McConnell and Cornyn's many virtues aside, neither of them are experts on this bill. Neither of them sits on the Senate Banking Committee. Neither of them can say what the legislation means for Wall Street. It's one thing to have those two going out on Fox News and offering red meat speeches to the base, but to have them telling a room of executives how the derivatives language will affect their business? It's laughable. And they didn't even have enough respect for the Wall Streeters to bring Richard Shelby or Bob Corker or one of the Republicans who can talk confidently about the legislation.
That said, if you're looking for help predicting the ultimate amount of bipartisan cooperation on this bill, the fact that Cornyn and McConnell are basing their fundraising strategy around their opposition to financial regulation should offer a clue.
Tuesday, April 20, 2010
Sens. McConnell and Cornyn go to Wall Street
The Eradication of Trust
Trust might as well be a four-letter word. American public opinion seems to have become an unguided Weapon of Mass Suspicion, and it’s not hard to understand why. But those who would exploit distrust, dissatisfaction and anger for political gain had better worry about collateral damage.
The overhyped tea party phenomenon is more about symbolism and screaming than anything else. A “movement” that encompasses gun nuts, tax protesters, devotees of the gold standard, Sarah Palin, insurance company lobbyists, “constitutionalists” who have not read the Constitution, Medicare recipients who oppose government-run health care, crazy “birthers” who claim President Obama was born in another country, a contingent of outright racists (come on, people, let’s be real) and a bunch of fat-cat professional politicians pretending to be “outsiders” is not a coherent intellectual or political force.
But even people who wouldn’t be caught dead at a tea party rally have lost trust in powerful institutions that are supposed to be working in the public’s interest—with considerable reason. Just look at the headlines.
There’s obviously no reason to trust Wall Street. Theoretically, the only reason for the financial system to exist is to service the economy—and the American people—by channeling capital to its highest and best use. The charges filed last week against Goldman Sachs illustrate the extent to which capitalism’s precepts have been turned on their head by financiers who believe the economy exists to service them.
The allegation, basically, is that John Paulson, a hedge fund mogul who wanted to place a billion-dollar bet that the housing market would deflate, convinced Goldman to round up patsies who would bet the other way. Then the transaction was allegedly rigged so that Paulson would almost surely win his wager, which he did. Goldman denies the allegations of fraud and says that, in any event, it lost money on the deal.
Leave aside for the moment whether Goldman’s action fell just inside or just outside the line demarcating what was legal. What possible socially redeeming value did the transaction have? How did the concoction of a “synthetic collateralized debt obligation” benefit anyone except the lavishly compensated traders at Goldman and the outrageously compensated John Paulson? Is this a system the rest of us could possibly trust?
Does anyone really question who the Republicans in DC are fighting for?
About 25 Wall Street executives, many of them hedge fund managers, sat down for a private meeting Thursday afternoon with two of the most powerful Republican lawmakers in Congress: Senate minority leader Mitch McConnell of Kentucky, and John Cornyn, the senior senator from Texas who runs the National Republican Senatorial Committee, one of the primary fundraising arms of the Republican Party.
The stated topic of the meeting: The Financial reform bill being sponsored by Senator Chris Dodd, the Democrat and chairman of the senate banking committee. Both McConnell and Cornyn listened to numerous complaints the executives have with the bill. These included complaints about provisions that allow the government to continue to prop up financial institutions that are “too big to fail.”
The undercurrent of the gathering, however, was undeniably political. It came on the heels of President Obama and Democrats in Congress passing health-care reform by a narrow margin, and who are now turning their attention to passing financial services reform a little more than a year after the Wall Street meltdown.
The Senators explained they can’t just oppose the Dodd bill — they need to come up with a reform plan of their own, as they fight its least free-market components, such as the notion that the government can determine which banks are “too big to fail.”
In the meantime, they need to increase numbers of Republicans in both the House and the Senate if they are going to make an impact on not just this bill, but other measures to increase Washington’s control of the financial business. To do that they need the support of the financial community. At one point McConnell quoted something he attributed to Democrat Barney Frank, the chairman of the House Financial Services Committee.
McConnell, according to a person who was present, said “Barney likes to say ‘Wall Street used to say we have Washington by the (neck), and we’re going to change that.’”
Spokespeople for McConnell and Cornyn didn’t return calls for comment.
During the meetings, both predicted that the Republicans will likely add at least six senate seats to their current total of 41, meaning they would come up just shy of control of the Senate. They predicted victories in Nevada, unseating the unpopular Senator Majority Leader Harry Reid, and said Republican Pat Toomey has a great shot at unseating Republican-turned-Democrat Arlen Specter in Pennsylvania.
They also said that they have a shot at taking control of the House by adding 40 additional seats to their current total. In New York State alone, the senators predicted a six-seat pickup.
But in order to assure those gains, and add even more, McConnell and Cornyn made it clear they need Wall Street's help. “There was no arm twisting but they did say that we should feel uncomfortable living in any country where one party has unfettered ability to pass anything including health care and anything else President Obama dreams up,” said another executive who was present.
In addition to Too Big To Fail, other parts of the bill that drew concern included what one executive from JP Morgan (JPM: 45.88, 0.49, 1.08%) said is a provision that would give authority to government to override bankruptcy laws, and determine which class of bondholders should get paid off first. During liquidation, bonds that have a higher priority and are considered “senior” are paid off first, thus they trade higher in the markets.
“I wouldn’t say this around the office,” said the executive, according to two people who were present, “but if that aspect survives, it will kill the market for distressed debt.”
Break Up The Banks
The biggest banks in the United States have become too big – from a social perspective. There are obviously private benefits to running banks with between $1 trillion and $2.5 trillion in total assets (as reflected in today’s earnings report), but there are three major social costs that the case of Goldman Sachs now makes quite clear.
1) The megabanks have little incentive to behave well, in terms of obeying the law. There is fraud at the heart of Wall Street, but these banks have deep pockets and suing them is a daunting task – as the SEC is about to find out. The complexity of their transactions serves as an effective shield; good luck explaining to a jury exactly how fraud was perpetrated. These banks have powerful friends in high places – including President Obama who still apparently thinks Lloyd Blankfein is a “savvy businessman”; and Treasury Secretary Geithner, who is ever deferential.
2) The people who run big banks brutally crush regular people and their families on a routine basis. You can see this in two dimensions
A. They are not inclined to treat their customers properly. They have market power in particular segments (e.g., new issues or specific over-the-counter derivatives) and there are significant barriers to entry, so while behaving badly undermines the value of the franchise, it does not destroy the business. Talk to some Goldman customers (off-the-record; they don’t want to bite the hand that hurts them). Lloyd Blankfein still claims that the client comes first for Goldman; most of their clients are surprised to hear that.
B. Small investors also lose out. Who do you think really bears the losses when John Paulson is allowed to (secretly, according to the SEC) design securities that will fail – and then pockets the gains?
3) Underpinning all this power is the ultimate threat: Too Big To Fail. If a big bank is pushed too hard, its failure can bring down the financial system. This usually means protection when the system looks shaky, but it can also protect big banks from serious prosecution – if their defenders, like Jamie Dimon, can make the case that this would undermine system stability and slow the creation fo credit. (This is startlingly parallel to the arguments made by Nicolas Biddle against Andrew Jackson during the 1830s; see chapter 1 of 13 Bankers).
In turn, this puts competitors at a major disadvantage, because the bigger banks can borrow on better terms. The extent of protection provided to management and boards in 2008-09 was excessive, but what really matters is the protection perceived and expected by creditors going forward. And this is all about whether you can credibly threaten the creditors with losses. This, in turn, is about a simple calculus – if a firm is in trouble, will it be saved?
A Short Citizen’s Guide to Reforming Wall Street
The real scandal isn’t the Street’s unlawful acts (i.e., Securities and Exchange Commission vs. Goldman Sachs) but legal acts that have reaped the Street a bonanza and nearly sunk the rest of us.
It’s good we finally have an SEC on which three out of five commissioners are willing to enforce laws already on the books. Hopefully other enforcement agencies (CFTC, FDIC, and the Fed) will follow suit. But we also need to make illegal the recklessness that’s now legal.
The Dodd bill now being considered in the Senate is a step in the right direction. Yet despite the hype, it’s a very modest step. It leaves out three of the most important things necessary to prevent a repeat of the Wall Street meltdown:
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. Wall Street doesn’t want these three major reforms because they’d cut deeply into profits, and it’s using its formidable lobbying clout with both parties to prevent these reforms from even from surfacing. It’s time for Main Street — Tea Partiers, Coffee partiers, and beer drinkers — to be heard.
Delusions, the Legislature and an implanted microchip
Last Wednesday, the House Judiciary Committee entertained SB 235, the bill sponsored by Sen. Chip Pearson (R-Dawsonville) to prohibit the involuntary implantation of microchips in human beings.
In Gov. Roy Barnes’ stump speech, the bill has become a routine example of the Republican tendency to attack problems that don’t exist, and ignore the ones that do. Besides, Barnes argues, if someone holds him down to insert a microchip in his head, “it should be more than a damned misdemeanor.”
Three states have instituted bans, and others have considered the legislation. In Virginia, a bill supporter declared microchips to be the “666″ mark of the beast referred to in the Book of Revelation.
Pearson has said his motivation isn’t biblical or religious – that he is simply working in advance of technology’s next assault on personal privacy. Not unlike limiting the uses of DNA testing by health insurance companies, he argues.
At the House hearing, state Rep. Ed Setzler (R-Kennesaw), who is shouldering the legislation in the House, spoke earnestly for better than a half hour on microchips as a literal invasion of privacy.
Georgia: Making a Scapegoat of Immigrants ---Steve Davis votes yes...
Georgia state lawmakers are discriminating against immigrants through proposed legislation SB 67 that would restrict driver's license exams to be issued in English only. Currently the state offers the exam in 13 different languages but according to State Senator Jack Murphy, the chief proponent of the legislation, restricting the privilege to English-only drivers is a matter of safety. The senator believes that foreign language drivers pose a danger because they cannot read English language road signs. If Georgia offered driving tests only in English it would eliminate the perceived problem.
I say perceived because I could find no evidence that non-English speakers are a danger. Even in legislative hearings, as the bill was being debated, there was no testimony by road safety experts to prove that English-only drivers would improve safety. Not only was there no evidence the bill would make Georgia roads safer, the proposed bill offers driver's licenses for illiterate drivers. Fifteen percent of driver's licenses in Georgia are issued to people who cannot read at all. According to Senator Murphy, they qualify as safer drivers than the non-English literate immigrants. If the bill passes, U.S. citizens and legal residents who are not proficient in English will be prohibited from driving.
I tried to speak with Senator Murphy but was told he was not available until after the legislative session. I tried to speak with a representative from the Governor's office, Sonny Perdue, but received no response. I called the Chamber of Commerce of the State of Georgia to see what their position might be -- no response. The immigrant community, civil rights leaders and religious community vehemently oppose the restrictive bill. Jerry Gonzalez, executive director of Georgia Association of Latino Elected Officials (GALEO) calls the measure xenophobic and anti-immigrant. "There is no evidence that this measure will make roads safer. It is just an attempt to target immigrants, legal or not." The bill will affect an estimated 60,000 immigrant drivers. People who need their car for employment or transporting their children will have to use an inadequate public transit system or find alternate transportation. Non-English speakers who have a history of safe driving will no longer be permitted to operate a motor vehicle. Bill Nigut, Southeast Regional director of the Anti-Defamation League (ADL) says, "The economic harm of an English-only policy could have a devastating impact. Many will not be able to obtain a driver's license and will be stranded and unable to go to work."
If there is no substantiated or legitimate basis for the restrictive legislation one can only draw conclusions that non-English speakers are not welcome in the state of Georgia. Some speculate that the bill is aimed at the growing Spanish speaking population and undocumented immigrants. It is a harsh, punitive measure that will not curb illegal immigration but will probably score political points.
The vast majority of non-English speakers in the state of Georgia were most likely marginalized in their home countries, fled oppression, escaped poverty, survived war or were searching for better opportunities. They have run into the arms of America to be embraced by the nation of immigrants where all are considered equal and all have a fair chance at stability and success. To require an English-only driver's license exam is literally forcing immigrants to sit at the back of the bus. They are not safe enough, smart enough or worthy enough for the simple liberty of driving a car. I wonder what any of us would feel like if our driving privileges were stripped for no legitimate reason.
The Georgia state legislature has made a scapegoat of immigrants for some cheap political gain. To further oppress and restrict the mobility of an already vulnerable population is cowardice and shameful. What Senator Murphy and his supporters do not understand is that immigrants are a vital part of what makes this country strong and unique. America was never intended to be a home just for the white, rich and English speakers. If the Statue of Liberty were somehow moved to Georgia, the powerful ode to immigrants by Emma Lazarus would have to be modified to accommodate the bigotry of the Georgia State Legislature:"Give me your wealthy, I shun the immigrant poor,
Your huddled politicians yearning to be free (of Spanish),
The wretched refusal of your driving test score.
Send these, the homeless, tempest-tost away from me
I turn off my lamp beside the closed golden door."I apologize to Emma Lazarus for my unskilled poetry. Please read the real poem here and see if the State of Georgia is living up to her promise.
Steve Davis voted yes on SB 67
HB1322 Public disclosure exemption; certain graphic image photographs; provisions
It was in the finest tradition of representative government that state Sen. Donzella James, D-Atlanta, proposed an amendment to a House bill restricting public access to some crime scene photos. Her amendment would extend that restriction to recordings of some 911 calls and some police dashboard video camera footage. And given the sensitive nature of such material, it's hardly surprising the Senate would vote 50-0 in favor of amending the House bill.
Unfortunately, in rushing - however understandably - to protect the interests of crime and disaster victims, senators have set the legislature on a course toward ignoring the interests of the public in knowing whether the emergency personnel who are paid with their tax dollars are doing their jobs.House Bill 1322 was drafted last month as the legislature's response to a request made to the Georgia Bureau of Investigation by a true-crime writer working for the pornographic magazine Hustler. In a matter that now is awaiting resolution in the courts, the writer has asked the GBI for crime scene photos in the murder of 24-year-old University of Georgia graduate Meredith Emerson. Emerson's nude and decapitated body was discovered in the North Georgia mountains in January 2008, shortly after she was slain.
In the version that passed the House, the bill exempted crime scene photographs showing a deceased person whose body had been mutilated, or whose genitalia were exposed, from disclosure to the media and the public under the Open Records Act. That version of the bill brought a relatively muted reaction from the media. This newspaper offered two editorials, on March 10 and March 12, arguing primarily that exempting such admittedly gruesome material from disclosure could unduly limit the public's ability to determine whether law enforcement authorities had adequately investigated a crime, or whether it was possible to arrive at a conclusion different from law enforcement about the circumstances of a crime.
While those are valid arguments, they are admittedly technical and relatively narrow. It's far easier, and far more vital to the public's right to know, to make the case that the amended bill passed by the Senate places an undue restriction on the public's access to information on public agencies. Here is the problematic language of the amended bill, which exempts from public disclosure the following:
"Records of a law enforcement agency, an emergency 9-1-1 system, a public health agency, or any other similar agency when:
"(A) Such records consist of or contain audio or video recordings of the personal suffering of a person in physical pain or distress;
"(B) Public dissemination of such records would cause emotional distress to the person whose suffering was so recorded or to the family of such person."
According to a Morris News Service report, Sen. James proposed the ban on 911 and other emergency service audio and video recordings on the basis of having heard the repeated broadcast of the final words of a victim of the flooding that plagued the Atlanta area in September.
According to an Atlanta Journal-Constitution report, residents of Douglas County, particularly hard-hit by the September flooding, had asked their senators for the disclosure exemption.
While James and other legislators deserve credit for responding to constituent concerns, a major problem with the amended bill is immediately apparent. How, exactly, is it to be determined whether a recording "consist(s) of ... the personal suffering of a person in physical pain or distress"? Clearly, anyone who calls 911, or is stopped by a police officer, or otherwise is interacting with emergency personnel, is almost always in some degree of suffering or distress.
Thus, the amendment creates the very real possibility that all 911 call recordings and all police dashboard videos would be exempt from disclosure. And that, in turn, creates the possibility that the public might never learn whether emergency personnel responded effectively and efficiently to a given emergency.
Again, it's clear that James and her Senate colleagues had the best of intentions in amending House Bill 1322. But if the bill remains as it is, and is signed into law that way, they will have done irreparable damage to the public's right to know what their government is doing.
Jay Bookman State leaders play a cruel, disrespectful game with MARTA
It is, at some level, a test of basic respect.
It’s also a test that the leadership of Georgia is failing, at least so far. Their refusal to date to lend a helping hand to MARTA in its moment of great need — a gesture that would not cost state taxpayers a single penny — comes across as callous and even oddly vindictive.
Tens of thousands of our fellow Georgians rely on MARTA for daily transportation. The transit system is as critical to their lives as streets and roads are to those Georgians who live in suburbs, small towns or rural areas.
MARTA customers use the system to go to work; they use it to get to school so they can educate themselves. They use it to check on the well-being of their elderly parents and grandparents; they use it to get to church on Sunday, to go to the doctor’s office and to bring home groceries.
And unlike every other major rail system in the country, MARTA provides that service with no financial support from state government. For decades, the people of Fulton and DeKalb counties have levied a one-penny sales tax on themselves to pay for the entire state and local share of MARTA’s construction and operating costs.
But like any governmental agency dependent on sales-tax revenue, MARTA has taken a dramatic financial hit. The agency’s operating budget faces a deficit of more than $100 million in the next fiscal year, even after scheduled rate hikes. If service has to be cut by roughly a third, as now estimated, MARTA’s basic mission would be threatened.
That story isn’t likely to win much sympathy these days, not with every state and local agency facing similar troubles. But while MARTA officials would love an injection of state aid, they have also asked the state Legislature and Gov. Sonny Perdue for something much easier to provide.
State law requires MARTA to spend at least 50 percent of its tax revenue on capital costs, such as equipment and new construction. No other major transit agency faces such a restriction. If that legal requirement could be dropped, even temporarily, MARTA would have the flexibility to shift money into its operating budget and at least soften the service cutbacks that loom ahead. It wouldn’t be a lot, but it would be something.
However, with just a few legislative days left on the 2010 calendar, it appears that even that minor gesture of respect and decency toward MARTA riders might be too much to ask.
Last week, the House Transportation Committee did raise hope by amending a Senate bill to give MARTA the flexibility it needs. However, that hope was brief. The very next day, Senate Bill 520 was pulled back into committee until it could be stripped of the MARTA provision.
Legislative leaders are still trying to hammer out a much-needed overhaul of the state’s transportation financing system, including provisions giving regions such as metro Atlanta the right to levy new taxes on itself for transportation. Conceivably, language addressing MARTA’s 50/50 restriction could become part of that last-minute deal-making.
At some point, a longer-term solution to MARTA’s fragile financing structure will also have to be addressed, but that’s a more complex issue best addressed another day.
For the moment, legislation giving MARTA more flexibility in how it spends tax money generated in Fulton and DeKalb counties and spent in the service of Fulton and DeKalb counties would be miracle enough.
Saxby Chambliss and the fight over derivatives
Georgia’s senior senator is in a head-to-head battle with Democratic committee chairwoman Sen. Blanche Lincoln over her version of Wall Street reform legislation that is scheduled for a committee vote Wednesday.
Lincoln has said her legislation will “end the days of backroom Wall Street deals” and prevent future bailouts of big financial firms.
But Chambliss argues it also will cause in a serious crunch on the financial industry and consumers alike.
“We’re going to put a lot of people out of the business of hedging their bets,” Chambliss said. “What that’s going to do is cause energy prices to go up, (cause) consumer prices to go up.”
Lincoln’s bill, which would be melded into a bigger Senate banking bill, would substantially limit how banks and other financial institutions trade derivatives, those risky investments that helped cause the meltdown of financial markets. Banks that don’t play by the new rules would be barred from receiving federal assistance if they got into financial trouble.
Why the Senate agriculture committee is involved in Wall Street reform is almost as confusing as derivatives themselves.
Basically, it’s because derivatives were once known more for their use in farming than high finance.
Farmers can buy derivatives, known as futures contracts, that guarantee set prices for crops, helping guard against major price swings because of natural disasters or other reasons.
Wall Street, of course, took that idea of derivatives to new levels. But the Senate agriculture committee never gave up its power on how derivatives are regulated.