Wall Street Lobbyists’ View of Financial System Reform
by Linda Beale
crossposted at Ataxingmatter
(Rdan…Linda is still in DC for briefings at Treasury so is not available at AB just now)
Wall Street Lobbyists’ View of Financial System Reform
[edited to add link 5/4/10 at 3:12 pm]
The Washington Post has an interesting story on the bank lobby’s thinking about financial reform. Klein, Lobbyists fret over legislation to reshape financial system, Wash. Post, May 4, 2010.
Basically, the story line is this (with some added interpretive flourishes of my own, in italics).
Bank lobbyists didn’t like the House bill. Too tough. They expected the Senate bill to be better. Sure, Dodd had a couple of provisions they didn’t like, but with Republicans Shelby and Corker making lots of noise about the need for bipartisanship and Dodd trying hard to get a bipartisan bill, there was pretty strong expectation that the bill that came out of that negotiation would be much more favorable to the bankers’ positions. But then something happened. Senators started worrying about upcoming elections.
(My goodness, what might ORDINARY VOTERS think if the senators don’t vote for tough regulation of the banks that caused the Great Recession and the bankers who flew through it with hardly a scrape, while ordinary Americans are suffering high unemployment, stifled dreams, and long-term fears about their financial security, while still paying exorbitant fees for everything provided by banks and getting loans, if at all, only by paying interest at quite a spread over the almost zero rate the bank has to pay to borrow from depositors or from the overly generous FED window.)
The bill made it out of committee with no amendments. None. It was a party line vote (GOP against) but all those expected GOP amendments didn’t materialize. It just took 20 minutes to vote it out of committee and make it possible that there would be real floor debate.
And the lobbyists’ response is this:
Instead of getting the provisions the banks don’t like loosened, the Senators’ thinking about upcoming elections has them adding tougher provisions. Those provisions are likely to actually impact the banks’ profits (their big business in derivatives and proprietary trading, most of it risky, a lot of it used to help banks or others evade regulatory requirements or avoid taxation through some kind of arbitrage) and their “global competitiveness” and benefit to the American economy
(Beale here…read this as –their ability to do all the risky stuff that big banks in other countries may still be able to do, and if you can’t be as risky as the next bank, you won’t make as much mone and, after all, what’s good for the big banks should be understood to be good for the American economy).
So what’s the solution? Why, the usual deal that lobbyists have been comfortable with over the last few decades–getting inside access to the men who have power to shape the bill in a back room somewhere (and letting them know that working for the lobbyists is their job, not paying attention to the ordinary people who put them in office). Says one lobbyist interviewed by the Post:
“They’ve got to get this thing off the [Senate] floor and into a reasonable, behind the scenes” discussion, said one lobbyist. “Let’s have a few wise fathers sit around the table in some quiet room” and work out the details.
Maybe, the lobbyists say, they’ll even have to accept a banker-unfriendly bill from the Senate, but they can work the Conference Committee when a few players from the House and Senate get together to iron out the differences between the two versions of financial reform–maybe even Barney Frank, who has been pretty critical of big banks lately (they seem to think that he can be influenced to be their best friend forever).
And if not, then they’ve got full employment for the next ten years, as they work to persuade Congress to weaken whatever bill is passed (just as they did with the Glass-Steagall Act, where they wheedled and bargained to get exemptions and waivers and eroded the law until the Great Recession was the result).
“I think it’s going to be job employment for me for the next decade, undoing some of this stuff,” said one lobbyist…..
Beale here: Now folks, it’s pretty revealing when lobbyists have become so accustomed to their privileged access and backroom dealings with politicians –as went on in regards to Cheney’s energy discussions, and each of the Bush tax cuts drawn up by a secretive group of GOP without any sunlight (or bipartisansip), for example, and too much with the health care bill as well–that they don’t even bother to hide their scorn for the public’s views and their hopes for getting that back room deal to go their way. No wonder Wall Street honchos have been so brazenly arrogant about their “entitlement” to bonuses, their rights to continue proprietary trading and hedge funds and derivatives desks–“doing God’s work” says Goldman CEO Blankfein–when they are merely running a casino market to strip as much gold off suckers as possible with their “financial innovations” like synthetic CDOs that made the market many times more volatile than “real” securitizations (which themselves were too easily done for our own good).
This is why I have long been worried about the “safe harbor” for mark-to-market rules for tax purposes under section 475, which lets banks use various types of financial statements to determine their “mark” that sets their income for tax purposes. It is far too subject to manipulation, and what we have seen is that there are simply no voluntary curbs that will constrain bankers from taking high risks to get the results they want to get to make their own pocketbooks even fatter.
Accordingly, I’m convinced that tough financial reform needs to break up the big banks so that we don’t have any that are “too big to fail.” Trying to maintain them big and then monitor the systemic risks they cause is a losing proposition, since their hubris and engineering smarts means they will always try to be one step ahead of regulators so they can make more money. See, e.g., The Fourteenth Banker, Huffington Post, Apr. 13, 2010 (management banker at one of our megabanks admits to ethical crisis at banks and need to move proprietary trading so that banks get back to supporting America’s entrepreneurs). The Senate should enact a bill with the Lincoln curbs on derivatives and a ban on proprietary trading for investment banks as well as the Kaufman limits on size. Let the accounting rules fall where they may, by the way, with more, not less, emphasis on taking losses from disrupted markets into account and less, not more, emphasis on mark-to-model accounting. Make bank regulatory decisions independently based on whatever criteria are important to that. All the other measures–capital reserves, liability limits, consumer protection agency with independent enforcement powers, a systemic review council–are important, but without those real teeth they won’t be enough to curb the banks’ appetite for outsize bonuses and the risk that they encourage.
with more, not less, emphasis on taking losses from disrupted markets into account and less, not more, emphasis on mark-to-model accounting. Make bank regulatory decisions independently based on whatever criteria are important to that.
Marking – not taking – losses from disrupted markets was a signficant cause of the crisis. Insurance companies, including AIG, generally follow a hold to maturity investment profile, but the accounting hurdles to categorize something as hold to maturity (vs. available for sale) are pretty high (e.g, you purchase $50MM of Compaq senior debt, $50MM of HP senior debt and $50MM of Palm senior debt in 2002. After the latest merger you’ve got $150MM of single credit exposure, so you decide to sell $50MM of debt – the remaining $100 is now AFS even though the intent is to hold to maturity).
Coupled with the ratings agencies who allowed (or explicitly used) market prices (stock price, CDS/debt spreads) in setting their credit ratings – this is a good way to get more bank runs, not less.
Some experts keep talking about the looming crisis in Commercial Real Estate, but we haven’t seen it yet (it’s always late cycle, so it’s not surprising we haven’t seen it yet even if it’s going to happen) and part of the reason is that there’s no “market” to mark to, and because of benign historical losses, the mark to modeled losses are that destructive to capital.
Accordingly, I’m convinced that tough financial reform needs to break up the big banks so that we don’t have any that are “too big to fail.”
Lehman or Bear Stearns would likely have fallen below the line that defines “too big”. AIG FP as a stand alone entity (though it couldn’t have existed stand-alone) also almost certainly would have been below “too big”. Canada and Australia had – entering the crisis – much greater concentration in their banking systems with minimal problems (partially because Australia navigated a soft landing to its own housing bubble).
If we are lucky, maybe we will soon find out that all of Europe’s banks are technically insolvent. Then maybe we can ignore our banks when they tell us they need to be “competitive” with a bunch of suicidal competitors. With us at their backs of course.
But who knows. Maybe Trichet will finally see the light and announce a huge QE program, buy all the PIIGS debt, flood euro banks with cash in the process, and it’s off to the races again?
It’s anything but deflation as the goal, right?
P.S. Actually, I’m not sure if Trichet is legally prevented from doing QE, or if he just hasn’t warmed up to the idea yet.
m.Jed – there IS a market to “mark to” – the FDIC has been selling commercial real estate secured loans that were held by banks that failed for over a year now. Some of them are performing and some of them are non-performing. There should be plenty of data.
Bankers, I think, don’t usually get, or have much reason to get, the difference between ‘politics’ (in which legislators can be easily bought) and ‘sovereignty’ (which comes into play when politicians realize that their power, not their wealth, is at stake.
Politicians, by definition pretty much, are people who value power highly. Normally, being cozy with bankers is a good way to preserve their power while getting richer. However, when banks’ power or actions directly threaten politicians’ power — either by causing the risk that they’ll be diselected, or by raising the risk of more prejudicial methods of disestablishing power structures — then the politicans are likely to behave in ways that are way out the long tail of bankers’ calculations. Politicans will do things to preserve their power that will seem utterly irrational to bankers — beyond their ken — and this is their weakness.
This weakness is compounded by the fact that power — and especially sovereign power — is not bound by any of the constraints that bankers assume. Sovereign states can and do repudiate debt, ignore bonds, arrest and execute people who threaten their power, and willingly do ‘economically irrational’ things, sometimes.
Bankers always think they have the upper hand, and normally they do…until they don’t.