Thursday, March 18, 2010

The Futility of Financial Reform

As I mentioned on Saturday March 13th it is unlikely that effective or relevant change to what ails Wall Street will be accomplished due to the excessive influence that lobbyists from the banking community have on the legislators. The following article by Chris Whalen of Institutional Risk Analytics sheds light on this discouraging situation.

Why is the President's Working Group Oppossing the FDIC Reform Proposals on Residential Mortgage Securitization by Banks? (from Zero Hedge and Jesse's Cafe Americain)

We hear that the FDIC rule making process could start as soon as next month, but more likely will wait till the FDIC's board meeting in May. We also hear that the President's Working Group (PWG) on Financial Services is preparing a "white paper," in cooperation with the Federal Reserve Board and the Office of the Comptroller, to block the FDIC reform effort. This campaign, which apparently was orchestrated by the largest dealer banks, is intended to derail the new rules proposed by the FDIC mandating greater transparency and disclosure for bank sponsored residential mortgage securitization deals.

The President's Working Group, in case you don't know, is an informal group created in 1988 by President Ronald Reagan that allows the executives of the biggest banks to influence public policy in Washington, but without going through the trouble of registering as lobbyists or other public disclosure. Sometimes referred to the "plunge protection team," the PWG is part of the invisible government of Washington," an agency which operates within the government, but at the behest of private interests.

Barry Ritholtz has a nice summary on the PWG in his book, Bailout Nation, and also in his Blog, "The Big Picture." As Barry notes, the PWG is every bit as incompetent as most other people in Washington, but they do have one special skill: pushing the banking industry's agenda in Washington via informal "guidance" and white papers that are written by and for compliant regulators. The PWG essentially acts as a super-lobbying channel for the largest banks focused right at regulators. Only "team players" need apply.

The Federal Reserve Bank of New York and the OCC in Washington are reportedly drafting the "guidance" on reform of bank securitizations and at the request of the PWG. No clue whether the White House is involved directly yet or if this is merely a Tim Geithner operation. These PWG white papers are never released to the public even though the Treasury acts as the de facto public affairs organ for this corporate influence group.

We called out former Wachovia Bank CEO and Goldman Sachs (GS) banker Robert Steel on the subject of the PWG last year at the Chicago Fed's international banking conference. He was unapologetic and more than a little offended, or so he claimed. The PWG acts with impunity in Washington, in part because the members of Congress understand their subordinate role. We hear that Senator John Warner (D-VA) is now competing with Judd Gregg (R-NH) to be the next "Senator from Wall Street" and specifically seems to be angling to join a private equity firm. Gregg's tastes seem to run more along the lines of a large OTC derivative dealer bank.

The fact that the PWG is in league with the Fed and Treasury against the FDIC board is all you need to know about the politics of reforming private label mortgage securitization.

If Barack Obama were really interested in reforming Washington, he would rescind President Reagan's executive order and disband the PWG for good. Allowing the big banks which participate in the PWG to lobby financial regulators and members of Congress without any public disclosure is a national scandal and makes a mockery of any claim by Barrack Obama to be changing the business of Washington.

We noted in our comment last Tuesday in American Banker, "Viewpoint: Stop Blocking FDIC Securitization Effort," that "the practical policy issue is the losses observed in failed banks over the past two years, averaging over 30% of total assets, versus just 11% on average in the S&L crisis. The common factor in failed banks with high loss rates is unsafe and unsound securitizations practices, thus the FDIC initiative on securitization."

It is very telling to us that the FDIC is advocating greater openness and transparency in bank sales of mortgage loans to securitizations, but the Fed and OCC are standing with the larger dealer banks that arguably caused the financial crisis in complex structured assets. Hopefully these federal agencies and the industry groups they seem to be allied with will realize that the FDIC's rule making process holds the potential to revive private label mortgage finance and that they can influence the outcome - but only if they participate constructively.

One mortgage market veteran who ran risk for one of the largest private conduits in the business put the situation succinctly last week: "You can argue against the FDIC securitization proposals, looking at them in a bundle, as perhaps being overkill, but each piece of their proposal, taken separately, is pretty compelling. The other bank regulators and industry groups could easily negotiate a better, more streamlined deal that would help the market if they bothered to push back and participate constructively, instead of simply attacking the FDIC."

Chris Whalen, Institutional Risk Analytics, March 15, 2010
The President's Working Group on Financial Markets consists of:
  • Tim Geithner, The Secretary of the Treasury, as Chairman of the Working Group;
  • Ben Bernanke, The Chairman of the Board of Governors of the Federal Reserve System,
  • Mary Shapiro, The Chairman of the Securities and Exchange Commission; and
  • Gary Gensler, The Chairman of the Commodity Futures Trading Commission.
It appears that in addition to the clandestine lobbyists peddling their influence on the Senators assigned the task of reforming an obvious defective financial system, the Obama administration have chosen to have the foxes guard the henhouse.

The following articles will attest to how much influence Wall Street and the 'Too Big to Fail' crowd have on Financial Reform. Seems strange that citizens who have lost their savings, homes and jobs due to the misdeeds and breaches of trust of some members of Wall Street have little or no say in determining how to ensure that these transgressions wont happen again--perhaps sooner than many people think!

Deutsche Bank, JPMorgan, UBS Are Charged With Derivatives Fraud

Chamber, Wall Street mobilize lobbyists to clip Sen. Christopher Dodd's financial reform plan

Fearing Powerful Lobbying From Industry, Financial Reform Proponents Target Key Lawmakers

Hedge Funds, Private Equity Firms, Payday Lenders Seek Financial Security from Congress

Effective Regulation: Part 4 Turning Good Ideas Into Good Outcomes Goldman Sachs (pdf)

In-Your-Face Influence Peddling

Bernanke Will Tell Congress Bank Oversight Aids Monetary Policy

House Republicans Huddle With Lobbyists to Kill Financial Reform Bill

Citigroup Taxpayer Ownership Doesn’t Prevent Lobbying

Top 10 lobbying fights over financial reform overhaul legislation

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