James Pethokoukis

Politics and policy from inside Washington

SEC tries to ride Goldman back to credibility

Apr 16, 2010 19:07 UTC

Can the Securities and Exchange Commission ride Goldman Sachs back to credibility? Perhaps, but it will take more than one high-profile lawsuit to restore the reputation of America’s top financial cop. L’Affaire Madoff was pretty close to a brand killer. But the move is powerful evidence — and warning — that the agency is out of the doughnut shop and back on the beat.

The all-points bulletin went out not long ago. Under the leadership of a new chairman and enforcement director, the SEC’s Obama years have marked a hard switch from the laissez-faire enforcement posture of the Bush administration. In 2009, the regulator opened twice as many investigations as in 2008, with fines up 35 percent. The new assertiveness helped tamp down talk on Capitol Hill that the SEC should be merged with the Commodity Futures Trading Commission or subsumed into a giant super-regulator.

But aggression can also lead to unforced errors. The regulator was impatient with the New York attorney general’s office during its tag-team litigation effort against Bank of America. So it dumped its legal partner and went it alone. The result: A judge threw out a $33 million SEC fine against BofA regarding bonuses paid to Merrill Lynch employees. And the judge called a later $150 million settlement between the two sides “half-baked justice at best”.

The SEC also failed to execute in its case against Cohmad Securities and the firm’s involvement with Bernard Madoff. In February, a federal court dismissed the SEC’s “flimsy” charges that Cohmad helped enable the notorious Ponzi schemer. And little has transpired in the more than nine months since the agency filed an insider trading complaint against former Countrywide boss Angelo Mozilo.

So a failed case against Goldman for alleged securities fraud might leave the SEC in worse shape. It would also open the watchdog to charges that the timing of its charges, right in the middle of a debate over financial reform, was merely an attempt by the Obama administration to intimidate Wall Street into supporting its get-tough legislation. But in the meantime, the financial industry will be looking hard over its shoulder for the first time in years.

COMMENT

Something really doesn’t add up here. Quite aside from the questionable timing – as Mr. P noted – of the charges against Goldman, it now appears that two other politicians facing difficult elections or by-elections in the coming weeks are now piling onto this bandwagon. Gordon Brown, facing near-certain defeat in the UK general elections, is reportedly ‘shocked, shocked’ over this whole business and has renewed his call for increased taxation and regulation of the world’s banks, while Angela Merkel of Germany, facing an awkward by-election so close that it compelled her to nearly scuttle an aid package for Greece, is now demanding an investigation of Goldman’s actions in Germany. This is all quite aside from Mr. Obama’s trying to get his stalled financial regulation package through the Senate, so it does seem awfully convenient for a number of embattled politicians. Perhaps I’m wrong, and maybe Goldie is indeed guilty of these allegations, but given the SEC’s track record and apparent turf-defending in recent months, as outlined by Mr. P, it’s hard not to be somewhat sceptical of this whole Goldman business.

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Obama’s SEC war against Goldman Sachs

Apr 16, 2010 18:09 UTC

A few thoughts on the SEC charges against Goldman Sachs:

1) Goldman Sachs gave the Obama campaign $994k during the 2008 election, his biggest donor. Doesn’t this undercut the theory just a bit that Washington is under the thumb of Wall Street?Even a tiny bit? (No, say Simon Johnson and James Kwak.)

2) I can’t help but think this boosts the odds of financial reform passing and a shift it to the left, as well. You might even see more GOPers advocate for breaking up the banks, as do some Fed regional presidents.

3) Certainly under the leadership of a new chairman and enforcement director, the SEC’s Obama years have marked a hard switch from the posture of the Bush SEC. In 2009, the regulator opened twice as many investigations as in 2008, with fines up 35 percent. The new assertiveness helped cool talk the Hill that the SEC should be merged with the CFTC pushed into a giant super-regulator

4) But its aggression can also lead to unforced errors. A judge threw out a $33 million SEC fine against BofA regarding bonuses paid to Merrill Lynch employees. The SEC also failed to execute in its case against Cohmad Securities and the firm’s involvement with Bernard Madoff. In February, a federal court dismissed the SEC’s “flimsy” charges that Cohmad helped enable the notorious Ponzi schemer.

5) A failed case against Goldman for alleged securities fraud might leave the SEC in worse shape. It would also open the watchdog to charges that the timing of its charges, right in the middle of a debate over financial reform, was merely an attempt by the Obama administration to intimidate Wall Street into supporting its get-tough legislation.

6) This is exactly the sort of scenario a bank exec outlined to me a few months back. The exec worried that the longer FinReg reform dragged on, the odds increased that some bolt-from-the-blue news would change the political calculus and push the bill to the left.

COMMENT

How about stopping SEC employees from sitting all day viewing on-line porn at the taxpayers dime.

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5 reasons why the Tea Partiers are right on taxes

Apr 16, 2010 15:28 UTC

Here is the new Washington Consensus: American taxes must be raised dramatically to deal with exploding federal debt since spending can’t/shouldn’t be cut. Only the rubes and radicals of the Tea Party and their Contract from America movement think otherwise. And don’t worry, the economy will be just fine.

Don’t believe it. While you will never hear this in the MSM, there is plenty of academic research supporting the idea that cutting taxes and spending is the ideal economic recipe for growth, jobs incomes and fiscal soundness. (This all assumes that America’s amazing turnaround since 1980 isn’t proof enough.)  Just take a look:

1) Tax cuts boost economic growth more than increased government spending. Cutting spending is a better way to reduce budget deficits than raising taxes. “Large Changes in Fiscal Policy: Taxes Versus Spending” — Alberto Alesina and Silvia Ardagna, October 2009:

We examine the evidence on episodes of large stances in fiscal policy, both in cases of fiscal stimuli and in that of fiscal adjustments in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.

2) Tax cuts boost growth. Tax increases hurt growth, especially if used to finance increased government spending. “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks” — Christina Romer and David H. Romer, July 2007:

In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects. … The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.

3) Cutting corporate taxes boosts growth. “The Effect of Corporate Taxes on Investment and Entrepreneurship” — Simeon Djankov, Tim Ganser, Caralee McLiesh, Rita Ramalho, Andrei Shleifer, January 2008:

We present new data on effective corporate income tax rates in 85 countries in 2004. The data come from a survey, conducted jointly with PricewaterhouseCoopers, of all taxes imposed on “the same” standardized mid-size domestic firm. In a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI, and entrepreneurial activity. For example, a 10 percent increase in the effective corporate tax rate reduces aggregate investment to GDP ratio by 2 percentage points. Corporate tax rates are also negatively correlated with growth, and positively correlated with the size of the informal economy.

4) Tax rates are reaching dangerous levels where higher rates bring in less money. “The Elasticity of Taxable Income with Respect to Marginal Tax Rates” — Emmanuel Saez, Joel Slemrod and Seth Giertz, May 2009:

Following the supply-side debates of the early 1980s, much attention has been focused on the revenue-maximizing tax rate. A top tax rate above [X] is inefficient because decreasing the tax rate would both increase the utility of the affected taxpayers with income above [Y] and increase government revenue, which can in principle be used to benefit other taxpayers. Using our previous example … the revenue maximizing tax rate would be 55.6%, not much higher than the combined maximum federal, state, Medicare, and typical sales tax rate in the United States of 2008.

5) Cutting corporate taxes boosts wages. “Taxes and Wages” — Kevin Hassett and Aparna Mathur, June 2006:

Corporate taxes are significantly related to wage rates across countries. Our coefficient estimates are large, ranging from 0.83 to almost 1-thus a 1 percent increase in corporate tax rates leads to an almost equivalent decrease in wage rates (in percentage terms). … Higher corporate taxes lead to lower wages. A 1 percent increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.

There are plenty more, of course. The Tax Foundation lists a dozen recent studies how harmful business taxes are to growth, jobs and wages. Economist Greg Mankiw has determined America is far from a low tax nation. More like in the middle. And let me add this from economist Scott Sumner:

When I started studying economics the US was much richer than Western Europe and Japan, but was also growing more slowly than other developed countries. They were still in the catch-up growth phase from the ravages of WWII. But since Reagan took office the US has been growing faster than most other big developed economies, and at least as fast in per capita terms. They’ve plateaued at about 25% below US levels, when you adjust for PPP. This is the steady state.  …   Why is per capita GDP in Western Europe so much lower than in the US? Mankiw seems to imply that high tax rates may be one of the reasons. … So I think Mankiw is saying that if we adopt the European model, there really isn’t a lot of evidence that we’d end up with any more revenue than we have right now. … Of course the progressives’ great hope is that we’ll end up like France. But Brazil also has high tax rates, how do they know we won’t end up like Brazil?

COMMENT

This guy seems to be confusing economic growth with creating an economic bubble.

The simple reality is that tax increases lead to higher GDP growth and lower unemployment. And cutting taxes lead to lower GDP growth and higher unemployment.

Take a look at the stark reality yourself.

http://img27.imageshack.us/img27/3633/ta xrates.jpg

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