Presentation on theme: "New York International Law Review Symposium St. John’s Law School, Jamaica, New York March 6, 2009 New World Order: Can a global economy continue to be."— Presentation transcript:
New York International Law Review Symposium St. John’s Law School, Jamaica, New York March 6, 2009 New World Order: Can a global economy continue to be regulated on a non-global basis? Presented by: A. JOYCE FURFERO, PH.D, J.D. Tobin College of Business St. John’s University firstname.lastname@example.org 718.990.7350
The CULPRITS Subprime Mortgages Credit Default Swaps CMO Ratings Capital Adequacy Requirements FAS 157 No Capital Controls
Domestic Banks FAS 157 FNMA/FHLMC Insurance Cos & Pension Plans Hedge Funds & Private Financial Cos Foreign Banks Individuals credit default swaps CMO s Commercial Banks ------------------- Investment Banks Mortgages jumbo subprime Alt-A Commercial Banks Mortgage Bankers Federal Regulators FR, FDIC, OCC State Banking Depts SEC State Insurance Depts Rating Agencies FASB Insurance Cos Financial Regulatory Scheme bond insurance Originators Packagers End Users Public regulators Private companies Financial instruments Insurance products Investment Banks & Dealers OFHEO
The HOLES Mortgage Origination unqualified borrowers inadequate documentation mismatch of borrower to mortgage instrument unregulated securitization Credit Ratings - improper AAA designations for CMOs Credit Default Swaps - NO reserves FAS 157 Level 1, Level 2, Level 3 Assets mark-to-market/mark-to-model Capital Adequacy Requirements - too rigid enforcement No Capital Controls - inflow/outflow of money/securities
Mortgage Origination Bad loans versus loans that go bad A “no brainer” for banks: Establish credible lending standards Qualify borrowers Demand documentation Tailor mortgages to borrowers ability to repay A “no brainer” for regulators: Hire more bank examiners Inspect loans with great scrutiny Raise required performance standards Verify quality of collateral Demand 100% compliance or close down A “no brainer” for Congress: Review/revise CRA
Credit Ratings Reassess risk evaluation methods Diversification - How does it apply to pools of homogeneous assets like mortgage loans, auto loans, and credit card loans? Reclassify derivatives, re: underlying asset Treated as securities rather than loans Decouple look at underlying asset Ask: can it be traded in the market - If yes, regulate it as a security (SEC) - If not, regulate it as a loan (FR, FDIC, OCC)
Credit Default Swaps Call a spade a spade If it looks like a duck and it quacks like a duck, it must be a duck. Reclassify CDSs as insurance --- establish reserve requirements --- enforce minimum reserve ratios Establish clearinghouse to keep track of CDSs public (FR)/private (NYACH) domestic (FR, NYACH)/international (BIS)
FAS 157 Problems Artificially devalues assets Forces unnecessary write-offs Reduces shareholder wealth Artificially reduces capital adequacy ratios Solutions Eliminate rigid enforcement of mark-to-market Eliminate Level 1, Level 2, and Level 3 assets Identify which assets can be marked to market and which cannot be marked to market Eliminate mark-to-model Require mark to-market ONLY when possible Suspend minimum capital requirements
The 10 Largest U.S. Banks as of December 31, 2008 Bank Name Total Assets Net Income JPMorgan Chase Bank, NA $1,746,242,000$10,419,000 Bank of America, NA $1,471,631,047 $5,894,592 Citibank, NA $1,231,154,000 ($2,101,000) Wachovia Bank, NA $635,476,000 ($511,000) Wells Fargo Bank, NA $538,958,000 $3,636,000 Wells Fargo Bank, NA* $1,174,434,000 $3,125,000 U.S. Bank NA $261,775,591 $3,356,107 Bank of New York Mellon $195,164,000 $1,235,000 SunTrust Bank $185,098,787 $975,730 HSBC Bank USA, NA $181,604,079 ($1,589,714) State Street Bank & Tr. Co. $171,227,778 $1,814,088 National City Bank $146,057,789 ($318,912) *As of January 1, Wachovia was merged into Wells Fargo.
Capital Adequacy Ratios as of December 31, 2008 Bank Name Tier 1 Tier 2___ JPMorgan Chase Bank, NA 8.73 12.48 Bank of America, NA 8.47 11.63 Citibank, NA 9.94 15.18 Wachovia Bank, NA 6.45 10.89 Wells Fargo Bank, NA 7.26 10.79 Wells Fargo Bank, NA* U.S. Bank NA 6.56 10.51 Bank of New York Mellon 11.26 14.75 SunTrust Bank 7.88 10.87 HSBC Bank USA, NA 7.49 12.04 State Street Bank & Tr. Co. 19.76 21.28 National City Bank 9.73 13.81 Peer Group 10.58 12.54 Required CA ratios 4.00 8.00 *As of January 1, Wachovia was merged into Wells Fargo.
International Money Flows Problem NO capital controls International contagion Unidirectional transmission: U.S. ROW Solutions Global organization Global agreement Domestic containment Alternative solution
Global Organization/Agreement A Global Constitution??? Detail powers of member countries Achieve appropriate balance of powers -- between organization and member countries -- among member countries or -- otherwise, the countries will not comply Tendency to cheat - self-interest Needs common interest or effective enforcement mechanism to force compliance ｷ European airline cartel ｷ OPEC
Problems of Global Organization/Cooperation Sovereignty versus global cooperation Paul Volker – Plaza Accord (G-5), Louvre Accord (G-7) Effectiveness of the World Court? WTO? IMF? IBRD? European Monetary Union Beggar thy neighbor policies Lack of 100% cooperation Grand Cayman Islands Switzerland Participants are not countries or national banks Private, publicly-owned shareholder corps A U.S. corp’s first obligation is to its shareholders – to maximize shareholder wealth Co-ordinator? The U.S., again??? Wolf by sheep’s door!!!
Domestic Containment Unidirectional transmission Much of the blame belongs to the U.S. Back to basics - U.S. domestic regulation Mortgage origination and securitization Credit ratings Credit default swaps FAS 157 Capital adequacy standards Government-mandated capital controls ???
Alternative Solution Insurance for deposits and other liabilities Current deposit guarantees must be honored in full Other assets should be classified into one of three categories (Level 1, Level 2, Level 3): ｷ Fully insure (100% of value) for a 10% premium ｷ Partially insure for 2/3 of value ｷ Partially insure for 1/3 of value Anti-contagion prevention Insurance facility for other countries
Conclusion The global economy is probably too large, too heterogeneous, too fluid, too self-interested, too nationalistic, too politically sovereign, and, currently, too fragile for even the most sophisticated governments to cooperate effectively for any extended period of time.