RJ and Makay

A recent inquiry by Senators Carl Levin and Tom Coburn has yielded 19 recommendations to deal with high-risk lending, regulatory failures, inflated credit ratings, and investment bank abuses. The recommendations, published on April 13, are as follows.

High risk lending:

1. Ensure "Qualified Mortgages" Are Low Risk - Federal regulators should use their regulatory authority to ensure that all mortgages deemed to be "qualified residential mortgages" have a low risk of delinquency or default.
2. Require Meaningful Risk Retention - Federal regulators should issue a strong risk retention requirement under Section 941 by requiring the retention of not less than a 5% credit risk in each, or a representative sample of, an asset backed securitization's tranches, and by barring a hedging offset for a reasonable but limited period of time.

3. Safeguard Against High Risk Products - Federal banking regulators should safeguard taxpayer dollars by requiring banks with high risk structured finance products, including complex products with little or no reliable performance data, to meet conservative loss reserve, liquidity, and capital requirements.

Don't expect a fiduciary standard for broker-dealers (B-Ds) before late July of this year, more than a year after passage of the Dodd-Frank financial reform law requiring such a standard.

What's the hold-up? Various federal agencies are haggling over the details of the new fiduciary standard, which will apply to investment advisors, as well, says Jennifer B. McHugh, senior advisor to Securities and Exchange Commission (SEC) chairman Mary L. Schapiro.

Morgan Stanley, like other investment banks, has had a tough time in the fixed-income, currency, and commodities trading markets recently. Making a profit in those markets has been more difficult, largely because trading activity declined so much as a result of the financial crisis and recession.

But that's not stopping Morgan Stanley's CEO James Gorman.