Financial Reform: Where's The Debate?

By Simon Johnson

The New York Times reports that financial reform is the next top priority for Democrats.  Barney Frank, fresh from meeting with the president, sends a promising signal,

“There are going to be death panels enacted by the Congress this year — but they’re death panels for large financial institutions that can’t make it,” he said. “We’re going to put them to death and we’re not going to do very much for their heirs. We will do the minimum that’s needed to keep this from spiraling into a broader problem.”

But there is another, much less positive interpretation regarding what is now developing in the Senate.  The indications are that some version of the Dodd bill will be presented to Democrats and Republicans alike as a fait accompli – this is what we are going to do, so are you with us or against us in the final recorded vote?  And, whatever you do – they say to the Democrats – don’t rock the boat with any strengthening amendments.

Chris Dodd, master of the parliamentary maneuver, and the White House seem to have in mind curtailing debate and moving directly to decision.  Republicans, such as Judd Gregg and Bob Corker, may be getting on board with exactly this.

Prominent Democratic Senators have indicated they would like something different.  But it’s not clear whether and how Senators Cantwell, Merkley, Levin, Brown, Feingold, Kaufman, and perhaps others will stop the Dodd juggernaut (or is it a handcart?)

This matters, because there is more than a small problem with the Dodd-White House strategy: the bill makes no sense.

Of course, officials are lining up to solemnly confirm that “too big to fail” will be history once the Dodd bill passes.

But this is simply incorrect.  Focus on this: How can any approach based on a US resolution authority end the issues around large complex cross-border financial institutions?  It cannot.
The resolution authority, you recall, is the ability of the government to apply a form of FDIC-type intervention (or modified bankruptcy procedure) to all financial institutions, rather than just banks with federally-insured deposits as is the case today.  The notion is fine for purely US entities, but there is no cross-border agreement on resolution process and procedure – and no prospect of the same in sight.

This is not a left-wing view or a right-wing view, although there are people from both ends of the political spectrum who agree on this point (look at the endorsements for 13 Bankers).  This is simply the technocratic assessment – ask your favorite lawyer, financial markets expert, finance professor, economist, or anyone else who has worked on these issues and does not have skin in this particular legislative game.

Why exactly do you think big banks, such as JP Morgan Chase and Goldman Sachs, have been so outspoken in support of a “resolution authority”?  They know it would allow them to continue not just at their current size – but actually to get bigger.  Nothing could be better for them than this kind of regulatory smokescreen.  This is exactly the kind of game that they have played well over the past 20 years – in fact, it’s from the same playbook that brought them great power and us great danger in the run-up to 2008.

When a major bank fails, in the years after the Dodd bill passes, we will face the exact same potential chaos as after the collapse of Lehman.  And we know what our policy elite will do in such a situation – because Messrs. Paulson, Geithner, Bernanke, and Summers swear up and down there was no alternative, and people like them will always be in power.  If you must choose between collapse and rescue, US policymakers will choose rescue every time – and probably they feel compelled again to concede most generous terms “to limit the ultimate cost to the taxpayer” (or words to that effect).

The banks know all this and will act accordingly.  You do the math.

Once you understand that the resolution authority is an illusion, you begin to understand that the Dodd legislation would achieve nothing on the systemic risk and too big to fail front.
On reflection, perhaps this is exactly why the sponsors of this bill are afraid to have any kind of open and serious debate.  The emperor simply has no clothes.

Let The Sun Shine In......

Congress: GET IT RIGHT ON FINANCIAL REORM....

.....or else. 

We mean it! 

We are tired of corporate types getting, literally, away with murder. Just remember where the votes are and don't think for a minute that you can get away with what you once did. We are watching you and informing our friends.

by Meg White

Like most political writers, I like studies. Sometimes the data give me semi-factual fodder for my opinions and other times a reason to reexamine my preconceptions.

Thing is, there are so many studies that people often only read the ones that have conclusions with which they already agree. In the worst cases, the request for a study to be undertaken in the first place is not an attempt to gain further knowledge, but a delay tactic.

And I'm afraid such is the case with the proposed government studies folded into the financial reform legislation working its way through Congress.

The New York Times writes today that those studies (roughly 38 in the House bill and 24 in the Senate) will "effectively delay for up to two years the possibility of addressing" the problems that led up to the financial crisis in the first place, and may prevent new regulations from being implemented until then. Reading between the lines of the piece, it's clear that the studies are less about information-gathering and more about mollifying the banking industry (emphasis mine):

Overly optimistic credit ratings and investors’ dependence on the credit rating agencies, for example, were shown to have contributed to the subprime mortgage mess. But the Senate and House bills call for four to six separate studies of up to 30 months’ duration of how credit ratings agencies work, how they are compensated and what can be done to make their ratings more relevant to investors.

Regulators have been investigating some of these same matters, and issuing new directives about them, since at least the early 1990s.

Several of the studies focus on proposals that are vigorously opposed by banking industry groups or Wall Street firms, like a change that would make stock brokers subject to the same fiduciary standards as financial advisers — that is, to act in the best interest of their customers. 

The Senate bill calls for a new study even though the Securities and Exchange Commission commissioned a similar report in 2008. At the same time, the new bill leaves the S.E.C. with no power to act on the subject of either review.

Opponents of new regulations say that the prescribed studies are warranted because they can help derail overly burdensome rules that can strangle growth, particularly for small companies, which often lack the resources required to meet the demands of regulators. 

...Some of the proposals for studies are so specific that they raise questions about whose interests are being watched over.

Any time the banking industry is clamoring for something these days, questions should be raised. The fact that The New York Times is (sort of) raising them should in turn raise eyebrows among progressives.

In a statement today calling for more robust financial reforms than are in the Senate bill currently, Sen. Bernie Sanders (I-VT) specifically criticized (among other things) the fact that the GAO is authorized to study the actions of the Federal Reserve Bank, but is not allowed to spur action based on its findings:

The legislation proposed by the Senate Banking Committee chairman would allow the Government Accountability Office to audit the Fed's emergency lending programs, but bar GAO from naming loan recipients and detailing the terms. “As long as the Federal Reserve is allowed to keep secrets about its loans, we will never know the true financial condition of the banking system. The lack of transparency could lead to an even bigger crisis in the future,” Sanders said.

He added a sense of urgency toward the end of the press release:

“We cannot wait for the next crisis to solve this problem... We have got to take action now.”

If financial reform is going to proceed in the same manner as healthcare legislation has, however, progressive action will not amount to more than such press releases. Reading the Times piece, there's an indication that pragmatism might indeed rule the day in Congress:

Consumer advocates say they believe that too often studies are used to push an issue down the road, perhaps with the hope of never having to address it.

Representative Barney Frank, the chairman of the House Financial Services Committee, said there was truth to that, but political realities often dictate that studies be included.

“If you shoot them down, the other side will say, ‘What, are you afraid of, the facts?’ ” Mr. Frank said. “Occasionally it is a legitimate thing, but mostly it is political folderol.”

But being realistic about future attacks from "the other side" is unlikely to win elections in this populist climate, at least when it comes to financial reform.

In her interview with Treasury Secretary Tim Geithner yesterday, MSNBC's Rachel Maddow noted that this is one of the key pieces of legislation for Democrats facing reelection in the fall:

After health reform, a lot of Democrats in the Congress are looking forward to being able to run on Wall Street regulation, these new rules for Wall Street.  And with Republicans essentially signaling that they‘re mostly going to oppose them, it gives Democrats an opportunity to say we are running against Wall Street, which I think a lot of them are salivating at the chance to do that.

Later in the interview, Maddow noted that the slow downs and weaknesses in the bill may prevent that from being a believable election year argument. Geithner's following response struck me as evidence of him giving too much credit to the rationality of the voters during an election year. But he clearly does understand the need for quick action, as evidenced by the many times he referenced swiftness (emphasis mine):

MADDOW: ...If, though, people do not believe that this administration and the government in general is on their side against predation from big firms, Wall Street, the result of that is that there‘s going to be a lot of people elected in November who, if they don‘t show up with actual pitchforks, probably will have flaming torches. And we are going to get very, very, very populist very fast unless this administration takes a more populist tone and people start to believe in it because that is the mood of the country. 

GEITHNER:  I will say a different view.  I think people are going to judge me and then judge the president.  They‘re going to judge their elected representatives in Washington by what they do to make a difference in the lives of Americans. So we are overwhelmingly focused on trying to make sure that we are acting as quickly and as forcefully as we can to make things better here.  And we -- this president -- he moved with enormous speed and care and force doing incredibly important, difficult and, you know, these unpopular things because they were necessary to save the economy from collapse and make sure we had an economy that was growing again, creating jobs again. That is what people are going to measure us by.  If we don‘t focus on that every day, then, we are going to be in a position where, you know, we are going to leave the economy much weaker, Americans losing even more faith in their government. And that is what guides all the actions we are making.  We are trying to focus on what is going to make the biggest difference as quickly as possible and things that matter to, not just the basic lives of Americans, but their confidence in their government again.  Because again, this government, the government of the country, failed them terribly.

Now, I know what you're thinking. Calling on Congress (especially the Senate) to act quickly on anything is like selling 3-D glasses to a blind guy. But the truth of the matter is that Maddow is right about the optics here.

The financial reform issue is different from healthcare in a historic way. Show me anyone who tries to convince the American people that the financial system is neither broken nor in need of an immediate fix, and I will show you a 2010 loser.

We don't need a study to tell us that deregulation created a huge casino to develop where our country's financial bedrock used to be. We had an enormous case study to tell us that: It was called the financial collapse of 2008.

If we can't appeal to facts or a sense of basic decency in Congress, at least we should be able to appeal to lawmakers' desires to keep their jobs. Studies can happen any time, but we need financial reform now or we will face dire circumstances well beyond the losses the Democrats will suffer in November.

Let The Sun Shine In......