Could Hank Paulson, the bald-headed, hard-charging former Treasury secretary who crafted the ad hoc bailouts of 2008, return to his former perch at under-fire Goldman Sachs? In a "what-if" story in today's Wall Street Journal, Paulson's name is floated as a potential successor to the chairmanship at Goldman, should current chair and CEO Lloyd Blankfein resign or be forced out of the chairman's role amidst one of the darkest periods in the Goldman's history.
To no one's surprise, rumors are swirling inside and outside of Goldman Sachs over the fate of the investment bank's leader, Blankfein—whether he'll survive the onslaught of lawsuits, the bad PR, a dip in the firm's stock, and so on. Right now, there aren't any indications that Blankfein or other top brass at Goldman are set to leave. There is, however, a resolution filed by a Goldman shareholder demanding a split of the CEO and chairman positions, both of which Blankfein currently occupies. If the resolution passed, Blankfein would have to relinquish the chairmanship. One bloc of speculators inside Goldman wants Paulson to return to the firm to fill the chairman role if Blankfein is pushed out.
Whether Paulson would jump at such a move is unlikely. After all, if his memoirs are any indication, Paulson sees himself as the man who helped rescue (most of) Wall Street's most storied firms and the financial markets, emerging relatively unscathed from the meltdown of 2008. A return to Goldman would likely tarnish that narrative. It would also provide more fodder for those who call Goldman "Government Sachs," and rail against the revolving door between Washington and Wall Street.
All of this, of course, hinges on the civil suit filed by the Securities and Exchange Commission against Goldman. The SEC alleges that the firm sold a complicated financial product to investors the design of which had been heavily influenced by a hedge fund trader, John Paulson, who was betting against that product; in other words, the product was designed to fail. What's more, the SEC says Goldman failed to fully disclose to investors Paulson's role in influencing the product's design. Right now, the case is still pending, and while there have been rumors of a settlement, Goldmanhas publicly said it will fight the suit. How the SEC-Goldman battle plays out will largely determine the fate of Blankfein and whether Paulson comes into the picture at all.
The two top lawmakers crafting the Senate's version of financial reform—Chris Dodd (D-Conn.) and Richard Shelby (R-Ala.)—appear to have finally reached a breakthrough on arguably the most contentious issue in reform: ending the threat of too-big-to-fail banks and future taxpayer bailouts. In a compromise, the New York Times reports, Dodd and Shelby have decided to scrap a $50 billion fund that would've been used to liquidate failed megabanks. The money for that fund would've come from fees charged to the country's biggest banks. Shelby and many Republicans opposed that fund, as did the Obama administration. Now, the Federal Deposit Insurance Corporation will handle the euthanization of big banks with support from the Treasury Department; the money spent to wind down those banks will later be recouped by selling the bank's assets. Shareholders and creditors, meanwhile, will be forced to take losses in the FDIC's wind-down process.
Dodd said on the Senate floor yesterday that the new FDIC proposal signaled that he and Shelby had "reached an agreement on the too-big-to-fail provisions." Further preventing future taxpayer bailouts is an amendment offered by Sen. Barbara Boxer (D-Calif.) that outright bans taxpayers from being on the hook for rescuing big banks. Her amendment is expected to win both Democratic and Republican support.
Dodd and Shelby's agreement, though, doesn't mean the issue of too-big-to-fail and bailouts is done, as some disagreement remains. As Mother Jones reported yesterday, Sens. Ted Kaufman (D-Del.) and Sherrod Brown (D-Ohio) will introduce an amendment calling for strict caps on the banks' size and amount of leverage—the amount of money they borrow to amplify the gains (or losses) of their bets. These kinds of capital and leverage limits are opposed by Republicans, haven't gotten much of a hearing from Dodd, but are backed by outside experts like Simon Johnson, former cheif economist of the International Monetary Fund and a widely read commentator on reform, because they proactively limit the size of banks. The way the Senate's bill looks now, there aren't any provisions preventing the growth of too-big-to-fail banks, only a new council to keep a close eye on them and new ways to liquidate them if and when they fail.
Republicans had been blocking votes on financial reform amendments until Dodd and Shelby reached an agreement on too-big-to-fail. With that impasse now resolved, the Senate is expected to begin voting on amendments as early as today.
More than any other issue, the question of what to do with too-big-to-fail banks has perplexed and divided lawmakers since the glaring need for new financial rules was laid bare in the fall of 2008. Ever since global insurer AIG teetered on the brink of collapse in 2008, and then took a $134 billion lifeline from the Treasury Department and Federal Reserve, experts, financiers, and politicians from both parties agreed something had to be done to prevent the next AIG from imperiling the global economy. Almost two years after the financial collapse, though, lawmakers still can't agree on how to fix our too-big-to-fail conundrum.
A recent exchange on the Senate floor illustrated this chasm. In one camp are senators like Ted Kaufman (D-Del.). Kaufman took to the floor on Monday for an impassioned speech calling for strict caps and restrictions on the size of banks. Citing financial experts and even former Treasury Secretary Robert Rubin, Kaufman said too-big-to-fail banks were too-big-to-regulate and a danger to the economy. Kaufman's amendment, authored with Sen. Sherrod Brown (D-Ohio), would not only cap the size of banks' balance sheets but also the amount of leverage—the money they borrow to amplify the gains or losses of their investments—they can use. "The truth is that these financial institutions have become so large and complex that regulators rely upon the banks and the markets to self-regulate," he said, adding that self-regulation is effectively no regulation. Capital and leverage limits essentially dummy-proof financial regulation, taking decisions out of regulators' hands and simply saying banks can't grow to AIG-like size.
Kaufman's proposal was cheered by outside experts like Simon Johnson, former chief economist of the International Monetary Fund, who wrote on Tuesday that ending the specter of megabanks is the "most pressing issue of financial reform." Yet Johnson rued the fact that Kaufman's proposal isn't getting a fair hearing in the Senate, which is content to "keep the 'debate,' in terms of votes, on issues less likely to infuriate powerful banks."
Presumably, Johnson is alluding to senators like Bob Corker (R-Tenn.), who today brushed off the need for capital and leverage restrictions. Corker, in essence, said we didn't these caps; the best way to deal with too-big-to-fail banks, he said, is to remove the implicit guarantee that megabanks will always be bailed out. The prospect of failure, Corker's thinking goes, will dissuade banks from growing to too-big-to-fail size, and if the bill ends up as he wants it, there will be no bailouts. "The best way to level the playing field is ensure that if a big company fails it fails," Corker said. The Tennessee senator said he also supported a resolution authority, which would be a special process created by the bill to handle the failure of these big banks in a timely way, outside the traditional bankruptcy process.
Think of Kaufman's proposal as the proactive one, and Corker's the reactive. While some see Kaufman's idea as the unwarranted reach of big government, Corker's stance overlooks the turmoil and pain involved with the failure of a big bank, an event sure to shake the foundations of the financial markets like AIG's near-collapse did. Letting big banks fail, instead of offering ad hoc bailouts, is indeed important, but Corker's position doesn't prevent the growth of new megabanks at all, failiure or not—a situation with ominous consequences for the markets and our country, says Johnson. At the end of the day, he sees the war over too-big-to-fail as more than just a debate over bank size:
This is, of course, partly about the political power of corporations. But corporations are, in this sense, merely a veil—this is really all about which people have what kind of power in our society. To what extent are we really still a democracy—and how far have we already slipped down the road to oligarchy?
Sen. Bernie Sanders (I-Vt.), the lead sponsor of a new rule to audit the Federal Reserve, is running up against some formidable opposition from nearly all sides. Most notably, Sanders told the Huffington Post that his provision, which has a good chance of winning 60 or more votes in the Senate, is opposed by the White House, and that chief of staff Rahm Emanuel has pushing back against the Fed audit. "I think momentum is with us," Sanders told HuffPo. "But I've gotta tell you, that on this amendment, you're taking on all of Wall Street, you're taking on the Fed, obviously, and unfortunately you seem to be taking on the White House, as well. And that's a tough group to beat."
The amendment would allow the Government Accountabililty Office (GAO) unprecedented access to the Fed's records, and would require the opaque, hybrid public-private institution to disclose who received the $2 trillion given out in loans by the Fed since the onset of the financial crisis. To one's surprise, Fed chairman Ben Bernanke and his acolytes have vehemently opposed the provision, saying it would taint the Fed's decision-making with politics and partisanship.
Sanders, though, appears to have considerable support amongst his colleagues in the Senate. A similar provision to audit the Fed, the Sanders-Webb-Bunning-Feingold Amendment, won 59 votes in April 2009, and eight of the "No"s on that 2009 vote have signed onto Sanders' current amendment. And considering that the House passed a similar amendment last year, and that right now Sanders' amendment has the support of 69 senators, it looks as if the white-haired Vermont independent might get his Fed audit after all. The amendment could come up for a vote as early as today.
The White House is targeting ten of what it has dubbed the "Most Wanted" lobbyist loopholes in the ongoing financial regulatory reform fight. Essentially these are the items big lobbying organizations, like the US Chamber of Commerce and the Financial Services Roundtable, are pushing hardest on in order to blunt the effects of new reforms. Here are the highlight from the "Most Wanted" list, penned by White House communications guru Dan Pfeiffer.
Ok, Consumer Protection Rules are Fine...Just Don't Enforce Them. Lobbyists are pushing hard to amend the bill so that Attorneys General lose their enforcement authority. Why does that matter? Because the Bureau would only supervise larger market participants. Without state AG enforcement authority, the citizens of their states will have much less protection against illegal conduct. If you want to weaken consumer protections, that's one way to do it.
Letting Non-Banks Play by a Weaker Set of Rules. We know this is coming, so keep an eye out: attempts to give car dealers that make car loans and other major providers of financial services a big exemption from the consumer protection rules. Now be aware: some people try to scare small businesses by saying that the consumer financial protection bureau will regulate main street businesses like orthodontists and florists. That is not true. But if a car dealer makes loans, or if a big department store sets up a financial services center, it’s doing what banks and credit unions do, and it should play by the same rules.
Preventing States from Protecting Their Own Citizens. Under the current bill, the Bureau of Consumer Financial Protection would set minimum standards for the consumer finance market, but states would still be allowed to adopt additional protections. In other words, federal consumer protections would set a floor, not a ceiling. There’s likely to be a fight about that provision. Citing the doctrine of “preemption,” big banks will try to take away states’ ability to supplement federal consumer protections. Why is this a problem? Because state officials are often the first to learn of new abuses and new problems in the marketplace, and we should not get rid of that canary in the coal mine. Federal law can overrule or “preempt” state law when a state law would significantly interfere with national banks’ business of banking, but states should otherwise have the right to protect their citizens as they see fit.
Preserving “Too Big to Fail” While Pretending to Kill It. The key to preventing future bailouts is to end the problem of “Too Big to Fail.” And the only way to do that is to make sure that we can shut down big financial firms in a swift, orderly way if they’re on the brink of failure. Of course, not everyone wants to see “Too Big to Fail” disappear, since it lets the biggest firms borrow money at lower cost and avoid the consequences of excessive risk-taking. But no one wants to be caught defending the status quo. So defenders of the status quo are using a sleight of hand: pushing to make the resolution process so unwieldy that it can never work. By proposing amendments that look tough but that make the resolution process unworkable, opponents of reform will try to save “Too Big to Fail” while pretending to kill it.
These are all important points from Pfeiffer, and all provisions or rules still in play as the financial reform debate hits full stride this week. Some of them we've already covered here at MoJo, with our "Five Fights to Watch" a few weeks ago. This week, the deluge of amendments to the financial reform bill will begin, as will votes on those amendments. Some of those amendments will seek to bolster the bill, like Sen. Byron Dorgan's (D-ND) which would give a new financial oversight council the power to break up overly big banks. Other amendments, likely from the Republican camp, will seek to pare down the council's too-big-to-fail oversight power and the independence of the proposed consumer agency. All in all, it'll be a bruiser of a week on the path toward rewriting the rules of our financial system.