The Parties Are Not the Same, Part 2 – Business, Banking, and Risk

Monday, February 13th, 2012

(By NCrissie B)

Writing for the Southern Pines Pilot, Walter Bull warns of the danger that President Obama poses for risk-takers:

The United States of America has traditionally been a nation of individual freedom and risk activities. That sets this country apart from most other nations and served as the foundation of a great, growth-oriented economic system that accumulated vast capital wealth. Successful risk-taking has yielded much higher returns than safe investments. Today, risk-taking is under assault by Obama’s tax proposals.
[...]
Ordinary income is income received as payment for employee labor or, in some cases, as payment for services. Capital investment, on the other hand, is made with funds that are generally made available after income taxes are paid. Capital investments are “risk” investments and serve as a storehouse for savings. Investment vehicles permit appreciation without taxation until liquidation.
[...]
Why would any owner of capital pay for a growth strategy when the rewards have been cut by politicians? The sound bite is popular in some quarters, but it is a recipe for stagnation.

It’s a familiar Republican argument. The wealthy are wealthy, the wealthy insist, because they take the risks. Ordinary workers don’t. Well, okay, ordinary workers take the physical risks. Like burning to death if an oil rig explodes around you. But Bull is writing about the economy and investors take the financial risks….

The BP ‘shakedown’

To hear Republicans talk, you’d think President Obama went to Al Capone University, rather than Columbia and Harvard. Consider Rep. Joe Barton (R-TX):

It is a tragedy of the first proportion that a private corporation can be subjected to what I would characterize as a shakedown, in this case, a $20 billion shakedown.

Congressman Barton was referring to the $20 billion escrow fund that BP set up in June of 2010, after the Deepwater Horizon explosion that April killed eleven workers and began dumping 53,000 barrels of oil a day into the Gulf of Mexico. That $20 billion fund was, in Rep. Barton’s view, $19.925 billion more than BP should have to pay under the 1990 Oil Pollution Act. That law, passed after the Exxon Valdez disaster, capped oil companies’ economic liability for spills at $75 million plus cleanup costs. Writing for the American Thinker, Raymond Richman suggested the BP escrow fund was an impeachable offense:

The president has no legal authority to create the escrow fund and no authority to compel BP to contribute to the fund. Forcing BP to agree to the terms of the escrow is ultra vires (i.e., illegal), beyond the powers of his office. Rep. Barton (R-TX) accurately described the slush fund as a “shakedown” (i.e., blackmail), a felony. If so, Pres. Obama has committed an impeachable offense. Congress itself does not have the authority to create the escrow fund retroactively. Congress will have no voice at all except to vilify any Republican who raises questions about it. All the ACORN employees who lost their jobs when the banks stopped paying “blackmail” to ACORN may be getting better-paying new jobs processing claims.

Economic risk-takers?

Tin foil haberdashery aside, the real issue was who should bear the risk of catastrophic oil spills, as Rep. Jeff Landry (R-LA) made clear while questioning offshore drilling company president Hank Danos during a hearing last April:

“Mr. Danos, you do a lot of work for shallow-water drilling contractors. Could you tell me if they remove the liability cap on the (Outer Continental) Shelf, the impact for those oil and gas contractors?” asked Landry, noting that most of those shallow-water companies are relatively small.

“My understanding is that if the liability cap was removed, that there would be more wells shut in and shut down, and less production in the Gulf of Mexico,” Danos said.

“So it would destroy the shallow water drilling industry,” Landry said. “Is that what it would do?”

“It could,” Danos said.

In short, the economic risks of offshore drilling are too great for the economic risk-takers who invest in offshore drilling companies. That risk should fall on government, or directly on the individuals who might be harmed. For Republicans, government should operate like a bank for individuals … and an insurance company for oil companies. And for banks?

The Emasculation of Wall Street

That is the title of a fascinating article by Gabriel Sherman in last week’s New Yorker, taken from a quote by banking analyst Dick Bove:

The government has strangled the financial system. We’ve basically castrated these companies. They can’t borrow as much as they used to borrow.

As Sherman explains, Bove is referring to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, a complex and much-maligned law that, surprisingly, is working better than expected:

Of course, described a little less colorfully, reducing the risk in the system at a cost of a certain amount of the banks’ profits was precisely what the government was striving for. All this has meant that Wall Street’s traders have found themselves on the wrong end of the market – a predicament that many of them have never seen before.
[...]
A few hours before Barack Obama delivered the State of the Union address, ­JP­Morgan Chase CEO Jamie Dimon sat in a cream-colored chair in his 48th-floor office, talking about the changed reality on Wall Street. “Certain products are gone forever,” Dimon told me. “Fancy derivatives are mostly gone. Prop trading is gone. There’s less leverage everywhere. Mortgages are back to old-fashioned conservative mortgages – which is a good thing.”

Reducing risk may be a good thing for the economy, but it has been dismal for the banks. All across Wall Street, financial institutions are suffering their worst results in years. JPMorgan reported last month that fourth-quarter profits were down by $1.1 billion. Goldman Sachs reported profits fell by 56 percent, Bank of America saw its profits drop by 38 percent, and Morgan Stanley reported a 26 percent drop.

Between the Volker Rule that bars banks from proprietary trading, regulations that require clearer explanation of risks, and the loss of public confidence, a three-decade business model for banking has collapsed:

“We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told [Sherman]. “But with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers – too many funds with fewer dollars chasing too few trades – many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

Reread that last paragraph again. Especially the first sentence. Then ask yourself why Republicans want to repeal Dodd-Frank.

Then ask yourself if both parties are the same.

(Crossposted from Blogistan Polytechnic Institute (BPICampus.com))

Why Are Republicans Scared of Elizabeth Warren? Because She Fights for the Middle Class

Monday, May 9th, 2011

(by Mark McCutchan)

A fight that is critical to the strength of the middle class appears to be coming to a head in Washington, as Republicans are making a last-ditch effort to gut the Consumer Financial Protection Bureau and stop Elizabeth Warren from heading the CFPB.  Help stop these Republican efforts by “liking” the Facebook page We Want Elizabeth Warren to get updates, contacting your legislators and the President, and a writing letter to the editor of your local newspapers in support of Ms. Warren as the best choice for CFPB director to protect our financial interests.

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The establishment of a strong and independent CFPB was the vision of Harvard professor Ms. Warren, who has been a long-time advocate for financial and bankruptcy law reforms that can help save America’s middle class.  As Ms. Warren has argued for years, vast portions of the American middle class are being squeezed by unfettered financial service companies focused that have used all sorts of unscrupulous tactics to maximize profits.   The CFPB is charged with changing this dynamic by enforcing a wide array of consumer protections, including the new credit card industry reforms signed by President Obama, and consolidating enforcement of consumer protections that are currently handled by seven different agencies.  The CFPB’s goal is to make the pricing and risks of financial products offered by these entities much clearer and fairer to the American public so that payday lenders, etc. are no longer able to prey on the most financially vulnerable among us.

The “Too Big to Fail” banks and their financial industry cronies have been against Ms. Warren’s efforts and the idea of an independent CFPB since its inclusion in the Dodd-Frank financial reform bill signed last July, and have complained about being over-regulated by a host of agencies while thousands of non-bank rivals face little or no regulation.

“This is not going to go down,” Warren declared. The bureau, she noted, has launched its website, posted her schedule on it and published a quarterly spending report.  The CFPB is scheduled to begin operating July 21st as an independent agency within the Federal Reserve System.

The Dodd-Frank legislation gave President Obama the power to appoint a director for the bureau, subject to approval by the Senate. While Elizabeth Warren seemed the natural and best choice for the position, complaints from the banking industry/GOP led the president to the interim step of assigning her to set up the CFPB organization.  This bought her time to prove herself and run a charm offensive, as she meets with hostile GOP congressmen and their banking friends to calm their concerns:

Ms. Warren’s effort to persuade the banks appeared to be going well this spring:

  • Roger Beverage, president of the Oklahoma Bankers Association, said “she would be an outstanding director, and I have encouraged both of our US senators to look past political rhetoric and look at what the woman has done.”
  • Camden Fine, president and CEO of the influential Independent Community Bankers Association, remarked to American Banker that “you would have to look favorably on a [Warren] nomination because clearly she understands our model.”
  • Frank Keating, the head of the American Bankers Association, told a reporter that the ABA would support Warren if she were confirmed as CFPB director by the Senate.
  • Robert Palmer, who heads the Community Bankers Association of Ohio, told Bloomberg Businessweek that if Warren “leaves, and the direction changes, we’re not going to be very receptive.”

Now either the bankers are at odds with their Republican congressmen, or more likely, they are saying one thing publicly while directing their minions in the opposite direction.

GOP House members submitted three Financial Service bills Wednesday to cripple the CFPB’s power to fulfill its duty; HR 1121 aims to turn the bureau into a five-member commission.  HR 1315 would make it easier for the Financial Stability Oversight Commission to overrule CFPB decisions with a simple majority vote instead of a two-thirds majority, and give the FSOC authority over not just the safety of the U.S. financial system, but also of individual institutions. The third bill aims to delay the July 21 starting date for the CFPB.

In response, House Democrats submitted several amendments to the bills; one failed amendment, offered by Rep. Carolyn Maloney (D-NY), would have required Congress to name Warren as head of the CFPB. “This debate is clearly about Elizabeth Warren, so let’s make it about her,” said Maloney, the top Democrat on the Financial Institutions and Consumer Credit Subcommittee.  She offered another amendment that would have defined the “safety and soundness” mentioned in the proposal to exclude profits, as that would be an easy rationale to overturn almost any CFPB rule or finding.  The amendment also failed, while the subcommittee passed the three GOP-sponsored bills.

The full Senate Financial Services Committee is expected to consider the bills this week, where Democratic senators can stop them.  These GOP bills could still be offered as amendments to larger pieces of legislation.

Last Thursday 44 GOP senators sent a letter to President Obama, saying that ANY nominee for director of the CFPB will be rejected, unless the bureau is significantly altered to reduce its “unfettered authority.”  They also demand handover of the CFPB budget from the Treasury Department, turning the bureau into a political football to be spiked.

Such public threats make it likely that the President will not back down from his preference of Elizabeth Warren, and he may appoint her as CFPB director during an upcoming congressional recess.  Congress is out for Memorial Day May 30-June 5, and July 4-10 for Independence Day. Still, President Obama has shown a past willingness to abandon some progressive measures for other pursuits, such as December’s extension of the Bush deficit-enhancing tax cuts, so it is important that we keep up the pressure in support of Ms. Warren and a strong CFPB.

A strong CFPB is not only good policy, it is also good politics.  Polling shows that 85% of Americans believe that people need additional protections against unfair and deceptive practices by financial institutions, and 60% or more support the CFPB.  In addition, a high profile fight in support of Ms. Warren would be a great way for Democrats to showcase that they are on the side of the middle class and that the Republicans are on the side of Wall Street and payday lenders.

Take action now to protect a strong CFPB led by Ms. Warren by “liking” the Facebook page We Want Elizabeth Warren to get updates, contacting your legislators and the President, and a writing letter to the editor of your local newspapers in support of Ms. Warren as the best choice for CFPB director to protect our financial interests.

Corporate Interests Are Fighting Democrats Because Democrats Fought Them

Thursday, October 14th, 2010

One way to discover what a candidate’s priorities would be if they were to take office is to see who is supporting their election.  This year, it is hard to know exactly who is funding the Republicans, because they are being supported by numerous outside organizations that are spending tens of millions of dollars but that do not have to report where they are getting that money from.  What is clear is that eight misleadingly-named corporate front groups are planning to spend more than $250 million this election cycle, with almost all of it devoted to defeating Democrats and electing Republicans.

As reported by the Washington Post, Fact Check.Org, and the People For the American Way, the outside organizations who are trying to buy the election for the Republicans include:

  • Chamber of Commerce – $20.5 million spent so far – planning to spend $75 million or more total – 501(c)(6) organization – does not have to disclosure its donors
  • Americans for Prosperity – planning to spend $45 million – run by the billionaire Koch brothers – donors are not disclosed – organization has led the fight against tobacco regulation, and also bankrolled the start of the tea party and opposition to health care reform
  • American Crossroads – $13.5 million spent so far – expect to spend $55 million total, plus $10 million on get out the vote efforts – run by Karl Rove and GOP consultant – funding is funneled through a spinoff organization – the Crossroads Grassroots Policy Strategies – which does not have to disclose its donors
  • Americans for Job Security – $8 million so far – 501(c)(6) trade association, founded by insurance and logging interests – no donor disclosure, but is known to have received funding from the pharmaceutical industry and other industries over the years
  • American Future Fund – $7.7 million spent so far – expects to spend $25 million total – Iowa-based organization that appears to have ties to the ethanol industry – does not disclose its donors
  • 60 Plus Association – expects to spend $6.9 million – appears to be a pharmaceutical industry front group, and has fought to privatize Social Security and to eliminate the estate tax – does not have to disclose donors
  • Club for Growth – $4.5 million spent so far – aiming for $24 million total – does not disclose donors
  • American Action Network – plans to spend $25 million – does not disclose its donors

This huge influx of money to fight against Democrats is great evidence that large corporations know that it is Republicans who will do their bidding in Washington, while it is Democrats who have fought to curb those corporate interests in order to protect every day Americans.

For example, Democrats are:

  • Reforming Wall Street by regulating derivatives, working to prevent future bailouts, and creating a Consumer Financial Protection Bureau

In short, corporate interests are spending $250 million to fight Democrats because they know that Democrats are working to break the stranglehold that those interests have on our political system.  If you want to make sure that secretive corporate donors are not able to buy the election for the Republicans, sign up to volunteer for your local Democratic candidate, write a letter to your local newspaper editor, and talk to your family, friends, and neighbors to remind them that the Democrats are on our side, while Republicans are on the side of secretive corporate interests.

The Democratic Record: Reforming Wall Street

Friday, October 8th, 2010

Wall Street reform is a complex topic, but the issue can be summed up as follows: Conservative deregulatory zeal allowed a financial market meltdown to occur, costing our economy eight million jobs.  Republicans and Democrats voted to save the financial industry through the TARP bailout.  Only one party – the Democrats – has worked to address the causes of the meltdown by seeking to avoid future bailouts, creating a consumer financial protection bureau, and regulating derivatives.

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While many contributing factors to the Bush Recession, which led to the loss of eight million jobs and the elimination of trillions of dollars in household wealth, have been identified, the overriding cause was the complete meltdown of our financial system in 2008.  And it is widely acknowledged that this meltdown was triggered by a deregulatory ethos that overtook our political system over the past twenty years, leading to a situation where more and more risky and speculative financial products were created with little to no oversight by the government.  Even Alan Greenspan, who was identified by the Washington Post’s business columnist Steve Pearlstein as “The Laissez-Fairest of Them All”, admitted in testimony to Congress that his deregulatory zeal was a flawed theory that allowed the financial meltdown to occur.

Unfortunately, members of both major political parties were complicit in allowing the conditions that led to the financial meltdown.  While the failed deregulatory approach is a core principle of the conservative movement that finds its home in the Republican Party, too many Democrats fell for the allure of the snake-oil that the deregulatory zealots were selling.

But important, substantive differences between the parties have been revealed by their responses after the meltdown occurred.  First, only one party – the Democrats – worked to make sure that the Troubled Asset Relief Program (“TARP”) funds were properly spent.  President Bush proposed, and Congress approved by a bi-partisan vote, TARP, which authorized the government to use up to $700 billion purchasing troubled financial products in order to save the financial industry.  After serious concerns were raised about the effectiveness of the distribution of the first $350 billion in TARP funds by the Bush Administrations, House Democrats passed the TARP Reform and Accountability Act, which would have dedicated $100 billion in TARP funds towards helping homeowners facing foreclosures, forced banks to report how they were using TARP funds, and limited executive compensation at firms accepting TARP funds.  Unfortunately, this legislation was one of 372 bills passed by the House that have so far died in the U.S. Senate, largely due to Republican obstructionism.  So, while both parties supported efforts to save the financial system, only one – the Democrats – had a significant block of members who wanted to increase government oversight to make sure that taxpayer money was being used in a transparent and effective way.

The second prong of the government response to the financial meltdown is to put in place policies that would reduce the chances of another meltdown in the future.  On this front, Democrats have had to act virtually alone, as Republicans have almost uniformly opposed and worked to weaken such efforts.  In July of this year, the U.S. Senate passed an historic financial reform bill by a 60-39 vote, after three Senate Republicans finally acted to break a long-running Republican filibuster.    The House had previously passed financial reform by a 232-202 vote, with every Republican member voting against it.

The financial reform legislation focused on filling a number of regulatory gaps that had developed because conservative anti-regulatory zeal had prevented our regulatory structures to keep up with changes in the financial system.  Three important provisions are especially worth highlighting:

  • Avoiding Future Bailouts: Since the 1930s, the Federal Deposit Insurance Corporation (“FDIC”) has had the authority to step in and liquidate a bank that was in financial trouble in order to prevent failure of that bank from having negative repercussions on the rest of the economy.   Unfortunately, that authority did not extend to other financial institutions, such as investment houses like AIG and Bear Stearns, which had become “too-big-to-fail.”  Because their failure would have taken down the entire economy, folks in D.C. felt that they had to bail those financial institutions out through TARP.  The financial reform legislation seeks to avoid this situation in the future by taking steps to prevent financial institutions from becoming too-big-to-fail, granting the FDIC the authority to liquidate financial institutions that are in trouble, and ensuring that the costs of such liquidations are borne by shareholders and creditors, not taxpayers.

  • Protecting Consumers: A second contributing factor to the Bush Recession was the growth of questionable consumers lending practices by subprime mortgage lenders, payday loan stores, and credit card companies.  Those practices led to an increasing wave of defaults on loans and foreclosures that undermined the real estate market and consumer spending.  Because the real estate mortgages had been securitized by the financial industry, the collapse of the real estate market had reverberations throughout the industry and economy as a whole.  The financial reform legislation creates a Consumer Financial Protection Bureau, housed within the Federal Reserve, which will be run by a Presidential appointee and have an independent budget.  The Bureau will be charged with enforcing a wide array of consumer protections, including the new credit card industry reforms signed by President Obama, and will consolidate enforcement of consumer protections that are currently handled by seven different agencies.
  • Regulating Derivatives: Another major contributor to the financial meltdown was the growth of over-the-counter derivatives, which are financial instruments whose value are based on the price of a different item.  While traditional derivatives, like trades in pork or corn futures, are done in the open and relatively safe, over-the-counter derivatives, which are often based on bets about the value of a particular currency or interest rate trends in a specific country, were almost entirely un-regulated before financial reform passed.   The reform legislation brings over-the-counter derivatives out of the dark, but subjecting them to regulation by the Security Exchanges Commission and Commodities Future Trade Commission.

The financial reform legislation, of course, does not solve all of the problems in the financial system, and some unfortunate compromises were made to get the legislation passed.  But, as I’ve discussed previously, progressive change involves a long, ongoing struggle in which today’s progress is built on with future successes.  In addition, the need for more reform is further evidence of why we need to return Democratic majorities, rather than letting Republicans who would turn the clock back on financial reform take Congress over.

The Democrats’ financial reform legislation makes a good start on addressing key causes and impacts of the financial meltdown of 2008 by avoiding future bailouts, protecting consumers, and regulating risky derivatives.   And, as our friends over at The People’s View recently pointed out, these reforms, combined with international financial reforms recently achieved by the Obama Administration, are already leading financial institutions to shift their investments into more safe and secure transactions.  By contrast Republicans, after voting to bailout the financial institutions that caused the Bush Recession, have largely sought to obstruct any effort to make sure that future financial meltdowns do not occur.

Are you glad that President Obama and the Democrats in Congress succeeded in passing financial reform that will end some of the worst abuses on Wall Street, avoid future bailouts, and protect consumers from subprime and payday lenders?  If so, volunteer for a local Democratic candidate, write a letter to your local newspaper editor, and make sure your friends, family, and neighbors know who you are going to vote for.

The Economy – Drive Forward or Back Into the Ditch?

Monday, September 6th, 2010

The above cartoon from a Hartford Courant cartoon contest, perfectly illustrates the economic condition that President Obama inherited when he took office. A CNN poll out today shows that the American public continues to believe that the Bush Administration’s disastrous policies are what drove our economy into the ditch. 53% of Americans identify the policies of Bush and the Republicans as the cause of our ongoing economic problems – only 33% point to President Obama and the Democrats. In short, people continue to recognize that the recession this country has suffered through is the Bush Recession.

Now, simply pointing fingers does not solve our economic problems. But looking back at the results from the Bush Administration’s approach of deregulation, budget deficits, and tax cuts for the likes of Paris Hilton is important as we approach the November elections because the Republicans are promising to promote the exact same economic policies as Bush did.

The following chart from the Washington Post illustrates well the impact of the Bush Administration’s economic policies.

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As the chart shows, (more…)