Round One to the Banks, More to Come
Round One to the Banks, More to Come writes Robert Weissman:
On the Wall Street reform bill, the Senate, late last Thursday, rejected probably the most important measure proposed to reduce Wall Street power, strengthen financial stability and fortify our democracy: breaking up the banks.
By a 33-61 vote, the Senate defeated the Brown-Kaufman amendment, which would have forced the largest banks to get smaller. Three Republicans, including Richard Shelby, the ranking member of the Banking Committee, joined 30 Democrats in supporting the measure.
[snip]
Although the defeat of Brown-Kaufman was crushing, it was, nonetheless, an indicator of the strength of the populist call to break up the banks and reduce Wall Street power. A sign of Wall Street’s ongoing dominance on Capitol Hill had been its success in defining the call to break up the banks as outside the bounds of legitimate debate. Wall Street succeeded in the House, which did not seriously consider proposals to break up the banks. But it could not block the issue from an airing in the Senate; and once aired, the break-up-the-banks proposal gained substantial support, notwithstanding opposition from the White House and the chair of the Banking Committee, Chris Dodd.
“Although the defeat of Brown-Kaufman was crushing, it was, nonetheless, an indicator of the strength of the populist call to break up the banks and reduce Wall Street power. A sign of Wall Street’s ongoing dominance on Capitol Hill had been its success in defining the call to break up the banks as outside the bounds of legitimate debate. “
I hope he means that we get to try again?
And why does the kleptocracy always refer to democracy as “populism” whenever they feel threatened? And since when is Volker considered to be a populist?
And hasn’t Dodd been promising us that he intends to retire soon?
i don’t think that putting a limit on the size of banks is such a bad idea (although i’d rather do it by slapping a significant tax on banks based on their size & leverage – very much like the one the Obama administration has proposed, but a lot larger). i’d agree with you that it’s a victory for bank lobbyists that they kept this out of the bill.
but it’s just not true that this means the bill is worthless, that the banks have completely gutted it, and none of the other provisions are worth anything. this is just like the trope that poisoned the health care debate (if there’s no public option then the whole thing is a waste of time) and it really serves no purpose other than to keep people feeling angry & disgruntled. that clealry works to the advantage of republicans, who have decided that their ticket to victory is the perception that nothing has changed (have you noticed the recent narratives they’ve been spinning about the BP oil spill & the Kagan nomination? “Obama’s Katrina”, “Obama’s Harriet Miers” … what the GOP wants more than anything is for the left & mainstream media to start conflating the current President w/ the last one, the very same discredited, disdained, disastrous GOP President whom they foisted on us & enthusiasticallt backed for years.)
But for people who favor reform, i don’t see the advantage. if you think the bank lobby is powerful, then you have to adknowledge that senators who challenge it are taking a political risk. (and the risk is that much greater when the odds of success are so slim, thanks to an opposition party that has demonstrated their willingness to try to kill anything, even legislation they support, if its passage would make the President look good.) if you want those senators to take that risk, there should be a reward, right? shouldn’t you give them some credit for the things they are getting done, even as you’re pushing them to do more, rather than just beating them up because your favorite provision didn’t make the cut?
Where is the legislation, or outrage regarding lack thereof, to break up the Big 3 automobile manufacturers? Aren’t they too, to big to fail?
I’m surprised that it managed to get 33 votes in favor.
That’s probably 33 senators who aren’t up for reelection in the next two cycles.
The problem with the banking sector is as much about derivatives and lax regulation on leverage as about anything else. The derivative problem has mushroomed the gambling aspect of almost all public markets, including credits (debt).
Combine that with high frequency trading and you’ve got incredibly expensive markets where volatility costs go through the roof. Unfortunately one man’s poison (those with insurable interests) is another man’s food (speculators). Get rid of the speculators and install the principal of limiting trading to insurable interests.
Why is speculation on a security declining in price any different than speculation on a security increasing in price?
No. The big five banks are much bigger in relation to $.
No one said the bill was worthless either in the complete article or here.
Please see posts here on healthcare legislation….it is easy to google to find this particular rant not relevant here. Not my favorite provision either, but one worked on carefully and with courage.
Normal speculation (and shorting) is a part of the price discovery process in markets. But hooking up a supercomputer with the highest bandwidth connection available, frontrunning the bids and asks, and doing 10 trades a second should be called something other than speculation.
The difference between security prices going up and down is now that we have securitization of credit and banks hold these as “capital”, if the price goes up we get a investment, speculation or lending boom because banks are awash in capital. (we don’t know which anymore now that we have integrated banking, post Glass-Steagle) If the price goes down we get insolvent banks, contagion, financial crisis, and severe recession. (see news for how that worked)
If you are a car company and your stock goes down, you don’t fail, but you may become a takeover target.
If you have a union workforce, everyone is too small to fail, because it would be bad for employment. (This was the new Bush and Obama policy)
One reason banks need to be broken up is so that bank intermediation works the way economists think it does and they won’t get so confused. (especially Fed economists)
The other reasons are TBTF, moral hazard, and they obviously can buy Congress.
I could be misremembering, but wasn’t the justification for GM and Chrysler receiving TARP aid, that bankruptcy (which they didn’t avoid) would lead to something like 1 out of 10 jobs to be lost? That seems like a pretty large systemic risk.
Which big five are you referring to? I assume JPM, BAC, C, GS and MS? Where’s Wells Fargo, which is almost twice as big as MS in terms of assets? GS and MS don’t have deposit franchises. Bear Stearns and Lehman, relative to those five (six?) companies would have likely been below the threshhold of “too big”, as would have AIG’s Financial Products division (though, as I’ve stated before, AIGFP couldn’t have operated as a stand-alone enterprise)
Canada, Sweden, France, Japan, all have more concentrated banking systems than the U.S. Size wasn’t an issue for any of those countries.
It’s a ridiculously blunt instrument, to fix a problem that hasn’t been clearly identified as the root cause.
TBTF is NOT the only thing that needs fixing. Volker and the “Group of 30” studied the issue thoroughly and there is a 500 page report on their analysis and conclusions floating around the Internet somewhere.
Repo financing of high leverage was one of the problems they identified.
CDS to get around insurance company capital adequency regulation is another.
There are many others. One problem with the Dodd bill is it leaves many things up to the discretion of regulators, which of course is what we had and we got regulatory capture. The Frank bill was stronger with absolute numerical limits.
I haven’t read all the bills myself, since this is not my favorite thing to do, but I have read a number of cognizant people say the Dodd bill is the weakest.
What if your not really speculating but in fact KNOW its gonna fall in price because the way you put the security together ,you placed known bad mortgages that were rated AAA (and cost more because of it). You then bought some upside just to make sure your play wasnt OBVIOUS and further went and paid for default insurance that pays more than the default value. Does that sound …… kosher?
Nobody “KNOWS”
m.jed:
Ok, I’ll bite. What was the root cause for Wall Street and TBTF nearly falling off the cliff?
John Paulson came damn close to being smart.
But one of the problems that needs fixing is they need to make fraud and white collar crime illegal.
Regula: Indicting everyone in the FIRE sector who made more than $1M dollars in any of the last 10 years would be a good start.
The root cause at it’s simplest was a housing bubble. Did Wall Street *cause* the housing bubble – no more than they caused the tech bubble, which is to say they were both complicit and a victim. Wall Street wasn’t a large enough orginator of sub-prime debt to have been able to cause it by themselves. And because both interest rates and credit spreads were so low, demand for yield among investors was quite high, so they were looking for highly-rated securities that had higher yields.
But the housing bubble was identified by some as early as 2003/2004. Sub-prime’s first real scare came in February 2007 and for most of 2008 the housing-related financial crisis was thought to be contained by sub-prime; that the “rescue” of Bear Sterns was staring into the abysss and stepping back from it (provided broker-dealers access to the Fed’s discount window).
I know the role of the rating agencies has been well-probed at AngryBear, but not nearly enough in the public domain. And of course Fannie and Freddie. Placing those 2 into conservatorship happened a few weeks before Lehman’s demise. And because of moral hazard concerns, the Preferred Equity of the two GSEs was wiped out. But lots of banks owned a significant portion of their Preferred Equity, which caused impairment to those banks’ balance sheets. Then, IIRC, Moody’s held a call the weekend prior to Lehman’s fall and said publicly that it didn’t matter how much capital they had, but that they were going to downgrade Lehman unless they merged with a strategic partner – for liquidty runs; this was the equivalent of yelling fire in a crowded theater. Further, this Moody’s statement was logically assumed to extend to AIG – which was widely expected to issue equity in late September 2008 – Citigroup, Merrill Lynch and Bank of America (who had purchased Countrywide at that time).
Mark-to-market accounting was also a significant culprit, as it created a vicious cycle of companies trying to maintain capital ratios on sevrely marked assets, which led to force sales, thereby further increasing the negative marks, perpetuating the cycle.
You won’t find a single cause, but you can’t say Wall Street played a minor role either.
Total residential mortgages were 11 trillion. Nearly 6 trillion was GSE. That leaves 5 trillion for Wall Street and private sector banks located elsewhere. The GSEs did start getting into subprime, but standards for prime eroded as well. Some commercial banks still made mortgages that they kept on the books, but securitization became the rage and Wall Street was the packager. Then CDOs provided a AAA traunche in a pool of not so great mortgages, or even really bad ideas like NINJA loans. So along came CDS because they needed to sell the crappy traunches somehow.
And they didn’t stop with mortgages. They did it with car, student, and credit card debt too (generically called ABS).
No one ever is quite sure how bubbles start, but it takes easy cheap money to keep them growing.
It did work for dotcoms too. But if you do with equity it doesn’t blow banks up. Securitized credit does, because banks now buy their business second hand, and they have to value the balance sheet somehow.
Of course then there is Shadow Banking if that becomes a problem.