09/04/09 - Bits of Tid

By: Jeremy Carpenter, MBA

Reform

The oversight reform has become like the recession, it’s progressing at a declining rate.  Nevertheless, here is a quick summary of where we stand (Obama’s objectives and the counter position) with help from the New York Associated Press and the Treasury’s website.

According to the Associated Press³, “in his address to Congress, Geithner laid out the administration’s plan to create a Consumer Financial Protection Agency, as part of a broader overhaul, to monitor the fine print on such products as credit cards and mortgages. Such oversight is currently scattered among the Fed and other agencies.  The Fed argues that it would be more economical, since they already hold this responsibility, for the Fed to retain and even increase its powers.  Both Democrats and Republicans on Capital Hill believe that would be a mistake given the role of the Fed in the current crisis. 

The Obama administration’s proposed agency could monitor nonbank institutions too, ensuring there aren't any gaps in oversight.”  Briefing.com says, “the administration's plan would still tap the Fed to supervise huge, globally interconnected financial companies whose collapse could endanger the entire U.S. financial system and the broader economy.  Any large, interconnected company that the government wants to take over and break up could be pushed into government seizure by the Treasury Department, if certain conditions are met.  Once taken over, the companies would typically be run by the FDIC but the proposal gives the government discretion to change the way this might work.  This authority will allow the government to impose the costs of the failing companies on the owners, creditors and counterparties thus eliminating the moral hazard generated from the belief that the government will bail out failing firms.”

House Republicans have offered an alternative. Their bill would strip the Fed of its regulatory role and abolish the Office of the Comptroller of the Currency and the Office of Thrift Supervision. In their place would be a single regulator for depository institutions, which would include an office focused on consumer protections. ³

As summarized by briefing.com¹, if it stays intact, President Barack Obama's plan will touch almost every corner of financial markets, from tougher consumer-protection policies to stricter rules over exotic financial products, such as credit derivatives. The plan would bring many of the products and companies that previously operated outside of the banking system under federal scrutiny.  It would prohibit practices such as paying brokers for pushing consumers into higher-priced loans or penalties for early repayment of mortgages.  In his recent testimony Geithner says, "we propose establishing a Financial Services Oversight Council to bring together the heads of all of the major federal financial regulatory agencies.  We think that the best way to keep the system safe for innovation is to have stronger protections against risk with stronger capital buffers and greater disclosure.”

On the Treasury website is an executive summary of Obama’s plan.  The following link will take you to the statement. http://www.financialstability.gov/docs/regulatoryreform/executive_summary.pdf

The White House and Capitol Hill are at a stale mate on these issues; don’t expect any progress to come until after the end of the August recess.

More Reform

The Securities and Exchange Commission has approved a series of measures aimed at reforming the oversight of credit rating agencies.  The latest measure since the government gave them this power in late 2007 will establish a new group of examiners to oversee credit rating agencies.  The agencies came under sharp criticism for their role during the financial crisis.  More needs to be done, however, including limiting the potential for rating shopping. ⁴

$30 billion toxic securities program announced

What was originally intended to be the meat and potatoes of the financial bailout, the Treasury Department announced it will invest up to $30 billion in a partnership with private investors to place value on and remove toxic assets from the balance sheet of troubled banks². During the market’s critical point, the program was originally conceived to be in the range of $75 - $100 billion of taxpayer money (coming from the TARP program) with private investors funding $400 billion.  As a sign of the healthier overall market this number has been drastically reduced.  The program is tabbed as a hopeful jump start for individual markets as opposed to a savior of the entire US economy.  According to the Wall Street Journal^{2, 1}, nine companies including BlackRock, Invesco, AllianceBernstein, Marathon Asset Management, Oaktree Capital Management, RLJ Western Asset Management, the TCW Group, Wellington Management and a partnership between Angelo, Gordon & Co and GE Capital Real Estate, will act as fund managers and will raise an initial $500 million each in order to qualify for government financing. The fund managers could raise as much as $10 billion, which would then be matched by the government allowing $20 billion more from the TARP to act as cheap financing.  The program, known as the Public Private Investment Partnership, or PPIP, should increase liquidity and act as a price discovery tool.  It will initially target commercial and residential mortgage backed securities.

“Cash for Clunkers”

After quickly burning through the initial $1 billion set aside for the CARS program after only 10 days, Congress approved an additional $2 billion in funding through September 2010 or until the funds run out.  Unfortunately, the US government determined that such a time was now.  As of August 24^th the incentive program will end.  The move comes as the Department of Transportation attempts to obtain an accurate accounting of how much money is left in the program. The Car Allowance Rebate System (CARS) gave consumers who trade in low-gas-mileage cars a $3,500 or $4,500 credit on a new or leased car.  Participating dealers reduced the purchase price of a new vehicle by the amount of the credit at the time of purchase or lease of a new vehicle.  Problems occurred when dealers claimed that it was taking too long for them to receive their rebate.  Rebates were backed up in the DOT system because of the programs popularity and it has become difficult to tell if there is enough money to go around even with the additional appropriations.  Without an accurate time frame or guarantee that they were going to be reimbursed, many dealers started to drop out of the program anyway.  Lawmakers will decide the best way to unwind the program and ensure that dealers receive all their incentives. 

In related news, look for the White House to begin a program later this fall that allows rebates for household appliances.  The House Appropriations Committee earmarked $300 million in the economic stimulus package to encourage consumers to replace their appliances with more energy-efficient models.  Consumers are expected to turn their old appliances in to be recycled, much like the cash for clunkers program.  The Energy Efficient Appliance Rebate Program (EEARP) could offer up to $290 on some types of appliances.  According to a press release by the Department of Energy, the system will work for household appliances (refrigerators, freezers, washing machines, dishwashers, etc.), furnaces, heating pumps, boilers and air-conditioning systems.  The program will be administered by individual states.  Florida, for example, is expecting to receive around $17.5 million in government assistance.  Check this link for your state’s allocation http://www.energy.gov/media/EE_EnergyStar_State_Allocations.pdf

Index funds for 401(k)s

Of the $1.5 trillion in 401(k)s and other retirement plans, 90% are in actively managed mutual funds as stated by the Wall Street Journal.  However, as regulators and plan participants look to lower 401(k) fees, employers are starting to offer low-cost index funds and ETFs as investment options.  Fund companies who offer actively managed funds have fees which tend to be higher than those charged on passively managed products such as index funds.  Not to mention that recent performance has been problematic for active managers to justify the higher fees.  While the largest employers are typically the ones who’ve had access to the low cost funds, plans of all sizes are now demanding the passively managed products.  According to a Wall Street Journal article, despite recent lawsuits and Congressional action looking to require clear disclosure of 401(k) fees, a longer-term factor slowing index fund acceptance in 401(k)s is revenue sharing.  Plan administration costs are often built into the overall expenses of the plan.  To avoid a closer examination of fees by employers, the plan administrators tend to use actively managed funds that have plenty of revenue sharing to offset the administrative costs.  This gives the illusion that the higher administrative fees are okay and allows them to stay elevated without the appropriate attention paid by employers or plan participants.

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