Queen Rania of Jordan listens intently in Davos

DAVOS, Switzerland — World Economic Forum: Upbeat bankers clashed with pessimistic economists on the opening day of the World Economic Forum, where the movers and shakers of global politics and business argued over whether to move forward with financial reforms – or to abandon what some claim would be a ruinous path toward over-regulation.

Just hours ahead of President Barack Obama’s first State of the Union address, bosses from Deutsche Bank, Lloyd’s and other financial giants warned Wednesday that a flood of new regulations risked choking off a global economy recovery. Others urged Obama, who has proposed restricting bank risk-taking, to push forward with stronger reforms.

The discussions in the rarefied air of this Swiss Alpine resort reflected the broader debate and anxiety over the global economy, and how to address an uneven recovery powered by a booming China and held back by high unemployment in the United States and other wealthy nations. “Let’s get good regulation, better regulation, but not more regulation,” said Peter Levene, chairman of British bank Lloyd’s. [But his argument misses the point that financial innovation has rendered depression-era regulations irrelelvant in today's casino-royale atmosphere of modern finance, and products like credit default swaps that Warren Buffett referred to as 'financial instruments of mass destruction.']

Davos: Get Live Streaming Updates here

FT: Davos WEC 2010 Update

Peter Sands, the CEO of Britain’s Standard Chartered Bank, added that his industry already has been “fundamentally changed” by tighter regulations and supervision, while Deutsche Bank Chairman Josef Ackermann said “we will all be losers” if governments clamp down on markets too zealously. “The pendulum might have swung too far,” Ackermann warned. “Consistent and global rules, and a level playing field is absolutely key to the global economy.”

Obama is expected to push Wednesday evening for greater regulation of Wall Street, and there are calls in the United States and Europe for tougher taxation on financial institutions to recoup the billions governments have doled out in rescue packages since 2008.

Coupled with the high unemployment much of the rich world is experiencing, there is strong public pressure for action against the sectors that were so deeply involved in leading the world into recession. Some economists said more needed to be done.

Read more from HuffPo here.  And from the Financial Times here. 

Sources:    HuffPo.com; FT.com        Photo:  Zimbio.com

Wall Street's destructive risk-taking practices continue unchecked

Jan. 6 (Bloomberg) — On what remains of Wall Street these days, the past year was filled with one opportunity after another to fix the myriad fundamental structural deficiencies — revealed all too painfully by the financial crisis — that continue to plague the country’s large securities firms.  At year’s end, not a single one had been adequately addressed, let alone resolved.

This ongoing failure to act in the face of the worst economic downturn since the Great Depression is especially disappointing since President Barack Obama was elected, in part, on a promise to bring constructive and lasting change to the canyons of Wall Street. A few weeks after the 2008 presidential election, Rahm Emanuel, newly appointed as Obama’s chief of staff, spoke at a Wall Street Journal conference and reflected on the numerous crises — financial, energy-related and in foreign policy — that the Bush administration had left for Obama to clean up.  “You never want a serious crisis to go to waste,” Emanuel said, “and what I mean by that, it’s an opportunity to do things that you think you could not do before.” The coming changes to the financial regulatory system, he added, should be based upon the principles of “transparency and accountability.”

Emanuel had it exactly right. So did Obama, 10 months later on the one-year anniversary of the collapse of Lehman Brothers, when he addressed business leaders at Federal Hall at the corner of Wall and Broad streets. “We will not go back to the days of reckless behavior and unchecked excess at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses,” he said then. He went on to demand “strong rules of the road to guard against the kind of systemic risks we have seen” and asked Wall Street to join in rewriting the regulations for a new post-crash epoch.

Alas, we still await the reforms that are so desperately needed to prevent the recurrence of the speculative bubbles — and their vicious unwinding — that have become all too prevalent during the last 25 years of laissez-faire regulations and unalloyed hubris and greed among many finance professionals.

Not surprisingly, as Congress dallies, Wall Street has been only too happy to return with all deliberate speed to business as usual. Only now, things are better than ever for it. The Wall Street firms that were bailed out thanks to taxpayer largesse — especially Goldman Sachs, Morgan Stanley and JPMorgan Chase — have the best of all possible worlds: little or no regulatory reform, far fewer serious competitors and an absurdly low interest-rate environment that allows them to obtain financing for close to nothing, from the Fed or from the public markets. Through arbitrage, they can then take advantage of widening spreads to reap levels of profitability unimaginable a year ago.

What is most remarkable about both pieces of legislation is just how light a touch they seem to put on the powers-that-be on Wall Street. On one hand, this is entirely predictable: Wall Street remains superb at lining the pockets of its chief congressional overseers. On the other hand, it is a bitter disappointment…  Read more here.

Source: Bloomberg.com, William Cohan

William Cohan, a Bloomberg Television contributing editor, is the author of “House of Cards: A Tale of Hubris and Wretched Excess on Wall Street” and “The Last Tycoons: The Secret History of Lazard Freres & Co.”

'Too Big to Fail' is simply TOO BIG to exist!

As I have been advocating for months now on my blog and in phones calls and letters to Congressional contacts, some of the Obama administration’s most resistant regulators and economists – such as Tim Geithner and Larry Summers – in recent weeks have finally conceded that the administration’s financial and regulatory reforms do not go far enough to prevent future financial catastrophe, and have been needlessly “industry-friendly.”  Consequently, in Congressional testimony this week, Geithener, following the lead of courageous reformers on ‘too big to fail’ (TBTF) policy such as former Fed Chair, Paul Volcker – an advisor to President Obama and a vocal proponent of de-coupling banks from investment firms; along with others whom I have also written about like Sheila Bair, Elizabeth Warren and the resurgent former New York Governor, Eliot Spitzer – the Obama administration economic policymakers now say that the government should consider breaking up the biggest banks and investment firms long before they fail, or at least impose stricter limits on their risky trading activities — steps that Mr. Obama himself continues to resist.

US Rep (I-VT) Bernard Sanders, Sept 2008 

By comparison, our friends across the pond seem to have their priorities in order.  The City of London’s top financial regulator, Adair Turner, Chair of the UK’s Financial Services Authority is adamant that banks and investment houses in Britain must bolster their capital ratio standards and put employee needs before addressing executive bonuses and compensation.  More on this topic here.

However, comparisons aside, Congress is leading on this issue and the Obama administration has finally endorsed aggressive ‘too big to fail’ reforms.  The House Financial Servies committee is about to take up one of the most fundamental issues that precipitated the near collapse of the global financial system last year, and seriously put at risk the financial health of our economy — namely, how to deal with ‘too big to fail’  companies such as AIG, Goldman Sachs and Bank of America.  These are banks and financial corporations that are so big, and so central to the operation of the nation’s economy and financial system that the government has no choice but to rescue them when they fail operationally or get into balance sheet trouble due to poor management or highly risky practices driven by greed and profits.  Congressman Barney Frank (D- MA),  Chair of the powerful House Financial Services Committee, has said his committee would take up more aggressive legislation on the topic, even as lawmakers and regulators continue working on other problems highlighted by the financial crisis, including overseeing executive pay, protecting consumers, pushing for stronger shareholder rights, and regulating the trading of risky derivatives.  Channeling the public mood and outrage over the huge taxpayer bailout of the financial industry, Rep. Frank’s recent observation that critics of the administration’s health care proposal had misdirected their concerns — and that Congress would now be adopting “death panels” not for infirmed people, but rather for gravely infirmed “zombie banks” and struggling major corporations.

The administration and its Congressional allies are trying, in essence, to graft the process used to resolve the troubles of smaller commercial banks onto both large banking holding companies and non-bank investment firms and financial services companies whose troubles could again threaten to undermine the markets, as well as the overall national economy.  By using this strategy, the administration has signaled its willingness to sign on to any such legislation that reaches the presidents desk.

I think someone was listening, after all. . .

Read more here. . .

 Web Resources:

Too Big to Fail, by Andrew Ross Sorkin

Too Big to Fail, in plain English Video

‘Too Big to Fail’?  Politico.com

Robert Reich on ‘Too Big To Fail’

Obama resisting Volcker counsel for stronger financial reform

Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis: “The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to President Obama since their Chicago days. “Whenever he has advice, the administration is very interested.”

Well, not lately. The aging Mr. Volcker, 82, has some advice, deeply felt.  He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.  He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying ‘no, it will not separate commercial banking from investment operations.’

“I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”

Economic Guru

Still, he heads the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser. As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence (he is 6-foot-8) offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.  More subtly, the Obama administration has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.

‘The Obama administration has in Paul Volcker an adviser perceived as standing apart from, and independent of Wall Street, and critical of its ways, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are beholden to Wall Street interests and more sympathetic to the concerns of the financial industry.’

The Obama economic team, in contrast, would let the ‘Too Big to Fail’ giants survive, but would regulate them better so they don’t get themselves and the nation into trouble again. While the administration’s proposal languishes, giants likeBank of America, Morgan Stanley and Goldman Sachs have re-engaged in old, highly risky and over leveraged trading practices, once again earning big profits, planning big bonuses while placing the nation’s fragile economic recovery in peril. 

Read more here.  

Source: ‘Volcker Fails to Sell Reform Strategy’ (L. UCHITELLE

NYT, 21 Oct)

Washington: support the public welfare over Big Business lobby

Really interesting editorial in today’s New York Times that hits the mark with the threat that an un-check and powerful bank lobby poses to achieving much needed bank and financial industry reform to protect consumers against industry collusion, predatory and price-gauging practices, as well as disproportionate risk-taking that threatens a sustained economic recovery.  These practices have reached crisis proportions and is pervasive in Washington.  The tactics of the bank lobby also subverts the U.S. Congress’s Constitutionally-ordained obligation to protect the ‘public welfare’ against all enemies, foreign AND domestic.  The “Big Business” lobby constitutes a clear and present threat to our citizens Republic. And “Big Government” represents the only realistic check against “Big Business.”  It is time to demand that “Big Business” be good “corporate citizens” to act in the public’s interest, and to show ‘corporate patriotism’ to their country and government for coming to their rescue.  It is also time for Washington lawmakers to take heed to public needs, as well as the public mood: something must be done.

(NYT) New York - Pretty much everyone agrees on the causes for the country’s desperate financial mess: predatory lenders, weak regulations, even weaker regulators, and risky nigh unto incomprehensible financial instruments.

Congress’s willingness to address those problems will have its first real test on Wednesday when the House Financial Services Committee puts finishing touches on what could be essential reform legislation — or a major disappointment, depending on what they do.

At the top of the committee’s agenda is regulation of the largely unregulated and dangerously opaque multitrillion-dollar derivatives’ market. Next on the agenda is the creation of a new Consumer Financial Protection Agency to oversee the consumer-credit offerings of banks and other financial firms — including mortgages, credit cards, overdraft “protection” and payday loans. Both reforms are crucial, and we fear both are in danger of being irreparably weakened. Derivatives are supposed to help investors and businesses manage risk, but their unchecked and unregulated use led — directly and indirectly — to the financial crash and subsequent trillions of dollars in taxpayer interventions.

Traitors to the public will

 Congress should require that all derivatives’ dealers and users — including banks, hedge funds and corporations — conduct their trades on exchanges where they would be subject to considerable regulation and public scrutiny. Regulators could create exceptions for customized contracts that are negotiated one on one for truly complex and unique circumstances. But most derivatives contracts are highly standardized and can be, and should be, exchange-traded.

The threats to the consumer protection agency are even more blatant. To curry favor with the banks, several lawmakers are intent on amending the proposed legislation so that no state could impose its own — tougher — consumer protection laws on banks. That would be a mistake because in the past, many states have demonstrated the will and the expertise to protect consumers. But federal rules were issued in 2004 that basically barred states from enforcing their laws over national banks and their subsidiaries. That short-circuited state efforts to control, among other things, the subprime lending that sparked the financial crisis. Some lawmakers are also intent on weakening the proposed power of the new agency to examine the books of the banks and firms that it would regulate. Current bank regulators have that power, but they have not used it with a sole focus on protecting the best interests of consumers.  Read more here.

Unfortunately, the proposed legislation has too many loopholes and exemptions. For example, many corporations and hedge funds would still be able to trade standardized derivatives privately. That may protect bank profits — without transparency, there is no chance for comparison shopping — but it would put taxpayers at risk of a repeat calamity. Like the banks, some corporate investors in derivatives resist exchange trading. They argue that more regulation would raise their transaction costs to hedge any given risk. That’s debatable because greater transparency is likely to reduce costs. But even if true, somewhat higher costs would be a small price to pay for systemwide stability. Still, there is reason for hope and the Obama administration seems to be taking the lead on this.

Such growing sentiment about the odious nature of Wall Street was also echoed by administration officials on the Sunday morning talk circuit. “The bonuses are offensive,” said the President’s senior adviser David Axelrod on ABC’s “This Week,” adding that banks must do more to support lending across the country and should stop their lobbying efforts aimed at blocking the passage of new consumer financial protections and needed industry regulations currently being considered in Congress.

“They ought to think through what they are doing, and they ought to understand that a year ago a lot of these institutions were teetering on the brink, and the United States government and taxpayers came to their rescue” Axelrod said. “They have responsibilities, and they ought to meet those responsibilities” by displaying good corporate citizenship, playing fair, and by supporting American business and responsible citizens by making loans. They also have a public duty as corporate citizens to their government as well as to the American taxpayers for coming to their rescue. Read more here.

Guru Greenspan endorses Obama Consumer Protection agency.

A keystone of Obama’s Wall Street reform agenda is getting support from the unlikeliest of corners. Alan Greenspan, an acolyte of Ayn Rand and extreme free-marketeer, is backing one of the most far-reaching elements of the financial overhaul: the Consumer Financial Protection Agency. Greenspan told the Washington Post that pushing for the CFPA was “probably the right decision.” Given the former Fed chairman’s penchant for obliquity, the straight-forward endorsement takes on greater weight.

Wall Street and community bankers argue that the proposed agency will restrict financial innovation and otherwise inhibit economic growth. Those are the types of arguments that Greenspan was prone to make during his tenure as chairman, but the financial crisis has persuaded Greenspan that the “intellectual edifice” buttressing radical free-market ideology has, in his words, “collapsed.”

Rep. Brad Miller (D-N.C.), the lead backer of the CFPA in the House Financial Services Committee, recalled the Greenspan opposed consumer protections while he was chairman. “It’s a dramatic turnaround from his public position and even more so, apparently, from what he was privately pushing within the deliberations at the Fed,” he told HuffPost.  Greenspan has acknowledged that the collapse has led to a crisis of faith. “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms,” Greenspan said at a House hearing last October under questioning from Rep. Henry Waxman (D-CA).  “In other words,” said Waxman, moving in for the kill, “you found that your view of the world, your ideology, was not right, it was not working.”

“Absolutely, precisely,” said Greenspan. “You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.”

It’s one thing to reject a failed ideology, but another altogether to embrace the kind of regulation represented by the CFPA. “He has already said that he erred in assuming that the market would take care of things–the Ayn Rand point of view–but this seems to go farther than he’s gone before in calling for a new agency to protect consumers from financial products,” said Miller.  Greenspan told the Post that the Fed has enough responsibilities to manage and that consumer protection would be too much. Miller noted that Greenspan’s position is “diametrically opposite of what leadership at the Fed are saying now.”

Top Fed officials are pushing to make consumer protection a core Fed responsibility. But Democrats passed a law in 1994 requiring the Fed to adopt rules protecting financial consumers. When the GOP took over Congress in 1995, the Fed decided not to act. It didn’t write the rules until Democrats retook Congress in 2007 and began work on a new set of laws. “The damage was already done,” noted Miller.

The CFPA would gauge the safety of financial products and be given broad powers to require understandable explanations of the terms of financial instruments and otherwise restrict behavior that now goes on unmolested. It was first proposed by Harvard Prof. Elizabeth Warren, the head of the congressional panel overseeing the financial bailout. It is fiercely opposed by the banking lobby. Financial Services Committee Chairman Barney Frank (D-Mass.) earlier postponed a vote on the agency until after the August recess. The banking lobby’s stiff resistance made it difficult for the chairman to be sure he had enough votes to pass it. The vote is now expected in October.

Last week, Frank issued a memo to committee members outlining proposed changes to the original package, which had been blasted by the Chamber of Commerce for over-reaching and going so far as to regulate butchers who give meat on credit.  The original bill would have required financial institutions to offer standard, “plain vanilla” financial products meeting certain basic guidelines for transparency and safety. That requirement has been dropped, according to the memo, which was obtained by HuffPost. Some consumer advocates expressed alarm at the proposed changes, but others following it closely say that the changes are largely technical and that the real fight is yet to come.

The Memo:   …Read more here.

The World's Central Bankers

The world’s central bankers and finance ministers emerged from this weekend’s Federal Reserve  annual Summer retreat in Jackson Hole, Wyoming (WY) amid growing concerns and debate in the world markets and financial centers about the outlook for a global economic recovery. One of the key issues on the agenda was whether, or not, to keep coordinated interest rates low in order to help boost world economic growth. Prolonged low interest rate environment can lead to persistent inflation if not delicately managed. Another central concern is whether the better and faster than expected rebound in China, Germany and France will dampen recovery in the U.S. and what impact this imbalance might have on international capital flows for trade and investments going forward. Central bankers warned that a global economic recovery shouldn’t delay an overhaul of financial market regulations following the worst banking crisis since World War II.

Federal Reserve Chairman Ben S. Bernanke said the global economy is beginning to emerge from recession after “aggressive” action by central banks and governments.  Among other things, he noted that “Economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good,” Bernanke said in a speech at the Federal Reserve’s annual symposium in Jackson Hole, WY.

Bernanke, speaking to an audience of central bankers and academics, warned that the world still confronts “critical” challenges. The note of caution underscored the Fed’s decision last week to leave interest rates near zero for an “extended period” and to delay by a month the scheduled end to its $300 billion program to buy U.S. Treasuries.

“Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit,” Bernanke said. Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

While economists predict the U.S. will return to growth this year, they say the jobless rate is likely to rise beyond 10 percent, restraining consumer spending and casting a cloud over the strength of the recovery.

“Economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good.” Critical challenges still exists and “Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit.” Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.”

Federal Reserve Chairman Ben S. Bernanke used the weekend symposium — which began on Thursday, and ran through Sunday – to single out the creation of rules limiting risk as one of the “difficult challenges” ahead. European Central Bank President Jean-Claude Trichet said “green shoots” aren’t enough for him to declare the recovery sustainable and cautioned that officials must do “an enormous amount of work.”