One Step in the Right Direction

Very soon our president will sign into law the Financial Overhaul Bill of 2010. This 390,000 word document was created from the ashes of the 2008 banking collapse that brought the worlds financial systems to its knees. The bill, being released from the Senate next week, will be the heaviest piece of legislation ever created and the most sweeping reform bill since the great depression. Though the repercussions of the bill will not be felt for years, it stands to protect consumers from predatory lending, sets up systems to more heavily scrutinize financial institutions and generally make banking a more transparent operation.

This is not the first time the banking system has failed though. The Savings and Loan crisis of late 1980's was the first major event to call into question where banking executives bread was being buttered. Systems become corrupt when individuals that are being compensated by volume incentives are told to "ethically police" the system. Any organization managed only by its internal components is doomed to fail. Leaving the Rooster in the hen pen will not always make more chickens.

In my opinion the reform bill is a very good thing. Being an ex-mortgage banker myself and experiencing first-hand the rise and fall of the financial industry, banks need more scrutiny for their own good. Consumers will be the residual beneficiaries of the bill, but so will the global banking system. Initially, as in 1991 when the S & L Reform Bill came into law, there will be complaints, increased fees and substantially greater processing times, but over time the global banking system will be in better synchronicity. This is one step in the right direction.

http://www.dallasnews.com/sharedcontent/dws/news/washington/stories/DN-overhaul_16nat.ART0.State.Edition1.29a137f.html

How European Woes Effect You

The European debt crisis is showing new signs that its credit problems are far from over. The European Nations, being one of the largest buyers of US mortgage backed securities manufactured from 2004-2007, is beginning to face the fact that their exposure to sovereign debt could haunt them for years to come. In 2009 US banks imposed “stress tests” on their ability to adequately provide sufficient liquidity during an emergency run on assets and avoid another round of government bank bailouts. European banks are now implementing similar tests.

Highly publicized economic events show stress on the system such as Greece’s public revolts against reforms as the government slashed programs and raised taxes to cover their mounting debts. Germany and Spain are also engaging economic reforms restructuring debt, reducing political banking appointees and branches. The Bank of England, in similar fashion, recently increased their “capital cushions” to protect banks liquidity.

How do European credit woes affect you? Banks are trying to avoid another liquidity crisis by increasing reserve requirements. These reforms have made rates banks lend to each other (over night funds) increase. Tighter banking reforms will drain the system of liquidity. Less liquidity will hinder banks ability to lend freely. Underwriting guidelines will become tighter and loan application scrutiny will increase. If you haven’t applied for a loan in a few years get ready for a new experience. Tighter regulation will not only affect the amount of information you will have to provide, but also lengthen the process, increase costs and ultimately may hinder your loan approval. Over the long term these reforms will provide a more stable global financial structure with significant safety valves, both high and wide, to protect itself from another melt down. Over the short term there will be more pain and less gain.