3
   

April 28, 2004: the meeting that created the "net capital rule", lowering capital requirements

 
 
Reply Fri 10 Oct, 2008 10:37 pm
Agency’s ’04 Rule Let Banks Pile Up New Debt


Quote:
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.

They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.

After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.

Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio " a measurement of how much the firm was borrowing compared to its total assets " rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.
  • Topic Stats
  • Top Replies
  • Link to this Topic
Type: Discussion • Score: 3 • Views: 2,653 • Replies: 8
No top replies

 
dlowan
 
  1  
Reply Sat 11 Oct, 2008 06:10 am
@Robert Gentel,
Interesting...reading...
0 Replies
 
rosborne979
 
  1  
Reply Sat 11 Oct, 2008 08:26 am
@Robert Gentel,
It was one step in a long sequence of steps to remove regulatory controls. Repeal of the Glass-Stiegal act was another.
0 Replies
 
CalamityJane
 
  1  
Reply Sat 11 Oct, 2008 08:49 am
Interesting article!
Greed goes a long way. Bush senior set already an example for it, and
Bush jr. in his limited abilities is bringing it to a bitter end.
cicerone imposter
 
  1  
Reply Sat 11 Oct, 2008 10:14 am
@CalamityJane,
It's interesting how conservatives wants to blame the democratic congress when they took over in 2006, but they don't understand why it's been the "do-nothing" congress from the right's filibusters - the most in history.

This find only confirms what I've been thinking about when and how this cash crisis began; when the republicans controlled both the administration and congress. We must also remember what Bush wanted to do with social security; he wanted to privatize it to invest in the stock market. Anybody interested? Even McCain pushed the same idea during his campaign. Bad judgment McCain.
0 Replies
 
talk72000
 
  1  
Reply Sat 11 Oct, 2008 11:24 pm
@Robert Gentel,
It is not greed but foolhardiness as leveraging is dangerous it is like walking on 30 foot-long stilts. The longer the stilts the greater the leverage i.e. stilt length to leg length. You certainly can go faster but at some point you lose control and the fall from thirty feet can be fatal.
0 Replies
 
MontereyJack
 
  1  
Reply Sun 12 Oct, 2008 12:29 am
bookmark. valuable reference material against the loons like ican who just don't get it.
0 Replies
 
talk72000
 
  0  
Reply Sun 12 Oct, 2008 04:16 am
@Robert Gentel,
If the debt to equity ratio of 35:1 is correct then $35 trillion would be required to ease the credit crunch assuming they have $ 1 trillion equity.
0 Replies
 
talk72000
 
  1  
Reply Sat 8 Nov, 2008 06:07 pm
Quote of the Day: Net Capital Rule

Here is the quote of the day:

Quote:
...we and other global firms have, for many years, urged the SEC to reform its net capital rule to allow for more efficient use of capital. This is the single most important factor in driving significant parts of our business offshore, so that our firms can remain competitive with our foreign competitors risk-based capital standards must become the norm. The SEC has made it clear that risk-based capital rules can be implemented only when the Commission is confident that firms employing value-at-risk models have robust credit and risk management policies in place.


Translated into English, this testimony from back in 2000 was from someone asking that major brokerage firms be permitted to increase leverage subject to oversight of their wondrous mathematical risk models. The request was agreed to four years later, in 2004, and it helped lead to the meltdown in independent brokers this year.

The speaker? Some guy named Henry Paulson, the then-CEO of Goldman Sachs. I wonder what happened to him.

http://paul.kedrosky.com/archives/2008/10/03/quote_of_the_da_6.html
0 Replies
 
 

Related Topics

Where is the US economy headed? - Discussion by au1929
The States Need Help - Discussion by Robert Gentel
Fiscal Cliff - Question by JPB
Let GM go Bankrupt - Discussion by Woiyo9
Sovereign debt - Question by JohnJD
 
  1. Forums
  2. » April 28, 2004: the meeting that created the "net capital rule", lowering capital requirements
Copyright © 2022 MadLab, LLC :: Terms of Service :: Privacy Policy :: Page generated in 0.03 seconds on 10/06/2022 at 10:09:33