Co. ("JPM") and BSC to resolve the latter's financial distress. As part of the original deal, the Fed agreed to assume credit risk on $30 billion of BSC's illiquid securities. The quid pro quo was that JPM would guarantee certain BSC obligations. JPM also received rights to purchase 19.9% of BSC stock shares for $2 and an option to buy BSC's Midtown headquarters at a below-market price. JPM could purchase the remainder of BSC shares, but only subject to shareholder approval. Once the original deal was in place, the risk of a BSC failure was contained.
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