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April 24, 2009

Should Credit Card Rates Freeze?

credit-cards  While President Obama met with executives from the leading credit card companies yesterday two senators have called on the Federal Reserve to immediately implement an emergency freeze on interest rates tied to existing balances on credit cards.

The Federal Reserve plans to put a new set of rules in effect for credit card lending beginning July 2010 but that’s an entire year from now.

In the meantime Senators Chris Dodd (D-CT) and Chuck Schumer (D-NY) wrote a letter to the Federal Reserve Chairman Ben Bernanke and other regulators saying that companies are increasing interest rates now before the new rules go into effect so Americans need help now.

“Consumers describe situations to our offices in which the interest rates on their accounts have doubled or tripled overnight, without any misconduct on their part,” the letter says. “This kind of practice clearly violates the spirit and intention of the rules, even if the delayed implementation date has the effect of making such behavior legal.”

Congress is currently developing legislation that will rearrange and organize the Fed’s new rules but they still have a way to go.

After meeting with 14 executives from companies like Bank of America, Wells Fargo and Visa, President Obama said that his administration would work with Congress to evaluate proposals for reform.

“We’re at a time where issues of credit and how businesses and families are able to finance everything from a car loan to a student loan to just paying their bills every day is on a lot of people’s minds,” President Obama said. “We want to preserve the credit card market, but we also want to do so in a way that eliminates some of the abuses and some of the problems that a lot of people are familiar with.”

The card executives at agreed to work with the Obama administration to address the President’s concerns according to the American Bankers Association, and are currently working to implement the Federal Reserves’ new rules.

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March 10, 2009

Federal Reserve Chairman Bernanke Wants Financial Regulations Revamped!

Federal Reserve Chairman Ben Bernanke is recommending an across-the-board revamp of U.S. financial regulations in an effort to even out the explosive up and down cycles in our financial markets.

“We should review regulatory policies and accounting rules to ensure that they do not induce excessive swings in the financial system and economy,” the central bank chief said today in remarks prepared for an address to the Council on Foreign Relations in Washington.

Bernanke recommended that lawmakers and supervisors rethink everything from the amounts firms set aside against potential trading losses and deposit-insurance fees to protections for money-market funds. His remarks reflect a judgment that the U.S. — like emerging-market nations in the past — failed to properly manage a flood of capital over the past decade and a half.

Bernanke also repeated his call for an agency will keep an eye on and be responsible for financial stability. While he didn’t specify which regulator should take that job, he noted that the Federal Reserve was first formed to address banking panics and said the initiative would “require” some role for the central bank.

Analysts are skeptical that the Federal Reserve will be the singular establishment to emerge with more managerial authority since Congress has been critical of their regulatory oversight as our economic crisis grew.

Bernanke also repeated that the central bank, U.S. Treasury and other regulators “will take any necessary and appropriate steps” to ensure banks have capital to “function well in even a more severe economic downturn.”

Referring to the stress test regulators will use to determine whether banks need more capital, Bernanke said an adverse scenario “involves unemployment averaging over 10 percent for a period, which we view as certainly well within the realm of possibility.”

Among the biggest challenges faced by regulators is addressing the issue of banks that are so big that their failure would put the entire banking system at risk. He said that firms that are too big to fail are “an enormous problem” and that large firms will require “especially close” oversight in the future. Regulators need the authority to seize such firms, such as the Federal Deposit Insurance Corp. already has for deposit-taking institutions, he said.

Bernanke also urged steps to protect against an outflow of money from money-market mutual funds, and said one market where banks and securities firms finance themselves — known as the tri-party repo market — may need to move to a central clearing system.

“Given how important robust payment and settlement systems are to financial stability, a good case can be made for granting the Fed explicit oversight authority for systemically important payment and settlement systems,” he said.

The Fed chairman also called for a review of accounting and capital guidelines that may cause banks to pull back in downturns.

The chairman also believes that capital regulations should be reviewed to ensure that they are appropriately forward-looking, and that capital is allowed to serve its intended role as a buffer — one built up during good times and drawn down during bad times.

Representative Barney Frank, chairman of the House Financial Services Committee, said last month he plans by April to release a draft of legislation designating the Federal Reserve as the overseer.

Senate Banking Committee Chairman Chris Dodd expressed disbelief that the central bank is up to the task, calling its regulation and consumer protection “abject failures.”

“The question is whether we should be giving you a bigger plate, or whether we should be putting the Fed on a diet,” Dodd told Bernanke at a hearing in February, noting that financial policy should remain the Federal Reserve’s top priority.

“When you keep asking an agency to take on more and more, it becomes less and less likely that agency will succeed at any of it,” said Dodd.

The Federal Reserve already supervises about 900 state banks and is the primary regulator for bank holding companies. The Fed also writes consumer protection rules and has the final word on proposed mergers among bank holding companies.

President Obama has asked his economic team to shape legislative proposals within weeks.

The global financial crisis stemmed in part from a failure by government supervisors to accurately measure risk-taking by financial institutions and the ability of lenders and investors to exploit loopholes in oversight, regulators have said.

October 10, 2008

Where Is The Subprime Crisis Warning Letter McCain Wrote?

 Both John McCain and Barack Obama took turns during the second presidential debate on Tuesday night claiming credit for having warned of an imminent economic crisis.

Obama has referred frequently to his 2007 letter to Treasury Secretary Henry Paulson. But Sen. McCain countered by saying that he had written a letter “warning of exactly this crisis.” As far as we can tell, this was the first reference McCain has made of such a letter, and we couldn’t find it. Despite multiple requests, the McCain campaign did not provide comment or the letter.

Obama likes to bring up the letter he wrote to Paulson and Federal Reserve Chairman Ben Bernanke. Dated March 22, 2007, about six weeks after he’d declared his candidacy for the presidency, the letter stressed the need for immediate intervention to curb the “rising rates of home foreclosure in the subprime mortgage market”:

And while neither the government nor the private sector acting alone is capable of quickly balancing the important interests in widespread access to credit and responsible lending, both must act and act quickly.

Crediting the senator with a foresight others lacked, however, would be a stretch. The subprime mortgage crisis had been well underway for some time. See, for example, reporting by the New York Times in June 2005 on a growing housing crisis. A month later the Times wrote of the unease among federal banking regulators with regards to high-risk mortgage loans.

At Tuesday’s debate, McCain added a new detail to his role as an early warrior against bad lending practices by Fannie Mae and Freddie Mac. Apparently he, too, wrote a letter:

I think if we act effectively — if we stabilize the housing market, which I believe we can if we go out and buy up these bad loans so that people can have a new mortgage at the new value of their home; I think if we get rid of the cronyism and special interest influence in Washington so we can act more effectively — my friend, I’d like you to see the letter that a group of senators and I wrote warning exactly of this crisis. Senator Obama’s name was not on that letter.

McCain may have been referring to actions he took in support of the bill he co-sponsored in 2005 — the Housing Enterprise Regulatory Reform Act — which called for stricter regulations for Freddie Mac and Fannie Mae. When he joined as a co-sponsor in May 2006, about a year after it was first introduced, he made the following statement:

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July 8, 2008

Economy: New Mortgage Rules To Protect Future Homeowners

  In an effort to prevent a repeat of the current mortgage mess, Federal Reserve chairman Ben Bernanke says the Fed next week will issue new rules aimed at protecting future homebuyers from dubious lending practices.

The mortgage rules will crack down on a range of shady lending practices that has burned many of the nation’s riskiest “subprime” borrowers who were hardest hit by the housing and credit debacles. The plan would apply to new loans made by thousands of lenders of all types, including banks and brokers.  The plan would:

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