Misleading “Research” From The Chamber Of Commerce

By Simon Johnson

On behalf of key financial sector players, Keybridge Research has just published a report that claims the Dodd-Frank reforms for over the counter derivatives market “could cost 130,000” jobs.  My MIT colleague, John Parsons, deftly takes this apart on his blog today – pointing out that the technical basis of this report is very weak (or nonexistent). 

John is an expert on these issues and spends a great of time with nonfinancial companies that use derivatives in a sensible and responsible manner.  His critique should carry weight – including with the relevant congressional hearings scheduled for this week.

But I would go further.

This is the “end-users coalition” at work again – a notorious lobby group for the derivatives industry that had great negative impact on the reform process in the past 18 months.  And it is backed in this instance, apparently, by the full might of the Chamber of Commerce and its “Center for Capital Markets.”

The Keybridge document itself is pure lobbying masquerading as research.  We know that financial sector players like to have as little capital at possible in all aspects of their business – a reckless degree of leverage is how they boost their return on equity (as Anat Admati is explaining to anyone who will listen).  The Keybridge survey seems to have been structured to elicit responses that are pro-leverage.

The central issue here is system stability.  Dodd-Frank is not perfect but that legislation – and Gary Gensler at the CFTC – have been arguing for sensible leverage-reducing restrictions. 

If Congress now presses the regulators to defer to the industry lobby, that would be reckless and foolish.  To do so on the basis of Keybridge’s “research” would be completely misleading. 

This is not any kind of research.  This is people who want to overleverage and risk the system – because, once again, they will get the upside and taxpayers/all citizens get the downside.

18 thoughts on “Misleading “Research” From The Chamber Of Commerce

  1. Thanks for your continuing discussion of the corruption in our political and financial systems. Have to ask myself, what sort of responsible government lets its financial system do trillions of dollars of damage to the economy and puts tens of millions out of work?

    Answer: no responsible or decent government. Ours is none of the above.

    In 2012, I’ll be looking for substantive reforms. If the candidates won’t buy in, I’ll vote for their opponents and then vote them out in the next cycle if they don’t get with the programs.

    Here’s my short list for a quick fix.

    1. Don’t vote for any candidate who doesn’t limit
    campaign using public funds.

    2. Don’t vote for any candidate who doesn’t agree
    to aggressively support a program to force
    Federal vendors produce the goods and services
    they sell the Federal government in America.

    3. Don’t vote any candidate who doesn’t subscribe
    to a plan to reduce our trade deficit from $10
    trillion to have that much in 10 years. (This
    will also force manufacturing in the US.)

    There are so many things we need to fix up this mess.
    My view is push hard on a few critical objectives — get money out of Federal politics, mandate job creation by government fiat and have real metrics — a measurable cut in the cumulative trade deficit.

    Obviously much more is needed. IMO, until we get the campaign contribution corruption out of our Federal government, the current cabal of politicos and CEOs will continue to strip mine our financial system, our
    Treasury and the more productive parts of our economy until they have sucked them dry.

    Sure, this may sound crazy and overwrought. But until
    we can clean up our government and stop the dismantling of our best jobs, we don’t stand a chance of making America a decent, self-sustaining country.

  2. My solutions are the following (http://www.tedauch.com/2011/01/25/my-ideas-for-ameliorating-the-next-great-recession/#more-653):
    1) decreasing leverage ratios to less than 10:1 (See LTCM),

    2) increasing counter-cyclical capital requirements to ≥19% or even 40-50% of risk-adjusted assets (See Eugene Fama[1], Switzerland[2], and the People’s Bank of China[3]) effectively reinstating a crucial provision of the Depression-era and highly effective Glass-Steagall Act of 1933 [186, 187],

    3) limiting loan-deposit spreads to ≤4.5-5%, marking everything to market all the time no exceptions,

    4) graduated bank taxes based on the percentage of funding that is short-term/”hot”[4],

    5) putting a 2% ceiling on the percentage of US deposits individual banks can have at any one time,

    6) pushing the murky world of derivatives trading onto Over-The-Counter (OTC) exchanges and eliminating non-agriculture (i.e., necessity vs. portfolio allocation decisions) and certain energy sector participants entirely (i.e., those overweight on derivatives due to unsafe capital cushions), what Michael Masters of Masters Capital Management, LLC respectively called “Bona Fide” Physical Hedgers and Wall Street bank controlled. Translation: leave the agricultural hedging to farmers not Gordon Gecko-types whose flippant money misallocation has a disproportionate effect on global food prices given that equity markets are 240 times larger than commodity futures contracts *$44 trillion vs. $180 billion in 2004),

    – Worse still speculation demand is exponentially positively correlated with commodity/food price increases creating a nasty and pro-cyclical Positive Feedback Loop of Mass Destruction (PFLMD).

    – The Traditional Speculators “provide liquidity by both buying and selling futures”, while the nascent Index Speculator Mafia “buy futures and then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets.” (i.e., Zero Social Benefit!)

    7) establishing a predatory lender watch list and agency,

    8) reengineering bonus payouts in a manner similar to what is commonly called “contingent core Tier-1 capital” or “CoCo” whereby deferred, say 10-years, payments convert to bonds in the long-term if bank’s Tier-1 capital falls below some predefined safety cutoff (See 2 above) preventing the intoxication brought on by short-term profitable but highly levered ventures [188, 189]. This would better synchronize managers’ schemes with those of shareholders,

    9) eliminating the influence and conflicts of interest associated with the Big Three rating (i.e., Moody’s Corp, Fitch Rating[5]), Standard and Poor’s) and accounting (i.e., Deloitte Touche Tohmatsu, Prcewaterhouse Coopers, Ernst & Young, and KPMG[6]) firms as both trios are corrupt and painfully lagging indicators of reality OR explicitly writing into law that the rating firms must be paid at all times by purchasers rather than issuers, and

    10) a federal version of New York’s 1921 Martin Act which gives the attorney general “broad powers to pursue financial corruption and a wide berth to conduct civil or criminal investigations by issuing subpoenas, taking depositions and compelling document production.” [190] The Act was employed with a high degree of efficacy and bite by New York’s recent AGs turned Governor Andrew Cuomo and Eliot Spitzer.

    11) demanding that all bonuses for all employees be directly coupled to a given bank’s most risky ventures in the form of restricted stocks that can’t be sold an earlier than 5-10 years from the day they are issued, and require that at least eighty cents of every dollar in revenues comes from raising capital for companies and advising small businesses on how to grow and increase employment in this country not somewhere else. As it stands only fourteen cents in every dollar goes towards the latter, while the eight cents mentioned is derived from buying and selling of securities according to John Cassidy [191].
    184. Cox, R., Still too big, in Reuters Breakingviews. 2010, Reuters: New York, NY.

    185. Cassidy, J., The Economy: Why They Failed, in The New York Review of Books. 2010: New York, NY.

    186. Staff, Regulating Swiss banks: First mover, in The Economist. 2010: London, UK.

    187. Gang, F., China’s Monetary Sterilization, in Project Syndicate. 2010: Prague, Czech Republic.

    188. Cox, R., Loco for CoCos, in Reuters Breakingviews. 2010, Reuters: New York, NY.

    189. Staff, Contingent capital: CoCo nuts, in The Economist. 2010: London, UK.

    190. Lattman, P., Cuomo Sues Ernst & Young Over Lehman, in DealBook, A.R. Sorkin, Editor. 2010, The New York Times: New York, NY.

    191. Cassidy, J., What Good Is Wall Street? Much of what investment bankers do is socially worthless, in The New Yorker. 2010.

  3. Simon:
    ” a reckless degree of leverage is how they boost their return on equity”

    True, but doesn’t it do something else that never gets mentioned? That is, when a trade is heavily leveraged, even a small move in the wrong direction will create a big enough loss to blow the trader out of his position (margin calls, or whatever the equivalent would be for a Wall St institutional looter).

    This creates a big incentive to find ways to cheat. Insider info, manipulation of information, somehow fixing the market. They’re almost certainly doing things like this, aren’t they?

  4. The loss of 130,000 jobs in order to have derivative regulation is a good trade-off compared to the 2.6 million jobs lost (in 2008 alone) due to the lack of derivative regulation. We should thank the Chamber of Commerce for showing us that regulation is affordable (even using their numbers).

  5. Hey Simon: It looks to me that the “powers that be” are all talking about the mortgage interest deduction and the 30 year mortgage all disappearing at the same time. The other talk is about subsidizing apartment rental construction. This coupled with the rampant speculation in world commodities really puts the bite on the average person.

    If the 30 year mortgage is changed to a five year renewable term with a 30 year amortization you have a chance of getting thrown out of your property every 5 years. This really changes the ball game for home ownership and would force a lot of people into being renters their entire lives.

    One thing people are not talking about with regards the mortgage interest deduction is that at one time all interest was deductible for the average person. I’d like to hear the original reasoning why all interest was once deductible. Anyone?

  6. It is rather amazing that the average business that joins the chamber of commerce thinks that the chamber has its best interests at heart. you can apparently fool all the people all the time.

  7. Imagine that you lend me $100 at 5% and also borrow from me $100 at 5%. The transaction should cancel out each other. But if interest income is taxable while interest expense is not deductible, then both you and I owe government money. This kind of policy will create disincentive and friction for credit flow. Credit flow is the lifeblood of the economy so you don’t want to have a tax system that punishes credit flow.

  8. Many thanks to you and my prior commentary posters. Simon, of course, as has been said many times in the past few months, it’s time for us to watch what happens in the Great American Plutocracy. The COC is just a group of oligarchs speaking in one voice. They enter the fray any time one of their magnates gets the hots for what is happening politically. At the moment, they are carrying the banner for derivatives. Gee, then it will be the EPA and the climate. Then the big oil companies and North Shore drilling. Then, as the budget cutting swings into serious debates, God only knows what they will champion, but I guarantee that it won’t benefit the average citizen.
    The Egyptians armed themselves with Facebook, Twitter, Satellite TV, and finally went to the streets to raise hell. Appropriately, one must say. I am waiting for our citizenry to start seeing what is happening. The whole time I was watching the Egyptian revolution unfold, over an eighteen day amazing stretch of events and popular determination, and wondered to myself: Just how long will America live the way it is, with foreclosures galore, massive unemployment, states beginning to fail their citizens and their budgetary processes? How long will we allow our military industrial complex to rape pillage and plunder by accepting the lies told about our national insecurity? Sure, we have lots of employed people in this country, but, as health care grows more and more expensive, and solutions more and more dodgy, how long?
    Every time I hear about the great American democracy and every time I hear about American exceptionalism, I groan a bit louder than the time before. I grew up in the 50’s and 60’s. There was lots of carping to be done then, but most moms still stayed at home, families were happy to have one car, one TV, occasionally see a movie and occasionally eat at a real restaurant. Kids played safely in their yards, banks did passbook savings accounts and Christmas Clubs, and made loans to people who could afford them, to buy home and cars and educate their college age children. Banks didn’t trade derivatives, or do currency speculation, or launder massive sums of drug money. The millionaire paid 90% on the AGI, and companies made things here. We didn’t buy anything made in China, and rarely anything made in Japan (it was all considered to be of inferior quality). And the wealthiest corporations and individuals didn’t hire our politicians. Sure, there was lots of dirt in politics then, but when it was caught, it was prosecuted. Now we got guys like Cheney and Rumsfeld writing revisionist history posing as autobiography. What will Greenspan’s book have to say? One can only wonder.

  9. I think one thing must be updated from your (relatively) golden era. It’s now the politico-financial complex, not the military industrial.

  10. The Chamber has absolutely zero credibility with me.

    We’re talking about the same people whose lawyers approached a cybersecurity firm, HB Gary Federal, with the aim of destroying their political opponents by smearing them.

    Political research on your opponents’ children? That’s despicable. I don’t want to hear about the US Chamber. Period.

  11. @ Paul Hamer

    Let’s start with the nascent introduction of the “Credit Card Industry” in the early 80’s. I always (thinking back at a simpler time?) enjoyed paying for my airfare, and auto rentals with cash and a valid ID – as a matter of fact all my purchases were paid by cash or a bank check…very simple indeed? What happened per usual was the “Predisposed Anticipation” aggregated by the lobbyist for the Banking Industry. In order to sell their product they needed a “Teaser”. Thus with the help of the “K Street Boy’s”, their wishes came true – they enacted a generous deduction for the interest carried. Brilliant to say the least, and credit cards as we know them *now*, have become ubiguitous as are the iPhones of today in comparison to worldwide demographics/distribution. But as always they had now captured their audience and didn’t need the interest deduction…therefore in unison with our Congress, and K Street the interest deduction was stricken/deleted from whence it came by our Congress (sound familiar). Amazing how things work? But as your question about the mortgage interest deduction, its quite simple – people nest for approximately 5-7 years and move on. Thusly the Banksters make money on both sides of the trade. Why is that? Because the Banks own our “Democracy”?

    Please reference : “The Creature from Jekyll Island, The Federal Reserve (Edward Griffin), it’s a short read and should answer some questions if your not abreast on how our FRB works!


  12. “I don’t want to hear about the US Chamber. Period.”

    Really? Not even when they’ve been tried, convicted and are being marched to the gallows?

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