May 6, 2010
As I discussed on April 26, expectations for serious financial reform are pretty low. Worse yet, Lloyd Blankfein (CEO of Goldman Sachs) felt confident enough to make this announcement, during a conference call with private wealth management clients:
“We will be among the biggest beneficiaries of reform.”
So how effective could “financial reform” possibly be if Lloyd Bankfiend expects to benefit from it? Allan Sloan of Fortune suggested following the old Wall Street maxim of “what they promise you isn’t necessarily what you get” when examining the plans to reform Wall Street:
President Obama talks about “a common sense, reasonable, nonideological approach to target the root problems that led to the turmoil in our financial sector and ultimately in our entire economy.” But what we’ll get from the actual legislation isn’t necessarily what we hear from the Salesman-in-Chief.
Sloan offered an alternative by providing “Six Simple Steps” to help fix the financial system. He wasn’t alone in providing suggestions overlooked by our legislators.
Nouriel Roubini (often referred to as “Doctor Doom” because he was one of the few economists to anticipate the scale of the financial crisis) has written a new book with Stephen Mihm entitled, Crisis Economics: A Crash Course in the Future of Finance. (Mihm is a professor of economic history and a New York Times Magazine writer.) An excerpt from the book recently appeared in The Telegraph. The idea of fixing our “sub-prime financial system” was introduced this way:
Even though they have suffered the worst financial crisis in generations, many countries have shown a remarkable reluctance to inaugurate the sort of wholesale reform necessary to bring the financial system to heel. Instead, people talk of tinkering with the financial system, as if what just happened was caused by a few bad mortgages.
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Since its founding, the United States has suffered from brutal banking crises and other financial disasters on a regular basis. Throughout the 19th and early 20th centuries, crippling panics and depressions hit the nation again and again. The crisis was less a function of sub-prime mortgages than of a sub-prime financial system. Thanks to everything from warped compensation structures to corrupt ratings agencies, the global financial system rotted from the inside out. The financial crisis merely ripped the sleek and shiny skin off what had become, over the years, a gangrenous mess.
Roubini and Mihm had nothing favorable to say about CDOs, which they referred to as “Chernobyl Death Obligations”. Beyond that, the authors called for more transparency in derivatives trading:
Equally comprehensive reforms must be imposed on the kinds of deadly derivatives that blew up in the recent crisis. So-called over-the-counter derivatives — better described as under-the-table — must be hauled into the light of day, put on central clearing houses and exchanges and registered in databases; their use must be appropriately restricted. Moreover, the regulation of derivatives should be consolidated under a single regulator.
Although derivatives trading reform has been advanced by Senators Maria Cantwell and Blanche Lincoln, inclusion of such a proposal in the financial reform bill faces an uphill battle. As Ezra Klein of The Washington Post reported:
The administration, the Treasury Department, the Federal Reserve, and even the FDIC are lockstep against it.
The administration, Treasury and the Fed are also fighting hard against a bipartisan effort to include an amendment in the financial reform bill that would compel a full audit of the Federal Reserve. I’m intrigued by the possibility that President Obama could veto the financial reform bill if it includes a provision to audit the Fed.
Jordan Fabian of The Hill discussed Congressman Alan Grayson’s theory about why Treasury Secretary Tim Geithner opposes a Fed audit:
But Grayson, who is known for his tough broadsides against opponents, indicated Geithner may have had a role in enacting “secret bailouts and loan guarantees” to large corporations, while New York Fed chairman during the Bush administration.
“It’s one of the biggest conflict of interests I have ever seen,” he said.
With the Senate and the administration resisting various elements of financial reform, the recent tragedy in Nashville provides us with a reminder of how history often repeats itself. The concluding remarks from the Roubini – Mihm piece in The Telegraph include this timely warning:
If we strengthen the levees that surround our financial system, we can weather crises in the coming years. Though the waters may rise, we will remain dry. But if we fail to prepare for the inevitable hurricanes — if we delude ourselves, thinking that our antiquated defences will never be breached again — we face the prospect of many future floods.
The issue of whether our government will take the necessary steps to prevent another financial crisis continues to remain in doubt.
Financial Reform Bill Exposed As Hoax
June 28, 2010
You don’t have to look too far to find damning criticism of the so-called financial “reform” bill. Once the Kaufman-Brown amendment was subverted (thanks to the Obama administration), the efforts to solve the problem of financial institutions’ growth to a state of being “too big to fail” (TBTF) became a lost cause. Dylan Ratigan, who had been fuming for a while about the financial reform charade, had this to say about the product that emerged from reconciliation on Friday morning:
The best trashing of this bill came from Tyler Durden at Zero Hedge:
Robert Lenzner of Forbes focused his criticism of the bill on the fact that nothing was done to limit the absurd leverage used by the banks to borrow against their capital. After all, at the January 13 hearing of the Financial Crisis Inquiry Commission, Lloyd Bankfiend of Goldman Sachs and JP Morgan’s Dimon Dog admitted that excessive leverage was a key problem in causing the financial crisis. As I discussed in “Lev Is The Drug”:
At Forbes, Robert Lenzner discussed the ugly truth about how the limits on leverage were excised from this bill:
Another victory for the lobbyists came in their sabotage of the prohibition on proprietary trading (when banks trade with their own money, for their own benefit). The bill provides that federal financial regulators shall study the measure, then issue rules implementing it, based on the results of that study. The rules might ultimately ban proprietary trading or they may allow for what Jim Jubak of MSN calls the “de minimus” (trading with minimal amounts) exemption to the ban. Jubak considers the use of the de minimus exemption to the so-called ban as the likely outcome. Many commentators failed to realize how the lobbyists worked their magic here, reporting that the prop trading ban (referred to as the “Volcker rule”) survived reconciliation intact. Jim Jubak exposed the strategy employed by the lobbyists:
At the Naked Capitalism website, Yves Smith served up some more negative reactions to the bill, along with her own cutting commentary:
So there you have it. The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective. Once this 2,000-page farce is signed into law, watch for the reactions. It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.
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