The Congressional Oversight Panel (COP), the watchdog investigating the government's bailout and other financial rescues, is set to question Vikram Pandit, the CEO of Citigroup today. Simon Johnson, former chief economist of the International Monetary Fund, says the grilling offers the COP an easy chance to ask some tough questions of the leader of one of the nation's biggest supermarket banks. "This is an important opportunity," Johnson writes, "because, if you want to expose the hubris, mismanagement, and executive incompetence—let's face it—Citi is the low hanging fruit."
To that end, Johnson offers five questions of his own, each well worth reading, that the COP should ask Pandit today:
As far as anyone can judge, Mr. Pandit, you are completely unqualified to restructure and run a disaster prone global bank. Can you please explain in detail how you got the job? 2.
Your hedge fund. Old Lane Partners, was closed by Citi in June 2008. Please elaborate on why it was closed, including how much money you lost on what kinds of securities. (Hint: follow the NYT through the sad story.)
Please review for us the details of your promised compensation package and how much you have actually received – including cash, deferred compensation, stocks, and perks (including executive jet travel, valued at market rates); do not forget your chunk of the Old Lane deal. How much taxpayer money has been injected into Citi and on what basis?
Of course, as you understand full well, the true cost to society of Citi’s misdeeds is vastly more than the direct taxpayer injections of capital. Please tell us – as specifically as you can – what other burdens Citi has generated for the rest of us. (Hint: there is a right answer here, which includes more than 8 million jobs lost since December 2007, a 30-40 percent increase in net government debt held by the private sector, and much higher taxes for everyone in the future.)
Mr. Pandit, your proposed restructuring plans simply make no sense; there is nothing you have put on the table that would reduce the risks posed by Citi to the national interests of the United States. Even John Reed, the man who built Citi as a global brand, now says that it should be disbanded. There is no evidence – and I mean absolutely none – for economies of scale in banks over $100bn in total assets. Richard Fisher, head of the Dallas Fed, calls for immediate action in terms of breaking up large dysfunctional banks such as yours; please explain to us why the Fed should not move immediately to apply his recommendations to Citi – surely, the safety and soundness of our financial system is on the line.
The Senate banking committee is reportedly "very, very, very close" to reaching a deal on a consumer-protection agency, which in turn could lead to a breakthrough on a broader agreement on financial-reform legislation. The latest news from the Senate's grueling, ongoing talks is that several more Senate Republicans—Sen. Mitch McConnell (R-Ky.), Sen. Mike Crapo (R-Idaho), and Sen. Judd Gregg (R-NH)—have joined the negotiations already being lead by Sen. Chris Dodd (D-Conn.), chair of the banking committee, and Sen. Bob Corker (R-Tenn.), Dodd's main GOP negotiator, the Wall Street Journal reports. It's unclear why the additional Senate GOPers jumped on board, perhaps to help finish off the closed-door talks.
The WSJ also reported that a deal to house a consumer-protection agency within the Federal Reserve, an idea of Corker's, remained on the table. The Fed option has been roundly panned by consumer advocates—John Taylor, president and CEO of the National Community Reinvestment Coalition, said he'd rather put the agency at the National Zoo than the Fed—and if passed, would be viewed as a win for the Big Finance. The Senate's financial-reform negotiations continue today, and a agreement within the banking committee could come as early as this week.
In just six months, Sen. Chris Dodd (D-Conn.), the stately front man of the Senate's campaign to crack down on Wall Street, has transformed from financial-reform avenger, scourge of the Federal Reserve, and ally of the average consumer to a GOP pushover. Last fall, the veteran Senator and chairman of the banking committee opened financial reform talks as if shot out of a cannon: He rallied around an independent consumer-protection agency, labeled the Fed's regulatory efforts "an abysmal failure," and proposed a super regulator who would rein in banks and lenders, instead of the existing muddle of offices that let the worst financial crisis in a generation unfold under their noses. "Dodd is basically starting out by out-reforming the administration," a congressional staffer told the Washington Post.
Now, Dodd appears to have switched his focus from out-reforming the White House to out-compromising just about everyone. As the Senate banking committee prepares to release a draft of a comprehensive reform bill as early as this week, Dodd has repeatedly conceded to his Republican counterparts on key issues, almost guaranteeing that the Senate's measure will be far more lenient on the banking industry than the legislation the House passed in December. (A spokeswoman for the banking committee didn't respond to an interview request for this story.) Dodd's willingness to appease Republicans like Sen. Bob Corker (R-Tenn.), the main GOP negotiating partner, and Sen. Richard Shelby (R-Ala.), the banking committee's ranking member, has disappointed Dodd's fellow Democrats and reform advocates who urge a tougher crackdown. "Those who are arguing for real reform," says one Democratic aide involved in the issue, "are arguing, 'Why even compromise if they're going to oppose it anyway? Why are you negotiating against yourself?'"
President Obama looks ready to fight to ensure the survival of his plan to ban risky trading within the same walls as taxpayer-backed US banks, according to draft language from the administration obtained by Reuters today. Obama's proposal would also place limits on the same kinds of trading at other big non-bank institutions, like Goldman Sachs. This new proposal, which will reportedly be sent to lawmakers today, reinforces a tough stance the president took back in January when, standing alongside former Federal Reserve chair Paul Volcker, for whom the idea is named, he called for new safeguards preventing federally-insured banks that take deposits from essentially gambling in venutres like hedge funds and private equity funds.
The proposal for non-banks would involve a cap on their risky trading levels and subjecting them to more enhanced regulation—the latter a proposal sure to irk the financial-services community. According to Reuters, the draft says, "These proposals are part of a comprehensive package of reforms to create a safer, more resilient financial system."
It's unclear right now how much of the Volcker proposals will make it into draft legislation now being hammered out in the Senate banking committee, led by Sen. Chris Dodd (D-Conn.), the committee's chairman. Earlier this year, Dodd had lightly criticized the Obama administration for rolling out the proprietary-trading ban, saying the president's proposal "seemed to many to be transparently political." The banking committee is expected to release its financial-reform framework as early as this week. The Volcker Rule has also been downplayed by experts, like former IMF chief economist Simon Johnson, who say a firewall between proprietary trading and more boring banking activities wouldn't get at the root of the problem:
For one thing, proprietary trading is but a small part of what these banks do. For most of the major banks, such activity accounts for less than 5 percent of total revenue—even at Goldman Sachs, which is, in some senses, the largest hedge fund in the world (backed by the US government through its access to the Fed’s discount window), proprietary trading accounts for only around 10 percent of total revenue on average. Even if we could strip this activity from the banks, it would reduce their size only slightly—and the too-big-to-fail banks would find ways to take similar-sized risks because their upside during a boom would still be big, and their downside in a bust would dramatically damage the economy, thereby forcing the government into some sort of rescue.
I'd recommend reading more of Johnson's take on the Volcker plans here. And hearing what Johnson has to say, Obama's continued backing for Volcker's idea looks even more political. We'll have to wait and see whether the Senate banking committee takes a cue from Obama or makes up its own mind on the issue.
Rep. Barney Frank (D-Mass.), chairman of the influential House financial services committee, says he'll continue to fight for an independent consumer-protection agency as part of this year's comprehensive financial-reform legislation, and that he opposes housing a consumer agency within the Federal Reserve, a plan that recently emerged from the Senate's ongoing negotiations. "My main objection to housing this critical function in the Federal Reserve has been the central bank's historical failure to implement consumer protection as a central part of its mission and role," Frank said in a statement today.
The Massachusetts congressman recently told Mother Jones that an independent consumer-protection agency was a "dealbreaker" for him. He also said an earlier plan leaked out of the Senate—where the banking committee's chair, Sen. Chris Dodd (D-Conn.), is leading the talks—to put a consumer agency within the Treasury Department was "weaker than I was hoping." Frank told Mother Jones recentlythat he'd rather see Senate Democrats push for a stronger financial-reform bill, and let Senate Republicans try to vote down that bill in public, rather than make early compromises in closed-door meetings.
Here's Frank's statement in full from this morning, which he issued to clarify comments in today's New York Times:
I do not support housing the Consumer Financial Protection Agency in the Federal Reserve. I continue to vigorously support the House-passed bill that establishes an independent agency with strong rule-writing authority and enforcement powers to implement consumer protections. I could, if necessary, support housing this important function in the Treasury Department, provided that the entity has sufficient independence and broad regulatory scope to accomplish the mission of protecting consumers.
My main objection to housing this critical function in the Federal Reserve has been the central bank’s historical failure to implement consumer protection as a central part of its mission and role.