“To Regulate Or Break Up?”: The Difference Between An Insurrectionist And An Institutionalist
Anyone who has been able to sit through both the Republican and Democratic presidential debates is very well-versed in the chasm that currently exists between the two parties. When all is said and done, the public is going to have a very clear choice between two starkly different directions for our country to embrace in November 2016. That is a good thing – especially for Democrats who seemed intent on watering down the differences in the 2014 midterms.
But Tuesday’s debate also clarified the differences between Clinton and Sanders. Matt Yglesias does a good job of teeing that up.
To Clinton, policy problems require policy solutions, and the more nuanced and narrowly tailored the solution, the better. To Sanders, policy problems stem from a fundamental imbalance of political power..The solution isn’t to pass a smart new law, it’s to spark a “political revolution” that upends the balance of power.
As we know from both the debate and their position statements, Clinton wants to regulate the big financial institutions and Sanders wants to break them up. The argument from the Sanders wing is that we can’t trust the government to be the regulator.
I remember that same argument coming up between liberals during the health care debate. Those who dismissed the ACA in favor of single payer often said that any attempt to regulate health insurance companies was a waste of time. I always found that odd based on the Democratic tradition of embracing government regulation as the means to correct the excesses of capitalism.
This basically comes down to whether you agree with Sanders when he says that we need a “political revolution that upends the balance of power” or do you agree with Clinton when she said, “it’s our job to rein in the excesses of capitalism so that it doesn’t run amok.” Peter Beinart calls it the difference between an insurrectionist and an institutionalist.
Depending on where you stand on that question, your solutions will look very different. That helps me understand why I never thought Sanders’ policy proposals were serious. Someone who assumes that the entire system is rigged isn’t going to be that interested in “nuanced and narrowly tailored policies” to fix it.
But in the end, this puts even more of a responsibility on Sanders’ shoulders. If he wants a political revolution to upend a rigged system, he needs to be very precise about what he has in mind as a replacement to that system. Otherwise, he’s simply proposing chaos.
By: Nancy LeTourneau, Political Animal Blog, The Washington Monthly, October 15, 2015
“Keeping Regulation At Bay”: One More Step Toward The Next Meltdown
The delaying tactics we told you about nearly two years ago have worked beautifully. The bailout worked (if not for homeowners, at least for the banks). It worked so well that the underlying problems that led to the financial crisis have remained largely ignored.
The regulations that have been written (and continue to languish during their extended comment period) are on their way to being eliminated or weakened yet again by Congress. The House helped out this week by passing a bill (HR 4413) that ensures that if any regulations do get approved, they will be difficult to enforce.
As we reported back in 2012, JPMorgan Chase in London managed to avoid examination and enforcement by the Commodities Futures Trading Commission simply by labeling their massive speculation in credit default swaps as “portfolio hedging.” It was a loophole big enough for a whale to swim through.
Another loophole made enormous by HR 4413 is the cutoff separating “end users” from “swap dealers.” In the CFTC draft regulations written after Dodd-Frank initiated oversight on the swap business, any market player with more than $100 million in swaps per year was considered a dealer, and subject to stricter oversight and capital requirements.
After the industry complained, the CFTC agreed to delay that stronger oversight for two years and put in a temporary $8 billion cap that was due to drop to $100 million later this year. The bill that passed the House makes that $8 billion cap permanent. Now any firm that wants to do $100 billion in business without regulation has the option to create 13 separate companies.
From the point of view of the people who profit from the lack of regulation, streamlining the lack of oversight is financially sound. After all, real estate values in waterfront Greenwich estates, the Hamptons, and even Park Avenue will likely suffer if bankers and hedge fund managers make less money.
For those who trade in opaque markets, profits are maximized when some participants have information that their customers and competitors don’t have. An open market with published prices and capital reserves would limit profits and return on equity. Complying with regulations and keeping records available for supervisory review costs money. It all cuts into profits.
And if profits get squeezed by an overbearing, overregulating government, how can a valuable part of our capital markets survive? It’s not cheap, after all, to employ the people needed to execute this business that virtually no one understands and that the government doesn’t want to regulate.
Remember when AIG Financial Products blew up? Even though there were traders, accountants, clerks, lawyers and others from Lehman who found themselves jobless, the Treasury Department decided to pay more than a million dollars in bonus payments to each of the valuable AIG employees that had bet so big, and so badly.
Thankfully, the lobbyists hired by the industry have figured out how to keep the business profitable, and how to turn the task of complying with new regulations into a potential new profit center. They helped incorporate a brilliant strategy into HR 4413, and got 265 members of the House to vote for it.
The CFTC will be required to create and publish cost-benefit studies prior to adopting new compliance policies, and those studies will be subject to judicial review. That will take some time. After the CFTC rules go into effect, market participants will be free to argue that the cost estimates were inaccurate. Because the studies are subject to judicial review, the companies being regulated can theoretically get the government to pay them for any additional costs they incur when complying. With a little creative accounting, maybe the swap dealers will turn a profit on compliance departments.
While the delaying tactics written into the bill keep regulation at bay, trading in credit default swaps will continue as it has, with the risks it has, here and abroad. Over half of the hundreds of trillions of dollars in swaps on the books of our banks belong to foreign subsidiaries. A condition of the new bill requires the CFTC and the SEC to certify that derivatives regulations are not already in place in those foreign jurisdictions before they become subject to the new “regulations.” All a bank or hedge fund needs to do is dispute the nature of existing derivatives regulations in their legal places of business overseas, and any oversight can come to a grinding halt while they all work it out. In the meantime, they can enter into lots of credit default swap contracts.
Perhaps the most brilliant part of HR 4413 is hidden in the budget. The congressionally mandated increased workload has no accompanying increase in the commission’s budget. It won’t be easy to run thousands of legal and economic analyses without the people to do it or the money to hire them.
Speaking of people, the bill passed in the House also peculiarly reinvents the org chart. Key regulatory and enforcement personnel currently report directly to the commissioner of the CFTC, but under the new law, those people would instead report to five different members of the commission. Hiring, firing, and departmental budgeting will be decided by all five members together.
Have you ever reported to five bosses at the same time? I did, for about a year, and it’s nearly impossible to get anything done.
By the way, in case you thought our government didn’t have a sense of humor, Congress tells us we can call HR 4413 the “Customer Protection and End User Relief Act.”
Correction: The “hundreds of trillions of dollars” figure cited in the 12th paragraph refers to all swaps, not just credit default swaps as this post originally stated.
By: Howard Hill, Former Investment Banker, The National Memo, June 27, 2014
“A Galloping Conservative Radicalism”: If Republicans Want Respect, They Need To Stop Using The Budget As A Weapon
One of the central provisions of the Dodd-Frank financial reform package was the creation of the Consumer Financial Protection Bureau, which is charged with preventing banks and other financial institutions from preying on vulnerable consumers. Republicans hate the CFPB, and have taken to complaining about its funding stream, which comes from the Federal Reserve rather than the normal budgeting process.
They have a point, but they have only themselves to blame, since the GOP has all but relinquished its claim to responsible oversight by using the budget to cripple laws it doesn’t like.
This steaming Washington Examiner editorial lambasting Reps. Maxine Waters (D-Calif.) and Al Green (D-Texas) is a helpful distillation of the GOP position:
Simply put, Waters and Green view the congressional appropriations process as an obstacle to doing things they judge to be good, rather than as a tool by which the American people make sure the executive branch properly enforces the laws they instructed Congress to approve. This is how a democratic republic functions. Do Waters and Green think other agencies — say, the IRS, NSA, the Department of Homeland Security or perhaps the FBI — should be similarly unaccountable to the people’s representatives?
And what will they do when, having freed the bureaucrats of congressional shackles, they find a Republican president using the CFPB in nefarious ways, with Congress powerless to intervene? [Washington Examiner]
I have some sympathy with this perspective. Putting the CFPB outside the normal budget does reduce its democratic accountability. And the agency hasn’t been covering itself with glory of late; a recent report from American Banker found systematic discrimination in hiring and promotion. It’s plausible that more oversight could have prevented that.
But the problem is that conservatives obviously aren’t concerned about whether taxpayers are getting a good deal. They want to cut the bejesus out of the agency’s funding, even if it means inviting another financial crisis. The GOP budget from earlier this year zeroed out CFPB funding after 2016. Republicans claimed they wouldn’t get rid of it altogether, but given the GOP’s animosity toward pro-consumer regulations, or any programs that benefit the non-rich, it’s easy to suspect that they are trying to quietly axe the agency.
The truth is that the strongest possible oversight authority over the CFPB — the power of life and death — is still firmly in Congress’ hands. The legislature created the agency, and it may destroy it. The trouble is that Republicans don’t have enough votes to destroy the CFPB. They don’t even have a majority in the Senate, never mind enough votes to override a guaranteed veto from President Obama.
By dividing government, the Constitution forces parties into compromise. For a normal partisan with a basic commitment to the norms of American democracy, the idea is to hammer out compromises with the other side until you are in a position to enact a suite of policies. You can’t get everything, but you can get half a loaf here and there. Then, when you get the rare chance at controlling both Congress and the presidency, you pass a big policy suite, and hope people like it enough that it sticks.
That’s a reasonably fair description of how Democrats behaved from 2006 to 2010.
But Republicans have abandoned this set of norms in favor of an enraged constitutional hardball. Under this model, when you don’t have enough votes to pass your agenda, you use every procedural tactic at your disposal to force the other side to embrace it. At the extreme, this includes threatening grievous damage to the nation, by deliberately defaulting on the debt or shutting down the government. Additionally, since what passes for Republican policy is simply repealing laws or privatizing huge swathes of the government, starving agencies for funds is a nice way to accomplish that goal on the sly.
Republicans have eased up on the government-by-hostage-crisis of late, but this behavior is what inspires Democrats to do an end-run around the budget process. Since they can’t trust Republicans to not use the budget process as part of the policy proxy war, there’s a constant search for ways to protect critical agencies from procedural extremism.
It’s not a great situation. But because our poorly designed institutions have collided with a galloping conservative radicalism, it is going to be a more common one.
By: Ryan Cooper, National Correspondent at TheWeek.com, June 24, 2014
“A Picture Of Massive Corruption And Cowardice”: The Decline Of The American Justice System
Jed Rakoff, a former prosecutor, has an interesting piece in the NYRB about why there have been no prosecutions of financial industry employees over the systemic fraud surrounding the financial crisis. The whole piece is worth a read, but here are the main points boiled down:
1) The FBI is consumed with terrorism, apparently cutting their financial fraud investigation force from over a thousand agents before 2001 to about 120 by 2007. Whether that’s justifiable or not, it does remind me of a line from one of the finest action movies of all time: “Jesus man, wake up! National security’s not the only thing going on in this country.”
2) Regulators and law enforcement, especially at the SEC, have been focused on insider trading cases and Ponzi schemes like the Madoff affair, which are easier to investigate and to prosecute. Mortgage and securities fraud, by contrast, are far more complex and difficult.
3) Government complicity. This isn’t a bad point, but Rakoff directs too much blame at subsidies for the poor. As I’ve written in the past, the whole government housing policy regime, most definitely including subsidies for the rich like the home mortgage interest deduction, are to blame as well.
4) A new trend in prosecuting companies instead of individuals. This seems unambiguously true, and it’s a reminder of how new trends in legal theories always seem to move in the direction of increased subsidies and decreased accountability for wealthy elites.
Those points are all fair enough. But taken together, I don’t think they go nearly far enough. As an instrumental account of the details of why these prosecutions aren’t happening, it makes a lot of sense. Though, for the record, they might not even be instrumentally true: according to a new David Kay Johnston report, the Justice Department has been running interference for JPMorgan Chase against Treasury investigators.
But in any case, make no mistake: added up, this is a picture of massive corruption and cowardice at the top levels of our law enforcement agencies. Because regardless of whatever structural trends are happening, no prosecutor with a single fair bone in her body could possible tolerate, oh I don’t know, a minor slap on the wrist for laundering money for drug traffickers and terrorists.
By: Ryan Cooper, Washington Monthly Political Animal, December 27, 2013
“Hurt Feelings”: Banks Demand Pity Party Over Volcker Rule Losses
Whatever successes might have been attained within the hundreds of pages of regulations implementing the Volcker Rule, our nation’s bureaucrats must have known they couldn’t do anything that would force banks to unearth any long-buried losses in their financial reports. Because then many bankers would feel victimized. They would demand that regulators rush to soothe their hurt feelings. And America would never be the same until the banks could keep those losses unrecognized again.
Yes, I’m kidding. But the banking lobby isn’t. This week, a Utah-based lender, Zions Bancorp, said it would have to take a charge to earnings in the neighborhood of $387 million because the new rules will force it to sell a bunch of collateralized debt obligations. Those CDOs declined in value a long time ago. But the accounting rules said Zions didn’t have to include those losses in its earnings. Now that Zions has to sell them, it can’t keep the losses buried and must count them on its income statement.
A few hundred other lenders may be in similar situations, though probably none as extreme as the one at Zions. Now the banking industry’s numerous lobbying groups are complaining to regulators and asking for clarification of the rule — footnote 1,861, if you care to look it up — which means they don’t like it and want it changed. They also have enlisted several U.S. senators to intervene with regulators on their behalf.
It generally isn’t a good idea for the government to pick winners and losers or to tell companies what investments they can’t keep. Surely there is money to be made somewhere buying up assets that banks aren’t allowed to own anymore. It’s hard to tell if the regulators intended the consequences in this instance or not, as part of the rules’ prohibitions against banks sponsoring or owning stakes in hedge funds and private- equity funds.
That said, the point of the Volcker Rule was to keep banks from gambling with depositors’ money. So it shouldn’t come as a surprise that banks face new restrictions on the types of investments they can make. At some point, after three years of hand-wringing, the banking regulators have to stop revising what they’ve passed and declare it final, which they happen to have done already this month. Whining from bankers about their sudden inability to paper over losses on old CDOs isn’t a sufficient reason to reopen the process all over again.
By: Jonathan Weil, Bloomber View, Published in The National Memo, December 23, 2013
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