Pearlstein of WPost makes a good summary of the stalemate in financial reform in Congress (not in the public mind you):
“There are many parties to thank for this stalemate: Liberal Democrats who insist that the only solution is to micromanage the financial services industry from Washington. Conservative Republicans who can’t accept that their deregulation went too far and can’t bear the thought of handing a legislative victory to President Obama. A financial services industry that says it supports regulatory reform in general but can’t agree to any specific changes. And regulators, in denial about their own failures, who remain determined to preserve their power and influence. “
Unfortunately, Pearlstein, a well-informed financial crisis writer shortchanges fundamental plans to real reform that were left out of the “new solution” by calling the solution attractive. The bill has no Volcker rule as recently pushed for by Obama and which would cap the size of banks at their current size and a stopping of some propietary trading; or that Glass-Steagall separation that keeps your money away from out-of-hand growth for big banks and extreme risk for the American taxpayer, and pushes for an undemocratized single regulator and passes by our most important crusader, Sheila Bair. Our litmus test for financial reform is still “nationalize, reorganize, decentralize” in the face of a crisis and in the construction of a financial industry in the present.
The shape of the regulator doesn’t matter, but its harmony, function, accountability and transparency.
Here’s what the compromis[ed] bill has:
“The compromise hammered out between Dodd and Corker would establish a single regulator of federally chartered banks with a dual mission and an independent source of funding, based on my conversations with several key players. One division would promulgate and enforce rules to protect consumers; the other would fulfill the traditional role of supervising banks for safety and soundness. Supervisors from both divisions would participate in the periodic reviews of bank operations, and any conflicts between the two would be resolved by the head of the agency.”
Why the change? Pearlstein says, “Some credit also goes to Obama, whose decision to embrace a more populist critique of Wall Street in recent weeks has rattled financial markets and persuaded big banks to push for a compromise rather than leave a cloud of regulatory uncertainty hanging over their heads. Apparently nothing focuses the mind of a Wall Street banker so much as the prospect of being forced to shut down his proprietary trading desk.”
The bill includes our “nationalize/receivership” rallying cry that would stop the bailouts to too big to fail banks and put them through an insolvency process in order to contain crises and keep capitalism on an even keel: “Dodd, Corker and Democratic Sen. Mark Warner of Virginia are putting the finishing touches on a plan reflecting these judgments. As they envision it, any time a big financial institution is threatened with insolvency, the government would be authorized to take it over and close it down in a bankruptcy-like process. The government could provide temporary loans to ensure an orderly liquidation process and prevent financial panic, but only to the extent that the loan would be repaid from proceeds of the sale of the bank’s assets. Although insured depositors would be protected, creditors, counterparties and investors would all suffer losses.”
Insider scoop from Politico: “Treasury Secretary Timothy Geithner meets with Senate Banking Committee Chairman Chris Dodd (D-Conn.) and Sen. Bob Corker (R-Tenn.) this afternoon to get a briefing on the progress they’ve made hammering out a compromise on financial regulatory reform and to strategize about how to move things forward.
MEANWHILE, SIGNS OF PROGRESS – POLITICO’s Victoria McGrane reports: The widespread consensus forming Tuesday was that the Dodd-Corker bill won’t be ready until next week – multiple industry sources heard Dodd tell his ranking Republican, Richard Shelby, as much. But the signs are auspicious for a bipartisan bill – and one that might actually be able to pass the Senate. Corker told POLITICO Tuesday that Republican support for the Dodd-Corker product is building behind the scenes.””
The banks are bigger than they’ve ever been, the only good financial reform bill is still nationalize, reorganize, decentralize, tuned for the different stages of a financial crisis and a steady economy.
As Simon Johnson and Peter Boone say, “As a result of the crisis and various government rescue efforts, the largest six banks in our economy now have total assets in excess of 63 percent of GDP (based on the latest available data).”
Volcker is a former Fed chief and served during the 80′s. He never fought for jobs first and foremost, though that is a mission of the Fed. These days he is making a come back by pushing for policies in the public interest. The Volcker proposal to break up the banks is gaining some steam, especially since Obama announced he wanted it as a part of regulatory plans going forward. Volcker had a hearing on his ideas and Dodd suprisingly supported them:
“The Obama administration has proposed bold steps to make the financial system less risky. We welcome those ideas,” said Dodd. “The first would prohibit banks – or financial institutions that contain banks – from owning, investing in, or sponsoring a hedge fund, a private equity fund, or any proprietary trading operation unrelated to serving its customers… I strongly support this proposal. I think it has great merit.”
“The second would be a cap on the market share of liabilities for the largest financial firms, which would supplement the current caps on the market share of their deposits. I think the administration is headed in the right direction with these two proposals,” Dodd continued.
Paul Volcker, Chairman of the President’s Economic Recovery Advisory Board and Former Chairman of the Federal Reserve, and Deputy Treasury Secretary Neal S. Wolin testified at the hearing.
The Committee will hold a second hearing on the proposals on Thursday.
Testimony and webcast will be available after the hearing here.
More Lies from Obama? by ANWF member, Nate Powell
Last week, Obama announced a surprise head turner: had the sane voices of reason represented by Paul Volcker prevailed over the loot-the-riches Robber Baron Larry Summers and his crackpot team from Chicago? Or, could this possibly be too good to be true given Obama’s proven knack for saying what we want to hear, then going in a completely opposite direction. This has been true in the past, so, for our protection, let us vet his proposal before giving it consideration. Obama needs to be pushed in the right direction since he seems so prone to manipulation by the wrong crowd… so it is imperative that it is we the people that do the pushing.
As the recent Scott Brown electoral victory shows, Americans are sick and tired of Wall Street giveaways as the national priority. Geithner himself gave approval for the 100% payout on collateralized debt obligations (CDOs) and credit default swaps (CDSs) to Goldman Sachs, and the personal OK to hide it from the public reports, as the latest press reports indicate. Independents and liberals voted Republican to send a message to the Democratic “leadership” that we’re tired of betrayal.
The leadership is unfortunately blind to reality and is suicidally pressing forward with more irresponsible schemes. Take for example the recent agreement reached where Obama will create, by executive order, a panel whose duty will be to make cutbacks to our standard of living. I’m not making this up. Recommendations will then be voted on as an entire package, with an up or down vote, and will be impossible to amend. Sniff, sniff, do you smell that? Smells like our constitution is burning away. So, instead of cutting off the bailouts and taking the money back, President Obama is going to propose that we continue feeding the vampires on Wall Street. Talk about going off the deep end.
The answer is not draconian austerity; the answer is to leverage the power of our (still) sovereign currency and create loans for improvements to the physical economy, instead of the near zero interest loans given to large banks specifically to buy the near worthless “toxic assets” called derivatives.
Derivatives are instruments that derive their value from other things, such as mortgages, as in the famous “mortgage backed security,” or commitments from institutions, such as CDOs and CDSs. They are basically valueless in and of themselves, but were used by banks to claim as assets upon which they used as collateral to make other leveraged financial “investments” like when the speculators drove the price of gas up. See, the banks have really bankrupt all along, but they have used derivatives to hide it. When the house of cards came falling down, they ran to the taxpayer to bailout their little scheme, so they could start all over again… Now instead of rebuilding the nation and the world, they continue to trade derivatives. Talk about a waste of time and money. Rome is figuratively burning while the bankers trade worthless “assets” on the public dime.
Meanwhile, the still somehow prevailing delusion is that the speculators must be protected! Why do we even need to protect them at all? The Federal Reserve Board, Inc. created trillions of dollars in loans to trade for these financial instruments at nearly 0% interest. Their measures have allowed the big banks to “earn” so much profit at taxpayer expense under the various bailout programs. Let’s instead use the awesome power of money creation to create trillions of dollars in loans for fantastic new technology and infrastructure for the nation and the world. We can eventually wipe poverty, hunger, and disease out of existence if we can make this decision. We’ll build a real recovery so we don’t need to make austerity cuts like those that were forced upon Haiti, for example, by the IMF.
The Four Disingenuous parts of the Obama/Volcker Proposal
Smokescreen #1, More gambling with your money in tow: An article in the Financial Times explains why Obama’s putative “war on Wall Street” is no threat to the Casino Economy. As concerns “proprietary trading,” banks will be able to continue proprietary trading related to their customers’ business (i.e., on behalf of their customers). “Glass-Steagall [Act] largely banned proprietary trading with certain exemptions for safety and soundness concerns. The trading, in which a bank buys and sells stocks and other securities from its own account, led to big profits at institutions after Gramm-Leach-Blilely allowed the transactions…. But implementation of Obama’s plan for proprietary trading could be messy since banks often conduct trading on behalf of clients from their own account.”
The Economist says, “Commercial banks may be unfazed by curbs on trading. Most have already pared their prop-trading desks. JPMorgan Chase derives a mere 1% of its revenues (and 3-5% of its investment bank’s) from such business. But having to divest Highbridge, a big hedge-fund firm, would be “horrible”, says a JPMorgan insider. The bank thinks that may not be necessary since its capital is not invested directly in Highbridge’s funds. But no one is sure.”
Smokescreen #2, Risky bets will continue: While banks would be forced to spin off or close proprietary trading desks, they could continue to take risky bets on their own account as part of market-making activities, as counterparties to derivative and structured credit products demanded by clients, and in securitization activities. As the Economist goes on, “Enforcement could be tricky, too. Regulators will struggle to differentiate between proprietary trades and those for clients (someone is on the other side of every trade) or hedging. Getting it wrong would be counter-productive: preventing banks from hedging their risks would make them less stable.”
Smokescreen #3, Cover-up for investing in hedge funds: Prohibiting banks from investing in hedge funds means nothing: banks would still be able to lend to hedge funds and private equity funds — and could structure these loans in ways that mimicked equity participation, in much the same way as shariah-compliant securities provide debt-like exposure without violating Islamic prohibitions on interest. The Economist says, “Nor would they be able to engage in “proprietary” trading—punting their own capital—though they could continue to offer investment banking for clients, such as underwriting securities, making markets and advising on mergers.”
Smokescreen #4 No real break up plans: According to Simon Johnson,
“The White House background briefing is that their proposals would freeze biggest bank size “as is” — this makes no sense at all. The Bush and Obama administration’s solutions to banking failure was to federally subsidize the already behemoth banks, and encourage them to eat their competition.
Twenty years of reckless expansion, a massive crisis, and the most generous bailout in human history are not a recipe for “right” sized banks. There is a lot of work the administration hasn’t done on the details — this is a classic policy scramble, in which ducks have not been lined up. But we should treat this as the public comment phase for potentially sensible principles — and an opportunity to propose workable details. The banks are already hard at work, pushing in the other direction.
It’s a big potential policy change, and my litmus test is simple – does it, at the end of the day, imply breaking Goldman Sachs up into 4 or 5 independent pieces?
The same Economist article says, “Moreover, the plan is unlikely to help much in solving the too-big-to-fail problem. Even shorn of prop-trading, the biggest firms will still be huge (though also less prone to the conflicts of interest that come with the ability to trade against clients). As for the new limits on non-deposit funding, officials admit that these are designed to prevent further growth rather than to force firms to shrink.”
John Carney notes “The banks are hesitant to speak out in any official capacity, although Goldman Sachs did say they thought less than 10% of their business would be affected. How is this going to really going to break up the banks?
This caused one executive at a competitor to scoff: “Goldman thinks it can still be Goldman, huh? Well, if they’re right, nothing changes. But I’m not sure Obama really can get away with leaving Goldman untouched,” the person scoffed.”
What actually needs to be done
Banks that we deposit our money into should be commercial banks, and do things that commercial banks do, you know, like lend commercially to the community. I don’t see any need for banks larger than community and regionally sized banks. The big national/international banks don’t know how to address the needs of the community. Roosevelt’s Glass-Steagall Act was banking modernization. The 1999 “Banking Modernization Act” was demodernization.
In order to achieve this, first, the scoundrels surrounding the President must be removed. This includes Summers, whose removal along with Geithner, Bernanke, Orszag, and the Emanuel brothers will probably be the first step away from careening over the edge of a pit of no return. This is essential because they will vehemently oppose what reforms that must be done. The President is apparently not capable of thinking for himself. We must therefore remove all corrupting influences whispering into his ears. We must completely split commercial banks from investment banks so banks will return to traditional banking activities, such as making investments in the community, in the physical economy. They may presently make more profit risking our deposits as leverage to speculate rather than produce. This is why we must separate them– in order to remove the temptation and turn them yet again into good servants of our communities.
Wealth is in production, not paper. Speculation produces no true wealth. Yet, strangely, investment banking functions are valued over commercial lending. This activity actually threatens us all because it dries up credit for the real economy– the place where we all live and work. This is why we need a true return to Glass-Steagall, because it will largely eliminate the derivative trade which is toxic to growth of the real economy.
Most of the credit in the world is now controlled by the big banks, thanks to the Bush-Obama bailout. This credit is being tied up by these toxic investment banking activities, like derivative trading that is actually counterintuitive to the health of the real economy, and there is little leftover for any traditional banking functions. Either we force Obama to implement the true Glass-Steagall and really break up the banks, or it’s the austerity panels for all of us.