It is generally bad news that Barney Frank is backing this effort to gut the Franken amendment. That's the only serious reform effort on the table today, and for Frank to be coming out against it implies that he's much more willing to do Wall Street's dirty work in the conference committee than his recent public statements have suggested. Activists and reformists need to take him to task for this and keep the pressure on. His office number is 202-225-5931.
So here's the Senate counter-offer on the House opposition to the Franken amendment:
The SEC would conduct a two-year study of fee and payment issues, and get the authority to prevent an issuer from choosing its raters at the end of two years. The House just wanted the study, no authority. This is clearly a watering-down of the Franken language, which is enormously disappointing.
House conferees just split to go vote. Looks like we won't resolve anything on credit rating agencies until 6:00 pm at the earliest.
Interesting development. Sen. Bob Corker, R-Tenn., himself no stranger to race-baiting ("Harold, call me!") has offered an amendment that kills the House Republican efforts to claim that Rep. Maxine Watters was trying to politically allocate lending along racial lines by creating diversity offices at the Fed and Treasury. He wrote a simple amendment that makes clear the Watters language has nothing to do with rationing credit, which should defang the outrageous charges from House Republicans this morning.
The Corker language is redundant-- the Watters language had nothing to do with forcing banks to lend to people of a particular racial or ethnic background. But the amendment is also clearly an effort to stop this vicious and bad-faith effort to smear the reform bill and appeal to the worst instincts of the American public. The amendment was approved. Hopefully that's the last we'll hear about this nonsense.
Okay, after a long break, they're back, debating the regulation of hedge funds and private equity. "Regulation" is not exactly the right word, because the bill doesn't actually give regulators the power to do much of anything. Instead firms over a certain size will be required to register with the SEC. They'll have to report some key information to the agency, like many other companies, but there will not be any new restrictions on their activities.
There is no reason to oppose this-- transparency is always good. But there's also no reason to get excited about it. Nothing will prevent private equity firms from looting other companies, and nothing will prevent big hedge funds from sparking major threats to the financial system, as Long-Term Capital Management did in 1998. The bill would give the Fed the ability to designate major hedge funds and private equity firms as "systemically important" and thus subject them to regulatory oversight from the central bank, but there is no evidence yet that the Fed has any inclination to actually exercise that authority.
This is exactly the sort of reform that activists should organize around next year.
Finally the real debate: rating agencies. House Democrats are defending their language as "stronger" than the Senate language, when the plan facts of the issue are exactly the opposite. Rep. Paul Kanjorski, D-Penn., is coming out against the tough reform from Sen. Al Franken, D-Minn. He wants closer "oversight" of credit raters, but no serious structural changes to their business model.
Rating agencies don't get paid by the investors who use their ratings. They get paid by the securities issuers who need to get their securities rated. That's a clear conflict of interest. If the rating agencies want to score business, they can't offer bad ratings. And so you end up with trillions of dollars worth of garbage mortgage-backed securities and derivatives scoring top AAA-ratings.
The trouble is, if you let investors pay, a handful of investors so dominate the market that they can exact improper concessions from rating agencies even in this capacity. And those dominant investors just happen to be the major issuers-- big, bad Wall Street banks. The big banks buy up loads of securities and derivatives, because they have loads of money. If you just shift the pay source from issuers to buyers, you end up with incentives that are very similar to those we have today. This is ultimately an argument in favor of breaking up the big banks-- the best way to end this kind of market distortion is to make sure you don't have players in the market that are so large as to distort the market.
Unfortunately, breaking up the banks is off the table this year (expect a big push during the next legislative cycle when Congress attempts to deal with Fannie Mae and Freddie Mac). So Franken pushed a very practical idea. Securities need ratings from multiple agencies. If we make regulators pick one of the rating agencies, the incentive to inflate ratings to secure business is dramatically curtailed.
The Franken amendment is a serious reform, and to the surprise of many, it actually cleared the Senate. The House language on rating agencies, by contrast, is virtually meaningless.
Kanjorski proposed a 2-year study of the Franken proposal. That's absurd. It's already been more than two years since Bear Stearns collapsed (with very good ratings until just a few days before their downfall). Further delay is clearly an effort to gut the reform.
This is really disgusting. Republicans are engaging in very aggressive race-baiting right now, fueled by a horrendous Wall Street Journal op-ed from yesterday.
Rep. Maxine Waters, D-Calif., has included language in the bill creating a new office at the Fed and the Treasury that reviews each agency's hiring of women and minorities and does outreach work to encourage women and minorities to apply. The office will also conduct a study on who receives bank loans, and whether minorities are actually receiving loans. The agency has no enforcement powers. There are no quotas. It is a borderline meaningless amendment that can do absolutely no harm whatsoever.
The Republicans are screaming that these new offices will force banks to give loans to women and minorities. That is not what this amendment would do. Regulators don't have that power under the amendment. Period.
This has nothing to do with reform. This is all about Republicans making the subprime crisis a race issue. They've brought up Fannie Mae and Freddie Mac repeatedly during this hearing in an effort to argue that the subprime crisis is all about black people and Latinos getting loans they didn't deserve. That's not what happened in the subprime mortgage market during the housing bubble. Wall Street banks aggressively pushed predatory loans on borrowers of all racial and ethnic backgrounds in an effort to transfer their household wealth to bank coffers. It worked until the market crashed, and during the interim, bank executives, loan officers and mortgage brokers got totally rich from this practice. Borrowers did not con the banks. Bankers pushed as many loans onto borrowers as they could, and got rich doing it.
So now Republicans are totally distorting an almost powerless diversity amendment, in an effort to paint the entire Wall Street reform process as a big giveaway to black people and Latinos. This is a truly nauseating project-- blaming minorities for the excesses of Wall Street elites, and then pretending that reining in those elites is actually a Big Conspiracy to help minorities get jobs. It's race-baiting, pure and simple, and it's horrendous.
I get pretty upset with the Democratic leadership for making totally unnecessary concessions to Wall Street (which, it should be noted, nearly all Republicans almost always support). But this is well beyond the reasonable scope of debate. This is overt racism, and the Republicans promoting it should be ashamed.
Republicans are pushing an amendment right now that would gut the Consumer Financial Protection Agency. They're freaking out about separating "safety and soundness" regulation from consumer protection regulation. Safety and soundness basically means "making sure banks don't fail." In practice, that means protecting anything that scores profits for banks, whether it's predatory or not. If you separate out consumer protection and establish a new agency that is only responsible for combating predatory lending, then you remove the regulatory incentives to allow consumer abuses in the name of preventing bank failures. That's really important. We don't want to have banks that can only make money by duping their customers.
The history on this issue is interesting too. Back in 2004, the bank lobby actually advocated for the separation of consumer protection and safety and soundness when the Fed was considering a proposal to get serious on consumer protection. Back in 2004, the American Bankers Association used this technical argument as an excuse to oppose a Fed proposal to enhance consumer protections. Now that Congress wants to separate consumer protection and safety and soundness in order to strengthen consumer protections, the bank lobby has reversed its position, and suddenly finds itself opposed to any separation between the two.
Anybody in either party who uses the alleged importance of uniting safety and soundness and consumer protection is just doing the bank lobby's hatchet work. The existing bank regulators are not reliable on this subject, either, since every existing regulator opposes sectioning off consumer protection from safety and soundness because they don't want to see any of their current authorities ceded to another agency.
Fortunately, the amendment failed.
Republicans are currently engaged in a blatant exercise of obstruction for obstruction's sake. They're resisting plans to extend FDIC insurance for checking accounts, and to guarantee deposits at up to $250,000 per account. Republicans like Rep. Scott Garrett, R-N.J., are saying we shouldn't do this, because it's anti-free-market and part of the "bailout mentality," and now Rep. Jeb Hensarling, R-Texas, is saying that the FDIC isn't even competent enough to deal with managing deposit insurance.
Prior to the financial crisis, the FDIC guaranteed all deposits up to $100,000. If you had more than $100,000 that you wanted to put in a bank, you could put it in multiple banks. Congress raised the cap to $250,000 during the crisis in an effort to keep people and companies who hadn't redeployed their money in excess of $100,000 from just pulling all of their funds and sparking a run. The FDIC also taxes banks to create a fund that is used to pay back depositors if their bank fails. That fund is very low right now because the Republican-led Congress passed a law in the 1990s limiting the FDIC's ability to collect funds from banks-- it was a clear giveaway to the banks that allowed them to book bigger bonuses for years, and now puts the FDIC in a tough spot. But that's not the FDIC's fault, that's Congress' fault.
Deposit insurance is the most important reform to come out of the Great Depression. Garrett is saying he doesn't believe in it, and Hensarling is saying that the government can't manage it. Garrett is asking banking to go back to 1929, and Hensarling is trying to pass the buck.
Republicans are just making a fuss for the sake of making a fuss and delaying this process. This debate is not important at all. Whether the cap is $100,000 or $250,000 is really meaningless. The purpose of this mess is to delay negotiations and reform and buy time for the bank lobby to attack other more serious provisions.
Things are just getting started. The big question today is whether the credit rating agency reform from Sen. Al Franken, D-Minn., will survive, and a lot of that depends on House Financial Services Committee Chairman Barney Frank, D-Mass.
I'll be updating this post as long as the conference committee session is going. Here's a live feed of the proceedings, courtesy of the Sunlight Foundation: