Thursday, June 5, 2008
Senate Hearing On Securities Underwriting Practices at Investment Banks
The U.S. Senate Banking Committee, chaired by Sen. Christopher Dodd (D-CT) held a hearing on 'Securities Underwriting Practices at Investment Banks' with Fed Vice Chairman Donald Kohn and Sheila Bair, FDIC Chairman, among others, providing testimony. I'll update with excerpts from the transcript as soon as they're available online. For now, here's the media reactions.
Bloomberg report has quotes Kohn as saying that "We expect bank holding companies to continue to report weak earnings and further asset valuation writedowns." Investment banks "are building their liquidity, they are reducing their leverage," Kohn said. "They are protecting themselves against downside risk.'' Regulations requiring banks to raise capital from other banks or financial institutions aren't too restrictive, Kohn said. There's "ample capital'' available and easing those limits would be a "huge change," he said, replying to a question from Shelby.
Reuters report says FDIC Chairman Bair was more forthright and said future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past. "There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."
And the Wall Street Journal takes the FDIC Chairman literally at her word, and comes up with a tutorial piece with all the nitty-gritty of how the FDIC handles a bank failure. At 7 p.m. on Friday, Mayor Chris Etzler walked through the back door of First Integrity Bank. The lobby should have been closed for the weekend, but dozens of strangers in dark suits were bustling about with laptops and file boxes. Someone had just delivered 32 pizzas. Dan Walker, a top official with the Federal Deposit Insurance Corp., a Washington, D.C., bank regulator, had summoned Mr. Etzler to explain what was going on: The FDIC had just taken over First Integrity.... In its role as receiver for failed banks, the FDIC acts as a SWAT team, playing equal parts secret agent, medical examiner, salesman and grief counselor. The first 48 hours are typically the most frantic, as the agency must turn a failed bank inside out and oversee its sale -- or its orderly burial.
Again from the Wall Street Journal, William M. Isaac, former FDIC Chairman, writes an op-ed piece related to the Bear Stearns bailout, questioning whether the Fed should be allowed to underwrite takeovers of failed firms. Do we want the Fed underwriting takeovers of failing firms? Are we willing to allow that to happen without a competitive bidding process, which is routinely used when insured banks fail? Would we want the Fed to rescue an insurance company? How about an auto company? In short, what are the rules going forward?
Putting it all together, everyone knows that sooner rather than later, another big bank is going to go belly-up, and the entire market will, without any doubt, demand that the Fed step in and do their bailout routine. And no one knows what are the rules going forward, since the Fed is stepping on turf which traditionally belongs to the FDIC. This hearing was probably more about what to do with failed banks, and who should be doing 'it', than about making sure that banks don't fail...
Bloomberg report has quotes Kohn as saying that "We expect bank holding companies to continue to report weak earnings and further asset valuation writedowns." Investment banks "are building their liquidity, they are reducing their leverage," Kohn said. "They are protecting themselves against downside risk.'' Regulations requiring banks to raise capital from other banks or financial institutions aren't too restrictive, Kohn said. There's "ample capital'' available and easing those limits would be a "huge change," he said, replying to a question from Shelby.
Reuters report says FDIC Chairman Bair was more forthright and said future U.S. bank failures linked to the downturn in the real estate market may include "institutions of greater size" than in the recent past. "There is also the possibility that future failures could include institutions of greater size than we have seen in the recent past," Bair said. "Uncertainties in today's economic environment continue to pose significant challenges for the banking industry, households, and bank regulators."
And the Wall Street Journal takes the FDIC Chairman literally at her word, and comes up with a tutorial piece with all the nitty-gritty of how the FDIC handles a bank failure. At 7 p.m. on Friday, Mayor Chris Etzler walked through the back door of First Integrity Bank. The lobby should have been closed for the weekend, but dozens of strangers in dark suits were bustling about with laptops and file boxes. Someone had just delivered 32 pizzas. Dan Walker, a top official with the Federal Deposit Insurance Corp., a Washington, D.C., bank regulator, had summoned Mr. Etzler to explain what was going on: The FDIC had just taken over First Integrity.... In its role as receiver for failed banks, the FDIC acts as a SWAT team, playing equal parts secret agent, medical examiner, salesman and grief counselor. The first 48 hours are typically the most frantic, as the agency must turn a failed bank inside out and oversee its sale -- or its orderly burial.
Again from the Wall Street Journal, William M. Isaac, former FDIC Chairman, writes an op-ed piece related to the Bear Stearns bailout, questioning whether the Fed should be allowed to underwrite takeovers of failed firms. Do we want the Fed underwriting takeovers of failing firms? Are we willing to allow that to happen without a competitive bidding process, which is routinely used when insured banks fail? Would we want the Fed to rescue an insurance company? How about an auto company? In short, what are the rules going forward?
Putting it all together, everyone knows that sooner rather than later, another big bank is going to go belly-up, and the entire market will, without any doubt, demand that the Fed step in and do their bailout routine. And no one knows what are the rules going forward, since the Fed is stepping on turf which traditionally belongs to the FDIC. This hearing was probably more about what to do with failed banks, and who should be doing 'it', than about making sure that banks don't fail...
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