Earlier this week I linked to a release by the central bank of China. Basically it was a statement that called for reforms of the international financial system. Yesterday I read it in it's entirety, and while it is about as exciting as reading an FOMC statement, it struck me that (a) there was no attempts at obfuscation through the "innovative" use of language, in other words they said exactly what they meant, and (b) they seem to be losing patience, particularly with the U.S. and Europe.
I'll quote some of the better passages, and add my comments.
In the midst of the current financial crisis, the needs for major reform of the global financial system and global financial stability framework have been increasingly recognized.
The first line of the statement. They detail the reforms done to date, then end the first paragraph with this sentence:
All these efforts will help to fend current crisis and future risks. However, we also note that several issues with respect to the financial regulatory framework have not received adequate attentions. In this note, we would like to explore these issues and provide relevant suggestions.
In other words, you haven't done enough, so it's up to us to help you out.
In terms of financial regulation philosophy, some developed countries have been heavily reliant on self-regulation of the marketplace, believing in “minimal regulation is the best regulation”. In fact, the financial institutions implicated in the Enron and WorldCom debacles and the liquidity crisis troubling some financial institutions in the early stage of the current crisis should have impelled regulators to upgrade supervisions. However, authorities have failed to take much-needed systematic actions. One of the most important reasons for this omission is the conviction that market can correct itself, which led to the overlook of financial sector vulnerabilities posed by the profit-seeking nature of financial institutions. The evolution of the crisis demonstrated that due to the profit-driven nature of market players, market forces, if unchecked, will lead to asset bubbles and ultimately a disastrous market clearing in the form of a financial crisis like the current one, hence wreaking great havoc to global finance and world economy.
How about that? Right off the back they bring up Enron and Worldcom (even calling them "debacles"). I'm getting the feeling these guys aren't goinmg to mince words.
Under the current regulatory model, only deposit-taking financial institutions and conventional financial products with obvious externalities are regulated, while near-bank entities and OTC products are subject to little, if any, supervision.
Not to mention any names **cough**AIG**cough**.
Moreover, the lack of coordination among regulatory authorities has also fostered regulatory arbitrage possibilities. As a result, financial institutions are able to circumvent rigorous regulations and maximize abnormal returns. Different types of arbitrage have hastened the rapid development of near-bank entities and OTC products, and let hedge funds enjoy the treatments from offshore financial centers.
They nail it here. One ot the reasons that Henry Paulson, when he was still at Goldman-Sachs, insisted that the leverage limits had to be done away with was that investment banks would lose business to overseas competition, who had no limits. We now know how that ended.
One ancient Chinese philosopher once said, “(w)e should self-examine ourselves three times daily.” This epitomizes the oriental philosophy on the importance of self-criticism in improving oneself. In analyzing the root causes of and drawing lessons from the current crisis, such spirit is sorely needed. Only by looking inward with this spirit, can we draw the right lessons and avoid being blindsided. Only with the right lessons learned, can far-reaching reforms begin. Recently, there have been some blaming games, which intend to hold others responsible for the on-going difficulties. Such lack of remorse does not help in examining the flaws in the existing financial regulatory system.
IBD says it's all Jimmy Carter's fault. Maybe we can find a way to blame Millard Fillmore, then everybody's off the hook.
Though some made efforts to address issues, most are reluctant to take a serious crack at the problems with an excuse of “(i)f it ain’t broke, don’t fix it.” The cost of waiting for the system to break has turned out to be tremendous. Against this backdrop, we should begin with an attitude of self-criticism while addressing the challenges of financial regulatory reform.
"Tremendous" is some of the strongest language they use, and it is an understatement. Try "devastating" or "apocalyptic".
Some regulatory agencies do not have enough professionals with practioners’ experience and hence are lack of sufficient understanding of the market developments, especially the systemic impacts of financial innovations. As a result, some supervisors turned a blind eye and were not sensitive to problems in structured products such as CDOs and derivatives such as CDS, and the shadow banking system reflected in the off-balance activities, including the critical rating methodologies for structured products.
Here we do the opposite. You go to work for a regulatory agency, such as the FDIC, learn the ins and outs of rugulations, find the loopholes, then go to work for one of the institutions that you were at one time regulating. So the really smart guys learn to "game" the system.
The business model of issuer-paying for services has rendered the rating process with conflicts of interest and the major rating agencies irresponsibly gave many structured products high ratings before the crisis. During the crisis, the reversal of market conditions have forced the rating agencies to lower the ratings of many financial products, which led to massive asset markdowns and exacerbated the severity of the crisis.
Our view is that the financial institutions should conduct independent examination of risks, not simply delegate the duty to the rating agencies.
They avoid using the word "fraud", but they are clearly unhappy about the "pay for ratings" system.
Evidence abounds that boards of directors at some systemically important financial firms in the US were rendered as a “gentlemen’s club”, which rubber-stamp all major decisions sponsored by the management. Often times, the independent non-executive directors (INEDs) did not have meaningful expertise or training in financial services sector. As a result, the board is unable to provide strategic direction for the firm’s operations and effective guidance and backing for risk management and internal control. Cases also reveal that at some too-big-to-fail institutions, the risk management professionals were beholden to business people. This has led to lack of effective check and balance mechanism, which tolerated excessive risk-taking in pursuit of short-term rewards.
Management was motivated by short-term barometers such as quarterly results and year-end bonus. The pro-cyclical compensation structure, which rewards short-term results, doesn’t help in restraining aggressive risk-taking. In addition, decisions for succession planning and appointment of Chairman/CEO was sometimes made not on candidates’ well-rounded qualifications and merits but on factors not consistent with the interests of the shareholders and the firm’s long-term viability.
The Chinese have found the basic flaw in too many Western business entities: to short a time horizon. The Chinese think ahead in term of years or even decades, we can't see past the next quarter. That leads to short term profits at the expense of long term health.
Maybe the new capatalists in China can teach us a thing or two. For some reason, we in the West have come to believe that "deregulation" means "allowing criminals to run rampant". And the Chinese are calling "B.S." on it.
"Out of the mouths of babes...."
Tuesday new highs, sorted by industry. SPSN is an error in the finviz database, and there could be others.
The high volume advancers on the relative strength list.
