Volcker Rule

Named after Paul Volcker, former Chairman of The Federal Reserve, the rule bans banks from proprietary trading. Banks can invest in private equity and hedge funds but are capped at 3% of the fund’s capital. For Tier 1 capital, the investment can be more than 3%. This is an amended provision from the bill introduced in May, when banks were completely barred from investing in hedge funds and private equities. This change was made in response to the Massachusetts Republican, Senator Scott Brown, whose concerns were that the ban would torment Boston-based State Street Corp. Brown along with three other republicans was the first to vote for the Senate bill, breaking party ranks. Proprietary trading is now defined as a principle for trading account of banks and financial institutions that are supervised by the Fed for purchase, sale or any other transactions. Any bans on proprietary trading actually reduce profits. Goldman Sachs says that 10 percent of its annual revenue comes from proprietary trading.

Derivatives

In a last minute deal, lawmakers for the first time introduced a regulatory structure for $615 trillion in the counter derivatives market. This provision will push banks to use some of their swap trading into subsidiaries. This will reduce the taxpayers’ risk by barring their trades from institutions that receive federal benefits. Senator Blanche Lincoln, chairman of the Senate Agriculture Committee actually introduced the original proposal to ban all swaps-trading by commercial banks. But, later there were negotiations among all parties, secretaries and directors whereby it was agreed that banks can maintain their trading operations until and unless they are used to trade interest rates or hedge risk or foreign exchange swaps. Now, federally insured banks will get two years time to clear un-cleared default swaps to separate capitalized subsidiary.

Consumer Bureau

A protection bureau at the Federal Reserve to police banks and financial services against abuse from credit-card and mortgage-lending, will be created. This plan is in opposition to the opinion of Republicans and financial industries. Obama proposed a stand-alone consumer agency to prevent financial crisis. Travis Plunkett, the Director at the Consumer Federation of America, said “It’s an agency with considerable authority to protect consumers from abusive financial practices, which is a landmark achievement.”

This bureau will be an independent authority though it will be housed at the Fed. It will be responsible to write consumer protection rules for banks and firms that offer financial services and will be headed by a director appointed by the president. It will enforce rules for firms with more than $10 billion in assets.

Credit, Debit cards

The Federal Reserve will have the authority to limit swipe fees during debit card transactions. Now retailers can refuse credit cards for less than $10 purchases. U.S. merchants pay interchange fees in Visa and MasterCard debit cards. Last year, the fees amounted to $19.7 billion and accounted to 1.63 percent on an average for each sale.

Oversight Council

It is meant to establish financial stability. The ‘Oversight Council’ will monitor large Wall Street firms and other real players and would respond to system risks. It will be headed by the treasury department. With 2/3 of the vote, the council can leverage capital requirements on lenders and bring hedge funds and broker dealers under the Fed’s authority. It will also have the power to force companies to divest their holdings if they become a threat for the financial stability of the country.

Bank Capital Rules

Introduced by Senator Susan Collins, the bill will force some banks to show their capital. It is going to show its impact on ‘Trust Preferred Securities’ (TruPS). Banks with $15 billion in assets will find 5 years time to replace TruPS with common stock and other securities. It is found that smaller lenders sold $45 billion in TruPS out of the $150 billion issued by US banks. According to Richard Bove, analyst at Rochdale Securities, smaller banks like McLean, Capital One Financial Corp. & Buffalo and M&T Bank Corp would be hurt the most as they heavily rely on TruPS.

The Federal Reserve

The Federal Reserve will possess a broad supervisory scope and will bring transparency to its 96 year history. Headed by Chairman Ben S. Bernanke, a new Financial Stability Oversight Council will be created that will deputize the Fed to implement tough standards for disclosure, capital and liquidity. The rules will be the same for all financial companies and banks that pose a financial system risk. The Fed’s bank supervision was earlier curtailed but now the bill would allow the Fed to keep supervising banks like Goldman Sachs, Bank of America and Central Virginia Bank shares Inc, which have assets around $471 million.

There are also other provisions under this bill that enforces amendments in segments such as Credit Raters, Private Equity, Failed Firms, Risk Retention, Fiduciary Duty and the Insurance Industry. The changes have helped to regulate discrepancies in the US financial system with concessions granted to taxpayers and banks.

The new program is modeled after state initiatives known as capital access programs (CAP), in which borrowers, lenders and local economic development entities contribute a certain percentage to an investment fund that is used as collateral to support loans issued to borrowers, according to the Dow Jones Newswire.

CAPs have a strong record of lending to minority and women-owned business that may have had trouble getting credit or faced discriminatory lending practices.
Some critics worry that the new program might have some of the same problems that plagued the TARP plan. TARP funneled money to large and mid-size banks in order to boost small-business lending but it remains to be seen if that’s actually happened, said Dow Jones.
The Federal Reserve and FDIC have made a priority of bringing local business leaders and community banks together, an effort praised by the National Minority Business Council President and other groups.
“As a society, we must level the playing field and make capital more available to small enterprises,” Javier Palomarez, president of the U.S. Hispanic Chamber of Commerce.

In an effort to spur the economy, the federal funds rate has been near zero since December 2008, but some economists contend that keeping interest rates so low doesn’t help the economy, and in fact, could raise inflation.

Critics say that the low rates contribute to banks not lending to consumers and small businesses. “One of the reasons lending is having such a hard time getting off the ground is that interest rates are so low,” Brian Wesbury, chief economist at First Trust Portfolios, told CNN. “Why would someone lend to a risky small business at 3.5%, especially if you expect rates to go up?”

Bernanke and others believe that raising interest rates could derail recent economic gains, especially in the housing market. Analysts say even a modest rate increase could lift mortgage rates and create another wave of home foreclosures, according to CNN.

The 22 banks that got the most help from the Treasury’s bailout programs have cut their small business loan balances $12.5 billion since April, when the Treasury began requiring them to file monthly reports, according to CNNMoney.com.

Bankers defend the cuts, saying small business loans are too risky and fewer entrepreneurs are seeking credit because of the recession.
But many small business owners say lending standards have grown more restrictive the past three years, and a report from the Federal Reserve backs that up, said CNNMoney.com.

Earnings at most big banks have turned around. JPMorgan, for example, reported earnings of $3.3 billion in the last quarter of 2009.

A number of politicians including the president have railed against bank executives for their unwillingness to free up credit while continuing to dole out huge employee bonuses.

Rep. Peter Welch, D-Vt., introduced a bill calling for a 50 percent tax on bonus compensation in excess of $50,000 at banks that received government bailout money. All revenue raised from the tax would go directly to the Small Business Administration to fund a new direct lending program, said CNNMoney.com.

“You are in that period where the recession is over but you don’t have job growth. And until we get job growth, nobody is going to believe the recession is over,” John Canally, an economist for LPL Financial in Boston, said in a Wall Street Journal article.

The unemployment rate tops 10 percent in 14 states, according to the Labor Department.

While the business climate is getting better, the report also noted that the commercial real estate market is still weak. Regional banks haven’t freed up business lending, so many empty storefronts remain vacant.

Cities with federal projects funded by the federal stimulus bill, such as Cleveland, Chicago, Minneapolis and Dallas, are the only areas reporting an increase in commercial real estate activity, according to the Wall Street Journal.

“I look for markets that are downtrodden,” Rich Lehrer, a North Carolina investor, told the magazine. “I’m expecting to get better yields than I would get on my cash.”

Sales on the Gulf Coast of Florida, California’s Inland Empire near Los Angeles, and the Las Vegas metropolitan area surged by more than 80 percent in February against the same month last year, the report said.

One person interviewed, a 31-year-old Las Vegas resident, scored a $140,000, 3-bedroom home that previously sold for $350,000, the report said.

So onto the million-dollar question: “Are we at the bottom?” Christopher Thornberg, an economist with Beacon Economics, asked BusinessWeek. “We are getting close.”

Most experts believe that in some areas the pendulum has swung so far in the opposite direction of the bubble that sellers can’t help but get back in the market. That said, it might just signal a floor to falling real estate prices, not a swing back north.

BusinessWeek said inventories — always deeply connected to price — are “falling fastest in markets where speculators and first-time buyers are driving the action. Those parties don’t have to put their own homes on the market to make a deal. It remains vexingly difficult for home-owners who have bought in the past five or so years to sell one property and buy another. On top of that, government incentives of up to $8,000 in tax credits for first-time buyers and low mortgage rates engineered by the Federal Reserve are luring shoppers who otherwise would be sitting out. If the government were to take away the punch bowl, markets that seem to be bottoming could well turn down again.”

In a Feb. 10 Reuters story carried by Businessworld , Treasury Secretary Timothy Geithner was set to lay out a rescue plan based on a mix of public and private funds to wipe clean $500 billion of such troubled assets.

While details were light, Reuters reported that sources said the plan would also extend a Federal Reserve program allowing the U.S. central bank to extend up to $1 trillion in loans.

But what was clear in the days following the announcement was that the U.S. had learned from the shocking failure of investment bank Lehman Brothers, which went under in September, marking the largest bankruptcy in U.S. history, and would not let other banks fail.

The plan also included a huge boost in the government’s stakes in one key bank, Citibank, bringing it up to a possible 36 percent, reports said.

Geither’s plan follows a Feb. 9 press conference where President Barack Obama told reporters that cleaning up banks’ balance sheets was a priority and didn’t rule out the possibility that it will take more money than the $700 billion Congress already has approved to complete the job, Reuters said.

“We don’t know yet whether we’re going to need additional money or how much additional money we’ll need until we see how successful we are at restoring a level of confidence in the marketplace,” Obama said.

Obama then called on Congress to speedily approve both Geithner’s plan and an economic stimulus package to complement the revamped bank-rescue proposals, Reuters said.

“If you delay acting on an economy of this severity, then you potentially create a negative spiral that becomes much more difficult for us to get out of,” Obama said. “This is not your ordinary, run-of-the-mill recession, we are going through the worst economic crisis since the Great Depression.”

Geithner, the former president of the New York Federal Reserve Bank, said banks will be closely monitored and tested.

“The spectacle of huge amounts of taxpayer money being provided to the same institutions that helped cause the crisis, with limited transparency and oversight, added to public distrust,” Geithner said in remarks prepared for delivery after the release of the new measures, Reuters said.

Republican lawmakers fiercely opposed the plan, while some Democrats joined the chorus, saying it didn’t go far enough.

It advanced earlier in the month after squeaking by in a procedural vote in the Senate with mostly Democratic support. But then business groups and GOP officials began seeking broader Republican backing, USA Today said in a story in its Feb. 9 editions. Key support appeared to come from GOP governors eager for federal dollars to help plug enormous state budget gaps.

To the administration, the plan perhaps couldn’t come together fast enough. Economic indicators continued to slide and Wall Street did little more than lurch day to day. In the week before the expected signing, the Dow shed 5.2%.

Here’s what’s inside the package, according to USA Today:

• $1 trillion from the Federal Reserve to buy bonds and other assets to boost consumer loans.
• $500 billion to $1 trillion from the government and private investors to buy distressed securities from financial institutions.
• $545 billion in spending, $293 billion in tax cuts in the Senate stimulus which was later reconciled with the $820 billion House version.
• $50 billion from the government to stem mortgage foreclosures.

Speaking in Austin, Texas on Dec. 1, Ben Bernanke, chairman of Federal Reserve, defended the central bank’s approach to the crisis so far, warned of a tough road ahead and advocated for more intervention.

Speaking in Washington the same day, Treasury Secretary Henry M. Paulson Jr. concurred, acknowledging “the journey ahead will continue to be a difficult one,” according to a Dec. 2 story in The New York Times.

Fiscal-policy officials are looking for more regulatory ammunition particularly in areas they feel are critical to the economy.

Bernanke, making his first major policy speech since the end of October, the Times said, acknowledged the limitations of interest rate cuts and suggested more attention would be paid to backstopping credit markets. Yet at the same time, Bernake indicated his preparedness for a December rate cut.

His view of the country’s immediate financial future was somber.

“The likely duration of the financial turmoil is difficult to judge,” he said. “But even if the functioning of financial markets continues to improve, economic conditions will probably remain weak for a time,” citing job losses, weak consumer confidence and a lack of credit, all significant drags on consumer spending.

Bernanke also acknowledged the limits of the Fed’s actions from the last few months, the Times said.

“Judging the effectiveness of the Federal Reserve’s liquidity programs is difficult,” he said, making note of the fact credit markets were still under lockdown. “But I am confident that market functioning would have been more seriously impaired in the absence of our actions.”

This article was submitted by Kathleen O’Connor, a contributing writer for Biz2Credit. Biz2Credit is a small business marketplace that provides entrepreneurs with the latest industry news and financial advice. Send all questions to info@biz2credit.com.