Senators Move to Create 21st Century Glass-Steagall Act – Money Morning – Only the News You Can Profit From

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Senators Move to Create 21st Century Glass-Steagall Act – Money Morning – Only the News You Can Profit From.

Warren, John McCain (R-Ariz.), Maria Cantwell (D-Wash.), and Angus Kin (I-Maine) introduced legislation that would again separate bank’s traditional activities (like deposits currently backed by the Federal Deposit Insurance Corp.) from riskier activities like investment banking, insurance underwriting, swap dealing, and hedge funds.

Glass-Steagall was repealed by Congress back in 1999.

When the news broke of Warren’s determined attempt to bring back Glass-Steagall last week, it covered front pages across the country and instigated a firestorm of commentary on the future of the U.S. economy.

The problem, of course, is the ability to cut through the hype and understand if financial reform is necessary to fix the U.S. economy.

Rarely do I find myself championing regulatory efforts by the Federal Government, but the financial sector is an entirely different beast from energy, agriculture, and other resource sectors.

But reinstituting key elements of the Glass-Steagall Act is just one step on a long return to sanity for the economy.

The End of Too Big to Fail

In 2008, as the financial crisis unfolded, many in Washington wanted to reduce the size of the banks, because they had grown too large and were considered “Too Big to Fail.” The government was about to throw billions of dollars into the bailout of the Big Banks.

But during the financial crisis, in order to stave off more bankruptcies, the Treasury Department actually made it easier for banks to grow even larger in a swath of mergers and acquisitions that led to a staggering concentration of wealth among the largest banks in the country.

“The four biggest banks are now 30% larger than they were just five years ago and they have continued to engage in dangerous, high-risk practices,” Warren said during a Senate Banking Committee hearing.

Meanwhile, attempts to curb Wall Street excess in 2010 with the Dodd-Frank Bill did little to clean up the system.

In the end, Americans ended up with a piece of toothless regulation. The law was quickly watered down by remarkable lobbying efforts by the financial sector, including an unprecedented effort to limit even the Volcker Rule, which aimed to curb proprietary speculation.

Now, Warren and her colleagues are aiming to create the 21st Century Act. According to our Shah Gilani, this new proposal would “would separate institutions with savings and checking accounts, in other words FDIC-insured depository commercial banks, from investment and trading ‘banks’ engaged in capital markets activities, most of which are on the border between speculation and manipulation.”

Here Come the Lobbyists

The reaction from Wall Street is predictable. The banks will say that increasing regulation on their activities will help facilitate another financial crisis.

Of course, this was also predicted by the banks in 1997 when regulators proposed overseeing the derivatives markets. After they lobbied to kill any regulation, 10 years later these toxic assets facilitated a major crash.

Instead, we should have listened to those who opposed the repeal of Glass-Steagall, because they too predicted a financial crisis would eventually result because of this deregulation.

At the time of its repeal, opponents of repeal argued that unshackling financial companies from regulations would enable them to shift their focus into unchartered areas of banking activity. As a result, these critics said, economic crisis was not just possible, it seemed inevitable.

Perhaps the most chilling prediction came from former Senator Byron L. Dorgan, Democrat of North Dakota just two days after the repeal of Glass-Steagall.

”I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930’s is true in 2010,” Dorgan said.

”I wasn’t around during the 1930’s or the debate over Glass-Steagall<” he added. ” But I was here in the early 1980’s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

For many, this statement is a chilling reminder of how vulnerable the U.S. economy had become by deregulation of the banking sector in the late 1990s.

Just a Starting Point

Our Shah Gilani isn’t entirely optimistic that the law or reform will be passed. He cites the obvious problem in Washington that would essentially make it impossible to fix: Lobbying.

Wrote Shah: “The only problem with trying to make banking 21st century safe is that we live in the new old age of robber barons, and they are the bankers and politicians they’ve bought.”

But the another important aspect of the conversation is that other types are reform would be needed as well.

Real financial reform requires more than just reducing the size of the banks and limiting their commercial and investment activities. Canada, for example, had only a mild economic downturn despite having a highly concentrated banking sector.

It also requires the willingness to address other factors that played a key role in the financial crisis and were essentially ignored or gutted from the Dodd-Frank Act of 2010 after extensive lobbying efforts and threats that the sky was falling.

Perhaps it isn’t the size of the banks that matters, but instead the types of securities that banks are allowed to invest in and the amount of leverage they may possess.

Congress seems to be overlooking the fact that it was massive derivative positions that led to this crisis, acting like weapons of financial mass destruction. But Congress also must recognize that banks were allowed to return to pre-Depression levels of leverage in 2004.

While Warren is getting the spotlight, a more important matter is happening in the Senate. Two Senators are looking to pass legislation to reduce leverage and increase capital-holding requirements.

Sens. Sherrod Brown, D-Ohio and David Vitter, R-La., recently introduced a bill that would force “Too Big to Fail” institutions to hold more capital, thus reducing leverage and protecting against significant losses.

This will be a very hard fought battle with a lot of misinformation being spread about the impact that such regulation would have on the economy. Stay tuned, as we continue to weed through the lies in order to deliver the truth on what reform in Washington would really mean to Wall Street.

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5 Warren Buffett tips

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1. Spend wisely

If you buy things you don’t need, you will soon sell things you need. – Warren Buffett

Rule No. 1 : Never lose money. Rule No.2: Never forget Rule No.1 – Warren Buffett

2. Saving: Save for the unexpected

Don’t save what is left after spending; spend what is left after saving. – Warren Buffett

3. Think long-term and be patient

Life is like a snowball. The important thing is finding wet snow (opportunities) and a really long hill (long term). – Warren Buffett

4. Borrowing: Limit what you borrow

I’ve seen more people fail because of liquor and leverage – leverage being borrowed money. You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing. – Warren Buffett

5. Risk

Investing without knowing increases risk. However, instead of shying away from investing one should acquire knowledge to get it right.

Shwetal – An Avid writer

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Multi PrimeBrokerage

Over the past  4-5 years world economy has seen some significant changes, these changes were not because of the crisis that debacled the global economy but also because of other parameters like regulations , transparency etc. When i say global economy has seen significant Changes it not only refers to the changes in financial markets but also in other industry . There is a shift of focus on “COST” . Earlier markets being good the firms were not much restricting themselves in terms of cost. Obviously if you are earning well you would not mind spending and expanding.  With the crsis looming and the world financial markets seeing distastes like Lehman Brothers , Bears and Stern , Merrill Lynch , this made the investors , fund managers thinking caps work.

This was the time which required innovative thinking and having a new model in place which would not only save the investors and market makers from the risks of crisis which were looming on to the world economy but also give them a wide verirty of options to choose the services . It was time which required a innovative model/ products in place which would help shareholders/ investors. This let to a shift from a single prime broker model to a multi prime broker model.

The focus of this blog is to highlight the fact that how the hedge fund managers have shifted from one model to another.  We are typically refering to a shift from a single prime broker model to a multi prime broker model. Now what a single prime broker model would typically mean is , a hedge fund would have one prime borker providing all services right from security lending to risk management and alpha generating trades. Since the financial markets turmoil started there was one thing which was very prominant ” Risk” . The one we are refering to here is the counterparty Risk . Being in a single prime broker model a hedge fund would always have a high counterparty risk.

Now with Multiple Prime Broker model coming into picture the first question that comes is who needs it ? and Why ? Now that intially was thoought that any Hedge fund whose size is less than $ 1 Billion would follow single prime broker model and aove that would go for Multi Prime Broker model. But as the crisis in markets deepend further. This led to more or less every hedge fund  following a multi prime broker model regardless of its size.

Now Why a multi prime broker model is required can be answered by the benefits of multiprime broker model.

  1. Diversification of counterparty risk among multiple brokerage firms and investment banks.
  2. Increased access to securities lending programs and competitive financing rates.
  3. Multiple execution platforms and increased opportunities across global markets
  4. Greater transaction capabilities within OTC asset classes and loan markets 
  5. Expanded capital introduction networks
  6. More comprehensive research capabilities 
  7. Access to ever-growing product and service
  8. offerings within multiple prime brokerages 

How to Make Multi Prime Broker model work for a Hedge fund ?

It requires both infrastructure and best  business practices to maintain control over the data .

1.Contact other market participants to determine which prime brokerage services best suit your individual needs. Discuss how other firms have prioritized,implemented, and managed these changes and which, if any, additional resources they utilized.

2.Gather feedback from the various constituents within your firm to fully consider data consumption needs such as reporting, reconciliation, and real time feeds, and implement a framework for consolidating data across the various counterparties. 

 3,Review internal processes to reconcile and remediateerrors with consideration to data sources andcommunication methods. When using a single-prime model, firms often passively accept data or reconcileonly when things look off. As a firm expands its use of counterparties, the increase in transaction sources and position data demands more thorough reconciliation and timely error correction. This necessitates the fund to develop a more robust reconciliation framework.

4.Establish operational metrics, such as aging of unreconciled positions or dollars spent on trading and hedging errors. Utilize these metrics to ensure the move to multi-prime is being handled correctly from an operational perspective. These metrics can also help a fund capture and resolve inefficiencies before expanding transaction volumes in those areas.

5.Define the appropriate risk reporting framework, including existing reports available from your prime broker, vendor packages, and internally defined risk alculators. Determine a methodology to feed multiprime data into your risk framework.

6.Negotiate service levels and methods of counterpartycommunication prior to signing on.

7.Build out the necessary allocation methodology and internal procedures for allocating trades among the various prime brokers.