The Huffington Post spread the word today about the bank lobbying group's "call to Action" to squash Congress's efforts to enact financial reforms. See Bank Lobbyists Launch 'Call to Action' to Crush Financial Reform, Huffington Post (Dec. 16, 2009). The memo announces the American Bankers Association's "shock" that the organization of community banks had supported the House bill and the desire to present a united front and defeat financial reform in the Senate.
The banks have successfully lobbied, once again, to keep a mortgage cramdown provision out of financial reform. The effort this time was spearheaded by the small banks, but the big banks are quite happy with that result, hoping that this additional defeat means the provision won't have a chance. Why Congress goes along with this is a mystery, other than the obvious fact that money from banks smooths the wheels of almost every Congressperson's reelection efforts. There is simply no good argument for not allowing mortgages to be modified in bankruptcy. Yes, banks will have to recognize more losses. But like the bank's arguments against fair value accounting, calling a loss a gain doesn't change the fact. Banks that are insolvent should be recognized as such and allowed to fade from the scene, with their shareholders bearing the burden. We should undo the governmental guarantee, and we should take steps to break the big banks up, rather than the Treasury acting unilaterally to uhdo enacted legislation by allowing banks to retain full use of their losses after ownership changes, which encourages more of the kinds of bank mergers that we ought to be discouraging.
The Post story notes a comment from a representative of the community banks about the lobbying organizations that represent one or more of the Big Banks (the "too big to fail" constitutencies):
"All the other folks out there who do financial services representation" -- that means bank lobbying -- "they all have some of the larger banks in their membership and the larger banks don't truly want a real bill because it will require higher capital, tougher regulations, make them pay into an insurance fund and maybe even downsize. They may pay lip service to having a strong or effective bill, but I just don't think their heart is in it."
There are lots of problems with the financial reform bill--it is at best a first step on the road to a revamped financial system that should address the "shadow" banks, derivatives, "too big to fail" banks, and other problems. Ideally, we will end up breaking up the banks and instituting strong capital, leverage and other rules to make much less significant the risky betting with other people's money (which is the main way that banks like Goldman Sachs make money these days, plus the fact that their cost-of-funds is so much less with the implicit government guarantee).
Two provisions in the bill (in addition to its failure to include a mortgage cramdown provision) are especially worrisome--they are ones that the banking association celebrates as victories for its lobbying efforts. First, the provision in the House bill allowing the new "systemic risk council" to oversee FASB's accounting rules is sheer idiocy. Banking regulators can set --and should set--capital standards that make sense for banks. But they should not pass rules that hide the truth of the banks' financial situation in order to pretend that a problem doesn't exist. Having a "doctor supervisor" that tells your regular doctor to rewrite the diagnosis so that you don't appear to have a terminal illness would be considered quackery by every patient. Yet that is essentially what the banks have got in an agency override to FASB accounting rules that require "fair value accounting".
The other provisions that are worrisome deal with jurisdictional issues--ability of national banks to establish state branches in competition with local banks and to have federal law preempt state banking regulation. We need more regulation, not less, and more restrictions on expansion and growth of big banks, not the opposite.
We should start a letter writing campaign on these and other issues so that Congress hears again and again that we do not want Wall STreet to make the rules to its own advantage.