[edited to add links]
Financial reform has taken over the hot seat from health care. See the Senate Banking Committee's summary of the Dodd bill; S. 3217 as filed (1408 pages).
The closer we get to perhaps doing some of the things that must be done the more the "party of nope" is pushing back. Take the idea of a prefunded liquidation authority through which banks can be assessed now for funds that would cover the winding down expenses of a liquidation when a bank fails later. Some Republicans apparently supported the idea of such a fund, since it would eliminate taxpayer bailouts, which nobody wants. That is, until McConnell stepped in as spinmeister and called the fund a "bailout fund". See Bacon, McConnell's Wall Street meeting prompts criticism from Democrats, WaPo, Apr. 20, 2010. Now, surely McConnell knows better. Bailouts occur when taxpayers pony up to pay for keeping an underwater bank alive. The resolution authority is to liquidate a bank, not keep it alive; the fund will be used to pay transition winding down expenses, not the banks' creditors or shareholders; and the money is from the big banks themselves, not from taxpayers.
Obama responded, as one would expect, by calling the mislabeling "cynical and deceptive", suggesting that the GOP is really interested in just obstructing the passage of financial reform. Id. This seems especially likely, since McConnell's push against reform came after a big meeting of GOP leaders with Wall Street executives. Id.
But Obama is already signalling that maybe the fund isn't an essential part of the bill. And of course, this is the worrisome part of this staging. McConnell knows in the long run the GOP can't completely oppose financial reform. So the goal is to reduce the impact of the provisions and allow the banks to go their merry profit-making and bonus-paying ways.
But if "bipartisanship" means letting the already weak Senate bill be weakened further, that is bad news. Why? because the Senate bill has a number of weaknesses:
- the consumer financial protection agency would be under the Fed, which historically has at most indifference and sometimes disdain for ordinary people, and sees its primary purpose as keeping banks in working order, which has a tendency to trend towards maintaining the financial system that we have now, rather than helping us move to a more sober and less risky system;
- the bill would permit banks to continue their "financial innovation", pushing products that they have devised as good ways for banks like Goldman to make money. So Obama would permit synthetic CDOs so long as the banks have a peppercorn of skin in the game (pardon the mixed metaphors). But synthetic CDOs are a good illustrator of the reason that financial innovation should be stifled, not encouraged. They serve no purpose whatsoever in the productive economy and are merely casino bets on positions that neither "short" or "long" side holds--neither has actually put money into the productive economy, but the banks get fed with big fees from both. Synthetic CDOs were the instrument of choice that Goldman built to order for Paulson to short the mortgage loan market (and sucker the other side of the CDO). These synthetic CDOs amplify existing risks, since they are built off loans by merely "referencing" them. See, e.g., Dittmer & Smith, Magnetar, Goldman Press Flurry Still Misses the Biggest Point of All, Naked Capitalism, Apr. 20, 2010; Adams, The Myth of 'Insatiable' Investor Demand for CDOs, Apr. 20, 2010.
- regulation and disclosure with respect to credit default swaps would be insufficient--customization is a huge loophole. Agriculture Committee chair Lincoln may push through much more stringent legislation on derivatives trading, which would be a step forward.
- the bills don't eliminate proprietary trading. Banks are supposed to be the sober, boring glue of the real world's productive networks, connecting lenders and borrowers.
- the bills don't break up the big banks. Systemic risk awareness, some kind of consumer protection, leverage and capital constraints--those are all good steps. But we shouldn't allow banks of the megasize that the big 5 have become. It is too dangerous when they fail, and we won't see every risk that we should see soon enough to prevent their failure.
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