How did I miss this one? Bloomberg News, on Aug. 31, reported that Standard & Poor’s is still giving its highest rating, AAA, to subprime-mortgage-backed securities:
Standard & Poor’s is giving a higher rating to securities backed by subprime home loans, the same type of investments that led to the worst financial crisis since the Great Depression, than it assigns the U.S. government….
More than 14,000 securitized bonds in the U.S. are rated AAA by S&P, backed by everything from houses and malls to auto- dealer loans and farm-equipment leases, according to data compiled by Bloomberg.
Granted, nobody reads 576-page commission reports, but this newly released, two-year-in-the-making report by the Financial Crisis Inquiry Commission looks pretty good, based on the article about it in today’s NYT. The article states:
‘The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.
‘“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.”’
Right on. And with testimony from more than 700 witnesses to inform those conclusions, there ought to be some good detail within the report.
The above conclusions might seem obvious, but acknowledging the obvious is something that politicians are not good at. And predictably, the commission was split among party lines. The above excerpt is from the majority report. From the article:
‘Of the 10 commission members, the six appointed by Democrats endorsed the final report. Three Republican members have prepared a dissent focusing on a narrower set of causes; a fourth Republican, Peter J. Wallison, has his own dissent, calling policies to promote homeownership the major culprit. The panel was hobbled repeatedly by internal divisions and staff turnover.’
So much for feasible solutions. Even with a Democratic Congress, the financial reform bill we got last year was extremely watered down. Get ready for the next conflagration.
This week the Senate passed a financial reform bill that’s at least a bit tougher than looked possible a couple weeks ago. Paul Krugman has a concise rundown on it right here:
“What’s good? Resolution authority, which was sorely lacking last year; consumer protection; derivatives traded through clearinghouses; ratings reform, thanks to Al Franken; tighter capital standards for big players, although with too much discretion to regulators.
“What’s missing? Hard leverage limits; size caps; not much in the way of restoring Glass-Steagall. If you think that too big to fail is the core problem, it’s disappointing; if you think that shadow banking is the core, as I do, not too bad.”
Dean Baker has some additional words here on Al Franken’s credit-rating-agencies reform amendment, which would eliminate the huge grades-for-sale conflict of interest of having companies being rated pay the rating agency for their work. Instead, the Securities and Exchange Commission will assign the rating agency for each new securities issue.
The Senate bill also includes a Consumer Financial Protection Agency, which will be technically independent, as reformers had been pushing for and industry had been furiously opposing. However, the agency will be housed within the Federal Reserve, which reformers had opposed because of the Fed’s dismal track record on consumer protection over the past decade. Supposedly the agency will not have to answer to the Fed’s leadership, but we’ll have to see how that works out in practice. I have not yet seen any word on whether the fabulous Elizabeth Warren, the Harvard Law professor who had been advocating for this agency, would still be interested in heading it.
All told, the bill still leaves much to be desired — Simon Johnson and James Kwak at The Baseline Scenario decry its lack of hard capital requirements or bank size restrictions — but looks a whole lot better than nothing:
Simon Johnson has yet another fine post on the need to break up the biggest banks, for the sake of financial stability. Unfortunately, he notes, it looks like it ain’t gonna happen, that the SAFE Banking Act sponsored by Sens. Sherrod Brown (D-OH) and Ted Kaufman (D-DE) won’t make it anywhere near the Senate floor.*
The post includes a remarkable quote by Alan Greenspan, who now seems to get it:
“For years the Federal Reserve had been concerned about the ever larger size of our financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest-sized institution. A decade ago, citing such evidence, I noted that ‘megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail.’ Regrettably, we did little to address the problem.”
Now, Greenspan is a bit like the Bible, Shakespeare, or Adam Smith — comb through all his words and you can probably find something to support your position, whatever it is. But it is striking that he acknowledges the lack of economies of scale brought by big banks and their potential for systemic damage. His regret at not addressing the problem would be more constructive if he could find a concrete proposal to support, like Sen. Kaufman’s bill, for example. (I’m reminded of the old quote A little knowledge that acts is worth infinitely more than much knowledge that is idle.)
* Update: The Brown-Kaufman SAFE Banking Amendment did make it to the Senate floor on May 6, but it was voted down, 33-61. The roll call vote is here. About two-thirds of Democrats voted for it, along with three Republicans. Among the Democrats voting No were Senate Banking Committee Chairman Christopher Dodd and New York’s Chuck Schumer and Kirsten Gillibrand.
The NYT has a good piece on the prospects for federal breakups of the big banks. It’s not part of the financial reform bill that the Senate Finance Committee just passed, or the one the House passed earlier, but a group of Democratic senators including Sherrod Brown of Ohio and Ted Kaufman of Delaware just introduced such a measure.
Some numbers to sink your teeth into, from the article:
The banking industry has become much more concentrated as it has grown in recent years. In 1995, the assets of the six largest banks were equivalent to 17 percent of G.D.P.; now they amount to 63 percent of G.D.P. Meanwhile, the share of all banking industry assets held by the top 10 banks rose to 58 percent last year, from 44 percent in 2000 and 24 percent in 1990.
UPDATE: Simon Johnson likes the Kaufman-Brown bill and discusses it at length here. A longer post here about the specious arguments by two senators and Larry Summers in favor of preserving the size of the big banks.
Thomas Hoenig, president of the Kansas City Fed and one of the most incisive critics of the “too big to fail” policy, has an op-ed in today’s NYT about the current financial reform bill before Congress. He says it does far too little to end “too big to fail” — while it sets up a mechanism for big failing financial institutions to be put under FDIC receivership, those financial institutions would still have the political clout to snag a bailout instead.
This may be true, but it seems to be a drawback in any financial reform bill that doesn’t call for the biggest financial institutions to be broken up into smaller ones that are not too big to fail, i.e., which can go bankrupt without significant systemic risk to the economy. Koenig has spoken elsewhere on the need to break up the biggest banks. It’s a position that finds favor among many liberal economists,including James Kwak of the Baseline Scenario (see previous link). Rep. Paul Kanjorski of Scranton, PA has proposed an amendment to give the government power to preemptively break up any financial institution whose failure would impose giant costs on the U.S. economy, but the Senate Banking Committee apparently has nothing like that on the table yet. Alas, the political clout of the big banks may well be enough to make bank size restrictions a non-starter in the Senate. Simon Johnson of The Baseline Scenario says much the same thing here.
Hoenig says that another provision of the bill actually makes things worse by narrowing the Fed’s supervisory role to just the nation’s 12 largest banks, most of which are headquartered in NYC. I do not know what the logic of this provision is, and Hoenig doesn’t say; maybe the idea is for the other banks to be supervised by the FDIC and/or other agencies instead. Whatever it is, Hoenig thinks the Fed needs to give just as much attention to the other 6,700 as to the top 12. As he points out, that would seem to be the whole point of having 11 regional Fed banks besides the one in New York.
UPDATE: Simon Johnson puts it a lot more plainly right here. For the record, Paul Krugman has his doubts that breaking up the banks would help much — see the last three paragraphs of this recent column. I’m with Simon Johnson here. By all means, crack down on fraudulent finance at institutions large and small, but I don’t see how you limit the power of the big banks without limiting their size, too.
“Bernanke is an airline pilot who pulled off a miraculous landing, but didn’t do his preflight checks and doesn’t show any sign of being more careful in the future – thank him if you want, but why would you fly with him again (or the airline that keeps him on)?”
— Simon Johnson, opposing the reappointment of Ben Bernanke as chairman of the Fed. Johnson’s preferred alternative appointment is a surprising one — so surprising that he himself scotched the idea as “crazy.”
I’ve been skeptical all along. So have Brad DeLong and Paul Krugman. It’s hard to say we’ve hit bottom when industrial production continues to fall, by 1.1% in May and by 13.4% over the past year, the worst 12-month showing since 1946. Industrial capacity utilization is at a record-low 68.3%. (The capacity utilization data go back to 1948.)
But it does appear that some economic indicators, like employment, are at least declining at a slower rate, so “bottoming out,” as opposed to “has already bottomed out,” may be appropriate. The question is how long it’ll take for the economy to start growing again, as opposed to staying at a low level. James Kwak of The Baseline Scenario offers a good rundown of the “green shoots” debate here.
Yahoo Finance’s Tech Ticker has a nine-minute interview with George Soros, and a quick summary, here.
Nothing too shocking here, but on target and well stated.
Simon Johnson’s latest analysis of the situation is even better, though his assessment of the circle-the-wagons politics of it all is mighty bleak. Don’t miss Johnson’s link to a January 2009 WSJ piece about financial economist Raghuram Rajan, one of the high-profile Cassandras who predicted the current implosion and who met a hostile “Jane, you ignorant Luddite” response from a star-studded 2005 gala of economists including Larry Summers.
(The money quote from Summers: “[I find] “the basic, slightly lead-eyed premise of [Mr. Rajan’s] paper to be misguided.” Lead-eyed? Not in the dictionary; seems to be a fishing term. Maybe he said “Luddite” and was misquoted?)
Blogging Through the Wreckage 