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Conservatives and Liberals Agree: Proposed Bank Oversight Bill Will Make Things Worse
- AFL-CIO
- Bank of America
- Bank of America
- Capital Markets
- Chrysler
- Citigroup
- Creditors
- Fail
- Fannie Mae
- Federal Deposit Insurance Corporation
- Federal Reserve
- Freddie Mac
- House Financial Services Committee
- Moral Hazard
- Private Equity
- Prudential
- Regional Banks
- RIchard Trumka
- TARP
- Testimony
- Too Big To Fail
When a liberal labor leader and a conservative financial policy
analyst unite against something, you know that something is really bad (actually, I don't believe in the whole fake left-right dichotomy; I think its Americans versus those trying to steal our wallets and our rights, but that's another story).
Today, AFL-CIO president Richard Trumka has slammed the Fed and the proposed "Tarp on steroids" legislation in his testimony to Congress today. Here are the must-read parts of Trumka's prepared remarks to the House Financial Services Committee:
We
are deeply concerned that the Committee’s work thus far on the
fundamental issues of regulating shadow financial markets and
institutions will allow the very practices that led to the financial
crisis to continue. The loopholes in the derivatives bill and the
failure to require any public disclosures by hedge funds and private
equity funds fundamentally will leave the shadow markets in the
shadows. We urge the Committee to work with the leadership to
strengthen these bills before they come to the House floor.
However, these powers must be given to a fully public body, and one that is able to benefit
from the information and perspective of the routine regulators of the
financial system. We believe a new agency, with a board made up of a
mixture of the heads of the routine regulators and direct Presidential
appointees would be the best structure. However, if the Federal Reserve
were made a fully public body, it would be an acceptable alternative.
But
we cannot support the discussion draft made public earlier this week
because it gives dramatic new powers to the Federal Reserve without
reforming its governance so that the banks themselves are removed from
the governance of the Federal Reserve System. Even more alarmingly, the
discussion draft would appear to give power to the Federal Reserve to
preempt a wide range of rules regulating the capital markets—power
which could be used to gut investor and consumer protections. If this
Committee wishes to give more power to the Federal Reserve, it must
make clear this power is only to strengthen safety and soundness
regulation and it must simultaneously reform the Federal Reserve’s
governance. Reform cannot be put off until another day.
The Federal Reserve currently is the regulator for bank holding companies. In that
capacity,
it was responsible throughout the period of the bubble for regulating
the parent companies of the nation’s largest banks. While regulatory
authority rests in the Board of Governors of the Federal Reserve in
Washington, routine responsibility for regulatory oversight has been
delegated by the Board of Governors to the regional Federal Reserve
Banks. The Federal Reserve System’s regulatory expertise resides in
these regional banks.
The problem is that these regional
Federal Reserve Banks are actually controlled by their member banks—the
very banks whose holding companies the Fed regulates. The member banks
control the selection of the majority of the regional bank boards, and
the boards pick the regional bank presidents, who are effectively the
CEO’s of the regulatory staff.
These arrangements may explain
why the Federal Reserve has never given any account of how it allowed
bank holding companies like Citigroup and Bank of America to arrive at
a point where they required tens of billions of dollars of direct
equity infusions from the public purse to avoid bankruptcy.
Giving the Federal Reserve with its current governance control over which financial
institutions are bailed out in a crisis is effectively giving the banks the ability to raid the Treasury for their own benefit.
We
are also deeply troubled by provisions in the discussion draft that
would allow the Federal Reserve to use taxpayer funds to rescue failing
banks, and then bill other nonfailing banks for the costs. The
incentive structure created by this system seems likely to increase
systemic risk.
We believe it would be more appropriate to require
financial institutions to pay into an insurance fund on an ongoing
basis. Financial institutions should be subject to progressively higher
fee assessments, and stricter capital requirements, as they get larger.
This would be a way of actually discouraging “too big to fail.”
In addition, language in the draft that appears to limit taxpayer bailouts of bank
stockholders
actually does no such thing, rather it simply ensures that when
stockholders are rescued with public funds, bondholders and other
creditors are rescued with them...
Finally, and not least, the
discussion draft appears to envision a process for identifying and
regulating systemically significant institutions, and for resolving
failing institutions, that is secretive and optional—in other words,
the Federal Reserve could choose to take no steps to strengthen the
safety and soundness regulation of systemically significant
institutions. In these respects, the discussion draft appears to take
the most problematic and unpopular aspects of the TARP and makes them
the model for permanent legislation.
Instead of repeating and deepening the mistakes associated with the bank bailout, Congress
should be looking to create transparent, fully publicly accountable
mechanisms for regulating systemic risk and for acting to protect our
economy in any future financial crises.
Conservative Peter Wallison - financial policy study analyst at the American Enterprise Institute - largely agrees. In his prepared remarks to Congress, Wallison says:
The
Discussion Draft of October 27 contains an extremely troubling set of
proposals which, if adopted, will bring economic growth in this country
to a standstill, essentially turn over the control of the financial
system to the government, and seriously impair competition in all areas
of finance.
Rather than ending too
big to fail, the Draft makes it national policy. By designating certain
companies for special prudential regulation, the Draft would signal to
the markets that these companies are too big to fail, creating Fannies
and Freddies in every sector of the economy where they are designated.
This will impair competition by giving large companies funding and
other advantages over small ones.
The
idea that the designation of these companies will be kept secret is,
with all due respect, absurd; securities laws alone will require them
to disclose their special status; simple truthfulness will do the
rest...
If this legislation is
passed, every industry will be in Washington, asking for special
treatment or exemption. Competition in the market will become
competition before this committee or in the halls of the Fed,
lobbyist-to-lobbyist and lawyer-to-lawyer...
This
will not only create uncertainty and moral hazard, but it will give the
large and powerful companies special advantages over small ones. Those
that seem likely to be taken over by the government will have easier
access to credit, at lower rates, than those likely to be sent to
bankruptcy.
In other words, the
Draft proposes nothing more or less than a permanent TARP, using
government money to bail out the large or politically favored
companies, and then taxes the remaining healthy companies to reimburse
the government for its costs of competing with them...
The
[proposed bill] would take control of the financial industry in the
United States, stifle risk-taking and initiative, and change
competitive conditions in every sector of the economy so that they
favor large, government-backed, too big to fail enterprises...
The
Draft ... would now give the Fed authority to regulate any financial
company that the Council determines should be subject to “heightened
prudential standards,” even if there is no insured bank in the group...
The
result is that the question becomes one of political clout, with
industries fighting in Congress for the competitive result they want.
Some industries want to invade others’ turf; the invaded industry uses
the law to fend off the competition; consumers are the losers. Congress
becomes the battleground. It’s not just unseemly; it’s a frightening
example of what happens when the government starts picking winners...
Congress
will be injecting itself into competitive fights between firms and
industries, further politicizing what should be economic or financial
decisions...
The Designated Companies
are under the complete control of the Fed. They will not be able to
initiate new activities without the Fed’s approval, or enter new
competitive fields, or perhaps even open new offices in new places.
This is a degree of political control of business that has never been
attempted before. Not only will it place the dead hand of government on
the activities of financial companies, but it will almost certainly
drive many financial companies out of the United States before they
submit to these restrictions.
The
effect of these restrictions for the U.S. economy will be dire. First,
Designated Companies will clearly have been labeled as too big to fail.
In effect, the government has notified the capital markets that these
firms will not be allowed to go into bankruptcy—they will be rescued in
the ways I will describe below. This means they will be less risky
borrowers than smaller companies that are not going to be controlled in
the same way. As less risky borrowers, the Designated Companies will
have lower costs of funding and will be able to drive smaller
competitors from the markets they enter. Sound familiar? Yes, it’s
Fannie Mae and Freddie Mac all over again. The existence of these
Designated Companies will impair competition in every market they are
allowed to enter, and will force the consolidation of competitors so
that markets become dominated by government-backed giants like
themselves....
[The bill assumes
that] our entire financial system must be subjected, today, to
far-reaching control by the Federal Reserve Board. With all due
respect, this is absurd, and certainly disastrous for economic growth
in the future.
The Draft also
contains language that suggest some of the problems of identifying
Designated Companies in advance—and thus creating the Fannie/Freddie
too big to fail problem—can be avoided if the designation of these
companies is not disclosed to the public. This, too, with all due
respect, is absurd...
In addition,
there is very little incentive for the government not to rescue failing
Designated Companies, because the Draft provides that the surviving
members of the financial industry larger than $10 billion in
assets—whether Designated Companies or not—will be taxed to reimburse
the government for its costs in the bailout...
As
in the GM and Chrysler bailouts, preferences are going to go to favored
groups, and disfavored groups will suffer disproportionate losses. It
will be a political free for all, with important legislators pressing
the FDIC to treat their constituents better than someone else’s
constituents.
What we know is that no
losses will be taken immediately by creditors. This is because the
objective of the resolution authority is to prevent a “disorderly”
failure, which actually means a failure in which creditors suffer
immediate losses...
The proposals in
the Draft reflect very bad policy—far more likely to be destructive of
the financial system and damaging to the economy than an improvement on
what exists today.
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I don't believe in the whole fake left-right dichotomy; I think its Americans versus those trying to steal our wallets and our rights
What rights, your to late. Tell them to stop left, or right since it your money with a gun in your face on either side
to both sides who are entitled to it in there quest for utopia. Help yes, but they take brother. The sheep must be armed but they are to lazy to care and its to late. They deserve whatever they get since they voted it in and I mean it. And really look more carefully what presisdents over the last 80 years have said.
Even more alarmingly, the discussion draft would appear to give power to the Federal Reserve to preempt a wide range of rules regulating the capital markets—power which could be used to gut investor and consumer protections.
What do they idiots not understand since the mid eighty's and before since the Senate was set on domestic duty as a bitch lifting her dress. We have been watching this for decades. For gods sake wake up and ask why where in a ditch before they put you in one. What Senate? Spineless as the squid they serve.
LEFT=RIGHT, that's agiven. We should all be disgusted with the outright apathy of our society. I refuse to pay another bill on time. I refuse to accept paying for another's inproper, immoral decisions. We need to make a stand and it will only count if it's with our wallets. Unite readers, cause this country is really becoming the laughing stock of the world.
I don't believe in the whole fake left-right dichotomy; I think its Americans versus those trying to steal our wallets and our rights
Please go on... I agree about the fake left-right dichotomy, but am interested who you think is stealing Americans wallets and rights. Are you suggesting that there is an "illuminati" or do you mean that one group of Americans are stealing from another, just as the American Empire stole from mother earth and Great Britian. This comment needs clearing up!
But evil men and impostors will proceed from bad to worse, deceiving and being deceived. 2Tim 3:13
Don't expect any goodness from Washington , they have been given over , given over , and given up .
"If this legislation is passed, every industry will be in Washington, asking for special treatment or exemption..." Change the word "asking" to "paying" and you now understand the purpose of this bill as written.
Like they already are, lobbying Ways & Means on tax code.
“Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power”
Benito Mussolini...
Thank you! I was searching for that quote when you posted it.
If anyone has a cogent rebuttal, let's hear it.
Sadly, I've got nothing.
Fascism is, what fascism is.
I have never really been pro on the 2nd Amendment. And I still don't think it grants me, the individual,the right to a gun.
But I am definitely glad its seen that way on the books.
Because, regrettably, that might be the only way to clean things up.
Yup. Just as I suspected.
Say, I hear that Silver Bullets are good against Vampires ---
Vampire Squids that is!
I'm all for a full clip and one in the chamber.
Goldman Sachs in Rolling Stone
This administration in particular and government generally craves control -- that is what this is all about. Sad part is that most in the US (at least those who voted for this guy) are happy to give it to them. Which is why the outlook is dismal -- government is generally inept, wasteful and power hungry.
They don't really want to fix things too well - they want to be able to continue meddling and adjusting (based on political forces and contributions).
A meaningful piece of this problem could be dealt with by risk adjusted capital reserve requirements (larger, more risky banks need higher capital requirements and vice versa). It maybe akin to self insuring -- but the government doesn't have its hands on the money -- which is why they would not like this alternative. Government also does not like anything involving "self" -- they want "shared."
"This administration in particular and government generally craves control -- that is what this is all about. Sad part is that most in the US (at least those who voted for this guy) are happy to give it to them. "
I beg to differ with you. I voted for change. I fully intend to do so at the next opportunity. I am not alone.
Unfortunately the VAST majority who voted for this guy LOVE him and will support no other. He is the annointed one who is above all criticism and opposition. Just listen to the news on TV.
"A meaningful piece of this problem could be dealt with by risk adjusted capital reserve requirements"
Agreed, but the process of risk evaluation would be corrupted in 15 seconds (as usual)
Just what we needed. Another bunch of GSE's. Oh, joy.
I THOUGHT "US OF A" is a free country. I am surprised to note that in the last two years the whole country has been reduced to a state of slavery . Enslaved by the disgustingly corrupt few bastards whose only aim is to create a state where each one of you would be DOMINATED in every sphere of life by the financial institutions. USA being goverened by US of Ass-holes.
What happened to the right to own guns. The right is there and it should be USED now. Now is the time to stand up and retaliate. No wonder Bag-Head Bush rode roughshod over the collective wishes of vast majority while attacking Iraq.
Wishing you folks good luck.
More WWF promo BS.
Seems that the masses want real oversight and enforcement. But our leaders offer up oversight by the oligarks?
What are they saying? "We got your vote, we are in power now shut up". That kind of position would make you wonder if there is ever going to be another election in this country?