Author: Simon Johnson

Scott Brown: ATM For The Big Banks

By Simon Johnson

During the Dodd-Frank financial reform debate in early 2010, newly elected Senator Scott Brown of Massachusetts was referred to as an ATM for the bankers – meaning that whenever they needed some more cash, they would stop by his office.  It was not paper money he was handing out, of course, it was something much more valuable – rule changes that conferred a greater ability to take on reckless risk, damage consumers, and impose higher future costs on the taxpayer.

Mr. Brown had this ability because he represented the final vote needed to pass Dodd-Frank through the Senate.  He could have asked for many things – including greater consumer protection, a more thorough investigation into mortgage practices, and reforms that would have cleaned up unscrupulous lenders.  He asked for none of those changes – or anything else that would have made the financial system safer and fairer.

Instead, Senator Brown’s requests were designed to undermine the Volcker Rule – i.e., he was opposing sensible attempts to limit the ability of big banks to place highly dangerous bets (and to blow themselves up at great cost to the rest of us).  Mr. Brown seems to have been particularly keen to allow big banks to invest in hedge funds of various kinds – and the Boston Globe reported recently that he has continued to push in this direction behind the scenes.  Continue reading “Scott Brown: ATM For The Big Banks” →

Restoring The Legitimacy Of The Federal Reserve

By Simon Johnson

The Federal Reserve has a legitimacy problem. Fortunately, a potential policy shift is available that offers both the right thing for the Fed to do and a way to please sensible people on both sides of the political spectrum: raise capital requirements for megabanks.

As the election season progresses, Republican politicians are increasingly criticizing the monetary policy of Ben Bernanke and his colleagues on the grounds that they are exceeding their authority, particularly by buying assets and trying to lower interest rates in what is known as “quantitative easing.”

There is growing concern in Republican circles that the Fed is tipping the election toward President Obama, and Mitt Romney repeated unambiguously in August that he would not reappoint Mr. Bernanke (a Republican originally appointed by President George W. Bush).

At the same time, a significant number of people on the left of American politics are concerned about how the Fed acted in the period leading up to the crisis of 2008 – blaming it for a significant failure of regulation and supervision – and about how much support it currently provides to big banks. Continue reading “Restoring The Legitimacy Of The Federal Reserve” →

Introducing The Latin Euro

By Peter Boone and Simon Johnson

The verdict is now in:  traditional German values lost and the Latin perspective won.  Germany fought hard over many years to include “no bailout” clauses in the Maastricht Treaty (the founding document of the euro currency area), and to limit the rights of the European Central Bank (ECB) to lend directly to national governments.  Last week, the ECB governing council – over German objections – authorized purchasing unlimited quantities of short-term national debts and effectively erased any traditional Germanic restrictions on its operations.  (The finding this week by the German Constitutional Court — that intra-European financial rescue funds are consistent with German law — is just icing on this cake, as far as those who support bailouts are concerned.)

With this critical defeat at the ECB, Germany is forced to concede two points.  First, without the possibility of large-scale central bank purchases of government debt for countries such as Spain and Italy, the euro area was set to collapse.  And second, that “one nation, one vote” really does rule at the ECB; Germany has around ¼ of the population of the euro area (81 million out of a total around 333 million), but only one vote out of 17 on the ECB governing council – and apparently no veto.  The balance of power and decision-making has shifted towards the troubled periphery of Europe.  The “soft money” wing of the euro area is in the ascendancy. Continue reading “Introducing The Latin Euro” →

Who Built That?

By Simon Johnson

Perhaps the biggest issue of this presidential election is the relationship between government and private business. President Obama recently offended some people by appearing to imply that private entrepreneurs did not build their companies without the help of others (although there is some debate about what he was really saying).

Mitt Romney’s choice of Paul D. Ryan as vice presidential running mate is widely interpreted as signaling the further rise of the Tea Party movement within the Republican Party – with the implication that the private sector may soon be pushing back even more against the role of government.

For most of the last 200 years, national economic prosperity has been about creating and sustaining a symbiotic relationship between government and private business, including entrepreneurs who build businesses from scratch. This symbiosis was long a great strength of the United States, something it got right while other nations failed to do so, in various ways.

Is the partnership between government and business now really on the rocks? What would be the implications for longer-run economic growth of any such traumatic divorce? Continue reading “Who Built That?” →

One Man Against The Wall Street Lobby

By Simon Johnson

Two diametrically opposed views of Wall Street and the dangers posed by global megabanks came more clearly into focus last week.  On the one hand, William B. Harrison, Jr. – former chairman of JP Morgan Chase – argued in the New York Times that today’s massive banks are an essential part of a well-functioning market economy, and not at all helped by implicit government subsidies.

On the other hand, there is a new powerful voice who knows how big banks really work and who is willing to tell the truth in great and convincing detail.  Jeff Connaughton – a former senior political adviser who has worked both for and against powerful Wall Street interests over the years – has just published a page-turning memoir that is also a damning critique of how Wall Street operates, the political capture of Washington, and our collective failure to reform finance in the past four years.  “The Payoff: Why Wall Street Always Wins,” is the perfect antidote to disinformation put about by global megabanks and their friends.

Specifically, Mr. Harrison makes six related arguments regarding why we should not break up our largest banks.  Each of these is clearly and directly refuted by Mr. Connaughton’s experience and the evidence he presents. Continue reading “One Man Against The Wall Street Lobby” →

Why Does Wall Street Always Win?

By Simon Johnson

After a long summer of high-profile scandals – JPMorgan Chase trading, Barclays rate-fixing, HSBC money-laundering and more – the debate about the financial sector is becoming livelier.

Why has it has become so excessively dominated by relatively few very large companies? What damage can it do to the rest of us? What reasonable policy changes could bring global megabanks more nearly under control? And why is this unlikely to happen?

If any of these questions interest you – or keep you awake at night – you should take another look at the last time we had this debate at the national level, and reflect on the work of Ted Kaufman, the former Democratic senator from Delaware, who was far ahead of almost everyone in recognizing the problem and thinking about what to do.

Senator Kaufman represented Delaware in 2009 and 2010, and Jeff Connaughton – his chief of staff – has a new book that puts you in the room. In “The Payoff: Why Wall Street Always Wins,” we see Senator Kaufman as chairman of oversight hearings on the Justice Department and the F.B.I.’s pursuit of financial fraud, pushing the Securities and Exchange Commission on the dangerous rise of computerized trading and working with Senator Sherrod Brown, Democratic of Ohio, on the legislative fight to impose a hard cap on the size and debts of our largest banks. (I wrote many pieces supporting the work of Senator Kaufman at the time, including in this space, but I never worked for him.) Continue reading “Why Does Wall Street Always Win?” →

Mitt Romney And Extreme Fiscal Policy

By Simon Johnson

As the presumptive Republican vice presidential candidate, Representative Paul D. Ryan of Wisconsin and his plans for the federal budget are drawing increasing interest. Mr. Ryan has been chairman of the House Budget Committee since the Republicans took control of the House of Representatives in the 2010 midterm elections and has articulated a vision for federal public finances that is quite different from what other prominent Republicans have been advocating – including Mitt Romney.

The contrast between Mr. Romney and Mr. Ryan tells us a great deal about the competition among fiscal ideas within the Republican Party. It also highlights the challenge Mr. Romney will face in November, if he is shifting rightward toward Mr. Ryan’s approach to budget policy, away from independents in the center of the political spectrum. Continue reading “Mitt Romney And Extreme Fiscal Policy” →

Bipartisan Push For More Equity In Big Banks

By Simon Johnson

Proponents of the status quo in the financial sector just cannot catch a break.  Early August is supposed to be a time when regulators and markets slow down, or perhaps even take a break, but this year the news continues to be dominated by mismanagement or worse inside complex financial institutions.

It’s time for a new approach to bank capital.  As proposed by two U.S. Senators, this is not a panacea, but it would have a dramatic effect on big banks and how they operate.

Earlier this week, Standard Chartered, a large global bank (about $600 billion in total assets) based in the UK, was accused of breaking US law in its dealings with Iran and other countries with financial sanctions imposed by the US.  The complaint, lodged by New York’s Department of Financial Services, suggests that the bank’s executives deliberately intended to deceive regulators.  Continue reading “Bipartisan Push For More Equity In Big Banks” →

Big Banks Fall Back On Three Myths

By Simon Johnson

Global megabanks have had a tough summer.  Jamie Dimon, vociferous opponent of restrictions on reckless risk-taking by big banks, presided over large losses due to exactly such behavior in the London office of JP Morgan Chase.  HSBC, which prided itself on running a uniquely decentralized management model, was found to have violated – massively, over many years, and in a uniquely decentralized manner – US money laundering and other laws; the head of global compliance resigned while on the witness stand during a Senate hearing in July.  And Barclays – which had bulked up on the strength of its capital market activities – conceded that traders from that part of the company had conspired to rig Libor, a key benchmark for global interest rates; in the ensuing public outcry, the top two executives were forced out.

And last week Sandy Weill, who amassed a vast fortune building Citigroup and pushing to dismantle the constraints on such megabanks’ activities, concedes that the entire exercise was a mistake.

“I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable,..”

According to American Banker, former top executives calling for the biggest banks to be broken up now include Phil Purcell, former chief executive of Morgan Stanley; John Reed, former chairman of Citigroup; and David Komansky, former chief executive of Merrill Lynch.  (I am asking American Banker to bring their slide show on this issue out from behind their paywall.)

Backed into a corner, representatives of these Too Big To Fail banks and their allies are forced to fall back on perpetuating three myths. Continue reading “Big Banks Fall Back On Three Myths” →

Fed Governor Speaks Out For Stronger Rules

By Simon Johnson

A powerful new voice for financial reform emerged this week – Sarah Bloom Raskin, a governor of the Federal Reserve System. In a speech on Tuesday, she laid out a clear and compelling vision for why the financial system should focus on providing old-fashioned but essential intermediation between savers and borrowers in the nonfinancial sector.

Sadly, she also explained that she is a dissenting voice within the Board of Governors on an essential piece of financial reform, the Volcker Rule. Her colleagues, according to Ms. Raskin, supported a proposed rule that is weaker, i.e., more favorable to the banks; she voted against it in October.

At least on this dimension, financial reform is not fully on track. Continue reading “Fed Governor Speaks Out For Stronger Rules” →

The Federal Reserve And The Libor Scandal

By Simon Johnson

On June 1, 2008, Timothy F. Geithner – then president of the Federal Reserve Bank of New York – sent an e-mail to Mervyn A. King and Paul Tucker, then respectively governor and executive director of markets at the Bank of England. In his note, Mr. Geithner transmitted recommendations (dated May 27, 2008) from the New York Fed’s “Markets and Research and Statistics Groups” regarding “Recommendations for Enhancing the Credibility of Libor,” the London Interbank Offered Rate.

The recommendations accurately summarized the problems with procedures surrounding the construction of Libor – the most important reference interest rate in the world – and proposed some sensible alternative approaches.

This New York Fed memo stands out as a model of clear thinking about the deep governance problems that allowed Libor to become rigged.

At the same time, the timing and content of the memo raises troubling questions regarding the Fed’s own involvement in the Libor scandal – both then and now. Continue reading “The Federal Reserve And The Libor Scandal” →

The Market Has Spoken – And It Is Rigged

By Simon Johnson

In the aftermath of the Barclays rate-fixing scandal, the most surprising reaction has been from people in the financial sector who fully understand the awfulness of what has happened. Rather than seeing this as an issue of law and order, some well-informed people have been drawn toward arguments that excuse or justify the behavior of the Barclays employees.

This is a big mistake, in terms of both the economics at stake and the likely political impact.

The behavior at Barclays has all the hallmarks of fraud, pure and simple – intentional deception for personal gain, causing significant damage to others. Continue reading “The Market Has Spoken – And It Is Rigged” →

Lie-More As A Business Model

By Simon Johnson.  For more discussion of these issues, listen to NPR’s All Things Considered, July 7, 2012.

On Monday, Bob Diamond – the CEO of Barclays, one of the largest banks in the world – was supposedly the indispensable man, with his supporters claiming he was the only person who could see that global megabank through a growing scandal.  On Tuesday morning Mr. Diamond resigned and the stock market barely blinked – in fact, Barclays’ stock was up 0.3 percent.  As Charles de Gaulle supposedly remarked, “the cemeteries are full of indispensable men.”

Mr. Diamond’s fall was spectacular and complete.  It was also entirely appropriate.

Dennis Kelleher of Better Markets – a financial reform advocacy group – summarized the situation nicely in an interview with the BBC World Service on Tuesday.  The controversy that brought down Mr. Diamond had to do with deliberate and now acknowledged deception by Barclays’ staff with regard to the data they reported for Libor – the London Interbank Offered Rate (with the abbreviation pronounced Lie-Bore).  Mr. Kelleher was blunt: the issue in question is “Lie More” not Libor.  (See also this post on his blog, making the point that this impacts credit transactions with a face value of at least $800 trillion.) Continue reading “Lie-More As A Business Model” →

Three More Governance Questions For The New York Fed

By Simon Johnson.  This is a long post, about 2500 words.

Over the last several weeks on this blog, I have expressed a broad set of concerns about governance arrangements at the Federal Reserve Bank of New York. I have made the specific case for Jamie Dimon, the chief executive of JPMorgan Chase, to step down from the New York Fed’s board because of the large, unexpected losses in his bank’s London proprietary trading operation – and the fact that these activities and their disclosure are now under investigation by the Fed.

On Monday I met with senior staff members of the Federal Reserve System to deliver and discuss a petition I created, signed by 38,000 people, requesting that Mr. Dimon resign or be removed from the New York Fed board. They were gracious in the time they afforded me.

More broadly, I see no grounds for optimism that Mr. Dimon will relinquish his Fed position any time soon. In addition, as a result of recent interactions with former officials and others who know the Fed intimately, I now have three additional substantive governance concerns for the New York Fed that merit further discussion. Let me pose them as straightforward questions that I hope the Fed – at the Board of Governors or New York Fed level – will answer publicly, and soon. Continue reading “Three More Governance Questions For The New York Fed” →