UPDATE: Ted Kaufman and Sherrod Brown release an important bill that would set leverage and size caps on the big banks.
The headline story in the Washington Post today states that Republicans, worried about being seen as too close to the big banks, especially in the wake of the Goldman Sachs scandal, are returning to the bargaining table and supportive of a bipartisan deal. This was how Democrats hoped this would turn out, that they could play a game of chicken and win, and that appears to be the case right now.
However, there’s nothing specific about any deal being discussed, just the notion that there is one in the works. So now it’s time to assess the nuts and bolts of the policy. Noam Scheiber is correct to say that the derivatives piece has actually strengthened as the bill has moved through the legislative process, first with the Dodd placeholder and then with Blanche Lincoln’s tougher bill. However, Scheiber neglects to mention that the sharp move on derivatives could be motivating Republicans to get back to negotiations to weaken it. In fact, everybody seems to be missing the big story that Banking Committee Republican Judd Gregg “basically has an agreement” on derivatives language with Jack Reed. If it brings his vote, the Gregg-Reed agreement would supersede Lincoln’s bill, making discussion on it fairly moot. And if that happens across the board, this “breakthrough” on Wall Street reform will be anything but.
In fact, the real action on this bill, what will make it passable or useless, is not coming from Republicans but from the left:
Finally, there’s the argument, which top Wall Street executives have conveyed directly to senior White House officials in recent days, that the administration faces almost as much peril as Wall Street does if it brings a partisan bill to the Senate floor. Should that happen, the argument goes, Senate liberals like Maria Cantwell and Byron Dorgan could triumph on amendments that would move the bill well to the left of where even the administration wants it. (In a telephone interview Monday afternoon, Dorgan allowed that he was “thinking through how to approach the too-big-to-fail piece” and that he might offer an amendment, though he was amused by the idea that it would represent a radical leftward thrust.)
This is written in the typical left=hippies style so prevalent in Washington, but it’s perfectly legitimate to ask whether the Dodd bill does anything to rein in the financial sector and prevent the next financial crisis. Whether it’s Cantwell’s Glass-Steagall act or Dorgan and Sanders pushing TBTF legislation or Sherrod Brown and Ted Kaufman really taking on bank size, the facts are that some Democrats actually want this policy to work rather than just wanting a policy.
In the last year and a half, the largest financial institutions have only grown bigger, mainly as a result of government-brokered mergers. They now enjoy borrowing at significantly lower rates than their smaller competitors, a result of the bond markets’ implicit assumption that the giant banks are “too big to fail.”
In the sweeping legislation before the Senate, there is no attempt to break up big banks as a means of creating a less risky financial system. Treasury Department and Federal Reserve officials have rejected calls for doing so, saying bank size alone is not the most important threat [...]
“By splitting up these megabanks, we by definition will make them smaller, safer and more manageable,” Senator Edward E. Kaufman Jr., Democrat of Delaware, said in a speech Tuesday.
The president of the Federal Reserve Bank of Dallas, Richard W. Fisher, broke ranks with most of his colleagues within the central bank last week, declaring, “The disagreeable but sound thing to do regarding institutions that are too big to fail is to dismantle them over time into institutions that can be prudently managed and regulated across borders.”
This article even includes Republicans and Alan Greenspan (!) making the argument about breaking up the megabanks. Ben Bernanke, while favoring limits on excessive risk-taking over size, conceded at yesterday’s Lehman Brothers hearing that allowing regulators to break up the big banks would be “constructive.” Sherrod Brown and Kaufman have legislation they plan to introduce later today that would cap bank size at 3 or 4% of GDP. We now have six banks – Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley – which hold assets totaling 63% of GDP. That’s simply dangerous, not only because of the amounts of money involved, but because of the political impact of letting firms get that big.
We’re finally seeing the intellectual argument needed to ensure that Wall Street reform is worthy of the name. If Republicans want to obstruct something, it might as well be something that could work.
UPDATE: This is the mentality that is absolutely killing Democrats right now:
Democrats should drop areas of disagreement with Republicans from their Wall Street reform bill in order to move forward, Sen. Tom Carper (D-Del.) suggested Wednesday.
Carper, a member of the Senate Finance Committee, said that he thinks a bipartisan deal can be reached on financial regulatory reform legislation, and argued it should be done by dropping the most contentious areas of the bill.
“At the end of the day…we agree on about 80 percent of the stuff here,” Carper said during an appearance on Fox News. “I think what we need to do is focus on the 80 percent on which we agree and set aside the 20 percent for another day.”
Hard to believe that Ted Kaufman and Tom Carper come from the same state, but of course, Kaufman isn’t running for re-election, while Carper is a wholly owned entity of the credit card and banking industry in Delaware.




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Democrats are going to fall for Lucy taking the football away again in the name of goddamn, fucking bipartisanship. Lucy always assured Charlie Brown that this time was going to be different.
Haven’t Democrats ever watched the Republicans? When Republicans are in power the only time they want bipartisanship is when they are doing something heinous like reducing Social Security or launching an unpopular and unnecessary war. When it came to their only popular position, tax cuts, they didn’t want a Democrat within 10 miles of the bill.
was actually snarking to oldnslow sunday night that we hadn’t heard from Tom Carper yet – work it Tom, uh huh, yeah, work that corner !
George – many of us feel strongly that nobody is ‘falling’ for anything here – that yummy bi partisan ploy is their idea of cover
Where is Mr. Hopey McChange in all this? Shouldn’t he be leading the charge?
Likewise, it is (as usual) unsurprising that the real meat of the reform effort is “coming from the left” (Cantwell is not a member of the left, she is the Senator from Corporate Technology) as it seems that meaningful reform and progress always comes from the left.
Bipartisanship is only for those in the loophole.
Gotta love ol’ Tom. Bipartisan means
.
What a shameless asshole.
doncha know !?! why, he’s going down to confront Wall Street, tomorrow !
heard tell he’s in favor of the Public Auction
thinking of doing a photo essay a la HuffPo about Wall Street escorts. Move over Tiger, Jesse . . .
Well, if the Ds can’t get it watered down enough to please their campaign contributors and get Dodd a good lobby job, then there’s always Plan C: O vetoes it because it’s not “strict” enough.
We have to remember things like this whenever we have the urge to stick up for the Democrats because Republicans act like total assholes– the Democrats are even worse because they’re like slippery eels.
Except that eels are vertibrates.
1/2 the Republicans in the comments in the Wall Street Journal are on OUR side. They want MORE regulation and MORE effective and aggressive enforcement. Take the derivatives away from the TBTF banks and put them on an exchange.
Too bad about the Gregg-Reed compromise language on derivatives. Wish someone would at least position to get rid of the default swaps, like the Europeans. Maybe Lincoln’s bill does that.
If any of these corporate whores currently being paid by us to be Senators in our Congress were seriously interested in fixing the financial mess, they’d start by insisting that someone such as Bill Black replace Timmy ‘the fucking weazel’ Geithner.
why not do a side bar on DC ?
O’Rhama has already cut a deal with Big Finance which makes the Fed the regulator, and bialout king.
All the rest is just a show for us rubes.
Nothing to see here, nothing at all, move along please, move along.
“saying bank size alone is not the most important threat.”
Thia is the same argument Paul Krugman made recently, but who the hell has said bank size ALONE is the answer? That bank size by itself is not the solution is a poor excuse for not addressing bank size at all.
Yup, and their buddies in the MSM (especially television) are right in there with ‘em. It’s all about the horserace for votes, and approximately zilch on actual policy points. Idiots.
I’ve seen this movie before. Sen. Dorgan will introduce legislation that the blue dogs will consider too far left (just like drug re-importation) and it will be voted down.
The White House does not intend, nor did it ever intend, to regulate the fucking thieves on Wall Street in any meaningful way. We can all grab our ankles and smile real pretty one more time.
Under what set of rules can the WH force thru legislation?
premise of the WaPo article was baloney.
Dem’s were the ones who cut off negotiations back a few weeks ago and could have restarted at them at any time. So, the action was with Dems. They said they were going to force it, GOP said “No way.” stood firm and Dem’s had to cave since they couldn’t get any GOP members on board for their non-=reform reform.
GOP was asking for talks the last few weeks. Dem’s wouldn’t do it until forced.
So, no, the Dem’s blinked. GOP demonstrated to the Dem’s they were ready to go to the wall and filibuster.
If the GOP had blinked, you wouldn’t be seeing all the changes in the bill go the GOP way. As you will see.
Dem’s lost. They didn’t really have as big an issue as they thought they had.
And the bailout deal was true. Ask Dem Brad Sherman. Or, actually look at the bill instead of listening to spin.
The real thing this bill does is put the big banks position is stone.
You are getting fooled just like with HCR (until the end when you woke up)
No break up of big banks, no reform of Fannie and Freddie, two org’s that contributed heavily to the meltdown. On top of that, big, unchecked authority in the hands of the Executive. You’re happy if Obama’s in charge, but what about when the President is GOP? Do you want him having such power with no need to get Congress approval??
You’re getting hosed again!
Robert Reich lists 3 changes that should be implemented which aren’t currently in the Dodd Bill. No doubt Obama will go along with the Dodd Bill to appease his corporate masters. Funny, how this is just a replay of HCR.
1.Require that trading of all derivatives be done on open exchanges where parties have to disclose what they’re buying and selling and have enough capital to pay up if their bets go wrong. The exception in the current bill for so-called “unique” derivatives opens up a loophole big enough for bankers to drive their Ferrari’s through.
2.Resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn’t go nearly far enough. Commercial banks should take deposits and lend money. Investment banks should be limited to the casino we call the stock market, helping companies issue new issues and making bets. Nothing good comes of mixing the two. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Congress allowed financial supermarkets to do both.
3.Cap the size of big banks at $100 billion in assets. The current bill doesn’t limit the size of banks at all. It creates a process for winding down the operations of any bank that gets into trouble. But if several big banks are threatened, as they were when the housing bubble burst, their failure would pose a risk to the whole financial system, and Congress and the Fed would surely have to bail them out. The only way to ensure no bank is too big to fail is to make sure no bank is too big, period. Nobody has been able to show any scale efficiencies over $100 billion in assets, so that should be the limit.
Gee, I just got an email that sez I won $485,000 & a Range Rover SUV. Lucky me.
I propose that the word reform have quotation marks around on a permanent basis when it’s used by any government agency, to demonstrate how empty and meaningless their version of “reform” is.
I agree with all three of your points except I might make #3 a little higher. Otherwise, a good post.
Especially when you see this IS a replay of HCR.
The non-reform “reform.”
I seem to recall GWB getting everything he asked for, except Social Security reform.
While the White House cannot “force through” legislation, is it unreasonable to expect some semblance of leadership? I have seen absolutely zero leadership thus far.
Obama is the leader of the country and the democratic party. It’s goddam time he acted like it instead of sitting around with his dick in this hand.
The Reed-Gregg derivative language will be interesting as they are a lock to be the replacement for the Dodd placeholder language.
I hope that while there will be, obviously, exceptions to the requirement that derivatives be on exchanges and clearing requirements, they still could be subject to margin requirements and have to post collateral and be subject to margin calls, and what kind of collateral–cash or noncash–is also a question. These are insurance products that do not require insurance product reserves – margin requirements for OTC derivatives is a poor substitute for actuarial reserves, but for goodness sake we need to stop any wording that tries to get end users exempted from those margin requirements.
Reserves – actuarial reserves – are needed because FASB rules make posting collateral for exchange-traded derivatives a minor problem for “investment-grade” hedgers – and we all know the value of rating agency “investment-grade” ratings.
Indeed, currently our more conservative banks require more collateral for below-investment-grade than would be required by an exchange.
We can not go through another period where there is no collateral to back up derivative gains and losses – where everyone refuses to honor their transactions – freezing the finance world and our economy.
It is hard to see the accounting need for exceptions – for not being put on exchanges – since the old advantage that “perfect hedge” OTC derivatives had is going away based on FASB’s plan to require “effectiveness testing” (a phrase used for actuarial testing by non-actuaries that results in much smaller numbers and lacks standards) for all hedges, with no shortcut for perfect hedges done with OTC derivatives.
Jane has a fresh cross-post already in progress: Goldman Takes A Page From AHIP to Game Regulation Reform
Again the essential kabuki here is that the Democrats want real reform and the Republicans don’t. The truth is neither Democrats nor Republicans want real reform. What we are hearing now is the equivalent of “public option” talk. It’s just pap for the rubes. Neither the Frank nor the Dodd bill have any reform in them. The Dodd bill is worse than the Frank bill in that it would give Treasury unlimited power to bailout the banksters, but both are reform disasters.
The whole mantra about bipartisanship should be a red flag that the fix is in. Yes, it is nice that somebody in Congress mentioned Glass-Steagall but its re-imposition should not be at edges of the debate but at its heart, and it should be noted that Glass-Steagall is the beginning point of reform, not its end. I have put up lists of proposed reforms from time to time the first being in December 2008. If I had to condense them
1. Re-imposition of Glass-Steagall
2. $100 billion deposit cap on banks
3. Eliminate all but plain vanilla derivatives
4. Eliminate the ratings agencies
5. Regulate money markets as banking
6. Ban pension funds from using hedge funds for investments
7. Restructure the Fed, make it answerable to Congress, end its bank/Executive branch domination
8. Make bank CEOs personally liable for losses due to any misfeasance and malfeasance unless reported immediately and in full to regulators
The problem with unique derivatives is that they can’t be priced (or traded) precisely because they are unique. It’s why they should be banned. It’s like saying I have something called a wuzzle, but just one. What is the price of a wuzzle? How can it be determined? There is no other wuzzle to compare it to. No one else is buying and selling wuzzles. So how can anyone other than the two parties involved, myself and the wuzzle buyer, say what a wuzzle is worth?
Thank you. Fingers crossed for mandatory exchange with strong margin and reserve requirements. Not holding breath.
Great list. Number 7 would be hard. They would all be hard, given the current Congress and Admin.
I like that last one, personal liability for CEOs. Another improvement would be to criminalize all of these financial sleights of hand instead of going after these people civilly. Whatever happened to RICO?
I don’t think it is as simple with the Democratic members of the Senate or the House as it was with Decider Bush and the Republics.
Simple and succinct.
Just like in healthcare, same pattern.
I’d add eliminate selling short, eliminate phantom stock, naked selling.
Sadly, with both your and my thoughts, enforcement is always the bane of their existence.
Bullshit.
I say again, bullshit.