Beyond Understanding

Ironic, isn't it, that proponents of federal overhaul of financial services industry regulation criticize structured finance transactions, derivatives trading and the interconnectedness of national and global financial systems on grounds of complexity. The implication is that mortgage backed securities and other collateralized debt obligation deals were so complicated that even the most sophisticated investors couldn't understand the risks they were incurring.

The bill before the conference committee, Restoring Financial Stability Act of 2010 (H.R. 4173), is over 1600 pages long.

Silence as Price of TARP Bailout Funds

Organized labor has seized the bailout of financial services companies as a tool to silence them in the political process.

Last month, the House of Representatives passed two bills in reaction to the AIG executive compensation story: H.R. 1586 (imposing a 90 percent tax on income in the form of retention bonuses received by executives at firms that accepted more than $5 billion in bailout funds) and H.R. 1664 (requiring Treasury to curb "unreasonable or excessive" executive compensation at firms that accepted federal bailout money).

Last Tuesday, labor federation Change to Win asked Neil Barofsky, Inspector General of the Troubled Asset Relief Program (TARP), to audit Bank of America and other firms who received TARP money to determine whether Bank of America and other financial institutionsused TARP money to lobby against the two bills. Treasury officials responded with puzzlement. Money is fungible. Change to Win doesn't agree. In particular, it wants the TARP Inspector General to disclose how much TARP recipients paid in membership dues to the Financial Services Roundtable, a financial services industry group that spoke out against the House bills amid the AIG populist revenge fervor. The Roundtable wrote to lawmakers just after H.R. 1586 passed urging Congressmen to consider the likely effect of bill on the success of the TARP program.

The AFL-CIO's Executive Pay Watch Website unveiled an annual update on April 14 which includes a section on pay practices at companies that have received TARP money. The site also features a report on companies, including Bank of America, that are actively opposing the union-backed Employee Free Choice Act (H.R. 1409, S. 560), a bill that would allow workers to form unions through a majority "card check" process and not by secret ballot. The AFL-CIO has its eye on B of A and Citigroup, TARP recipients who likely oppose the bill.

Some Damn Foolish Thing in the Balkans

That's what Bismark predicted would set off the war that seemed inevitable. The trigger turned out to be the assasination of Archduke Franz Ferdinand, heir to the Hapsburg throne. The assassins were seven young men. All were members of a secret Serbian nationalist movement. All had tuberculosis which was a death sentence in 1914. The rest, as they say, is history.

Two days ago, at a Brookings Institute conference on Turmoil in Housing and Financial Markets, former Treasury Secretary Lawrence Summers (now at Harvard's Kennedy School) observed that there is no single root cause of the current financial crisis and no simple single solution. The fix, he said, requires "multiple instruments targeted to multiple objectives." One response to the housing crisis currently getting most of the attention is to regulate institutions so they won't make mistakes again. People and businesses make mistakes and they always will, whether government regulates them or not. Summers offered another approach --reforming the financial system to make it safe for institutions to fail. The goal should be reduction of systemic, not individual risk of failure.

Summers noted that even without subprime mortgages, the US economy was still vulnerable to leverage bubbles and might still have found itself in crisis. Blaming the current financial crisis on submprime mortgages, he said, is like blaming World War I on the assassination at Sarajevo.