By Simon Johnson
The bank lobbyists, it turns out, missed one. They and their congressional allies were able to gut the Volcker Rule, the Lincoln Amendment, and almost everything else that could have had a meaningful effect on the industry.
But, as I point out in a Bloomberg column today, they couldn’t get at (or didn’t sufficiently understand?) the Kanjorski Amendment. This Amendment was originally proposed by Congressman Paul Kanjorski (chair of an important House subcommittee on capital markets) during the fall. Against the odds, it survived in the final House bill and now – probably because it has stayed mostly below the radar – remains in the reconciled legislation.
Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a “grave risk” to the financial system.
The Federal Reserve is in the hot seat on this issue – and it needs 7 out of the 10 members of the new systemic risk council to agree to any action. But for the first time someone at the federal level must make a determination regarding whether an individual firm poses system risk.
And congressional committees can call upon the responsible people to explain how they determine whether a megabank is or is not dangerous. What are the risk metrics they use? To what extent do they take on board outside opinions? How much do they consult with the bank itself?
This also creates important space for critics. There are many people – outside of the big banks – working on developing ways of assessing system risk. Again, congressional hearings can raise the prominence and credibility of this work. The question will be: If the regulators are not taking these perspectives into account, why not?
This may all sound rather technical, and to some extent it is. But it is also intensely and pointedly political. The Kanjorski Amendment makes it clear that system risk must be assessed and dealt with. And it assigns clear responsibility for this issue – along with a cut and dried list of remedies.
The debate on big banks and the dangers they pose is far from over.
The Baseline Scenario 
The regulators were not enforcing the laws in place that would have prevented the last meltdown. In spite of their incompetence and negligence, no regulator has been fired and several have been promoted. Evidently, the banks figured that they need not gut this provision since they’ve already captured the regulators. You pointed out that US regulators support TBTF banks due to European banks competing with them in global markets in earlier posts. At least, that is the Treasury’s argument that TBTF institutions are needed to compete in global markets which is a lie. By the time the next financial crisis hits, it’ll be too late to fix the risky banks that posed the greatest danger. Some regulator may lose his job, or retire to a cushy job at some bank, because he didn’t enforce this part of the law, but it will be way too late by then. Or possibly, he’ll be promoted to Treasury or be reassigned to some other position within the Fed. Since the wrecking crew we have in place now are the same people who caused the mess we are in in the first place, it’s likely that no one will be fired for not doing their job and enforcing the existing laws the next time this happens either.
This would not be the first regulatory legislation with far-reaching effects that passed under the radar. The entire U.S. structure of hazardous waste regulation rests on a section of the Resource Conservation and Recovery Act that was overlooked by industry lobbyists when the law was enacted in 1976. Environmental lobbyists intentionally distracted their industry counterparts with a campaign for a different part of the bill, eventually dropped, requiring deposits on soft drink bottles. At the same time, lengthy negotiations were under way over the Toxic Substance Control Act, whose provisions (aside from a ban on PCBs) the chemical industry succeeded in gutting.
so you think this passes basic constitutional tests?
“Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a “grave risk” to the financial system.”
Great, but what is more needed is someone with the powers to break up the regulators when they pose a grave risk to the financial system… as the current regulators do.
Though everyone knows that bank and financial crisis are always born out of risks that were a priori considered to be no risks… the financial regulators have increased the ex-ante bank returns from investing in what a priori seems not to be risky… precisely the stuff than bank crisis are made of.
We have regulators who are pushing banks to dangerously overcrowd what would otherwise be safe-havens.
Can you say “Interstate Commerce Clause?”
Understanding the assumptions underlying the Central Limit Theorem is essential for regulators. Bankers will engage in pettifogging and smoke blowing as long as they are allowed to do so, always claiming that they are protected by diversification of asset class.
Simply put, under extreme stress, there is only one asset class. If one is net long across the summation of exposures, one takes a loss. If one is using the 100 to one gearing ratios, one is bankrupt.
Make bankrupting a major bank a capital crime (like that will happen) then there will be no more major bank failures.
As long as Obama, Bernanke, Summers and Geithner are in power no meaningful financial reform can or will occur. It is all one cruel sad joke on the American people who are too busy texting or twittering to notice or care.
No accountability = no confidence
When Bernanke said “Subprime is contained” the import was that a meltdown of the subprime market would not engender systemic risk. As we know this was completely off-base. Yet Bernanke has not been held accountable for this clear failure of foresight and leadership. So why should we have any confidence that a systemic risk council will act in a responsible way?
this is kind of funny because i thought at sometime GS Ceo Blankfein said something to effect ‘we don’t need more regulations – we just need a systemic risk evaluatator’. I may be incorrect in understanding what he said(sounds a lot like ‘hey we are dumb also and need someone looking over our shoulder’) but he may now have one. Wonder what he will say when he figures this out.
“Simply put, under extreme stress, there is only one asset class. If one is net long across the summation of exposures, one takes a loss. If one is using the 100 to one gearing ratios, one is bankrupt.”
From one old guy to another, finally somebody who understands risk analysis. Make the D&O insurance guys pay off if they have any money left.
Potentially, the Kanjorski mechanism could be effective. However, it depends on key people being aware, active and not bought off. It’s hard to be optimistic.
SHHHHHHH! Now look what you’ve done, Simon!
This article should have waited until the Obama signing ceremony…
“As long as bankers are rich and bought and paid for politicians are in power no meaningful financial reform can or will occur.”
Fixed that for you.
>Wonder what he will say when he figures this out.
Wonder no more: “How much will that regulator cost?”
It needed fixing. A stealth attack on ‘Liberals’ methinks? Nice work!!!
Exactly. Simon, if there are any more good things in this bill, please don’t write about them until they are signed into law.
And let us not forget that the regulators are, by mean of their regulations, the largest supplier of systemic risk and so I really wonder how they are going to handle that conflict of interest.
I think my version was both more timely and more accurate.
I neglected to add that virtually no one has been held accountable, but Bernanke’s clueless overconfidence (at best) stands out.
According to today’s http://www.marketwatch.com, the reconciled bill also contains the exact contrary of the Kanjorski amendment today touted by Simon Johnson: “The provision [for cap on bank size achieved by M&A–Kanjorski not mentioned] has one exemption, however. It permits mega bank deals beyond the cap in the event of an impending financial crisis — following in the footsteps of the government facilitated bank deals that sought to stem the 2008 crisis.” (article by Ronald D. Orol,a MarketWatch reporter, based in Washington) Mr. Orol, like Prof. Johnson, refers to the discretionary power of regulators in effectuating provisions of the reconciled bill. Please clarify, Prof. Johnson: If Mr. Orol is correct, has not the Kanjorski proviso already been negated?
It seems to me, much as Dean Baker of CEPR has argued repeatedly, that federal regulators, policy makers and so forth have always had the power to restrain or finish off the mega banks. The problem is the lack of will, the lack of effective action. The Federal Reserve, the FDIC, other financial regulators, not to mention the Antitrust arms of the Justice Department had and have the power to stop this. An ammendment like this is just as meaningless as all the laws and regulations that were on the books or could have been put in place during the past decade.
The enormous cost and long term menace of the federal government subsidizing a cartel of giant banks that have proven utterly incapable of selecting prudent, productive investments should be obvious and clear. Trillions of dollars spent on these banks is trillions of dollars not spent on farms, factories, effective research and development, good jobs, and all sorts of other good things that most people want.
This is only likely to be fixed if the Left and Right set aside their (dare one say) petty differences, as effectively occurred during the first TARP vote in the House of Representatives, and gang up on the banking cartel. The common interest is clear and can be easily argued.
So start talking to the conservatives, libertarians, business people and so forth and emphasize the enormous cost of these policies, the threat to genuine growth of trillions spent on lousy investments like housing bubbles, and the threat to individual liberty of super-powerful state subsidized banks.
Sincerely,
John
Um… “clueless overconfidence” is way too kind. I should have said “incompetence.”
Blaming the current crop of corrupt politicians is to narrow-minded. A broader view is required to actually control or fix the sickness (general corruption) instead of just treating the symptoms by just focusing the current Wall St stooges.
Seems like those of us with that view can’t get enough of the normal folks angry enough for the politicians to care. Do you have a good resource that I can show to somebody not so versed in all this that would convince them with a 5 minute, mostly emotional argument? I do not expect logic and reasoning to work (see: most winning political rhetoric for an example of why), so do you know of a good appeal to emotion that can be used?
I think the key to the politicians here is numbers, and right now we just don’t have them. We need enough people (read as “voters”) to make the money that banks are waving around look paltry in the eyes of a politician about to lose his job.
“But, as I point out in a Bloomberg column today, they couldn’t get at (or didn’t sufficiently understand?) the Kanjorski Amendment. This Amendment was originally proposed by Congressman Paul Kanjorski (chair of an important House subcommittee on capital markets) during the fall. Against the odds, it survived in the final House bill and now – probably because it has stayed mostly below the radar – remains in the reconciled legislation.”
bmoore wrote:
“Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a “grave risk” to the financial system.”
The regulators were not enforcing the laws in place that would have prevented the last meltdown. In spite of their incompetence and negligence, no regulator has been fired and several have been promoted.
Evidently, the banks figured that they need not gut this provision since they’ve already captured the regulators.”
Agreed.
Surely you jest!
How else do you plan to “actually control or fix the sickness” except by replacing the people who are preventing this from happening with people both willing and able to meet the problems head-on?
Excuse me Mr. Simon Johnson MIT genius but since the last good thing in FinReg is “under the radar” of the oligarchs you would be wiser to STFU about it.
The “current crop of corrupt politicians” who operate under either of the major brand labels of convenience, i.e. D or R.
The “current crop of corrupt politicians” who operate under either of the major brand labels of convenience, i.e. Democrat or Republican.
The Kanjorski Surprise will be erased. Everything else has.
Quite frankly, you have to get the vast majority of normal people angry enough to force changes on the laws. So long as the law (and lack of enforcement of the law) remains as it is, the problem itself will not be treated. You will only be treating the symptoms by throwing out the current corrupt group and replacing them with another corrupt or soon-to-be-corrupt group.
You don’t cure disease by treating symptoms. You have to actually fight the disease; in this case its the lack of anti-corruption laws or lack of enforcement for the few laws that are there. To fix THAT issue you don’t focus on throwing the current politicians out. You work on fueling, focusing, and sustaining the anger of the people to get laws changed and enforcement in place. THEN you toss the current crop of bums out.
Again , those monkeys (see no evil, hear no evil, speak no evil) are confident they will once again be laughing all the way to the bank.
The subject matter is too complex for the general populace. Not to mention the confusion caused by the numerous sources of dogmatic disinformation. The choice faced by many politicians is this: accept campaign contributions and stay in office while recieving perks, or recieve non of these things and face a relentless attack by certain media circuits. The discussions of campaign finance reform has been sidelined by the many other issues of the day, but it still very relavent.
Many of the people who object to this usually have a very simplistic (or selective) understanding of economics which does not include externalities. Your correct, a populist commentator for this viewpoint is needed.
John, beautiful job of articulating the tremendous opportunity costs of this debacle. Technological progress takes years of research, most people have no idea the long term impact this is having. Research labs around the country are closing.
seven out of ten members need to agree?
Then it will never happen. This provision is meaningless and I’m surprised to see Mr. Johnson point at it.
I believe that Bernanke knew that he was blowing smoke when he made the statement. He, just as Greenspan before him (and perhaps because of), was thinking that his mere pronouncement would make what he said true. These guys both suffer from a belief in their fiscal divinity. They see themselves as divine, not unlike Lloyd saying that GS was doing “God’s work.” These people are certifiable sociopaths, or intent on destruction (I pick the former, at least, for Lloyd). Anyway, I don’t believe that the statement was either overconfidence (it accidentally turned out that way), or clueless (since I believe that there was strong belief and intent).
This discussion somehow reminds me of the BP situation. Not having to do with any energy legislation, but rather with what we can expect from regulators. Now it has been widely published that MMS knew about the dangers and risks involved in Macondo for a very long time, and with this specific drilling in early February (two months before the catastrophe). It was also well known that if something went wrong (and that was likely from the start) that the ensuing problem might well be unresolveable (which is probably is). Of course that very problem may render this entire discussion moot, since it bodes ill for the survival of life on planet Earth. At any rate, assuming we somehow survive the BP issue, I don’t trust anyone in the government to effectively regulate any area of the plutocracy. Sorry, but until we get a revolution or Constitutional Convention, it is unlikely. Every good thing could have been left in the bill, it could have passed 100 to 0 in the Senate, and there still would be no assurances of it being successful.
Last time I checked it was the large banks that had bribed the ratings agencies for AAA ratings on garbage paper (CDOs), not the regulators.
The only conflict of interest I have seen is Goldman Sachs doing proprietary trading, but I’m sure you can find a creative way to shove responsibility for that on anyone other than a banker.
It’s interesting to note that Marketwatch.com (although semi-useful for following intra-day price movements of stocks) is owned by Dow Jones, which is owned by News Corp., which is owned by Rupert Murdoch (AKA Fox News).
You might ask yourself if news from companies owned by the ultra-Republican ( not conservative, as that word is so often misused) Rupert Murdoch is reliable. I have my doubts.
I totally agree that regulators have been captured in the past, but what can make this different is the participation of all of us – that means all of you – to keep this issue alive in the public, keep stoking that anger and suspicion. To this end I thank Simon Johnson for his constant efforts to enlighten the sheeple. And to keep the Kanjorski Amendment alive and well.
“Appetite, with an opinion of attaining, is called hope; the same, without such opinion, despair.”
Thomas Hobbes (1588 – 1679)
One solution to the problem of unreliable or miscreant regulators would be their placement in military penal units assigned to serve only during the most dangerous offensive operations in Afghanistan. A direct connection would be made in part thereby between those most responsible for corruption and the policies that issue from it. A similar program of emergency nude diver units could be instituted for the manual recaping for oil well leaks and so on. I fully suspect that a noticible improvement of regulatory efficiency would come about.
regulators upholding laws and regulations!? where? lol
right and i got wetlands in West Texas if you believe in regulators regulating. lol
Imagine that! Regulators regulating!!!!!
novel idea! where did that idea come from? ancient Greece or Rome, perhaps. not in St. Ronnie’s America.
Government bad, Regulations Bad, Free market good!!
Really? You think Bush/Cheney was a good admin? You think McCain/Palin would be doing a great job? You think Senator Inhof of Oklahoma is man we need in a position of power in the 21st Century? Those are the alternatives. Can you catapult us into a parallel universe?
Interesting read…but why does public information have too be pryed out of the hands of the politicians, and pulic domain – is this not a democracy? The secrecy has begun to metastasize our consciousness leaving us barren idiopathic aberrants. Here is a chronologically choreographed script of the (FRB) Federal Reserve Bank Chairman’s names, and what their leadership has done to a “Free Country” with a secret (non-american/private entity?) society running our finances: #1/14 Charles Sumner Hamlin (8-10-14/8-9-1916); #2/14 William Proctor Gould Harding (8-10-16/8-9-1922); #3/14 Daniel Richard Crissinger (5-1-23/9-15-1927); #4/14 Roy Archibald Young (10-4 27/8-31-1930)***(Master of the 1929 Stock Market Crash*); #5/14 *Eugene Issac Meyer (9-16-30/5-10-1933); #6/14 Eugene Robert Black (5-19-33/8-15-1934); #7/14 **Marriner Stoddard Eccles (11-15-34/1-31-1948); #8/14 Thomas Bayard McCabe (4-15-48/3-31-1951); #9/14 Wm.(William) McChesney Martin Jr. (4-2-51/1-31 1970); #10/14 Arthur Frank Burns (2-1-70/1-31-1978); #11/14 George William Miller (3-8-78/8-6-1979?); #12/14 Paul Adolf Volcker (8-6-79/8-11-87); #13/14 Alan (?) Greenspan (8-11-87/1-31-2006 *******); #14/14 Ben Shalom Bernanke (2-2006/ Present?)…this is what I’m talking about – it has to do with freedom of choice!
Since in the final statement of the G10 summit in Toronto, of which US government is a signatory, we find, with respect to financial regulatory reform, the Basel Committee on Banking Supervision mentioned 11 times, and the Financial Stability Board (FSB) 27 times… I would not really call it a totally “secret society”
But, since in the 2.319 pages of the Financial Regulatory Reform approved by the House of Representatives in the US Congress we do not find any of those two entities mentioned once… it sounds more like a sort of secret mistress to be kept in style in a pied-à-terre in Europe very far from Washington.
Watch your step. The blog is now censored/moderated.
One assumes that you’re watching your step?
Is this some prissy, cowardly attempt to intimidate or muzzle kliment? If you have some official position with this blog at least have the cojones to say so. Otherwise take your arrogant “watch your step” and stick it in your ear.
“But for the first time someone at the federal level must make a determination regarding whether an individual firm poses system risk.”
This statement is absolutely false. The current FDIC Act “systemic risk exception” requires such a determination approved by 2/3 FDIC Board, 2/3 Fed Board and Treasury in consult w/President. This was done in the case of Citi and the Temp Liability Guarantee Program.
As for references to ability to get info out of the agencies (FDIC and Fed in particular) I have spent the past year trying to do the same in 3 federal lawsuits and it is not easy:
http://www.scribd.com/vernmckinley
Re: @ Vern McKinley___The “Freedom of Information Act” (FOIA) won’t even help your cause. What will happen is an atypical “Modus Operanda” (MO) government charade ala`carte. This will be determined not as a “Fiscally Systematic Risk”, but will magically morph into “National Security”? Bank on it!
“Interesting read…but why does public information have too be pryed out of the hands of the politicians, and pulic domain – is this not a democracy?”
It is no different here in Canada. Information is power and more often than not, that is information is redacted before released to the public.
You mean this would operate somethimng like the law requiring Treasury Department to ascertain whether countries are engaging in “currency manipulation?” Well, I fully expect it to be equally effective.
“The debate on big banks and the dangers they pose is far from over.”….please, please, don’t let the debate be over….i need to sell more copies of my book. That is the only thing that matters.
Oh great — we only need 7 of 10 to determine systemic risk.
In other words, 4 can block action. This will be less effective than the senate.
The problem with all the real-time problem-detectors is this.
As trouble develops, and both the market sees it or the prior decisions of the “detectors” indicates action might be taken, the effect, even the reality, of their expected decision will be undercut by several steps: hedging, bets anticipating (ie spreading) contagion, manipulation of the books to skirt limits, deliberate pushing of the entity toward the boundary by other players (eg collateral calls, refusal to lend, etc).
In other words, we have simply created one more discontinuity in the system, one more non-productive event on which to bet.
Absolutely!
There are now more financial courses about how to predict a change in the opinion of credit rating agencies than there are on evaluating the real credit standing of a company.
If you doubt how useful the exercise is look at what the GAO wrote back in 2003 on the IMF’s capacity to predict crisis. http://unsustainabledebtsustainability.blogspot.com/2010/07/us-gao-report-on-imfs-ability-to.html
And has anyone seen the IMF’s all its fine and dandy report on Iceland a couple of months before the crisis?
“Quite frankly, you have to get the vast majority of normal people angry enough to force changes on the laws.”
That won’t get angry as long as gas is cheap and porn is delivered via broadband.
Thank you Ed.You are absolutely right on the mark!