The Bank Proposal:

[amborin]

The Obama proposal to rein in banks is overdue. That it required the wake up call in Massachusetts Tuesday is unfortunate. It again leaves the Obama team appearing to be behind, not ahead, of the issues. Many well-informed and well-intentioned analysts, not just Paul Volcker, have been advocating a similar paring down of bank activities– a modern Glass Steagall – for a long time. We should all eagerly await the details of how it will work. But at first glance, the proposals appear to be well thought out. Savers’ deposits, insured by the federal government, cannot be put on the line to help individual traders make a personal fortune.

But at the risk of being a party pooper, let me loudly state that this is not all there is to do. High on the priority list should be a new set of capital requirements for the shadow banks. These may yet include Goldman Sachs and Morgan Stanley, who may decide to give up their bank holding company status to avoid the new restrictions.

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The shadow banks, it should be clear, can still do a lot of damage to the financial system. A new set of capital requirements is needed at a fairly high level to restrain absurd excesses by investment banks and other entities that escape bank regulation.

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On this issue, the question remains as to who will be in charge of such matters. The current proposed legislation would leave it to the Fed, as systemic risk regulator, whose job would be to set new requirements. But the Fed has done a terrible job of regulation in recent years. Terrible is not too strong a word to use, as many now realize. It has been subject to capture by the financial community or to flights of ideological fancy — Greenspan’s but to a lesser degree Bernake’s, who at least has shown the ability to adjust quickly. We need a body that can be trusted and that itself is subject to oversight.

Regulation of derivatives is still inadequate in the Barney Frank House bill as well. Nothing substantive is done about the private credit ratings agencies. Compensation is still untouched in any real sense.

The Obama administration has not been able to put forward a cohesive, intellectually sound explanation of the sources of the crisis. It has addressed only the variety of failures that all of us are aware of. Without that vision, the efforts have so far had little weight.

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http://www.newdeal20.org/?p=7659

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The reforms sound good. It is always too easy to criticize reform for not going far enough. However, the nature of this proposal seems to indicate that Obama still does not understand the scope of the problem. Let me provide what I believe to be more than mere quibbles:

1. The financial bail-out was not needed and would do nothing to prevent another great depression. We had a liquidity crisis that could have been resolved in the normal way, through lending by the Fed without limit, to all financial institutions, and without collateral. That is how you end a liquidity crisis. But that has nothing to do with the Paulson/Rubin/Geithner plans that variously bought bad assets, injected capital, and provided guarantees — in an amount estimated above $20 trillion. None of that was necessary and none of it prevented collapse of the economic system. Banks are still massively insolvent. If we wanted to leave insolvent institutions open, all we had to do was to use forbearance. And, in truth, that is the only reason they are still open for business.

2. And of course, none of that had any benefit at all for Main Street. Indeed, we could have closed down the top 20 banks (responsible for almost all of the mess) with no impact on the economy. The only thing that has helped was the fiscal stimulus package. That will soon run out, and although it helped it was far too small. Obama has zero chance of getting more money for Main Street unless he can convince Congress and the public that he has changed his ways. The reforms he has announced fall short.

3. The financial system is not healthier today. Indeed, it is much more dangerous. The Bush and Obama administrations reacted to the crisis by encouraging and subsidizing consolidation of the sector in the hands of gargantuan and dangerously insolvent institutions. The sector is essentially run by a handful of rapacious institutions that have made out like bandits because of the crisis: Goldman, JP Morgan, Citi, Chase and Bank of America. All of these are systemically dangerous. All should be closed. Today.

4. Yes, the lobbyists are a problem.

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5. It is not enough to subject banks to the requirements of the Volcker Rule. Any institution that has access to the Fed and to the FDIC should be prohibited from making ANY KINDS OF TRADES.
They should make loans, and purchase securities, and then hold them. (An exception can be made for government debt.) They should perform underwriting and due diligence to ensure that the assets they hold meet appropriate standards of risk. And then they should bear all the risk through maturity of the assets.
They should not be allowed to offload assets, much less to short assets that they sell, while knowing they are trash (Goldman’s favorite strategy). They should not be able to hedge risks through derivatives. They should not be allowed to purchase credit default “insurance” to protect themselves. They should not be allowed to move risk off balance sheet. They should not be involved in equities markets. Any behemoth that does not like these conditions can hand back its bank charter and become an unprotected financial institution. Those that retain their charters will be treated as public-private partnerships, which is what banks are. They put up $5 of their own money, then gamble with $95 of government (guaranteed) money. The only public purpose they serve is underwriting-and that only works if they hold all the risks.

6. Obama ignores fraud. It is rampant in the financial sector. Indeed, it has no doubt increased since the crisis. Where do you think all of those record profits come from? It is a massive control fraud, based on Ponzi (or Bernie Madoff) schemes.

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Only if Obama is willing to take on fraud will we know that he really is about hope and change. He has got to start with the Rubin, Geithner and Summers team. Fire them, then investigate them. That is change I can believe in-and an end to “business as usual”, as Obama put it.

[ProSense]

1. The proposal was drafted Wednesday. "Towards a 21st Century Glass-Steagall"

Towards a 21st Century Glass-Steagall

<...>

Simon Johnson has follow-up questions.

I’ve been thinking a lot about this approach as a major piece of regulating the financial sector. The point isn’t to simply redo what we’ve already done, because markets change and our government’s approach to them needs to change as well. There’s an argument that the old conflict between commercial and investment banking is gone, and that having these two types of business lines together now actually creates stability for the firm itself. So the idea is to take the spirit of what has worked in the past and update it to new challenges, and in this sense I like to think of this as a “21st Century Glass-Steagall.”

<...>

And the separate but related question of conflict of interest will be interesting: During the first FCIC hearing last week, Angelides grilled Goldman Sachs CEO Blankfein about whether or not there was a conflict between Goldman’s market making and prop desk and their underwriting desk. Blankfein said no, these are never in conflict, while Angelides clearly thought they did. I will withhold saying more until I learn about the press conference, but how these types of conflicts of interests are separated out will be a major piece of concern for financial reform, and something that should be clarified today.

So as we discussed in the previous entry, this is a simple and elegant solution. There’s no raising a “rainy-day” TARP-esque fund. There’s no trying to second-guess the proper limits for trading for profit within a commercial bank. If you want to be in that space, and get the safety net and stability that comes with it, you have to accept simple terms.

Because if a commercial bank fails, it has access to government mechanisms through the normal FDIC channel. If a prop-trading investment bank fails, it should be wound down in accordance with new financial firm bankruptcy rules. Now note we have to move two other piece of reform in order to make this credible: we need a system where parties are aware of the derivatives holdings of an investment bank pre-crisis, say through a clearinghouse or exchange, so to make resolution credible and prevent panics. We also need a new resolution authority to handle these firms in a manner that won’t destroy the system. Regulating exchanges, and special bankruptcy proceeding for financial firms: we’ve done this before in the New Deal, we just never upgraded it for a new century, and right now a broken financial sector calls again for these changes.

more

[ProSense]

6. Oops, edited: "wasn't drafted." n/t

[sabrina 1]

2. 'The Fed has done a terrible job'

Yes, which is why he should withdraw the Bernanke nomination and as soon as possible start distancing hinself from Goldman Sachs.

And it is a shame that it took the loss of Ted Kennedy's seat to wake them up, but better late than never.

[amborin]

4. agree; and fire Geithner; but look at all the Goldman Sachs in the admin:

Neal Wolin
Deputy secretary of the treasury (Tim Geithner's No. 2)
Exec at one of the largest insurance and investment firms

Mark Patterson
Treasury secretary's chief of staff
Goldman Sachs lobbyist

Gene Sperling
Counselor to the treasury secretary
Made nearly $900,000 advising Goldman Sachs

Larry Summers
Obama's chief economic adviser
Made $5 million as managing director of a hedge fund

Rahm Emanuel
White House chief of staff
Made $16 million as a partner at a Chicago investment bank

Herbert Allison
Assistant secretary of the treasury (oversees TARP)
Longtime exec at Merrill Lynch; headed Fannie Mae

Kim Wallace
Assistant secretary of the treasury for legislative affairs
Managing director at Barclays Capital and Lehman Brothers

Karthik Ramanathan
Acting assistant treasury secretary for financial markets
Foreign exchange dealer at Goldman Sachs

Matthew Kabaker
Deputy assistant secretary of the treasury
Made $5.8 million at the Blackstone Group in 2008-2009

Lewis Alexander
Counselor to the treasury secretary
Chief economist at Citigroup; paid $2.4 million in 2008-2009

Adam Storch
Managing executive of the SEC's Division of Enforcement
VP of Goldman Sachs' Business Intelligence Group

Lee Sachs
Counselor to the treasury secretary
Made more than $3 million at a New York hedge fund

Gary Gensler
Chairman of Commodity Futures Trading Commission
18 years at Goldman Sachs, where he made partner

Michael Froman
Deputy assistant to Obama, deputy nat'l security adviser
Managing director of a Citigroup investment arm

http://motherjones.com/politics/2010/01/henhouse-meet-f...

[sabrina 1]

5. Wow, I had no idea there were that many of them.

Getting rid of Geithner would be a start. He may resign now that it looks like things are leaning more towards not being so friendly to the banks.

And people are human, even presidents. He's been listening to these people for so long, and not to the American people, it took a real shocker like the loss of the Mass Senate seat to make him realize his presidency and his party are on the line.

[Grand Taurean]

3. Why has Obama kept Volcker in the background

while propping up Geithner and Bernanke?
Does Obama share some responsibility here? I say he does.

[sabrina 1]

7. I think he does too. I think he was supported in the campaignb

by so many big corporations and was probably advised to ignore the 'left' and go with more 'experienced' economists. Volcker wanted to end the deregulation of the banks. Obama was probably convinced by the Goldman Sachs crowd that Volcker's ideas were old fashioned and with things as bad as they were when he took over, he needed to listen to those who understood 'today's market'.

I think he now feels betrayed by them. In his speech you can see that he is angry about their behavior, big bonuses etc. Maybe he really thought they would start behaving themselves if he bailed them out. If he did, he was pretty naive. But if he's learned a lesson, then that's progress at least.

[amborin]

8. GS was

Obama's 2nd biggest prez campaign donor:

Goldman Sachs $994,795 ***********
Harvard University $854,747
Microsoft Corp $833,617
Google Inc $803,436
Citigroup Inc $701,290 ************
JPMorgan Chase & Co $695,132 *************
Time Warner $590,084
Sidley Austin LLP $588,598
Stanford University $586,557
National Amusements Inc $551,683
UBS AG $543,219
Wilmerhale Llp $542,618
Skadden, Arps et al $530,839
IBM Corp $528,822
Columbia University $528,302
Morgan Stanley $514,881 *****************
General Electric $499,130
US Government $494,820
Latham & Watkins $493,835

from opensecrets.org