I’m pleased as punch to see that New York lawmakers appear to have struck a deal to repeal the Rockefeller Drug Laws. I can honestly say that I never thought I’d live to see that happen, and that I take it as a sign that we’ve reached a new era where real progressive change is possible. Not guaranteed, put possible.
And that leads me to the big story in this morning’s Washington Post.
Treasury Secretary Timothy F. Geithner plans to propose today a sweeping expansion of federal authority over the financial system, breaking from an era in which the government stood back from financial markets and allowed participants to decide how much risk to take in the pursuit of profit…
…The nation’s financial regulations are largely an accumulation of responses to financial crises. Federal bank regulation was a product of the Civil War. The Federal Reserve was created early in the 20th century to mitigate a long series of monetary crises. The Great Depression delivered deposit insurance and a federally sponsored mortgage market. In the midst of a modern economic upheaval, the Obama administration is pitching the most significant regulatory expansion since that time.
And, indeed, they are. The sweep of their regulatory ambition is much broader than I had assumed even two days ago (and I have been an optimist from the beginning). Even the framing is bolder than I anticipated.
An administration official said the goal is to set new rules of the road to restore faith in the financial system. In essence, the plan is a rebuke of raw capitalism and a reassertion that regulation is critical to the healthy function of financial markets and the steady flow of money to borrowers.
The man so derisively referred to as ‘Timmeh’ hasn’t just won over the endorsement of Nouriel Roubini for his banking plan. He’s introducing a broad regulatory plan that will do, among other things:
1. Vest a single federal agency (probably the Federal Reserve) with the power to police risk across the entire financial system
2. “…define which financial firms are sufficiently large and important to be subjected to this increased regulation. Those firms would be required to hold relatively more capital in their reserves against losses than smaller firms, to demonstrate that they have access to adequate funding to support their operations, and to maintain constantly updated assessments of their exposure to financial risk.”
3. new statutory authority to take over too-big-to-fail non-depository institutions (like AIG), in effect nationalizing them.
4. “…expand oversight of a broad category of unregulated investment firms including hedge funds, private-equity funds and venture capital funds, by requiring larger companies to register with the Securities and Exchange Commission. Firms also would have to provide financial information to help determine whether they are large enough to warrant additional regulation.”
5. “…call for the SEC to impose tougher standards on money-market mutual funds, investment accounts that appeal to investors by aping the features of checking accounts while offering higher interest rates.”
6. “…a plan to regulate the vast trade in derivatives, complex financial instruments that take their value from the performance of some other asset. Derivatives have become a basic tool of the financial markets, but trading in many variants is not regulated. Credit-default swaps, a major category of unregulated derivatives, played a major role in the collapse of AIG.”
You will probably hear rumblings from some people that are never satisfied that the plan doesn’t call for restoring the Glass-Steagall Act. One of the reasons that Phil Gramm had the support of over ninety senators and Bill Clinton and then-Treasury Secretary Larry Summers for repealing Glass-Steagall was because foreign countries were not governed by the law. That allowed foreign financial institutions to offer one-stop shopping and gain a competitive advantage. For the same reason today, the solution to our too-big-to-fail problem is not necessarily to restore Glass-Steagall. Geithner’s proposals appear to tackle the problem from a different direction. Rather than force the break-up of giant financial institutions by statute, he requires them to hold vastly greater capital reserves and takes away their ability to mask their liabilities through derivatives speculation and other silliness.
Geithner and Obama did not decide to play small-ball with these proposals. They are going FDR-deep. The ultimate success of their plans (assuming they pass through Congress) will depend in part on their ability to convince foreign countries like Germany and Switzerland and the UK to impose similar regulations. I think that will be a huge part of Obama’s agenda at next month’s G20 summit.
Some people will keep telling themselves that Obama is a DLC democrat who is in the pocket of an frozen-in-Clinton Era-amber Larry Summers. Meanwhile, the guy is pushing along like his middle name was Delano.
Most of the “criticism from the left” is actually criticism from the right.
great news about NY!
I have to read the WaPo article before i opine on geithner’s plan.
One of the reasons that Phil Gramm had the support of over ninety senators and Bill Clinton and then-Treasury Secretary Larry Summers for repealing Glass-Steagall was because foreign countries were not governed by the law. That allowed foreign financial institutions to offer one-stop shopping and gain a competitive advantage.
This is a bad reason. So what if foreign companies can offer “one stop shopping”? Foreign banks are under completely different regulatory schemes in a lot of ways – if this is a valid excuse for knocking back good regulations, then we’re just in a race to the bottom with other countries.
I’m tired of that attitude – there’s no reason for our banking sector not to be the safest in the entire fracking world. Geithner’s plan might be fine, but put the controls that Glass-Steagall had back on as well. There really isn’t a reason that I’ve heard yet not to do it.
One caveat to the welcome (and long-overdue) news: Can’t comment without knowing more, but the Federal Reserve is private – it’s not a federal agency per se, though it fills some regulatory roles. But its workings are notoriously opaque. (Hence its fascination for conspiracy theorists.) I’d want to take a very close look at any significant expansion of its power.
Roubini also says that despite the Geithner Plan being the best way currently to get toxic assets off the banks’ books, it also will be inevitably followed up by nationalization as getting those assets off the books will save the solvent banks, but won’t be enough to save many of the insolvent ones: (emphasis mine)
And frankly, if Roubini can’t come up with a better capitalization plan, I sure as hell am not qualified to try.
The regulatory oversight and seizure power Geithner is asking for indicates to me that the power to seize insolvent banks is intended to be used, and used soon.
Geithner Plan for the solvent banks, nationalization for the insolvent ones, stress test to determine which is which. In the end, even I have to admit Obama’s on the ball here.
Very Interesting.
How do you seize a bank like Citi? If the FDIC did it, they would need something like 12000 people full time at the approx 1500 nationwide branches plus ATMs and other.
Also, what do you do about trans nationals?
All this might do is drive a lot of this stuff off shore. Leaving us high and dry.
These big financial conglomerates should not be so large. Those who ended Glass-Steagles snowed everyone with the competition angle. One stop shopping? After this economy gets back together (if ever) that will be a dirty word.
Yes, that’s possible. That could very well drive the financial industry from Wall Street to Beijing or London.
Of course, losing trillion would tend to do that as well. Tougher regulations are needed globally, frankly.
As far as the technicals of seizing Citi? My guess would be day-to-day business as normal, just the people making the decisions at the top would be Treasury/FDIC. The point would be to break up the operations of these too big to fail companies into manageable chunks, sell them to other solvent banks, and assure customers that their assets are safe in the bank.
Yes, the taxpayer will lose money on the deal. We’re still going to be paying for it. But it’s clear that the “systemic risk” banks are too much of a risk to continue to be so large and so unregulated.
I presume you’re talking about a FDIC-style seizure of the bank. In a case like Citi, I imagine the FDIC would need assistance from law enforcement, which would probably require less than 8 people/branch- one bank examiner and a couple cops ought to do it. It could get done, it’s not impossible.
And I think it’s an awfully depressing/dangerous thought that we might have insolvent banks that are not only “too big to fail” in the traditional sense, but also “too big to fail for the US fucking government to logistically handle.” If that’s true (which I don’t think it is), then it probably is time to go stock up on bottled water and canned goods.
Have you looked at how big Citi is? Ginormous doesn’t begin to describe it.
My desire for one world government grows.
And before they start parroting RW attacks on the most progressive Presidency in 75 years, think a little bit.
Boo:
Do you really trust Geithner or whomever comes after him? As others on other blogs have pointed out, if someone like Greenspan doesn’t want to enforce them, then what? If someone like Greenspan(or Bernanke for that matter) doesn’t recognize the problems, what good are the rules?
given the scope and ambition of these regulations, I am not sure that your question really makes sense. I, of course, want to familiarize myself with more of the details before I make an overall assessment, but if you were having trust issues, these proposals should start to alleviate them.
so far, the market is going up today which is an indication that wall street is reacting favorably to timmeh’s favorable treatment. /snark.
From Geithner at today’s house hearing:
Perhaps you’re right and there will be tough new regulations, or perhaps unveil a bunch of toothless crap and pretend it is tough regulation. In the meantime explain to me the advantage of allowing Wall Street to buy CDSs on bonds it doesn’t own?
I think the new “regulations” are just a way to ensure than when they are going to give billions to their buddies it won’t be so obvious and can be kept from the public eye.
I think Geithner’s right. But, in order for him to be right you have to do about 11 other regulatory things at the same time.
In other words, the problem isn’t the swaps themselves (which serve a real purpose) but the lack of ability to pay on defaults.
Default insurance is important, but it must actually insure against defaults.
Boo:
I don’t trust them because they have not proven trustworthy. Remember Bernanke saying at one point that it was all “contained”? That we were only talking about $200B worth of stuff. I think Barry Ritholtz or Calculated Risk has more on the nonsense that Bernanke and Greenspan have said in the past when someone asked them about possible problems looming. Also, Digby has a post up(yesterday) about Geithner talking at some event that was attended by likes of Pete Peterson .. and how they are looking forward to balancing the budget on the backs of the little guy(ie. looking to cut entitlements).
“The man so derisively referred to as ‘Timmeh’ hasn’t just won over the endorsement of Nouriel Roubini for his banking plan.”
…but…but…he’s a tool of corporatists that owns a 1.6 million dollar house! This just proves, um, something.
Like others, I think the devil will be in the details, not only in the regulations but how seriously they take enforcement. And since this will be written by congress, who have all taken megabucks from finance, I think we gotta watch them very, very closely.
One thing I can confidently predict: the righties will scream that anything proposed is gonna stiffle the free market, and we are doomed. The left will argue it doesn’t go far enough, and we will be doomed.
Don’t worry, the anti-‘Timmeh’ crowd will take credit for any and all positive outcomes, including this “sweeping expansion of federal authority over the financial system.” If it weren’t for their ‘populist uprising’, after all, Geithner would still be riding his mechanical Wall Street bull. All in a day’s work for the revolutionaries. Now, let’s break for some appletinis!
Commentator: Jordan is just bringing the ball up the floor. He’s so fucking stupid he doesn’t realize you need to put it in the basket to score. Oh my god, now he’s passed it to that idiot Pippin who can’t play at all. What wrong with these people. Pippin, that moron, is now running AWAY from the hoop – he’s clearly in the pay of the other team. Now Jordan is running around – he doesn’t even realize he doesn’t have the ball. What a moron. Pass to Jordan. Dunk. Finally they took my advice.
That just might be one of the best blog comments eva!!!! LOLOL
Once again the stark choice appears. Either Obama goes big and convinces the G20 and others to create an international economic regime that works for people or we retreat into protectionism in the US. The international economic regime that is needed includes anti-trust, consumer protection, labor standards, accounting standards, commercial law, environmental sustainability standards, and …
If “we must do this to avoid losing business to furriners” is the excuse for not having effective regulations, we either have to get common regulations on those furriners or avoid doing business with them and tightly regulated US financial institutions.
“sorry”, this is very, very weak:
so WHAT? please help me understand how it’s good for most of us in the U.S. to have our entire economy dumbed down and made weaker overall— just because other nations adopt a certain policy, or just because they have slave labor, no environmental laws, etc?
put this into the context; the Financial Masters of the Universe did not deliver on their often heralded beneficial-for-all-of-us philosophy– they failed miserably and have driven our economy to disaster.
we have a what? $7 trillion per year economy when healthy? that’s not big enough, not enough “opportunity” for the banksters?
Good, I’m glad you mentioned this- because this explains exactly what’s going to happen to most of the $1 Trillion dollar PPIF fund being handed to the banksters. they will use the corporate welfare to provide the liquidity they need– and look for the next high risk scam they can find.
Loaning money to we commoners? what a Load that is. at what terms? 30%?
better to goto a real mafioso; Vito on the corner.
the repeal of Glass-Steagall was an enormous disaster as many of us predicted at the time. But it’s more complicated than just that they removed some restrictions. The problem wasn’t inevitable from that alone, and the repeal was addressing a real disadvantage facing US firms. What doomed us was a failure to adopt the kind of robust regulation made necessary by the repeal.
So, now, when we look to fix the problem, it isn’t necessarily the best solution to go back to 1998 and restore the act. What’s probably more critical is that impose the regulation that was lacking.
It’s more complicated than this, of course, but that’s the gist of it.
Regulation is only good as the regulator. Most of the time the regulators and the regulatees end up in common cause, snickering at the people who represent the commoners. Just go to any PUC meeting.
That said there were a number of reasons for Glass Steagle and some of those reasons were to prevent consolidation in the those industries. Just ask the poor schmucks who were originally at Travelers insurance. The idea was to have regional banks be the top end to scatter the risk and overhead around and employ people. The foreign competition thing was and still is a red herring. And whatever happened to anti-trust laws. This is exactly what they are for. Not just for monopolistic actions that are bad for consumers, but for what is bad for the common good.
Who was it said that an honest politician is one who stays bought. That time in 1999 was the heyday for cheap politicians (at least since Abscam) It was also the setup for a huge takedown of the puplic treasury.
Does anyone remember W. Michael Blumenthal, he was Carter’s Treasury secretary. After Reagan came into power he became CEO of Burroughs Computer Corp. He did a junk bond financed takeover of Sperry and paid himself millions. While Treasury secretary, he and a bunch of cronies setup the rape that happened under Reagan ( SNL crisis, Michael Miliken, unfunded pensions, lots of other crap ) They set the tone and along comes Rubin, Summers, and Gramm to slam it down on us all.
sorry to go on so long ( especially since I can’t write real well)
Regulation is only good as the regulator.
exactly. the US has more laws on the books than, I’m guessing, any other nation.
but they aren’t enforced. drive on any freeway in any major urban area; you’ll see dozens of incompetent, reckless drivers, some of the them texting, reading magazines, all sorts of bullcrap going on– where’s the cops?
it’s pointless to have laws regarding auto use if the cops are only going to inforce them .1 percent of the time. I’m afraid this applies, more or less, to crucial fed agencies like the SEC.
well, obviously Timmy and team has to come up with some sort of sliding scale i.e. the higher the investment risk, the more liquidity you are req’d to have on hand.
before even going there, Obama should be demanding a full, independent accounting of the zombie banks getting welfare. the fact he isn’t doing this is highly suspect.
AND the idiots at the SEC have to start doing their job.
Myself I am looking for two things: (1) a clear commitment to market functionality and (b) a clear recognition of systemic moral hazard and commitment to root it out where identified. I am not terribly optimistic on (b) but then I also don’t see why I should be a preemptive cynic.
What a lot of people don’t seem to understand (but I am sure “Timmeh” does) is that the reason why the many types of style nouveau CDOs and related trash are so illiquid, is because the various banks who issued them wanted them to be that way. So they could better fuck their customers. What Soros has called “the alphabet soup” was deliberately created to prevent fungibility, informed pricing and a unified secondary market.
Under the demented Basel II treaty financial sector moral hazard was supposedly non-existent. No regulatory regime will maintain a modicum of sanity unless it constantly focuses on (a) and (b).
Btw. during the hearings the infamous “Timmeh” struck me as intelligent, as a straight shooter, and unlike Summers with his constant I’m-trying-to-be-nice-to-you-smirk, he doesn’t seem to be an overbearing asshole.
What a lot of people don’t seem to understand (but I am sure “Timmeh” does) is that the reason why the many types of style nouveau CDOs and related trash are so illiquid, is because the various banks who issued them wanted them to be that way. So they could better fuck their customers. What Soros has called “the alphabet soup” was deliberately created to prevent fungibility, informed pricing and a unified secondary market.
Buffett didn’t call them Financial Weapons of Mass Destruction for nothing.
Buffett’s WMDs are OTC credit derivatives rather than the securutized loans but yes, the same wonderful mixture of academic conceit and criminal mindset worked arguably even greater wonders in that area.
I love that term. It’s so evocative of what “financial innovation” is all about.
another goodie.
summers always reminds me of that old joke about harvard.
yokel walking around harvard is lost. stops harvardian and asks
Y: “Sir:can you tell me where the library is?”
H: “At Harvard, my dear man, we do not end sentences with ‘is’.”
Y: “Ok. Can you tell me where the library is, asshole?”