RTFA: http://www.reuters.com/article/BANKSL/idUSN0725372…

Senators were outraged by the lack of details about where the bailout money has gone.

“That we find ourselves in this situation at all is … quite frankly, sickening,” said Senator Christopher Dodd, the Democrat who chairs the committee. “The lack of transparency and accountability in this process has been rather stunning.”

Eric Dinallo, superintendent of New York State’s Insurance Department, railed on Friday against AIG’s failed business model, likening its insuring credit-default swaps as gambling with somebody else’s money.

“It’s like taking insurance on your neighbor’s house and even maybe contributing to blowing it up,” he said at a panel sponsored by New York University’s Stern School of Business.

U.S. lawmakers have said they are running out of patience with regulators’ refusal to identify AIG’s counterparties.

On Thursday, Richard Shelby, the top Republican on the banking committee, said: “The Fed and Treasury can be secretive for a while but not forever.”

Agreed. What happened to Obama’s transparent government pledge and what is the point of hiding this information?

More than a decade ago, a bunch of banks thought it would be a good idea to make some plans for … cooperation. Recent events have … enhanced cooperation.

RTFA: http://www.fsforum.org/about/history.htm

On October 3, 1998, the Finance Ministers and Central Bank Governors of the G7 countries commissioned Dr Hans Tietmeyer, President of the Deutsche Bundesbank, to recommend new structures for enhancing co-operation among the various national and international supervisory bodies and international financial institutions so as to promote stability in the international financial system.

G7 Ministers and Governors reinforced their commitment to reforms to the international financial system and financial stability in a declaration issued on 30 October 1998. He recommended the creation of a Financial Stability Forum.

Dr Tietmeyer presented his report to G7 Ministers and Governors at the meeting in Bonn on 20 February 1999 and G7 Ministers and Central Bank Governors endorsed the creation of a Financial Stability Forum (FSF) bringing together:

*
national authorities responsible for financial stability in significant international financial centres, namely treasuries, central banks, and supervisory agencies;

*
sector-specific international groupings of regulators and supervisors engaged in developing standards and codes of good practice;international financial institutions charged with surveillance of domestic and international financial systems and monitoring and fostering implementation of standard;

*
committees of central bank experts concerned with market infrastructure and functioning.

The FSF was first convened on 14 April 1999 in Washington. Mr Andrew Crockett, General Manager of the Bank for International Settlements, was appointed Chairman of the FSF in a personal capacity.

Here’s a smidgen of extra information from Wikipedia:

The Financial Stability Forum is a group consisting of major national financial authorities such as finance ministries, central bankers, and international financial bodies. The Forum was founded in 1999 to promote international financial stability. Its founding resulted from discussions among Finance Ministers and Central Bank Governors of the G7 countries, and a study which they commissioned.[1]

The Forum facilitates discussion and co-operation in supervision and surveillance of financial institutions, transactions and events. FSF is managed by a small secretariat housed at the Bank for International Settlements in Basel, Switzerland.[2] It is chaired by Mario Draghi, an Italian banker and economist who became the governor of the Bank of Italy in January 2006 for a six-year term.

The FSF membership includes about a dozen nations who participate through their central banks, financial ministries and departments, and securities regulators, including (in descending economic size): the United States, Japan, Germany, the United Kingdom, France, Italy, Canada, Australia, the Netherlands and some other industrialized economies.[3] It also includes several international economic organizations. [4] At the G20 summit on 15 November 2008 it was agreed that the membership of the FSF will be expanded to include emerging economies, such as China.

I’m sure you’d like to know more, but so would I.

RTFA: http://en.wikipedia.org/wiki/Basel_ii

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

It’s interesting to note the timing of this work. Basel II guidelines were originally published in 2004? It makes one question how much of our current financial crisis had been foreseen.

I was tipped off to Basel II from Michael Lewis and David Einhorn’s great editorial in the New York Times, which had a few suggestions for repairing the US Financial system:

Impose new capital requirements on banks. The new international standard now being adopted by American banks is known in the trade as Basel II. Basel II is premised on the belief that banks do a better job than regulators of measuring their own risks — because the banks have the greater interest in not failing. Back in 2004, the S.E.C. put in place its own version of this standard for investment banks. We know how that turned out. A better idea would be to require banks to hold less capital in bad times and more capital in good times. Now that we have seen how too-big-to-fail financial institutions behave, it is clear that relieving them of stringent requirements is not the way to go.

Another good solution to the too-big-to-fail problem is to break up any institution that becomes too big to fail.

This editorial about “fixing the financial crisis” is a followup to their earlier editorial describing the problem:

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

Great stuff! …but where does Basel II fit in? The timing truly is strange – what motivated its creation? How early were banks aware of the impending disaster?