Reformers, Take 2

by hilzoy

Having gone over McCain and Obama's legislation on banking and mortgage reform, I thought I'd continue my search for John McCain, Scourge Of Wall Street by looking at his website to see what new regulations he proposes for financial institutions. As far as I can tell, though, not only is there nothing in his issues section that spells that out, there's nothing that so much as mentions any aspect of the present crisis other than the need to help homeowners in foreclosure. As far as his position papers are concerned, the financial crisis, like foreign policy, simply doesn't exist.

So I decided to check out the various speeches McCain has given on the economy during this campaign, to see how his career as a financial reformer might have manifested itself in them. On March 25, he gave a speech on the housing crisis. Given his recent claims to be a champion of tighter regulation on Wall Street, you might expect that he would have called for new regulations back in March. Au contraire: while he did call for more transparency in lending, here's what he said about regulating financial institutions:

"In financial institutions, there is no substitute for adequate capital to serve as a buffer against losses. Our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital."

That's right: we need fewer regulations on financial institutions. How prescient!

McCain gave a speech on the economy on April 10: he did not mention any reforms of financial institutions, though he did call for "an immediate DOJ task force to aggressively investigate potential criminal wrongdoing in the mortgage lending and securitization industry." On April 15, he gave a speech on the economy. For the most part, he focussed on tax cuts, restraining spending, and trade deals. Here's the sum total of his remarks on reforming financial institutions:

"It's important as well to remember that the foolish risk-taking of lenders, investment banks, and others that led to these troubles don't reflect our free market as it should be working. In a free market, there must be transparency, accountability, and personal and corporate responsibility. The housing crisis came about because these standards collapsed -- and, as president, I intend to restore them."

On April 22, McCain actually mentioned the need to reform Wall Street. Unfortunately, he didn't say much about it: "Reckless conduct and the abuse of power must be called to account -- on Wall Street, in Washington, or any place else. And I have a few ideas about Washington in particular. (...)" On May 15, McCain gave a speech on his vision for America four years from now. The section on the economy focussed entirely on tax cuts, eliminating earmarks, trade agreements, and employee retraining. As he imagined himself looking back over four years of his Presidency, the housing crisis and the reform of financial institutions didn't even rate a mention.

On May 19th he gave another economic address in which the housing and financial crisis is not mentioned. One paragraph starts out promisingly enough, but doesn't follow through:

"Serious reform is also needed to help American companies compete in the world economy. I have proposed a reduction in the corporate tax rate (...)"

On June 10, McCain actually mentioned the need for corporate reform. Unfortunately, the only specifics he gave concerned executive compensation and the need for vigorous prosecution of existing laws:

"In times of hardship and distress, we should be more vigilant than ever in holding corporate abuses to account, as in the case of the housing market. Americans are right to be offended when the extravagant salaries and severance deals of CEO's -- in some cases, the very same CEO's who helped to bring on these market troubles -- bear no relation to the success of the company or the wishes of shareholders. Something is seriously wrong when the American people are left to bear the consequences of reckless corporate conduct, while the offenders themselves are packed off with another forty - or fifty million for the road.

If I am elected president, I intend to see that wrongdoing of this kind is called to account by federal prosecutors. And under my reforms, all aspects of a CEO's pay, including any severance arrangements, must be approved by shareholders"

McCain's July 7 speech on job creation didn't mention the subprime crisis or the need to reform Wall Street. Likewise, in a speech on July 9 that was largely devoted to the economy, McCain didn't mention the subprime crisis at all.

Last Friday, McCain finally got around to giving a speech about the need to reform financial institutions, and offered some actual specifics. I encourage you to read it.

I'd also encourage you to read several speeches by Barack Obama, for the sake of comparison. First, there's his NASDAQ speech from September 2007, in which he addresses the subprime crisis, and explains, a full year before McCain got around to it, what happened, why we need reforms not just in the mortgage industry but in financial institution, and what they should be. A prescient bit from that speech:

"Markets can't thrive without the trust of investors and the public. At a most basic level, capital markets work by steering capital to the place where it is most productive. Without transparency, that cannot happen. If the information is flawed, if there is fraud, or if the risks facing financial institutions are not fully disclosed, people stop investing because they fear they're being had. When the public trust is abused badly enough, it can bring financial markets to their knees."

Second, there's Obama's speech from March 27, 2008, in which, at a time when John McCain was still calling for financial deregulation, he was not only proposing new regulations to prevent the abuses that led to the present crisis, but laying out six guiding principles that he would follow in creating them. To this day, John McCain has not gotten nearly that specific.

Obama has many more speeches on the economy. I haven't bothered to go through them all, as I did with McCain's, since the two I've mentioned are more specific, and much earlier, than anything McCain has offered.

Why do I bother? Because lies annoy me. And the idea that John McCain is some kind of Wall Street reformer is a lie.

Obama's principles for regulatory reform, from his March 27, 2008 speech on the economy:

"Our capital markets have helped us build the strongest economy in the world. They are a source of competitive advantage for our country. But they cannot succeed without the public's trust. The details of regulatory reform should be developed through sound analysis and public debate. But there are several core principles for reform that I will pursue as President.

First, if you can borrow from the government, you should be subject to government oversight and supervision. Secretary Paulson admitted this in his remarks yesterday. The Federal Reserve should have basic supervisory authority over any institution to which it may make credit available as a lender of last resort. When the Fed steps in, it is providing lenders an insurance policy underwritten by the American taxpayer. In return, taxpayers have every right to expect that these institutions are not taking excessive risks. The nature of regulation should depend on the degree and extent of the Fed's exposure. But at the very least, these new regulations should include liquidity and capital requirements.

Second, there needs to be general reform of the requirements to which all regulated financial institutions are subjected. Capital requirements should be strengthened, particularly for complex financial instruments like some of the mortgage securities that led to our current crisis. We must develop and rigorously manage liquidity risk. We must investigate rating agencies and potential conflicts of interest with the people they are rating. And transparency requirements must demand full disclosure by financial institutions to shareholders and counterparties.

As we reform our regulatory system at home, we must work with international arrangements like the Basel Committee on Banking Supervision, the International Accounting Standards Board, and the Financial Stability Forum to address the same problems abroad. The goal must be ensuring that financial institutions around the world are subject to similar rules of the road - both to make the system stable, and to keep our financial institutions competitive.

Third, we need to streamline a framework of overlapping and competing regulatory agencies. Reshuffling bureaucracies should not be an end in itself. But the large, complex institutions that dominate the financial landscape do not fit into categories created decades ago. Different institutions compete in multiple markets - our regulatory system should not pretend otherwise. A streamlined system will provide better oversight, and be less costly for regulated institutions.

Fourth, we need to regulate institutions for what they do, not what they are. Over the last few years, commercial banks and thrift institutions were subject to guidelines on subprime mortgages that did not apply to mortgage brokers and companies. It makes no sense for the Fed to tighten mortgage guidelines for banks when two-thirds of subprime mortgages don't originate from banks. This regulatory framework has failed to protect homeowners, and it is now clear that it made no sense for our financial system. When it comes to protecting the American people, it should make no difference what kind of institution they are dealing with.

Fifth, we must remain vigilant and crack down on trading activity that crosses the line to market manipulation. Reports have circulated in recent days that some traders may have intentionally spread rumors that Bear Stearns was in financial distress while making market bets against the company. The SEC should investigate and punish this kind of market manipulation, and report its conclusions to Congress.

Sixth, we need a process that identifies systemic risks to the financial system. Too often, we deal with threats to the financial system that weren't anticipated by regulators. That's why we should create a financial market oversight commission, which would meet regularly and provide advice to the President, Congress, and regulators on the state of our financial markets and the risks that face them. These expert views could help anticipate risks before they erupt into a crisis. "

Comments

[ThatLeftTurnInABQ]

Sixth, we need a process that identifies systemic risks to the financial system. Too often, we deal with threats to the financial system that weren't anticipated by regulators. That's why we should create a financial market oversight commission, which would meet regularly and provide advice to the President, Congress, and regulators on the state of our financial markets and the risks that face them. These expert views could help anticipate risks before they erupt into a crisis. "

We already have this - it is called the econ blogs. Many of them work for free. The better ones were calling attention to the outlines of what would eventually become the current crisis 18-24 months ago. Almost nothing that has happened recently was not forecast at least a month in advance by them.

If Obama wants to pay somebody to just read econ blogs all day and then present summary briefings to the President and other cabinet level officials, that would probably be a wise investment.

[redwood]

you're doing God's work, hilzoy, a truly worthwhile read.

And I think Obama framing this crisis a matter of public trust in capital markets should get us past the knee-jerk conservatives who want to lay it at the feet of individuals borrowing beyond their means.

[Ben Alpers]

I do need to give the McCain campaign some credit. Their new strategy of simply lying about everything is universally applicable to the challenges they face in this campaign.

[LFC]

And I think Obama framing this crisis a matter of public trust in capital markets should get us past the knee-jerk conservatives who want to lay it at the feet of individuals borrowing beyond their means.

I agree, redwood. After all, how much is Joe Six-Pack paid annually to understand the collective risk of the financial and real estate markets, or the risk/return of mortgage based derivatives? Those who bow down to the religion of "Tinkle Down Economics" were the pump monkeys who told the masses everything was great and they should borrow and buy. Now they want to lay the blame upon the very victims who believed their lies. These so-called conservatives have balls of brass and brains of s***.

Were there also greedy, unthinking people? Of course. Would they or could they have ever created the current crisis on their own, without the GOP kicking out all protections with their deregulatory policy, while the same institutions that gave big campaign contributions to get them to deregulate went hog wild? I don't f***in' think so.

[nadezhda]

As usual with your historical surveys, hilzoy, this is a very useful compilation. I've followed Obama's thinking on these issues, but it's helpful to have all these speeches, legislative proposals, etc. in one place.

It's also important to show McCain's overall history. His occasional self-righteous bursts of outrage at "bad guys" can lead to his support for specific fix-it legislation. Post-Enron, Fannie/Freddie accounting hijinks, etc. But these are simply outbursts at people he thinks are crooks or have "gamed the system." His default position, however, is an unquestioning belief in "the system" itself, and the goodness of it all if only the bad guys were run out of town.

McCain doesn't understand that any market is, in a certain sense, nothing but a set of rules, it's defined by its rules -- not all of them encoded in laws or regulations; custom and practice is also important and always evolving. And markets are defined by how and by whom those rules are enforced -- sometimes by government, sometimes by market disciplines, such as our current crisis when counterparties won't trade because of lack of transparency. It's really an artifical distinction to glorify the market (and its internal rules and disciplines which are often as arbitrary as any regulator) but disparage the regulators as somehow distorting the market.

All this as a preamble to say that McCain doesn't have any instincts to fall back on if the market doesn't work -- other than to find a scapegoat and try to run him out of town on a rail.

That being said, I think we have to give a hat tip to McCain's advisers, who came up with a rough and dirty proposal for a Mortgage and Investment Trust before Paulson's "plan" was announced. It's no more a "plan" than Paulson's -- just a concept that needs a lot of meat on its bones. But it would be a much better starting point than Paulson's blank check. It creates an entity with some outside governance beyond the heads of Treasury and the Fed -- starts to address the problem of a lame duck administration and transition to a new administration. It also starts to put some conditions (warrants) on access to this facility.

Although McCain has mentioned his Trust concept in his response to Paulson's proposal, McCain himself almost surely doesn't understand the issues well enough to sell his own proposal. I'm confident that would not be a problem Obama would suffer from. I'd like to see Obama pull a fast one and point out McCain's Trust proposal as a better "starting point" than Paulson's proposal while adding additional elements to improve the effectiveness and fairness of a rescue plan. I think Obama could make a better case for McCain's proposal (as further modified by Obama) than McCain could for his own proposal. How much more "bipartisan" could one be, while sticking it to the Paulson proposal.

McCain's Trust idea shares the major problems with Paulson's "plan" -- what's the purpose, and the related question, what's the price Treasury will buy the toxic waste for? But it's not quite such a freebie for Wall Street. I don't usually pimp my posts, but I've written a long "what's wrong with the bailout" post here, which fits with Krugman's most recent assessment here, and I've suggested some of the politics of opposing the bailout here.

[Gary Farber]

Frank Rich covers the truthiness.

[cleek]

everyone who thinks Palin is competent to handle this mess, raise your hand.

[felix culpa]

Great and wonderful work, hilzoy. Definite headway in grasping the danger, and dangerous task, ahead.
And nadezhda, may I buy you a drink? outstanding and admirable.
You two make a great team!

Wowf. Last I saw, the Demos were making reserved nice with the Pubbles, which doesn’t sound healthy; in fact it sounds suicidal. Seems as if this is one of those moments reminders, bitter or merely nagging, will be with us for a long time. Isn’t this when minds may be expected to be focused? But the feeling appears to be Quick, sweep it under the rug and Is my flight booked? This is the kind of thing that should pull Congress out of recess for a special session devoted to hammering and finessing it out.

[Bernard Yomtov]

John McCain:

Americans are right to be offended when the extravagant salaries and severance deals of CEO's -- in some cases, the very same CEO's who helped to bring on these market troubles -- bear no relation to the success of the company or the wishes of shareholders.

This is a guy who has Carly Fiorina as a senior adviser. How does he get away with this BS?

[Jeff]

How does he get away with this BS?

IOKIYAR

[nadezhda]

@felix --Thanks for the kind words!. I'll gladly take you up on your offer for a drink on Nov 4, at which time I'll be needing a pick-me up, either as I near-expire from relief or as I try not to contemplate suicide.

[Gary Farber]

"I'll gladly take you up on your offer for a drink on Nov 4, at which time I'll be needing a pick-me up, either as I near-expire from relief or as I try not to contemplate suicide."

We used to think that was a sure thing, the result after election day. Until 2000.

[nadezhda]

@Gary -- Anything but a clear victory and I'm going to be quasi-suicidal.

[russell]

How does he get away with this BS?

It's a way of life.

Thanks -