March 26, 2010
Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, spoke out in favor of financial reform on Wednesday in a speech before the U.S. Chamber of Commerce. The shocking aspect of Hoenig’s speech is that it comes from the mouth of a member of the Federal Reserve’s Open Market Committee (FOMC) which sets economic policy. Beyond that, Hoenig brutally criticized what has been done so far to tilt the playing field in favor of the megabanks, at the expense of smaller banks. Here are some choice bits from what should be mandatory reading for everyone in Congress:
As a nation, we have violated the central tenants of any successful system. We have seen the formation of a powerful group of financial firms. We have inadvertently granted them implied guarantees and favors, and we have suffered the consequences. We must correct these violations. We must reinvigorate fair competition within our system in a culture of business ethics that operates under the rule of law. When we do this, we will not eliminate the small businesses’ need for capital, but we will make access to capital once again earned, as it should be.
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The fact is that Main Street will not prosper without a healthy financial system. We will not have a healthy financial system now or in the future without making fundamental changes that reverse the wrong-headed incentives, change behavior and reinforce the structure of our financial system. These changes must be made so that the largest firms no longer have the incentive to take too much risk and gain a competitive funding advantage over smaller ones. Credit must be allocated efficiently and equitably based on prospective economic value. Without these changes, this crisis will be remembered only in textbooks and then we will go through it all again.
Hoenig’s speech comes at a time when the Senate is considering a watered-down version of financial reform that has been widely criticized. Economist Simon Johnson pointed out how any approach based on U.S. authority alone to “resolve” or break up systemically dangerous banks would be doomed because “there is no cross-border agreement on resolution process and procedure — and no prospect of the same in sight”.
Blogger Mike Konczal expressed his disappointment with what has become of the Financial Reform Bill as it has been dragged through the legislative process:
It’s funny, I know what a good financial reform bill becoming a bad financial reform bill looks like through this process. I’ve seen bribes and more bribes and last-minute giveaway changes.
The notion that bribery has been an obstacle to financial reform became a central theme of Karl Denninger’s enthusiastic reaction to Hoenig’s speech:
All in all it’s nice to see Thomas Hoenig wake up. Now let’s see if we can get CONgress to stop opening the bribe envelopes, er, ignore the campaign contributions for a sufficient period of time to actually fix this mess, forcing those “big banks” to get that leverage ratio down to where it belongs, along with marking their assets to the market.
Thomas Hoenig provided exactly the type of leadership needed and at exactly the right time to give a boost to serious financial reform. We can only hope that there will be enough responsible, ethical people in the Senate to incorporate Hoenig’s suggestions into the Financial Reform Bill. If only . . .
Getting Cozy
April 1, 2010
This week’s decision by the United States Supreme Court, in the case of Jones v.Harris Associates received a good deal of attention because it increased hopes of a cut in the fees mutual funds charge to individual investors. The plaintiffs, Jerry Jones, Mary Jones and Arline Winerman, sued Harris Associates (which runs or “advises” the Oakmark mutual funds) for violating the Investment Company Act, by charging excessive fees. Harris was charging individual investors a .88 percent (88 basis points) management fee, compared to the 45-bps fee charged to its institutional clients.
In his article about the Jones v. Harris case, David Savage of the Los Angeles Times made a point that struck a chord with me:
The lousy job that boards of directors do in protecting the investors they supposedly represent has become a big issue since the financial crisis, as Mr. Savage explained. Think about it: How could the boards of directors for those too-big-to-fail institutions allow the payouts of obscene bonuses to the very people who devastated our economy and nearly destroyed (or may yet destroy) our financial system? The directors have a duty to the shareholders to make sure those investors obtain a decent dividend when the company does well. If the company does well only because of a government bailout, despite inept management by the executives, who should benefit – the execs or the shareholders?
Michael Brush wrote an interesting essay concerning bad corporate boards for MSN Money on Wednesday. His opining point was another reminder of how the financial crisis was facilitated by cozy relationships with bank boards:
Michael Brush contacted The Corporate Library which used its Board Analyst screener to come up with a list of the five worst corporate boards. Here is how he explained that research:
I won’t spoil the surprise for you by identifying the companies with the bad boards. If you want that information you will have to read the full piece. Besides — you should read it anyway.
All of this raises the question (once again) of whether we will see any changes result in the aftermath of the financial crisis that will help protect the “little people” or the not-so-little “investor class”. I’m not betting on it.