(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Daniel Indiviglio

WASHINGTON, May 20 (Reuters Breakingviews) – Wall Street’s
top advocacy group is finally getting with the program. The
Securities Industry and Financial Markets Association (SIFMA)
announced on Monday that it has hired two former members of
Congress to run the ship. The previous leadership under Tim
Ryan, a former banker who has returned to JPMorgan (JPM.N: Quote, Profile, Research),
scored some successes battling new rules. But using former
politicians to sweet-talk regulators and try to improve the
image Main Street has of the industry could be a better
strategy.

Both are friends of high finance. Former Republican Senator
Judd Gregg, SIFMA’s new chief executive, was the chief GOP
negotiator on the bank bailouts in 2008. He later fought
Democrats as they drafted the Dodd-Frank Act in 2010 as a member
of the chamber’s Banking Committee. And after leaving office he
acted as an adviser to – surprise, surprise – Goldman Sachs
(GS.N: Quote, Profile, Research).

Ken Bentsen, who will be Gregg’s second in command as
SIFMA’s president, is at least from the other side of the aisle.
He’s a former Democratic congressman who sat on the House
Financial Services Committee. But he also spent some time as an
investment banker in municipal and mortgage finance.

Nonetheless, with their different political hues they should
make for a formidable pair. SIFMA is a bit behind the trend on
this one, though. The Financial Services Roundtable, another
industry advocate, plumped for a politician for the top spot
last year – former Minnesota Governor Tim Pawlenty. Christopher
Dodd, erstwhile senator for Connecticut and co-author of the
landmark 2010 banking law, heads the Motion Picture Association
of America. And Blanche Lincoln, who spent two terms as a
senator in Arkansas, leads the Small Business for Sensible
Regulations coalition.

Such jobs are great money-spinners for former lawmakers
looking to cash in. Tim Ryan, Gregg’s predecessor, earned $3
million in 2011, for example. They’re also key roles, though,
for an industry grappling with what it thinks are overly
aggressive new rules and growing calls to break up the largest
firms. Dealmaking bankers like Ryan have not done a bad job. But
a couple of astute glad-handing baby-kissers may do better.

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CONTEXT NEWS

– Former Senator Judd Gregg on May 20 was named chief
executive of the Securities Industry and Financial Markets
Association (SIFMA). Gregg was a member of the Republican
opposition on the Senate Banking Committee when Congress
constructed the Dodd-Frank financial regulation law in 2010. He
was also a member of President Barack Obama’s bipartisan fiscal
commission. After leaving office, Gregg served as an
international adviser to Goldman Sachs.

– The lobbying firm also announced that Ken Bentsen, a
former member of the U.S. House of Representatives, would serve
as its president. In addition to his time in Congress, he worked
as an investment banker and was the president of the Equipment
Leasing Association before joining SIFMA. The Democrat from
Texas is the nephew of Lloyd Bentsen, who served as Treasury
Secretary under President Bill Clinton.

– Reuters: Former GOP Senator Judd Gregg named CEO of
lobbying group SIFMA [ID:nL2N0E10IP]

RELATED COLUMNS

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Career trough [ID:nL1E8KL64P]

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(Editing by Jeffrey Goldfarb and Martin Langfield)

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(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Daniel Indiviglio

WASHINGTON, May 1 (Reuters Breakingviews) – A plan for
private firms to buy Fannie Mae (FNMA.OB: Quote, Profile, Research) and Freddie Mac
(FMCC.OB: Quote, Profile, Research) needs killing off. The new-found profitability of the
U.S. mortgage finance behemoths has inspired a few big hedge
funds, including Paulson & Co and a Carlyle Group (CG.O: Quote, Profile, Research) fund,
to suggest that Uncle Sam should sell them the two companies,
according to Bloomberg.

The hedgies own Fannie and Freddie preferred stock. The
government’s plan is supposed to be to wind down the two
discredited enterprises, which should mean the preferred shares
end up worthless. But if instead the lenders are sold off, the
holders of that stock could turn a big profit.

Politicians just might go for it. A successful sale could
mean $150 billion in proceeds for the Treasury, according to a
version of the proposal authored a year ago by investor and
former Treasury official Jim Millstein. That would offset most
of the $188 billion rescue tab. For some voters, the notion of
offloading the two troubled companies to private-sector owners
could be appealing, too.

Unfortunately, privatization along the lines proposed by
Millstein, who also owns preferred shares, is a bum deal for
taxpayers. It would remove government support for the companies,
but leave taxpayers on the hook for losses on the mortgage
securities they create.

There’s a chance that the government could manage that risk
if it prices guarantees appropriately. But the track record
isn’t great. Fannie and Freddie failed at it, and the financial
condition of the Federal Housing Administration is still
deteriorating – its insurance fund has a $16 billion shortfall
and could need a rescue of its own.

And Fannie and Freddie’s structural flaws and governance
breakdowns date back many years before the crisis of 2008. Even
if the government’s role in mortgage finance continues – which
ought to be up for discussion – a new approach is called for.
The need to phase in changes, probably over a decade or more,
leaves plenty of time for the companies to recoup much of what
they owe before they disappear.

The hedgies’ plan would hand them profit that might
otherwise accrue to the Treasury while leaving taxpayers on the
hook should mortgage markets take another beating. For the hedge
funds it’s worth a try. With luck, lawmakers know better.

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CONTEXT NEWS

– Several large hedge funds are lobbying Washington
lawmakers to privatize failed mortgage financiers Fannie Mae and
Freddie Mac, according to a Bloomberg report published on April
30. The investors named include Paulson & Co, Perry Capital and
Claren Road Asset Management, which is majority owned by the
Carlyle Group.

– The U.S. government seized the firms near the peak of the
financial crisis in 2008. Since that time their bailout has cost
taxpayers nearly $190 billion. As the housing market has
stabilized, however, the companies have again become profitable.
Fannie posted a record first-quarter profit of $7.6 billion.

– Although the details of the funds’ proposal are unknown,
it is likely they resemble the privatization framework
previously laid out by investor and former Treasury official Jim
Millstein. His plan would reduce the firms’ activity to their
core business of repackaging mortgages into bonds and insuring
the resulting securities against underlying loan defaults. The
companies’ Washington support would be withdrawn, but the U.S.
government would sell them reinsurance on their mortgage
securities.

– Bloomberg story: Paulson leads hedge-fund lobby push to
privatize Fannie: link.reuters.com/qan77t

– Reuters: Fannie Mae posts record $7.6 billion quarterly
profit [ID:nL2N0CP0JH]

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Frannie goes moo [ID:nL2N0CP0MI]

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Frannie at last [ID:nL1N0BX54Z]

Flawed assumption [ID:nL1N0BQ2NS]

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Whatever happened to predictions the United States would soon experience Weimar Republic-like inflation? When the Federal Reserve kicked off its massive stimulus campaign, critics invoked this dark period of modern German history and its images of wheelbarrows full of valueless cash. Four years later, only the most stubborn hawks still fear such hyperinflation. Consistently low price growth has made Ben Bernanke’s easing look safe – so long as his exit works.

As the Fed began to pour trillions of dollars into the economy to calm the financial crisis and resulting severe unemployment, inflation alarmists issued dire warnings. Some prominent investors like gold bug Peter Schiff said current policy could put the nation on a path to the sort of hyperinflation suffered by the parliamentary democracy that Germany adopted in the decade following World War One. In one 18-month period, the country suffered inflation of as much as 2 trillion percent.

Dropping Weimar into discussions about inflation wasn’t just a trick for extremists either. Dallas Fed President Richard Fisher also used the early 20th-century republic as an example of what could happen if Congress leaned too heavily on the Fed for monetary stimulus. Even those who disagreed with the analysis felt compelled to acknowledge it.

Not anymore. Though the Fed’s balance sheet has quadrupled in size since 2008 to $3.2 trillion, inflation has remained remarkably tame. Over the past four years, the Consumer Price Index has averaged only 2.4 percent growth. Core CPI, which the Fed prefers since it excludes volatile food and energy, has grown just 1.7 percent annually – below the Fed’s target. The country has clearly avoided Weimar-style hyperinflation – as well as the more benign price instability that characterized 1970s America.

While the most vocal “Weimarists” should have found it humbling to be so wrong for so long, they’ve not disappeared. It’s just that the establishment no longer pays them any attention. PIMCO co-founder Bill Gross, for instance, recently went bullish on low-yielding 10-year Treasuries, implying he must not be very scared of higher inflation hitting any time soon.

So it would appear that recent history vindicates Bernanke. But as a modern economic historian, he’s smart enough not to claim “mission accomplished” yet. He has avoided inflation during monetary expansion – his exit must proceed with equal aplomb.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Daniel Indiviglio

WASHINGTON, March 28 (Reuters Breakingviews) – Less is more
when it comes to the new top American banking lawmaker. The next
chairman of the Senate Banking Committee needs to minimize
conflicts of interest with the industry the body oversees,
giving Ohio’s Sherrod Brown the edge over his New York
counterpart Charles Schumer. Brown may have some fringe views
about breaking up banks, but he’s more likely to challenge the
status quo than a friend of Wall Street.

Since the committee’s top three Democrats may have stronger
interests outside banking, Brown looks next in line. He’s a huge
advocate for Main Street manufacturing and a staunch critic of
Wall Street. During the Dodd-Frank Act debate, he co-authored a
failed amendment that would have broken up big banks like
JPMorgan (JPM.N: Quote, Profile, Research), Wells Fargo (WFC.N: Quote, Profile, Research) and Bank of America
(BAC.N: Quote, Profile, Research) by limiting their share of U.S. deposits and non-deposit
liabilities.

Since then, he has continued to trumpet splitting up the
titans as a way of ensuring no institutions are too big to fail.
He sponsored a successful bill in the Senate last year for the
Government Accountability Office to study the implicit subsidy
conferred on large banks and will soon propose a biting capital
surcharge on giant institutions.

Such a foe of Big Finance may seem too extreme to lead the
committee that governs the industry. But Schumer, the likeliest
alternative, is biased in the other direction. Though he has
talked tough in recent years, from 2007 through 2012 he raised
nearly $3 million in campaign contributions from securities
firms, 14 percent of his total, according to opensecrets.org.
The same group gave Brown just $270,000 and didn’t break into
his top 10 industry donors.

To some extent, a Brown-led banking committee would be a
blessing in disguise for Schumer, who could be faced with having
to vote against policies that, while on balance may favor the
national interest, would harm his direct constituents in New
York.

And, anyway, with Texas Republican Jeb Hensarling running
the House Financial Services Committee, Schumer has little to
worry about. Hensarling is as far to the right as Brown is to
the left. Though there is, of course, an increased risk of
gridlock, the balance between a firebrand and a friend of
finance might actually ensure only truly good reform ideas make
the grade.

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CONTEXT NEWS

– U.S. Senate Banking Committee Chairman Tim Johnson
announced on March 26 that he would retire at the end of 2014.
At that time, he will be replaced as chair by another committee
member. Leading names include Jack Reed, Chuck Schumer and
Sherrod Brown.

– Reuters: U.S. Senate banking chair Johnson to announce
retirement [ID:nL2N0CH1AM]

RELATED COLUMNS

Texas dangers [ID:nL1E8M7AI2]

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The cure for the U.S. housing malaise may sustain its disease. A new Senate bill seeks to forbid Congress from raising Fannie Mae and Freddie Mac’s mortgage guarantee fees to pay for federal spending. It sounds sensible. But in the alternate universe that is Washington, it may kill one of the few ways available to reduce taxpayer support for housing and bring back private capital.

The legislation would prevent Congress from paying for unrelated programs by raising the insurance premiums charged by government mortgage finance agencies. Just last year lawmakers boosted these fees for 10 years to pay for a two-month extension of subsidized student loans.

That’s awful policy. So it’s no surprise that the bill to nix it has inspired bipartisan support. Republican Bob Corker, an unabashed advocate for reducing the government’s role in housing, is co-sponsor with vociferous freshman Democrat Elizabeth Warren, best known for helping create the Consumer Financial Protection Bureau.

They’re right that a responsible government should either raise taxes or cut spending to reduce deficits. Furthermore, increasing Frannie’s premiums should only happen in lock-step with a broader plan to reform mortgage finance. The new bill assumes such an approach is probable.

In a perfect world, it would be. But this is the government that passed spending cuts in 2011 so unpalatable that it believed Congress would be forced to replace them with a grand debt bargain. Instead, no deal was struck and cuts began this month.

Few lawmakers have shown much eagerness to even plan shuttering Frannie nearly five years after their seizure and $188 billion bailout. And the agencies’ regulator, the Federal Housing Finance Agency, hasn’t used its authority to raise fees enough to encourage much competition.

Yet bumping up the premiums is crucial. It will put the cost of taxpayer-backed and private capital on a more level playing field. Tempting more banks and other lenders to get back into the market will reduce the government’s near-omnipresent role in backing home loans.

Preventing one of the few mechanisms for raising the fees – even if wrongheaded – sets up a nasty unintended consequence: it could actually discourage reforming mortgage finance. Allowing Washington to use Frannie as an ATM, while crazy, could, perversely, be housing finance reform’s best hope.

(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Daniel Indiviglio

WASHINGTON, March 12 (Reuters Breakingviews) -
T oo-big-to-fail still looms large for America’s community banks,
despite the best efforts of lawmakers. At the Independent
Community Bankers of America annual gathering this week, the
little guys, who make up the bulk of American bank charters if
not assets, will argue that Dodd-Frank failed to do the trick. A
study citing an $83 billion subsidy and the U.S. attorney
general admitting some banks are too big to jail re-energized
their opposition. But the small fries would be better off
focusing on their businesses.

This year’s shindig couldn’t come at a more opportune time
to whine about Washington. In February a study emerged from the
International Monetary Fund that found a gigantic government
subsidy handed to big banks, thanks to implicit federal backing.

And Attorney General Eric Holder told the Senate last week
that some institutions may be too big to prosecute, citing
financial stability concerns. The notion that Wall Street titans
could effectively be immune from prosecution understandably
upset the legions of U.S. community bankers meeting in Las
Vegas.

The White House maintains that Dodd-Frank ended
too-big-to-fail. Moreover, big bank lobbyists released a policy
brief of their own on Monday rejecting the IMF analysis. It
argued that the fund used stale and unreliable data from 2010,
before the Dodd-Frank Act created laws to ensure even giants
could fall. The brief cited recent studies that show large banks
pay up to 0.35 percentage point more to fund themselves than
smaller ones, a stark contrast to the 0.2 percentage-point
discount the IMF study found.

Eventually, a huge institution will founder and need to be
unwound, putting the new liquidation mechanism included in
Dodd-Frank – not to mention the political will to let a bank
fail – to the test. Only then will the market know the fate of
bank bailouts.

In the meantime, community banks have enough challenges of
their own to worry about. New regulations are being finalized
for mortgages, a key product for small banks. The new consumer
bureau is digging in with exams and rulemaking. And new capital
standards could force these institutions to comply with complex
risk-weighting rules.

With so many nitty-gritty changes to come, these Davids
don’t need so much to defeat Goliath. They need to find a way to
exist in a complex new regulatory regime while differentiating
their vaunted personal touch with customers. That’s the best way
for community banks to beat the big guys.

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CONTEXT NEWS

– The Independent Community Bankers of America (ICBA) will
hold its annual meeting during the week of March 11 in Las
Vegas, Nevada. ICBA President and CEO Camden Fine, in kicking
off the confab, said he believes that too-big-to-fail is alive
and well. He expressed concern that big banks will receive
favorable treatment both economically and in the U.S. justice
system, citing an IMF study and recent remarks by the attorney
general.

– U.S. Attorney General Eric Holder told a Senate panel on
March 6 that prosecuting very large institutions could have a
negative impact on the national economy. In December, HSBC
(HSBA.L: Quote, Profile, Research) agreed to pay $1.9 billion to resolve a
money-laundering charge, but did not face criminal prosecution.

– Senators questioned Federal Reserve Chairman Ben Bernanke
on Feb. 26 about an International Monetary Fund study from May
2012 that found large institutions benefiting from an $83
billion subsidy thanks to an implicit federal backing.

– Reuters: Regulators look to punish bankers for money
laundering [ID:nL1N0BZ5VJ]

RELATED COLUMNS

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Financiers are failing their version of the Hippocratic Oath. They aren’t taking the necessary measures to keep client money safe, the U.S. Securities and Exchange Commission warns. The failure is as basic as doctors not washing their hands, despite reminders from the likes of Refco and MF Global. The extent and severity of the problem should worry customers and investors alike.

Keeping customers’ money safe should be an obvious ethical imperative for any firm. But the law also requires it. Yet brokerages fall short on a depressingly frequent basis. Client cash got locked up with company assets both when futures broker Refco went under in 2005 and Lehman Brothers hit the skids three years later. MF Global, which had some Refco assets, tried to head off its 2011 demise with some client assets. And last year Peregrine Financial collapsed after it turned out boss Russell Wasendorf had been misappropriating such funds for years.

These might seem like extreme cases. But the SEC’s investigation discovered that 140 – or around one-third – of those firms it examined fell short of the rules.

A number of those deficiencies were particularly troubling. Some advisers kept physical possession of assets like securities certificates, while investor firm personnel sometimes served as the trustee for client accounts – even though qualified custodians generally must perform such tasks. Others underwent “surprise exams” conducted by their auditors. But these occurred at the same time each year, making them easier to pass.

Such sloppiness is bad news for clients. Few retail investors have the ability to verify that their broker is taking all necessary measures to protect their funds. And if client money mysteriously disappears, lawsuits may take years to recoup it – and may well fail to do so.

It’s a sad indictment of poor governance. These rules are hardly new – they were brought in with the 1940 Securities Act. If cutting corners on such a basic duty is any indication, there’s little reason to give financial firms the benefit of the doubt over whether they’ll address the raft of new regulations stemming from the Dodd-Frank Act. Pledges don’t seem to count for much.

Free markets often get the blame for such troubling outcomes as inequality, corporate scandals and economic crises. In “Conscious Capitalism,” Whole Foods co-founder and co-CEO John Mackey and business professor Raj Sisodia argue that economic liberty needs a reboot.

The authors say that the trouble with capitalism isn’t that firms have too free a rein; it’s that economists have told them to focus on the wrong thing and that government gets in the way. They suggest that companies should focus on purpose rather than profits. And they blame crony capitalism for poisoning an otherwise excellent economic system.

They’re not wrong. Corporations are too close to lawmakers, and the result is overcomplicated tax systems which don’t serve the public good. Governments end up over-regulating in the name of safety, only making it safer for big companies to trample small ones that can’t cope with higher compliance costs.

While stomping out cronyism is a fairly easy sell, Mackey and Sisodia have more work to do to persuade readers that most businesses should turn their strategies upside-down. The heart of their reform plan for capitalism is captured by a paraphrase of Richard Leider, an executive coach and author. He asks what the most important day of one’s life is, other than birth. “It is the day you realize why you were born.”

Similarly, say Mackey and Sisodia, the most important thing a company can do is understand and pursue its higher purpose. They cite Walt Disney Co, which asks employees to use their imaginations to bring happiness to millions. For Southwest Airlines, it’s to give people the freedom to fly.

If a company aims chiefly at its purpose, profits will follow, they say. While that sounds plausible, it’s pretty vague. And Wall Street analysts are unlikely to smile when higher purposes lead to lower profits for a quarter, or perhaps a decade. Investors might want to see more emphasis on the bottom line before they part with their funds. But then again, the conscious company of Mackey and Sisodia is not merely run to enrich shareholders. Instead, it must integrate the interests of all stakeholders.

That means paying your workers well and your executives relatively modestly. No gouging of suppliers to cut costs. Such corporations must be a positive force in their community. The authors would even have firms befriend their foes: “A more constructive way to think about competitors is as allies in striving for mutual excellence.”

The image of corporate leaders sitting around a campfire, joining hands and singing Kumbaya, may warm the soul. But bitter experience, not to mention thousands of runs of the “prisoner’s dilemma” game, teaches that cooperation is not guaranteed, even if it’s in everyone’s best interests. Unless people begin to exhibit and deserve greater trust and reliance, many conscious companies will end up beaten unconscious.

That may be where conscious leaders come in. The authors portray them not as the smartest and most cunning, but excelling in emotional, spiritual and systems intelligence. They say the best leaders are empathetic, not ruthless. They probably meditate. And they must successfully manage relations between all stakeholders as one.

With such leaders in place, cooperation could lead to kinder competition. And maybe they could even convince investors that their purpose matters more than analysts’ financial models. The conscious economy that Mackey and Sisodia imagine sounds perfect. But people aren’t. Until humans evolve into a race of hyper-moral, fully-actualized beings, their capitalist ideal may be too lofty an ambition.

For all the rhetoric from both political parties, the impending U.S. budget cuts are more a blip than a bomb. An initial $100 billion-worth of federal spending reductions won’t do much real damage to the growing economy.

President Barack Obama has lately portrayed the so-called sequester as devastating and putting thousands of jobs in jeopardy. He has warned that cuts to air traffic control and airport security will cause travel delays – and even that defunded research could set back science for a generation.

There’s no doubt that the cuts are heavy-handed. The whole thing was supposed to be replaced by a more thoughtful package which Obama and Congress have been unable to negotiate. Even so, the federal budget, excluding interest payments, will still grow by $13 billion in 2013 and $1.8 trillion over the next decade, according to the Congressional Budget Office. The cuts, which will hit each year for a decade if they aren’t replaced, mostly eat away at projected increased spending, not the prior year’s level of outlays.

All the same, some programs will see authentic cuts. The sequester slashes discretionary items like environmental protection and education by $72 billion, or 5.6 percent. But by 2019 this category of spending will once again be higher than it was in 2012. And half the cuts come from a military already winding down its presence in, say, Afghanistan and ripe for greater procurement discipline. Other government departments may need short periods of reduced work hours or hiring freezes, but attrition should minimize the need to fire too many people.

The CBO estimates the sequester could reduce GDP growth by about half a percentage point. But even accounting for this drag, Federal Reserve projections show 2013 economic expansion of between 1.7 percent and 2.4 percent. That’s modest but it’s no worse and potentially better than the past two years. It’s a short-lived effect that should be quickly absorbed by the private sector.

Both political sides are using scare tactics. The White House, for instance, may hope to push Republicans into raising taxes again. In a more pragmatic world, Washington’s energy would be focused instead on structuring cuts that do the least real damage. With Jack Lew, an authentic budget guru, winning confirmation on Wednesday as the next Treasury secretary, Obama’s administration is equipped to lead the way doing just that.

Mortgage reform is caught in a negative intellectual equity trap. On Monday the Bipartisan Policy Center, a Washington think tank, unveiled its plan to shake up housing finance. Unfortunately, it rests on the usual received wisdom that the market cannot exist without a government backstop. It’s an idea prevalent among lawmakers, bankers and investors. It’s wrongheaded.

The BPC report is merely a variation on one of the three Treasury proposals from 2011. It recommends replacing mortgage finance bailout twins Fannie Mae and Freddie Mac with a public entity that would provide a backstop in the event of a market catastrophe. Private lenders and mortgage insurers would be on the hook for losses, but the public insurer – funded with premiums paid by the industry – would step in if they run out of capital to make mortgage bond investors whole.

The only innovation is to cap such aid to mortgages that are $275,000 or less. That’s a third smaller than today’s standard limit, which leaves the government standing behind 90 percent of new home loans. But the BPC suggestion is still about 40 percent higher than the average mortgage.

The proposal would at least shrink the government’s presence. But it’s problematic. In good times, the industry will lobby to cut guarantee fees – probably successfully, based on recent history. Setting proper prices is not a strength of the public sector: the Federal Housing Administration, for example, suffers from a $16 billion shortfall after setting its guarantee fees too low.

The plan highlights, though, just how bereft of new ideas both Washington and the mortgage industry are. No one wants to imagine a world without government support. Banks love stuffing their balance sheet with Frannie bonds, treating them as quasi-cash. Other mortgage debt buyers seem quite happy outsourcing the credit risk to Uncle Sam.

The smarter course of action would be for investors to embrace more rigorous analysis of their own and to buy only those mortgages whose lending standards meet their investment criteria – be that ultra-safe loans or riskier, subprime debt.

For now, though, the lazy status quo that allows the United States to be the only country that backstops most of its mortgages looks set to endure.