Don’t Forget The Kanjorski Amendment

By Simon Johnson

Substantive discussion in the House-Senate financial reform reconciliation conference is focusing on the Lincoln amendment, with some back-and-forth on the Volcker Rule (as manifest in the Merkley-Levin amendment).  The FT reports today that Paul Volcker is no longer opposed to the Lincoln approach – now it has become clear that this is really just about (substantially) raising the capital that banks need to back derivatives trading.  And the influential Tom Hoenig, of the Kansas City Fed, appears to be strongly in the Lincoln camp

While our most experienced regulators weigh in, the lobbyists start to struggle.  The mobilization of broader support against gutting the legislation also helps – the earlier Senate debate has raised sensitivity levels and there is a new concentration to the public scrutiny.  The reconciliation process itself is much more open than would ordinarily be the case – a result of outside pressure.

But amidst all this excitement and potential moving parts, don’t forget about the Kanjorski amendment (not currently on the list of most prominent topics).

The Kanjorski amendment would greatly strengthen the hand of regulators vis-à-vis big banks and further reinforce their power to break up those banks.  This is not, unfortunately, the same thing as the Brown-Kaufman amendment, which would have broken up the largest six banks outright. 

Still, the Kanjorski amendment is important for the next time that one or more major banks get into serious trouble.  Judging from their current swagger and the slogans you hear from top bankers (“our risk management is now simply amazing”), we only have to wait a few years for the next bailout cycle.

A great deal of discretion would remain with the regulators, and of course this is a potential danger.  But the heightened public awareness of the idea that “bailouts are bad” at least increases the chances that management and directors would be replaced in a failing megabank.  Whether creditors would face any losses remains a more open question – but at least the Kanjorski amendment, if applied properly, would put that possibility firmly on the table.

Brown-Kaufman was turned back on the Senate floor, but the Kanjorski amendment is an integral part of the financial reform bill that passed the House.  And Congressman Paul Kanjorski is a formidable member of the House conference delegation.

When you argue and push hard this week for the Lincoln amendment and for Volcker-Merkley-Levin, don’t forget to also push for the Kanjorski amendment.

34 responses to “Don’t Forget The Kanjorski Amendment

  1. Isn’t the Kanjorski amendment an example of something that sounds vaguely good in premise but is actually a reactionary assault in the details?

    Specifically, doesn’t it enshrine a new power for insolvent banks to drag the FDIC into court, thereby making seizure and “resolution” even less practicable than it already is, and rendering bailouts even more likely?

    Here’s an example of such commentary:

    http://www.creditwritedowns.com/2009/11/the-kanjorski-amendment-trojan-horse-and-prompt-corrective-action.html

    Based on the evidence I’m sure that no matter what “the law” says, in the crisis the kleptocracy will want to bail out insolvent banks. Anybody remember the Prompt Corrective Action law, the law we already had in 2008? Anybody remember how much clout the law carried where the system didn’t want to obey the law?

    It’s obvious that the same will be true of any sham new “resolution authority”.

    The only limits the kleptocracy will ever submit to will be purely political resistance, if the taxpayers really look like they’re about to revolt; or the structural limits of the tower of debt itself, that is when it finally collapses once and for all.

    But any sham law in itself has nothing to do with either of these, except in the sense that it’s meant to blunt political resistance by pretending to be taking “reform” action (“but you have to be patient!”). The system will never actually recognize the limits of such rigged laws even in the cases where they have to break them.

    The truth is the same as always – we can either destroy the rackets once and for all, or submit meekly to their extortion and tyranny.

    But they can never be “reformed”.

  2. “Paul Volcker is no longer opposed to the Lincoln approach – now it has become clear that this is really just about (substantially) raising the capital that banks need to back derivatives trading”

    I called this weeks ago. Fin services people were screaming about having to divest derivatives desks and how this would push derivatives ops further into the shadows. I said it was nonsense and that the law only requires the holding company to push derivative ops into a subsidiary separate from banking ops. These companies create new subs all the time, it’s no big deal. All this does is prevent them from using capital from their commercial banking ops (which is protected by the government BTW) to support derivative ops. Net-net, as you said, all this does is make banks raise more capital for their derivatives ops, and that’s a good thing IMO.

  3. Challenging The U.S. Economic Model:

    German Chancellor Angela Merkel said:
    Consumption “that is financed by debt is not our mentality,” http://www.bloomberg.com/apps/news?pid=20601100&sid=acg9jQOWj7DQ

  4. “Based on the evidence I’m sure that no matter what “the law” says, in the crisis the kleptocracy will want to bail out insolvent banks.”

    Here’s the reason why all these proposals, from resolution authorities to living wills to new chapters of the bankruptcy code, are doomed to fail:

    The mega banks are highly dependent on short term borrowing (repos and commercial paper) to fund their operations. A significant portion of their funding must be rolled over every day. If they are unable to rollover their financing on any given day, they are effectively out of business. That’s why in 2008 we had all of these news releases of trouble on Friday afternoons after the market close followed by the Fed, the Treasury, and everyone else scrambling all weekend long to arrange a bailout before the opening of Asian markets on Monday morning.

    Unless you address the structural issues by building firewalls (ala Glass-Steagall), directly regulating leverage and maturity mismatch, and imposing hard size caps that actually break up the mega banks, you’re wasting your time and ensuring another crisis will happen in the next decade.

  5. The American consumption model has already been dealt a fatal blow by this financial recession. The German Chancellor is simply stating the obvious.

    Bottom line: We waste a majority of our capital and that behaviour is coming to an end — just as our capital comes to an end. Not a coincidence.

    The major reason banks are fighting finreg is not because they want to make a lot of money, which they certainly do, but because they’re still insolvent.

    If finreg is too blunt, this will become painfully obvious and will trigger another wholesale bankrun. Should be interesting. But there’s simply not enough capital to prop up the system, and not enough time in the world either.

    System’s totally bust.

  6. Mr. Johsnon wrote:

    “…don’t forget to also push for the Kanjorski amendment.”

    CSPAN Rep Paul Kanjorski Reviews the Bailout Situation

    2:55 min/sec into video

    “On Thursday at about 11 o’clock in the morning the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States…of $550-billion in an hour or two….. quickly realized that we were having an electronic run on the banks…”They decided to close the operation…so there wouldn’t be further panic …”

    “Their estimation was that by 2 o’clock that afternoon, $5-Trillion+ would have been drawn out of the money market system of the United States… would have collapsed the economy of the United States and would have collapsed the world economy within 24-hours…..”

  7. Well, There you have it. If She just understood what the facts were/are.
    Then she won’t panic about not having gas or electricity or worry about how she will be able to feed her family. All she need are the facts, then everything will be OK.
    The fact that Paulson was Wrong in everything he did before and after the crash is beside the point. The point is Paulson still has credible standing in the economic community and is not in Jail.

    But then I don’t even have a college degree. How could I possibility understand?

  8. Well, There you have it. If She just understood what the facts were/are.
    Then she won’t panic about not having gas or electricity or worry about how she will be able to feed her family. All she need are the facts, then everything will be OK.
    The fact that Paulson was Wrong in everything he did before and after the crash is beside the point. The point is Paulson still has credible standing in the economic community and is not in Jail.

    But then I don’t even have a college degree. How could I possibility understand?

  9. Re: @ RueTheDay____”These companies create new subs all the time, it’s no big deal”…I seem to recall that it was a subsidiary of “AIG” – Maiden Lane III that caused all the problems? PS.___an Insurance (Fitch Rating Agency) Company at best,…go figure?

  10. When this video first came out very few people believed it – http://www.capitalismgonewild.com/2009/02/electronic-run-on-banks-550-billion.html

    Also this posting has a link to the full congressional research report – http://www.capitalismgonewild.com/2009/02/update-rep-kanjorski-on-550-billion.html

  11. How funny, Simon, in a nice way… “But amidst all this excitement and potential moving parts, don’t forget about the Kanjorski amendment” (and don’t forget how we saved the banking industry through TARP; the old way of doing things has ended but taxpayers haven’t quite gained total access to the system; I don’t know what is wrong with those in charge but we should hear better news from the conference meetings later this week.)

  12. Re: @ Anonymous___The “FOREX Currency Market” (Electronic Exchange/No Uptck-Rule) worldwide, trades on average $2.5tn USD/daily. There have been days where its traded twice that – something else was in the mix? Was it panic – was it a well thought out diviate plan – was it for real, “the final straw”? Ask yourself this – who in the end benefited the most from this ruse? Someone, or some group of people got filthy wealthy while the everyday homeowner lost 40%-50% value in their greatest asset being the “roof over their head, castle – overnite! PS. Something just doesn’t add-up,…?

  13. Earl,
    I am not sure exactly what your point is.
    My understanding has been broadened from reading this blog and the comments and many other blogs and articles on the web regarding economics etc. I thank Simon and James for presenting this blog in a way that the average person can understand. albeit requires on my part to stop and look up the stuff that is over my head.

    I was trying to make the point that Kanjorski is as disconnected from working or not people/families as any pol in government .
    What I heard him say is if she just knew the facts she would not be in a panic and everything would be OK. I listened to the clip again.

    That’s not actually what he was saying. The second time what I got was he was stating the actual facts of the TARP bailout it’s intent. That was 2 years ago.

    Which IMO and many others think did nothing to help average US citizens (and as Kanjorski states was never intended to) who through taxes supplied or will supply the capital to fund the bailout.

    Yes some of us understand the US and world economy would have collapsed. What was done was so poorly orchestrated and all the people involved still have their JOBS. While somewhere around 10 million Americans do not.

    Where I live in Northern Ca. most two wage earner families work 4 or 5 JOBS just to keep their head above water. Some politicians have said they do that because they like it that way.

  14. The Lincoln compromise enables “swap entities” to obtain emergency bailouts from the Fed…doesn’t this weaken the amendement so much that it’s now virtually meaningless?

  15. Dianne Foster

    Thanks so much to Simon for mentioning the Kanjorski Amendment – add that onto the other 3 for citizen lobbying. So am I now given to understand that the Lincoln derivatives amendment is reduced to a kind of resolution authority, not an actual structural change, i.e. spin off? How is that affected by the Cantwell smendment?

  16. LOL. Without debt-financed consumption among its trading partners, Merkel goes Weimar.

  17. Re: @ anonymous___It will never get better, period! Lending small business loans only helps them go offshore for labor/manufacturing. But – we/they can open a McDonald’s/Burger King/WalMart on every crossroad in america creating a wonderful “Service Sector” – Tennessee Ernie Ford’s famous song in the 50’s:…”16 Tons/I owe my soul too the company store”. The Glass Steagall revision has been put so far out in the “back-forty” ,the country is literally going back to the “Plow-Horse (buying ,and subsidizing our state-of-the-arts ingenuity from abroad) – I have so much empathy for that woman, and, “No” I don’t feel her pain (NAFTA) Clinton? Kanjorski always sounds like a broken record thats still plays on a 33rpm. half a century ago, pathetic! Think of Hank Paulson for a moment – Feb/2008 – about the very fact/data that the world’s three (3) largest holders of US Currency Reserves are #1) China (~ $1.6tn); #2)Japan; (~ $1.0tn); and Russia (~ $0.5tn); approx. $2.6Trillion US$ Total of black-mail (manipulation) money. Think about the currency manipulation for a second that precipitated the very cause for the United States “Market Meltdown late/2008″ – now juxtapose that with the “Flash Crash” of May/2010? PS. I love getting in my car,and driving to my minimum wage job with no benefits paying $3/gal gas ,and then going to my part-time job to wash the floors of the “Holiday Inn”? That’s what I’m talking about.

  18. It’s 30 million jobs “gone forever”, not 10 million.

    This was a 30 year heist and in that 30 years the world’s population increased by what? – 3 billion or so?

    Look, RAW FACTS – especially with a major food source (Gulf of Mexico) disappearing before our eyes in that slow motion of cancer taking it’s toll – if we don’t start grabbing some global food off the table ourselves – it’s over. We need to re-sign the Declaration of Independence and print up life-maintenance currency – which at this point is nothing more law-breaking than exercising OUR right to exist…

    If we can grow it, manufacture it, and MAINTAIN it – the money-printing machine DOES NOT HAVE THE RIGHT to say we can’t save our lives.

    How about golf courses setting up tomato crop “rough” challenges…?

  19. earle, florida wrote:

    Something just doesn’t add-up,…?

    earle,

    It doesn’t need to add up, it hasn’t added up, for quite a while.

    All that needs to be added up is, how well you will be prepared to respond to the bad math.

  20. Thanks Anonymous,

    Nice to see I’m not alone.

    http://tinyurl.com/I-wanna-believe

  21. BRIEF-“Rep. Kanjorski says financial reform will include Volcker rule

    (AFX UK Focus) 2010-06-14 18:47

    Article layout: raw

    WASHINGTON, June 14 (Reuters) – * U.S. Representative Kanjorski says compromise to let banks keep derivatives trading desks in an affiliate works to a degree–CNBC interview ”

    http://www.iii.co.uk/news/?type=afxnews&articleid=7942270&action=article

  22. Kliment Voroshilov

    “When you argue and push hard this week for the Lincoln amendment and for Volcker-Merkley-Levin, don’t forget to also push for the Kanjorski amendment.”

    And this idea brought to you by the same person that doesn’t believe that the word “corrupt” accurately describes the relation of our body of legislators to those that fund their political campaigns. Rather, these have been “captured” intellectually, we’re told! With such mind-numbing naivete parading about as the cornerstone of his analysis, is it any wonder that Johnson, like some baton twirling majorette, would sponsor yet another call-your-Congressman drive? I mean if you lack the moral gumption to accept only what scraps the ruling class deigns to give you, you can expect the kind of “financial reform” that is emerging from the Congress. It never seems to dawn on Johnson that an eviscerated “reform” bill shouldn’t be supported at all and that instead of voting, one might organise a general strike as a more authentic way of extracting value out of these bacteria. No thanks, I won’t be “arguing and pushing hard” for the kind of drek that actually will emerge from Washington in a short time no matter how meritorious any individual element of it might be. Johnson increasingly plays the part of ruling class wuss in these situations. And now he wants you to join him.

  23. Obama’s Treasury Dept Working To Defeat Derivatives Proposal ‘Of Utmost Importance’ To Reforming Wall Street

    06-14-10 03:44 PM – Huff Post – excerpt

    A Senate proposal to force banks to shed their lucrative yet risk-laden derivatives units — which is vehemently opposed by Wall Street — is gaining steam, picking up the support of some regional Federal Reserve chiefs with more on the way.

    Yet President Barack Obama’s Treasury Department, led by Timothy Geithner, continues to oppose the measure, Senate aides say, who add that Treasury is supporting Wall Street over Main Street by opposing the measure considered of “utmost importance” to financial stability.

    “It shows the access of the major Wall Street banks in the Treasury Department in spades,” one Senate aide said on the condition of anonymity. Assistant Treasury Secretary for Financial Institutions Michael S. Barr is said to be leading Treasury’s efforts.”

    http://www.huffingtonpost.com/2010/06/14/obamas-treasury-dept-work_n_611205.html

  24. Kanjorski Hopes For Best, But … “Don’t Overdrink. We’re Not Going To Allow You To Overdrink, Get In Your Damn Car And Kill All Our People.”

    June 11, 2010 – Pennsylvania News

    WASHINGTON — “For the last year, U.S. Rep. Paul Kanjorski hosted bipartisan dinners with lawmakers and economic experts.

    Over drinks and a meal, members of the financial services subcommittee Kanjorski chairs met to learn the nuances of a complicated and troubled economic system. He described what resulted, far away from the C-SPAN cameras and the politics, as being a thoughtful exchange.

    That probably won’t be the case now.

    Hours before the first of many conference meetings to negotiate the House and Senate versions of a Wall Street reform bill, Kanjorski said the only thing that will stand in the way of what he’d consider great legislation will be politics.

    “It’s going to be good whatever we do because it’s better than what we have, but we can make it a hell of a lot better if we put the politics aside,” Kanjorski said.

    Good luck. Almost immediately U.S. Sen. Richard Shelby, R-Alabama, complained the talks were off to a “rocky start,” and likened the conference to “political theater.”

    Kanjorski, a Democrat whose 11th District includes Carbon and Monroe counties, has dealt with financial issues in Congress for 26 years. He’s a vocal advocate for regulating Wall Street and is the author of language preventing financial institutions from getting so big that if they fail it would collapse the economy. He drafted a significant portion of the reform bill that stands to forever change business on Wall Street.

    Republicans argue that the bill just creates more Washington bureaucracy, does nothing to address shortcomings of mortgage lenders Fannie Mae and Freddie Mac and has provisions that go far beyond the problems that caused the financial meltdown.

    But Kanjorski says that’s where the politics take over.

    “What I anticipated hearing the most was that government is suddenly playing the role of Big Brother or becoming communist or socialist or controlling. But the reality is, I think, this last crisis was so grave, so fundamental, and when you talk to the titans of capitalism they know that if we hadn’t taken the rescue plan, the entire world economy would have disappeared as we know it,” he said.

    Kanjorski is one of 43 lawmakers who will meet to hammer out a compromise on a nearly 2,000-page financial reform — one of the Obama administration’s foremost priorities. He’ll be sitting in the seat directly to the left of Massachusetts Democratic Rep. Barney Frank, the conference committee chairman.

    The goal is to have the bill completed by the July 4 recess and before President Barack Obama goes to Canada for the G-20 summit.

    Sitting in his office on Capitol Hill, Kanjorski acknowledged that one of the toughest challenges is to explain how the legislation affects the everyday American. He said Republicans have done a better job of demonizing “bailouts” and tying this bill to bailouts than the Democrats and the administration have done of educating the public.

    When Congress passed the bank “rescue plan,” as Kanjorski calls it, “we forgot about the public relations aspect.”

    “If we hadn’t taken that action, the people who would have really paid the price are not the bankers.…We would have had 50 million unemployed and we would have bombed ourselves back economically speaking to the 16th century,” he said.

    Kanjorski fears that a few politicized issues during the conference will steal the spotlight from the substantive matters. One, he noted, is a controversial amendment by Senate Majority Whip Dick Durbin of Illinois that caps the fees debit card companies can charge retailers to process transactions.

    “Hell, up until two weeks ago I never heard of it,” Kanjorski said, although he said it’s the issue that his office has received the most calls about.

    For Kanjorski, it’s most crucial to ensure the 2008 economic meltdown doesn’t repeat itself. His “too big to fail” language would act as a “preemptive strike,” he said, by giving federal regulators the power to dismantle financial firms deemed so large and inter-connected that if they fall it would unravel the entire economy.

    The goal, he says, is to ensure that taxpayers never have to bail out Wall Street again.

    Kanjorski’s wording appears only in the House version. The Senate bill contains a similar piece authored by Paul Volcker, former chair of the Federal Reserve. Kanjorski’s plan would give regulators more power.

    The issue is not the most hot-button, as the industry is most opposed to a provision regulating derivatives. But Republicans still say the “too big to fail” effort gives Washington too much power over capitalism and that such power would inevitably lead to more taxpayer money spent bailing out banks.

    Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable, a policy group made up of CEOs of the world’s 18 biggest financial services firms, including Goldman Sachs, Citigroup and JPMorgan Chase, has been critical of Kanjorski’s measure.

    “It will act as a strong disincentive for financial firms to grow and to be able to serve corporate America,” Talbott told Bloomberg News in November.

    But Kanjorski said any firm so big that its risks would damage the entire economy is just too big.

    “It’s like a drunk. You’re not a drunk or have an alcoholic problem if you can go to the bar, have two drinks and go home,” he said. “If you can contain yourself…that’s what we’re saying to corporations. Don’t overdrink. We’re not going to allow you to overdrink, get in your damn car and kill all our people.”

    http://tinyurl.com/2aa94kd

  25. Kanjorski wrote:

    “We would have had 50 million unemployed and we would have bombed ourselves back economically speaking to the 16th century,” he said.”

  26. In Jail For Being In Debt

    Star Tribune – excerpt

    “Deborah Poplawski still gets angry about her arrest in Minneapolis last year over an old $250 debt.

    During her night in jail, she worried about abandoning her 15-year-old dog, Nina, in her apartment. You committed no crime, but an officer is knocking on your door. More Minnesotans are surprised to find themselves being locked up over debts.

    June 9, 2010 – Star Tribune

    As a sheriff’s deputy dumped the contents of Joy Uhlmeyer’s purse into a sealed bag, she begged to know why she had just been arrested while driving home to Richfield after an Easter visit with her elderly mother.

    No one had an answer. Uhlmeyer spent a sleepless night in a frigid Anoka County holding cell, her hands tucked under her armpits for warmth. Then, handcuffed in a squad car, she was taken to downtown Minneapolis for booking. Finally, after 16 hours in limbo, jail officials fingerprinted Uhlmeyer and explained her offense — missing a court hearing over an unpaid debt. “They have no right to do this to me,” said the 57-year-old patient care advocate, her voice as soft as a whisper. “Not for a stupid credit card.”

    It’s not a crime to owe money, and debtors’ prisons were abolished in the United States in the 19th century. But people are routinely being thrown in jail for failing to pay debts.

    In Minnesota, which has some of the most creditor-friendly laws in the country, the use of arrest warrants against debtors has jumped 60 percent over the past four years…. ” – excerpts

    http://www.startribune.com/local/95692619.html

  27. Great post by Professor Simon Johnson.

    We need to keep informed on the progress of the banking and finance legislation. The Americans who still have enough literacy to read the NYT or an above average newspaper appreciate it greatly. And the number of Americans who care about derivatives reform is larger than is perceived. Notice Blanche Lincoln last minute surprise, and that was fighting against union money.

    I would argue that her relocating her backbone on derivatives legislation and her reach out to the black communities helped her the most. If Lincoln shows some principles and ethics the people will get out and vote for her.

  28. Bayard Waterbury

    This is just one more element in the mix that should be passed. I’m not expecting it. Until we have a Constitutional Convention and amend our constitution to eliminate the illegal bribery now codified by the Supreme Court, we won’t get a Congress that represents anything but the rich and powerful. Anyone wish to argue?

  29. theotherguydidit

    Brooksley Born tried in 1998 to get the Congress critters open their eyes to what was going to happen.

    Thank God, Greenspan, Rubin, Summers, and Geithner were there to save us.

    Oh, wait.

    We’ve got….

    Hell! Just burn the whole thing down.

  30. I second the motion.

  31. Re: @ Annie____”the people’s “congress” use both ears as a shuttered one eye cyclops does for myopia – occasionally blinking with amicable prejudice – we… the collective all…reach with a youthistic psycloptic vision – sadly the raven that nestles with the “congress” cackles a clarion call of a vulture – our senses numbed by the institution” PS. Here’s a follow-up Annie, I think you will appreciate : “4-Non Blonds” – Titled ; What’s-Up (Video/Song)

  32. Typical fear tactic to counter any consideration about other news about ousted (England and Australia) Israeli diplomats

    and jailed (Ireland and Poland) Moussad agents…

    The amount of criminal ACTS going on all at once as gears in the all out heist and WAR against hard earned civilization is not sustainable.

    Nihilism is NOT sustainable.

  33. Financial reform? How about STARTING with things that HELP America’s unemployed, like TAKING the TEETH away from the creditors. They take a risk whenever they extend credit to anyone making under 50k a year, they should have NO rights to secure UNSECURED DEBT, after the fact. I had a credit card with Discovery Bank. I did NOT agree they could put a lein on my property, seize my bank account or any of those things. Yet when I couldn’t make payments 4k turned into 7k and they inflated it with legal fees, after THEY refused to work with the income I had. Now I am paying them 100 a month I don’t have without letting other bills go. It is OUTRAGEOUS. I’m in my 50’s a single parent of a nearly adult child and I did NOT agree to any of that what is the meaning of UNSECURED debt in America? They probably already WROTE THIS OFF as bad debt on their taxes, too.