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Financial
Reform Fails to Reform
Geithner’s
team spent much of its time during the debate over the Senate
Financial Reform bill helping Senate Banking Committee chair Chris
Dodd kill off amendments with teeth in them.
A good
example was Senator Bernie Sanders’s measure to audit the Federal
Reserve.
Another was
the Brown-Kaufman Amendment,
"If enacted, Brown-Kaufman would have broken up the six biggest
banks in America,’ says a senior Geithner Treasury official. If we’d
been for it, it probably would have happened. But we weren't, so it
didn't.”
Here’s what one lobbyist said about the AIG bonus controversy:
“First, the White House decides to politicize the issue. Second,
they overshoot the target, and the thing gets away from them.
It made
people realize there’s no adult in charge. If Bob Rubin or Hank
Paulson were Treasury secretary, they would have walked into the
Oval Office and said, ‘Mr. President, I know you’d like to do this,
I know your political advisers want you do this, but I’m sorry, you
can’t do this.’”
Bob Rubin and Hank Paulson, of course, were both former chairmen of
Goldman Sachs.
Wall Street CEOs like to think they are the adults, the big men in
the room, the ones who know how the world works.
They screwed
up their own banks, the financial system, and the economy.
Every single
major bank would have failed in late 2008 without massive government
intervention — because of wounds that were entirely self-inflicted.
Citigroup:
holding onto hundreds of billions of dollars of its own toxic waste.
Bank of
America: paying $50 billion for an investment bank that would have
failed within three days.
Morgan
Stanley and Goldman Sachs: levering up without a stable source of
funding.
Obama and
Geithner are wondering why those Wall Street CEOs aren’t showing
more gratitude.
[Obama] thinks the Wall Street guys are just "disconnected from
reality," says a White House official.
He still takes the meetings with them, but his attitude now is,
“Whatever.”
“Tim Geithner, too, finds
himself in the odd position of battling with an industry toward
which he’s never felt an ounce of antipathy; in private, he now
half-mockingly refers to the megabank CEOs as ‘the warlords.’ A
Washington Mandarin to his core, Geithner has been ineffective at
winning over either Wall Street or Main Street. His experience
during his tenure has provided him a political education, not unlike
Obama’s—which has only strengthened the bond between them.”
Yes, they deserve more gratitude. They saved the bankers twice —
once by protecting them from their own mistakes, and again by
protecting them from Sherrod Brown, Ted Kaufman, and all the other
“populists” who wanted fundamental changes in our financial system.
As should be clear, for all my differences with Tim Geithner, I
would rather have him calling the shots than Jamie Dimon or Lloyd
Blankfein.
Wall Street bankers and the Obama administration deserve each other.
Senator
Blanche Lincoln
Against 13 Bankers
May 26, 2010
Simon Johnson, Ph D.
Economist, MIT
By now you
have probably realized – correctly – that “financial reform” has
turned into a victory lap for Wall Street.
When they saved the big banks, with massive unconditional support
over a year ago, top administration officials promised they would be
back later to fix the underlying problems.
Our banking
structure remains unchanged, the rules will be tweaked at the
margins, and the incentive and belief system that lies behind
reckless risk-taking has only become more dangerous.
(The back story, if
you can still stomach it, is in 13 Bankers).
There is only one small chance for any sensible progress remaining –
and you are about to see this crushed in conference by the
supporters of unfettered big banks.
Senator Lincoln’s derivative proposal is good because a fiduciary
duty for swap dealers vis-à-vis customers is long overdue.
Real time price reporting would help regulators understand what is
driving market dynamics.
Senator Lincoln's legal authority against market manipulation, and
protections for whistleblowers are good.. The kind of transaction
that Goldman entered into with Greece, swap transaction with the
goal of reducing measured debt levels, deceiving current and future
investors, would become clearly illegal.
Most of the anti Senator Lincoln fire has been directed against the
idea that “swaps desks” would be “pushed out” to subsidiaries –
i.e., the big broker-dealers could still engage in these
transactions, but they would need to hold a great deal more capital
against their exposures, thus making the activities significantly
less profitable.
It is striking that while Treasury argues that increasing capital is
the way to go with regard to financial reform, they are adamantly
opposed to what would amount to more reasonable capital levels at
the heart of the derivatives business. This is beyond disappointing.
No doubt the administration feels good about what it has “achieved”
on financial reform. The public aura of mutual congratulation will
last for about three weeks.
But outside of the inner White House-Capitol Hill bubble, it is very
hard to find anyone well-informed about the financial system who
thinks that anything substantial has changed or that risks will be
better managed as we head into the next cycle.
“Business as usual” is the abiding legacy of the Obama
administration with regard to the risks posed by this financial
system.
At one point in early 1998,
Larry Summers called Brooksley Born – the last person who really
tried to rein in the dangers posed by derivatives (and it was a much
lower level of danger then compared with now). Summers reportedly
said, “I have thirteen bankers in my office, and they say if you go
forward with this you will cause the worst financial crisis since
World War II.”
The 13 bankers have won, completely. Here we go again. |
