Financial markets clobbered early, but end Thursday down 3 percent: The Dow Jones Industrial Average lost almost 1,000 points and then recovered enough to close the day down a significant, but not devastating, 348 points. The S&P 500 lost 38 points and the Nasdaq dropped 83 points. Each of the markets lost a little more than 3 percent. The biggest one-day loss in the Dow’s history was 777 points, or 7 percent. Crude oil prices on Thursday dropped to levels not seen since February. The euro dropped 1.5 percent from Wednesday and briefly traded at its lowest level since March 2009. At the same time, the price of gold rose 3 percent to a five-month high of $1,200 an ounce, nearing an all-time record in after-hours, electronic trading on Thursday.
The lesson from the financial crisis: Treasury Secretary Timothy Geithner on Thursday said that the lesson of this crisis is that we cannot move the functions necessary for businesses to raise capital and hedge risk outside the reach of strong regulation. In prepared testimony before the Financial Crisis Inquiry Commission (FCIC), the group created by Congress to determine the causes of the financial crisis, the secretary said, “No single entity had the authority to act to limit the emerging risk in funding markets financed by money market funds. … No regulator or supervisor had the legal authority to look across the financial system and take action to prevent the diversion of activity away from regulation.” According to the secretary, the Fed was unable to enforce capital requirements, the Securities and Exchange Commission (SEC) was unable to regulate investment banks, and the OTC had no authority to effectively supervise companies such as AIG.
“The least knowledgeable people?” One of the recurring proposals of the financial reform debate is creating a council of regulators to monitor U.S. banks and financial companies. But FCIC member Peter Wallison has questioned whether a council of regulators would have any more success than any single agency. Mr. Wallison is quoted in an interview saying: “The regulators are the least knowledgeable people about what is actually happening in the market.”
Window dressing: One of the key topics for the FCIC this week is how banks continue to modify their balance sheets right before reporting their results, often with loans from private special-purpose vehicles and hedge funds. According to the New York Times, industry analysts say that, even now, many financial companies routinely obscure their assets and risks in their quarterly financial statements through a variety of practices. Lending shares, using swaps and “netting” are all legal practices, but they are not recorded on the banks’ books, almost never publicly reported and may result in significant risks. The Times reports that the SEC is examining the borrowing practices of nearly two dozen financial companies, but it is unclear if they will turn up any wrongdoing.
Labor goodies in the financial reform bill: Politico outlines two provisions of the pending bill that organized labor apparently loves. One gives the SEC the power to force the names of outside nominees onto the corporate ballot, giving large, long-term investors, like the pension funds that fund union members’ retirements, more access to board seats. The other change would require directors running in an uncontested election to win a majority, rather than plurality, of votes cast. Unions maintain that too many boards are made up of corporate-approved members who are not accountable to shareholders. Business groups have opposed these provisions as forcing the companies to fund labor candidates and giving labor more leverage over company operations.
Net neutrality: In 2002, the Federal Communications Commission (FCC) deregulated the Internet. Next week, FCC Chairman Genachowski is set to circulate a notice to reclassify cable and phone Internet lines as common carrier services subject to FCC jurisdiction. Consumer advocates are ecstatic; phone and cable companies are not. The proposal would establish “net neutrality” rules, which President Obama made a campaign priority. Net neutrality rules would prohibit Internet providers from blocking or slowing access to specific Web sites. At stake is how far the FCC can go to regulate how Internet providers manage traffic on their own multibillion-dollar networks. In the past, the FCC had not pursued any regulation of the Internet.
Internet privacy bill: A bill was introduced in the House this week that pits consumer advocates against the advertisers in the $23 billion online advertising market. The draft bill’s chief proponent, Rick Boucher, Virginia Democrat, the chairman of the House Subcommittee on Communications, Technology and the Internet, said it’s designed to strike a middle ground between privacy protection and the need for online companies to benefit from interactive and targeted advertising. The Electronic Privacy Information Center said it is disappointed by the proposed bill, which it says will do little to nothing to stop companies from collecting and using information.