So why has President Obama called Senate Minority Leader Mitch McConnell's opposition to Chris Dodd's financial reform bill "cynical and deceptive" - other than, of course, Obama's abiding passion for post-partisan civility in Washington. Given that Goldman Sachs was the second largest contributor to Obama's campaign (sandwiched between the University of California and Harvard) and that a large majority of Wall Street money has gone to Democrats in recent years, it is good to look beyond the politics of demonizing Republicans and see what is really going on with financial reform.
Lets briefly review the elements of financial reform and see what the Democrats are trying to deliver. I'll be simplistic, and let you click on the reference to the level of your appetite.
1. Too big to fail. The administration and Congress have backed away from any effort to break up the large banks - for example by re-instituting the Glass-Steagall Act (rescinded in 1999 under President Clinton) which separated commercial banks (which serve individuals and Main Street) from the investment banks (which deal with public offerings, acquisitions, derivatives, and the like.) The closest remaining effort is a discussion - not in the bill - to prohibit the banks from trading on their own accounts - and a feeble objective of preventing the big ten banks, which have grown in twenty years from 24 % of the industry to 58 %, from getting much larger. With big contributions to both parties, Wall Street has won their biggest fight.
2. Future bail outs. The most argued portion of the bill is a $50 billion fund to be derived from industry levies and to be used to wind down big banks that are going under - much like the FDIC does with small banks. All want larger reserve requirements. Opponents (virtually all Republicans, but also including Democrats like Representative Paul Kanjorski of Pennsylvania and Senator Edward Kaufman of Delaware) fear any fund would be too small (AIG absorbed $185 billion), that its presence would make the banks seem safer and thus give them a competitive advantage, and that decisions about who to help would be made by the government instead of the market. Proponents want any shock absorber not paid for by the taxpayers. People of good will can disagree.
3. Regulation of derivatives. Most agree that Collateralized Debt Obligations, Mortgage-Backed Securities, Credit Default Swaps, and the like should be traded on an exchange for visibility and regulated. Obama's threat to veto the legislation if this provision isn't included was pure political theater - and it is in a parallel bill in the Agriculture Committee.
4. Rating Agencies. Reform - perhaps by compensating them with a fee on bond or derivative sales to be paid by the buyer rather than by fees on the sellers - would get at one of the central points of the meltdown. Nada.
5. Consumer protection. Creation of a central agency to oversee credit cards, mortgages, and various loans adds some bureaucracy, but centralization may improve advocacy and diminish abuse. Popular and included.
6. Fannie/Freddie. Republicans would like to rein in Fannie Mae and Freddie Mac who now hold $6.3 trillion of debt reflecting (along with Sallie Mae) government control of 90% of the residential mortgages in the United States. Not on Barney Frank's watch.
7. Preventing corruption. Some recent examples show two types:
- Bernie Madoff, Allen Stanford, and Raj Rajaratnam demonstrate that the SEC has been indifferent, incompetent, or worse. Heads should roll - and at least a few private industry ones are, even as the public watchdogs send their resumes to Wall Street.
- The more subtle double dealing where one Wall Street genius creates a pile of crap, sells it to a crony who buys a Credit Default Swap to bet on its collapse, and pays the middle men million dollar commissions to make it happen before they get out of Dodge. This is the current Goldman Sachs kerfuffle, with a more egregious example being the Magnetar scam of 2006-2007. (The attached Magnetar discussion is lengthy, but totally revealing.)
Give Obama and company an A for politics and misdirection, but a D for substance. Without downsizing the banks, new evasions will need to be invented for new constraints; enforcement will remain spotty (but politically timely); the big banks will grow and prosper; clever ethically-challenged bankers will be buying their places in the Hamptons; and the campaign contributions will continue to roll in. For skeptics, make a note to look at OpenSecrets.com before the 2012 election.
Sometimes the only thing that you can do is laugh. If you are up to it, watch this hilarious video about the Magnetar trade.
For those who want to see Representative Paul Ryan's view on all things financial (of whom I am one), here is a 7 minute video.
bill bowen - 4/23/10