Bank for International Settlements, BaselJack Ewing at the New York Times reports today on the agreement reached at the summit known at Basel III:
BASEL, Switzerland — Top central bankers and bank regulators agreed Sunday on far-reaching new rules for the global banking industry that more than triple the amount of capital banks must hold in reserve as a shield against financial disasters. But the new requirements could also dampen bank profits and strain weaker institutions.Rumors were flying before the summit that the requirement could be fixed as high as 9 percent; bankers are so sick with relief that it was settled lower that right now, at least, nobody's doing much grumbling about the host of new regulations.
Financial authorities from 27 countries reached agreement on rules that require banks to raise the amount of common equity they hold to 7 percent of assets from 2 percent, part of a series of measures intended to help avert crises of the kind that nearly plunged the world into depression in late 2008. ...
However, a curmudgeon who blogs under the name "Gary A" set up such a howl about an aspect of the proposed Basel III regulations that it reached the ears of John Carney, Senior Editor of the CNBC financial website, who agreed with Gary that Basel III was pulling a fast one on Americans and that Tea Partiers didn't seem to grasp the issue:
(September 6) - Last week we pointed out that the Basel committee's changes to the definition of regulatory capital that result in the inclusion of Fannie Mae and Freddie Mac obligations threaten to saddle us with a permanent government guarantee of those failed mortgage giants.Carney cut off Gary's rant before it wound up but the above is the meat of his argument -- although you might want to read the entire thing and follow the links to some of his earlier writings, which include handy tips for spotting what he calls a housing loan bubble 'ponzi' scheme. Gary A claims that he spotted the last housing market bubble as early as 2005 -- the one that led to the present financial crisis. I don't have time to check his claim but it should be easy to verify if he was blogging that far back.
Our concern was mostly with the financial effects of the permanent guarantee. We think the government guarantee stifles market processes in a way that encourages risk taking by Fannie and Freddie and blinds them to market signals that would indicate when to become more cautious. And we think the dominance of Fannie and Freddie is stifling innovation in housing finance. Everyone keeps doing conforming mortgages, rather than innovating, because that's the only game in town.
Over at Seeking Alpha, Gary A. points out that even those who do not totally condemn the guarantees of Fannie and Freddie should be worried about this development out of Basel. The problem: it takes away the option of the US government to decide whether or not the guarantees are a good idea. It's an attack on American sovereignty.
From Seeking Alpha:"The way that they would do this would be to allow the big TBTF ["too big to fail"] banks to buy massive amounts of GSE securities, and place them as part of the mandatory tier 2 capital. Once the banks were in this position, congress and the taxpayer would no longer have the choice to overturn the guarantees. Once the mortgage bonds were a part of tier two capital, any effort to overturn the guarantees would result in an immediate bank crisis.
"It is my view that these shenanigans would result in more ponzi easy money loans, as the government guarantee would erase any fear of making a bad loan. And worse yet, this exposes Basel 3 and the central bankers as the threat to sovereignty. I have been screaming about this attack on national sovereignty by a conspiracy of international bankers for months and even years now. Few listen. If there was any doubt in anyone's mind that the conspiracy of the new economic order was real, they should never have those doubts ever again!
"... The Tea Party is playing into the hands of these international bankers. They are, unless something changes, supporting Taxation without Representation, which is at the root of this Basel 3 push. The Tea Party wants to cut mainstreet spending which plays into the hands of the IMF and the international bankers. And one wonders if they realize that taxpayers will be on the hook for bailouts that they cannot ever reject, as Basel 3 intends to make the international financial system, as a whole, too big to ever fail. ..."
(Update: Gary replied to my question: "I was not blogging back in 2005, however I live in a [housing market] bubble city, and inventory was through the roof second half of 2005. My real estate buddy warned me and thanks to others, I found that it was a problem in many areas of the country." )
As to whether his dire predictions about the Fred-Fannie loan guarantees will come to pass -- I would have to plow through the entire agreement before I could begin to estimate how the new regulatory regime would play out for Americans. But the regulations are only recommendations at this point.
The agreement won't be ratified until the G-20 summit later this year. Then Tea Partiers will have until January 1, 2013 to figure out the maze of new regulations; the date is when individual G-20 member nations will vote on whether to adopt the regulations.
Of course the vote will not be put to individual voters. So if Gary A is right, Tea Partiers had damn well better hope they control the Congress come January 2013.