More Absentee PolicymakingPosted: June 24, 2010
There are so many policies running amok these days that it’s hard to keep track of them all. I’m switching my focus back to the
financial markets for a bit where Politico’s Ben White is chasing down the bites and pieces that will be part of the Financial Market Sausage. There’s a lot to read over there, but this stood out to me because it seems that there are a many policies going through Congress right now to take care of various crises and there’s a vacuum of executive leadership. (If you’d like to read where they stand, it’s on the White House Blog. That beats hearing it read off of a teleprompter as far as I’m concerned.)
Wall Street executives are complaining that the Obama administration has been largely absent from the financial reform conference process, failing to step up and push back on big issues such as the exact language on derivatives reform and the amendment from Sen. Susan Collins (R-Maine) on capital requirements.
The only thing that brings me a sigh of relief–coupled with a wtf–on this statement is that the complaints about the lackadaisical one are coming from “Wall Street” Executives. I would hope the pushback would come from people wanting the President to be more active in pushing a strategic agenda for Wall Street translucence and safety. As an example, Blanche Lincoln has been trying to ride derivatives reform to re-election. You think she’d like Presidential backing.
Several other things stood out. The discussion on Fannie and Freddie may lead to a liquidation authority. This is a huge deal. These behemoths were obviously mismanaged and misregulated. However, the concern now is with the ratings of the agencies’ debt which is a staple in nearly every ‘safe’ investment portfolio including banks. I’d hate to be any one stuck with one of their bonds should this language become law. I should mention that I’m still betting that parts of my pension plan and yours contain a number of them. This could tank the implicit guarantee from the FEDs on any of those quasi-agency bonds moving them all up a risk level or six.
Bank executives were panicking last night over a proposed fix to Title II of financial reform literally penciled in at the last minute. The fear is that that the proposed change to the orderly liquidation authority could leave banks on the hook for a possible wind-down of Fannie Mae and Freddie Mac that could cost as much as $400 billion. In the House counter-offer below, Fannie and Freddie are penciled in as falling under the definition of ‘financial company,’ meaning they could be resolved by the orderly liquidation process. This process is paid for by the sale of the failing company’s assets and/or through assessments on other financial companies, possibly putting the Street in line to pay for the liquidation of the troubled housing giants.
There are also some interesting tales concerning Dodd and MA Senator Scott Brown who seems to be seeking an exception to every rule. The NYT editorial page stepped in for stronger regulation. It also seemed to take a direct smack at Brown. As long as these things get traded on an exchange, they must be fairly standard, audited and watched by the Exchange, and meet Exchanges standards. This is essential as far as I’m concerned.
Exceptions to the rules in the Senate bill are narrowly drawn. Painstakingly negotiated and uniquely customized contracts would not need to be publicly traded, nor would derivatives deals that commercial businesses use to hedge legitimate risks. Any attempt by negotiators to expand the exceptions would be moving in a dangerously wrong direction.
Lawmakers also have to keep the definition of an “exchange” narrow. A transparent exchange is a trading facility in which many participants make bids and offers and everyone can see what prices were offered and paid. Proposed language from the House for the final bill would allow telephone deals to qualify as a proper trade, which is seriously wrongheaded.
Meanwhile, the housing market is showing signs of weakening. Since this is the major wealth item for most American Families, this will surely depress consumer confidence and buying plans. This also means continued problems for Fannie and Freddie assets and any one holding anything remotely related to mortgages.
“Housing is contributing absolutely zilch to economic growth,” said William Wheaton, an economics professor at the Massachusetts Institute of Technology in Cambridge, Massachusetts. “It’s not that people want houses to be expensive. They want the housing sector to start pulling up the economy as it has done after past recessions, and that’s not going to happen until prices rise.”
When that price gain happens, it will have to be substantial to make up for losses in home values, said Columbia’s Stiglitz.
“Even a 3 to 4 percent increase in value won’t help people who have seen their homes decline 20, or 30 or 50 percent,” Stiglitz said.
Bloomberg has a fairly good summary of what’s left standing in the Financial Overhaul Bill. (You would think the President would take some interest in this at this late stage of the game, but he appears to be off having hamburgers with Russian President Medvedev.) The House and the Senate are hammering out what will stand of the Volcker Rule, how to deal with swaps, and other extremely important measures. So far, the ban on proprietary trading by banks is holding.
On the Volcker measure, lawmakers were awaiting proposed changes to the Senate language that would ban U.S. banks from proprietary trading and bar them from investing in or sponsoring hedge funds and private-equity funds.
Dodd may propose incorporating aspects of a proposal from Democratic Senators Jeff Merkley of Oregon and Carl Levin of Michigan. The two senators want to strengthen the language to eliminate what they consider wiggle room that could allow regulators to change or eliminate the ban later.
In addition, Dodd may offer to add Merkley-Levin language to curb conflicts of interest by preventing companies that underwrite asset-backed securities from placing bets against them. The proposal aims to address the fraudulent activity alleged in the Securities and Exchange Commission’s lawsuit against Goldman Sachs Group Inc. The SEC claims the bank created and sold collateralized debt obligations linked to subprime mortgages without disclosing that hedge fund Paulson & Co. helped pick the underlying securities and bet against them.
Now’s the time to push as much through as possible.
Oh, and more importantly, here’s Business Week’s report on the BIG Hamburger Summit.
Obama had a cheddar cheese burger with onions, lettuce, tomato and pickles, washed down with an iced tea. Medvedev selected a cheddar cheese burger with onions, jalapeno peppers and mushrooms. He ordered a Coca-Cola.