Tag Archives: regulation

FISA Revamp

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Congress may be moving to revamp the Foreign Intelligence Surveillance Act, which among other things, creates a secret Federal court that empirically allows the Federal government to spy on American citizens in the United States—one of whom was a representative of citizens of Illinois whom they had elected to Congress—without a warrant.

[Congressman Austin, R-GA] Scott said lawmakers on the committee want to address who in government can query the database, who can be targeted and who must sign off on such warrantless surveillance. He also suggested there is some support for adding lawyers to the secretive process to help defend the rights of Americans who are being surveilled without their knowledge.

The problem with those first three…suggestions…is that there already are limits on who can query, who can be targeted, and who must sign off, and each of those limits have been routinely violated by FBI and intelligence personnel. There’s no reason to believe that new limits won’t similarly be blithely ignored.

The problem with that last is even larger: the secret process still would be secret, the lawyers supposedly defending the targeted Americans’ rights would be secret, they would be appointed by the same government that has been abusing FISA surveillance powers right along, and there would be no way for us American citizens to assess the skill with which those “defense” lawyers defend, or even their level of zeal.

It’s promising that there is finally a recognition that the FISA process is flawed in some way.

However, what’s truly required is to abolish altogether the Star Chamber that is the secret FISA Court. Scott made the case for abolishment—although he didn’t intend that—when he told JtN that there was clear evidence that the law’s past safeguards have been breached by the FBI and intel agencies. Given that, there’s no reason to believe those FBI and intel agency personnel won’t “breach” any new safeguards, also.

Yellen and Law

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The Wall Street Journal editors wrote Thursday about Treasury Secretary Janet Yellen’s…flip-flopping…on making whole, or not, nominally uninsured depositors in the wake of SVB’s failure and the government takeover of Signature Bank. Their subheadline accurately summarized the matter.

Are all deposits insured or not? Only [Yellen] seems to know.

The editors’ lede was this:

Treasury Secretary Janet Yellen on Thursday walked back her comments from the day before that walked back her remarks the day before about providing a de facto guarantee on all US bank deposits.

The editors then asked the question: Who’s on first?

An especially a propos followup came just a bit later in that routine: “Q: When you pay off…who gets the money? A: Every dollar of it.”

Legally, in answer to the subheadline question is no; only deposits of $250k or less are insured. But what’s a law to a Progressive-Democrat? Only a suggestion, to be ignored at convenience.

Studying for the Test

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Instead of studying the material. In a Monday Wall Street Journal op-ed, Michael Faulkender and Tyler Goodspeed, University of Maryland Finance Professor and Fellow at Stanford University’s Hoover Institution, respectively, wrote about bank stress tests and their resulting uniformity of banks’ risk management techniques. Citing a Boston Federal Reserve study, they noted that

banks that performed poorly on the mandated Dodd-Frank stress tests subsequently adjusted their portfolios such that they more closely resembled the portfolios of banks that performed well. The average institution’s portfolio is more diversified, but the system is more uniform. By requiring all of the biggest financial institutions to adhere to the same measures, pass the same tests, and follow the same practices, America has lost diversification in the entire banking sector.

Dodd-Frank, in essence, required individual banks to do better at diversifying their individual portfolios. But that business of all of them having to pass the same test means that all the banks have much the same portfolios, diversified over much the same instruments.

This is the complement of teaching the test rather than teaching the material and then testing that knowledge. Banks are (regulatorily pushed into) learning the test rather than learning the material and then acing the test.

Uniformity is dangerous for species in a biological ecology, and uniformity is dangerous for categories of businesses in an economical ecology.

Whitewash

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It seems the Federal Reserve knew of the risks stemming from SVB management moves as long ago as 2019 [emphasis added].

In January 2019, the Fed issued a warning to SVB over its risk-management systems, according to a presentation circulated last year to employees of SVB’s venture-capital arm….
The Fed issued what it calls a Matter Requiring Attention, a type of citation that is less severe than an enforcement action. Regulators are supposed to make sure the problem is addressed, but it couldn’t be learned if the Fed held SVB to that standard in 2019.
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Following the 2019 warning, the Fed informed SVB in 2020 that its system to control risk didn’t meet the expectations for a large financial institution, or a bank holding company with more than $100 billion in assets, the presentation to employees at SVB’s venture-capital arm said.

And:

Over time, the central bank issued numerous warnings to SVB, suggesting the bank’s problems were on the radar of the Fed, the bank’s primary federal regulator.

So, what was done by the Fed’s regulators in response to this string of noncompliances?

A central-bank review of its oversight of SVB is due by May.

Will those prior whitewashes be followed up with an official whitewash?

I’m not holding my breath over a favorable outcome, which IMNSHO would include, at the very least, the public firing for cause of the Fed regulator(s) directly responsible for SVB oversight and that individual’s/team’s supervisor. Pour l’encouragement des autres régulateurs.

Further to the Government Bailout of SVB Depositors

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The Biden administration and his…regulators…are, indeed, bailing out all SVB depositors, including those with deposits larger than the FDIC’s insurance of deposits worth $250k or less. This is being done under the administration’s claimed “systemic risk exception” in order to bail out the bank’s uninsured deposits—which is to say the bank’s uninsured depositors.

That is a power that was used during the 2008 financial crisis. Measures such as this can be controversial, with some arguing that it creates what is known as a “moral hazard”—that by letting banks or their customers know the government will backstop them in a crisis, they will think less about risks.

The move was a mistake in 2008, which the House recognized when it rejected that bailout before caving and voting for it, and it’s a mistake now. It does, indeed, create the moral hazard that Uncle Sugar will save investors from their risk folly—or even from accurately assessed risk, but the odds came home against them, so there’s no need for investors to worry about risk. Here is that moral hazard made concrete:

The Federal Reserve took another action on Sunday, which was to establish something called the Bank Term Funding Program. What this will do is ensure that a bank that is holding safe assets, such as Treasurys or government-backstopped mortgage bonds, can bring them to the Fed and swap them for cash for up to a year. They could use that cash to grant customers’ requests for their deposit money.

SVB held most of its assets as precisely those Treasurys.

The problem that SVB…had with its investment securities was that the rise in interest rates last year depressed the market value of even safe assets that will almost certainly repay the banks’ money, just not for a long time. But had the banks gone to sell them now to cover deposit outflows, they wouldn’t have gotten back what they paid for them.
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It is an issue that isn’t just concentrated in one or two banks: the FDIC has said that across all banks, there were about $620 billion in what are called unrealized losses as of the end of last year.
The Fed has now promised to swap these securities for cash at face value, meaning banks won’t have to realize any losses on them for now.

That spreads the moral hazard all over the banking system. No banking investor or depositor will take any risks; those risks are being laid off on us average Americans.

And this:

So regulators might have to walk a fine political line: indicating strength and decisiveness to stem further bank runs, but not looking like they are granting a free pass to banks. The regulators said any losses to the Deposit Insurance Fund to cover uninsured deposits would be recovered by a special assessment charged to banks.

No, they don’t have to walk that line at all. They could just say “No.” Instead, they’re planning on making things worse: that bit about making other banks pay for the regulators’ decision to bail out SVB’s investors. Those other banks had nothing to do with SVB management failure or the risks its depositors chose to take. Guilty, anyway, pay up, suckers.

Too, there’s a critical difference between the current situation (and the 2008 predecessor) and the Panic of 1907. The Federal government then had neither the tools nor the finances to stop that depositor run on the banking system. Private citizen, banker, and Evilly Stinking Rich, JP Morgan, along with a number of his fellow Evil Rich guaranteed their fortunes against the banks’ ability to pay depositors. The run stopped. Government intervention wasn’t needed; private citizens acted.

We don’t need government intervention today, even though wealth isn’t nearly as heavily concentrated today as it was those 115, or so, years ago. We certainly don’t need the regulators’ deliberately manufactured moral hazard systemic bailouts.