White House senior economic adviser Lawrence Summers says ‘Time has come’ for deep change for banks.

“Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country — by accepting the necessary regulation to protect the American people,” Summers said in remarks prepared for delivery at the Economist’s Buttonwood Gathering in New York.

“There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.”

In calling for financial-services companies to accept new regulations, Summers said bank executives and other financial-industry managers should consider the recent financial crisis within the context of a broader set of crises that have occurred in recent years, including the Latin American debt crisis, the 1987 stock-market crash, the savings-and-loan debacle, the Mexican financial crisis, the Asian financial crisis, the collapse of Long Term Capital Management and the bursting of the dot-com bubble.

“[We have] one crisis every three years,” Summers said. “Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform.”

98% Exempt From Oversight

Inquiring minds are reading the New York Times article Bill Shields Most Banks From Review.

Bowing to political pressure from community bankers, the House Financial Services Committee approved an exemption on Thursday for more than 98 percent of the nation’s banks from oversight by a new agency created to protect consumers from abusive or deceptive credit cards, mortgages and other loans.

The carve-out in legislation overhauling the regulatory system would prevent the new consumer financial protection agency from conducting annual examinations of the lending practices at more than 8,000 of the nation’s 8,200 banks, leaving only the largest banks and other lenders subject to the agency’s examiners.

Earlier in the day, the committee completed its work on a different contentious provision of the legislation when, on a nearly straight party-line vote of 43 to 26, it approved tougher regulations over the derivatives market. That provision, too, contained exemptions for many businesses.

Under the Miller-Moore amendment, the new agency would have the authority to write rules for all banks and other lenders, including lenders that have never faced significant regulation. But the banks with assets of less than $10 billion and credit unions smaller than $1.5 billion would not face regular exams by the agency.

While the administration quickly embraced the derivatives legislation, a top regulator appointed by President Obama indicated that compromises made to win the support of moderate Democrats led to problematic loopholes. The regulator, Gary G. Gensler, chairman of the Commodity Futures Trading Commission, vowed to try to strengthen the measure when it is considered by a second House committee next week.

Robert G. Pickel, the chief executive of the International Swaps and Derivatives Association, a trade group, said the legislation would “force people to trade a certain way, which ultimately means parties would have less flexibility to effectively manage their risks.”

But Ed Mierzwinski, consumer program director at the United States Public Interest Research Group, said the legislation had “broad exceptions that swallow any rule it creates.”

Until final legislation is passed it is tough to know what they will come up with. However, we can be certain of this:

These bills will attempt to prevent the last problem (dependence on residential and commercial real estate for earnings), while creating a breeding ground of loopholes that will form the foundation for the next crisis.

Goldman Sachs will probably be in the middle of it all, benefiting from whatever legislation is passed (even if at first glance it appears otherwise).

Mike “Mish” Shedlock
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