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Tuesday, November 30, 2021

Change you can be fooled by

Treasury Secretary Tim Geithner has been a busy man. Besides the ill-conceived PPIP and TARP-forever resolution authority he laid out a few weeks back, he also proposed some legislation purporting to strengthen financial regulation. And, per the usual, I don’t think it’ll work; his focus onsystemic risk is troubling, because it ignores the central problem.

Consider that there are three major ways to regulate a financial institution: limit systemic risk, limit internal complexity or limit size. Let’s look at each.

Systemic risk basically means that a firm like AIG has so many counterparties and so many investments that if it went down, it would take everyone else *cough* Goldman Sachs *cough* down with it.

Internal complexity, on the other hand, explains why CEOs are unable to tell Congress what their company even does; they have so many things going on in so many markets that it’s functionally impossible for them to comprehend their overall risk exposure.

Then we get to size; if a large firm fails, there’s simply too much at stake on a national level and socially important investors, e.g. pension funds, can be wiped out. In addition, a large firm will have undue clout in Washington, giving banks excessive influence on the rules that govern their operations.

Now, if you simply regulate systemic risk, you can’t effectively stop a firm from developing crippling internal complexity or from using its size and clout to relax regulations. In the same way, if you limit internal complexity there is still a high level of systemic risk and regulations can still be pared back.

The only way to effectively regulate financial institutions is to ensure that they cannot become too big to fail. This has the added benefit of making it far less likely that a firm will become too complex or systematically vital. So in the event of a bankruptcy, there’s no macroeconomic threat; other firms can fill the niche.

In calling for a newsystemic risk regulator, Geithner misses another key point; that we already have one (see, Federal Reserve).

Furthermore, regulators already have immense power. They can literally tell a firm it no longer exists, which is exactly what the FDIC does about once a week these days.

This is key. The problem lies not so much in the current structure of regulation, but in its implementation. Geithner’s new regime misses that these banks did have regulators; it’s just that regulators didn’t do their job.

And there are plenty of reasons. Regulators weren’t capable (remember internal complexity?); didn’t have the resources (conservatives cut their budgets and staff, and the FBI diverted over 500 agents away from its financial fraud division to investigate hippies after 9/11); didn’t see a problem (Greenspan); had friends in finance (Larry Summers, more on him in a bit); or engaged directly in fraud (failed bank IndyMac’s head regulator actively coordinated with the bank to cook its books, a move that ended up costing the FDIC $10.7 billion).

But that’s not all. Many regulators generate fees from the banks they oversee, which incentivizes them to regulate a lot of banks. But banks have the ability to choose their regulator, which incentivizes them to select the most forgiving one. Thus, in the build up to this crisis, regulators offered less comprehensive oversight in order to attractclients.

Then there was the ideological aversion to regulation, which led lawmakers to actively deregulate the industry. Besides Greenspan, another prime example is Neal Wolin, Geithner’s recent nominee for the treasury’s number two spot and was an integral author of deregulatory legislation in the 90s.

Finally, there’s the revolving door of finance and government. And for that, we need look no farther than Larry Summers, Obama’s lead economic advisor.

Summers was most recently apart-time director of the world’s sixth largest hedge fund, D.E. Shaw and Co., before joining up with Obama. For his trouble, that is, for showing up once a week, Summers was paid $5.2 million in 2008. It seems D.E. Shaw and Co. was either buying access to power or just saying thanks for Summer’s tenure as treasury secretary where, from 1999 to 2001, he too pushed hard for increased deregulation of financial markets.

Summers also took part in the most transparent racket in America: the speaker circuit. This is where powerful political elites command fees greater than the yearly income of two-thirds of American households (about 60 grand) to talk to small groups of really rich people. It’s basically a legal way to bribe and launder money, and serves again to either buy access for future handouts, show thanks for previous handouts or, in the case of Summers, both.

The man raked in over $2.7 million in 2008 just for talking, taking payment from the likes of Citigroup ($99,000), American Express ($67,500), Goldman Sachs ($202,500), JPMorgan Chase ($67,500) and Lehman Brothers ($135,000). These companies have received a combined $83.4 billion from the TARP alone, not counting various guarantees and other support programs.

And while the administration claims that Summer’s payolaslong pre-date his work for Obama, it’s hard to imagine how they could justify that; his last paid speaking engagement was on Nov. 11, a week after the election and just two weeks before being appointed to his current post.

Summer’s situation has eerie, though less sinister, parallels with Dick Cheney’s Halliburton scandal. In case you forgot, Cheney was sitting on $34 million inretirement money (yet another large thank you for his stint as defense secretary under Bush I) as he made energy policy behind closed doors with executives from companies like Enron and ExxonMobile.

I mean, I guess it’s an improvement that Obama’s recent kumbaya with the most unrepentant and fraudulent executives in capitalism, at which Summers and Geithner were present, was public knowledge; and at least the man who is one of the chief architects of the administration’s economic policy only made $8 million from the industry he’s currently working with; but come on.

Summer’s tale is just one among many, which is why Geithner’s regulatory proposals fall short. Creating more underfunded, understaffed regulators cut from the same cloth as the men they’re supposed to regulate won’t do the trick.

With no serious attempt to include transparency for the resolution authority, to increase regulatory manpower and funding, to subsequently oversee those regulators, to undo Washington’s revolving door, to get regulators off the dole of the banks they regulate and to crack down on fraudulent rating agencies, there’s no real fix involved; just a consolidation of power among the financial elite at our expense. As I said last week, the fuck-you is in the fine print.

I hope you brought your reading glasses.

 

K.C. CODY is tired of talking about the banks. Give him something else to complain about at kccody@ucdavis.edu.

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