What happened to the global economy and what we can do about it
with 25 comments
By Simon Johnson
The bank lobbyists, it turns out, missed one. They and their congressional allies were able to gut the Volcker Rule, the Lincoln Amendment, and almost everything else that could have had a meaningful effect on the industry.
But, as I point out in a Bloomberg column today, they couldn't get at (or didn't sufficiently understand?) the Kanjorski Amendment. This Amendment was originally proposed by Congressman Paul Kanjorski (chair of an important House subcommittee on capital markets) during the fall. Against the odds, it survived in the final House bill and now "“ probably because it has stayed mostly below the radar "“ remains in the reconciled legislation.
Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a "grave risk" to the financial system.
The Federal Reserve is in the hot seat on this issue "“ and it needs 7 out of the 10 members of the new systemic risk council to agree to any action. But for the first time someone at the federal level must make a determination regarding whether an individual firm poses system risk.
And congressional committees can call upon the responsible people to explain how they determine whether a megabank is or is not dangerous. What are the risk metrics they use? To what extent do they take on board outside opinions? How much do they consult with the bank itself?
This also creates important space for critics. There are many people "“ outside of the big banks "“ working on developing ways of assessing system risk. Again, congressional hearings can raise the prominence and credibility of this work. The question will be: If the regulators are not taking these perspectives into account, why not?
This may all sound rather technical, and to some extent it is. But it is also intensely and pointedly political. The Kanjorski Amendment makes it clear that system risk must be assessed and dealt with. And it assigns clear responsibility for this issue "“ along with a cut and dried list of remedies.
The debate on big banks and the dangers they pose is far from over.
Written by Simon Johnson
July 9, 2010 at 6:06 am
Posted in Commentary
The regulators were not enforcing the laws in place that would have prevented the last meltdown. In spite of their incompetence and negligence, no regulator has been fired and several have been promoted. Evidently, the banks figured that they need not gut this provision since they’ve already captured the regulators. You pointed out that US regulators support TBTF banks due to European banks competing with them in global markets in earlier posts. At least, that is the Treasury’s argument that TBTF institutions are needed to compete in global markets which is a lie. By the time the next financial crisis hits, it’ll be too late to fix the risky banks that posed the greatest danger. Some regulator may lose his job, or retire to a cushy job at some bank, because he didn’t enforce this part of the law, but it will be way too late by then. Or possibly, he’ll be promoted to Treasury or be reassigned to some other position within the Fed. Since the wrecking crew we have in place now are the same people who caused the mess we are in in the first place, it’s likely that no one will be fired for not doing their job and enforcing the existing laws the next time this happens either.
jbmoore
July 9, 2010 at 7:14 am
“But, as I point out in a Bloomberg column today, they couldn't get at (or didn't sufficiently understand?) the Kanjorski Amendment. This Amendment was originally proposed by Congressman Paul Kanjorski (chair of an important House subcommittee on capital markets) during the fall. Against the odds, it survived in the final House bill and now "“ probably because it has stayed mostly below the radar "“ remains in the reconciled legislation.”
bmoore wrote:
“Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a "grave risk" to the financial system.”
The regulators were not enforcing the laws in place that would have prevented the last meltdown. In spite of their incompetence and negligence, no regulator has been fired and several have been promoted.
Evidently, the banks figured that they need not gut this provision since they've already captured the regulators.”
Agreed.
Anonymous
July 9, 2010 at 2:22 pm
This would not be the first regulatory legislation with far-reaching effects that passed under the radar. The entire U.S. structure of hazardous waste regulation rests on a section of the Resource Conservation and Recovery Act that was overlooked by industry lobbyists when the law was enacted in 1976. Environmental lobbyists intentionally distracted their industry counterparts with a campaign for a different part of the bill, eventually dropped, requiring deposits on soft drink bottles. At the same time, lengthy negotiations were under way over the Toxic Substance Control Act, whose provisions (aside from a ban on PCBs) the chemical industry succeeded in gutting.
Benjamin Ross
July 9, 2010 at 8:07 am
so you think this passes basic constitutional tests?
q
July 9, 2010 at 8:22 am
Can you say “Interstate Commerce Clause?”
old guy
July 9, 2010 at 9:43 am
"Kanjorski gives federal regulators the power and the responsibility to limit the activities or even break up big banks if they pose a "grave risk" to the financial system."
Great, but what is more needed is someone with the powers to break up the regulators when they pose a grave risk to the financial system… as the current regulators do.
Though everyone knows that bank and financial crisis are always born out of risks that were a priori considered to be no risks… the financial regulators have increased the ex-ante bank returns from investing in what a priori seems not to be risky… precisely the stuff than bank crisis are made of.
We have regulators who are pushing banks to dangerously overcrowd what would otherwise be safe-havens.
Per Kurowski
July 9, 2010 at 9:38 am
Understanding the assumptions underlying the Central Limit Theorem is essential for regulators. Bankers will engage in pettifogging and smoke blowing as long as they are allowed to do so, always claiming that they are protected by diversification of asset class.
Simply put, under extreme stress, there is only one asset class. If one is net long across the summation of exposures, one takes a loss. If one is using the 100 to one gearing ratios, one is bankrupt.
Make bankrupting a major bank a capital crime (like that will happen) then there will be no more major bank failures.
old guy
July 9, 2010 at 9:49 am
“Simply put, under extreme stress, there is only one asset class. If one is net long across the summation of exposures, one takes a loss. If one is using the 100 to one gearing ratios, one is bankrupt.”
From one old guy to another, finally somebody who understands risk analysis. Make the D&O insurance guys pay off if they have any money left.
windmill
July 9, 2010 at 11:28 am
As long as Obama, Bernanke, Summers and Geithner are in power no meaningful financial reform can or will occur. It is all one cruel sad joke on the American people who are too busy texting or twittering to notice or care.
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