Senator Ted Kaufman (D., DE) has given three blistering speeches recently, individually and collectively cutting to the heart of the financial reform matter: the deregulation of finance has gone too far and big banks now need to be reined in; the continued prevalence of fraud among Wall Street's biggest bankers; and why the administration's proposed "resolution authority" would do nothing at all to end the problems associated with Too Big To Fail financial institutions.
You might think no one listens to Senate floor speeches, but you'd be wrong. Yesterday, on "This Week" (ABC), Jake Tapper asked Larry Summers - head of the White House National Economic Council and key strategist on financial reform - point blank about one of Senator Kaufman's most important points.
Summers started this part of the interview with a fiery anti-finance industry moment, citing their lobbying spending against financial reform ("$1 million per congressman") and arguing that the legislation currently before Congress will provide basic consumer protection, more effective regulation, and the ability to handle the failure of large financial firms. "How can anyone take the position ... that we don't need comprehensive financial reform?"
To which, Jake Tapper responded,
"TAPPER: Some Democrats say it doesn’t go far enough. Here’s Delaware Democrat Ted Kaufman talking about the Dodd bill."
(BEGIN VIDEO CLIP: in this version, the question is asked around the 1:50 mark; note, the transcript below includes a few important sentences at the end that are not in the clip)
"KAUFMAN: Unless Congress breaks up the mega-banks that are too big to fail, the American taxpayer will remain the ultimate guarantor of an almost certain to repeat itself cycle of boom, bust and bailout."
(END VIDEO CLIP)
"TAPPER: Senator Kaufman is saying that there isn’t being — enough being done about too big to fail. In 2000, you said, quote, “It is certain that a healthy financial system cannot be built on the expectation of bailouts.” Can you honestly say that the Dodd bill changes that?"
"SUMMERS: Yes, I can. It changes — it reduces the expectation of bailouts by insisting that institutions have much more capital so they won’t need to be bailed out. It eliminates the prospect of bailout by creating a framework in which a failure can be managed with creditors taking responsibility."
"It restricts — and this was the important point that former Fed Chairman Paul Volcker has stressed — it restricts the so-called proprietary trading activities, some of the most risky activities of these institutions. So, yes, this bill is a direct attack on too large to fail by making failure a possibility, as it has to be in a market system, and by making these institutions much safer and much sounder. Senator Kaufman is exactly right."
Larry Summers is incorrect on three important dimensions of the Dodd legislation: it doesn’t “insist institutions have much more” capital requirements, it doesn’t “restrict proprietary trading activities in any meaningful fashion,” and it doesn’t “eliminate the prospect” of a bailout. For the details on all these issues, review the three Kaufman speeches linked above - these are now essential reading for anyone who wants to grasp what really needs to happen.
The White House rhetoric on financial reform is moving in the right direction. But there is growing dissonance between what the White House says it is supporting and what is really in the legislation.
Mr. Summers and other leading representatives of the administration should move to recognize and correct this dissonance. Either they should work hard to strengthen the legal provisions, along the lines stressed by Senator Kaufman, or they should be more honest - i.e., they do not think that "too big to fail" is really such an important problem, or they are afraid that big banks would react by contracting credit (this is essentially what Jamie Dimon threatens at the end of his letter to shareholders last week).
If the White House continues down the path of endorsing reform while not really pushing for meaningful change, the financial reform conversation will become increasingly uncomfortable for them.
Passing a bill that contains mostly mush is not a good idea - it would only further the perception (and the reality) that this administration is far too close to certain "savvy businessmen" on Wall Street.
The coming legislative debate will clearly divide people into "for" and "against" our massive global banks that have so manifestly gone bad. For the last time: Which side does the president really want to be on?
Note: Jake Tapper was quoting from Larry Summers's 2000 Ely Lecture to the American Economic Association is available to buy through JSTOR - or you can ask your favorite library to obtain this. See my review of Summers' thinking from the 1990s on crises and financial reform here - we also cover this in more detail in chapter 2 of 13 Bankers. While some specific actions of Treasury during the 1990s were controversial and even regrettable, Summers' Ely Lecture was right on target. The administration, however, has not found itself able to apply the principles outlined in Summers' Lecture - 13 Bankers, in part, explains why.
Cross-posted from The Baseline Scenario.