Friday, June 25, 2010
The financial reform bill -- "finreg" to the cognoscenti -- got through the House and Senate conference this morning at 5:39 am. The New York Times covers the politics, and the Street has a nice analysis of the bill's provisions. I wish I were expert enough in the ways of Wall Street to know whether this massive new law actually addresses genuine problems we are likely to have again. Like most armies, Congress tends to fight the last war, and I worry that is what is happening here.
That said, I generally agree that institutions that take insured deposits should not do risky things. The question is whether we need institutions that do not take insured deposits to step up and do those things instead. Put differently, if proprietary trading goes away will that have the effect of making debt capital in particular systematically more expensive?
Anyway, neither linked article answers my question: Will Goldman Sachs now give up its bank charter so that it can continue to do proprietary trading, and if it tries will the government let it?
GS already has it covered. They disclosed months ago that finreg wouldn't appreciably change their trading activity as they already have an internal clearing house for such activity that would not fall under new restrictions. I'm sure many of the big houses will be doing the same and have ways around the new legislation proposed.
Mortgages were once a safe investment - when the banks that made the loan also collected the monthly payments from mortgages until they were paid off.
The banks were more careful who they lent money to and how much and on what property. Then the govenment started requiring that a certain paercentage of loans be made to non-traditional (i.e. non-creditworthy) borrowers on properties in areas with declioning values. But then the banks could just sell these steaming-pile-of-pelosi loans to the GSEs.
Things went wrong when collecting the mortgage loan was completely disconnected from making the loan.
We will be able to judge the success of finreg. If Dodd is gifted with an all weather tennis court and an all weather swimming pool for his Irish palace, then finreg was a success.
Plus, he has to have relatives who will be able to accept "fees" for many years for interpreting what the true intent of the law was.
Experience shows that parent companies aren't insulated when supposedly independent financial subsidiaries get into trouble -- witness Citigroup and its SUVs, Bear Stearns and its subprime hedge funds, AIG and its CDS business, GE and its CP-funded financial business -- just to cite some recent examples.
So what's the point of "prohibiting" proprietary trading if the likes of GS already have a work-around to use some kind of "insulated" affiliate.
GS still has big time litigation exposure. They may skate, or not.
The beat goes on.
Obama got his national Consumer Protection Bureau -- which is what he cared about. State AGs get delegated enforcement powers. Plaintiff lawyers smile big shit-eating grins ... so do BigLaw defense lawyers (quietly).
Fannie and Freddie are notably ignored. Their lock on 80% of the mortgage market only got stronger.
Recall that the House-passed version of Energy would require Fannie and Freddie to buy home-improvement loans originated by Green Jobs entrepreneurs like Van Jones. I may have to move to Detroit and get into the weather stripping business.
This is a tell that Obama & Co continue to see Fannie and Freddie as big piggy banks.
Also, dig the omission of auto companies from consumer regulation.
"The banks were more careful who they lent money to and how much and on what property. "
"Then the government started requiring that a certain percentage of loans be made to non-traditional (i.e. non-creditworthy) borrowers on properties in areas with declining values. "
I think the following is correct -- but it's been years since I knew this stuff well:
CRA is exaggerated as a root cause. It was a hortatory statute in practice. Banks only cared when they needed M&A approvals. That's when ACORN would come a 'knockin, and were bought off with promises of future inner city lending -- to avoid M&A delay. Not a big deal, actually.
The role of banks and thrifts in mortgage lending was radically transformed by Fannie and Freddie years ago. This was true for all but the 10% at the high-end (non-conforming jumbos) and what used to be the 5% at the bottom (sub-prime). For 85% of mortgages, banks and thrifts have just been originators.
This worked well, so long as we required simple but basic underwriting. This means requiring a real-down payment. You need to have saved for it, or have a rich uncle. Uncle Sam isn't your uncle, unless you did military service. It's that simple. Capeche?
Securitization -- which was an accidental offshoot of how Fannie grew -- can work well. But contrary to what Alan Greenspan thought, securitization can magnify risk.
We let subprime go from 5% of the mortgage market to 20%. How could we not see that trouble would follow. Lots of blame to go around here. Ironically FinRegReform will forever be called "Dodd-Frank."
What's amazing is that we took just a few hundred billion in bad mortgage loans and managed to turn it into a few trillion in bad paper.
Anyone still want to defend Goldman Sachs for doing God's work?
So..we sit by idly as the architects of our latest financial meltdown, Mr. Dodd and Ms. Frank, propose legislation that gives Mr. Obama "90%" of what he has been "fighting for".
I am afraid it is grrowing close to the time for pitchforks and torches.
I hope Dodd's (or was it Frank's?) squeeze of private equity firms got negotiated out. Nearly 75% of my potential investors would no longer qualify as accredited investors if this bill passes with that provision. It would destroy the private equity markets, which is probably the point (throw Wall Street a bone as compensation for this regulation).
You couldn't make this up:
"President Barack Obama, fresh from a win on a sweeping overhaul of Wall Street regulations, on Saturday urged Congress to take up his proposal for a $90 billion, 10-year tax on banks as the next step in reform.
"We need to impose a fee on the banks that were the biggest beneficiaries of taxpayer assistance at the height of our financial crisis -- so we can recover every dime of taxpayer money," Obama said in his weekly radio and Internet address.
You couldn't make this up II:
... said a teary-eyed Sen. Christopher J. Dodd (D-Conn.), who as chairman of the Senate Banking Committee led the effort in the Senate. "No one will know until this is actually in place how it works."
Like the medical insurance companies before them, banks shed no tears after learning that congress had reached agreement on financial regulation bill.
Lobbyists nowadays are far "better" at their jobs than most any politician we could ever elect.