We have pointed out more than once that a major impediment to reform of the financial services industry is that a small number of firms control infrastructure crucial to modern capitalism:
1. Credit is essential to any society beyond the barter stage
2. Debt markets are now at least as important in providing credit as traditional lending, by a lot of measures, even more so
3. A handful of firms are crucial because they operate the debt markets
4. These firms are deeply enmeshed. If one goes, the others are at risk of failure, which will take down the entire debt markets apparatus.
The banksters understand this situation full well, that they have a knife at the throat of the economy, and they will fiercely resist any efforts to disarm them. And note that the enmeshed-ness is one of the sources of their leverage (no pun intended). If single firms could be taken out and shot wound down, the firms collectively would have much less power. The interconnectedness of the players, via their credit exposures to each other (most importantly but not limited to the repo and credit default swaps markets) makes “reforms” like living wills of dubious value. Unless the tight coupling is substantially reduced, these living wills remain fig leaves for political and regulatory inaction.
Put it this way: if banks can forestall a not very ambitious reform program by huffing and puffing about “destablizing markets” when the financial markets are on comparatively sound footing, do you think anyone, in bona fide financial crisis, will take the risk of putting down a significant player in an untested wind-down protocol? A bailout is the less risky course of action (although some ancillary operations might be hived off of a floundering firm to improve the optics).
Recall what took place during the Bernanke confirmation process. There was a point where opposition was significant, and there was a hope of getting a thumbs-down, particularly since conventional MSM outlets like the Wall Street Journal were making particularly articulate cases (as in going through his record as Fed governor as well as chairman, and arguing that his role in causing the crisis was much more significant than widely appreciated).
In addition, the claims that a no vote on Bernanke would be detrimental were wildly exaggerated. He would still have remained a Fed governor; the spectrum of opinion within the Fed is not terribly wide; the idea that a new Fed chairman would pursue radically different (as opposed to merely somewhat different) policies was a chimera. A vote against Bernanke was necessary for accountability, and a shot across the Fed’s bow on how it defined its constituency (as in a warning that its cognitive capture by the banking industry was no longer acceptable).
But what did we see around the time of the vote? Statements that a vote against Bernanke would “destabilize markets” and, lo and behold, markets fell appreciably when the nomination looked to be in doubt. And senators appeared to get the message. A number of senators who voted for Bernanke went so far as to explain their vote in terms of “I’m not wild about this, but oh, no, we don’t dare cross the markets.”
So the ability to get the markets to fall on cue when regulators are threatening to do things that are inconvenient has now become a critical source of power for the financial services industry.
On the Bernanke vote, do we have any reason to think that pension funds, insurance companies, endowments, retail investors, or mutual funds would have had a strong point of view either way on Bernanke, strong enough lead them to take action? Unlikely.
It has hit the point where the Administration has tried to use the same threat, which given the fact pattern above, must strike industry participants as truly comic. From the New York Times:
As part of a regulatory overhaul adopted in December, the House voted to create a freestanding Consumer Financial Protection Agency. Since then, the financial services industry has been largely unified in trying to reduce the proposed agency’s independence, as well as the scope of its powers.
The lobbying effort has been so fierce that the Treasury secretary, Timothy F. Geithner, called a meeting on Thursday with representatives of the United States Chamber of Commerce, the American Bankers Association and six other groups, at which he warned that failure to pass a regulatory overhaul could destabilize the markets.
Yves here. There are so many ways to interpret Geithner’s threat that I am not certain where to begin. Is this merely an effort to trump the industry’s usual nuclear option? The problem is that that his remark is not credible, at least in the short term, which is all that seems to matter these days in the US (yes, failure to pass reforms will perpetuate the underlying bad incentives and behaviors that generated the crisis, but that does not seem to be the argument Geithner was making). Does anyone really think that not having an independent consumer financial protection agency (something I favor) is going to roil markets? No.
Or (being cynical) was the use of that threat a deliberate effort to signal the Administration’s powerlessness? “Yes, I summoned you all, and I as Treasury Secretary must engage in some Kabuki theater to show we really really wanted this to pass, and that we really really gave it the good old college try. But you and I know you guys really have the upper hand.”
Now if we were back in the days of Johnson or Nixon, when the government was not ashamed of exercising its authority, the conversation would have been very different. Someone like Geithner would have hoped and prayed a lobbyist would invoke the “destabilize markets” threat, and would have responded these lines (no doubt more iron fist in velvet glove than this rendition, but the underlying message would have been the same):
Do I hear that you are threatening the government and the hardworking citizens of this country with a self-serving action of creating a market rout which will cause losses to investors solely to preserve your privileged and perquisites? I’ve heard this threat before, and I’ve seen it happen, and we are no longer willing to tolerate this sort of abuse.
Let me discuss how many legal violations that involves. Collusive action to manipulate markets, a probable violation under antitrust law. Mail and wire fraud. To the extent it involves equities or regulated options and futures exchanges, market manipulation. And given that all your clients operate only by the grace of various Federal and State licenses, I am sure we can add to the list. Given the repeated threats and consistent market declines after threats like these have been made, we can compel your client to divulge internal information.
The point here is that if you having made this threat gives us reason to believe you plan to engage in market manipulation should we proceed with our program. So you tell your clients this: we will engage in a full bore discovery process of any down market moves that appear to be an effort to undermine financial regulatory reform. We will post the results of trading activities, internal communications, meeting records, all the details in a public forum so as to leverage our resources. As you know, our colleagues in the EU right now are not very happy with the conduct of US firms either, so I am highly confident that we can obtain their cooperation in getting the same kind of information from your clients’ overseas operations. And I am sure you understand full well your clients will not come out looking very pretty from this level of scrutiny.
Do not try telling me that this sort of investigation will hurt your clients’ relationship with their customers. Whether we take action is entirely at their discretion. I have no sympathy for arguments that we might damage your clients’ precious customer franchises when they seek to place their interests over that of the US as a whole.
You go back and tell your client if they are not on this bus, they will be under the bus.
Yves here. So now I have to wonder whether Geithner having tried a clearly not credible “destabilize the markets” threat was to give the industry cover for its past bullying….Nah, I’m clearly too cynical.
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It’s long been clear that these market actors, with their market destabilization threats and actions, are criminal extortionists. They actually fit most definitions of terrorism.
I bet if someone charted the markets’ acute ups and downs vs. whether or not it looked like policy might serve the public interest, vs. where it was clear the looting was on, we’d see an inverse correlation.
This was clear early on, when the markets dealt out severe punishment when Lehman was allowed to go down, and again when the TARP was first voted down in the House. In both cases the banks took a crowbar to the public’s knees and snarled, “there’s more where that came from if you don’t cough up the loot.” There was also the dip early in Obama’s tenure when Geithner at first looked less than impressive in selling the next stage of the Bailout. The shot across the bow signalled, youse guyze need to get alot more proactive.
Those are a few examples. (There’s also the way health insurance stocks have tracked the progess of Obama’s proposed health racket bailout throughout this demented process. It’s hard to see how anyone would need more evidence of the malevolence of this bill than how favorably racket stocks have reacted to it at times.)
I would broadly treat deal with these gangsters through RICO, anti-terrorist laws, and beyond that through a new Nuremburg.
But even more conventional means could apply if anyone had the will to apply them, as Yves says:
Let me discuss how many legal violations that involves. Collusive action to manipulate markets, a probable violation under antitrust law. Mail and wire fraud. To the extent it involves equities or regulated options and futures exchanges, market manipulation. And given that all your clients operate only by the grace of various Federal and State licenses, I am sure we can add to the list. Given the repeated threats and consistent market declines after threats like these have been made, we can compel your client to divulge internal information.
The MSM is also complicit, having often acted as errand boy to deliver these terrorist threats.
http://attempter.wordpress.com/2009/03/20/aig-2/
Legally, there’s essentially nothing stopping Obama from declaring intransigent FIRE CEOs to be enemy combatants and executing them by Predator strike.
Arguments that the administration lacks the power to control the FIRE sector doesn’t hold water.
The underlying problem is ideological capture. FIRE gets what FIRE wants because the administration believes that’s how things should be.
Curmudgeon @ 4:58 am:
“… because the administration believes that’s how things should be.”
Look, kiddo, BHO clearly believes that there should be an American oligarchy.
The question is why does he believe that.
GWB was under the influence of RBC.
Who occupies the role of Cheney in THIS White House???
Answer please,
That one’s complicated (probably more than one person/entity), but I’ll start with Rahm.
“Look, kiddo, BHO clearly believes that there should be an American oligarchy.
The question is why does he believe that”.
So that there is an oligarchy for him to join. He’s very proud of being an upwardly mobile black guy.
It’s not easy to handle the truth: we need to untangle the Ponzi scheme set up by bankers and governments.
How fortunate we terrified masses are to have the wrath of the markets explicated to us by this priestly caste of bankers and Treasury officials.
I wonder if they can make eclipses go away, too. Perhaps only if we continue to be obedient.
What a miserable farce this is.
“Thorstein Veblen” at “Economonists for firing Larry Summers” notes that for almost a year now the Administration has left two Fed Governor positions vacant, allowing the Fed to be dominated by inflation hawks. As for who is playing “Dick Cheney” in the current administration, I am afraid the President, as a faculty member of the University of Chicago Law School, has long since drunk the Hyde Park kool-aid and is attuned to Larry Summers’s and Robert Rubin’s neo-liberalism and Eugene Rama’s market utopianism. He probably believes that helping the bankers and making the bond market happy will unleash a second “1990s” boom. I am one of those that believe that his is a case of ideological capture. As for the apparent slip sliding away, I think this is an example of where the Prince has not learned the importance of being feared when it comes to the ruling of men and women.
Finally, reading Calculated Risk and looking at some of the statistics that are coming in for this quarter, I wonder if we are back into recession? Certainly, the U.S. exports are going to take a hit with the rise of the dollar against the Euro, both Japan and Europe seem to be slipping back into recession, and China is trying to cool its growth.
And furthermore, these guys are no fun. From this mornings’ NY Post:
“First it was a purge of the suits — now Soho House is getting rid of the people who wear them.
The exclusive club in the Meatpacking District — patterned after its British ancestor as a haven for power players in movies and media — is kicking out hundreds of members to cull a crowd that’s gotten more corporate than cool.”
http://www.nypost.com/p/news/local/manhattan/posh_soho_house_boots_uncool_members_U2u0QvEnJQq9AdLABLiItM
Yves,discussions about how to fix the system are like discussing what kind of glue to use on Humpty-Dumpty.I hope I am wrong,but would not bet my money on it.
More great writing, Yves, but this sort of sounds like the Stockholm Syndrome to me.
Yves, this isn’t much different from a Roman blog asking “Why No Regulatory Action on Sulla’s “Take over the Republic” Threats?”
CAPITAL is on STRIKE! Nothing more than a political lesson in which the finance tail is demonstrating who really wags the government dog… Why is anyone shocked by this? This is a capitalist society in which the holders of capital are dominant. We are NOT in this all together.
The financial sector is the “commanding heights” of this domination at its core, controlling the vital fluid – credit – on which the entire edifice depends. To pretend otherwise defies reality. Time to pull out Rudolf Hilferding’S FINANZKAPITAL for a reread…and update it. Not that CAPITAL in the aggregate wants to borrow anyways as excess capacity and depressed aggregate demand make borrowing unnecessary, exacerbating this credit freeze out even more. But why can’t capital go strike?
Not even the POTUS can compel the banks to lend. It’s called private property. Perhaps a misuse, you say, but many an acolyte of Ayn Rand would disagree. No, what we are witnessing is one of those rare historical moments when FINANCE CAPITAL has bared its fangs for all to see but no one wants to believe what they’re seeing… The banks are saying we have you by the balls and we can squeeze harder… Let’s see who cries “uncle” first.
Remember many in Congress, the Executive Branch, and the Judiciary were weaned on neoliberalism as they climbed the stairway to heaven over the course of the past 40 years. Now that they’re there, they act on their ideas – the public be damned. Ideological capture is much too polite… They believe in what they’re doing. After all it’s God’s work on earth, right? It is in the public interest! Capital accumulation is in the public interest, isn’t it?
Lack of regulatory reform would appear to be a test of wills and clearly the government isn’t winning. But imagine what it would be like if Republicans were in the White House. How different would it be? Or would it?
Americans wanted less governemnt and they got what they wanted. And CAPITAL is laughing all the way to the bank.
Heh, it’s not often you read someone yearning for the heady days of Nixon’s price and wage controls.
Of course, there’s no actual evidence of market manipulation, but isn’t that the beauty of principles-based regulation? Rules are an overrated invention; humans have a long history of success avoiding tyranny by just going with whatever feels right.
When someone’s bluffing you just say – “I call……”
I suspect ‘we the people’ would survive without a few of these firms. I am biased, but hell – real sustainable growth might even occur.
These self proclaimed merchants of freshly minted fiat debt are NOT in the power position. They are not in charge. We are just prisoners of our own device.
Resolve to serve no more, and you are at once freed. I do not ask that you place hands upon the tyrant to topple him over, but simply that you support him no longer; then you will behold him, like a great Colossus whose pedestal has been pulled away, fall of his own weight and break in pieces. – ÉTIENNE DE LA BOÉTIE “The Politics of Obedience”
disclaimer: still optimistic on humanity
Yves Smith: “Is this merely an effort to trump the industry’s usual nuclear option? The problem is that that his remark is not credible…”
But an indication that the Federal Govt. is considering starting up a publicly-owned bank itself might be credible.
http://angrybear.blogspot.com/2009/02/commonwealth-bank-of-united-states.html
I like the idea of a publicly-owned bank as a counterbalance to FDIC-insured private banks. How many people would entrust their money to the current crop of banksters without that insurance? Let private bankers earn their money the really old-fashioned way by being trustworthy.
“How many people would entrust their money to the current crop of banksters without that insurance?”
After the shining example of Frannie? All sensible people, obviously.
So, in effect, Yves, what you are saying is that the banksters “destabilizing Markets” hypothesis will never be tested and falsified by Congress, because, well, they remain captured and well because they are really afraid of potential consequences.
So, Congress votes for status quo, and hope that all will be well in the garden as long as the roots are not severed….They are all Peter Sellers now!
Not to nitpick too much, but you mean “Chauncey Gardiner”, right? So as not to confuse the dancer with the dance.