Paulson’s Pitch: A New Regulatory Framework

The Fed's new "Unified Regulatory Framework" is about to be unveiled, which should provide a bit more clarity for confused analysts who are grappling to understand the Fed's facilities and ultimate backstop.

Hank Paulson believes the Fed should have the “authority to access necessary information from highly complex financial institutions and the responsibility to intervene in order to protect the system”.

But he will stop short of proposing a dramatic expansion in powers for the US central bank.

His comments come just over a week after Tim Geithner, president of the Federal Reserve Bank of New York, said that “globally active” banks and investment banks should operate under a unified regulatory framework with “appropriate requirements for capital and liquidity”. Financial Times

Yes, behind the scenes it would seem the regulators have been encouraging the brokers to get their houses in order; Goldman de-levered last quarter after previously claiming they would stand pat, and emerged with the largest liquidity pool in their history. Merrill is looking to raise cash by possibly selling off stakes in Bloomberg LP and Blackrock Inc., which might enable them to avoid Lehman's fate, being forced to raise capital at a most inopportune time.

With carrots failing to produce the desired effects, the Treasury is breaking out its stick, and keeps beating on a theme:

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“Move along ,there is nothing to see here.”

Herbert H. Lehman (1878-1963)
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“As we work through the immediate issues associated with the primary dealers’ access to the Fed’s facilities, we must also begin in earnest the serious work it will take to transform our current regulators’ structure into something closer to what we envisioned in the blueprint,” Mr Paulson will say.... A US Treasury official said Mr Paulson would also make clear that access to the Fed emergency cash for investment banks was temporary.

Paulson’s words come on the heels of Robert Steel’s speech last week, in which he provided some clues to the Treasury;s stance. The brokers will not be forced to slum it with their commercial banking brethren, but there is a devil in these details, and the Fed’s lending facilities are going away, likely within 90 days or so..

While I often suspect Goldman alums (Steel, Paulson, et al) for favoring 85 Broad, they have likely done Lehman a major favor this time around. However, the lifeline they threw Dick Fuld is about to be reeled in. To be sure, Fuld has not shown up hat in hand since April 16th, but based on his body action, Paulson is sticking to his guns.

But will an emergency backup facility takes its place?

Federal Reserve Chairman Ben S. Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox and their staffs are in almost daily discussions about the future of the so-called Primary Dealer Credit Facility, said one of the officials on condition of anonymity.

The Treasury and SEC want the program, designed to be in place until at least September, to be temporary. The discussions with the Fed center in part on what precautions might need to be in place in case a large securities company with hundreds of trading counterparties faces failure, as was the case with Bear Stearns Cos. Bloomberg

Meanwhile, the dust continues to settle from the recent earnings releases of three of the largest brokers. While Lehman claims its current liquidity position will suffice, Goldman’s boasts would seem to indicate that record levels of liquidity are mandatory as the hatches are battened down across the Street…

Lehman’s conference call laid out the progress thus far :

....we have significantly increased our cash capital surplus to $15 billion from $7 billion at the end of the first quarter, and our liquidity pool to $45 billion from $34 billion. We completed our funding plan for 2008. We’ve issued all the long-term debt necessary to refinance current portions this year and do not expect to return to the market, with the exception of possible opportunistic pre-fundings for 2009.

We have also increased the funding provided by our banks and we will continue to grow this funding source. We had $47 billion of assets funded in our bank as of the second quarter, up from $44 billion at both the end of the first quarter and year-end. This represents around 19% of our inventory today, up from around 14% at the end of the first quarter.

Our holding company liquidity position, which does not include liquidity at our regulated broker dealers and banks, nor the $4.5 billion in long-term committed unsecured bank facilities, is available to mitigate the liquidity impact of a severe stress event. Seeking Alpha

You get the idea, and if you need to see more about their liquidity discussion on the recent conference call you can go here.

$45 billion worth of belts and suspenders might save the day; and while it might not be pretty, it is the brokers only hope to keep their shirt on their back, and the wolves at bay, as the braintrust in Washington irons out the final accommodations.

Paulson’s speech starts at 12:45 sharp.

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Belt and Suspenders- Careful - not taking any chances.

Origin--Belts and braces (a.k.a. bracers) are meant to hold one’s trousers up. Going ‘belt and braces’ is a double insurance against having them fall down. The figurative use, as a general term for cautiousness, was coined around the mid-20th century.
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Bank bailout shows need to intervene
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Lehman Brothers F2Q08 (Qtr End 5/31/08) Earnings Call Transcript
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