Marketplace Scratch Pad

Morning Reading

Scott Jagow Jan 22, 2010

Happy Friday. Among this morning’s items — more analysis of the president’s new bank regulation proposals, Obama puts Social Security on the chopping block, plus a look at why the SEC is so ineffective.

The President gets serious about moral hazard (Wall Street Journal)

Phony populism aside, yesterday Mr. Obama introduced his first serious idea into the debate on reforming the financial system. In calling for an end to proprietary trading at firms with a federal safety net, the President showed that he now understands an important principle: Risk-taking in the capital markets is incompatible with a taxpayer guarantee.

The days ahead will demonstrate whether Mr. Obama is serious, or if this is merely a political tactic to encourage Republicans to defend big banks. If he’s serious, he will add to his plan a taxpayer exit strategy from the most expensive bailouts–at Fannie Mae and Freddie Mac.

But the president’s proposals target the wrong problems (Times of London)

… banks created the crisis not because of size but out of cluelessness. A typical bank is many times more highly leveraged than a hedge fund. It is better to limit banks’ borrowing than restrict their activities. An integrated bank, combining retail and securities businesses, can generate economies of scale and thereby make higher profits. The crisis has demonstrated that there must be more things for a bank to achieve than returns for shareholders. But there is no sense in placing limits on banks that contribute little to the stability of the financial system while making it more difficult to turn a profit.

The SEC’s failures are many (Washington Post)

Kolchinsky is one in a series of whistleblowers who in recent years tried to tip off the SEC to potential wrongdoing, only to be ignored, misunderstood or left to wonder whether they were being listened to. The SEC has no system in place to guide how officials should handle tips and complaints from outsiders, making it difficult for investigators to take advantage of an invaluable source of information.

This failure helped to continue two of the most celebrated frauds of the last decade for several years, potentially costing unwitting investors millions of dollars. Countless others may have been left vulnerable to shysters because of warnings that went unheeded.

A bomb squad for Wall Street (New York Times) On over-the-counter-derivatives.

Obama puts Social Security on the chopping block (Mother Jones)

Health care overhaul may be mortally wounded (NPR)

A funny headline (Reuters) Read carefully.

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