First, if you haven’t read the recent diary by Selise at dKos or The Seminal, do that now, and then come back. She provides information about a conference where economists and others are not afraid to explore territory forbidden by the Deficit Hawks. Remember that recovery from the Great Depression was originally stalled because the deficit hawks of the day inhibited the kind of recovery efforts that eventually succeeded.
Next, listen to the great interview of Bill Black by Bill Moyers last night. Black argues that there has been massive fraud on Wall Street, fostered by 8 years of non-regulation by the Bush administration, which resulted in a "criminogenic" environment on Wall Street.
In other news, the Financial Crisis Inquiry Commission has issued its first subpoena: Moody’s Slapped With Subpoena: Credit Rating Agency Not Cooperating With Crisis Investigators (First Posted: 04-21-10 06:00 PM | Updated: 04-21-10 07:49 PM), and widely reported in the MSM (NYT, MSNBC’s Dylan Ratigan, etc.). The FCIC’s next hearings, on May 5 & 6, will be on the Shadow Banking system.
In Congress, Blue Dog Blanche Lincoln has surprised just about everyone by proposing a strong bill regulating Derivatives that may be the best part of the Senate bill ("Senator Blanche Lincoln’s Derivatives Reform Bill Must Pass")
But to understand the legislation moving through Congress, everyone needs a score card. I’ll provide one based on the Roosevelt Institute’s Mike Konczal’s "Six Critical Elements of Financial Reform." Here’s the lede:
Financial reform is moving fast and it is likely to pass the Senate within days. Much of the action will take place on the floor, where amendments will be debated and voted on. What should progressives fight for at this point, and what amendments accomplish these goals?
See Konczal’s handy two-page summary & chart(pdf). So let’s review.
1. Are financial conglomerates allowed to get Too Big To Fail? Does the proposal allow bank/non-banks to get too big to be allowed to fail, e.g. merely creating two kinds of banks: the monsters, and the normals? How is TBTF defined? The Conglomerates get TBTF by combining bank and non-bank businesses– The sort of thing that Glass-Steagall used to prohibit. The "Volcker Rule," to restrict banks from making certain kinds of speculative investments if they are not on behalf of their customers, is also relevant here, but is covered explicitly in #6 below.
2. Is there a Hard Leverage Cap? Konzcal explains,
A major reason why our recession is so deep, with unemployment so high, is that the SEC allowed the largest players to significantly increase their leverage during the bubble. Though a leverage cap won’t replace a full regimen of proper capital reserving — which the administration is leaving to the international community to figure out — as citizens, we should demand a hard cap on how risky the financial sector can get. This would supplement good prudential regulation, not replace it.
There is currently a 15:1 leverage cap in the House Bill, though there currently isn’t one in the Senate. Senators Brown, Kaufman, Casey and Whitehouse have introduced their Safe Banking Act of 2010, which would require that banks to set into law a 16.67:1 leverage limit.
3. Should Risky Banks Pay For Their Own Cleanup?
The bills currently allow a fund of $50 – 150 B., built up from bank funds ahead of time, to allow for the orderly liquidation of out of control banks. The Republicans have pounced on this as proof of future consumer-funded bail-outs (they say that the costs will be passed on to consumers.) The Republicans have been blowing a lot of blue smoke on this, which puts this fund in danger. Progressives should defend this mechanism.
4. Should Derivatives be regulated?
Strong derivatives language crafted by Senator Lincoln has passed through the Agriculture Committee. Her bill might be the most important part of the emerging bill. Fighting to keep loopholes out of it is essential for financial reform.
5. Should there be a change in how Off-Balance Sheets are disclosed?
Konczal writes that
There needs to be a change in the way off-balance sheet products are disclosed. In particular, liabilities should include, but not be limited to, liabilities associated with swaps and VIEs. And there should be a private right of action for failure to comply.
There is not extensive language on off-balance sheet reform in the House. Senator Menendez has announced an amendment to address these issues, and it is essential to the integrity of our markets that it is incorporated into the Senate bill.
6. What about the Volcker Rule? Konczal wrote,
The Volcker Rule is essential for restoring the stability and integrity of what our financial system does.
The Volcker Rule was announced after the financial reform bill left the House, so it is not present in the passed House bill. Senators Merkley and Levin have proposed an amendment that not only solidifies the Volcker Rule, but also specifically targets the conflict of interest that we have seen with Goldman-style bets against clients.
As the news comes fast and furious in the next few days, these are 6 good things to keep an eye on, and to write to your Congresspersons about.
Bob in AZ