Corporate Governance

Shock and Awe: From Massachusetts to the Obama ?Volcker Rule? (Part 10 of 10)

By Jennifer S. Taub

Given that this is the final part of this 10 part series, it is appropriate to summarize the key take-aways from the visits with Senate Banking Committee members and staff.  They are organized by the encouraging observations, causes for concern, and the open questions.

Encouraging Observations: The Good Guys and Gals
The most encouraging observation is that there appear to be several Senators, House Members, and a President who are concerned about repeating the mistakes of the past. 

1. Senate: There are some very engaged Senators and staffers on the Banking Committee who want to prevent future financial crises. The one who stands out is Senator Jeff Merkley (and his fabulous staffer, Andy Green) from Oregon. A close second is Senator Kohl from Wisconsin, due to his stellar staffer, Harry Stein.
2. House Legislation: I am encouraged that the House did pass by a vote of 223- 202, H.R. 4173, the Wall Street Reform and Consumer Protection Act of 2009. Quite simply, there are at least 223 people looking out for the taxpaying middle class. The general topics this bill covers were identified earlier in this series.  You might want to see who supported this bill. Here's the roll call for the vote. It is worth noting that there was not a single Republican 'aye' vote and there were 27 Democrats who voted 'no.' There were nine who did not vote at all. If you want to know the name of your Representative in the House, check here. 
3. House Hearings on Executive Pay: Moreover, at the House Financial Services Committee hearing on 'Compensation in the Financial Industry,' many in attendance (at least one Republican and at least a half dozen Democrats) were very concerned about the way Wall Street is using the bailouts and back-door subsidies to the record of $140 billion in bonuses for 2009. One expert witness noted that some banks that received bailout funding (TARP) returned the money even though it lead to a decline in stock value. The implication is that the CEOs of those banks did this so that they would be able to make more money personally at the expense of their own shareholders.
4. Obama 'Volcker Rule': It was encouraging that the President heard the message that the public is frustrated with the slow progress on financial regulatory restoration, and though not as expansive as one would hope, the proposal does require action to be taken to help prevent the gambling and speculation at too-big-to-fail banks to avoid another massive economic crisis.

Causes for Concern

1. Taxpayers to Fund the Next Bailouts: I am not kidding you. It is true. The Senate plan is for taxpayers to fund the next bailout. In some Orwellian double speak, we heard from both Warner's and Corker's staff that no one wants another bailout, but that the funding to resolve a failing giant bank will come from the Treasury, capped to some degree, but open for Congress to increase the funding.
2. The Warner- Corker Bankruptcy Approach: As noted in detail in an earlier part in this series, bankruptcy instead of pre-funded receivership-type resolution is (1) not new; (2) not a resolution; and (3) not the free market approach, but just another taxpayer funded bailout.
3. Lack of Preventative Measures:  It was alarming to hear the staffer for Tennessee Senator Bob Corker (R) inform us that no preventative regulation was needed other than some transparency, and that she doubted that we would ever again have a situation where another large financial institution became insolvent. This was stated in the context of questions we raised about funding a resolution. In other words, this reflects a view, perhaps of her boss, Senator Corker, that transparency and the presence of more regulators with oversight (such as the Fed's current oversight of investment banks that are now bank holding companies) would be enough to prevent a future debt-fueled asset bubble.
4. Power of the Big Banking Lobby: It was extremely distressing to find out that the lead Democratic Senator on the systemic risk/too-big-to-fail legislation appears more committed to satisfying the big banks than taxpayers, consumers, or the 5,000 community banks. This was evident, as noted above, when his lead legislative aid chose to meet with the President of the American Bankers Association instead of keeping the appointment with us. Indeed, the  banks may be okay with the ban on proprietary trading because they can easily get around the ban, according to former Goldman Managing Director, Nomi Prins.
5. The Obama proposal freezes firms as they are, but does not address their existing scope, scale, concentration or interconnectedness. Finally, many of the important measures for improving corporate governance (including shareholder empowerment), enhancing consumer protection, ending predatory lending, reforming credit rating agencies, creating transparency in the asset-backed securities markets, requiring registration of advisers of hedge funds, and other private pools, are not being addressed in the Senate. They are outside of the Warner-Corker team's scope or the President's proposal. And, many excellent suggestions such as those by SAFER, Shareowners.org, and AFR are relevant and not yet being considered.

Open Questions

The Volcker Rule: The president declared that 'Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.' There seems to be uncertainty as to what qualifies as 'proprietary trading for their own profit, unrelated to serving their customers.' That might appropriately include all trading activities other those under which the bank has a 'fiduciary duty." Expect this definitional space to be where the lobbying begins.

Full post as published by The Race to the Bottom on January 30, 2010 (boomark / email).