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More Favorable Reviews For Huntsman

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In my last posting, I focused on how Jon Huntsman has been the only Presidential candidate to present responsible ideas for regulating the financial industry (Obama included).  Since that time, I have read a number of similarly favorable reactions from respected authorities and commentators who reviewed Huntsman’s proposals .

Simon Johnson is the former Chief Economist for the International Monetary Fund (IMF) from 2007-2008.  He is currently the Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management.  At his Baseline Scenario blog, Professor Johnson posted the following comments in reaction to Jon Huntsman’s policy page on financial reform and Huntsman’s October 19 opinion piece for The Wall Street Journal:

More bailouts and the reinforcement of moral hazard – protecting bankers and other creditors against the downside of their mistakes – is the last thing that the world’s financial system needs.   Yet this is also the main idea of the Obama administration.  Treasury Secretary Tim Geithner told the Fiscal Times this week that European leaders “are going to have to move more quickly to put in place a strong firewall to help protect countries that are undertaking reforms,” meaning more bailouts.  And this week we learned more about the underhand and undemocratic ways in which the Federal Reserve saved big banks last time around.  (You should read Ron Suskind’s book, Confidence Men: Wall Street, Washington, and the Education of a President, to understand Mr. Geithner’s philosophy of unconditional bailouts; remember that he was president of the New York Fed before become treasury secretary.)

Is there really no alternative to pouring good money after bad?

In a policy statement released this week, Governor Jon Huntsman articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem:  Too Big To Fail banks,

“To protect taxpayers from future bailouts and stabilize America’s economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices”

Mr. Geithner feared the collapse of big banks in 2008-09 – but his policies have made them bigger.  This makes no sense.  Every opportunity should be taken to make the megabanks smaller and there are plenty of tools available, including hard size caps and a punitive tax on excessive size and leverage (with any proceeds from this tax being used to reduce the tax burden on the nonfinancial sector, which will otherwise be crushed by the big banks’ continued dangerous behavior).

The goal is simple, as Mr. Huntsman said in his recent Wall Street Journal opinion piece: make the banks small enough and simple enough to fail, “Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail.  There is no reason why banks cannot live with the same reality.”

The quoted passage from Huntsman’s Wall Street Journal essay went on to say this:

These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s.  There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop.

Far be it from President Obama to make such an observation.

Huntsman’s policy page on financial reform included a discussion of repealing the Dodd-Frank law:

More specifically, real reform means repealing the 2010 Dodd-Frank law, which perpetuates too-big-to-fail and imposes costly and mostly useless regulations on innocent smaller banks without addressing the root causes of the crisis or anticipating future crises.  But the overregulation cannot be addressed without ending the bailout subsidies, so that is where reform must begin.

Beyond that, Huntsman’s Wall Street Journal piece gave us a chance to watch the candidate step in shit:

Once too-big-to-fail is fixed, we could then more easily repeal the law’s unguided regulatory missiles, such as the Consumer Financial Protection Bureau.  American banks provide advice and access to capital to the entrepreneurs and small business owners who have always been our economic center of gravity.  We need a banking sector that is able to serve that critical role again.

American banks also do a lot to screw their “personal banking” customers (the “little people”) and sleazy “payday loan”-type operations earn windfall profits exploiting those workers whose incomes aren’t enough for them to make it from paycheck-to-paycheck.  The American economy is 70 percent consumer-driven.  American consumers have always been “our economic center of gravity” and the CFPB was designed to protect them.  Huntsman would do well to jettison his anti-CFPB agenda if he wants to become President.

Mike Konczal of the Roosevelt Institute, exhibited a similarly “hot and cold” reaction to Huntsman’s proposals for financial reform.  What follows is a passage from a recent posting at his Rortybomb blog, entitled “Huntsman Wants to Repeal Dodd-Frank so he can Pass Title VII of Dodd-Frank”:

So we need to get serious about derivatives regulation by bringing transparency to the over-the-counter derivatives market, with serious collateral requirements.  This was turned into law as the Wall Street Transparency and Accountability Act of 2010, or Title VII of Dodd-Frank.

So we need to eliminate Dodd-Frank in order to pass Dodd-Frank’s resolution authority and derivative regulations – two of the biggest parts of the bill – but call it something else.

You can argue that Dodd-Frank’s derivative rules have too many loopholes with too much of the market exempted from the process and too much power staying with the largest banks.  But those are arguments that Dodd-Frank doesn’t go far enough, where Huntsman’s critique of Dodd-Frank is that it goes way too far.

Huntsman should be required to explain the issues here – is he against Dodd-Frank before being for it?  Is his Too Big To Fail policy and derivatives policy the same as Dodd-Frank, and if not how do they differ?  It isn’t clear from the materials he has provided so far how the policies would be different, and if it is a problem with the regulations in practice how he would get stronger ones through Congress.

I do applaud this from Huntsman:

RESTORING RULE OF LAW

President Huntsman’s administration will direct the Department of Justice to take the lead in investigating and brokering an agreement to resolve the widespread legal abuses such as the robo-signing scandal that unfolded in the aftermath of the housing bubble.  This is a basic question of rule of law; in this country no one is above the law. There are also serious issues involving potential violations of the securities laws, particularly with regard to fair and accurate disclosure of the underlying loan contracts and property titles in mortgage-backed securities that were sold.  If investors’ rights were abused, this needs to be addressed fully.  We need a comprehensive settlement that puts all these issues behind us, but any such settlement must include full redress of all legal violations.

*   *   *

And I will note that the dog-whistles hidden inside the proposal are towards strong reforms (things like derivatives reform “will also allow end-users to negotiate better terms with Wall Street and in turn lower trading costs” – implicitly arguing that the dealer banks have too much market power and it is the role of the government to create a fair playing field).  Someone knows what they are doing.  His part on bringing down the GSEs doesn’t mention the hobbyhorse of the Right that the CRA and the GSEs caused the crisis, which is refreshing to see.

If Republican voters are smart, they will vote for Jon Huntsman in their state primary elections.  As I said last time:  If Jon Huntsman wins the Republican nomination, there will be a serious possibility that the Democrats could lose control of the White House.


 

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The Lehman Fallout

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March 16, 2010

Everyone is speculating about what will happen next.  The shock waves resulting from the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, have left the blogosphere’s commentators with plenty to discuss.  Unfortunately, the mainstream media isn’t giving this story very much traction.  On March 15, the Columbia Journalism Review published an essay by Ryan Chittum, decrying the lack of mainstream media attention given to the Lehman scandal.  Here is some of what he said:

Look, I know that Lehman collapsed a year and a half ago, but this is a major story — one that finally gets awfully close to putting the crimes in the crisis.  I’ll go ahead and say it:  If you’ve wanted to know about the Valukas report and its implications, you’ve been better served by reading Zero Hedge and Naked Capitalism than you have The Wall Street Journal or New York Times.  This on the biggest financial news story of the week — and one of the biggest of the year.  These papers have hundreds of journalists at their disposal.  The blogs have one non-professional writer and a handful of sometime non-pro-journalist contributors.

I’m hardly the only one who has noticed this.  James Kwak of Baseline Scenario wrote this earlier today:

Overall, I’m surprised by how little interest the report has gotten in the media, given its depth and the surprising nature of some of its findings.

At the Zero Hedge website, Tyler Durden reacted to the Columbia Journalism Review piece this way:

Only a few days have passed since its release, and already the Mainstream Media has forgotten all about the Lehman Examiner Report, with barely an occasional mention.  As the CJR points out, this unquestionably massive story of corruption and vice, is being covered up by powered interests controlling all the major news outlets, because just like in the Galleon case, the stench goes not only to the top, (in this case the NewYork Fed and the SEC), but very likely to various corporations that have vested interests in the conglomerates controlling America’s key media organizations.

One probable reason why the Lehman story is being buried is because its timing dovetails so well with the unveiling of Senator “Countrywide Chris” Dodd’s financial reform plan.  The fact that Dodd’s plan includes the inane idea of expanding the powers of the Federal Reserve was not to be ignored by John Carney of The Business Insider website:

Why do we think these are such bad ideas?  At the most basic level, it’s hard to see how the expansion of the scope of the Federal Reserve’s authority to cover any large financial institution makes sense.  The Federal Reserve was not able to prevent disaster at the firms it was already charged with overseeing.  What reason is there to think it will do a better job at regulating a wider universe of firms?

More concretely, the Federal Reserve had regulators in place inside of Lehman Brothers following the collapse of Bear Stearns.  These in-house regulators did not realize that Lehman’s management was rebuking market demands for reduced risk and covering up its rebuke with accounting sleight-of-hand.  When Lehman actually came looking for a bailout, officials were reportedly surprised at how bad things were at the firm.  A similar situation unfolded at Merrill Lynch.  The regulators proved inadequate to the task.

Just think:  It was only one week ago when we were reading those fawning, sycophantic stories in The New Yorker and The Atlantic about what a great guy “Turbo” Tim Geithner is.  This week brought us a great essay by Professor Randall Wray, which raised the question of whether Geithner helped Lehman hide its accounting tricks.  Beyond that, Professor Wray emphasized how this scandal underscores the need for Federal Reserve transparency, which has been so ardently resisted by Ben Bernanke.  (Remember the lawsuit by the late Mark Pittman of Bloomberg News?)  Among the great points made by Professor Wray were these:

Not only did the NY Fed fail to blow the whistle on flagrant accounting tricks, it also helped to hide Lehman’s illiquid assets on the Fed’s balance sheet to make its position look better.  Note that the NY Fed had increased its supervision to the point that it was going over Lehman’s books daily; further, it continued to take trash off the books of Lehman right up to the bitter end, helping to perpetuate the fraud that was designed to maintain the pretense that Lehman was not massively insolvent. (see here)

Geithner told Congress that he has never been a regulator. (see here)  That is a quite honest assessment of his job performance, although it is completely inaccurate as a description of his duties as President of the NY Fed.

*   *   *

More generally, this revelation drives home three related points.  First, the scandal is on-going and it is huge. President Obama must hold Geithner accountable.  He must determine what did Geithner know, and when did he know it.  All internal documents and emails related to the AIG bailout and the attempt to keep Lehman afloat need to be released.  Further, Obama must ask what has Geithner done to favor his clients on Wall Street?  It now looks like even the Fed BOG, not just the NY Fed, is involved in the cover-up.  It is in the interest of the Obama administration to come clean.  It is hard to believe that it does not already have sufficient cause to fire Geithner.  In terms of dollar costs to the government, this is surely the biggest scandal in US history.  In terms of sheer sleaze does it rank with Watergate?  I suppose that depends on whether you believe that political hit lists and spying that had no real impact on the outcome of an election is as bad as a wholesale handing-over of government and the economy to Wall Street.

It remains to be seen whether anyone in the mainstream media will be hitting this story so hard.  One possible reason for the lack of significant coverage may exist in this disturbing point at the conclusion of Wray’s piece:

Of greater importance is the recognition that all of the big banks are probably insolvent.  Another financial crisis is nearly certain to hit in coming months — probably before summer.  The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking.

Oh, boy!  Not good!  Not good at all!  We’d better change the subject to March Madness, American Idol or Rielle Hunter!  Anything but this!



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Simon Johnson In The Spotlight

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October 12, 2009

An ever-increasing number of people are paying close attention to a gentleman named Simon Johnson.  Mr. Johnson, a former chief economist at the International Monetary Fund, now works at MIT as Professor of Entrepreneurship at the Sloan School of Management.  His Baseline Scenario website is focused on the financial and economic crises.  At the Washington Post website, he runs a blog with James Kwak called The Hearing.  Last spring, Johnson turned more than a few heads with his article from the May 2009 issue of The Atlantic, “The Quiet Coup”, in which he explained that what happened in America during last year’s financial crisis and what is currently happening with our economic predicament is “shockingly reminiscent” of events experienced during financial crises in emerging market nations (i.e. banana republics and proto-capitalist regimes).

On October 9, Joe Nocera of The New York Times began his column by asking Professor Johnson what he thought the Wall Street banks owed America after receiving trillions of dollars in bailouts.  Johnson’s response turned to Wednesday’s upcoming fight before the House Financial Services Committee concerning the financial reforms proposed by the Obama administration:

“They can’t pay what they owe!” he began angrily.  Then he paused, collected his thoughts and started over:  “Tim Geithner saved them on terms extremely favorable to the banks.  They should support all of his proposed reforms.”

Mr. Johnson continued, “What gets me is that the banks have continued to oppose consumer protection.  How can they be opposed to consumer protection as defined by a man who is the most favorable Treasury Secretary they have had in a generation?  If he has decided that this is what they need, what moral right do they have to oppose it?  It is unconscionable.”

This week’s battle over financial reform has been brewing for quite a while.  Back on May 31, Gretchen Morgenson and Dan Van Natta wrote a piece for The New York Times entitled, “In Crisis, Banks Dig In for Fight Against Rules”:

Hotly contested legislative wars are traditional fare in Washington, of course, and bills are often shaped by the push and pull of lobbyists — representing a cornucopia of special interests — working with politicians and government agencies.

What makes this fight different, say Wall Street critics and legislative leaders, is that financiers are aggressively seeking to fend off regulation of the very products and practices that directly contributed to the worst economic crisis since the Great Depression.  In contrast, after the savings-and-loan debacle of the 1980s, the clout of the financial lobby diminished significantly.

In case you might be looking for a handy scorecard to see which members of Congress are being “lobbied” by the financial industry and to what extent those palms are being greased, The Wall Street Journal was kind enough to provide us with an interactive chart.  Just slide the cursor next to the name of any member of the House Financial Services Committee and you will be able to see how much generosity that member received just during the first quarter of 2009 from an entity to be affected by this legislation.  The bars next to the committee members’ names are color-coded, with different colors used to identify specific sources, whose names are displayed as you pass over that section of the bar.  This thing is a wonderful invention.  I call it “The Graft Graph”.

On October 9, Simon Johnson appeared with Representative Marcy Kaptur (D – Ohio) on the PBS program, Bill Moyers Journal.  At one point during the interview, Professor Johnson expressed grave doubts about our government’s ability to implement financial reform:

And yet, the opportunity for real reform has already passed. And there is not going to be — not only is there not going to be change, but I’ll go further.  I’ll say it’s going to be worse, what comes out of this, in terms of the financial system, its power, and what it can get away with.

*  *   *

BILL MOYERS:  Why have we not had the reform that we all knew was being — was needed and being demanded a year ago?

SIMON JOHNSON:  I think the opportunity — the short term opportunity was missed.  There was an opportunity that the Obama Administration had.  President Obama campaigned on a message of change.  I voted for him.  I supported him.  And I believed in this message.  And I thought that the time for change, for the financial sector, was absolutely upon us.  This was abundantly apparent by the inauguration in January of this year.

SIMON JOHNSON:  And Rahm Emanuel, the President’s Chief of Staff has a saying.  He’s widely known for saying, ‘Never let a good crisis go to waste’.  Well, the crisis is over, Bill.  The crisis in the financial sector, not for people who own homes, but the crisis for the big banks is substantially over.  And it was completely wasted.  The Administration refused to break the power of the big banks, when they had the opportunity, earlier this year.  And the regulatory reforms they are now pursuing will turn out to be, in my opinion, and I do follow this day to day, you know.  These reforms will turn out to be essentially meaningless.

Sound familiar?  If you change the topic to healthcare reform, you end up with the same bottom line:  “These reforms will turn out to be essentially meaningless.”  The inevitable watering down of both legislative efforts can be blamed on weak, compromised leadership.  It’s one thing to make grand promises on the campaign trail — yet quite another to look a lobbyist in the eye and say:  “Thanks, but no thanks.”  Toward the end of the televised interview, Bill Moyers had this exchange with Representative Kaptur:

BILL MOYERS:   How do we get Congress back?  How do we get Congress to do what it’s supposed to do?  Oversight.  Real reform.  Challenge the powers that be.

MARCY KAPTUR:  We have to take the money out.  We have to get rid of the constant fundraising that happens inside the Congress.  Before political parties used to raise money; now individual members are raising money through the DCCC and the RCCC.  It is absolutely corrupt.

As we all know, our system of legalized graft goes beyond the halls of Congress.  During his Presidential campaign, Barack Obama received nearly $995,000 in contributions from the people at Goldman Sachs.  The gang at 85 Broad Street is obviously getting its money’s worth.



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