Year: 2010

Focus On This: Merkley-Levin Did Not Get A Vote

By Simon Johnson

After 9 months of hard fighting, yesterday financial reform came down to this: an amendment, proposed by Senators Jeff Merkley and Carl Levin that would have forced big banks to get rid of their speculative proprietary trading activities (i.e., a relatively strong version of the Volcker Rule.)

The amendment had picked up a great deal of support in recent weeks, partly because of unflagging support from Paul Volcker and partly because of the broader debate around the Brown-Kaufman amendment (which would have forced the biggest 6 banks to become smaller). Brown-Kaufman failed, 33-61, but it demonstrated that a growing number of senators were willing to confront the power of our biggest and worst banks.

Yet, at the end of the day, the Merkley-Levin amendment did not even get a vote. Why? Continue reading “Focus On This: Merkley-Levin Did Not Get A Vote” →

Reforming Credit Rating Agencies

This guest post was contributed by Gary Witt, an assistant professor in statistics and finance at the Fox Business School at Temple University. He was previously an analyst and then a managing director at Moody’s Investors Service rating CDOs from September 2000 until September 2005. Witt also caught one error in 13 Bankers, which I explain here.

Many readers will think that the last person whose opinion should be consulted on the issue of rating agency reform is a former rating agency employee. Maybe they’re right, but I did learn one thing from rating hundreds of complex securities. Contrary to what some may think, there are no easy solutions here. Unintended consequences are guaranteed. So here’s my humble take on the current CRA reform proposals.

What should be the goal of rating agency reform?

In 2007, as S&P and Moody’s were trying to decide how to rerate the entire structured finance debt market, I asked a shrewd fund manager what advice he would give to the management of a rating agency. He said they have to get the ratings right. No matter how hard it is, they have to focus on getting the ratings right.

There is an alternative school of thought. Instead of improving ratings, the reform agenda should be to be to eliminate their use. Since the rating agencies are hopelessly stupid or corrupt or both, just say no. End the market’s addiction to credit ratings by eliminating the SEC designation Nationally Recognized Statistical Rating Organization (NRSRO). Go cold turkey and end the practice of using ratings to assess credit risk by governmental or regulatory entities.

These two competing goals, improve credit ratings and eliminate credit ratings, can be viewed from a larger perspective, a Minsky mindset. If stability breeds instability, then trust breeds disappointment; the greater the trust, the bigger the disappointment. The rating agencies were over-trusted until 2007.

Continue reading “Reforming Credit Rating Agencies” →

The Very Bad Luck of The Irish

By Peter Boone and Simon Johnson

With the European Central Bank announcing that it has bought more than $20 billion of mostly high-risk euro zone government debt in one week, its new strategy is crystal clear: We will take the risk from bank balance sheets and give it to the central bank, and we expect Portugal-Ireland-Italy-Greece-Spain to cut fiscal spending sharply and pull themselves out of this mess through austerity.

But the bank’s head, Jean-Claude Trichet, faces a potential major issue: the task assigned to the profligate nations could be impossible. Some of these nations may be stuck in a downward debt spiral that makes greater economic decline ever more likely. Continue reading “The Very Bad Luck of The Irish” →

The Middle Ground On Financial Reform

By Simon Johnson

In Politico this morning, I question whether the president should really be seen as “centrist” or “moderate” with regard to financial reform. His staff goes to great lengths to make this claim, including both the specific quotes and general tone in the Financial Times on Tuesday (May 18, p.7).

Treasury Secretary Tim Geithner:

“I would say [the president] is fundamentally at the centre and pro-market. But he recognizes the market cannot solve all problems.”

Larry Summers:

“Sometimes the most courageous thing to do is not to take the largest and most sweeping course of action.”

But if this is the correct way to frame the president’s position, how can we explain the fact that it is moderates – not left-wing radicals – who are pushing (against the White House, among others) for stronger reform both within the administration and in Congress? I suggest another interpretation: On financial reform, the president does not hold the middle ground.

Fire Up Twitter

The White House has over 1.75 million followers on Twitter.

The latest presidential tweet is a bit stale (17 hours ago), but right on target.

“Obama to Senate GOP blocking increase in oil company liability: “stop playing special interest politics” http://bit.ly/d65jfY“

The White House needs to send out the exact same message, but replacing “increase in oil company liability” with “financial reform”, and then linking to the Merkley-Levin amendment and the imminent failure of the Volcker Rule and meaningful financial reform.

How hard can that be?

Update (12:40pm): at about 10:30am, the president’s staff put out this tweet (@BarackObama; i.e., http://twitter.com/BarackObama, with nearly 4 million followers):

“It’s time for Wall St. reform that gives greater security to folks on Main Street. Call your Republican Senators today: http://j.mp/cwhtg7“

Good tweet – but the president should call explicitly for Merkley-Levin to pass; this is his own Volcker Rule, after all. Here’s Senator Jeff Merkley, to the point: http://twitter.com/senjeffmerkley

In Defense Of Europe’s Grand Bargain

This guest post is by Jacob Funk Kirkegaard, a research fellow at the Peterson Institute for International Economics. He is more positive than the current consensus on recent economic and political developments in the eurozone.

The frantic spectacle of European leaders struggling to avert a financial crisis caused by Greece has seemed unsettling and at times amateurish. It is certainly easy to point fingers at policy makers patching solutions together solutions that immediately unravel under pressure from the markets, and to do so again and again over the last several weeks.

But if you look less at the sausage-making process and more at the final result, you have to be impressed. There are of course many painful steps that still need to be undertaken by all sides – the Greeks, the weaker European economies, the European banks and the European governments. But the derision of some commentators and the uneasiness of the markets seems overstated.

Recall the disdain, for example, when the TARP was introduced in late 2008 or the bank stress-tests were carried out last year. Today most would argue that they ultimately played a large and constructive role in containing the immediate crisis contagion. In time, Europe’s response to the Greek crisis will be viewed in a similar positive light. Continue reading “In Defense Of Europe’s Grand Bargain” →

Finally, The Republicans Come Out To Fight. Where Is The President?

The Senate Republicans are refusing to allow a vote on the Merkley-Levin amendment, which would put a meaningful version of the Volcker Rule into law (splitting off proprietary trading from major banks).

After weeks of dancing around, the Democrats finally have a signature issue on which to fight. Senator Carl Levin frames it exactly right: “It’s a sad day when the power of Wall Street can overwhelm the power of the American people in the US Senate.”

This is the opportunity that White House claims it has long sought – to have an intense fight on a financial reform issue that everyone can understand. Paul Volcker made his determination long ago: the big banks are too big and must, in this fashion, be broken up. Senators Merkley and Levin negotiated the precise language of their amendment in good faith. The Republicans have made their answer clear: No way.

Time for President Obama to make the call. Continue reading “Finally, The Republicans Come Out To Fight. Where Is The President?” →

Constructive Populism

By James Kwak

I don’t expect to get a holiday card from Tim Geithner this winter. Nor do I expect one from Larry Summers. Or even Michael Barr, despite everything I’ve written in favor of consumer protection. (I probably will get one from Barack Obama, since I donated money to his campaign.) But they might want to consider putting me on their lists.

“Populist” has mainly been used as a smear over the past year and a half, to connote irresponsible pandering to . . . well, to the people, actually. Simon and I have been written off by many people as populists, as if that alone were enough to settle the argument. But if and when financial reform does finally get passed by both houses of Congress, the administration will owe a major debt to the recent resurgence of anti-Wall Street sentiment, which can only be called populist.

Continue reading “Constructive Populism” →

Sam Brownback’s Staff Are Amateurs

By James Kwak

Senator Sam Brownback has been pushing an amendment in the Senate that would exempt auto dealers from regulation by the Consumer Financial Protection Agency. The auto dealer exemption has gotten a lot of press. The House version of the exemption was the focal point of a Huffington Post story back in December on how the House Financial Services Committee was loaded with moderate Democrats who are weak on financial reform. (That amendment was introduced by John Campbell, a former auto dealer who is no longer an auto dealer but who owns real estate that he rents to auto dealers.)

The argument for the exemption is that regulating auto dealers will — you guessed it — reduce access to credit.* The arguments against are: (a) auto loans are a major source of financing for consumers, along with mortgages and credit cards, so people need to be protected; (b) auto loans provide even more opportunities for ripping off customers than most bank loans, because of the auto dealer’s privileged market position and its ability to shift money back and forth between the sale price and the loan fees; and (c) if you open up this loophole, you will have regulatory arbitrage.

Continue reading “Sam Brownback’s Staff Are Amateurs” →

Senator Ted Kaufman: Financial Reform Against The Odds

By Simon Johnson, an excerpt from my latest column on Project Syndicate

America’s financial sector has shown renewed strength in recent months – political strength, that is – by undermining most of the sensible proposals for banking reform that remain on the table. If we are still making any progress at all, it is because of the noble efforts of a small number of United States senators.

Most notable has been the work of Senator Ted Kaufman, a Democrat from Delaware (yes, a pro-business state), who has pressed tirelessly to fix the most egregious problems in the US financial sector. Kaufman understands that successful reform requires three ingredients: arguments that persuade, the ability to bring colleagues along, and a good deal of luck in the form of events that highlight problems at just the right time. On two fronts, Kaufman has – against long odds – actually managed to make substantial steps.

The rest of this article is available (free) on Project Syndicate.

ABA Argues That Black Is White and Must Stay That Way

By James Kwak

I wasn’t sure if I was going to write about the Whitehouse Amendment, which would allow states to regulate the interest rates charged to their residents. According to a 1978 Supreme Court decision, financial institutions are governed by the law of the state that they reside in, not the laws of the states they do business in; the result was the current situation, where the big credit card issuers are based in South Dakota, because Citibank basically wrote South Dakota’s consumer credit laws. In its essence, the amendment says this: “The interest applicable to any consumer credit transaction [not a mortgage], including any fees, points, or time-price differential associated with such a transaction, may not exceed the maximum permitted by any law of the State in which the consumer resides.”

Obviously I’m in favor of it, as the current system just allows the worst kind of regulatory arbitrage. (Note that administration officials like to oppose strict legislative measures, like a hard leverage cap, on the grounds that these things need to be negotiated internationally so that banks won’t just set up shop in the most lightly-regulated jurisdiction — yet that’s exactly what happens with credit cards.) But I wasn’t sure what there was to add, since Mike Konczal and Bob Lawless have already weighed in.

Then I read the ABA’s argument against the amendment, that gave me all the motivation I needed.

Continue reading “ABA Argues That Black Is White and Must Stay That Way” →

Agreeing on the Problem

By James Kwak

Over the past month, Simon and I have become very closely associated with the Brown-Kaufman amendment to break up big banks, and that’s an association I welcome, especially given the last chapter of 13 Bankers. The fact that the amendment came from basically nowhere and got thirty-three votes in the Senate is, to me, an encouraging sign. But while this solution looks like it is unlikely to pass in this session of Congress — and there is debate about whether it is the right solution to begin with — the more encouraging sign is the amount of agreement on the problem to be solved: a financial system that is too big, too concentrated, and too powerful.

I wrote a guest post for the Harvard Law School Forum on Corporate Governance and Financial Regulation, a group blog, on this broader issue and some of the other solutions that have been floated. As we’ve said many times, as long as debate moves in this direction, that’s progress.

Thinking About Financial Reform

By Simon Johnson, co-author of 13 Bankers

There are three contending narratives regarding the financial reform legislation that this week approaches its final hurdles in the US Senate.

The first narrative is “the reforms would make things worse.” This view, advanced recently by some Republican leadership, seems to have receded in recent weeks – at least with regard to systemic risk – particularly after Senator Ted Kaufman dealt with it rather brutally on the Senate floor. For the most part, this line has sunk down to the level of sneaky astroturf campaigns.

There is still a rear-guard action by special interests against consumer protection on financial products, but here the administration started out with a sensible vision and – with strong support along the way from the likes of Elizabeth Warren – reasonable safeguards will eventually emerge. The biggest remaining item is probably the Whitehouse Interstate Lending Amendment, which would definitely help – call your senator, but only if you don’t like being gouged by credit card companies.

The second narrative is “Obama administration as heroes.” Against the odds, in this view, the administration has prevailed in the teeth of tough opposition. Continue reading “Thinking About Financial Reform” →

The Cost of “Multitasking”

By James Kwak

“I’ve given lectures on incivility around the globe. When I ask audiences whether anyone considers sending e-mail or texts during meetings uncivil, almost everyone raises their hand.

“Then, when I ask whether anyone in the audience sends texts or e-mail during meetings, about two-thirds acknowledge the habit. (Presumably, there are still more who don’t want to admit it.)”

That’s Christine Pearson, from her article in The New York Times.

Continue reading “The Cost of “Multitasking”” →

13 Bankers: Lehrer Newshour Edition – And Another Connection

By Simon Johnson

On Thursday evening, the Lehrer Newshour ran my discussion with Paul Solman on American financial history and previous attempts to constrain the power of big banks – covering the main points in chapter 1 of 13 Bankers. On Paul’s part of the Newshour website, we also talk about “astroturf” organizations that pretend to be reformist but are really just stalking horses for corporate interests opposed to reform.

We covered a lot of ground (and much of Manhattan) in 8 minutes, but we missed one potential irony. At the American Museum of Natural History, above the Teddy Roosevelt statue (and not readable, it turns out afterwards, in any of the shots) there was a huge banner celebrating an exhibit made possible in part by David Koch (a trustee and major funder of their dinosaur wing).

Teddy Roosevelt would have loved the irony of appearing under a banner with Mr. Koch’s name.

Continue reading “13 Bankers: Lehrer Newshour Edition – And Another Connection” →