The $700 Billion Gorilla – When the Fed sets the price, liquidity and confidence will be restored.

Prices are a funny thing. When there are no buyers, there can be no price. But the minute there is a price that can be identified, a price can be set. It’s all psychological. When you have a price that some buyer is willing to pay, and you have a transaction in which that buyer actually did pay that price, then you have established a reference price.

All the Fed has to do is buy a few tranches of bad loans and presto! the prices they pay become the reference price. At that point, speculation becomes moot and due to draconian mark to market rules, all identical assets immediately are compelled to be revalued at the reference price. That is, all assets IN ALL PORTFOLIOS world wide. Bang! Asset values are reset and liquidity returns.

And all the Fed has to do is buy a few tranches of a carefully calibrated selection of bad loans (e.g. 30/60/90 days past due, 3/6/12 months in foreclosure, etc.) and all like assets in the market are priced accordingly. The prices the Fed paid become in effect a pricing guide to bad loans that will be referred to by all buyers and all asset appraisers.

It might cost the Fed $1 or $2 billion at most to achieve this. If the market balks, then the Fed goes back to the well and buys another $1 or $2 billion. With $700 billion at its disposal, even the shorts will capitulate even if the Fed never spends another dime more than a few billion. The mere fact that the Fed, the $700 billion gorilla, can if it wants to will be sufficient.

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Henry Paulson’s Regulatory Blueprint for Wall Street

 Henry Paulson appeared on all four major Sunday news shows yesterday and repeatedly mentioned his regulatory blueprint.

Well, here is the recommendation section excerpted from the  212 page document:

VI. The Optimal Regulatory Structure

 

 

This chapter presents a conceptual model for an optimal regulatory structure. This model is intended to begin a discussion about rethinking the current regulatory structure and its goals. It is not intended to be viewed as altering regulatory authorities within the current regulatory framework.

 

 

Recommendation Overview
Treasury recommends a regulatory structure that recognizes the differences between business models centered on transactions with consumers (i.e., retail transactions) and those focused on transactions with other businesses (i.e., wholesale transactions). Strong arguments exist for distinguishing the regulation of businesses (or the portions of businesses) with explicit guarantees from the federal government (e.g., deposit insurance) from the regulation of those entities with no explicit guarantee from the federal government.

Treasury proposes a modernized regulatory structure that recognizes the convergence of the financial services industry. The proposed structure will be more efficient and strengthen our capital markets.

Treasury proposes the creation of three regulators focused exclusively on financial institutions and two other key authorities, a federal insurance guarantee corporation and a corporate finance regulator.

Each of these authorities is described below.

The market stability regulator should be  responsible for overall conditions of financial market stability that could impact the real economy. Given its traditional central bank role of promoting overall macroeconomic stability, the Federal Reserve should assume this role. A primary function of the Federal Reserve’s  market stability role should continue through traditional channels of implementing monetary policy and providing liquidity to the financial system. In addition, the Federal Reserve should be provided with a different, yet critically important regulatory role and broad powers focusing on the overall financial system. In terms of its recast regulatory role, the Federal Reserve should have specific authority regarding the collection of appropriate information from financial institutions, disclosing information, collaborating with other regulators on rulemaking, and taking corrective actions when necessary in the interest of overall financial market stability.

The prudential financial regulator should focus on financial institutions with some type of explicit government guarantees

 

associated with their business operations. Although protecting consumers and helping to maintain confidence in the financial system, explicit government guarantees often erode market discipline, creating the potential for moral hazard and a clear need for prudential regulation. Prudential regulation in this context should be applied to individual firms, and should operate like the current regulation of insured depository institutions, with capital adequacy requirements, investment limits, activity limits, and direct on-site risk management supervision. To perform this function, a new regulator, the Prudential Financial Regulatory Agency, should be established.

The business conduct regulator should be responsible for business conduct regulation across all types of financial firms. Business conduct regulation in this context includes key aspects of consumer protection such as disclosures, business practices, and chartering or licensing of certain types of financial firms. One agency responsible for all financial products should bring greater consistency to areas of business conduct regulation where overlapping requirements currently exist. The business conduct regulator’s chartering and licensing function focuses on providing standards for firms to be able to enter the financial services industry and market and sell their products and services to customers. To perform this function, a new regulator, the Conduct of Business Regulatory Agency, should be established.

The Federal Insurance Guarantee Corporation should function as an insurer for institutions regulated by the prudential financial regulator. The Federal Insurance Guarantee Corporation should possess the authority to set risk-based premiums, charge ex-post assessments, and act as a receiver for failed prudentially regulated institutions.

The corporate finance regulator should be responsible for general issues related to corporate oversight in public securities markets.

These responsibilities should include corporate disclosures, corporate governance, accounting and auditing oversight, and other similar issues. These responsibilities are not unique to financial institutions, but are broadly applicable across all publicly traded companies and publicly traded securities. The Securities and Exchange Commission would continue to perform this function in the optimal structure.

 

The straight line on McCain.

Look I like McCain. I think he has displayed some very admirable personal qualities as a Senator.  But he has some weaknesses that must be factored in with a run for the White House.

McCain is wedded to the government like nobody I know. He is a third generation government employee. In fact, as far as I can tell, he has never worked a day in his life or ever received a paycheck from anyone other than the federal government. Both his father and grandfather were in the military. McCain attended the Naval Academy – a government college, then entered the Navy. When he came back from Vietnam, he took a job as a liaison between the Navy and the government. Then he ran for Congress and then the Senate.

Now he wants to be President. The man will go to his grave never having worked a day in his life for any private enterprise. 

So, his granddaddy was paid by the government, his daddy was paid by the government, he attended a government college, he has only ever been paid by the government and now the government is paying for his campaign financing. No wonder he picked as a running mate the governor of the only state in the country where every citizen is paid by the government every year! The odds of him changing government are slim. He is a creature of government!

Heroics

John McCain is a war hero. But why? Because his plane was shot down and he was tortured in a POW camp for 5 years. Ok, no argument on the facts. But let’s be clear on heroes in the Vietnam War. First of all, there are more likely more heroes among the Vietnamese in that war than among Americans. But among the American heroes surely the men and women who died in the war are the real heros and those who came back – in any shape – are far better off. This does not diminish the courage and bravery that McCain demonstrated nor the torture he endured. No one would wish that on anyone. But there is a limit to the  number of Brownie points McCain gets for coming back from Vietnam.

How a Free WSJ.com Can Beat Yahoo Finance

ON: Fri Jan 4th 14:17 PM

They’re practically giving it away now. I just subscribed to the print and the online combined for $99 – same price I’ve been paying for online alone every year since they started charging. One thing to watch out for though — content inflation (can’t think of a better word). You’re going to see a lot of wire service stories puffing up the content both online and in print. It’s already started, and it certainly cheapens the franchise. Why should I read day old AP stories in WSJ when I can read them anywhere? That’s not why I read WSJ. I want original stories with bylines.