As I look at the financial "reforms" proposed by Obama, it appears that there is precious little in the way of reform that is actually meant to address the issues raised by our financial crisis. My first question in that regard is how can Obama reform the financial system if we have not identified the problems at issue. Obama has established a commission to determine the causes of our financial break down. He wants reforms passed this summer, but the commission won't be reporting until the winter. So how the hell can he push through financial reforms months before that commission has completed its work and issued its report? Obama's push for financial reform before the commission issues its report makes a mockery of both.
Beyond that question, all of my issues with Obama's proposed financial reform are substantive. One, we know that much of the problem with the subprime mortgages came about because sub-prime loans were being bundled and given AAA ratings. This should be a central focus of financial reform, yet how that happened has been perhaps the most studiously ignored issue of the entire sub-prime mess. Indeed, the degree to which it has been ignored is making my spidey senses go tingling off the charts. On its face it appears that there has been massive fraud - and fraud that deeply implicates Fannie Mae. Moreover, having heard Barney Frank within the past year pressure Fannie Mae to upgrade the rating for certain loans, I really wonder whether this issue might not implicate some of our elected representatives also.
Two, it appears that our financial crisis came about one step removed from the sub-prime crisis. Besides apparent fraud in the bundling of tranches, you had derivatives designed to spread the risk - normally a good thing - but you also had recently enacted mark to market accounting rules that required institutions to show the value of their mortgaged backed securities as zero when the market for mortgages froze. Of course the value of the securities was not zero, but this rule caused untold chaos for those firms holding many securities - and it was what nearly froze the international credit market. Yet I see nothing being done to address those rare situations when mark to market becomes punitive and fails to give an accurate measure of the value of the securities being held.
Three, I supported the bailout of our financial institutions last year in light of the unique circumstances and the threat to credit - a meltdown that might have caused a true depression. That said, under anything short of such a unique set of circumstances, we should be not bailing out any financial institution. For capitalism to work, corporations need to be allowed to fail - whether they be AIG or GM. Yet Obama's proposed regulations give the government unlimited power to take over and bail out financial institutions and even establishes a slush fun to support such acts.
Four, Fannie and Freddie need to be completely privatized and put out of the reach of Congressional control. No one can argue that it was the demonic intersection of Fannie and Democrats that lay at the heart of our current fiscal woes. Yet they have now been, for all practical purposes, completely nationalized by the Obama administration.
Five, it was social engineering of credit qualifications that led directly to our current fiscal woes. Any financial reform should make color blind lending standards mandatory. Yet Obama proposes to put racially charged lending standards back into the front and center of our financial industry. That is anything but reform.
Six, someone needs to explain how heavily taxing banks and their profits will do anything to protect the banks customers, improve efficiency, or do anything other than further feed the trough at which at which our voracious socialist governments feed. Yet that is what is being proposed by the IMF:
Tough proposals to cut the world's biggest banks down to size by taxing their profits and pay were outlined by the International Monetary Fund tonight in an attempt to spare taxpayers another massive public bailout of the financial sector.
In measures more stringent than Wall Street and the City had expected, the fund called for the introduction of a twin-track approach to the three-year banking crisis that would both force firms to pay for any future support packages and raise new taxes on their profits and remuneration. . . .
Those are the issues I see. Michael Barone, writing at The Examiner amplifies several of them:
. . . The Dodd bill, however, has it trumped. Its provisions promise to give us one episode of Gangster Government after another.
At the top of the list is the $50 billion fund that the Federal Deposit Insurance Corp. could use to pay off creditors of firms identified as systematically risky, i.e., "too big to fail."
"The Dodd bill," Democratic Rep. Brad Sherman writes, "has unlimited executive bailout authority. That's something Wall Street desperately wants but doesn't dare ask for."
Politically connected creditors would have every reason to assume they'd get favorable treatment. The Dodd bill specifically authorizes the FDIC to treat "creditors similarly situated" differently.
Second, as former Bush administration economist Larry Lindsey points out, the Dodd bill gives the Treasury and the FDIC authority to grant an unlimited number of loan guarantees to "too big to fail" firms. Chief executive officers might want to have receipts for their contributions to Sen. Charles Schumer and the Obama campaign in hand when they apply.
Lindsey ticks off other special favors. "Labor gets 'proxy access' to bring its agenda items before shareholders as well as annual 'say on pay' for executives. Consumer activists get a brand-new agency funded directly out of the seniorage the Fed earns. No oversight by the Federal Reserve Board or by Congress on how the money is spent."
Then there are carve-out provisions provided for particular interests. "Obtaining a carve-out isn't rocket science," one Republican K Street lobbyist told the Huffington Post. "Just give Chairman Dodd and Chuck Schumer a s--tload of money."
The Obama Democrats portray the Dodd bill as a brave attempt to clamp tougher regulation on Wall Street. They know that polls show that voters strongly reject just about all their programs to expand the size and scope of government, with the conspicuous exception of financial regulation.
Republicans have been accurately attacking the Dodd bill for authorizing bailouts of big Wall Street firms and giving them unfair advantages over small competitors. They might want to add that it authorizes Gangster Government -- the channeling of vast sums from the politically unprotected to the politically connected.
That can boomerang even against the latter. Goldman Sachs employees gave nearly $1 million to the Obama campaign and $4.5 million to Democrats in 2008. That didn't prevent the Goldman from being shoved under the SEC bus. Gangster Government may look good to those currently in favor, but, as some of Al Capone's confederates found out, that status is not permanent, and there is always more room under the bus.
Ultimately, I see no reason to think that the financial reforms proposed by Obama will do a single thing to improve our economy. What a surprise, eh?