Poly Financial Reg 6 - Financial Regulation Reform Guiding...

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Financial Regulation Reform Guiding Principles
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Current Climate Today, in the context of the current financial crisis, in a post-Enron, post- Worldcom, post-Madoff world, the trust in financial markets has been severely damaged.
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Before and After US had five major investment banks that were not owned by a larger commercial bank: Merrill Lynch, Goldman Sachs, Morgan Stanley, Lehman Brothers and Bear Stearns. By the late Fall of 2008, all of these investment banks had either failed or abandoned their status as independent investment banks Bear Stearns had remained in
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Failure of SEC? SEC’s staff was unable to monitor the participating investment banks closely or to demand specific actions Only three SEC staffers were assigned to each CSE firm Enough to oversee an investment bank the size of Merrill Lynch?
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Autopsy - What Happened? Between 2001 and 2006, an extraordinary increase occurred in the supply of mortgage funds Mortgage loan originators had come to realize that underwriters were increasingly willing to buy portfolios of mortgage loans for asset-backed securitizations without seriously investigating the underlying collateral. Significant erosion of market discipline by those involved in the securitization process, including originators underwriters credit rating agencies global investors risk management weaknesses at some large U.S. and European financial institutions regulatory policies, including capital and disclosure requirements, failed to mitigate risk management weaknesses Excessive leverage: A quite unique feature is that investment banks are particularly fragile. They finance their business using short-term capital to hold long-term illiquid assets.
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Crisis is Result From Intense Competition Charles Prince, the then CEO of Citigroup in July, 2007, asked by the Financial Times if he saw a liquidity crisis looming: “When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.” The incentives for financial institutions to seek to increase leverage in order to enhance profitability are strong In 2002, the total amount of debt securities issued in asset-backed securitizations equaled (and then exceeded in subsequent years) the
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Reform [W]e need to streamline a framework of overlapping and competing regulatory agencies. Reshuffling bureaucracies should not be an end in itself. But the large, complex institutions that dominate the financial landscape do not fit into categories created decades ago. Different institutions compete in multiple markets--our regulatory system should not pretend otherwise. A streamlined system will provide better oversight, and be less costly for regulated institutions. --Barack Obama, Cooper Union speech, March 27, 2008[1]
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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6211 taught by Professor Chappe,raphaele during the Spring '09 term at NYU Poly.

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Poly Financial Reg 6 - Financial Regulation Reform Guiding...

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