ND20 Alert: FCIC Announces Hearing on Derivatives

Jun 17, 2010

alert-button-150The FCIC is ready to tackle the financial weapons of mass destruction.

alert-button-150The FCIC is ready to tackle the financial weapons of mass destruction.

The Financial Crisis Inquiry Commission today announced that it will hold its next hearing, “The Role of Derivatives in the Financial Crisis," on June 30th and July 1st, this time to investigate derivatives. Warren Buffett himself has warned of the danger of these products, as they tap into the human tendency to gamble with more money than we should. Will the FCIC help uncover the mistakes made and crack down on their use? Tune in to find out!

Before the hearing, read up on New Deal 2.0's coverage of derivatives reform:

"Nailing Down Derivatives, Part One"

"Nailing Down Derivatives, Part Two: Clearinghouses"

"Joe Stiglitz on Derivatives Reform and Section 716"

"How Goldman Will Keep Gaming the System"

"Michael Greenberger on Over-the-Counter Derivatives"

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Finreg Please Don't Be Serious Edition: House Dems Dismantling the Volcker Rule?

Jun 17, 2010Mike Konczal

I explained before how Bear Sterns had a $40 million dollar upfront bet sponsoring a hedge fund that ended up putting them on the hook for billions of dollars in losses. That's how it goes sometimes with hedge funds, especially with complicated strategies and tail risk. Implosions can go big, quickly. That's the risk that the investors take: but is it risk that needs to be attached to someone with a commercial banking charter?

I explained before how Bear Sterns had a $40 million dollar upfront bet sponsoring a hedge fund that ended up putting them on the hook for billions of dollars in losses. That's how it goes sometimes with hedge funds, especially with complicated strategies and tail risk. Implosions can go big, quickly. That's the risk that the investors take: but is it risk that needs to be attached to someone with a commercial banking charter?

And what are Democrats doing fighting for State Street's ability to put a hedge fund and shadow bank right in the middle of their crucial, boring custodial business? Did they like the business model of AIG and State Street, and the subsequent bailouts, so much they want to do it all over again?

Brian Beutler makes a great catch: Behind Closed Doors Four Key Democrats Maneuver To Weaken Financial Reform. Brian (my bold):

Two sources identified four House members on the conference committee--Reps. Dennis Moore (D-KS), Gregory Meeks (D-NY), Mel Watt (D-NC), and Luis Gutierrez (D-IL)--who have privately pushed to write a loophole into the Volcker rule which would allow banks to invest in hedge and private equity funds. That loophole has the strong backing of Bank of New York Mellon, and State Street Bank and Trust among other firms, but is fiercely opposed by Volcker himself, who has had tremendous influence over the shape of the reform bill. Volcker was supposed to meet with the Democrats yesterday to warn them away from supporting this loophole, but the meeting was canceled at the last minute.

Hey look, it's noted TARP-recipient State Street Bank lobbying and teaming up with Democrats! Remember the Cambridge Winter analysis, released this week, of the complete 2008-2009 failure of State Street and the subsequent taxpayer bailout? If you are interested in reform and the lobbying process read it again (here's my discussion of it).

State Street runs the custodian business of 19 trillion dollars in assets. This is the business of physical and electronic safekeeping and record-keeping of equity, fixed-income, and money market securities for institutional investors. It's really low margin, high volume, and boring. Essential, but boring. If one of these firms had a major guns-blazing-into-failure collapse like Lehman did, it would destroy a large part of the world economy. Hence the reason we bailed it out when its shadow banking division collapsed in 2008-2009. How bad would it have been if it had collapsed? Here's a commenter from my coverage post:

Let’s not forget that SSgA manages some of the most widely traded securities in the world: the SPDR ETFs and the GLD ETF (State Street stores more physical gold than all central banks combined). Plus the fact that they manage investments for thousands of the nation’s biggest pension funds, especially their passive investments.

The panic effect caused by a State Street bankruptcy would probably be bigger than any bank failure, anywhere in the world, since the 1930s. I’d say it’s the financial equivalent of shutting off a sizeable portion of the US electric grid for weeks at a time. But I suppose this is very unlikely.

And here's Raj Date following up with me:

Hedge funds fail all the time; P.E. funds do too. That’s sad, I’m sure, for the principals, and the investors, but that’s just life in the big city. But that doesn’t mean you should deliberately create a structure in which their failure brings the system down with them, or a structure that allows them to siphon value from a bank charter that exists for a decidedly different reason. Frankly, it is the separation of these vehicles — all of which serve legitimate purposes — from the banking system that enables us to ‘just let them them fail.’

And it’s hard to imagine what failure (aside from the failure of a major sovereign, or of quasi-sovereigns like the GSEs) would be more disruptive than that of a major custody bank. These firms — State Street, Bank of New York, JP Morgan — are a big part of the central nervous system of the markets. If you thought Lehman was bad — well, my advice in that case would be: buckle up, you’re in for the scariest ride of your life.

And there State Street goes, lobbying away to make sure it can continue to do the very things that required taxpayers to bail it out the first time around.

Raj's quote is important here: Hedge funds fail everyday. And I encourage people to start hedge funds, and to start commercial banks. But just don't do them in the same place, a place where the main benefit is getting to siphon value off the bank charter. Here's State Street getting bored and placing a shadow banking casino inside their firm:

And of course it collapsed, and of course the taxpayer has to step in to pick up the tab. Instead of expanding access to state colleges (or prisons if you are a conservative, it's a big tent in financial reform), us taxpayers get to spend our tax dollars doing the following:

That's the bailout we just did of State Street bank. Click through to see it in all it's gory details. And here they are, not even 2 years later, demanding that the one reform which would have stopped that be gutted. And we will get to do this crisis all over again hoping that everyone learned their lesson. And that's the problem. It's that the lesson State Street may learn is that it will get bailed out and still get to write sections of the financial reform bill.

And it is possible that Reps. Dennis Moore (D-KS), Gregory Meeks (D-NY), Mel Watt (D-NC), and Luis Gutierrez (D-IL) are running point for this bailed out firm in dismantling the Volcker Rule. I hope they clarify.

UPDATE: Brian reports "Gutierrez's spokesman Doug Rivlin calls to say that his boss hasn't taken a position on the Volcker rule. "Volcker rule isn't something that he's been working on," Rivlin says, noting that Gutierrez's main concern is with the portion of the reform bill dealing with resolution authority. Gutierrez wants a liquidation fund to be created in advance of the failure of any systemically significant financial firm--the Senate bill calls for those funds to be raised in the aftermath of a failure."

That's very good to hear. Gutierrez, in addition to being my old congressman, is leading the fight on the prefunding resolution, which I am rooting for him as it is a major thing to make resolution authority credible.

Mike Konczal is a fellow with the Roosevelt Institute, and you can follow him on twitter here.

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BP Bashing and Obsequious Officials on Finance

Jun 17, 2010Robert Johnson

robert-johnsonAs I read the article below I can only wonder what forces of fundraising and deference stopped our national leaders from "taking the hide off" of Wall Street's leaders after they did a multi-trillion dollar "financial spill" onto the world economy in 2008.

robert-johnsonAs I read the article below I can only wonder what forces of fundraising and deference stopped our national leaders from "taking the hide off" of Wall Street's leaders after they did a multi-trillion dollar "financial spill" onto the world economy in 2008. Instead, they tiptoed to this very moment to avoid strong legislative reform and looked helpless amidst a monster bonus pool sent to the bailout beneficiaries. We were all told we were too rash, or that we could not let Wall Street collapse or they would take us down with them. We were scolded by JPM's CEO Jamie Dimon, for trying to vilify finance. Dimon is a man who has been applauded in the mainstream media as "winning the crisis," whatever that means when the rest of us who lost trillions, homes, jobs and more.

In my book, we had reckless spillovers in finance that are the perfect analogue to these awful oil spills. A 40 percent climb in the debt/GDP ratio, massive unemployment around the world and all of the tangible damage that financial sector sycophants want to pretend "just happened" and it was no one's fault. Yes, is was someone's fault and those someones should have suffered the dilution of their stockholdings, writedown of their credit, firing of management, bonus curtailment and clawbacks, thorough examination and recapitalization, and yes, some vilification that is more than warranted.

It is good to see they are responding to the oil mess on Capitol Hill. Maybe our elected representatives can muster the courage to take on finance next time. After all, Mr. Dimon told his daughter that we should expect crises like 2008 every 5 to 7 years. While watching the justifiable BP bashing, one can clearly feel how the pandering to finance has an oily feel. Slick operators on Capitol Hill will never live down a second obsequious performance. Or will they?

From Anderson Coooper's AC360 blog, "Democrat: Lawmakers going to take Hayward's 'hide off'":

Democratic lawmakers will try to build the case of a corporate culture which chose riskier, cheaper methods over safety concerns as they grill BP CEO Tony Hayward on Capitol Hill Thursday.

"Members are angry. Members are frustrated," Rep. Bart Stupak, D-Michigan, told CNN's Dana Bash. "They're going to take his hide off, as they should."

Stupak, who chairs the House Energy and Commerce Subcommittee on Oversight and Investigations, outlined evidence his committee has put together from thousands of pages of internal BP documents.

Read the full article here.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

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Taxes, Turnover and Financial Innovation

Jun 16, 2010Mike Konczal

One part about financial 'innovation' that isn't always brought up is the fee churn factor in innovation. Here's Joe Stiglitz, Senior Fellow at the Roosevelt Institute, here, with this great quote about what constitutes financial innovation:

One part about financial 'innovation' that isn't always brought up is the fee churn factor in innovation. Here's Joe Stiglitz, Senior Fellow at the Roosevelt Institute, here, with this great quote about what constitutes financial innovation:

There are alternatives out there. They could have done it right. The Danish mortgage bonds system, there are other mortgage products out there. But they did not generate the fees that have motivated the industry. And it goes back to the fundamental problem that I mentioned in the beginning of failure of alignment between private rewards and social returns. When I was on the council of economic advisors I saw that not only was the financial sector not innovative, they resisted our innovation. We came up with this idea of having inflation indexed bonds, and it was initially resisted by treasury, resisted by the financial markets. I scratched my head and I asked why. And then we figured out why. People buy these products and hold them to retirement. If you hold them to retirement you don’t make fees, because you don’t have people selling and buying them. And so for the financial sector they were disastrous. For Americans worried about the risk of inflation, they were a fantastic product.

I love that. The most innovative product for a financial firm is one that always has volume and, sometimes, always has volatility. Many investors would prefer neither, they would prefer their investments boring. So there's a clash here.

I thought about that when reading the following from Dylan Matthews, at his new Research Desk Answer feature: How to raise $100 billion from a financial transactions tax:

As you can see, the main revenue sources would be in stocks, bonds and swaps. Even if trading is cut in half, the tax still raises $176.9 billion a year, which would make it the federal government's third-largest revenue stream after individual income and payroll taxes (see Table 1-8 in the CBO's FY2011 budget analysis).

How much trading would actually be affected is an open question; the authors have in the past called (PDF) a 25 percent drop "implausibly high," suggesting that the probable revenue would be somewhere between $353.8 billion (the figure for no drop in trading) and $265.3 billion (the figure for a 25 percent drop). Proponents hope that at least some meaningful drop in trading would occur. One point of the tax is to deter high-frequency trading and to reduce the size of the financial services industry, which would not be accomplished if trading does not fall. There's thus a trade-off between the revenue gains to be had from an FTT and the size of its effect on the financial sector.

In any case, an FTT would produce far more revenue than alternative taxes on the banking sector. A new Institute for Policy Studies paper, set to be released tomorrow, shows that FTT revenue (as measured in the Baker et. al. paper) pales in comparison to what would be generated by the Obama administration's proposed bank levy ($9 billion a year) and the IMF's proposed financial activities tax ($28 billion a year). Of the three, only an FTT would make a big dent in the deficit.

Even a small FTT would cut so much of the churn factor out of the financial markets that can increase volatility or lead people to think they have liquidity in bad times that they in fact don't. I'm still learning the international experiences with an FTT, and I'll have more towards the end of the summer. But hitting two birds with one stone strikes me as a good idea here.

Mike Konczal is a Fellow at the Roosevelt Institute, and you can follow him on twitter here.

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How to Prevent the Next Financial Crisis? Pop the Compensation Bubble.

Jun 16, 2010Wallace Turbeville

money-and-greed-150It's time to examine and re-structure the financial incentives afforded to traders living within the Wall Street vacuum.

money-and-greed-150It's time to examine and re-structure the financial incentives afforded to traders living within the Wall Street vacuum.

The financial reform legislation will address specific business activities that led to a massive run on the largest financial institutions in 2008. Understandably, it looks backwards to analyze what went wrong and regulate those activities.

It would be naïve to think that this is a complete, long term solution to the problem of periodic, systemic financial crises. Historically, bank panics tend to run in more frequent cycles unless the underlying causes of those panics have been addressed. More is needed to root out the causes.

The power inherent in the financial sector as the arbiter of capital flows in our economy is formidable. Society allows the bankers to amass wealth as they wield this power because it is in the long term interest of us all. The unwritten contract demands that the financial system provide capital to generate sustainable jobs and investment opportunities for the public.

The major Wall Street banks breached this contract. As I have previously written, massive changes in the sector fostered by technological advances and deregulation allowed this to happen. Deregulation conveyed the impression that the contract no longer mattered; technology allowed the banks to deploy their huge advantages in capital and information on a massive scale at the speed of the processor. The rise of the traders to control Wall Street shifted the focus from clients to transactional relationships. The social contract got lost in the shuffle. Re-alignment of incentives of bankers with the long term interests of the economy is the only way for the public to demand performance.

Implications of this tectonic shift are massive. With all of our large institutions dominated by trading, the risk of illiquidity remains extreme. Firms dominated by trading fail because they run out of cash, not because liabilities exceed assets. The crisis is abrupt, and the value of other, stable businesses cannot be used to stave off failure. Trading risks are inter-related among the trading banks. While this is mitigated by clearing, the business is so concentrated in the largest financial institutions that the conditions for a general meltdown persist.

Traders are very much individual entrepreneurs. They are allocated capital and trade their books within the constraints of rules imposed by their employer. At their core, they believe that they are responsible for the revenues which they generate and are compensated on this basis. Generally, this is an effective way for the financial institution to achieve maximum profit from a trader. The message to the trader is to make as much money for the firm as possible as quickly as possible. Trader success is very personal and perspective is defined by the cycle of bonus pool allocations.

While the legislation is important, we must address the motives behind dangerous behavior by Wall Street. The traders will not simply accept the new regulations passively. These are some of the most competitive and resourceful people on the planet. They will adapt so that they continue to earn huge bonuses by doing what they do best. Inevitably, they are at work crafting the next opportunities. It is impossible to predict what will precipitate the next meltdown. The dysfunctional relationship between the short term view of the financial sector and the long term needs of the American public assures that the cycle of runs on the financial system will continue.

Appeals for altruistic behavior are worthless. Traders genuinely believe that the public's interest is served by the efficiency of self-interested market activity. There is truth in this viewpoint, but it ignores larger issues which traders cannot easily internalize and still perform their jobs effectively. It is time to address the core of the problem

This is compensation. We are painfully aware of the housing bubble. But there is an ongoing compensation bubble embedded in our financial system which distorts the relationship of the sector to the economy as a whole. A system which excessively rewards short term perspectives and trading techniques which do not build an economy geared to generate wealth broadly is not sustainable.

This is deeper than compensation of the heads of banks and hedge funds. The compensation of individual traders is more pervasive. A direct relationship between compensation and trading techniques defines their roles and encourages their behavior.

Banks argue that they must pay vast sums of money to retain traders and prevent them from moving to hedge funds. I, for one, believe that this is overstated. Nevertheless, the compensation issue applies to hedge funds and other non-bank financial organizations as well - it is the incentive-based behavior which is the problem.

There have been proposals to tax bonuses. This seems to have a greater appeal in Europe than here. It may be more practical to curb compensation by targeting employers. Limiting the ability of any institution involved in securities trading to deduct compensation above a specified level would discourage excesses. So would an excise tax on excessive compensation by the employer. Whether a tax or a limitation on deductibility is the method, setting the level at which it kicks in has both practical and political implications. A multiple of median household income would be a good start. It has the benefit of being tied to the general welfare of the public.

New York politicians would likely resist this as an unfair penalty that affects state and local tax revenue. Corporate profitability is, however, the principal engine of tax revenue. The politicians should also be aware that basing fiscal integrity on a bubble (here the compensation bubble) is unwise.

Finally, there is an argument of sorts that has been made by opponents of compensation reform that must be addressed, even though it is probably a cynical effort to deflect discussion from the main point. The argument is that the public tolerates high levels of compensation of athletes and entertainers so why punish bankers? One word comes to mind: Wow! It is the behavior of bankers which is the concern, not retribution to assuage abstract moral indignation. There is no history of a baseball player behaving in a way that risks another Great Depression. The goal is to assure that financial sector incentives are more aligned with the interests of the people. Personally, I am not so concerned with alignment of interests with sports and entertainment. I still prefer an afternoon at the ballpark over a day at my computer writing about trader excesses that threatened the republic.

Wallace C. Turbeville is the former CEO of VMAC LLC and a former Vice President of Goldman, Sachs & Co.

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The Volcker Rule and the Saga of State Street Bank

Jun 15, 2010Mike Konczal

Cambridge Winter Center's Raj Date has a new paper out: Test Case on the Charles: State Street and the Volcker Rule.

In order to get a sense of why the Volcker Rule would be important, he walks his audience through the story of State Street bank, the 15th largest bank that had a nice, stable boring business model and decided to jump into the deep end of finance, necessitating a bailout at the end. Here's Raj:

Cambridge Winter Center's Raj Date has a new paper out: Test Case on the Charles: State Street and the Volcker Rule.

In order to get a sense of why the Volcker Rule would be important, he walks his audience through the story of State Street bank, the 15th largest bank that had a nice, stable boring business model and decided to jump into the deep end of finance, necessitating a bailout at the end. Here's Raj:

At first glance, State Street would seem an unlikely test case for the Volcker Rule. It is, after all, only the 19th largest bank holding company, with roughly $150 billion in assets. But like Bank of New York Mellon, and to a lesser extent Northern Trust, State Street has a systemic importance that is vastly disproportionate to its balance sheet size. State Street serves as “custodian” for more than $19 trillion in assets...To most observers, custody is a dreadfully dull affair: a scale-intensive, IT dependent processing business in which low-cost operations are key and pricing is measured in single-digit basis points. Although its revenues are market-sensitive, it is typically viewed as a lower-risk banking business, given that it is not prone to large credit- or interest rate-risk shocks.

Raj has many graphs that tell the story about why it is a good idea to silo out the high risk from the necessary, core functioning of the banking sector. I want to focus on three. Here's what boring banking looks like:

Click through on all three for a bigger graph with explanation. There it goes, making single basis point income off acting as a custodian for trillions of dollars of assets. This custody business is profitable, safe, and boring. So where do they dive into the deep end? Here's what exciting banking looks like:

Off-balance sheets conduits took on credit and liquidity risk by funding medium and long term asset-backed securities through short-term commercial paper. This business model eventually imploded. The stock took a 60% hit in a single day in January 2009 as the market realized these off-balance sheet conduits would need to be consolidated. It did not face a liquidity run thanks to FDIC, the Federal Reserve, and a post "stress test" equity raise. Rather than have this key mechanism of how financial markets work not be able to turn on their lights, taxpayers rushed in with bailout money. This graph walks through the bailout mechanism:

This is why the core of the financial sector needs to be protected. The temptation to take a boring business line, like this custodial mechanism for record-keeping among equities and bonds, or the boring insurance lines of AIG, and stick a giant hedge fund or shadow bank on top of it is going to be too much for businesses. And when the temptation is too much for businesses, it's going to be too much for regulators to make the call. Hence why we want to write these rules into the bill, and failing that, as close to the bill as reasonably possible.

Raj and I had some follow-up conversations about the Volcker Rule and State Street, and here is what he said:

Hedge funds fail all the time; P.E. funds do too. That's sad, I'm sure, for the principals, and the investors, but that's just life in the big city. But that doesn't mean you should deliberately create a structure in which their failure brings the system down with them, or a structure that allows them to siphon value from a bank charter that exists for a decidedly different reason. Frankly, it is the separation of these vehicles -- all of which serve legitimate purposes -- from the banking system that enables us to 'just let them them fail.'

And it's hard to imagine what failure (aside from the failure of a major sovereign, or of quasi-sovereigns like the GSEs) would be more disruptive than that of a major custody bank. These firms -- State Street, Bank of New York, JP Morgan -- are a big part of the central nervous system of the markets. If you thought Lehman was bad -- well, my advice in that case would be: buckle up, you're in for the scariest ride of your life.

Two things to note: the "siphoning of value from a bank charter" is a serious problem now that many of the biggest players were given bank charters as a result of the bailouts. And the other is that the "fail all the time" part of the equation for hedge funds and other investment vehicles is incredibly important. Social insurance in the form of Federal Reserve access isn't needed for this; this is why we have unemployment insurance. And I'd be more than happy to give 99 weeks of that to the employees of a failed Too Big To Fail firm if we can actually resolve it in the next crisis. The Volcker Rule gets us closer to that goal.

Mike Konczal is a fellow at the Roosevelt Institute.  You can follow him on twitter.

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Mike Konczal Gears Up for Conference Committee Madness

Jun 14, 2010

Roosevelt Fellow and ND20 contributor Mike Konczal, fresh from writing a paper on what to expect in finreg conference, gears up for the committee madness with with Timothy Carney on bloggingheads. It's hard to know just what is going on behind the committee's closed doors, and since no politician has to put his or her name to anything, Mike notes that "no one loses their job over something that happens in conference," which makes those closed doors wide open to lobbyists. But Mike and Tim take a stab at it anyway.

Mike has boiled the bill down, noting that one of the most important pieces is resolution authority -- dealing with failing "Too Big To Fail" banks in the future. But the problem is that "resolution authority sounds great on paper, but we're never on paper." It needs to be more credible in real life. Watch the conversation for his suggestions, predictions, and whether this bill will finally put an end to TBTF:

Roosevelt Fellow and ND20 contributor Mike Konczal, fresh from writing a paper on what to expect in finreg conference, gears up for the committee madness with with Timothy Carney on bloggingheads. It's hard to know just what is going on behind the committee's closed doors, and since no politician has to put his or her name to anything, Mike notes that "no one loses their job over something that happens in conference," which makes those closed doors wide open to lobbyists. But Mike and Tim take a stab at it anyway.

Mike has boiled the bill down, noting that one of the most important pieces is resolution authority -- dealing with failing "Too Big To Fail" banks in the future. But the problem is that "resolution authority sounds great on paper, but we're never on paper." It needs to be more credible in real life. Watch the conversation for his suggestions, predictions, and whether this bill will finally put an end to TBTF:


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Getting the Best of Both Bills: A Conference Committee Report

Jun 11, 2010Mike Konczal

I just wrote a report for the Roosevelt Institute outlining several important narratives to watch for in how the financial reform conference committee plays out in the next few weeks. It's titled Getting the Best of Both Bills (pdf, website), and it outlines the goal financial reformers should target.

I just wrote a report for the Roosevelt Institute outlining several important narratives to watch for in how the financial reform conference committee plays out in the next few weeks. It's titled Getting the Best of Both Bills (pdf, website), and it outlines the goal financial reformers should target. There's no reason reformers can't fight for the best parts of the Senate bill that are currently at risk and pick and choose the good items from, while ignoring the worst parts of, the House bill, like a financial reform buffet. Here's a summary graphic:

(Click through for full image.) There was a lot to choose from, and rather than give you dozens and dozens of examples I decided to focus on four that I thought were the closest to fantastic reform but were also in the most danger of being tossed overboard. Specifically, I frame it as how something that is in the baseline Senate bill (or something that is very close to being in there, namely the Cantwell and Merkley-Levin amendments) forms a solid foundation, and with an amendment or two brought over from the House it would be significantly better.

There is uncertainty in whether resolution authority will work in practice, and as such mechanisms that make it more credible are worth fighting for. Banks need to hold more and better capital, and there are amendments between the House and Senate that can deliver both. The over-the-counter derivatives market need to be brought into the disinfectant sunlight of clearinghouses and exchanges, and there is a clear path in the bill that gets the financial sector there. And an ongoing audit of the Federal Reserve using the mechanism from the Senate version gets us closer to an ultimate goal of transparency.

That's not to say there aren't more things in play. I am nervous about losing the ratings agency language, as well as having auto dealers be exempt from the consumer financial protection (which I discuss in the conclusion). But in the interest of clarity I focus on these elements that are particularly at risk.

Stay tuned here as conference committee proceeds to see how these financial reform narratives play out.

Mike Konczal is a fellow with the Roosevelt Institute and a blogger at rortybomb.wordpress.com.

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FinReg Update: Rob Johnson Exposes the Financial System's Plumbing

Jun 11, 2010

The Real News Network sat down with Roosevelt Senior Fellow Rob Johnson to discuss what he thinks of the FinReg bill currently in conference. Johnson supports the split between proprietary trading and commercial banking; after all, the Federal guarantees for are meant to "fortify the necessary plumbing" of traditional activities. He argues using that money to subsidize proprietary gambles encourages the addiction. The problem is, though, that these risky activities are now the "sump pumps being used to fill the hole in these balance sheets." It's a risk-taking Catch 22.

Overall, the bill has been watered down, Johnson notes, because "people depend upon the mother's milk of politics, called money, to get re-elected," and a lot of that money comes from the financial sector. But there are a few areas where he sees glimmers of hope: the CFPA, ratings agency reforms, and resolution authority are all steps in the right direction. Watch the full interview:

The Real News Network sat down with Roosevelt Senior Fellow Rob Johnson to discuss what he thinks of the FinReg bill currently in conference. Johnson supports the split between proprietary trading and commercial banking; after all, the Federal guarantees for are meant to "fortify the necessary plumbing" of traditional activities. He argues using that money to subsidize proprietary gambles encourages the addiction. The problem is, though, that these risky activities are now the "sump pumps being used to fill the hole in these balance sheets." It's a risk-taking Catch 22.

Overall, the bill has been watered down, Johnson notes, because "people depend upon the mother's milk of politics, called money, to get re-elected," and a lot of that money comes from the financial sector. But there are a few areas where he sees glimmers of hope: the CFPA, ratings agency reforms, and resolution authority are all steps in the right direction. Watch the full interview:


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Buying the Rules

Jun 11, 2010Robert Johnson

If you want to know how the final finreg bill will be devised, you will want to read the latest on the Open Secrets blog. From "Financial Reform Bill to Be Finalized by Members Who Benefit from Wall Street Cash":

Democratic and Republican leadership in both the House and Senate have named 43 individuals to a conference committee tasked with hammering out the final version of the Congress' financial regulatory reform legislation.

If you want to know how the final finreg bill will be devised, you will want to read the latest on the Open Secrets blog. From "Financial Reform Bill to Be Finalized by Members Who Benefit from Wall Street Cash":

Democratic and Republican leadership in both the House and Senate have named 43 individuals to a conference committee tasked with hammering out the final version of the Congress' financial regulatory reform legislation.

These members comprise just 8 percent of Congress, but the group has been far more likely to benefit from Wall Street's cash.

Out of every $100 that Wall Street interests have contributed to sitting members of Congress over the years, $16 has gone to a member of the financial reform conference committee, the Center for Responsive Politics has found.

Since 1989, all political action committees and individual employees of companies classified by the Center as part of the finance, insurance and real estate sector (FIRE) have contributed more than $695 million to the campaign committees and leadership PACs of current members of the 111th Congress.

More than $112 million from these interests has benefited the Democrats and Republicans named to the conference committee, which will reconcile differences between the Wall Street reform measures passed by the House and Senate.

Among specific interest groups within the FIRE sector, commercial banks were found to have given about $18 to a member of the conference committee out of every $100 donated to all current members of Congress.

Securities and investment interests have given $1 out of every $5 to a member of the conference committee, the Center for Responsive Politics found.

And people and political action committees associated with credit and finance companies have given nearly $1 out of every $4 donated to members of the conference committee.

Click here to read full text.

Rob Johnson is a Senior Fellow and the Director of the Project on Global Finance at the Roosevelt Institute.

 

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