The stock market hit a new high for the year this week, and Wall Street bonuses are resurgent. The financial sector is booming... but legislation to reform the financial system is still stuck in Congress.
It's a little like watching a recovering cancer patient sit up in bed and reach for the cigarettes.
How do we make sure the weakness that spread throughout the financial system doesn't return? Some ideas were recently presented by none other than... the financial sector. The Association of Mortgage Investors delivered a proposal for financial market reform to Congress
this past week.
The Association represents institutions and asset managers that buy bonds backed by mortgages. Bond buyers from hedge funds to banks to pension funds provided much of the money that inflated the housing bubble. The trillions of dollars they spent buying housing bonds paid for millions of home loans, including many mortgages that probably shouldn't have been made.
But we need private investors who put money into mortgages. Without them, either the federal government would have to invest taxpayer dollars (as it has been doing with its massive mortgage-backed security buying program that just ended
) or very, very few people would be able to get home loans.
In the wake of the financial collapse, these bond investors would like to feel more confident
that bonds have some real value and avoid putting money into loans that put their investment and the broader economy at risk. A triple-A rating from Moody's Investors Service or Standard & Poors is no longer provides the confidence that it used to
Here are some of their recommendations:
• The investors want the financial companies that issue bonds to provide information on all the home loans that are pooled together to create the bonds - and they want this information to be updated on at least a monthly basis.
• The bond buyers want a two-week "cooling off" period between the time bonds are auctioned on the market and the time investors have to close the deal. The extra time would give bond investors a chance to poke into the deal and make sure that the individual mortgages are not, you know, about to go into foreclosure.
As so on. It all sounds like common sense. But why didn't we have rules like this before? Look at recommendation # 5: "Develop clear standard definitions for securitization markets." So up till now people have bought and sold trillions of dollars in securities with ever nailing down the definitions of what they were buying and selling?
The short answer is yes. That's why we need financial market reform.