Zombie Politics

Left for dead after November 2008, the Republicans look pretty good for a bunch of zombies. The neo-cons plan to destabilize the Middle East and southwest Asia seems fully entrenched. In fact since the Democrats' triumph last November, we can't talk about simply occupying and destabilizing Afghanistan, we need in the same breath add Pakistan into the mix too, and the destabilizing of Pakistan seems to be going along swimmingly. At the same time, despite its two year and counting implosion, the Reagan Revolution seems fully in control of the economic debate in DC.

What's been laid bare in the past ten months is the simple fact the Democrats regained control of DC on the cheap. Before regaining power, there was no great revaluation of principles brought about by the decline of the New Deal coalition, nor was there a massive movement from the bottom like the conservatives in the 70s and 80s that brought the Republicans back to power. The Democrats gained power with the American people's exhaustion of a corrupt, bankrupt, and decadent Republican elite. And in a two party system, you only have one other choice, begging the question what happens come next November if Americans aren't charmed by Democratic rule? It will be an election of the living dead between zombie Democrats and zombie Republicans -- advantage zombie Republicans.

If you believe this implausible, I highly recommend a piece by Eliot Spitzer (ND 2.0). There's maybe a half dozen people in this country who both understand the financial industry and can talk intelligently about electoral politics, that is, to the extent anyone can talk intelligently about electoral politics. Spitzer warns Democrats Wall Street is an issue if used smartly can indeed raise the political dead. One thing, I'll say about the zombie Republicans, outside of their lemming march off the cliff with W in 2006, they've proved a little more politically pliable than our zombie Democrats.

Lesson for Democrats, shrinking Wall Street will lose campaign dollars, but every dollar lost will equate to a hundred votes at the ballot box -- count on it! Unfortunately, as we all know, zombies just aren't that smart.

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The newest bill won't break up the banks, but alludes to it

It's interesting: Congress is trying to put one over us and for a second we were excited to be wooed by them (I was glad to see them using language like "break up the banks" and "end too-big-to-fail"). They put out a bill called the Too-big-to-fail bill, but unfortunately, the bill does almost nothing different from what we have seen in the past year. I said this is a previous post that this bill simply formalizes the process of making banks bigger, of making them more of a systemic risk to the entire economy, and of allowing bailouts to the biggest banks when they fail. Dean Baker has an excellent layout the major "business as usual" highlights of the bill. Article pasted here (tx Mary Bottari):

Those who like banks that are too big to fail will love the latest financial reform proposals circulating in the US Congress. The bill put forward by Barney Frank, the chairman of the House finance committee, does little to change the current structure of the financial system.

The "too-big-to-fail" banks will be left in place, even bigger and less accountable than before. There will be nothing done to separate commercial and investment banking, so giants like Goldman Sachs will be free to speculate with money guaranteed by the Federal Deposit Insurance Corporation. The main difference is that the Federal Reserve Board will be granted even more power than it has now. And, we will tell the Fed to be smarter in the future, so that it doesn't make the same stupid mistakes that gave us the current crisis.

While we all want a smarter Fed, it is not clear that the bill before Congress will get us one, even though it will definitely give us a more powerful Fed. The new Fed will be able to decide which financial firms need to be put through a bankruptcy-like resolution process, paid for with a virtually unlimited amount of taxpayer dollars.

While the bill proposes that the cost of cleaning up after a big bank failure is supposed to be paid by other big banks, in fact the mechanism laid out in the bill virtually guarantees the opposite. Rather than raising a pool of money in advance from the big banks to cover the cost of a bailout, the bill proposes that large banks would be assessed a special fee only after a failure.

To see how strange this is, suppose Citigroup or some other major bank collapsed, requiring $100bn to pay off creditors. (We actually should not need a penny to pay off anyone other than insured depositors if we were serious about the banks not being too big to fail.) Either the failed bank was acting as a rogue institution, engaging in behaviour that was far more reckless than its peer institutions, or it was doing the same thing as everyone else.

In the first case, would it make sense to tax the other large banks $100bn because Citigroup acted recklessly? If the recklessness of one bank had led to its collapse in an environment where its competitors are sound, this would imply that there had been some serious failures of regulation. Why would we tax other large banks because the Fed, the FDIC and/or other regulatory bodies had failed in their job?

Alternatively, suppose Citigroup collapses because it was doing the same thing as other banks, but was just slightly more reckless or unlucky. In this situation, which is similar to the one we faced last fall, all of the banks would be severely stressed. It would be impossible to hit them with a special fee. Could we have slapped a special fee on Citigroup and Bank of America last autumn to have them cover the cost of the failure of Lehman Brothers? At the time, imposing any significant fee would have almost certainly pushed several more banks to insolvency.

The bottom line is that this bill is almost certain to leave the taxpayers holding the bag for future bailouts. Even worse, it does nothing about the moral hazard created by having institutions that are too big to fail. There is nothing in the bill to lead creditors to believe that the government will not make good on their loans to Goldman, JP Morgan and the other banking behemoths.

There is a large and growing consensus across the political spectrum for breaking up banks that are too big to fail. Advocates of this position include former Federal Reserve Board chairmen Paul Volcker and Alan Greenspan; Sheila Bair, the current head of the FDIC; and Simon Johnson, the former chief economist of the International Monetary Fund. There is no reason that we need financial institutions that are so big that they cannot be safely unwound without large commitments of government money.

The only people who seem to stand outside this consensus are those who hold power and are steering the process of financial reform. This is largely the crew whose regulatory failures gave us the current disaster. If they cannot learn from their mistakes then someone else will have to drive the reform process.

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Goldman Hedged Bad Mortgages to Reap a Profit, Latvia is a microcosm of a burst bubble

As a McClatchy report over the weekend reveals, Goldman Sachs bet that a slew of mortgages would fail, marketed and peddled them to more customers, and are making billions off of their scheme: 'Now, pension funds, insurance companies, labor unions and foreign financial institutions that bought those dicey mortgage securities are facing large losses, and a five-month McClatchy investigation has found that Goldman's failure to disclose that it made secret, exotic bets on an imminent housing crash may have violated securities laws.

"The Securities and Exchange Commission should be very interested in any financial company that secretly decides a financial product is a loser and then goes out and actively markets that product or very similar products to unsuspecting customers without disclosing its true opinion," said Laurence Kotlikoff, a Boston University economics professor who's proposed a massive overhaul of the nation's banks. "This is fraud and should be prosecuted."'

Here's an article from Kristina Rizga (who covered ANWF back in April). Latvia's economic bubble burst in late 2008 and Kristina has been working on explaining what happened and what new hope there is to rebuild their country. It's an interesting parallel to what is happening here, as consumer spending fueled the bubble that was also financed by private debt. A quote from the article applies to what we need in this country as well.

"In the current situation, we have definitive proof that you can't let the markets run completely free. The state has to be involved to assure fair rules for everyone and provide safety nets for the most vulnerable."

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On Political Economy

Thursday, the government stated GDP rose at at a 3.5%, but take away the government stimulus across the board and the economy was basically flat, so says the boys at Goldman Sachs. I'm not of the economic priesthood and while away no hours inanely discussing faith based orthodoxies of private spending versus government spending, for in matters of real economic output, it makes no difference. Is that car or house you purchased any less real because of a government subsidy?

The reason our economic church's discussion on such matters are of little economic relevance to anyone outside the priesthood is in reality they are questions of power, and there are no power equations in modern economics. The last three decades, America saw an enormous shift of economic power from government to both the financial sector and our leviathan corporations. The last year and half has seen not an expansion of government power in the economy, but the government playing a unprecedented and massive role in propping up the existing economic order of the last three decades. What becomes increasingly clear from the third quarter's economic numbers is this government role is necessary for any continuation of the established order.

In the months ahead, we will see a growing chorus for continued stimulus. At a purely hack political level, future stimulus is likely to be a necessity to keep Democratic congressional majorities, and well, who could argue against that if it is to keep the knuckleheads calling themselves Republicans these days from coming to power? But this once again only begs the question, are we so politically crippled
to not be able to come up with a viable alternative to our increasingly harmful two party politics?

From a larger political economy view more stimulus is problematic as the entrenched economic order controlling our political economy uses the money to continue a unsustainable status quo, the harmful clash for clunkers program being the best example. Last week saw the price of oil once again go above $80 a barrel and there is no stimulus large enough to reflate the past three decades American economy at $80 a barrel. Today, each new internal combustible engine only insures
greater future economic problems.

We need to fundamentally reform the American political economy and that means a fundamental reform of the American government and politics. Most of the questions needing to be answered are questions of power. Today's economic solutions are not simply how to produce and consume more stuff, but questions on the distribution of power. How can people gain value by being included into decision making processes, and this necessitates a reformation of political and economic power.

The employment problem of today will not be solved with increasing production and consumption, but by cutting work hours, reducing consumption and production, while increasing public space and the role of the citizen. In large part, the 20th century
industrial model is what this crisis is about. 20th, much less 19th century solutions are not going to fix it.



In helping understand the mindset such a political economy reformation will necessitate, The Nation has an interview with Mikhail Gorbachev on the anniversary of the fall of the Berlin Wall. Mr. Gorbachev states about the thinking necessary for reform:

I am an intellectually curious person by nature and I understood that many changes were necessary, and that it was necessary to think about them, even if it caused me discomfort. I began to carry out my own inner, spiritual perestroika--a perestroika in my personal views...I began to understand that society needed a new vision--that we must view the world with our eyes open, not just through our personal
or private interests. That's how our new thinking of the 1980s began, when we understood that our old viewpoints were not working out.

Some great wisdom from the last man to pull out of Afghanistan, and remember, going into Afghanistan isn't the death of empires, pulling out is, paraphrasing Carl Spackler, "So, we got that going for us, which is nice."

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The most important questions on TBTF bill

Just as too-big-to-fail is said with two distinctive meanings or tongue-in-cheek - it was used as a positive way to describe banks that needed bailouts but also has come to describe banks that should not exist or get bailouts, the too-big-to-fail bill is also coming to have the same double identity. It's not a bill that will substantially keep too-big-to-fail from happening again, but in fact will simply create a more formal process for doling out bailouts to the too-big-to-fail institutions when they fail. Again, the TBTF bill isn't a solution to completely resolving TBTF, but is creating a more complete process to deem banks too-big-to-fail. The resolution authority is not mandatory.

Here is a Forbes article on the most important questions to keep asking of the new bill unveiled:

Fuzzy Areas In Financial Reform Bill
Joshua Zumbrun, 10.29.09, 06:11 PM EDT
Does the proposal allow bailouts? Can we say who would be Too Big To Fail? And has anyone actually read it yet?

WASHINGTON -- As new financial reform proposals begin to worm their way through Congress, a number of sticking points have emerged. New laws to monitor firms that could pose risks to the whole financial system, create a council of regulators and shut down flailing financial institutions--it all sounds nice on the surface. But you know what they say about the details.

Here's a look at some of the early criticisms of the financial reform bill that emerged in testimony before the House Financial Services Committee on Thursday. (See "Familiar Flavor To Financial Reform Bill.")

Does the bill allow bailouts or not?

Treasury Secretary Timothy Geithner insists that the legislation does not give the government the authority to bail out companies. Under the legislation, any high-flying financial institution that gets in trouble would be forced into a new resolution process under which the FDIC would shutter it, as the FDIC currently does with normal banks.

But the bill as written would seem to also allow the government to provide liquidity to solvent institutions. Since these are nebulous concepts, it seems the government could declare that a bank is illiquid but not failing, and lend it money in a fashion quite similar to a bailout.

Peter Wallison of the American Enterprise Institute says, "The draft proposes nothing more or less than a permanent TARP." Phillip Swagel, a professor at Georgetown and a former assistant Treasury secretary under Henry Paulson, said he does not think it is Geithner's intention to do this, but the legislation would allow it.

Is the proposed resolution process the same as failing?

The bankruptcy of Lehman Brothers ( LEHMQ - news - people ) and the catastrophic fallout is cited as Exhibit A for why bankruptcy court is inadequate for dealing with major financial institution failures. The administration argues that the resolution process would create a system where nobody is "Too Big To Fail." No matter how big you are, you will get taken to resolution if you screw up.

CEOs would be likely to lose their jobs, a bit of added incentive for them to not wreck their companies, but what about the firm's bondholders? If bondholders believe that the resolution process is preferable to bankruptcy, then they could enable the same sort of mistakes seen in the past year.

In the event of a failure, the rest of the financial industry would be assessed a fee to cover the costs. The idea is to protect taxpayers. But couldn't this also end up being a punitive assessment, even against financial institutions that had absolutely nothing to do with a particular failure?

Who is "Too Big To Fail"? What firms are even financial institutions?

This question matters for two reasons: First, who gets special oversight and will end up in special resolution; and second, who will have to pay for the resolutions after. The legislation gives the government discretion in determining who is "Too Big To Fail," and even which institutions can be considered financial institutions.

This is a trickier question than it ought to be. After all, the TARP was written to rescue financial institutions, but after intense lobbying from the automotive industry, the Treasury decided the law could be interpreted to bail out General Motors and Chrysler as well. Sheila Bair, the chairman of the FDIC, agreed in questioning that the law probably needed to be clarified, to prevent the scope from getting out of hand.

Can we say who is "Too Big To Fail"?

One provision requires that the government will not keep a public list of firms who have been designated as systemically risky. But under questioning, Geithner said it would not be secret, because the firms would be held to different standards. What is the point of this charade where the designation of "systemically risky" is public, but the government does not keep a public list of the firms? Geithner says it strikes the proper balance between transparency, and not overhyping expectations of Too Big To Fail.

Should the Fed have more power?

In the original version of the legislation, the Federal Reserve would have had sole responsibility for monitoring systemic risks and systemically risky institutions. Monitoring risks is now the job of the proposed council, but the Fed still gains the authority to regulate new institutions. After doing such a crummy job of regulation running up to the financial crisis, a lot of Congress still balks at the idea of giving the Fed more authority.

Can we have time to read the bill?

An irritated Spencer Bachus, R-Ala., the ranking Republican on the House Financial Services Committee, complained that the draft legislation (253 pages of it!) was released Tuesday evening. The testimony of witnesses was due 48 hours before the hearing--the experts and regulators who came to testify about the bill had to turn in their testimony before having a chance to read the bill. A poor process for possibly "the most important legislation this committee will ever consider in our lifetimes," says Rep. Scott Garrett, R-N.J.

When asked if they'd had enough time to actually read and consider the legislation they had been called to discuss, all 10 witnesses on the final panel said "no." Several times witnesses responded that they could not answer questions from Congress because they were not sure what all the legislation said.

The legislation still faces, at minimum, markups in House and Senate committees, votes in the committees, votes on the House and Senate floor, then a conference to resolve the differences between House and Senate versions, and another vote. There's plenty of ironing yet to occur. Careful wording may fix some of the problems, but some sticking points are far from resolved.

Sheila Bair's issue with the bill is this: 'Federal Deposit Insurance Corp. Chairman Sheila Bair, breaking with the Obama administration, said U.S. financial companies should prepay into a fund the government would use to unwind large failed firms.

Congress should set up a Financial Company Resolution Fund and force institutions with more than $10 billion of assets to pay before a firm collapses, Bair said in testimony prepared for a House Financial Services Committee hearing today. Investors in failed companies also should take losses, she said.

“A prefunded FCRF has significant advantages over an ex- post funded system,” Bair said. “It allows all large firms to pay risk-based assessments into the FCRF, not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis.”'

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No SIncerity in TBTF Stability Bill

I'm 29 and still don't know exactly why Congress can't be sincere about fixing problems. There's a deep question there that I don't think just has to do with greed. Perhaps, it's mindless.

The Too-big-to-fail bill that was unveiled the other day seems to have almost no real sincerity for fixing the problem of too-big-to-fail bailouts. Regulation is done in secret, the Federal Reserve still gets to decide some of the things that create too-big-to-fail (cash reserve ratios, etc.). David Sirota writes the following:

"At a recent hearing, Rep. Brad Sherman, D-Calif., called the language "TARP on steroids," noting the provisions would deliberately let the executive branch enact even bigger, more unregulated bailouts than ever – and by unilateral fiat.

Whereas the original TARP included some oversight language and power to limit Wall Street bonuses, TARP on Steroids includes no specific oversight or executive pay constraints. Whereas TARP permitted the government to underwrite both small and large banks, TARP on Steroids allows taxpayer cash to go only to the behemoths (which, not coincidentally, tend to make the biggest campaign contributions). And whereas TARP limited the treasury secretary's check-writing authority to two years and $700 billion, TARP on Steroids would let him spend as much as he wants for as long as he wants.

This last point is what poker players call "the tell" – the inadvertent tip exposing a scam. Treasury Secretary Tim Geithner's tell came when he publicly said the Obama administration would oppose amendments limiting the new bailout power – even if the limit was a $1 trillion cap.

The former financial executives inside the Obama administration have labeled their bill the "Financial Stability Improvement Act," and some might say that's like Bush officials oxymoronically calling their own anti-environment initiatives a "Clear Skies" agenda. But that's not a totally fair comparison because there's an underlying consistency here: While these new "financial stability" powers may destabilize the nation's finances, they would more than stabilize Wall Street's larcenous profits.

That thievery, of course, has been the big problem all along – and now, only another 9/29 can prevent it from getting worse.

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Proposal for a new Glass-Steagall - a 3-way split instead

John Grapper of the Financial Times (tx Mary Bottari) suggests that we actually need to break up financial firms by keeping separate three kinds of banking. The mixing of these different kinds have helped the largest banks balloon incredibly in size ever since they were allowed to do so and has also helped balloon the size of the industry itself to obviously unsustainable levels. Too-big-to-fail not only is a culmination of our personal accounts getting mixed up with riskier investments, they also came to be because companies have had their hands in each other's pockets in a variety of complex ways. Our deposits should just get out of that scene. The Glass-Steagall Act was passed during the Great Depression by FDR to address a major reason for the crash of '29 -- a mixing of commercial banking with investment banking in the same company. FDR saw to end that, now perhaps we can take to a more modern version, see below:

"My colleague John Kay has described this as splitting banks into utilities and casinos – or deposit-taking banks that need to be backed by governments and investment banks indulging in proprietary trading that do not.

I think a more logical division would be a three-way split into utilities, casinos and people who visit casinos to gamble. That means retail banks, investment banks and asset managers, including private equity and hedge funds.

It may sound like a three-way split rather than a two-way one is a fine distinction. Yet it matters because this mix of businesses is what many too-big-to-fail institutions contain, with all the conflicts of interest and systemic problems it creates."

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"You’re discouraging a company from achieving the American Dream"

"Simply breaking them up … then you’re discouraging a company from achieving the American Dream, working hard, earning money, producing products, and getting bigger.” - Scott Talbott on breaking up the banks

Recently, Simon Johnson and Charles Calomiris were on NPR talking about breaking up the banks and TBTF. Calomiris like most extremist free marketers make the following argument about large and extremely large: "They have complex financial needs having to do with hedging. We're not going to be able to serve the needs of large global firms with mom-and-pop banks."

Big companies and their lobbyists say big is important for consumers and that only big companies can handle international operations. I'm curious what percentage of people really buy this -- I expect a group to do polling on this soon.

James Kwak of Baseline Scenario lays out why this statement is just a smokescreen statement for the truth in this post here and here. James' rebuttal is backed by reality.
The basic idea is that in actuality global corporations, like Johnson and Johson usually work with hundreds of banks and no one large bank does the trick for every local context, etc. and data shows that big does not correlate with the data.

We've also done our research and I feel lucky that evidence shows when knowledgeable people say big banks are better, they are actually lying. In terms of prices that you see on the credit card or bank market, make sure you are aware that whenever you hear that big banks offer better products, better choices, you are hearing a straight-up lie. I've seen many research papers on bank fees. All of them show that the largest banks charge the most. The largest banks own enough of the market, that together they're kind of one monopolistic force. They can essentially keep prices high (control them) and they do. Their efficiency gain for getting bigger or more tech-savvy are not passed onto the consumer. So, terms like economies of scale that describe the phenomenon of greater efficiency with greater growth in the company may make the financial industry more efficient and better for the customer only up to a size. There's economy of scale for banks under the $100 billion mark and any bank that is bigger than that just doesn't pass on the savings.

Here is the cold, hard evidence. Please don't forget it.

Pew Charitable Trust July 2009 Study (released today)

1. These banks control more than 90 percent
of outstanding credit card debt nationwide.

2. One hundred percent of credit cards from the
largest 12 banks used practices deemed “unfair
or deceptive” under Federal Reserve guidelines.
None of these bank issued cards would meet the
requirements of the Credit CARD Act of 2009.

3.Our recent review includes, for the first time, credit
unions. Although the largest 12 credit unions control
only 1 percent of overall credit card lending, many
consumers will find it helpful to know that these
credit unions offered prices that were generally
lower compared to those of the largest banks.

4. 95 percent of bank cards allowed issuers to apply
payments in a manner that the Federal Reserve
found likely to cause substantial monetary injury to
consumers. The other 5 percent did not disclose
the issuer’s policy.

In our research on bank size, competition, and stability in the markets, we also came across the The Washington Monthly has this article called, "The Subprime Student Loan Racket: With help from Washington, the for-profit college industry is loading up millions of low-income students with debt they'll never pay off." These two paragraphs give you a good idea on how debt, credit can really become a noose rather than an opportunity.

"Her loan balance has ballooned to $40,000, and she has no idea how she will ever pay it off. “My credit is ruined,” Leveque says. “I made one mistake, and I will be paying for it for the rest of my life.”

Leveque’s story is far from unique. Each year, more than two million Americans enroll in for-profit colleges, also known as proprietary schools, and their popularity has only grown since the financial crisis. While traditional four-year colleges are struggling with dwindling student bodies and budget gaps, proprietary schools are reporting record enrollments as the newly unemployed try to retool their skills so they can wade back into the job market. Some of the largest for-profit chains say their numbers have doubled over the last year.

The students who are flocking to these schools are mostly poor and working class, and they rely heavily on student loans to cover tuition. According to a College Board analysis of Department of Education data, 60 percent of bachelor’s degree recipients at for-profit colleges graduate with $30,000 or more in student loans—one and a half times the percentage of those at traditional private colleges and three times more than those at four-year public colleges and universities. Similarly, those who earn two-year degrees from proprietary schools rack up nearly three times as much debt as those at community colleges, which serve a similar student population. Proprietary school students are also much more likely to take on private student loans, which, unlike their federal counterparts, are not guaranteed by the federal government, offer scant consumer protections, and tend to charge astronomical interest—in some cases as high as 20 percent."

You can also download our 27 ways flyer to get some of the most gouging of the documented abuses of large banks on the average consumer and our economy.

Here they are listed for you as well:

27 Ways the Mega-Banks Took Down the Economy

1.Largest banks’ credit card fees: 20% or higher
2.Largest banks move to states with no limits on usury – so they can charge consumers in states that do have usury laws
3.$170 billion profit from overdraft programs and manipulative overdraft processing that most people don't sign up for
4.Banks hold checks for 3-8 days (despite changes in technology) for better interest returns - meanwhile creating cash flow issues for working people
5.$10,000 difference between lowest basic closing costs and typical closing costs to those unaware
6.Inflated stock prices paid by the public
7.Encouraged and facilitated rise in personal debt, then ensured inability to emerge from debt
8.The 4 largest banks hold 41% of the nation's deposit accounts - and thus can make our country sink or swim.
9.The 4 largest bank holding companies exchange 95% of the country's derivatives
10.400% increase in subprime lending in the past ten years
11.Racial profiling for predatory loans to both low and upper income minority families.
12.Growth of inflation and an attitude of spend, spend, spend
13.The largest banks contribute the most in campaign contributions to Congress
14.The largest banks received billions of “no-strings-attached” bailout dollars when their investments went sour
15. Flattening of wages in the past 20 years; inability for workers to organize for better wages.
16.The central bank allowed the largest banks to have little reserves set aside to insure losses
17. In the 1990's, the largest banks lobbied heavily for rules that could increase risky investments for short term profits
18. The largest banks ballooned in size after Congress passed rules that allowed them to take on investment banking activities and risky investments
19. Inflated credit ratings on bundles of home loans
20. Bundling of risky mortgages for hedging and investing – passing on the risk to the next hedger or bettor
21. Backing of securities by risky mortgages
22. Collusion and capture of the Federal Reserve and regulators – “revolving door” between government and finance
23. Economy structured to favor short term growth and creation of bubbles; home price surges were in part artificially inflated.
24. Growth of banks to “too-big-to-fail” sizes to ensure federal support in case of failure as supported by FDICIA Act
25. Only the largest banks can buy US treasuries from a “discount window”
26. Only the largest banks provide those sought out as “experts” and who are formally involved in determining monetary policy
27. Bank concentration leads to barriers to entry for new and small banks - and higher prices

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Analysis of bill dubbed the TBTF bill

Here's a comprehensive breakdown of the most and other important points about the recently unveiled too-big-to-fail bill, section by section with notable quotes. This bill is not exactly a too-big-to-fail bill and is not quite a break-up-the-banks bill either because it is mostly dealing with the issue of what to do when large banks fail. Most of the bill will be unable to stop "business as usual" from happening from the onset and allows large systemic risk failures to happen for the most part. If the bill had more clear, strict orders for identifying systemic risk, such as limits on assets, tiered reserve requirements, the unwinding of complex investments with personal deposits, we'd really be setting ourselves up for a more innovative, constructive economy where competition isn't limited. The key to how important this bill can be or how much more safe we are with it depends truly on how sincere our reps are actually about it.

Full text or summary. Major points of the bill, quotes pulled from a a Washington Post article, and statements from the House Financial Services Committee, which are noted with abbreviations below:

SUBTITLE A – The Financial Services Oversight Council, pp. 1-11
- Creates a council of regulators to monitor risks of finance companies to the entire financial system, led by the US Treasury. This move is fully in line with our analysis on who should play regulator. The Federal Reserve shouldn't get oversight powers until it earns it and is reformed for being too much in the pockets of the bankers. A council made up of officers from each of the offices can be more objective but we do have to watch over them, especially the US Treasury -- we also think they should be completely transparent and on record. One issue though is that, "[the bill] would also give the Federal Reserve Board a lead role in directly supervising many of the largest financial conglomerates."-NYT; "Frank's bill, however, gives more power to the council than the administration originally envisioned, including the ability to determine which firms are put under the Fed's umbrella of oversight." Our NO New Powers for the Fed" petition has done some good - we can say we're getting what we want. This move by Frank and others shows that even petitions matter and we are helping to change the way everyone thinks about power structures.

SUBTITLE B – Prudential Regulation for Financial Stability Purposes, pp. 11-46
"Harmonizes and consolidates holding company regulation so there is “no place to hide,” ensures communication and coordination among regulators and maintains clear lines of authority. Subjects firms or activities that pose significant risks to the system to heightened, comprehensive scrutiny by Federal regulators. Removes the Gramm-Leach-Bliley Act’s restraints on the Fed’s authority over companies subject to consolidated regulation and provides specific authority to the Fed and other federal financial agencies to regulate for financial stability purposes and quickly address potential problems." -HFS

SUBTITLE C – Supervision and Regulation of Federal Depository Insts., pp. 46-96

"The legislation would impose new restraints on industrial loan companies — financial institutions owned by commercial enterprises like retailers or manufacturers — and, in the future, would not permit any more commercial companies to own banks. The committee, striking a compromise with the administration, preserves the thousands of thrift charters that the White House proposed to eliminate, but it gives supervision of thrift holding companies to the Fed to prevent them from shopping for the least restrictive regulator." -NYT

SUBTITLE D – Regulation of BHCs and Depository Insts., pp. 96-127
"require hedge funds, private equity funds and offshore pools of capital to register with the Securities and Exchange Commission.. [Representative Paul Kanjorski] added the requirement of registration by offshore funds. Without that, he said, regulators could not get a broad picture of the marketplace. Mr. Kanjorski’s legislation contained an exemption for venture funds, but they would have to provide more information to regulators in other ways."-NYT "The central bank would also have the power, when it reviews firms, to require financial holding companies to “sell or otherwise transfer assets or off-balance sheet items to unaffiliated firms.” The central bank could also require that the firms terminate certain activities or impose other conditions. The legislation would also preserve the federal charter for thrifts -- savings and loans firms -- but would shift all the current powers of the Office of Thrift Supervision (OTS) to the Office of the Comptroller of the Currency (OCC). Frank's bill would also mandate existing non-banks, industrial loan companies and other similar companies that engage in commercial activity to create a bank holding company." -The Hill

SUBTITLE E – Payment, Clearing, and Settlement Supervision, pp. 127-57
"Under the proposal, future rescues of large institutions would be paid for by other big firms. The proposal says that any financial company with assets of more than $10 billion would have to contribute to the rescue of a failed firm. The legislation emerged after community banks lobbied to ensure that small institutions would not have to pay for future bailouts." -NYT

SUBTITLE F – Improvements to the Asset-Backed Securities Process, pp. 157-64
"The legislation approved by the committee on Tuesday would also give the commission the authority to abolish the requirement that brokers force customers to take disputes to arbitration. And it would establish a fund to compensate whistle-blowers on Wall Street who report unlawful activity... would tighten restrictions on credit rating agencies and would explicitly give investors the ability to sue the companies if they violate federal securities law and “knowingly or recklessly” fail to review significant information as they prepare their ratings." NYT

SUBTITLE G – Enhanced Resolution Authority, pp. 164-253
"Provides for the orderly wind-down of failing firms and ends “too big to fail” to ensure that industry and shareholders absorb the risks and costs of failure, not taxpayers."-NYT; "[The bill would] empower the government to seize troubled firms other than banks that are deemed "too big to fail. Officials at Treasury and the Fed have pushed for "resolution authority" over non-bank financial firms for months, viewing it as one of the most important tools for dealing with future crises. "-WP

This quote sums up the general reaction to the bill from the two parties in power: "Concerns have also deepened in Congress, among Republicans and some Democrats, that the program could amount to a permanent bailout fund and reduce private market discipline by being too generous to creditors of failed firms. Despite such differences, the problem is clear to all sides: Banks got so big that federal officials could not let them fail without risking catastrophic consequences for the economy. During the crisis, the government arranged mergers that pushed troubled banks into the arms of more stable firms. Big firms got even bigger. Senior officials now worry that these financial behemoths could return to the reckless behavior that led to the crisis, reasoning that federal officials will clean up any mess. "-WP

We are glad to hear that the European Union has approved the breaking up of a bailed out bank into a good bank and a bad bank. It's a trial I'd really like to see happen. The reasons are exactly my reasons for becoming engaged in the fight from the beginning:
"Important structural changes, including the split of the bank into two entities and a significant reduction of its market presence, will allow the bank to become viable in the long-term and limit distortions of competition,” the European competition commissioner, Neelie Kroes, said in a statement." .. They argued that a lack of competition in the sector could impede Britain’s economic recovery by not providing enough credit to smaller companies and households. The high market share concentration also makes for a less stable banking system that is more vulnerable to future banking crises, they said."

We're happy to support Rep. Grayson's Unmask the Fed campaign (tx Zephyr) calling for a Bernanke reappointment delay until he discloses where he sent $2 trillion in taxpayers' money.

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Systemic Risk is being discussed tomorrow

There will be a hearing tomorrow that will help shape how banks are broken up or thought of as posing a risk to the economy. What gets decided, not just tomorrow, will truly shape how regulatory reform moves forward in this country. We at ANWF think it's important the public is a part of the discussion. Our discussion on systemic risk is just as important and we need to make sure they hear us. The House Financial Services Committee will hold a hearing titled "Systemic Regulation, Prudential Matters, Resolution Authority and Securitization" on Thursday, October 29, at 9:30 a.m.

The way I see systemic risk is this: I don't care how innovative and new your product is if it's mostly based on air and fluff (speculation) then it's not innovative or useful and if a large enough percentage of your portfolio is made up of that fluff and your company is growing disproportionately larger than 90%+ of the rest because of that fluff, and you're large enough that you're extremely interconnected with many parts of the market equal to your share in the market, then you're a systemic risk poser. Numbers could be put to all of these parts and set as limits. The limits will be clear and not subjective. And then, there is the question of bailouts, if you're bigger than $100 billion in assets, you're going to get a bailout from a Democrat or a Republican, so you better not be bigger than $100 billion.

Here are the panelists on the hearing who will help make arguments for who should or should not be regulated and what systemic risk is. The issue of who needs to be watched over is muddled because there is a difference between small and large banks and small banks think they shouldn't be regulated further since they didn't cause the crisis. Though we're here to see greater competition in the industry, including helping small and medium-sized banks be even better servicers to the public, there's a strong reason why small banks should be watched over -- anyone can be collusive, create a problem, etc. It has been true that small and medium-sized banks have posed less of a systemic risk, make more community or small business loans, and have lower rates. Overall, they have been better for the average consumer. Small and medium banks should be watched over but treated differently, possibly regulated with lower requirements for how much cash on hand they must have per transaction/deposit and their systemic risk needs to be measured differently.

Notice that the first panel has one person -- Geithner. Not sure how panels have been broken up. According to members of the Americans for Financial Reform, a coalition we are a part of, Jane Dirista, Michael Menzies, and Trumka will most likely speak on the side of the public. We expect great things from Sheila Bair, Tarullo, and Dugan on panel 2.

Panel one

* The Honorable Timothy F. Geithner, Secretary, U.S. Department of the Treasury

Panel two

* The Honorable Sheila Bair, Chairman, Federal Deposit Insurance Corporation
* The Honorable John C. Dugan, Comptroller, Office of the Comptroller of the Currency
* The Honorable Daniel K. Tarullo, Governor, Board of Governors of the Federal Reserve System
* Mr. John E. Bowman, Acting Director, Office of Thrift Supervision
* The Honorable Thomas R. Sullivan, Insurance Commissioner of the State of Connecticut on behalf of the National Association of Insurance Commissioners

Panel three

* Mr. Richard Trumka, President, American Federation of Labor and Congress of Industrial Organizations
* The Honorable Richard Baker, President and Chief Executive Officer, Managed Funds Association
* The Honorable Phillip Swagel, Visiting Professor, McDonough School of Business
Georgetown University

* Mr. Scott Talbott, Senior Vice President for Government Affairs, The Financial Services Roundtable
* Mr. Steven A. Kandarian, Executive Vice President and Chief Investment Officer, Metropolitan Life Insurance Company
* Mr. R. Michael S. Menzies, Sr., President and Chief Executive Officer, Easton Bank and Trust, Co. on behalf of the Independent Community Bankers of America
* Mr. Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies, The American Enterprise Institute
* Ms. Jane D'Arista, Americans for Financial Reform
* Mr. Edward L. Yingling, President and Chief Executive Officer, American Bankers Association
* Mr. T. Timothy Ryan, President and Chief Executive Officer, Securities Industry and Financial Markets Association

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