Mike Konczal on Rachel Maddow: Goldman Calls the Shots

May 24, 2010

Our very own Mike Konczal visited the Rachel Maddow show, guest hosted by Chris Hayes, the day the Senate passed its version of FinReg. He explains the Volcker Rule, which says that you can't both run a hedge fund and a commercial bank, and how it never got a vote. Even though Senators Merkley and Levin tried to "sneak" this language in as an attachment to the amendment to exempt auto dealers from regulation, both were withdrawn when it came time. "Which goes to show you who really calls the shots, auto lenders versus Goldman Sachs," Mike notes.

After giving a quick overview himself, Chris turned to Mike for his insights:

Visit msnbc.com for breaking news, world news, and news about the economy

Our very own Mike Konczal visited the Rachel Maddow show, guest hosted by Chris Hayes, the day the Senate passed its version of FinReg. He explains how the Volcker Rule, which says that you can't both run a hedge fund and a commercial bank, never got a vote. Even though Senators Merkley and Levin tried to "sneak" this language in as an attachment to the amendment to exempt auto dealers from regulation, both were withdrawn when it came time. "Which goes to show you who really calls the shots, auto lenders versus Goldman Sachs," Mike notes.

After giving a quick overview, Chris turned to Mike for his insights:


Visit msnbc.com for breaking news, world news, and news about the economy

Read some of Mike's pieces on the topic:

"Why Merkley-Levin Is Necessary"

"Merkley-Levin Amendment Can’t Get a Vote"

"A Roadmap of the Shadow Banks, plus targeting the Volcker Rule"

"Towards a 21st Century Glass-Steagall"

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More ND20 FinReg Reactions: Bill Black and Henry Liu

May 21, 2010

question-mark-150 Two more New Deal 2.0 contributors have weighed in to help you navigate the debate on the Senate bill...

Bill Black:

question-mark-150 Two more New Deal 2.0 contributors have weighed in to help you navigate the debate on the Senate bill...

Bill Black:

The key things to look for in judging the seriousness and effectiveness of any reform effort are whether it addresses the primary drivers of our recurrent, intensifying crises. Those are:

1. Compensation: Executive and professional -- control frauds use these to (a) create the "Gresham's dynamic" that allows them to suborn "controls", officers and employees and turn them into fraud allies, and (b) to convert firm assets to their personal benefit while minimizing the risk of prosecution.

2. Accounting: Capital and liquidity ratios are meaningless without good accounting. We have weakened the real capital requirements because the industry used its contributions and its economist allies to convince Congress to extort FASB to gimmick the accounting rules so that banks need not recognize losses on bad assets prior to their sale. Until this action is reversed everything done on capital/liquidity is a sham.

3. Ending the regulatory black holes that were deliberately created: You can't leave any holes. Control frauds are dynamic. If you fix five of seven holes they will exploit the other two and your five successes will be hollow.

4. Regulators: By far the largest problem was with the anti-regulators that Bush appointed for the explicit reason that they opposed regulation. Desupervision was a far greater problem than deregulation. As long as the anti-regulatory Rubin wing of the Democratic Party governs economic and regulatory policy we will fail. So watch for whether Rubin, Summers, Geithner, and the anti-regulatory Bush leftovers running the Fed, OCC, and OTS remain in power. When they hire Mike Patriarca to be their top regulator you'll know that they actually want to succeed. Track how many criminal referrals of CEOs the regulatory agencies make.

5. Control fraud: While the Supreme Court decision on corporations being persons for First Amendment purposes is obscene, it has at all times been within Congress' power to restrict conflicts of interest. When the financial services committees bar their members from receiving any political contributions from the financial services industry and its shills (and bar anyone that took money from the industry from joining the committee) we'll know that serious reform has arrived.

So, proverbial bottom line: the Senate bill did, in fact, get stronger. And that tells us something very positive about what the Members' constituents are supporting, because the organized "special interest" effort to weaken the bill was intense. The fact that the strengthened bill is zero for six on dealing with the problems driving these crises shows that the original bill was so weak in all of its fundamentals that even with the marginal improvements it will not address successfully the reasons why we are suffering recurrent, intensifying crises.

Henry Liu:

Generally speaking, while regulatory reform is obviously needed in financial markets, one should recognize the limits of reform as always being a rearview mirror endeavor. That is the difference between reform and revolution. The former is an attempt to restore a broken past while the latter is an attempt to construct a utopian future.

Based on information available so far, regulatory reform seems to have been ensnared by obscure technical details -- the systemic consequence of which have not been fully established -- and headline-grabbing red herrings that divert attention from fundamental issues. Financial innovations are adopted in the market generally because they serve a particular positive function. Yet a sharp knife can cut many ways; in the hands of a surgeon it will be a useful instrument, while in the hands of criminals or even innocent children it can be a dangerous weapon. Therein lies the dilemma of financial regulation, a problem faced also by regulation on scientific research.

There is logic in not placing unrealistic hope in regulation as a regime of forbiddance. Rather, the application of the concept of fail-safe may be more useful than the nebulous quest to eliminate the too-big-to-fail syndrome. Fail-safe incorporates systemic features which in the event of failure respond in ways that will cause no harm or at least a minimum of harm or danger to other elements in the system. Fail-safe components in a system allow, but do not cause or invite, improper systemic behavior without a system-wide contagion of penalties. It seems that the current regulatory reform effort has been focused more on the concept of fail secure -- by seeking to prevent improper systemic behavior through the impediment of proper systemic behavior.

In a market system, incentive-driven good behavior is preferable to criminalization of bad behavior. Given the ingenuity of market participant creativity, one can expect that an incentive-driven fail-safe regime can be developed for financial markets. History has shown that fail-safe regimes have been devised to successfully manage nuclear arms control during the Cold War to prevent a nuclear war.

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ND20 FinReg Reactions: Elizabeth Warren, Mike Konczal, Marshall Auerback

May 21, 2010

question-mark-150Last night the Senate signed off on the financial regulation bill by a 59-39 vote. Next step: the bill will move to a conference committee where it will have to be reconciled with the House bill. The Senate bill is big (1,500 pages). It's unwieldy. It's full of compromises. Is it enough? What works?

question-mark-150Last night the Senate signed off on the financial regulation bill by a 59-39 vote. Next step: the bill will move to a conference committee where it will have to be reconciled with the House bill. The Senate bill is big (1,500 pages). It's unwieldy. It's full of compromises. Is it enough? What works? What doesn't? To help you navigate the murky waters of financial reform, we asked ND20 contributors to give us their take. ** Stay tuned for more reactions...

Elizabeth Warren:

"No bill that deals with big issues is ever perfect, but the Senate's Wall Street reform package will go a long way toward preventing the kinds of abusive practices that brought our economy to its knees. Getting to this point was a tough slog, and President Obama and Chairman Dodd deserve a lot of credit for producing a strong bill."

Mike Konczal:

The best point of comparison for the Senate Bill is the House Bill, HR 4173, that passed last December. Resolution authority is a little bit weaker than what reformers were able to achieve in the House. There is no equivalent of Miller-Moore's amendment for unsecured creditors in a resolution. A lack of a leverage cap also means that there is no fencing on what the

regulators can do with their discretion. Collin's amendment on capital ratios is better than what the House got, since it really focuses on high quality capital.

The Senate's consumer protection bureau versus the House's CFPA is a trade off; the House has a new agency, but there are a lot of carve outs for auto dealers. The Senate version is housed at the Fed and the risk council has a veto over its actions, but is a pretty pure version of what reformers wanted given that.

Derivatives in the Senate is still up in the air. Section 716 would be major change, akin to a 21st Century Glass-Steagall, however it will come under massive lobbying attacks in conference.

Given what they wanted this bill to do in regards to Too Big To Fail -- give regulators more legal powers in a crisis, and expand prudential regulatory powers -- it's fairly good. But will that be enough?

Marshall Auerback:

On the Volcker Rule (which restricts banks from making certain kinds of speculations) there are so many allowed exceptions that the rule is meaningless. There are two things that could be done right away which would be far more effective than anything passed by Congress. On the issue of securitization, the standard securitization structure takes the form of a trust or what is called a "special purpose entity". For all intents and purposes these are the equivalent of an investment company. Investment companies are normally subject to registration under the 1940 Investment Companies Act. However, the SEC has ruled (3a-7) that a special purpose entity that issues fixed-income securities or other securities which entitle their holders to receive payments that depend primarily on the cash flow from eligible assets will not be deemed to be an investment company and is thus exempt from registration. The 3a-7 exemption also provides that the securities sold by the securitized structure be rated, at the time of initial sale, in one of the four highest categories assigned long-term debt by at least one nationally recognized statistical rating organization. But such fixed-income securities may be sold to qualified institutional buyers as defined in rule 144A. This means that the securities issued by an unregistered entity do not have to be registered or performance reported, with all due diligence undertaken by a nationally recognized rating organization.

Also, since we're not yet ready to get rid of credit default swaps, let's take Wall Street at its collective word. It claims that the CDSs are in effect a kind of insurance to hedge against the underlying reference securities. So let's get rid of the rule which exempts them from state insurance regulation. Regulate them like insurance entities and force the dealers to come up with a full method of provisioning in the event that someone has to collect on the 'insurance'. Of course, this is likely to make the credit default swaps uneconomic and unprofitable, but it's better than the alternative of using trillions of dollars of government funds to underwrite these horrible financial Frankenstein type products.

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Merkley for Main Street

May 20, 2010

Senator Jeff Merkley took to the Senate floor on Tuesday, complete with fist pounding, to air his frustration over the blockage of the Merkley-Levin amendment that would fortify the Volcker Rule. What he wanted to know: "Why is Wall Street winning and Main Street losing tonight in the US senate?" Watch his passionate speech:

Senator Jeff Merkley took to the Senate floor on Tuesday, complete with fist pounding, to air his frustration over the blockage of the Merkley-Levin amendment that would fortify the Volcker Rule. The rule restricts banks that have access to FDIC insurance from speculative trading. What he wanted to know: "Why is Wall Street winning and Main Street losing tonight in the US senate?" Watch his passionate speech:


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On Unemployment, Wall Street, and a 'Nuevo Deal'

May 20, 2010Bryce Covert

lealan-jones-150LeAlan Jones is running for US Senate in Illinois on the Green Party ticket to take the seat vacated by President Obama.

lealan-jones-150LeAlan Jones is running for US Senate in Illinois on the Green Party ticket to take the seat vacated by President Obama. Jones grew up in public housing projects in the South Side of Chicago, and at the age of 13 made an award-winning radio documentary called "Ghetto Life 101" about life in his neighborhood. He later trained to be an investment banker at JP Morgan, but decided instead to devote himself to fatherhood and now works as a football coach at Chicago's Simeon High School. I sat down with Jones to discuss unemployment, the culture of Wall Street, and reviving the New Deal.

BC: Why did you choose the Green Party? What does it offer that the Democrats or Republicans can't?

LJ: It's a question of common sense. If we were in the streets and somebody had their hand in your pocket and somebody else had their hand in your pocket, how could you accept either? Traditionally African Americans have voted Democratically, and I think blindly, because aside from all the politics that have come out of the Democratic party about helping people, I have to ask myself on a daily basis what has been the productivity from all these politics, from all the speeches and all the supported interests. What has actually been the productivity and the sustainability of people that have supported the Democratic party? And on the other side, we look at the Republican party, they have been a party that has existed on fringe issues like abortion, militarism, and at the very same time they've delivered very little to their base in terms of real jobs, real wages and real opportunities. So being a conscious person and being a fair and balanced person, there is no way I could see myself, as my grandmother would say, fattening flies for frogs. That's what I tend to believe, that supporting Democrats or Republicans, it's an act of futility, not an act of faith or real substance. I'd rather be ahead of the curve than behind the curve and I think that green politics is the way of now, not the way of tomorrow.

We're really just trying to start off where the New Deal left. And we believe that being a third party candidate tends to allow us to do that to a greater extent than the party that Mr. Roosevelt started this discussion in. And that's all we seek to do, is to bring forth the "Nuevo Deal." They say all tides rise ships, and I think that's what this movement is going to be about, is that we're trying to bring forth a discussion that America needs, the world needs, and we believe that we're the party that's going to do that. And I think that going forward the two major parties can't deliver on their solutions because they're too mired in the problems.

BC: You and Obama both come from Chicago but have very different backgrounds. What are the similarities and differences between the two of you? What's your view of what he's doing?

LJ: Barack Obama is a tremendous man. And I will not say anything to disparage him on a personal level. But take into consideration that 80% of political contributions come from corporations or individuals that have specific interests that they want to see out of government and those individuals who have contributed, whether it was Bush or Obama, have undue influence on legislation. It wouldn't be a criticism of Barack Obama, it would be a criticism the system and of a game he's had to play to get to where he's gotten. And the most fundamental difference between me and President Obama would be the fact that I am taking a belief that my political course is about the genuine interest of allowing people to be able to optimize their evolution within a society. Without having infringement from entities or institutions that would like to otherwise control them.

And it's not just to speak to Obama. It's to speak to the new realities in American politics where the corporations are in competition against the citizen. You'll see that with any reform that has tangible and material influence on middle income America being volleyed by special interests and politics and media. So there's this cycle between the corporate interest, the media, and the citizen, and out of that ball being juggled the citizen usually falls first.

BC: What solutions do you think will be most effective in solving the jobs crisis?

LJ: I think for one that the American economy has always been driven by the American people. When we look at the great inventors, when we look at the great products that have come, they've primarily come from people who have had ideas but may not have had the equity. And those two things came together and created the American economy. What seems to be happening now is people still have ideas but they're limited in terms of the resources to drive this American economy forward. So that's why we have a complete program -- we want to work on cooperatives, co-ops, credit unions and use those as mediums to be able to get the capital resources to people in order to drive job growth from the bottom up as opposed to the top down.

BC: Do you see this capital coming mostly from the private sector in community banks or venture capital, or do you think the government has a role to play in helping fund ideas?

LJ: I think that there has to be a multi-dimensional approach to it because you don't want to subsidize, you can't subsidize prosperity. It goes back to the old Bible proverb, "If you give a man a fish he eats for a day, if you teach a man how to fish he'll eat for the rest of his life." I think that the African American community, and not just the African American community, middle-income communities, have been impacted by having been given too many fish. And now in these economic times, if you did give people a fishing rod they wouldn't know what to do with it.

BC: Do we need different or extra steps to bridge the race gap and fix the high levels of unemployment and poverty for African American people?

LJ: I think that the African American community has a unique set of circumstances which has exacerbated economic figures for unemployment. Do special concessions need to be made? Maybe in certain cases, but I think if the right social investments in terms of education, housing and sustainable things like that were done effectively, the African American community would be no different than any other community in terms of being able to get a return on those types of investments. A large part of the African American economy is not an economy that's registered. You have a lot of people that are service-oriented, that are barbershop owners, that are mechanics, that have skills and trades that are in the labor market but are not filing 1099s for it because a lot of their skills are cash and carry. The other thing that affects us is that many of these people that are entrepreneurs don't get a chance to expand their businesses because they're cash and carry operations and because they have an aversion to dealing within commerce. So the thing is to get those individuals that have these great ideas, that have these great small business models, to think outside of just where they're at. And getting them integrated into a system which allows their ideas to be expanded through reasonable financial investment and reasonable talent investment. Once of the most remarkable things about the African American community is that it's a very talented community. We wouldn't have gotten to this point if we were not. The thing is that we tend to isolate ourselves when we come into business as opposed to integrating what our business concepts could be and how those things can be expanded. Once of the things that does not happen in the African American business is you rarely have mergers and acquisitions. Usually their businesses have been around for one generation and don't get to transcend out of that generation because we look at our entities as being very personal things as opposed to things that can be enhanced and optimized by doing very basic things and creating synergies that can create efficiencies that can create jobs that can create sustainability.

BC: What is your view of financial reform? Will it help unemployed and/or middle class people?

LJ: Financial reform is huge. The financial institutions have as a result of deregulation and free market principles really deteriorated the quality of life for people in Middle America. And the profits are earned by individuals but the losses are shared. So financial reform is one aspect of it. And that is going to regulate, but I think there still has to be an expansion of growth. That's the defining line: how do we regulate with the understanding that we have to generate growth. And that's why our cooperatives and working with the community banks and credit unions are going to be able to expand that capital into Middle America, as well as, as we said, financial regulation has to happen. And we think that's where we're going to create the jobs and the opportunities that are going to get people back to viability economically.

BC: How do you view the financial industry, having trained to work at JP Morgan?

LJ: As much as I'm a Green, I do understand there are aspects of the financial industry that have expanded the American middle class. But it expands the American middle class at the very same time that it undermines it. It's an oxymoron. And that's why I think that as much as we want to regulate the industry we also have to create viable alternatives where we can have capital appreciation and capital allocation in industries and institutions that are going to produce and service the American people. It does leave a bad taste in my mouth, but I do understand that some of the functions of Wall Street are actually beneficial to middle America. And that to demagogue the entire industry won't help America gain fiscal responsibility. But there have to be regulations, because we do recognize that deregulation has a tremendous impact on Middle America.

BC: What is the culture like in these firms?

LJ: You are at the top of the food chain. So it's basically being a lion or being a sheep. And these are definitely men that think of themselves as lions in this economy. But at the very same time, even lions have to live in equilibrium within the environment they're in. And these lions on Wall Street have been overfeeding. And now they're fat, and now it's time for those sheep to live.

I've compared them to drug dealers. I don't think there's any difference between Wall Street investors and young men in urban communities that have participated in drug distribution. The only difference between the two of them is their commodities. And that's why I think that in terms of regulation some of these men need to go to jail if it is found that they have willfully and consciously conspired to undermine investors. It's the criminalization of it. Young men in the cities selling drugs won't tell you they're about capital allocation but they will tell you they're trying to feed their families. And yet they're doing it at the expense of undermining their community and they understand that risk and some of them are willing to take it. Because some of them actually do good with it. And they accept that society has a taboo against what they do. I would just hope that society begins to have the same taboo against the men who wear suits and ties instead of baggy jeans and gym shoes.

BC: Part of your platform is a green economy and clean energy. What do you envision as viable solutions?

LJ: I saw the solution this week in the middle of the state of Illinois where I had the opportunity to visit an organic farmer who has a ten acre field, who produces great vegetables, and also driving back on that expressway and seeing a wind farm. And knowing that we're not talking about anything revolutionary here. More than talking about politics, it's about a philosophy. It's a smarter way for man to live, being in a green world as opposed to a world where you profit at the expense of the environment. We only have one world and we can't get it back when this one is done. So I think that it's important that we take into consideration that it's not about us, it's about what we leave behind. And right now, if we look at American politics we're going to leave behind more debt, we're going to leave behind more pollution when we look at places like the Gulf of Mexico where we've had one of the most prolific ecological disasters in American history at the expense of propping up and old economy that we don't' have to deal with. We're dealing with an economy that's a lot smarter, we're dealing with a people that's a lot smarter, and the only thing that's holding them back are the politics and interests that profit off of this old model.

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The Attack on Collin's Leverage Amendment by Banks and Treasury

May 20, 2010Mike Konczal

There is little time left in financial reform. Little changes made in the next few days will have major consequences for developing a 21st century financial sector that works to grow, nurture and build the real economy, that creates a broad-based prosperity and that will shine as an example to the developing world on how to have a financial sector that works.

There is little time left in financial reform. Little changes made in the next few days will have major consequences for developing a 21st century financial sector that works to grow, nurture and build the real economy, that creates a broad-based prosperity and that will shine as an example to the developing world on how to have a financial sector that works.

Pressure from Treasury and the Federal Reserve right now could make all the difference in getting the derivatives market into the sunlight, having a resolution authority that is credible and reduces risks, silo-ing business lines so they can innovate, experiment and, yes, fail without destroying the entire economy, making banks less likely to collapse by getting them to hold more and better capital, and changing the consumer-financial sector relationship to something different than the "rip-the-face-off" exploitation that has characterized it of late.

So what is Treasury and the Federal Reserve spending the last days doing? Trying to shred amendments that would require banks to be less leveraged.

Collins Amendment

Kevin Drum mentioned a week ago how excited he was for the Collins amendment, about getting more serious leverage requirements in the bill. So I imagine it was only a matter of time until the Wall Street Journal reported that Treasury and the Federal Reserve are fighting against this amendment tooth and nail (h/t wonkbook, my bold):

Officials from the Treasury Department, Federal Reserve and Wall Street are working to kill an amendment to the Senate's financial regulations bill that was adopted unanimously last week and that could force big U.S. banks to hold billions of dollars in additional capital...

The amendment, written by Sen. Susan Collins (R,. Maine) with backing from Federal Deposit Insurance Corp. Chairman Sheila Bair, would force banks with more than $250 billion in assets to meet higher capital requirements...

For example, Sen. Collins's five-page amendment would not allow banks to count "trust-preferred securities" as part of their Tier 1 capital ratios, according to a summary provided by her office. Trust-preferred securities are a type of subordinated debt held by many banks, particularly several large banks....

European regulators are trying to push new rules that would prohibit banks from including holdings in trust-preferred securities in their capital ratios, but several U.S. officials are trying to block this. Sen. Collins's amendment could factor into these discussions because it might lock U.S. regulators into specific policies that are currently under negotiation.

An interesting bold we'll come back to at the end. The amendment attracted little attention when it was passed unanimously last week, but it has sent government officials and bankers scurrying in recent days as they try to have it stripped out. Here's Ezra Klein's take, as well as his explaination of leverage requirements.

What it Does

We talked about this amendment briefly here, and here is the text. So what does this amendment do?

- First off, this amendment makes it clear that bank holding companies follow capital rules that are at least as tough as those imposed on banks. This is the essence of the shadow banking problem: if you want to act like a bank you have to be regulated like a bank.

- This amendment also makes clear that if you are engaged in riskier activities than a bank, you must hold more capital. Examples it gives of risky activities it mentions are "(i) significant volumes of activity in derivatives, securitized products purchased and sold, financial guarantees purchased and sold, securities borrowing and lending, and repurchase agreements and reverse repurchase agreements." You know, the things that caused the last crisis and could cause it all over again.

- This amendment also implies, in conjunction with the last paragraph, that banks will need to hold more capital when it comes to scope of businesses. The more high-risk business lines that a bank has, including ones that we can't even think of yet, the more capital it has to hold. It tells the regulators that, when they aren't certain, to require more capital.

- It also establishes "(A) the minimum ratios of tier 1 capital to average total assets, as established by the appropriate Federal banking agencies to apply to insured depository institutions under the prompt corrective action regulations...regardless of total consolidated asset size or foreign financial exposure."

No more capital loopholes! No more playing BS games where a firm creates a trust and does financial engineering alchemy to pretend that debt is equity. Serious, quality capital is required for our largest and most systemically risky banks.

This is probably the real fight. "Yes we'll hold more capital as long as massive amount of risky debt turned into 'safe' equity through the shenanigans of our financial engineers can count as that capital." Do we need to do that all over again?

Enough people think these points are implied in Section II of the bill, but the ability to have discretion on this point is something the regulators are fighting tooth and nail over. And here's something fascinating: for all the talk about how Basel III and "international agreements" will fix our bank capital problems, the US is fighting this over there too. Check out the bold above; having serious quality capital for our banks is a major disagreement between the US and the Europeans, with the US wanting weaker requirements, and if their hands are tied here then they'll be tied over there where they could possibly win this.

Ultimately, here's the big question: is the way we measured leverage and the amount of capital we asked banks to hold in 2007, 1 year before the massive crisis that has devastated our real economy, good enough? Or do we need to get serious about increasing it?

The banks are fighting for the 2007 level. What are you fighting for?

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

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Merkley-Levin Amendment Can't Get a Vote

May 19, 2010Mike Konczal

Is this a joke? There's a broad effort, lead by Shelby, to block a discussion and vote on the Merkley-Levin amendment. Even with a 60 vote requirement and some democratic senators missing (with "one hand tied behind our backs" as Merkley said on the floor), it is still being blocked. David Dayen has the best roundup of the financial massacre from last night.

Is this a joke? There's a broad effort, lead by Shelby, to block a discussion and vote on the Merkley-Levin amendment. Even with a 60 vote requirement and some democratic senators missing (with "one hand tied behind our backs" as Merkley said on the floor), it is still being blocked. David Dayen has the best roundup of the financial massacre from last night. If you get a chance, watch video of Merkley and Levin fighting for their amendment last night. They were on fire.

Between the last minute changes, the way the bill has morphed into an endless stream of studies to be ignored at a later date, the dropping of any of the strong progressive resolution mechanisms in the House and the blocking of votes and discussion on Dorgan, Merkley-Levin and Cantwell's amendments, this has really been a massacre of what was originally a fairly decent bill. Both Reid and the President need to step in before this situation becomes even worse.

Dorgan slipped in his amendment by attaching it to another amendment, which nobody seemed to have caught. The Senate voted immediately to not have a discussion on the Dorgan amendment, thus having to avoid any responsibility for it.

As we discussed before, members of the “Chartered Financial Analyst”, or CFA, community were polled about the Volcker Rule. CFA's are considered extremely well-qualified within the financial sector, and here's how they voted:

Even reforms supported by a majority of polled financial CFA's can't get a discussion on the Senate floor. But having to deal with it daily, CFA's are likely to feel how concentrated, politically powerful and abusive the current US financial system has grown.

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

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Collectively Bargaining for a Better World

May 19, 2010

line-of-american-peopleAccording to Stephen Lerner, it's time for union members to seize the day.

line-of-american-peopleAccording to Stephen Lerner, it's time for union members to seize the day.

"Now is the moment to change collective bargaining practices so you can take a larger role in social movements," writes Stephen Lerner in his article An Injury To All: Going Beyond Collective Bargaining as We Have Known It (full text below as PDF). Lerner wants to shake up the old models of unionization and build upon on the potential of the current economic climate. "This is the time to offer a moral voice for those devastated by the economic crisis," urges Lerner, "and to have the courage and passion to liberate ourselves from the straitjacket of limited expectations."

In this must-read piece, Lerner reminds us that "throughout history, labor's greatest growth and most significant impact has come when labor is part of a broader social movement." When unions began growing in 1935, they pressed for government regulations and programs that ensured the social safety net for themselves and other Americans. He sees a parallel in this today -- a chance for another organized, collective movement toward better business practices, based on the power of workers.

By banding with other unions and groups, Lerner sees the opportunity to transform industries like food processing, banking, trucking and health care. The finance sector, in particular, could benefit from grassroots opposition and reform. "Banks represent the most extreme example of the unsustainable disparity between those on top and the rest of us." By linking deregulation, abuse of workers and consumers, and the economic crash, unions can capitalize (no pun intended) on the current anger and work for "substantive" fixes to the current system.

This sea change in the way unions do business is not just necessary for the general public; it's necessary for the relevance of unions themselves. "If we don't seize the opportunity of the current economic crisis to chart a radically different course -- committing ourselves and our movement to organizing for transformative change -- we will sink into a deserved abyss of irrelevance." So it's time to get to work - the work of social change.

Read full text of An Injury to All as PDF.

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Traffic Snarls on K Street as Protesters Demand Reform

May 18, 2010Bryce Covert

raised-fist-150For the last year, the anger against the financial industry has been boiling, spilling over into protests in Chicago and on

raised-fist-150For the last year, the anger against the financial industry has been boiling, spilling over into protests in Chicago and on Wall Street. It continues to drive people to the streets, this time in Washington DC at a protest yesterday on K Street. K is home to lobbyists for big banks and other large corporations, and several thousand people showed up to highlight the influence of lobbyists in the financial reform debate and demand accountability for Wall Street. Protesters sat in the street, disrupting traffic at the intersection of 14th and K, while holding aloft a puppet of a lobbyist pulling the strings of a Congress member. The group later marched to Bank of America with a letter demanding changes to the bank's business practices.

The connection between the economic recession, unemployment, and the need for financial reform was on everyone's mind. "Let the big banks know that it is not OK to spend millions of dollars for legislation that protects the banks and forgets the people," one demonstrator said, recounting her effort to save her home from foreclosure.

"Wall Street and corporate special interests are the single biggest obstacle to the reforms working families urgently need -- from good jobs to Wall Street reform," said AFL-CIO Secretary Treasurer Liz Shuler. "The big Wall Street banks brought on the economic collapse that destroyed millions of jobs, they took billions in taxpayer bailouts and then they went right back to fighting meaningful reform."

The series of protests -- called "Showdown in America" -- are intended to stand in contrast to the outrage of the Tea Partiers, focusing their anger against the corporations that caused the meltdown instead of just the government. "Wall Street has taken over our economy. They are taking our jobs. We are losing our homes," said a demonstrator who lost her job last year after her manufacturing plant was purchased by a private equity firm. "We need to reclaim our rights."

"More and more Americans are making the connection between a broken banking system and a broken democracy," said Reverend Dr. Eugene Barnes, President of National People's Action. "[Banks and lobbyists] have hijacked our democracy, and we are here to take it back."

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Why Merkley-Levin Is Necessary

May 18, 2010Mike Konczal

A funny thing happened in June of 2007. Back when times were better, Bear Sterns had previously created two hedge funds, one in 2004 and one in August of 2006, named "Bear Stearns High-Grade Structured Credit Fund" and "Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund."

A funny thing happened in June of 2007. Back when times were better, Bear Sterns had previously created two hedge funds, one in 2004 and one in August of 2006, named "Bear Stearns High-Grade Structured Credit Fund" and "Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund."

As the New York Times explained it in June 2007, "...41 months of positive returns of about 1 percent to 1.5 percent a month. But investors were clamoring for even higher yields, which would require more aggressive bets on riskier mortgage-related securities and significantly higher levels of borrowed money, or leverage, to bolster returns."

So Bear Sterns put up $40 million dollars of its own money into these two firms between 2004 and 2006, and in June 2007, Bear had to bail out these two funds with a line of credit worth $3.2 billion dollars. A $40 million dollar upfront bet sponsoring a hedge fund ended up putting them on the hook for billions of dollars in losses. They got a nice trickle of returns for loading up on the tail risk, a great strategy that works until it doesn't.

And that's fine that they did that. The question is do we need banking firms that have access to the discount window, banking firms that receive FDIC insurance, the commercial banking firms that handle deposits and form the backbone of our lending and payments systems, to be making these bets? Should firms that are protected under the safety umbrella of commercial banking be making proprietary bets, bets that can go lopsided quickly and with devastating losses?

The Volcker Rule works under the assumption that they shouldn't. That these activities are great for hedge funds to go gamble with, but if you are a bank you need to be regulated like a bank, and part of that involves not running hedge funds that puts depositors and taxpayers at risk.

More than the Dodd Bill

Given that section 619 of the Dodd Bill makes provisions for Volcker Rule, why is the Merkley-Levin Amendment (SA 3931) necessary?

Section 619 right involves the Council of regulators, which includes (and will likely be overly influenced by) the Federal Reserve, Treasury and the OCC, would come together and do a study, and then decide what if any restrictions they want to impose. The bank regulators would then go about implementing them.

The problem is that the Council, the way the Dodd Bill is written, has very broad authority to determine what type of regulations they want to impose and what kinds of exemptions they want to give. It allows the Council can rewrite the rules as they see fit. The Section 619 language also doesn't have conflict-of-interest language at all.

A Floor, Not a Ceiling

Economics of Contempt has a critique that says that this amendment tries too hard, and that in defining what proprietary trading is it creates new loopholes that industry can drive through, and that regulators on the ground will have better knowledge of the specific ins and outs of what does and does not constitute proprietary trading. As EoC concludes: "People often ask why I say that complicated financial regulations can't be written at the statutory level. The reason, sorry to say — which Merkley-Levin demonstrates quite well — is that Congress sucks at writing complicated financial regulations."

The disagreement is over what constitutes a "permitted activity", what is allowed, and whether or not it is so broad regulators on the ground would be able to do better. I think Merkley-Levin is way ahead of this critique, and what EoC doesn't mention is that the bill provides for this. In case they excluded too much from permitted activities at the statutory level, regulators can add some provided it meets a certain threshold (p. 10):

‘‘(d) PERMITTED ACTIVITIES...(I) Such other activity as the appropriate Federal banking agencies, in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission, jointly determine through regulation, as provided for in subsection (c), would promote and protect the safety and soundness of the banking entity or nonbank financial company and the financial stability of the United States.

If there are activities that could be justified in promoting safety and soundness, regulators can include them into the bucket of permitted activities. Note that this is a fairly high bar to hurdle, so regulators have to make a fairly good excuse to go for it. Now let's say that an element in the bucket of permitted activities is good in theory, but regulators want to be able to beef up requirements based on that element. In the amendment, regulators can increase their supervision of a permitted activity (p. 11-12):

(3) CAPITAL AND QUANTITATIVE LIMITATIONS.—The Board, in consultation with the Securities and Exchange Commission and the Commodity Futures Trading Commission, shall adopt rules imposing additional capital requirements and quanitative limitations regarding the activities permitted under this section if the Board determines that additional capital and quantitative limitations are appropriate to protect the safety and soundness of the banking entities and nonbank financial companies engaged in such activities.

Now that's in one direction. What if EoC's critique is correct, and that financial firms will be able to abuse a permitted activity in a manner intended to evade the requirements of the amendment? Well, the amendment allows the regulators to go after that:

(2) TERMINATION OF ACTIVITIES OR INVESTMENT.—Notwithstanding any other provision of law, whenever an appropriate Federal banking agency or the Securities and Exchange Commission or Commodity Futures Trading Commission, as appropriate, has reasonable cause to believe that a banking entity or nonbank financial company under the respective agency’s jurisdiction has made an investment or engaged in an activity in a manner that is intended to evade the requirements of this section (including through an abuse of any permitted activity), the appropriate Federal banking agency or the Securities and Exchange Commission or Commodity Futures Trading Commission, as appropriate, shall order, after due notice and opportunity for hearing, the banking entity or nonbank financial company to terminate the activity and, as relevant, dispose of the investment; provided that nothing in this subparagraph shall be construed to limit the inherent authority of any Federal agency or state regulatory authority to further restrict any investments or activities under otherwise applicable provisions of law.

Isn't that clever? "Regulators, you have to follow these rules, but if you want to make them stricter by all means go ahead."

Again, it's a floor, not a ceiling. This is a good solution for how to use the best that regulators can bring to the table without assuming they are perfect. I brought it up when talking about state consumer pre-emption. If you have two potential regulations, the smartest game theory move is to follow the strategy where you always pick the stricter one. That's what having a firm baseline written down, and then regulators with the ability to increase it as they see fit.

UPDATE: Yglesias posted a response to EoC's critique sent from Merkley's office, that is also worth checking out as you make up your mind on this matter.

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

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