Financial reform and what we still don’t know

Expectations are high that financial reform will be the next big issue that Congress will tackle, particularly now that Senate Majority Leader Harry Reid is talking down the prospects for getting to immigration reform anytime soon.

And in typical congressional fashion, the reform bill will probably pass and become law before the bipartisan commission empaneled to determine the causes of the financial crisis is finished with its work.

Whether this is a problem depends on how you look at it.

On the one hand, there seems to be little immediacy for passing a financial reform bill, and therefore good reasons for waiting until we better understand the causes of the crash and panic. The system has by all accounts been stabilized, albeit at great cost. The key to avoiding future panics and costs — and thus to producing any good legislation — is to understand what went wrong and why. “Greedy bankers” doesn’t cut it; greed and bankers, and greed among bankers, existed long before the 21st century.

The likes of Barney Frank, Chris Dodd, Richard Shelby and Spencer Bachus were deeply involved in congressional oversight of banks and the financial sector in the years leading up to the crisis. To think they suddenly have all the answers, and don’t need to wait for the commission to finish its inquiry, strikes me as crazy.

They and the rest of Congress may have a sense of political immediacy on the issue. Voter anger about the crisis and the bailouts was high in 2008, and it will be high again in this year’s elections unless lawmakers “do something.” But that’s no good reason to rush things. Congressional history offers too many examples of the bad unintended consequences from rush jobs (see: Sarbanes-Oxley).

And yet…

The commission is not off to the best of starts. In his column today, The Wall Street Journal’s Holman Jenkins describes the panel’s third set of hearings, held last week, as an “incurious inquiry” that failed to ask such key questions as:

What exactly was it about these securities that caused a global panic — that caused, in the words of Goldman Sachs, a situation in which “institutions were hoarding cash and were unwilling to transact with each other”?

Was it fear that banks wouldn’t be able to sell these now-illiquid securities to meet their own obligations?

Was it fear that government would force banks to recognize accounting losses on them so great that the banks would be rendered insolvent?

The question is crucial because panic was the key actor in the drama — turning a severe housing correction in a handful of U.S. states into a global calamity.

The most interesting panel of witnesses consisted of several Citi executives who ran this business. A question the inquisitors failed to ask is how these supposedly super-safe securities are performing today. Have they been able to withstand the surge in mortgage defaults? Do they continue to pay? The question begged to be asked, but [commission Vice Chairman Bill] Thomas was too busy assuring the Citi executives that the commission’s final report “won’t contain one word of what you folks just told us” and then promptly berating them over whether they lost “one night of sleep over what happened.”

One of the few things we did learn from the panel, Jenkins writes, was the admission from Thomas, a former GOP congressman, that “the inquirers are getting insufficient time to master their brief — easy to believe given their reliance on the adjective ‘toxic’ to substitute for any curiosity about the securities at the heart of the meltdown.”

As Jenkins’ colleague, Peggy Noonan, wrote of the hearings, “Can’t we do better than this?”

34 comments Add your comment

jconservative

April 14th, 2010
12:55 pm

I would support regulations, the generic brand of regulations.

My problem is the foundation problem is not being examined. I would suggest that any bank making a mortgage, consumer or commercial, be required to own that mortgage until one half of the principal has been made. Toxic would then disappear from the lingo.

Tyler Durden

April 14th, 2010
1:09 pm

I agree that not enough questions have been asked or answered. And I also agree that many of the same ‘reformers’ (Dodd, Shelby et al) are culpable in failing to help avoid this. I find it curious that despite bipartisan talks for months and months, the GOP claims to have been left out. I know Dodd made a dumb move by abruptly halting the talks and proclaiming himself solely capable of crating this, but given the utterly contrarian stance the GOP has taken to this (and every other initiative), how long do you talk with someone who’s sole reply is ‘NO! NO! NO!’?

Can’t lay all these issues on the GOP’s feet, but they can’t seriously proclaim the role of uninvolved victim either… At some point in the process, a moderate, rational member of the Republican party will have to come to fore and restore something resembling a mature, productive role in the talks.

If someone DOES begin to represent the GOP rationally and constructively, then the Dems had better get their act together and meet them halfway. I think we can all agree that this hardcore partisan nonsense has gone on long enough…

CJ

April 14th, 2010
1:09 pm

…no good reason to rush things.

Coming from the right, this notion has a familiar ring to it.

Here’s the thing. Conservative hate regulation. It’s not that they want to impose the right kind of regulation; it’s that they don’t want any regulation at all. “Slow things down” translated means “do nothing.” If the taxpayers have to bail out Wall Street again, then so be it.

Hillbilly Deluxe

April 14th, 2010
1:25 pm

I would suggest that any bank making a mortgage, consumer or commercial, be required to own that mortgage until one half of the principal has been made. Toxic would then disappear from the lingo.

A very good idea but of course Congress and their contributors and lobbyists will never go along with it.

Kyle Wingfield

April 14th, 2010
1:29 pm

Reasonable people could quibble about the proportion, jconservative, but I think more skin in the game is definitely one place we need to head. Even I was amazed when only one month passed between the origination of my mortgage (last year, well after the housing market crashed) and the sale of it to another bank.

Kyle Wingfield

April 14th, 2010
1:30 pm

Oops, better retract that last statement — CJ just reminded me I’m supposed to be against “any regulation at all.”

Road Scholar

April 14th, 2010
1:32 pm

Kyle , can you tell me what specific issues/solutions the Conservatives have proposed? Web links will suffice if a narrative is too lengthy. I have heard nothing on their position , other than “go slowly” and we don’t need any regulation.

Oh, and while you are at it, what is their position on immigration?

Kyle Wingfield

April 14th, 2010
1:39 pm

Road, I haven’t read this financial-reform bill and can’t vouch for it, but it was filed last summer: http://bit.ly/9iT5VW

Immigration is trickier because as far as I know there’s nothing close to a unified position on it. But I don’t think the case is much different for the Democrats — if they were united on the issue, I’d expect them to press forward with what the president wants while they have a big House majority and 59 senators. I expect they could find a couple of GOP senators on that issue, depending on what the final bill looked like.

The Tar and Feathers Party

April 14th, 2010
1:52 pm

PAUL CRAIG ROBERTS is another former WSJ writer, but he is ever so much better than our little Kyle.

The Tar and Feathers Party

April 14th, 2010
1:55 pm

Paul’s got balls….The AJC doesn’t.

Linda

April 14th, 2010
2:17 pm

jconservative@12:55, The problem is that almost all loans are originated by mortgage companies, not banks. Mortgage companies have no money of their own to lend, no depositors. Almost all mortgages have always been sold on the secondary market to both private investors & to Fannie Mae & Freddie Mac, which were private, then public, then quasi-government, now under total government receivership & with unlimited funds. They were at the heart of the world-wide economic melt-down & the situation is worse. Today they guarantee or insure almost ALL new mortgages & mortgage-backed securities. The fed govt. has BECOME the residential mortgage market with taxpayers baring almost ALL the risk that was once borne by private investors.
The strategy you propose is called moral hazard.

Linda

April 14th, 2010
2:19 pm

Tyler@1:09, The Reps tried for years to rein in Fannie Mae & Freddie Mac. Even Bill Clinton admitted it in his biography.

CJ

April 14th, 2010
2:23 pm

Kyle: “Reasonable people could quibble about the proportion, jconservative, but I think more skin in the game is definitely one place we need to head.

Without a doubt, if Dems put up a bill limited to legislation proposed by jconservative, Kyle would be against it. He’d claim not enough time was spent reviewing the issues; the legislation would cause community banks to go under; it would hurt small business; interest rates would rise; Republicans were excluded from the process; Democrats rammed it down the American people’s throats; the legislation is unconstitutional; states rights…

The goal of the right is ObamaFail. That way we could get back to the way things ought to be…USA, Incorporated.

Willie

April 14th, 2010
2:24 pm

I pray the GOP stalls everything until Feb 1, 2011.

Willie

April 14th, 2010
2:26 pm

“The goal of the right is ObamaFail. That way we could get back to the way things ought to be…USA, Incorporated.”

You are exactly right! After all do you not work for a corporation?

Linda

April 14th, 2010
2:46 pm

Neil Barofsky is the Special Inspector General of TARP. Google his last report to Congress on 1//30/10 &/or his testimony before the House Committee on Oversight & Govt. Reform on 1/27/10.

According to Barofsky, huge “too big to fail” institutions that contributed to the crisis are now ever bigger because of TARP & other bailouts. Banks were incentivized to take reckless risks through a “heads, I win; tails, the govt. will bail me out” mentality. There’s been little change in excessive bonuses on Wall St. The govt.’s takeover of the housing market thru purchases & guarantees of nearly ALL the residential mortgage market risk re-inflating the bubble. Even if TARP saved our financial system from driving off a cliff in ‘08, we’re still driving on the same winding mt. road, but in a faster car.

CJ

April 14th, 2010
2:47 pm

I do work for a corporation Willie. So did the 29 guys who died at Massey Energy’s Upper Big Branch mine.

Your point?

Jefferson

April 14th, 2010
2:59 pm

Do that hand jive, Willie.

Kyle Wingfield

April 14th, 2010
3:10 pm

Tar, you know the rules: No long cut-and-pastes, particularly without attribution. Please provide a link and just a paragraph or two at most. Thanks.

Kyle Wingfield

April 14th, 2010
3:30 pm

That last part went over the line, Church’s.

Keep up the good fight!

April 14th, 2010
3:52 pm

Sure, no need to rush things. Its only been 2 years so far and some of the practices are coming back….we can wait until a new bailout is needed. Reinstating the provisions of Glass-Stegal, which is what much of the proposed bill covers, is just too radical…I mean it actually worked for how many years?

As for the fund to be created by payments from the banks themselves and to be regulated, well why do that now so they can contribute now. Let’s wait until the taxpayers have to bail them out again.

Maybe its not a “perfect” fix but there rarely is. We still argue about the cause of the Civil War – 150 years later. And of course, there is absolutely no chance to tweak the law in the event that there are other good suggestions. Republican…don’t participate but be sure to claim credit later on.

Churchill's MOM

April 14th, 2010
3:54 pm

Kyle Wingfield 3:30 pm

just wrote what I think, sorry if I hurt your feelings.

Kyle Wingfield

April 14th, 2010
4:12 pm

It’s not about my feelings, Church’s.

Michael H. Smith

April 14th, 2010
4:23 pm

I’d rather Congress spent more time to get this thing right, Kyle. There is far too much ground to cover for rushing things through for the sake of just having done something. Those unintended consequences you spoke of we have all witnessed and know whereof you speak.

Glenn

April 14th, 2010
4:49 pm

What should jump out to everyone after the meltdown was how so many of these toxic products were given high credit ratings . These derivatives are packed , diced , & blended with so much stuff they can’t be given an accurate credit rating . How can that not be a red flag that these things shouldn’t be sold in their current form ? What makes ” those greedy bankers ” a fair assessment is that they were deliberately making these products as complex as possible so they would be given a AAA credit rating even though no one was capable of braking it down . When Goldman Sachs can tell Fitch & Moody’s what credit rating to give certain products is something not wrong ?

Farsider

April 14th, 2010
4:57 pm

Why is the “conservative” solution to always do nothing? And when in doubt, loosen regulations?
The GOP rhetoric is comical. NOW that they’re out of power, they’re saying bailouts were a mistake, we should have just let it all burn down. Easy to say that when you’re the out party. But are we really to be left with the choices of either letting it burn down or costly bailouts with tax-payer monies? The only thing I can think of is that the GOP is against it for one reason. It was proposed by the President and his party.

The Tar and Feathers Party

April 14th, 2010
5:11 pm

The scam of the 21st Century, and Kyle is worried about cut and paste, no wonder newspapers are failing everywhere. A 2 trillion dollar theft right under the noses of the American press, and all they can smell is Reganomics.

Kyle Wingfield

April 14th, 2010
5:19 pm

As I said, Tar, you’re welcome to link to it. My reasons for not allowing long C&P are listed clearly under “Some rules for this blog” and have been for months.

The same goes for your Dick Morris C&P, Dave. A link and a 2-3 paragraph summary, please.

Dave

April 14th, 2010
5:25 pm

Hey, I made the big time! :)

Dave

April 14th, 2010
5:39 pm

Well here’s the link: http://thehill.com/opinion/columnists/dick-morris/92019-obamas-terrible-powers

And the relevant paragraph:

“If the financial regulation bill that passed the House last year becomes law, President Obama and his Treasury Secretary will acquire the right to take over any financial institution they wish to, provided that, in their sole opinion, it is both “too big to fail” and on the brink of insolvency. The House bill provides for no judicial review and does not require any objective evidence of imminent failure to trigger the takeover provisions.”

Basically answers most of the questions posed in your blog.

Linda

April 14th, 2010
5:43 pm

The entire financial crisis started with the ideology of the federal government, not with greedy bankers.
The federal government mandated that these subprime loans be made in the 1990’s by the nation’s biggest underwriter of home mortgages!

Kyle Wingfield

April 14th, 2010
6:01 pm

Thanks, Dave.

CJ

April 14th, 2010
6:52 pm

Dave,

Dick Morris lied to you.

The authority to resolve (not “take over”) megabanks under the proposed legislation would rest with the FDIC (expanding their existing authority with smaller banks), not the President and/or the Secretary of Treasury.

Morris is getting rich off the gullibility of his fans. He’s laughing at you for believing his nonsense.

Michael H. Smith

April 14th, 2010
8:46 pm

More needs to be done than reenacting The Banking Act of 1932 and 1933 which will require more time. Obama might want to talk to his economic adviser Larry Summers about those derivatives and AIG long enough to ask him why he, Robert Rubin and Allen Greenspan pushed Congress to deregulate them during the last years of Clinton administration?