JONATHAN CHAIT APRIL 22, 2010
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[Guest post by Noam Scheiber:]
Substantively, there wasn’t a ton of news in Obama’s Wall Street speech earlier today. Certainly the proposals were familiar to anyone who’s followed the debate these last few months.
Politically, there were two important signals. First, it appears that the administration is beyond the demonization phase of its campaign for financial reform. Instead, what we saw today was vintage Obama unity. I don’t have the precise text of the speech in front of me, but my notes show that he used the phrase “urge you to join us”—as in, urging Wall Street to help enact reform—at least twice. He waxed lyrical about the “power of the free market” and stressed the “legitimate role” that financial instruments like derivatives play in the real economy.
Sure, there were a couple of low-intensity jabs—addressing the bank executives in attendance, he quipped about the crush of lobbyists in Washington who “work for you.” Obama also closed by reading from a June, 1933, Time magazine piece in which bankers screamed that the recently-created FDIC—now one of the most lovable agencies in Washington—would “rob them of their profession.” But, all in all, this sounded like a president who’s ready to cut a deal if he can get 80 percent of what he wants.
Second, it was telling that, when it came to specifics, Obama led off with "resolution authority." This is the provision that would give an administration the power to take over a failing megabank, fire its managers, wipe out its shareholders, sell off its assets, and even imposes losses on creditors. That would be an improvement over the status quo, in which the government has to choose between letting a megabank fail or bailing it out, though there’s some ambiguity about how resolution authority would work in practice.
The catch is that, because unwinding a big bank this way could take months, the bank would need a kind of bridge loan to keep operating in the meantime.* As written, the Senate bill would raise $50 billion through a fee on big financial firms to cover these bridge-financing needs. Predictably, Republicans have seized on the idea of such a fund as the bill’s soft underbelly, insisting it’s designed to institutionalize bailouts. (What makes the charge especially annoying is that the provision was basically hashed out by Democrat Mark Warner and Republican Bob Corker.)
But the flip side of the fact that Republicans are focusing all their attention on resolution authority is that they’re implicitly endorsing the rest of the financial reform bill—which covers everything from a new consumer protection agency to tough derivatives regulations. That leaves the White House and congressional Democrats with a huge opening: If they can just knock the leg out from under the “permanent bailout” critique, the GOP’s rhetorical opposition to the entire bill will collapse.
And that’s what Obama was essentially trying to do today. He explained that the idea is to respond to a future Lehman Brothers or AIG “in a way that doesn’t force taxpayers to pick up the tab,” and ensures that “customers and taxpayers are protected.” He noted that the idea would be to “recover all the money—every dime” and derided the permanent bailout mantra as something that “makes for a good sound-bite but is not factually accurate.”
If this rhetorical push on resolution authority succeeds—and it sounds like Obama is taking his pitch on the road over the next several days—then I’d expect the administration to have a very strong hand going into the financial reform endgame. That 80-percent deal would start to look a lot more like a floor than a ceiling.
*A big bank needs to keep operating will its being unwound because shutting down, as Lehman did, would separate creditors from their money for months, risk a financial panic as they raced to withdraw it from other institutions.
8 comments
"Both bills represent significant improvement on the flawed rules that we have in place today, despite the furious effort of industry lobbyists to shape this legislation to their special interests. And for those of you in the financial sector I'm sure that some of these lobbyists work for you and they're doing what they are being paid to do. But I'm here today specifically -- when I speak to the titans of industry here -- because I want to urge you to join us, instead of fighting us in this effort. [...] Now, there's a legitimate debate taking place about how best to ensure taxpayers are held harmless in this process. And that's a legitimate debate, and I encourage that debate. But what's not legitimate is to suggest that somehow the legislation being proposed is going to encourage future taxpayer bailouts, as some have claimed. That makes for a good sound bite, but it's not factually accurate. It is not true."
- icarusr
April 22, 2010 at 1:47pm
Help me out here guys, but when I read 'resolution authority' and 'bailout', I 'm confused. Who are we bailing out? The management that drove the bank into the ground in the first place? Isn't that so...2008? I thought that a resolution authority and subsequent bailout would include a buyout of the troubled bank by a solvent bank, or at the very least, dumping the management (like they seem to have done in England) and moving a new management team in. Noam's point is well taken that the bank needs to keep operating while being wound down, but even if large banks are too large to be purchased FDIC style (which in itself is part of the problem), shouldn't there be an alternative that punishes the problem management while keeping the bank running? Which would therefore undermine the Republican critique that the reform is just a bailout (of the people that caused the problem). Our bank pro roi has made some quite insightful comments about how to limit banks exposure for the current crisis, but what about the next 'financial innovation' scheme that causes bank failure in the future (which we all seem to expect) and we do need to wind down banks?
- jet
April 22, 2010 at 2:31pm
"If they can just knock the leg out from under the “permanent bailout” critique, the GOP’s rhetorical opposition to the entire bill will collapse" This bit of optimism ignores the fact that the GOP hardly holds itself to a consistent line of rhetoric; as we've seen time and time again, if they're dead-set on obstructionism, they'll happily switch to a different line of attack that will somehow magically turn out to have been their real quibble all along. The real reason to be optimistic is political: while I doubt the GOP would have a problem switching from anti-Wall-Street populism to pro-Wall-Street free-marketing if it would help them, the political environment is probably too anti-WS for this to be a good idea. If that's true, then the Republicans will probably fall into line -- but it certainly won't be because the Dems have made their rhetoric obsolete.
- frippo
April 22, 2010 at 3:17pm
Not surprisingly, the bill doesn't do anything to deal with GSEs role in crisis even though only GSE are only ones issuing MBS since 2008 panic. At present, only Fannie, Freddie and Ginnie Mae issue mortgage-backed securities. Thus far in 2010, Fannie has issued $91.5 billion in MBS, Freddie $65.7 billion and Ginnie $23.9 billion Typical liberal stupidity, try to fix 1/3 of the problem, ignore root causes, and implement such that huge loopholes persist.
- mr_rationale
April 22, 2010 at 3:52pm
- A boring speech or a short telegram to announce where we're going and who's in charge? This isn't over, it won't be perfect and Obama isn't seeking a perfect solution. But I'll take fundamental legislation over flawed slogans as the chants of losers is soon forgotten. Democrats know who they can turn to and Republicans are still looking for someone to blame while Obama still controls the agenda. I've also been saying the GOP is probably at or near the peak of a sustainable enthusiasm curve and a loss here may mean they've begun to slide. Plus, they've only caused chaos and didn't defeat any initiatives and that was not their goal. For all the potential damage the right may do in November, a lot of time, energy and dollars are being spent on their individual races and that doesn't help their broader cause. Oh, they have Rush, FOX and Beck and with friends like them....
- michael
April 22, 2010 at 4:42pm
Mr_Rationale: The White House proposal calls for a complete reevaluation by Treasury and HUD of the role of GSEs, with recommendations due next year. Options mentioned in the proposal include... "(i) returning them to their previous [*] status as GSEs with the paired interests of maximizing returns for private shareholders and pursuing public policy home ownership goals; (ii) gradual wind-down of their operations and liquidation of their assets; (iii) incorporating the GSEs’ functions into a federal agency; (iv) a public utility model where the government regulates the GSEs’ profit margin, sets guarantee fees, and provides explicit backing for GSE commitments; (v) a conversion to providing insurance for covered bonds; (vi) and the dissolution of Fannie Mae and Freddie Mac into many smaller companies." (*) "Previous status": i.e., pre-2008 (my note). This is p. 42 of the PDF widely available, e.g., on the WSJ: http://blogs.wsj.com/washwire/2009/06/17/obamas-financial-reform-plan-the-condensed-version/tab/article/ So Obama's proposal demands that a decision be made within a year about whether the GSEs will even continue to exist. This is "doing nothing" to address their role?
- frippo
April 22, 2010 at 6:48pm
Yeah, frip, I agree, the GOP can pick a new part of the bill to target, but maybe I'm looking for a hint of some possible reasons behind letting that part of the bill be targeted. Like maybe it's easy for the public to understand that part of the bill (and maybe that's why the GOP targeted it the first place), so maybe it'll also be easier to flip public opinion on it later. Or something like that. Or maybe the president, 'The Great Collapser' as the media sometimes implies, underestimates the popularity of this line of attack. I'm fishing, so I'm willing to hear more.
- jet
April 22, 2010 at 11:10pm
(Maybe I should maybe try using a different word other than maybe when expressing the potential for other possibilities. Maybe.)
- jet
April 22, 2010 at 11:14pm