Earlier today political corpse Chris Dodd said that he would proceed with unveiling a financial reform bill on Monday without Republican participation, in a humiliating blow to Bob Corker, who was most recently seen doing all he could to help his Wall Street colleagues make sure the Volcker plan would never see the light of day. Yet with recent rumors out of Washington that not only is the Volcker plan alive and well, the double whammy for Corker may be coming any day. So what does the Tennessee Senator do? He joins the Fed bashing brigade. Among his remarks from his conference given today after his was "fired" by Dodd, was the observation that the "Fed will, no dobut, will have its wings clipped in reform" and that the Fed "likes their marble buildings" as the Fed is actively lobbying on regulatory reform, with a material amount of turf protection in play. No doubt Senator: it is people like you who make Fed (and broader Wall Street) lobbying efforts quite easy. We hope that you and all your other bought and paid for colleagues in the Senate can learn from Senator Kaufman, whose speech on financial reform we already posted earlier, but which needs to be read and understood by all who are serious about regulatory reform, instead of puppets like Chris Dodd who huff and puff, yet only want to secure a friendly donation paycheck from his core Wall Street constituency, well into his retirement days.
Here are the key Kaufman speech highlights as selected by Shahien Nasiripour of the HuffPo:
Kaufman on the need for fundamental reform:
I start by asking a simple question: Given that
deregulation caused the crisis, why don't we go back to the statutory
and regulatory frameworks of the past that were proven successes in
ensuring financial stability?...
Mind you, this is a financial crisis that necessitated a $2.5
trillion bailout. And that amount includes neither the many trillions
of dollars more that were committed as guarantees for toxic debt nor
the de facto bailout that banks received through the Federal Reserve's
easing of monetary policy...
Given the high costs of our policy and regulatory failures, as well
as the reckless behavior on Wall Street, why should those of us who
propose going back to the proven statutory and regulatory ideas of the
past bear the burden of proof? The burden of proof should be upon those
who would only tinker at the edges of our current system of financial
Congress needs to draw hard lines that provide fundamental systemic
reforms, the very kind of protections we had under Glass-Steagall. We
need to rebuild the wall between the government-guaranteed part of the
financial system and those financial entities that remain free to take
on greater risk...
The notion that the most recent crisis was a "once in a century"
event is a fiction. Former Treasury Secretary Paulson, National
Economic Council Chairman Larry Summers, and JP Morgan CEO Jamie Dimon
all concede that financial crises occur every five years or so.
Kaufman on the growth of megabanks:
Most of the largest banks are products of serial mergers.
For example, J.P. Morgan Chase is a product of J.P. Morgan, Chase Bank,
Chemical Bank, Manufacturers Hanover, Banc One, Bear Stearns, and
Washington Mutual. Meanwhile, Bank of America is an amalgam of that
predecessor bank, Nation's Bank, Barnett Banks, Continental Illinois,
MBNA, Fleet Bank, and finally Merrill Lynch.
Kaufman on the failure of regulators:
Regulatory neglect, however, permitted a good model to mutate and grow into a sad farce...
In fact, one of the primary purposes behind the securitization
market was to arbitrage bank capital standards. Banks that could show
regulators that they could offload risks through asset securitizations
or through guarantees on their assets in the form of derivatives called
credit default swaps (CDS) received more favorable regulatory capital
treatment, allowing them to build their balance sheets to more and more
While this was a recipe for disaster, it reflected in part the
extent to which the and complexity of this new era of quantitative
finance exceeded the regulators' own comprehension...
In the brief history I outlined earlier, the regulators sat idly by
as our financial institutions bulked up on short-term debt to finance
large inventories of collateralized debt obligations backed by subprime
loans and leveraged loans that financed speculative buyouts in the
They could have sounded the alarm bells and restricted this
behavior, but they did not. They could have raised capital
requirements, but instead farmed out this function to credit rating
agencies and the banks themselves. They could have imposed
consumer-related protections sooner and to a greater degree, but they
did not. The sad reality is that regulators had substantial powers, but
chose to abdicate their responsibilities.
Kaufman on Too Big To Fail and the government's response during the crisis:
This provided them with permanent borrowing privileges at
the Federal Reserve's discount window - without having to dispose of
risky assets. In a sense, it was an official confirmation that they
were covered by the government safety net because they were literally
"too big to fail"...
We haven't seen such concentration of financial power since the days of Morgan, Rockefeller and Carnegie...
By expanding the safety net -- as we did in response to the last
crisis -- to cover ever larger and more complex institutions heavily
engaged in speculative activities, I fear that we may be sowing the
seeds for an even bigger crisis in only a few years or a decade...
Because of their implicit guarantee, "too big to fail" banks enjoy a
major funding advantage - and leverage caps by themselves do not
address that. Our biggest banks and financial institutions have to
become significantly smaller if we are to make any progress at all.
Kaufman on current financial reform proposals:
Unfortunately, the current reform proposals focus more on
reorganizing and consolidating our regulatory infrastructure, which
does nothing to address the most basic issue in the banking industry:
that we still have gigantic banks capable of causing the very financial
shocks that they themselves cannot withstand...
While no doubt necessary, [resolution authority] is no panacea. No
matter how well Congress crafts a resolution mechanism, there can never
be an orderly wind-down, particularly during periods of serious stress,
of a $2-trillion institution like Citigroup that had hundreds of
billions of off-balance-sheet assets, relies heavily on wholesale
funding, and has more than a toehold in over 100 countries.
There is no cross-border resolution authority now, nor will there be for the foreseeable future...
Yet experts in the private sector and governments agree - national
interests make any viable international agreement on how financial
failures are resolved difficult to achieve. A resolution authority
based on U.S. law will do precisely nothing to address this issue...
While I support having a systemic risk council and a consolidated
bank regulator, these are necessary but not sufficient reforms - the
President's Working Group on Financial Markets has actually played a
role in the past similar to that of the proposed council, but to no
discernible effect. I do not see how these proposals alone will address
the key issue of "too big to fail."
Kaufman on separating Main Street banking from Wall Street trading:
Massive institutions that combine traditional commercial
banking and investment banking are rife with conflicts and are too
large and complex to be effectively managed...
To those who say "repealing Glass-Steagall did not cause the
crisis, that it began at Bear Stearns, Lehman Brothers and AIG," I say
that the large commercial banks were engaged in exactly the same
behavior as Bear Stearns, Lehman and AIG - and would have collapsed had
the federal government not stepped in and taken extraordinary
By statutorily splitting apart massive financial institutions that
house both banking and securities operations, we will both cut these
firms down to more reasonable and manageable s and rightfully limit the
safety net only to traditional banks. President of the Federal Reserve
Bank of Dallas Richard Fisher recently stated: "I think the
disagreeable but sound thing to do regarding institutions that are
['too big to fail'] is to dismantle them over time into institutions
that can be prudently managed and regulated across borders. And this
should be done before the next financial crisis, because it surely
cannot be done in the middle of a crisis."
A growing number of people are calling for this change. They include
former FDIC Chairman Bill Isaac, former Citigroup Chairman John Reed,
famed investor George Soros, Nobel-Prize-winning-economist Joseph
Stiglitz, President of the Federal Reserve Bank of Kansas City Thomas
Hoenig, and Bank of England Governor Mervyn King, among others. A
chastened Alan Greenspan also adds to that chorus, noting: "If they're
too big to fail, they're too big. In 1911 we broke up Standard Oil --
so what happened? The individual parts became more valuable than the
whole. Maybe that's what we need to do."