Year: 2010

Wake The President

By Simon Johnson, co-author 13 Bankers

Most days we can coast along, confident that tomorrow will be much like yesterday. On a very few days we need to look hard at the news headlines, click through to read the whole story, and then completely change a large chunk of how we thought the world worked. Today is such a day.

Everything you knew or thought you believed about the European economy – and the eurozone, which lies at its heart – was just ripped up by financial markets and thrown out of the proverbial window.

While you slept, there was a fundamental repricing of risk in financial markets around Europe – we’ll see shortly about the rest of the world. You may see this called a “panic” and the term conveys the emotions involved, but do not be misled – this is not a flash in a pan; financial markets have taken a long hard view at the fiscal and banking realities in Europe. They have also looked long and hard into the eyes – and, they think, the souls – of politicians and policymakers, including in Washington this weekend.

The conclusion: large parts of Europe are no longer “investment grade” – they are more like “emerging markets”, meaning higher yield, more risky, and in the descriptive if overly evocative term: “junk”. Continue reading “Wake The President” →

Three Modest Proposals For Goldman Sachs

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

At this stage in the proceedings, the Goldman Sachs’ public relations people must be feeling more than a little down. The firm’s lawyers are still breathing fire, Lloyd Blankfein trod the fine line between not being apologetic and actually saying “it’s capitalism, stupid”, and the more junior executives interrogated today did not say anything blatantly incriminating. But the public image of the firm around the world – including with finance ministers and pension funds – has taken a severe beating.

In the interests of finding a more positive and cooperative way forward, here are three suggestions for the PR team to take up with senior management – once they are in mood to think long-term about their “franchise value” again. Continue reading “Three Modest Proposals For Goldman Sachs” →

What Did Goldman Know And When Did It Forget It?

By Simon Johnson

There is a live blog on the Goldman Sachs hearing now on the Lehrer NewsHour website, including comments by Paul Solman and me. The interaction between Goldman and the Senators – Democratic and Republican – is fascinating.

The Goldman executives so far seem to be struggling to recall exactly what happened. The Senators are pressing them hard. This is much more than theater. This is (some) people trying to figure out exactly who did what to whom.

The Republicans Help Reform, Inadvertently

By Simon Johnson, co-author of 13 Bankers

No one can publicly oppose what is widely perceived to be “financial reform” – the polls are quite clear on this point. If you want to help Wall Street, your options are:

1) Oppose the Dodd bill, claiming that it would create a more dangerous situation than what exists today. But Senator Mitch McConnell already tried this and was thoroughly debunked, e.g., by Senator Ted Kaufman. There will be rhetorical posturing along these lines, to be sure, but there is no sign of any real traction.

2) Run a comprehensive “astro turf” disinformation campaign, pretending to be the voice of “true reform.” But these efforts are too obvious at this point – and too obviously fraudulent, so this actually helps the pro-reform narrative.

3) Stall for time in terms of preventing the Dodd bill from coming to the floor of the Senate, while working out a backroom compromise that will greatly gut the substance (on consumer protection, derivatives, and/or the resolution authority). This appears to be what the Republicans are focusing on, with Senator Richard Shelby in the lead.

But there is a potential weak point in this Republican strategy. Continue reading “The Republicans Help Reform, Inadvertently” →

When Will Senator Dodd Start Taking Yes For An Answer?

By Simon Johnson, co-author of 13 Bankers

Senator Chris Dodd is a tactical legislative genius – keep this clearly in your mind during the days ahead. In terms of maneuvering for the outcomes he seeks, managing the votes, and controlling the floor, you have rarely seen his equal.

Senator Dodd wants some financial reform – enough to declare victory – but not so much as to seriously undermine the prevalence of megabanks on Wall Street. You can take whatever view you like on his motivation – but Senator Dodd himself is quite open about his thinking and intentions.

Given the mounting pressure from many sides – including Federal Reserve Bank presidents – to implement significantly more reform (see also David Warsh’s Sunday evening assessment), for example using some version of the Brown-Kaufman SAFE banking act, how exactly will Senator Dodd prevail? Continue reading “When Will Senator Dodd Start Taking Yes For An Answer?” →

The Washington Post Makes A Major Factual Error

By Simon Johnson, co-author of 13 Bankers

Of all the weak, ill-informed, and misleading pieces written on the “resolution authority” – a central tenet of the Dodd bill – by far the most disappointing is the Washington Post editorial in Sunday’s paper.

I fully appreciate that these are complex issues and I understand that journalists frequently write under great time pressure.

But honestly, if you don’t know the answer to a question – you should really just call Treasury, the White House or Senator Dodd’s people. What even they will tell you, in my experience – if you press them hard enough (i.e., don’t fall for the initial spin) is that it is incorrect, or at least significantly incomplete and misleading, to say that the Dodd bill will create: Continue reading “The Washington Post Makes A Major Factual Error” →

The Sickening Abuse Of Power At The Heart of Wall Street

By Simon Johnson, co-author of 13 Bankers

Here’s where we stand with regard to democratic discourse on the future our financial system: leading bankers will not come out to debate the issues in the open (despite being approached by reputable intermediaries after our polite challenge was issued) – sending instead their “astro turf” proxies to spread KGB-type disinformation.

Even Larry Summers, who has shifted publicly onto the side the angels (surprising and rather late, but welcome anyway), cannot – for whatever reason – bring himself to recognize the dangers inherent in our unstable and too-big-to-manage banks. Or perhaps he is just generating excuses that will justify not bringing the Brown-Kaufman amendment to the floor of Senate?

So let’s take it up a notch. Continue reading “The Sickening Abuse Of Power At The Heart of Wall Street” →

Rewarding Teacher Performance? Resist the Temptation to “Race to Nowhere”

This guest post is contributed by Kathryn McDermott and Lisa Keller. McDermott is Associate Professor of Education and Public Policy and Keller is Assistant Professor in the Research and Evaluation Methods Program, both at the University of Massachusetts, Amherst.

On March 29, the U.S. Department of Education announced that Delaware and Tennessee were the first two states to win funding in the “Race to the Top” grant competition. A key part of the reason why these two states won was their experience with “growth modeling” of student progress measured by standardized test scores, and their plans for incorporating the growth data into evaluation of teachers. The Department of Education has $3.4 billion remaining in the Race to the Top fund, and other states are now scrutinizing reviewer feedback on their applications and trying to learn from Delaware’s and Tennessee’s successful applications as they strive to win funds in the next round.

One of the Department’s priorities is to link teachers’ pay to their students’ performance; indeed, states with laws that forbid using student test scores in this way lost points in the Race to the Top competition. A few months ago, James pointed out some of the general flaws in the pay-for-performance logic; here, our goal is to raise general awareness of some statistical issues that are specific to using test scores to evaluate teachers’ performance.

Using students’ test scores to evaluate their teachers’ performance is a core component of both Delaware’s and Tennessee’s Race to the Top applications. The logic seems unassailable: everybody knows that some teachers are more effective than others, and there should be some way of rewarding this effectiveness. Because students take many more state-mandated tests now than they used to, it seems logical that there should be some way of using those test scores to make the kind of effectiveness judgments that currently get made informally, on less scientific grounds.

The problem is that even if you accept the assumption that standardized tests convey useful information about what students have learned (which we both do, in general), measuring the performance gains (or losses) of students in a particular classroom is far more complicated than subtracting the students’ September test scores from their June test scores and averaging out the gains. We’re concentrating on the statistical issues here; there are other obvious challenges in test-based evaluation, such as what to do for teachers who teach grade levels where students do not take tests and/or subjects without standardized tests.

Continue reading “Rewarding Teacher Performance? Resist the Temptation to “Race to Nowhere”” →

Two Senators And Larry Summers On Bank Size

By Simon Johnson, co-author of 13 Bankers

Bank size is suddenly the issue of the day – with politicians lining up to oppose any meaningful restriction on the size of our largest banks. Their reasoning is varied and all quite flawed, particularly when they insist there must be no Senate floor debate on the Brown-Kaufman amendment.

Senator Dick Durbin may be right to say that the Brown-Kaufman amendment is “a bridge too far” and will not pass in this legislative cycle – presumably this sounds like a tactical political assessment. Surely in that case he would not oppose bringing it to the floor of the Senate and allowing that body to prove him right (or wrong).

Senator Chris Dodd opposes the amendment, but his reasoning is rather vague. Here’s what he says in his interview with Ezra Klein, which appeared yesterday,

“It’s not size; we’re preoccupied with size. And I’m not suggesting that any size is okay, but it’s really risk, it’s these other elements in here. A relatively innocuous product line in a relatively small company can pose huge, systemic risk. That said, in our bill, we provide the authority to break up companies. That is clearly in the bill, the authorization to do that under certain circumstances. But I’m not sure that we ought to become so preoccupied with it. And again, I’ve looked at the 13 Bankers book, and so forth, that approach, and hear this, by the way, not just from them, but from CEOs of major corporations. This is not some left/right question. But I just don’t think that it makes a lot of sense. I don’t think it’ll prevail.” Continue reading “Two Senators And Larry Summers On Bank Size” →

Greece, The IMF, And What Comes Next

By Peter Boone and Simon Johnson

The latest developments from Europe – including Greece appealing for an IMF program today – may well be a watershed, but if so, it is not a good one. The key event yesterday was that the yield on all the debt of weak eurozone governments widened while German yields fell. The spreads show all you need to know: a very clear and large contagion risk. Continue reading “Greece, The IMF, And What Comes Next” →

The Consensus on Big Banks Starts To Move

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

The ideology of unfettered finance is crumbling. Whatever you think of the merits of the Goldman case from a legal or short-term perspective, the SEC’s allegation – and Goldman’s response – have further moved the mainstream consensus away from “finance is generally good” to “big banks are frequently scary.”

Senator Ted Kaufman should get a great deal of credit for his well timed charge on this issue – as I argue in BusinessWeek/Bloomberg. But Lloyd Blankfein also gets an inadvertent assist, quoted in the Financial Times yesterday as saying that the SEC case against Goldman would “hurt America.”

Mr. Blankfein is starting to sound – and act – a lot like Nicolas Biddle, head of the Second Bank of the United States (by far the most powerful commercial bank of the day), during his confrontation with President Andrew Jackson in the early 1830s. Continue reading “The Consensus on Big Banks Starts To Move” →

Make The Call Or Get Out Of The Booth: After The President’s “Wall Street” Speech

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover And The Next Financial Meltdown

Update: The Progressive Change Campaign Committee has a petition that takes you to a page with your senators’ names and phone numbers, as well as a script to use when calling them.

The president’s rhetoric today at Cooper Union was impressive and his body language indicates a major shift in administration attitudes towards the big banks over the past year. This is commendable.

But there is still the awkward question of legislation that would actually reduce the political power of big banks – and make our financial system significantly safer. The latest indications from the Senate are that there will be some sort of “Dodd minus” compromise bill brought to the floor early next week. The Republicans have substantially backed down from Senator McConnell’s “hell, no” position of last week because the polling is crystal clear: Anyone perceived as opposed financial reform will lose badly in November.

But the Democratic leadership is not seizing on this advantage and on the opportunity presented by the SEC case against Goldman Sachs – key figures in the Democratic establishments are too worried about upsetting financial sector donors. As a result, come November, independents will view the Democrats with scorn, while the Democratic base will be far from energized; you do the math.

What can you do? What makes sense in both economic and political terms? Continue reading “Make The Call Or Get Out Of The Booth: After The President’s “Wall Street” Speech” →

The SAFE Banking Act: Break Them Up

By Simon Johnson, co-author of 13 Bankers.

On Wednesday, Senators Sherrod Brown and Ted Kaufman unveiled a “SAFE banking Act” with a clear and powerful purpose: Break up the big banks.

The proposal places hard leverage and size caps on financial institutions. It is well crafted, based on a great deal of hard thinking, and — as reported on the front page of The New York Times this week — the issue has the potential to draw a considerable amount of support.

The idea is simple, in the sense that the largest six banks in the American economy are currently “too big to fail” in the eyes of the credit market (and presumably in the leading minds the Obama administration — which saved all the big banks, without conditions, in March-April 2009). The bill put forward by Senator Christopher J. Dodd, the chairman of the Banking Committee, has some sensible proposals — and is definitely not an approach that supports “bailouts” — but it does not really confront the problem of the half-dozen megabanks.

In the American political system — where the power of major banks is now so manifest — there is no way to significantly reduce the risks posed by these banks unless they are broken up. Continue reading “The SAFE Banking Act: Break Them Up” →

What Did Robert Rubin Think About Derivatives?

By James Kwak

First Bill Clinton said he got bad advice from Robert Rubin on derivatives. Then a Clinton adviser issued a statement essentially taking it back and blaming Alan Greenspan. (Jennifer Taub discussed some of the substantive issues on this blog.) Dan Froomkin asked Rubin, who said, “I thought we should regulate derivatives; I thought so when I was at Goldman Sachs and I thought so afterwards.” But Froomkin points out that Rubin was part of the team that suppressed Brooksley Born’s attempt to regulate derivatives back in 1998.

Brad DeLong defends Rubin, although it seems like a somewhat lukewarm defense. DeLong’s point #3 is: “Brooksley Born and her organization are the wrong people to regulate derivatives.” (That’s a statement of Rubin”s thinking at the time.) Norman Carleton, a Treasury official at the time, also defends Rubin with two posts on his blog that spell out DeLong’s point #3. In the first post, he says that Rubin favored regulation but was concerned with giving the CFTC jurisdiction over the OTC derivatives market. In the second, he explains the issue (legal certainty of existing contracts, something I don’t really want to get into here, so go read the argument there) and concludes with this logically plausible but somewhat bizarre argument:

“Rubin had proposed to Born that, instead of the CFTC asking questions about the need for regulation of the OTC derivatives market, the President’s Working Group on Financial Markets issue the questions. Born point blank refused this suggestion, thus pushing Rubin into Greenspan’s camp, much to the relief of ISDA and other Wall Street groups lobbying on this issue. They knew they had a problem with Rubin.

“Brooksley Born was so sure she was right in her legal position that she could not compromise in face of the practical and political realities. While, not to make too fine a point about it, she has been proven right and Greenspan wrong about the dangers of the OTC derivatives market, Greenspan was the better politician. History might have been different if Born had agreed to Rubin’s suggestion.”

Continue reading “What Did Robert Rubin Think About Derivatives?” →

What Should The President Say On Thursday?

By Simon Johnson, co-author of 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown

On Thursday, President Obama will give one of the defining speeches of his presidency. Most presidents are remembered for only 2 or 3 policies or events during their tenure. The SEC case against Goldman Sachs means, like it or not, the legacy of this administration is wrapped up with the outcome of this and related cases.

The president is apparently lining up to give a fairly conventional “support the Dodd bill” speech. This would be major miscalculation.

The Democrats are afraid that if they truly take on the big banks, they will lose campaign contributions and be placed a major disadvantage for November 2010 and 2012 – “don’t push it too far” is the message from the White House to the Senate. But this just shows the White House has not fully comprehended the modern nature of banking. Continue reading “What Should The President Say On Thursday?” →