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” →

Financial Safety and Fire Safety

This guest post was contributed by engineer27, a longtime reader of and frequent commenter on this blog. (I had exams this past week, which is why I haven’t posted in a while.)

This Thursday, the Senate added two amendments to the Financial Regulation in process that deal with Nationally Recognized Statistical Rating Agencies (NRSROs), which are blamed for being a factor in the financial crisis of 2008. The most widely cited problem with the NRSROs is the inherent conflict of interest which resides in the “issuer pays” model currently in use. However, even supporters of doing something are stymied when trying to envision a workable solution. The two (perhaps contradictory) amendments each try to implement a proposed solution that runs into some of the critiques. The Franken amendment has rating agencies assigned to debt issues by a neutral arbiter; critics maintain that lack of competition may reduce the quality of analysis. The LeMieux amendment removes legal mandates to obtain a NRSRO rating and the preferential treatment those issues currently receive. However, it leaves out details about whose advice agencies and public trusts should seek out instead.

This is not such a difficult problem. We already have an example of a successful private rating agency, whose imprimatur is desired or in some cases required by law, that is paid for by fees on the seller, and has been operating since 1894: Underwriters Laboratory. The UL publishes safety standards for almost 20,000 different types of products, many of which are adopted by other standard-setting organizations like ANSI (American National Standards Institute) and Canada’s IRC (Institute for Research In Construction). Although generally not actually required by federal law, the sale of many types of products in the US would be difficult without UL listing. Also, many local jurisdictions responsible for building and fire codes mandate the use of UL approved products. In all cases, the manufacturer must submit samples and pay fees to UL in order to win approval.

Continue reading “Financial Safety and Fire Safety” →

Fear Quantitative Trading

By Simon Johnson

Look forward. The holy grail of any serious financial market player must now be: Become Too Big To Fail. You can do it is as a megabank – this part is obvious. But you can also do it as a hedge fund or some other lightly regulated pool of capital – this, after all, is the lesson of Long Term Capital Management that has never been addressed.

And quantitative trading, while in principle just one approach to investing or even only set of tools, greatly increases the complexity and opaqueness of markets – further allowing you to become big (in any future sense) relative to the political and economic system, and moving us closer to a more complete version of the stock market shut-down we saw on May 6.

For more on this, see my review of Michael Lewis’s The Big Short and Scott Patterson’s The Quants – now in The New Republic’s on-line book section.

Senator Kaufman Was Right – Our Financial System Has Become Dangerous

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

Update: link to Senator Kaufman’s speech yesterday

Senator Ted Kaufman (D, DE) is best known these days for arguing that, as part of comprehensive financial reform efforts, our biggest banks need to be made smaller. His advocacy on this issue helped build support around the country and forced a Senate floor vote on the Brown-Kaufman amendment, which was defeated 33-61 last Thursday.

Senator Kaufman has also pushed strongly the idea that in recent years there was a pervasive “arc of fraud” within the mortgage-securitization-derivatives complex. This thesis also seems to be gaining traction – according to the WSJ today, the criminal probe into this part of the financial sector continues to develop.

But the Senator’s biggest home run has been on a different issue: his warnings about the dangers of high-speed trading, involving “dark pools” of money, appear to have been completely vindicated – ironically enough, also last Thursday. Continue reading “Senator Kaufman Was Right – Our Financial System Has Become Dangerous” →

Supporting Swap Desk Spinoffs Just Got Easier

The following guest post was contributed by Jennifer S. Taub, a Lecturer and Coordinator of the Business Law Program within the Isenberg School of Management at the University of Massachusetts, Amherst (SSRN page here). Previously, she was an Associate General Counsel for Fidelity Investments in Boston and Assistant Vice President for the Fidelity Fixed Income Funds.

It’s about time. Yesterday, by a vote of 96 – 0, the U.S. Senate passed a ground-breaking amendment to the financial reform bill. Introduced by Senator Bernie Sanders of Vermont, this amendment would require an audit of all emergency actions taken by the Federal Reserve since December 1, 2007. In addition, the amendment mandates that by December 1, 2010, the Fed reveal those who received $2 trillion in zero or near zero interest Fed loans and what those institutions did with the money.

This was the second recent “yes we can” show of bipartisanship. Last week, by a 96 -1 vote, the Senate approved an amendment introduced by Senator Barbara Boxer of California. The Senator described its purpose was to “protect taxpayers” through the creation of an “orderly process to liquidate failing financial firms and ensure that Wall Street pays to clean up its own messes.” Whether the amendment can live up to that promise is a good question. The answer depends less upon government intervention once a firm nears collapse and far more upon government prevention of the excesses that lead both to widespread failure and government support.

Continue reading “Supporting Swap Desk Spinoffs Just Got Easier” →

Our Eurozone Call In October 2008 And Banking Reform Today

By Simon Johnson

Eighteen months ago, on October 24, 2008, Peter Boone, James Kwak and I published an opinion piece in the Guardian (UK), “Start by Saving the Eurozone“. We argued that the recession would put a great deal of pressure on the eurozone, because of flaws in its design.

Our proposals for addressing these issues, and preventing a broader global crisis, included:

“2. Create a European Stability Fund with at least €2tn of credit lines guaranteed by all Eurozone member nations and potentially other European countries with large financial systems such as Switzerland, Sweden and the UK. This fund should provide alternative financing to member countries in case market rates on their government debt become too high. This will prevent a self-fulfilling cycle of rising interest rates. The fund should be large enough to have credibility; countries could access the fund automatically, but should then adopt a 5-year program for ensuring financial stability, subject to peer review within the Eurozone.” Continue reading “Our Eurozone Call In October 2008 And Banking Reform Today” →

Restructuring The Eurozone

By Simon Johnson

In today’s Financial Times, Peter Boone and I have an op-ed with proposals for reforming how the eurozone operates. The current arrangements have proved unstable – encouraging countries to run excessive budget deficits while also giving banks an incentive to both finance profligate governments and also fuel real estate bubbles.

Addressing these problems would require creating a “core” of countries that keep the euro, agree to much more unification of fiscal policy, and put in a place a single strong bank regulator/supervisor. A move in this direction may not seem likely in the short-term, but the pressures are still building.

Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency

By Peter Boone and Simon Johnson

The eurozone self-rescue plan announced last night has three main elements:

750bn euros in a fiscal support program, with 1/3 coming from the IMF (although this was apparently news to the IMF).
The European Central Bank promises to buy bonds in dysfunctional markets.
Swap lines with the Federal Reserve, to provide dollars.

At first pass this package might seem to be in with what we recommended a week ago and again on Thursday.

But the European central banks have come in very early – with government bond prices still high – and there is no sign yet of credible fiscal adjustment for Spain and Portugal. The eurozone apparently did not even discuss the situation in Ireland, which seems increasingly troubling.

This is a whole new level of global moral hazard – the result of an alliance of convenience between troubled governments in the south of Europe and the north European banks (and implicitly, north American banks) who enabled their debt habit. The Europeans promise to unveil a mechanism this week that will “prevent abuse” by borrowing countries, but it is hard to see how this would really work in Europe today.

Overall, this is our assessment: Continue reading “Eurozone: The Kitchen Sink Goes In – Now It’s All About Solvency” →