Commentaries

Let the Fed regulate

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Politics is trumping common sense in Congress as Republicans and Democrats keep heaping abuse on the Federal Reserve. As a result, they could end up adopting an unworkable, risky overhaul of financial market regulation. 

Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, is leading the parade with his plan to strip the central bank of virtually all its oversight of commercial banks.

  ”I really want the Federal Reserve to get back to its core enterprises,” Dodd said. In recent years, the Fed’s regulation of bank holding companies and consumer lending “was an abysmal failure,” he charged.    No, the Fed didn’t cover itself with glory in some of its regulation and supervision, but neither did any of the other financial regulatory agencies. Moreover, the most serious failures last year involved investment banks overseen by the Securities and Exchange Commission, not the Fed.

But there are three more important reasons to keep the Fed in a major role as a regulator of financial institutions. (more…)

The commitments committee

The bursting of the dot-com bubble pales in comparision to the financial crisis. In retrospect, it seems a comic-book lesson about the all-too-obvious consequences of irrational exuberance: What were they thinking?

Yet the Internet bubble was in many ways a warm-up for the much larger credit bubble. The common thread, Jonathan Knee, a senior managing director at Evercore Partners, writes in DealBook, is the enabling role played by financial institutions.

In both crises, a bank had to agree to sponsor the poisonous security, whether shares of a profitless dot-com or a risky debt instrument. Banks leave such decisions to the commitments committee, a “once-hallowed, almost sacred institution.” Knee says:

The seriousness with which these firms undertook decisions to underwrite reflected not only a self-interested preoccupation with the long-term value of their own reputations but a genuine belief that they were playing an important role in protecting the overall integrity of the financial markets.

The fundamental question asked by commitments committees was: should their respective institutions sponsor a particular security? It was not just a cynical assessment of whether there was a market for the stock or bond issuance at hand.

“The Internet boom,” Knee contends, “marked a wholesale break with this tradition.”

Knee, the author of “The Accidental Investment Banker,” sounds almost misty-eyed in recounting the standards of yore. Was Wall Street ever so upright and just? He is also not very convincing in suggesting that the recent consolidation in the financial industry should mean a return to standards because the institutions that remain “have a more deeply vested interested in ensuring the health of the overall system.” Wasn’t that also true in 2007?

Still, he is right to note that regulatory reforms in the wake of the dot-com bust failed because “none spoke to the core question of maintaining underwriting standards.”

“Tobin tax” gaining ground in Europe

No longer just a hopeless cause for anti-capitalist activists, the idea of a global tax on financial transactions is gaining ground in Europe.

European Union leaders could not agree to put it on the agenda of this week’s G20 summit on reforming the financial system in Pittsburgh, but the leaders of France, Germany and the European Commission endorsed the concept. (more…)

Cleaning up the mess that remains

At least the Obama administration isn’t saying “Mission Accomplished.”

In marking the anniversary of Lehman Brothers’ demise, the administration understandably focused on how far we’ve come since, and on the various exit strategies in the works.

Lehman Brothers has been at the center of the narrative of what went wrong last year, and that makes it much easier for the administration to tell a story of triumph rather than the more uncomfortable legacy of dysfunctional companies and hidden toxic assets.

Coinciding with President Barack Obama’s speech in New York, the Treasury released a paper today, titled “The Next Phase of Government Financial Stabilization and Rehabilitation Policies.”

Its summary reads like a check list of emergency programs that are no longer needed now that the worst of the crisis is past. The insurance program for money market funds and the federal guarantee of qualifying bank debt can be tied directly to the fallout from Lehman’s spectacular end.

But last year’s turmoil didn’t begin and end with Lehman. Change the anniversary’s focus to, say, the government’s seizure of Fannie Mae and Freddie Mac that occurred a week earlier, or to American International Group, just a day after, and it’s clear that some of the messier legacies of the credit crisis still haunt the current administration a year later.

The government arguably isn’t any closer to figuring out what to do with the two giant housing finance companies than the previous administration was on September 7, 2008, when it announced Fannie and Freddie would be put into conservatorship.

Lehman tales

Over the past two days, we’ve been treated to two long stories in The New York Times and The Wall Street Journal focusing on employees of Lehman Brothers, one year after the firm’s chaotic bankruptcy filing. Yawn.

Now, don’t get me wrong–both stories are well reported and well written.  I was glad to see that one of the people the Times did a mini-profile on was a former Lehman banker who packaged and sold rotting mortgages and is honest enough to admit he has “blood on my hands.”

But it’s not the Lehman employees I’m really concerned about–even if some of them are feeling remorse now. I’m more concerned about average Americans–and for that matter, average people around the globe–who were impacted by the collapse of Lehman and the collateral damage to the financial system.

A year later, we still don’t read or hear enough stories about the average folks who bought Lehman’s now worthless structured notes, which were pitched as conservative investments. Over the past five years, a Lehman subsidiary in Amsterdam sold some $30 billion of these notes to average investors–many of them retirees–in England, Belgium, Germany, Switzerland and elsewhere in Europe.

How are these people getting on?

Or what about the thousands of people in Thailand and Asia who bought similarly worthless Lehman mini-bonds?

And let’s remember, this crisis began long before Lehman with the meltdown in the housing market. The foreclosure crisis is still going on and it’s getting worse.

A year on, it’s still a housing story

Around the time Lehman Brothers’ collapse nearly pushed the global banking system off a cliff, Rose Barrett’s own personal financial crisis began.

Recently separated from her husband, the Kissimmee, Florida resident quickly found it hard to keep making her monthly $1,939 mortgage payment on her salary as a night nurse at a local rehabilitation center. She made a hardship application to her lender, the subprime banking arm of Banco Popular seeking relief from her 40-year fixed rate $200,000 mortgage with a hefty 9.45 percent interest rate.

But by the time she asked for help in mid-September, it probably was too late to alter the trajectory of what is an all-too-familiar tale.

As the stories and commentary marking the one-year anniversary of the failure of Lehman mount, it is also worth remembering that housing was a root cause of the financial crisis — and that it had many victims like Barrett.

And even as the banks that are holding mortgages appear to be getting healthier, the tide of foreclosures, which threatens to keep a lid on consumer spending for months to come, shows no signs of abating,

Indeed, Barrett’s story is also about the post-crisis winners like Goldman Sachs, who snatched up opportunities amid the subprime wreckage.

It was an investment subsidiary of Goldman that began a foreclosure proceeding in Polk County Circuit Court on Barrett’s four-bedroom home in December. The Goldman unit last September paid $731 million for Banco Popular’s $1.1 billion subprime mortgage portfolio in the US.

Stones and glass houses, offshore tax haven edition

One of the week’s more amusing stories takes us to the sun-kissed shores of the Cayman Islands, scuba diver’s paradise, magnet for hedge funds and – until very recently – world-beating tax haven.

The financial crisis has not been kind to the Caymans. Hundreds of hedge funds have collapsed and global banks have slashed jobs. As if this was not enough, President Barack Obama in the spring launched a crackdown on tax havens that forced a number of Caribbean islands, including the Caymans, to embrace greater transparency – after a fashion.

Things are so bad that the government of the Cayman Islands is facing a $82m revenue shortfall in the budget. Local officials say they need a big loan or the government risks bankruptcy.

However, the British government – which oversees the islands – last week vetoed the loan. Chris Bryant, the British Foreign Office Minister, said he would not approve any new lending until he was convinced the Caymans had their house in order. He even suggested the islands might have to introduce – horror of horrors – income taxes in order to make ends meet.

Bryant continued:

It would be unwise, I suspect, to rely too heavily on a rapid improvement in trust fund income or to expect that the Cayman Islands’ prosperity can presume on an off-shore tax haven status.

Bryant would appear to have a point. But the island’s financial authorities think the British have other, baser, motives. As Anthony Travers, head of the Cayman’s financial services authority CIFSA, told Reuters’ Lorraine Turner:

Shock! Banker says banks must shrink

One of the most depressing, though predictable, aspects of the financial crisis has been the reluctance of senior bankers to publicly debate the industry’s shortcomings.

Though there has been plenty of finger-pointing in private, bankers have refrained from discussing their own – and each other’s – failures in public. The result is that the debate about the future of banking has been almost entirely conducted by non-bankers.

Bert Heemskerk is an exception. Until a month ago, the 66-year old Dutchman was chairman of Rabobank, the Dutch co-operative lender. Since announcing his retirement, he has embarked on a public crusade for banking to rediscover its traditional roots. He has given lectures and interviews, and published a book with his analysis of what went wrong, and what should be done about it. It’s only available in Dutch, but the title – which translates as “A Healthy Shrinkage” – gives some idea of where he’s coming from.

I interviewed Heemskerk shortly before he retired, and found his views refreshingly blunt. (My write-up of the interview was published today by the Financial Times). Little of what he says that hasn’t already been said by regulators, academics and politicians. But it is still unusual to hear it from a senior banker. His perspective is also a welcome alternative to the measured, but self-serving, arguments against radical reform served up by the likes of Deutsche Bank’s Josef Ackermann.

Heemskerk cannot be easily dismissed. In his forty-year career he rose to the upper ranks of Amro bank, became the first non-family member to run Van Lanschot, the Dutch brokerage firm, and helped steer Rabobank through the crisis virtually unscathed. While other Dutch banks were nationalised or forced to seek state support, Rabobank increased its profits. It is now the only large private bank that still has a ‘AAA’ credit rating.

Of course, one can pick holes in Heemskerk’s arguments. Rabobank is owned by its customers, so it is not entirely surprising that he blames the cult of shareholder value for much of what went wrong. He is also far from clear on how his proposed changes to a more utility-like banking system would be implemented, or how to ease what is likely to be a painful economic transition.

Nevertheless, Heemskerk is a serious banker who has published a serious critique of his industry. For that reason alone, his views deserve to be widely aired.

Shock! Banker says banks must shrink

One of the most depressing, though predictable, aspects of the financial crisis has been the reluctance of senior bankers to publicly debate the industry’s shortcomings.

Though there has been plenty of finger-pointing in private, bankers have refrained from discussing their own – and each other’s – failures in public. The result is that the debate about the future of banking has been almost entirely conducted by non-bankers.

Bert Heemskerk is an exception. Until a month ago, the 66-year old Dutchman was chairman of Rabobank, the Dutch co-operative lender. Since announcing his retirement, he has embarked on a public crusade for banking to rediscover its traditional roots. He has given lectures and interviews, and published a book with his analysis of what went wrong, and what should be done about it. It’s only available in Dutch, but the title – which translates as “A Healthy Shrinkage” – gives some idea of where he’s coming from.

I interviewed Heemskerk shortly before he retired, and found his views refreshingly blunt. (My write-up of the interview was published today by the Financial Times). Little of what he says that hasn’t already been said by regulators, academics and politicians. But it is still unusual to hear it from a senior banker. His perspective is also a welcome alternative to the measured, but self-serving, arguments against radical reform served up by the likes of Deutsche Bank’s Josef Ackermann.

Heemskerk cannot be easily dismissed. In his 40-year career he rose to the upper ranks of Amro bank, became the first non-family member to run Van Lanschot, the Dutch brokerage firm, and helped steer Rabobank through the crisis virtually unscathed. While other Dutch banks were nationalized or forced to seek state support, Rabobank increased its profits. It is now the only large private bank that still has a AAA credit rating.

Of course, one can pick holes in Heemskerk’s arguments. Rabobank is owned by its customers, so it is not entirely surprising that he blames the cult of shareholder value for much of what went wrong. He is also far from clear on how his proposed changes to a more utility-like banking system would be implemented, or how to ease what is likely to be a painful economic transition.

Nevertheless, Heemskerk is a serious banker who has published a serious critique of his industry. For that reason alone, his views deserve to be widely aired.

Apocalypse Then

How bad was the financial crisis in the bleak depths of September?

At today’s House Oversight subcommittee hearing on the Bank of America/Merrill Lynch merger, Representative Paul Kanjorski, the Pennsylvania Democrat, tried to coax Hank Paulson, the former Treasury secretary, to describe the potential doom and gloom policy makers were contemplating as the TARP proposal was being drafted.

Paulson was reluctant to be drawn out on what he and others had feared, but said that “when a financial system breaks down… the number of unemployment we were looking at was much greater than the number we are looking at now.”

Kanjorski said he had been in New York recently, where some in the financial industry told him that at the time they were afraid the country would have “gone back to the 16th century.” (One assumes that didn’t mean a return to the colonial economy of fur trapping and tobacco farming. )

Paulson said that for Ben Bernanke and himself, the fear was a slide into a new Great Depression. “I knew it was going to be very bad,” Paulson said.