Giant holes in new banking rules

Giant holes in new banking rules

Ferguson: Admin. asked for too little in the banking bill, nothing is preventing another banking crisis




Thomas Ferguson Interview (Part 2)

PAUL JAY: Welcome back to The Real News Network. We're in Boston, Massachusetts, and we're talking to Tom Ferguson about the state of the American economy. Thanks for joining us again, Tom. We recently did a series of stories with McClatchy Newspapers where McClatchy had done an investigation into Goldman Sachs and how they, first of all, cashed in on the subprime mortgage bubble, and then they knew ahead of time that it was going to explode.
THOMAS FERGUSON: Like, they cashed in on the bubble. They cashed in on the bursting of the bubble. Now they're cashing out on this sort of post-burst of the bubble.
JAY: And what a surprise, given that Goldman people are writing all the regulations. And that's—.
FERGUSON: That's unfair, considering that there's surely other financial houses that have people writing the regulations, too. So let's be careful there.
JAY: Alright. The houses—.
FERGUSON: For a nuanced scholar like myself, that's important, you know!
JAY: The players are writing the rules.
FERGUSON: Yeah.
JAY: How's that?
FERGUSON: For sure. Yeah. Look, what's happened in the banking bill stuff is really scary. First of all, the administration asked for very little. I mean the Geithner-Summers-Bernanke, I think it's fair to say they're clearly the three power players in the design of the legislation. They really didn't deal with very much in the way of anything that would really forestall another banking crisis. I mean, and then Barney Frank's committee and the Financial Services Committee in the House actually weakened it further. I mean, the Frank reworking of that bill's actually quite scary and needs a good deal more careful review from the press than it's had.
JAY: Alright. Be specific. What are the three or four things that should have been there and they're not?
FERGUSON: Yeah. Let's be specific. First of all, well, on too-big-to-fail, neither the administration nor Frank really should, in my opinion, make the Federal Reserve the lead regulator on that question. The banks all want the Fed to be their chief regulator, 'cause they know perfectly well they'll control it. I think you'd be better off with some kind of counsel or the FDIC, or almost anything is better than having the Fed be the chief supervisory institution for too-big-to-fail. Second of all, you know, you've got to have a better policy toward too-big-to-fail than they did. I mean, they are effectively just proposing things like better capital requirements and things like that. None of that's going to stop a return to—. I mean, the next time you get a financial crisis—. They're not reining in seriously either leverage—. And above all, specifically on too-big-to-fail, that's where the derivatives regulation these folks propose, that's—that was weak in the administration bill, but Barney Frank's committee gutted it a whole lot more. Basically, the loopholes in that bill—first thing is they wrote a loophole that allows you to pretty much do what you want over the so-called over-the-counter derivatives.
JAY: So explain that to someone who doesn't understand it.
FERGUSON: Okay. The derivatives ought to all be sitting on not just clearing houses but exchanges, where in effect the partners in the exchange, the various members of it, are sitting behind the contracts and actually guarantee it. That gives them all some incentive to actually check on each other. Now, there can—I mean this is a little scarier, actually, than most people are willing to admit, because you can certainly get—even an exchange might decide, "We're going to try to get this, we're going to try to get ourselves, as some people have proposed, special access to the Federal Reserve, so that, in other words, we don't have to really worry about whether all this stuff is sound, and then they'll just bail us out." That can happen. There's not enough consideration given to that. But if you do do an exchange you're surely better off. Moreover, the derivatives need to be just standardized. The standardized stuff you can see. It has a price, it fluctuates, it moves around, and you can put reserves in, sort of like an insurance policy that changes every day—you've got to put some more reserves in or take them out. With prices you can do that. When you go to over-the-counter derivatives, there are no prices. They're just negotiated, and they're not revealed, and they're hugely complex. That's the whole point of them. And when, as Frank's committee did, in effect they sort of gave you loopholes that allow you to leave open the status of foreign exchanges and people who are doing stuff between the US and abroad. You can do just about anything you want in some other currency than bring it back into here, to put it simply. That stuff—and in effect you have no regulation at all. The loopholes, because of over-the-counter and the treatment of the foreign exchange stuff, they're giant holes. Giant holes.
JAY: And this McClatchy piece showed how much of Goldman Sachs' subprime business was being run through the Cayman Islands.
FERGUSON: Yeah. Yeah. There are also this ridiculous end user, commercial—what—sometimes called "end user", "commercial users", the bank trick in this one was to go to large industrial companies—although a lot of these folks turn out to have financial subsidiaries that now are most of the company (an unsympathetic being might even say something like GE should be treated as a bank, for example)—but they went to the end user, to the commercial user, people who claim they hedge with this stuff, and then said, "I'll tell you what. You go with us to have an over-the-counter regulation, 'cause we can then do tailored derivatives for you. And let's not have you guys do any capital set-asides as this stuff gets riskier." In effect what you're doing is you're selling under-priced insurance, and in effect the commercial users and the big financial sellers of this are colluding against the public. In technical terms it's an externality, meaning we're going to pay when this stuff goes down. And that's why it can be profitable for both the—. There is a view which is dead wrong—one some of the lobbying and some of the public interest groups have used—saying, well, the industrial users can't possibly understand what they're doing. Now, they understand very well. Everybody's keeping their capital set-asides low, and they're colluding, in effect, against the rest of us. That view has won out in the House Financial Services Committee. Ms. Melissa Bean in Chicago and others were big pushers on this. And, you know, Frank did not regulate it, did not rein it in. That's a really big hole. It's got to be corrected.
JAY: One of the things that was, I think, an underpinning of the whole bubble, the subprime bubble, was the rating agencies who are giving these bundles of derivatives of essentially mortgage triple-AAA ratings.
FERGUSON: Yeah. They were effectively regulating almost anything AAA.
JAY: And nobody was reviewing anything. In the McClatchy piece, he found out that what had been 100 percent of mortgages being reviewed in the 1990s had gone down to 10 percent of mortgages actually even being looked at. Has anything changed on this? Or can they still give AAA ratings to crap?
FERGUSON: They're likely, I think, to just give AAA ratings to anything. But the real issue here is just telling ratings agencies—.
JAY: Well, you say they're unlikely, but that's just—is there anything in terms of regulation?
FERGUSON: No, no. That was my next sentence, right? The real meaning of this is, look, there's no reason why the privileged status of the rating companies should continue, because in effect what you're actually doing here is they're probably not—they're not very well regulated by state insurance commissions. We know this. What's really going on here is you get a kind of sham good-housekeeping seal of approval, which all kinds of pension funds and everybody else then can say, "I've done my fiduciary duty. I've done due diligence. I'll just buy this junk." You'd be better off just getting rid of that. You just don't need these guys. And I myself rather doubt that the structural problem with the ratings agencies, where they're paid by the folks that they're supposed to rate—it's insane. I mean, you know, if you don't fix that, you don't fix—.
JAY: And there's no accountability. They can rate something three, it can turn out to be junk, and where's the repercussions?
FERGUSON: The "I'll be gone" problem I believe that's in technical terms. Yeah. And, yeah, it's—they're gone. I mean, sure. I mean, the hearings—.
JAY: So in terms of solutions, one—.
FERGUSON: You haven't got any.
JAY: Well, one proposal is—.
FERGUSON: Okay? You can have this all happen again real fast, in particular if—you know, if—all you need is a big change in asset prices down and you're likely to find a lot of trouble again.
JAY: One proposal on the table's been if the public option works for the health insurance in theory, why not a public option when it comes to a rating agency? What about a public agency that does ratings?
FERGUSON: I'm not opposed to it, but I'd also allow anybody that wants to rate them to come in. And the other side of the thing is is right now the ratings agencies have, if you follow the testimony in, that they get a lot of information that no one else does. That stuff's got to be available to anyone who wants to rate those securities. That's an issue. That's one problem that you actually have to sort of come to terms—. I wouldn't favor one public ratings agency, which the record on these things in the last two or three decades is not—you know, I mean, would you—having, you know, in effect—let's not turn it over to the Fed. You know, I mean, the joke I make is the FDIC to banks has a power called prompt corrective action. There's no prompt corrective action for regulators. You need that in the American system.
JAY: So if you were going to lay out, like, three things that need to be done in terms of regulation that are not being done, what are they?
FERGUSON: The Fed should not be the lead regulator on all too-big-to-fail issues. Derivatives have to be all moved on exchanges and standardized, just no exceptions, period, point, end of story. And then, of course, we have to have the Consumer Protection Agency part of the bill—that's been gutted also—needs to be very strong and in there. I mean, that was an excellent idea. It should happen.
JAY: Okay. So when all is said and done, what are your expectations of this banking bill?
FERGUSON: Well, I remind you that America is not a Disney movie. A happy ending is not guaranteed. And it looks to me like the administration's bill, modified by the Frank Financial Services Committee, is not going to pass. It's clear that in the Senate, effectively, one could think of it as the right wing has split in two. That is to say, their divisions over whether the Fed ought to be the lead regulator are so sharp that they're perhaps unbridgeable, and that the Senate bill that Dodd and Shelby are going to write's going to be substantially different. And that's probably going to stalemate the process for a while. We'll see if there's any other bloc of Senators that would come forward with a better public-interest bill. But the chances of having no bill at all are not negligible, and a lot of financial institutions, I think there's a fair number of them that were hoping they'd get a bill through before all their bonus payments come out in January. But apart from that, they'd really rather not have any financial regulatory bill, and they may get their way.
JAY: Okay. So in the next segment of our interview, let's talk about why all this isn't happening, 'cause it's all kind of obvious, yet it's not happening. And the Obama administration came in with a lot of promises. So why not? Why are they not being executed on? So please join us for the next segment of our interview with Tom Ferguson.
END OF TRANSCRIPT

Tax havens & currency speculation

Tax havens & currency speculation

Kapoor: Tax currency speculation, close off-shore tax havens and raise tax on unearned income


Sony Kapoor is the Managing Director of Re-Define (Rethinking Development, Finance & Environment), an international Think Tank promoting financial system reform. A prominent expert on international finance and development, he started his career in investment banking and derivative trading. In 2003 he quit to work on reforming the financial system and promoting international development. Kapoor has been a leading advocate for debt cancellation, action against tax havens, and promoting innovative sources of financing. He is a key adviser to several governments, international agencies, political parties, unions, and NGOs on helping shape a more progressive society. Kapoor has worked in a policy advisory and strategy consulting capacity for international organizations such as the World Bank, UN, and UNDP, international NGOs such as Oxfam, and Christian Aid, financial institutions such as the Industrial Credit and Investment Corporation of India, and Lehman Brothers, and governments including that of Norway. He has studied at the prestigious Indian Institute of Technology, University of Delhi and the London School of Economics.

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