Archive for February, 2010

Who should regulate banks?

Thursday, February 25th, 2010

Federal Reserve Chairman Bernanke is still campaigning for banking regulation to be given to the Fed, rather than to an actual Federal agency like the Treasury.
He misses the difference between two meanings of “supervise” when he argues that the Fed should remain the bank supervisor so it can stay in touch with bank health.

Meaning 1: Literally “over-seeing” the banks, keeping an eye on them.

Meaning 2: Regulating the banks. The Fed could continue to over-see without doing any regulating. In fact, that’s what they did since Greenspan became Chairman of the FOMC.

Precisely because the Fed didn’t do any regulating, we need to give that power to a more responsive and transparent Federal Agency to serve the citizens’ needs, not the banks’.

More big picture unseen

Tuesday, February 9th, 2010

In my prior post I described how financial executives are apparently blind to the fact that the financial crisis has hurt many other people, non-bankers all over the country and the world.  The execs seem to think that since they’re OK now thanks to taxpayer bailout, then everything is OK.  They don’t see that they have some responsibility to help out the still-suffering taxpayers who helped them.

It’s not as if the big banks were simply present at a major accident, and were innocently harmed along with all the other bystanders.  Quite the contrary, the banks’ actions, political and financial, set up the necessary conditions for the collapse.  They may argue that they didn’t “cause” the crisis, in the sense that they didn’t push a button labeled “cause crisis,” but they did create an environment where a crisis was inevitable.  So it happened.

Details of the banks’ shenanigans are detailed in this excerpt from They Brought It Upon Themselves:

Executives at our nation’s largest financial firms reacted with shock and dismay this afternoon, but they brought these policy proposals on themselves. They’ve successfully gamed the legislative and regulatory systems so well and for so long that they literally cannot understand why so many people are angry enough to side with the President on this issue. Maybe their memories are a little foggy, so let me try to list just some of the change Wall Street firms themselves were able to effect during the past 15 years. It’s a Top 10 checklist of memorable achievements only a bank executive could love:

(1) Preventing OTC derivatives from being listed on exchanges and keeping them in a “regulation-free zone” during the mid 1990’s so they could become today’s multi-hundred trillion dollar business of intertwining counterparty risks — check.
(2) Tearing down the Glass-Steagall act during the late ’90’s so financial firms could take more risk and enter almost whatever business they pleased — check.
(3) Prevailing upon SEC Chairman Chris Cox during the early 2000’s to let firms lever up by exempting large financial institutions from regulations that had effectively capped their balance sheet leverage at levels just above 10 to 1– check.
(4) Finding (or creating) loopholes that would enable large financial firms to take on even more leverage through off balance sheet vehicles like SIVs — check.
(5) Boosting ROEs during the last decade by acquiring illiquid, higher yielding investments with this newfound leverage — check.
(6) Letting lending standards slip so badly during the middle of the last decade that almost anyone who could fog a mirror could now receive whatever financing they needed to buy a home — check.
(7) Allocating huge amounts of the resulting ersatz profits to themselves as compensation — check.
(8) Negotiating and then accepting relatively cheap, taxpayer-backed funding from the TARP — with few strings attached — when their levered business models threatened to bring down the entire financial system in late 2008 — check.
(9) Negotiating their way back out from under the TARP with relatively little pain during 2009 — check.
(10) Lobbying Congress to thwart the type of financial reforms that might prevent taxpayers from having to bail them out again some day — check.

By helping to bring about the changes listed above, executives in the upper echelons of our largest financial firms have, in the eyes of most of the public, pulled off the perfect caper: Private profits and socialized risks. Until now. Now these firms will reap the political whirlwind of antipathy blowing in the wake of the changes these firms foisted upon our financial system since the mid 1990’s. Yes, there many others — like the Maestro, who gave his official nod to numbers 1-7 above — who deserve blame. But if Wall Street and its army of lobbyists hadn’t been so successful in preventing even sensible reform in recent months, then they might have escaped the type of populist proposals put forth by the President this morning. In so many ways, they brought this mess upon themselves.

– Jack McHugh

Until the banks realize the extent of their mistake, and take part in a genuine sensible conversation about re-regulation, then the animosity toward the banks will continue to rise.  If the banks manage to dodge the regulatory bullet this time, through public spin and private lobbying, then the public’s re-regulatory thunderbolt when it comes will be all the stronger.

Still not seeing the bigger picture:

Wednesday, February 3rd, 2010


The outspoken representatives of the financial industry are now up in arms at the prospect of being forced to pay a “financial crisis responsibility fee” to help pay for the public’s losses in some areas of the TARP bailout.

The banks say, accurately, “We paid back the money we got, plus generous interest.”

OK, now let’s think more broadly:  they paid back the money that the taxpayers and workers of America put up to save the financial industry.  So now the surviving industry titans are saying, “Hey, we’re fine now, crisis over, settled up, bye-bye.”

“And, uh, write if you get work.  Good luck.  Really.”

The bailed-out financial industry is ignoring the fact that they caused a huge amount of damage, which is still quite unhealed, to the larger economy, the workers and taxpayers.  Are the financiers offering to return the favor of rescue by rescuing the taxpayers?  Only in the “What’s good for Goldman is good for America” sense.  They want to be left alone to keep their future profits, and the only benefit to the common wealth will be indirect, the result of having restored a largely-functioning financial system to play its part in commerce.

That’s totally self-centered, even solipsistic, logic from the financiers.  They’re OK now, so let them get on with things.

The American taxpayers were hurt by the bankers’ mistakes.  The taxpayers paid to rescue the bankers.  The bankers now need to pay to rescue the taxpayers.  That’s a true adult sense of responsibility in action:  if you hurt someone, you make them whole.

The leaders of the bailed-out financial industry need to see the world through a larger frame than their own private interests.  Anything less invites the taxpayers to take MUCH stronger action.  Good corporate governance requires being a good neighbor, especially when your neighbors have paid to rescue you.  It’s your turn, rescue your neighbors.

Baby steps

Wednesday, February 3rd, 2010

On a long, long list of things to do, some are so small that they seem trivial.  None the less, they have to get done, and doing them takes time.

Longsplice Investments now has a checking account with linked savings account, BillPay, and a debit card.  WooHoo!

A journey of a thousand miles…