Group of 30 report could portend regulatory changes

A Group of 30 report, whose co-author is Obama adviser Paul Volcker, calls for limiting the size of banks, prohibiting large banks from engaging in hedge funds, limiting their proprietary trading, and making them retain pieces of CDOs they underwrite. Large insurance companies and brokerage firms need oversight by an appropriate regulator, the report said. Money markets should be reogranized as special banks with government insurance, with no more "amortized cost pricing," meaning no more stable NAVs.

The report called for higher capital requirements, " given the demonstrable limitations of even the most advanced tools for estimating firmwide risk."

And regulators will need good luck to ensure this recommendation: "In all cases, countries should explicitly reaffirm the insulation of national regulatory authorities from political and market pressures."

A Washington Post story is here.

Coming full circle on the TARP

A story in the Wash. Post. lays out what the Obama administration is thinking about the credit crisis. Buy bad assets through a "bad bank" is one option, and requiring private investors to match terms of bailouts is the other.

Re buying bad assets, the Post hits what has, I think, been the nub of the problem:

The difficulty is that banks think their assets are worth more than investors are willing to pay. If the government sides with investors, the banks will be forced to swallow the difference as a loss. If the government pays what the banks regard as a fair price, however, the markets may ignore the transactions as a bailout by another name.

Most economists favor an approach in which the government would pay market prices, and then help the banks cover the losses through a program of capital injections.