Mike Konczal at Rortybomb is still looking at Dodd's Senate Banking Reform Bill. In comparing it to Barney Frank's House version, he finds a few significant differences. One of them is the way they handle prevention: Barney's does (barely), Dodd's doesn't.
Picture if you had a woodshop filled with oily rags, no ventilation, no exits, a woodshop that was always catching on fire. One thing to do is to get a fire extinguisher. That is the resolution authority of the financial reform debate. Another thing to do is to establish new codes and rules to make it less likely that there will be a fire. Current regulators and industry leaders will tell us that the financial capital markets are up to The Swanson Code, the "I'll know trouble when I see it" system; however we want there to be clear rules regulators won't mess up to reduce the likelihood that there will be fires.
***
This is language from the final House Bill, HR 4173 (giant pdf, page 44):
(3) LEVERAGE LIMITATION.-The Board shall require each financial holding company subject to stricter standards to maintain a debt to equity ratio of no more than 15 to 1, and the Board shall issue regulations containing procedures and timelines for how a financial holding company subject to stricter standards with a debt to equity ratio of more than 15 to 1 at the time such company becomes a financial holding company subject to stricter standards shall reduce such ratio.
Here's the equivalent language from the Dodd Bill (giant pdf, starting page 25):
(2) DUTIES.-The Council shall, in accordance with this title….(H) make recommendations to the Board of Governors concerning the establishment of heightened prudential standards for risk-based capital, leverage, liquidity, contingent capital, resolution plans and credit exposure reports, concentration limits, enhanced public disclosures, and overall risk management for nonbank financial companies and large, interconnected bank holding companies supervised by the Board of Governors
In both bills, regulators have discretion in how to set limits, as determined by internal risk managers. In the House Bill though, there's a strict limit: no systemically risky firm can have leverage greater than 15-to-1. In the Senate, the FSOC will make recommendations to the Federal Reserve. The Federal Reserve will do like, whatever it wants - it could follow the recommendations. Or it could not.
This solution in the House Bill is a satisficing solution - there are almost certainly firms that could handle being leveraged 16-to-1. However we don't trust the regulators to be able to detect that firm and also not bend the rules for firms that couldn't handle that leverage. So we write down a clear rule.
And these clear rules are exactly what the lobbyists are going to go after.
Actually, he's wrong about that. That is, his tense is wrong. They're not "going to", they are and have been for months. They started as soon as reform was in the air, which was when AIG damn near went belly up. We've reported a number of times that bankster lobbyists were working the Congress hard, particularly the Senate where they own quite a few Senators, including Dodd himself and now-VP Biden. The fact that they've been hard at work is the reason that Dodd changed Barney's rigid rule into pudding for the kids on Wall Street to play in.
In a post at MoJo (which is where he is now) called, appropriately, "The Dismal Outlook for Financial Reform", Kevin Drum thinks Mike's low-balling it.
In fact, it's probably even worse than that. The problem with resolution authority is that it's like a nuclear bomb: it causes a lot of damage and you don't want to haul it out except as a last resort. So the default position for regulators is always going to be the same as it is for the banks themselves: do everything they can to avoid using it. Troubled banks will propose plan after plan to unwind their risky positions and earn their way back to solvency, and regulators, who are terrified of pulling the trigger on a big bank that might still have a chance of survival, will allow things to continue spiraling. And when the shit finally and irrevocably hits the fan, the problem will be massively greater than anyone ever thought it could be.
***
The House bill is the bare minimum that's likely to work. And even at that it depends heavily on defining exactly how leverage is calculated; keeping a gimlet eye on bank shenanigans at all times; defining "bank" broadly to mean virtually any big financial institutions; getting buy-in from other countries; making sure the relevant regulators consider bank safety to be their primary mission; and then applying leverage constraints in other areas, such as residential and commercial loans. In other words: even the House version isn't all that likely to work. But it's way better than the Dodd version. Congress shouldn't micromanage, and regulators should always have the ability to tighten standards on individual banks, but Congress should put in place an absolute ceiling that can't be easily wisked away by the SEC or the Fed when times are good and everyone thinks they're going to last forever.
Sound familiar? Here we go again....
Powered by Zoundry Raven
Comments