The Last Hold Out: Senator Blanche Lincoln Against 13 Bankers
By Simon Johnson
By now you have probably realized – correctly – that “financial reform” has turned into a victory lap for Wall Street.
When they saved the big banks, with massive unconditional support (both explicit and implicit) over a year ago, top administration officials promised they would be back later to fix the underlying problems. This they – and Congress – manifestly have failed to do.
Our banking structure remains unchanged, the rules will be tweaked at the margins, and the incentive and belief system that lies behind reckless risk-taking has only become more dangerous. (The back story, if you can still stomach it, is in 13 Bankers).
There is only one small chance for any sensible progress remaining – and you are about to see this crushed in conference by the supporters of unfettered big banks.
Senator Blanche Lincoln’s proposal with regard to derivatives has much to commend it. A fiduciary duty for swaps dealers vis-à-vis customers would be entirely appropriate – in fact long overdue.
Real time price reporting should also help regulators at least begin to understand what is driving market dynamics, for example around the May 6 “flash crash” – a point that Senator Ted Kaufman has also been making most forcefully.
Legal authority against market manipulation would be greatly strengthened and there would be more protection for whistleblowers. And the kind of transaction that Goldman entered into with Greece – a swap transaction with the goal of reducing measured debt levels, effectively deceiving current and future investors, would become more clearly illegal. All of this is entirely reasonable and responsible – and completely opposed by the most powerful people on Wall Street.
Of course, most of the anti-Lincoln fire has been directed against the idea that “swaps desks” would be “pushed out” to subsidiaries – i.e., the big broker-dealers could still engage in these transactions, but they would need to hold a great deal more capital against their exposures, thus making the activities significantly less profitable.
It is striking that while Treasury argues that increasing capital is the way to go with regard to financial reform, they are adamantly opposed to what would amount to more reasonable capital levels at the heart of the derivatives business.
This is beyond disappointing.
No doubt the administration feels good about what it has “achieved” on financial reform. The public aura of mutual congratulation will last for about three weeks.
But outside of the inner White House-Capitol Hill bubble, it is very hard to find anyone well-informed about the financial system who thinks that anything substantial has changed or that risks will be better managed as we head into the next cycle.
“Business as usual” is the abiding legacy of the Obama administration with regard to the systemic risks posed by this financial system. Treasury and White House let us down repeatedly and completely in the last 18 months on financial sector issues – just as they did (as decision-making bodies and as some of the same individuals) at the end of the 1990s.
At one point in early 1998, Larry Summers called Brooksley Born – the last person who really tried to rein in the dangers posed by derivatives (and it was a much lower level of danger then compared with now). Summers reportedly said, “I have thirteen bankers in my office, and they say if you go forward with this you will cause the worst financial crisis since World War II.”
We now seem to have come full circle to exactly the same people saying exactly the same things – no doubt top people in the administration are now calling Senator Lincoln and impressing upon her a version of the same point made by Summers to Born.
The 13 bankers have won, completely. Here we go again.
Written by Simon Johnson
May 26, 2010 at 7:26 am
Posted in Commentary
Tagged with Senator Lincoln
18 Responses
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This answers the question about how empires crumble… the powerful elite convince “the public” that their lecherous ways are good for everyone. It will work for awhile, until the the music stops, and the ’13 bankers’ all scramble to sit in a chair, only to find they are all gone. unfortunately, their demise is ours as well….
Teotac
May 26, 2010 at 8:05 am
“…and if there’s one place where you can redefine yourself, one place where your relevance is a deal away, it’s Wall Street” – the new normal
Beth
May 26, 2010 at 9:18 am
If there are other candidates who are stronger on bank and finance reform (Kaufman, Bernie Sanders, Jeff Merkley, Carl Levin, Maria Cantwell) I won’t be voting for President Obama in 2012. If he is going to handle the most crucial issue for our country in a superficial way I have no time for the man anymore.
http://rortybomb.wordpress.com/2010/05/20/treasury-and-the-banks-attack-on-collins-leverage-amendment/I’m finished with this administration. Excuse time is over.
Look at this imbecile and what he’s saying now. Have you ever seen anything so pathetic??? Oh yeah Timmy, they’ll be changing that exchange rate tomorrow. MORON!!!
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=asasJMfFzDl0
I also want to thank you for your book and this blog. Keep up the good work!
May 26, 2010 at 8:07 am
Yes. Thanks for your hard work Simon.
It has been strange and awful, paying such close attention to all this over the past two or three years.
brendan
May 26, 2010 at 8:18 am
It would be wonderful to see Brooskley Born come out in support of Senator Lincoln and expose the players and events one more time. Greenspan has been shown to be a misguided player. Couldn’t she expose Summers as well?
If the derivative reform does not go through, Obama’s fate is sealed. We can begin calling him Mr. “O” Jangles. He is only dancing to the tune of Wall Street. He will not survive. Sites like this will continue to expose the folly that has been perpetuated.
No more lobbyists. – What an absolute joke.
finally
May 26, 2010 at 8:26 am
Dear Prof. Johnson,
In your book « 13 Bankers » (I posted a book review of mine in my blog) you notice that in the long term the most effective constraint on the financial sector is public opinion. How should be the public opinion encouraged and supported? What is to be done ? Which means and resources do we need ? Can you supply some arguments please ?
@ James Kwak : James, did you get my interview request per email ? Thanks.
May 26, 2010 at 10:51 am
Our government be it an economic, financial, or industrial disaster has responded along the following lines
“We will take the necessary steps to ensure that this never happens again”
In reality nothing happens, and every time another disaster happens we find the regulators are filled with people from the industry they are meant to regulate, and both parties have taken gobs of cash from corporations
The crash of ’29 nobody prosecuted and jailed although congress did pass strong legislation
Savings and loans – Neil Bush fined $50,000, cost to taxpayer $1.3 billion
Iran contra – most of the players pardoned by BUSH senior
NIXON – Pardoned by FORD
Buffalo Creek Flood – 125 people killed, 1000 injured, 4000+ homeless – Toothless investigation. The governor of Virginia settled for 1 MILLION DOLLARS
Martin County Sludge Disaster – MASSEY fined $5,000 and later that year gave $100,000 to the NATIONAL REPUBLICAN Committee
Sago Mine Disaster – 13 Killed. Bush filled Regulation Agency with people from ENERGY INDUSTRY
Upper Big Branch Mine – 29 dead – So far no criminal prosecution
07/08 Financial Meltdown – Nobody prosecuted. Financial Reform toothless and does not protect the people
Anonymous
May 26, 2010 at 10:53 am
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Wednesday, May 26, 2010
The Last Hold Out: Senator Blanche Lincoln Against 13 Bankers « The Baseline Scenario
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