Friday, December 28, 2012

Will Obama Name Brad Miller Secretary Of The Treasury?


When the North Carolina legislature sat down to redistrict the state, they targeted 3 Democratic incumbents with grotesquely gerrymandered districts: two Blue Dogs-- Larry Kissell, who was defeated, and Heath Shuler, who promptly got a job as a K Street lobbyist and retired, his seat going to a radical right sociopath-- and a mainstream progressive, Brad Miller, who would have had to challenge a friend and colleague, David Price, if he was to remain in Congress. First elected to the North Carolina legislature in 1992 and to Congress in 2002, Brad is one of Congress' most brilliant and decent members (a graduate of the London School of Economics and Columbia Law). But he opted to retire instead of going up against Price. He has been one of the Democratic stars on the House Financial Services Committee and his tenure has been all about working to protect consumers from financial predators. He wrote the Mortgage Reform and Anti-Predatory Lending Act of 2009, which passed the House but which the banksters were able to get their shills in the Senate to kill. A bill he worked on with Elizabeth Warren, the Financial Product Safety Commission Act, was included as one of the better parts of Dodd-Frank.

There couldn't be a better nomination Obama could make as Treasury Secretary for his second term. Nor one he is less likely to consider. Brad Miller is not a shill of the Wall street banksters or K Street hucksters. That alone would tend to disqualify him from presidential consideration for a job like that. And, if that wasn't enough, he had the temerity to face down Federal Reserve Chairman Ben Bernanke in 2006 and ask him, "With tax cuts going to the people who receive inherited wealth, can you identify a single policy of this Congress or the Bush Administration that appears directed at closing income inequality or the concentration of wealth?" Nope, not a potential Obama Secretary of the Treasury. Yesterday, Brad penned a long piece for American Banker that demonstrates exactly the kind of Secretary of the Treasury Obama should be-- but isn't-- looking for.
The speculation about what to expect in a second Obama term has overlooked one obvious possibility: another financial crisis.

According to JPMorgan Chase CEO Jamie Dimon, financial crises are "something that happens every five to seven years," which makes us due for the next one in the next four years. Tyler Cowen, a professor of economics at George Mason University, has said "the most important development to emerge from America's financial crisis" was that the "age of the bank run has returned," a view he ascribes to economists generally.

Rather than rely on insured deposits for financing, the biggest financial institutions now rely increasingly on the largely unregulated shadow banking system. The sheer size of shadow banking—$67 trillion, according to the Financial Stability Board-- may create "a need for sudden payouts [that] could also prompt a run on a financial institution," Cowen says. "It now seems that the 21st century will resemble the 19th and early 20th centuries, with periodic panics and runs on financial institutions, perhaps followed by deflationary collapses."

All of this makes banking regulators' nonchalance about preparing for a crisis puzzling.

The Dodd-Frank Act did not break up the biggest banks into small-enough-to-fail institutions or end their reliance on shadow bank borrowing. Instead, the Act provides an "orderly resolution authority" so regulators can dismantle failing institutions without catastrophic consequences for the financial system or for the real economy.

The Act requires the largest institutions to submit resolution plans, or "living wills," to help regulators prepare. Living wills outline how institutions are organized and identify critical operations and known risks. Regulators use living wills to spot impediments to quick, orderly resolution in bankruptcy. If the plans do not show a credible way to avoid severe disruption, regulators can require tougher supervision or restructuring.

The biggest banks submitted their first living wills this summer. William Dudley, the president of the Federal Reserve Bank of New York, recently conceded that the banks' living wills "confirmed that we are a long way from the desired situation in which large complex firms could be allowed to go bankrupt without major disruptions to the financial system and large costs to society. Significant changes in structure and organization will ultimately be required for this to happen." The "initial exercise," Dudley said, provided regulators a "better understanding of the impediments to an orderly bankruptcy," and was the beginning of an "iterative process."

Simon Johnson, former chief economist for the International Monetary Fund, concluded from Dudley's remarks that the living wills process was "a sham, meaningless boilerplate and box checking." Maybe Johnson is too harsh, but "ultimately" is a very indulgent deadline in the new "age of the bank run." The uncertainties in the financial system may not allow for year after year of polite suggestions by regulators and modest tweaks by institutions.

Dudley said that the "current approach" of regulators is to reduce the likelihood that the biggest institutions might fail by requiring frequent stress tests, increased capital and liquidity buffers, and reforms to shadow banking and derivatives markets. "The bad news is that some of these efforts are just in their nascent stages," Dudley said.

The "blunter approach" of breaking up the biggest banks "may yet prove necessary," Dudley said, but it is "premature to give up on the current approach."

The "negative externalities" of the last crisis, to use Dudley's phrase, were widespread, long-term unemployment and underemployment; declining wages; the loss of decades of wealth accumulation by most families; and frightening rage that may be incompatible with enduring, stable democracy. A trial and error approach to regulation really should not be an option.

Megabanks have many incentives to remain too big to fail. They apparently enjoy immunity from criminal prosecution, even for "epic" rigging of the world's benchmark interest rates to defraud counterparties to interest rate derivatives, and for money laundering for terrorists, genocidal regimes and drug cartels. The "implicit government guarantee" provides almost unlimited liquidity for every line of business and allows megabanks to borrow more cheaply than smaller competitors. Megabanks will not voluntarily become small enough or simple enough to fail.

In fact, the most obvious impediments to orderly resolution appear intentional. The seven largest banks have 14,500 subsidiaries between them, but each megabank operates as a single enterprise with consolidated management and a common pool of capital and liquidity. As a result, every subsidiary is responsible for the liabilities of the parent corporation and all of the siblings. An obvious starting point for regulators is to require that the riskiest lines of business be conducted in separately managed, separately capitalized subsidiaries. A stand-alone subsidiary could fail without a collapse of the entire enterprise, and if the enterprise became insolvent, many subsidiaries could still operate relatively normally. Stand-alone subsidiaries would be easier to sell or spin off without serious disruption, even if the megabank is at the point of death.

The Dodd-Frank Act did not give regulators the choice of taking measures to make a panic less likely or planning for a panic. Banking regulators should act with urgency to require that living wills be credible plans to resolve failing firms without the "negative externalities" of the last crisis. Banking regulators should not wait for a protracted "iterative process" to remove obvious impediments to orderly resolution.
Obama has been kicked around by Republicans insisting he give John Kerry the Secretary of State job and by AIPAC Zionists insisting he ditch Chuck Hagel as a potential Secretary of Defense. The thing about Secretary of the Treasury is that Wall Street won't even have to raise its voice to make sure Obama doesn't even consider anyone as qualified to work for the interests of the American people-- rather than the odious criminal banksters who finance the careers of American politicians-- as Brad Miller. Miller has as much a chance of being nominated by Obama as he would being nominated by Mitt Romney, John McCain or George Bush. Brad Miller has made it abundantly clear-- and quite publicly-- that he  fully understands the nature of Wall Street/Capitol Hill corruption.

HSBC did say they were sorry for laundering billions of dollars for terrorists, genocidal regimes and drug cartels. "We accept responsibility for our past mistakes," Stuart Gulliver, HSBC's CEO said. "We have said we are profoundly sorry for them, and we do so again." The settlement also "would most likely tarnish the bank's reputation," so maybe HSBC executives will feel embarrassed at holiday parties.

Not everyone agrees that the settlement was tough punishment that fit the crime. Rolling Stone's Matt Taibbi asked "Are you fucking kidding me? That's the punishment?" A New York Times editorial, in more Gray Lady-like language, called the settlement "a dark day for the rule of law." "When prosecutors choose not to prosecute to the full extent of the law in a case as egregious as this," the editorial said, "the law itself is diminished. The deterrence that comes from the threat of criminal prosecution is weakened, if not lost." Even the Economist asked "Has a handful of banks become not too big to fail, but too big to jail?"

So what are government officials in Kenya, Azerbaijan or Nepal going to make of our scolding about the evils of corruption and the importance of the rule of law? Our moral authority may be in doubt, but our advice is sound. Nations really do work better when an impartial rule of law constrains abuses of political or economic power.

Maybe we should take our own advice.
I'm sure Brad Miller is not even on Obama's Christmas card list.

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At 7:24 AM, Blogger TheDailyLmo said...

You deliberately held your nose on Nov 4 & now you are complaining bout the stink of corruption?

At 11:11 AM, Blogger John said...

Mr Dudley's " 'negative externalities' of the last crisis ... were widespread, long-term unemployment and underemployment; declining wages; the loss of decades of wealth accumulation by most families; and frightening rage that may be incompatible with enduring, stable democracy."

To this should be added millions of families foreclosed upon, some legally.

All this has happened since late 2007. Now, I'll admit that I am NO candidate for the Secretary of the Treasury, so I must ask: what would be the REALLY "catastrophic consequences for the financial system or for the real economy," that we have been "avoiding" since, of letting so-called "too-big-to-fail" banks ignominiously go down the drain, where they belong?

At 6:30 PM, Blogger DownWithTyranny said...

Daily, not sure what you mean about deliberate nose holding, but I didn't vote for Obama; I didn't vote for Dianne Feinstein; and I didn't vote for my local Blue Dog congressshill, Adam Schiff. I walked out of the voting booth feeling GREAT


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