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Mendacious Commercials Against Financial Regulation

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Annie Lowrey over at The Washington Independent has a nice post deconstructing  the latest series of advertisments attacking the financial regulation bill now being debated in the Senate.

I admit I hadn’t seen this lovely bit of propaganda until she drew my attention to it, and it’s interesting to examine the claims it makes. The first rule of propaganda is to attribute to your enemy your own actions and intentions. Thus, the commercial rather cleverly accuses the Senate of setting up an apparatus for “unlimited bailout authority”, and, astoundingly, claims that “Goldman Sachs is in favor of the bill”.

Neither of these statements is true, of course, but the implications go deeper than that. As TPM revealed earlier this week, the sponsors of the ad, a front-organization calling themselves “Stop Too Big to Fail”, are funded entirely by corporate dollars, including, yes, Goldman Sachs. This attempt to dust up public anger against the financial reform bill indicates Wall Street’s fear of it, and their willingness to tell any lie in order to see that the reform bill doesn’t pass.

Not that they really have that much to worry about. As George Washington remarks, the reform bill currently being debated is “All Holes and No Cheese“, noting that:

Dodd’s bill:

What it will do, however, is set up new protections for consumers, specifically to protect them from predatory lending practices, overdraft fees, byzantine contracts that require a Ph.D to understand, etc. The bill will also (hopefully) enact some barriers to the trade of over-the-counter (unregulated) derivatives, those delightful instruments that got us into this crisis.

As with the health care bill, I feel really ambivalent about this.

On one hand, the Dodd bill does almost nothing to prevent too-big-to-fail, it proposes some watered-down reform on derivatives trading, it doesn’t reduce the size or power of our mega-conglomerate banks, it doesn’t reinstate Glass-Stegall, and it does nothing to rein in the frankly absurd amounts of cash the bank executives make, whether or not they happen to crash the economy

On the other hand, this bill does provide some new consumer protection services, it bans proprietary trading (whatever that is), and it does create a new regulatory body whose specific charge is to watch over our mega-banks (as opposed to the SEC, which has a universal mandate).

Is this good enough? Can we do better? With the flood of Wall Street money flowing into campaign coffers, and with the November election only 6 months away, I’m inclined to say no. Maybe we should take what we can get. And keeping in mind that, unlike the health-care bill which had full industry support, the Dodd bill is being opposed by nearly every major bank, maybe it isn’t so bad after all. If the banks are against it, there must be something good inside this bill.

Update: Also see Nomi Prins’ article in Alternet entitled “Ten Ways The Dodd Bill is Failing on Financial Reform“:

It won’t constrain the Fed’s future bailout operations. It appears to limit the Fed’s ability to lend money freely to firms in trouble by “allowing” its system-wide support only for healthy institutions or systemically important market utilities. But what’s to stop the Fed from designating any company a “systemically important market utility”? That was basically the rationale behind the AIG bailout.

Update II: It’s also important to keep in mind that Chris Dodd, the bill’s sponsor, is heavily funded by some of the most odious Wall Street titans, including Citigroup (who gave him $110,000 this cycle), AIG ($87,000), Merrill Lynch ($61,650), Morgan Stanley ($44,000), and JP Morgan ($37,000). Hooray for transparency!

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Written by pavanvan

April 29, 2010 at 1:00 pm

Geithner Turns Halfway Around on Derivatives Regulation

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Via Bloomberg, it looks like the Treasury Secretary has backed off on his previous stance that the derivatives market (which got us into this mess) does not need to be regulated. Today he says:

Geithner said the over-the-counter derivatives market should be subject to “substantial supervision and regulation,” while omitting support for the provision that would force banks like JPMorgan Chase & Co. and Bank of America Corp. to wall off trading operations from their commercial banks.

The Obama administration requires that all over-the- counter derivatives dealers and “major market participants” be subject to “conservative capital requirements, conservative margin requirements and strong business conduct standards,” Geithner said.

There is some very tricky parsing of words here that will probably escape most peoples’ attention.

One of the major factors in the credit freeze of 2008 was the widespread proliferation of so-called “over-the-counter” derivatives, which are debt obligations that were traded secretly between banks. Unlike the mortgage industry or the credit card industry, derivatives were largely unregulated and are not traded on an exchange. Thus, banks can package and sell derivatives to one another “over the counter” – that is, without any public record of the transaction having taken place. This became a serious concern in 2008 when Lehman Bros. failed; because the derivatives market was undisclosed, no bank knew how many assets the other banks had, or if the assets they did have were worthless. As such, lending between banks froze overnight – no one knew who was solvent and who was underwater.

Many have taken this as evidence that OTC derivatives are inherently dangerous and should be banned. This could be done by outlawing all asset-backed derivatives (like the mortgage securities that got us into this mess to begin with), or by simply mandating that derivatives be traded on an open, transparent exchange. Thus, they would cease to be “over the counter”. Geithner’s recent comments, while they sound impressive, make a derivatives exchange highly unlikely, and actually point to an extension of the policies that caused the 2008 crisis.

“Substantial supervision and regulation” can fail. While the OTC derivatives had been the subject of a massive push for deregulation, the problem was that even if there were regulators to look at the books, the instruments had become too complex for them to decipher. Simply adding another layer of regulation won’t change the underlying problem, which is that these instruments are basically impervious to regulation unless traded on a transparent exchange, something Mr. Geithner apparently does not support.

Similarly, the “provision that would force banks to wall off trading operations from their commercial banks” refers to the infamous Glass-Stegall Act of 1934, the repeal of which in 1999  Nobel Laureate Joseph Stiglitz gives an “especial role” in causing the 2008 crisis. I’ve written on Glass-Stegall in the past, and I don’t wish to repeat myself, but I should stress that so long as Lawrence Summers, the architect of the bill that repealed Glass-Stegall (and thus, a major architect of the crisis) stays in place, there is little hope of reducing the size of our Too-Big-To-Fails. Needless to say, Mr. Geithner is not even considering reinstating Glass-Stegall.

So basically, Timothy Geithner’s big plan to rein-in derivatives trading gives only a minor face-lift to the status quo. He’ll slap on a few regulatory outfits and say he’s done the job. Meanwhile, our Too-Big-To-Fail banks are getting even bigger, over-the-counter derivatives are still legal, and there won’t be any meaningful punitive action towards the banks that caused this crisis. The severe risks to the system remain.

Written by pavanvan

April 16, 2010 at 8:03 pm

The “Too Big To Fail” Problem

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(c/o Ezra)

David Min over at Center for American Progress has one of the clearest and most concise explanations of our current banking system I’ve seen so far. And he’s honest enough to mention that the only true solution to our “too big to fails” is to nationalize them and break them up. This is a must-read article:

To address this problem, we first need to define “too big too fail” and how the problem can implode our financial system. “Too big to fail” is best understood as a bank panic problem, and has arisen as the result of two developments in the global financial markets over the past several decades. The first development was the tremendous growth of a “shadow banking system” operating outside of the rules that have governed depository banking since the Great Depression. This shadow banking system essentially performed the same functions as banking—attracting short-term investments and using them to finance long-term loans—but did so through the use of entities that were not depository banks, and the use of financing instruments (such as mortgage-backed securities, commercial paper, or short-term repurchase agreements) that were not deposits. Because of this nonbank, nondepository structure, the shadow banking system, which grew to an estimated $10 trillion in size, fell outside the rules and protections of the regulated banking system.

The second development was the concentration of risk within the shadow banking system, such that a small number of financial firms were and are responsible for the vast majority of its liabilities. Before the 2008 crash, the five major U.S. investment banks had a combined balance sheet size of approximately $4 trillion, and this may have understated the true level of liabilities they were holding. Witness the recent revelations about failed Wall Street investment bank Lehman Brothers, which raises questions about the extent to which shadow banks offloaded balance sheet risk through the use of dodgy transactions.

Good stuff.

Written by pavanvan

March 25, 2010 at 7:23 pm

JP Morgan Says California A “Bigger Risk” Than Greece

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The London Telegraph has the scoop:

Mr Dimon told investors at the Wall Street bank’s annual meeting that “there could be contagion” if a state the size of California, the biggest of the United States, had problems making debt repayments. “Greece itself would not be an issue for this company, nor would any other country,” said Mr Dimon. “We don’t really foresee the European Union coming apart.” The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

California however poses more of a risk, given the state’s $20bn (£13.1bn) budget deficit, which Governor Arnold Schwarzenegger is desperately trying to reduce.

Written by pavanvan

March 1, 2010 at 5:55 pm

Too big

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I know I’m somewhat late to this party, but I wanted to point out to all who are still unaware that the ‘too big to fail’ banks which caused our late crisis are even bigger.

JP Morgan, AIG, Citigroup, Goldman, and Bank of America were the winners of Geithner-Paulson’s free money giveaway (with Lehman a bad loser), and together they have swallowed the hundreds of small and medium banks that have failed since. They now present an even bigger and more systemic risk, should they choose to gamble away their money once again.

Despite repeated calls from almost every respected economist (notably Joseph Stiglitz) that these banks are a menace, Lords Geithner and Bernanke have done nothing to restrict their size – indeed, they have made them impossibly more dangerous and lucrative.

Furthermore, none of the incentives which led to such reckless gambling (ludicrous bonus packages, easy credit, low intrest, short-term rewards) have been addressed, and instead have been reinforced.

The next bailout will have to be 700 trillion instead of a mere 700 billion.

Written by pavanvan

November 30, 2009 at 10:06 pm