Granted, it’s no surprise a progressive blog would endorse the candidacy of Rep. Shelley Berkley (D-NV1) for the Nevada Senate seat — but this isn’t a patellar reflex test. Anyone who has been reading this blog for over a week knows that this is the place wherein a person should expect a heavy dose of “Please Can We Save Capitalism From The Wall Street Wizards Who Feel Entitled To Have Taxpayers Cover Their Losses While They Reap All The Profits.” Or, can we please just save Capitalism?
Representative Berkley summed the regulatory situation up nicely,”As we rebuild our economy, we must put in place common-sense rules to ensure Big Banks and Wall Street can’t play Russian Roulette again with our futures. Wall Street may be bouncing back, but we know from experience they’re not going to police themselves.”
She’s located the problem creators precisely. Big Banks and Wall Street investment firms played fast and loose with the U.S. housing market. The aftermath is still visible on the Nevada landscape. Foreclosures are still moving forward in the Silver State. And, yes, we do know that the Big Banks and the Wall Street investment firms have little inclination to rein in their trading activities if such action might cut into their revenues — and bonuses.
Personally, I didn’t get all I wanted from the Dodd Frank Act. I’d have been a far happier camper if synthetic credit default obligations were flat illegal. I’d have been happier if the betting with credit default swaps was more severely curtailed. I’d have been gleeful if the act had made securitization more rational. However, we did get (1) clearinghouse oversight of some derivatives, (2) a consumer protection bureau to supervise the more egregious practices of some mortgage marketers, (3) a rational system to determine systemic risk to our banking sector, and (4) an orderly liquidation authority provision to replace the bankruptcy/bailout mentality on Wall Street and in Washington, D.C.
Representative Berkley supported the Dodd-Frank Act, on December 11, 2009 she voted in favor of the bill. Representative Dean Heller (R-NV2) voted against it. [GovTrack] There is more than a little irony in the protestations coming from Senator Heller about being “against bank bailouts,” when his vote was one to preserve the bailout/bankruptcy option status quo on Wall Street. Far from being an affirmation of ‘bail outs,’ the Dodd Frank Act provides a resolution process to wind down banks which have the potential to cause chaos similar to the Lehman Bros. collapse.
To pound on this point a step further, the opposition to the orderly liquidation authority came from Wall Street and the Big Banks, and early in the game from Big Bank allies at Treasury and the FED. The crucial question concerned who would get burned in the event of a meltdown. Under the old system a Big Bank facing insolvency or illiquidity faced two options — (1) either collapse into bankruptcy; allowing the counter-parties to dodgy portfolios to grab their collateral and run, while battalions of bankruptcy attorneys fought endlessly over the remains; or (2) get “certified” as a Systemic Risk and have the Treasury Department organize a bail out. The Big Banks calculated that the Treasury and Federal Reserve wouldn’t want a repetition of the Lehman Debacle and would ride to the rescue.
The arguments from the Big Banks were predictable — the new statutory requirements for the liquidation process weren’t sufficiently transparent; this coming from Big Banks which had squealed the loudest about opening their books for inspection. The new liquidation authority would cause increased bank consolidation — which was happening already because larger, better managed, banks were buying up the flotsam and jetsam in the wake of Washington Mutual, Wachovia etc. And, finally new regulations were unnecessary because such commercial banks as Wells Fargo and Bank of America weren’t dependent on proprietary trading for their major income. The latter is an interesting proposition because it’s perfectly possible to have a commercial bank with solid conservative management owned by a bank holding company which is a complete mess.
So, instead of a resolution authority which allows regulators to keep the bank stabilized while finding buyers for the good stuff, fencing off the bad junk, and preventing the counter-parties from running away with their stash before any other creditors can even get in line — the Big Banks wanted “better bankruptcy laws…” and the Good Old Days …with bailouts. Then Representative Heller was happy to oblige. Not only did he oblige once, he obliged twice — voting against the conference report on the Dodd Frank Act H.R. 4173 on June 30, 2010. [GovTrack] Representative Berkley voted in favor of the conference report on H.R. 4173 (111th).
Want a Senator not quite so obliging and beholding to the interest of the Wall Street Wizards and the Big Banks? The choice would be Berkley.
References and Additional Recommended Reading: Hardee, North Carolina School of Law, “Orderly Liquidation Authority, 4/4/2011. (pdf) Guynn, St. Louis Federal Reserve, “The FDIC’s New Resolution Authority under the Dodd-Frank Act: Will it Work and Can It Prevent “Too Big to Fail”? Sept. 2010. (pdf) Erickson & Fucile, “Dodd Frank Reforms After 2 Years,” Center for American Progress, July 20, 2012. Hal S. Scott, “The Reduction of Systemic Risk, Capital Markets Regulation, Nomura School of Business, Harvard University, (pdf). American Academy of Actuaries, “Federal Insurance Regulations and Systemic Risk, links to articles. Frank, “Wall Street Reform and Consumer Protection,” U.S. House, Summary. H.R. 4173 (111th Congress) Bill Summary and History, GovTrack. Congressional Research Service, “Financial Regulatory Reform and the 111th Congress,” June 1, 2010. SIFMA, (Dugan, Ryan) “Bloomberg View Op-ed: Ryan and Dugan – Too Big to Fail? Then Get a Living Will,” June 27, 2012.