2010 - %3, May

How Derivatives Lost the Game

| Wed May. 5, 2010 9:40 AM PDT

Dan Drezner points out that the fight over financial regulation has gone a little oddly. Normally, interest groups manage to water down legislation over time, but in this case it's actually gotten tougher in some ways. This makes sense if the public is united in outrage and can swamp interest group power, but Dan is skeptical about that:

This is pretty surprising, because financial regulation is so friggin' arcane. Quick, what's a credit default swap? A collateralized debt obligation? Are they examples of derivatives or not? Sure, readers of this blog likely know the answers to those questions, but I guarantee you that 99% of registered voters do not know the answer. The fact that public pressure and attention is still mobilized on this issue is unusual.

I think it's tied into the one part of the story that [Noam] Scheiber failed to mention — the SEC indictment of Goldman Sachs. Whether what Goldman did or not was actually illegal is not the issue. There was a lot of reporting about what Goldman actually did — and it seems like they weren't acting like just a couple of bookies. The indictment changed the political optics of financial regulation and dramatically reduced the utility of lobbying from the financial sector.

The Goldman indictment might have something to do with this, but I'd personally give it about as much credit as Anthem's 39% insurance rate hike gets for helping pass healthcare reform: not that much. (Not zero. A little push when things are already going your way is always helpful. But in the great scheme of things, not a lot more than zero.)

I'd make a few points. First, Blanche Lincoln's surprisingly tough derivatives proposal came before the Goldman indictment. Second, 60 Minutes and other popular outlets have been banging the derivatives drum pretty hard for a while — and always with an intensely negative spin. This stuff isn't quite as arcane as it used to be. Third, the fact that it's still mostly arcane is a feature, not a bug.

That last requires a little explanation. If you propose an agency that's going to regulate consumer credit, it's entirely possible to get the citizenry riled up about it. You make some arguments about how it will make it harder to get a home loan or qualify for a credit card or something like that. People get that. If you pitch your argument right, they'll respond. Ditto for resolution authority. It's a little harder, but still, people sort of understand bankruptcy and they sort of understand the proposition that a $50 billion pool is a "bailout fund." It doesn't matter if the argument is bogus, just that it makes some kind of sense at a visceral level.

But derivatives? It's the fact that they're arcane that makes them such a great target. Think about it. It's almost impossible to explain them at all, and completely impossible to explain them in a way that makes them sound like a good thing to the average joe. The best you can do is make an argument about, say, airline companies hedging fuel prices, but even that's pretty arcane and only applies to huge corporations. The average guy just can't be convinced that there's any upside to allowing Wall Street free rein with these things. Conversely, they're really easy to demonize. If you were looking for a poster child for Wall Street tycoons ripping off ordinary folks with pure paper shuffling, derivatives would be it.

I'm not talking about substance here. Derivatives reform is important, but there are two or three things I'd rank above it. (1. Leverage. 2. Leverage. 3. Leverage) But from a pure PR perspective, the very fact that derivatives are (a) arcane and (b) solely the preserve of gigantic Wall Street firms make them a perfect target. The fact that the White House has figured this out — and that the business lobby can't figure out how to fight back against it — doesn't surprise me a bit.

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Kerry Touts Oil Industry Support Despite Growing Tension Over Spill

| Wed May. 5, 2010 9:33 AM PDT

With the remains of the Deepwater Horizon rig still spewing hundreds of thousands of gallons of oil into the Gulf of Mexico unfettered, a growing group of legislators has disdain for the oil industry and apprehension about plans to expand offshore drilling. But not John Kerry, who on Wednesday praised the oil industry for working with him on climate and energy legislation, even as tensions in over what his bill may say about drilling threatens to divide Senate Democrats.

While he acknowledged that "we can't drill and burn our way out of danger," Kerry also spoke highly of the oil companies backing the draft legislation, which was supposed to be released last week. BP, operator of the rig currently spewing hundreds of thousands of gallons of oil into the Gulf of Mexico, was expected to be among the supporters. But that bill remains on indefinite hold amid political wrangling over the legislative calendar.

"Ironically we've been working very closely with some of these oil companies in the last months," Kerry told a conference of labor and environmental groups on Wednesday. "I took them in good faith. They have worked hard with us to find a solution that meets all of our needs. I believe when we roll out a bill, ad we will will roll it out very soon, that we are going to have a unique coalition."

Kerry also touted the process he and Sens. Joe Lieberman (I-Conn.) and Lindsey Graham (R-SC) have used to craft the bill. The trio has held extensive meetings with industry and trade groups, but most senators have yet to see a completed draft.

"A lot of colleagues of mine in the Senate were really frightened about voting for this because they were scared about what the impact might be on you and the politics of it," he told the crowd. "Instead of going to them and trying to persuade every one of them, which we wouldn't have been able to do ... we decided to change the playing field by going to the various companies themselves and getting them to be comfortable."

He also downplayed the possibility that a trio of coastal state Democrats may abandon the bill if it includes expanded drilling provisions. "We will not lose them," Kerry told reporters.

Can Congress Be Trusted With Financial Regs?

| Wed May. 5, 2010 8:56 AM PDT

James Pethokoukis writes today that Congress shares some of the blame for the financial crisis. His bill of particulars, taken from a paper by Ross Levine of Brown University, includes poor regulation of (a) ratings agencies, (b) credit default swaps, (c) investment banks, and (d) Fannie Mae and Freddie Mac. This has become a steady drumbeat over the past few weeks: sure, Wall Street screwed up, but federal regulation of the industry sucked too. So how can we trust these clowns to do the job right this time?

If conservatives hadn't waited until now to make this argument, I might think it was one of those brilliant Rovian strategies, going straight after your opponents' strong point and then turning it around on them. You liberals say that Congress was a slave to Wall Street interests? You're right! So there's no point in letting them pretend to regulate Wall Street yet again.

But now? This long after the regulation train has left the station, this argument sounds so dumb it barely even needs rebutting. Is the point truly to pretend that no regulation will work? Or that the current proposed regs are actually favors to Wall Street? (A few people have tried to suggest exactly that.) Or to goad Democrats into beefing up their bill so much that it has no chance of passing? Or what? The fact that Republicans and Democrats both bought into the deregulatory fervor of the past three decades doesn't mean they can't both unbuy into it if they work up the gumption. And while nothing lasts forever, a decent set of finance regs will improve things for a few decades anyway. If the point of this particular critique were truly to lobby for tighter regs, it would be great. As it is, it's just juvenile.

UPDATE: Mike Konczal has a more sophisticated take on this game of three card monte here.

The Primary Winners

| Wed May. 5, 2010 8:41 AM PDT

Tuesday's primary elections in Ohio, Indiana, and North Carolina produced few surprises. (I previewed the races yesterday.) In the Buckeye state's Democratic Senate primary, Lt. Gov. Lee Fisher, the favored candidate of the DC Democratic establishment (and Gov. Ted Strickland) beat Secretary of State Jennifer Brunner by 10 points. Fisher will face Bush budget director Rob Portman and his $7.6 million war chest in November. The most interesting thing to watch here is whether Brunner will back Fisher in the general election. Brunner had previously said she would not support Fisher if he won, and she may make it harder for him to lock down liberals if she keeps her word.

In Indiana, GOP establishment candidates held on—barely—across the state. Former Sen. Dan Coats, heavily criticized for his time as a Washington lobbyist, took home just 39 percent of the vote in the Republican primary for the Senate seat being vacated by retiring Dem Evan Bayh. That was enough to win the race, but the poor performance earned Coats mockery from the Democrats. The Democratic National Committee sent out an email blast quoting news reports about Coats' win: "Not 'overly impressive,' Republicans Not 'ready to embrace Dan Coats as a returning hero,' Result 'Humbling.' The Dems' crowing is unsurprising: they were happy to see Coats win, because they think that running against Coats (and his lobbying) gives their candidate, moderate Rep. Brad Ellsworth, the best chance of winning the seat.

On the House side, GOP incumbents and former officeholders struggled to fend off primary challenges from enraged conservative activists. Fourteen-term Rep. Dan Burton, who faced the toughest challenge, earned just 30 percent of the vote in his primary. But in a seven-way contest, that was enough—Burton edged onetime state Rep. Luke Messer by two points and will be favored to win a fifteenth term in the fall. Rep. Mark Souder, like Burton, faced several conservative challengers who split the vote against him. He won his primary with a plurality—48 percent—but was 14 points ahead of his nearest challenger, Bob Thomas. Elsewhere in the Hoosier state, former Rep. Mike Sodrel failed in his bid to face Dem Rep. Baron Hill for an almost unprecedented fifth time. (Sodrel was 1-3 in four previous tries.) Sodrel finished a dissappointing third in the primary, which was won by attorney Todd Young.

In North Carolina, there were six candidates in the Democratic Senate primary to face incumbent Republican Sen. Richard Burr. Elaine Marshall, the secretary of state (and the candidate favored by progressives) beat state Sen. Cal Cunningham, 36 percent to 27 percent. But Marshall wasn't able to hit the 40 percent cutoff required to avoid a June run-off. Cunningham and Marshall will campaign for another month before facing the primary electorate again on June 22, when the Dems will finally have a candidate.

Some Times Square Perspective

| Wed May. 5, 2010 8:21 AM PDT

You know, I get that questioning authority is a good thing and skepticism of the system can be a virtue. But Jeez. The Times Square bomber was caught within 48 hours, placed into custody, and is providing us with tons of information. Not bad! What's more, if I remember right, pretty much everything we thought we knew about the Christmas bomber in the week after his terror attempt turned out to be wrong. I know there are elections to win and all that, but maybe this time we should all calm down just a hair and wait to piece together the entire story before deciding that everything was a complete clusterfuck?

Exploiting the Oil Spill: One Word—Lithium

| Wed May. 5, 2010 7:29 AM PDT

In recent days, Rush Limbaugh and other rightwingers have accused the Obama administration and environmentalists of trying to exploit the BP oil spill for political gain—even suggesting that they caused the disaster or let the leak continue in order to undermine plans for expanding offshore drilling. This is wacko stuff, showing that the soundbite scoundrels of the right will exploit anything to score political points. But there are those on the right who are also trying to exploit the BP oil spill the old-fashioned way: for financial profit.

This morning I received an email from Townhall.com, a prominent conservative site that features the writings of well-known conservative pundits. The subject head: "Obama may cancel ALL oil drilling, wants Lithium. LTUM stock could triple." Townhall had rented out its email list to a stockpicking newsletter that was pushing lithium stocks—and attempting to make a buck off the paranoid conservatives who soak up Limbaughian lies. Well, if  rightwingers really do believe that President Barack Obama will cancel all offshore drilling, then they ought to be easy marks for Townhall's partner. They might also be interested in purchasing some swamp land in Florida.

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Hank Paulson-Goldman Reunion

| Wed May. 5, 2010 7:15 AM PDT

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, Goldman has 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.

Bipartisan Deal on Too-Big-to-Fail?

| Wed May. 5, 2010 6:19 AM PDT

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.

We're Still at War: Photo of the Day for May 5, 2010

Wed May. 5, 2010 4:11 AM PDT

 

Special operations Soldiers stand clear as they blow a door open to demonstrate how they clear buildings during the USASOC capabilities exercise. Photo via the US Army.

Will Taxpayers Bail Out Big Oil?

| Wed May. 5, 2010 4:00 AM PDT

The Obama administration has made it very clear that it intends to force BP to pay all of the costs associated with the massive spill in the Gulf of Mexico. But that might be easier said than done, thanks to a law passed by Congress in the aftermath of the Exxon Valdez spill that puts a $75 million cap on liability for spills.

The costs associated with the Deepwater Horizon spill are numerous. BP is already spending $6 million a day on clean-up efforts. The government is  expending millions as the Coast Guard and numerous state and federal agencies rush to provide back-up. The spill has halted local fishing, an industry that brings in $41 billion to the Gulf region every year. It also threatens to seriously harm the region's tourism industry, which brings in $100 billion for Gulf states annually. And then there are damages that are more difficult to measure. The blast killed 11 workers and injured 17 others, and hundreds of gallons of oil are still seeping into the Gulf every day, standing to destroy fragile coastal ecosystems. It's hard to put a dollar figure on such losses.

Not long after the Exxon Valdez spill of 1989, Congress passed the Oil Pollution Act of 1990, which imposed a fee on oil companies—currently  8 cents a barrel—to be paid into the Oil Spill Liability Trust Fund. The federal government uses the fund to cover losses from oil accidents—such as  the destruction of wildlife and fisheries—up to $1 billion per incident. It looks very likely that this particular incident will far exceed that limit; current estimates are as high as $8 billion. But the 1990 law also capped the liability of companies at just $75 million for all costs claimed by parties injured in an accident, including individuals, businesses and government agencies.

This means that it could be very hard for the government to force BP to pay for all the expenses stemming from the spill. A trio of anti-drilling senators on Monday introduced the "Big Oil Bailout Prevention Act," a measure that would raise the liability limit on spills to $10 billion per incident.

"Let's be honest, $75 million to BP, that earned $5.6 billion in the last quarter alone, is less than a drop in the bucket," said sponsor Sen. Robert Menendez (D-NJ) on Tuesday. Raising the cap to $10 billion, he said, "gives us real access to the type of money necessary and makes the polluter pay." Menendez also said it would instill more "discipline" on companies to "make sure they've got the safest technology and that it is working." Borrowing language from the debate over financial reform, Menendez said they hope to drive home the point that offshore drilling isn't "too safe to spill."