Page 1 of 2 Financial reform next for Obama
By Julian Delasantellis
Had not the joke ended so badly with the tragedy of Anna Nicole Smith [1], the
story of the old, conservative captain of banking or industry throwing away all
his probity and industry at the end of his life used to be quite humorous.
Picture a painfully dry, dark-paneled lawyer's office. The memorial service for
a late local potentate, attended by the mayor, and all the town's various
prelates, has finished, with but one formal ritual left to attend to - the
reading of the will. A stenographer keeps the record.
"For my three sons, Richmond II, Winthorpe II and Alisdair II, I bequeath to
each 7% of my business, stocks, bonds and other interests. For the other 79%
... " - all eyes turn to another person in the room, no more than 19 years old,
in thigh-high purple boots, fishnet stockings, white spandex miniskirt
revealing an obvious
red thong, bare midriff, a cut-off T-shirt that proudly proclaims her
second-place finish in the "Autumn 2001 Miss Cabo wet T-shirt contest",
frisbee-sized white plastic earrings, bleach-blonde hair so teased that it
looks like it wants to scream, minty glitter lip gloss, upon lips that part to
reveal a king size wad of Britney Spears Supah Chewee bubble gum - "I bequeath
to Ms Fifi La Voosh the sum of the remainder of my worldly possessions and
assets."
And so we, in the final analysis, and especially after the first pictures hit
the tabloids, learn that, in his final years, Richard Winthorpe Alasdair Sr was
far less conservative and probative as we were made to think during his
lifetime.
At last, the long, brutal fight over healthcare policy in the United States
appears to be coming to a close, and, more than after the end of the Thirty
Years War in 1648, or even the end of the Hundred Years War in 1453, the
conditions now in the American political landscape more closely resemble the
conditions that Albert Einstein described would follow a nuclear war - that the
winners must envy the dead.
All previously established political institutions have been smashed and
crushed, the parties themselves emasculated and bypassed, as even those who
favored the healthcare initiatives survey what once was America's lush and
verdant political landscape and wonder when, or even if, it can ever be
rebuilt.
As the leader of a nation that begged for the concept of change before the
election and who then became reviled by its actual prospect afterward,
President Barack Obama has apparently decided next to tilt at the razor-edged
windmill blades of the financial system, the knives that eviscerated the real
economy when the wheel became unhinged from its hub last year.
The need is clear, for the depression sparked by the financial system collapse
shows absolutely no evidence of abating to such an extent as to generate the
employment sufficient to win Obama a second presidential term in 2012; but one
wonders if there is any added caution engendered by the most recent
unpleasantness that the charging knight possibly sees as an obstacle.
If the Achilles' heel of the healthcare fight were the huge monetary resources
the healthcare industry could devote to its interests, Obama shows in fighting
the giants of world turbo-finance an intent to go directly from frying pan to
fire, from the punches of a talented amateur pugilist to those delivered by the
iron fists of the undisputed champion of the purchase of political influence.
Most observers have come around to the conclusion that the central point in the
adoption of rules and regulations to prevent what happened in 2008 from
happening again involves the modification or outright elimination of so called
"too big to fail rules", established practices and procedures for dealing with
the impending collapses of such large banking and finance institutions that
their insolvency would present a challenge to the system itself.
Last Thursday, Treasury Secretary Timothy Geithner, with perhaps more
braggadocio than sense, strode mightily back into the lion's den, maybe more
accurately called the streetwalker's lamppost, on Capitol Hill.
I've written about some of the bare outlines of the Obama financial reform
plans previously, and, especially, the bipartisan - a thumbs down - nature of
the response to them. The effort to create a single, effective financial system
czar has degenerated into pure prom-queen cattiness among the contenders for
the post in the US Treasury, Federal Reserve, and Federal Deposit Insurance
Corporation (FDIC).
The proposal for a government agency to protect consumers from deceptive and
abusive financial sales practices has floundered upon an industry advertising
campaign extolling the virtues of the uniquely American freedom to be
bankrupted by your stockbroker's lies. On Thursday, Geithner finally decided to
finally address "too big to fail":
Over the past few decades, we have
seen the significant growth of large, highly leveraged financial firms. These
firms benefited from the perception that the government could not afford to let
them fail, creating a classic moral hazard problem. During the recent financial
crisis, in order to preserve the stability of the financial system, protect the
savings of Americans and prevent greater economic fallout, the government was
forced to step in and stand behind almost all of these firms. That cannot
happen again. No financial system can operate efficiently if financial
institutions and investors assume that the government will protect them from
the consequences of failure. We cannot put taxpayers in the position of paying
for the losses of large private financial institutions. We must build a system
in which individual firms, no matter how large or important, can fail without
risking catastrophic damage to the economy.
During the rescues
of 2008, many observers noted the apparent catch-as-catch-can quality of the
rescue process, acting as only a weak, Potemkin-like covering that shielded the
absolute policy befuddlement going on behind the press curtain. This was to be
replaced by a standardized, repeatable, transparent rescue template that the
public could see and in which the public could have confidence in its
replication. Geithner again:
Under the proposed special resolution
authority, a failing firm would be placed into an FDIC-managed receivership.
The purpose of the receivership would be to unwind, dismantle, sell, or
liquidate the firm in an orderly way that protects the financial system at
lowest cost to taxpayers.
And I'm sure that the big banks will
be pleased as punch to realize that it is they who will be taking part of the
financial burden off the US taxpayers next time, with special charges levied
against them at the conclusion of the crisis. Geithner:
The government
should have the authority to recoup any such losses by assessing a fee on large
financial firms. These assessments should be stretched out over time, as
necessary, to avoid adding to the pressure induced by the crisis.
Another important new feature of the just-released Geithner plan is that no
longer will the government, like an ice-cream truck rolling through a
playground on a hot day, just ring its bell to start throwing out billions to
all the freckle-faced bankers who then come running. If you're something other
than a bank, the way AIG was being an insurance company or Bear Stearns an
investment bank, you need not apply. Geithner:
The Federal Reserve's
ability to extend credit to failing non-bank firms under section 13(3) of the
Federal Reserve Act [the long-used Great Depression era provision the Fed staff
had to dig out of the cellar in order to find the authority to rescue Bear
Stearns] should be eliminated. Going forward, the Federal Reserve should be
able to use 13(3) only to provide liquidity to solvent firms during periods of
severe stress in the financial markets or US economy.
This
provision is fairly interesting, and rather anomalous, to find in a document
such as this. The rest of the document is the Fed, like any standard
bureaucracy, grabbing with all the gusto and regulatory authority it can get.
Is this the line with which the Treasury is trying to placate the
anti-government crowd? If so, Geithner would probably get more mileage covering
his back with tattoos then taking his shirt off at the nearest biker bar.
My reaction to all the new reform proposals is pretty much identical to that of
my view of the old proposals - they're great, if they get enacted. A wizened
old economics professor once warmed me about the economics profession's fatal
attraction to the word "if". If the proposals pass it's great; then again, if
you put wheels on my grandmother, she becomes a tricycle. Either way, the
significance of the analysis is just about the same.
However, near the end of the Geithner plan is an innocuous and unthreatening
bit of a policy singlet that, should it fool the lobbyists and make it into
law, may really change the debate over too big to fail. Geithner again:
Major
firms must be subject to a prompt corrective action (PCA) regime and be
required to prepare and regularly update what some have called "living wills",
which are plans for their rapid resolution in the event of distress. These
plans would leave us better prepared to deal with a firm's failure, and provide
another incentive for firms to simplify their organizational structures and
improve their risk management.
Living wills? Wills of any
manner? Just like what proved so much of a benefit to the aforementioned Ms
Fifi La Voosh?
Precisely.
In September, I noted how Lord Turner, the head of the United Kingdom's
Financial Services Agency, its watchdog for the public's interest in matters
relating to banks, brokerages and the insurance industry, barely seemed able to
contain his seething contempt for the industry he was regulating, calling much
of its commercial activity "socially useless". (See
When Timmy met Sheila, Asia Times Online, September 10, 2009.) In the
midst of advocacies of other wide-ranging reforms, he proposed what have come
to be known as wills, or living wills, made up by the banks about to go under
to serve the interests of the regulators who must clean up the mess left
behind.
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