Reining in the Financial Services Sector

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Reining in the Financial Services Sector
By: bobschacht Saturday October 24, 2009 8:58 pm	Tweet2

President Obama and his economics team claim that they want regulation of financial services. Obama’s proposals were first outlined in June.

He has sought tougher capital requirements for banks, arguing that banks’ buying of exotic financial products without keeping enough cash in reserve was a key cause of the crisis.

He wants more openness for the markets in which banks trade the most complex products.

Obama’s plan also would give the Federal Reserve new oversight powers and impose conditions designed to discourage companies from getting too big.

And he proposes a consumer protection agency to make rules for financial products, so people know what they’re buying.

A congressional commission, modeled on the Pecora Commission that was created in the wake of the Great Depression, as been appointed and has conducted its first meeting. Called the Financial Crisis Inquiry Commission, it already has a Wikipedia entry. And one of its members, Brooksley Born, was the heroine of the Frontline special last Tuesday evening, The Warning.

I was also inspired to put this diary together by the FDL Book Salon today, hosted by economist James Galbraith, with guest author Robert D. Auerbach, about his book, Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan’s Bank.

The chair of the new Financial Crisis Inquiry Commission, who was appointed by Speaker Pelosi and Senate Majority Leader Harry Reid, is Phil Angelides. The Republicans’ choice for chair was Bill Thomas. Brief descriptions of each member of the committee have been provided by the Harvard Law School blog. The committee has subpoena powers, and can refer any evidence of fraud or other wrong-doing to the USAG, or the AG of the appropriate state. According to the Harvard Law blog,

The criminal referral provision distinguishes this commission from the 9/11 Commission, which did not provide for referrals explicitly. The Financial Crisis Inquiry Commission would have had referral power even without an explicit provision. By including the provision, however, Congress created an expectation that the Commission will make referrals in appropriate cases. Besides increasing the potential for criminal liability, the Commission’s work could well create fact trails leading to civil enforcement and other regulatory and supervisory sanctions.

Angelides hired Thomas Greene as Executive Director. Greene previously served as Chief Assistant Attorney General of the Public Rights Division in the Office of the Attorney General of California.

The Committee held its first meeting on Sept. 17, but by that time had already held a few working sessions. Its final report is due to Congress on December 15, 2010.

The Harvard Law School Blog, already cited several times above, has an interesting commentary on the FCIC that is worth reading.

I personally hope that Cynthia Kouril, who wrote an impressive series of blogs on the Pecora Commission on FDL last spring, will drop in from time to time to give us her assessment of the Committee’s progress. But we may also be able to follow along at The Franklin and Eleanor Roosevelt Institute’s website, WhatCausedTheCrisis.com, with an open letter to encourage the Commission to appoint a single investigator, afford no special treatment, and provide the tools to do the job. The letter is signed by Hamilton Fish V, James P. Hoffa, James K. Galbraith, Robert Reich, Joseph Stiglitz, and Howard Gardner, among others.

19 Comments Recommend

19 Responses to Reining in the Financial Services Sector

iremember54 October 24th, 2009 at 9:33 pm 1

We all don’t get it. If Obama or the Congress really had the will to act they could. In hours not days or years.

Stetting up, appointing, and making plans for, are excuses not to do what You say You want to do.

It doesn’t take a rocket scientist to know what the problem were, and What to do to fix them.

They want to give the Federal Reserve more power? That aught to be a hint they are fools.

Obama has all the bad guys around Him telling Him how to fix what they helped cause. This is pure stupidity on His part.

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bobschacht October 24th, 2009 at 9:38 pm 2

The Harvard Law Blog article actually offers a series of commentaries on different aspects of the commission’s work. The commentaries begin about 2/3rds of the way through. There are at least 5 commentaries, and at the end they offer these “Concluding Observations”:

Institutions with any ties to the financial and economic crisis should be concerned about the Commission’s broad and detailed mandate for investigation. Much of the Commission’s work will likely focus on discovering the causes of the financial crisis, uncovering details about the institutions and individuals associated with the crisis, and creating a record of events leading up to it.

In terms of timing, it is possible that a comprehensive regulatory reform bill will be enacted before the Commission’s final report comes due in December of 2010. The Commission’s precise effects on regulatory reform will depend largely on how the investigation and any relevant legislation move forward. The existence of the Commission means that, if legislation is enacted before it reports, there is likely to be a second round that responds to the final report.

Moreover, we understand that the Commission has been reaching out to key members of Congress to establish relationships and open channels of communication. Such actions increase the likelihood that the Commission’s work will affect regulatory reform legislation.

Going forward, institutions should recognize the Financial Crisis Inquiry Commission’s unique set of functions and powers. The Commission will not proceed from the same authorities and motivations as the executive agencies with which most institutions are used to working. Institutions should start planning ahead to prepare themselves should they be contacted or investigated by the Commission.

Sounds to me like the Harvard Law blog is taking this commission seriously.

Bob in AZ

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bobschacht October 24th, 2009 at 9:40 pm 3

In response to iremember54 @ 1

You could have said the same thing about the original Pecora commission.
Let’s give’em a chance.

Bob in AZ

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bobschacht October 24th, 2009 at 9:41 pm 4

One more thing: I haven’t yet found the Commission’s web page. Presumably they will have one, if they don’t have one up already. If anyone finds it, please post it here.

Thanks,
Bob in AZ

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iremember54 October 24th, 2009 at 9:51 pm 5

In response to bobschacht @ 2

Like I say. Why have a commission when You know what the problems were?

It’s more smoke and mirrors, and giving them a chance is fruitless, but we have no choice, because we will see no real action before or after, that will mean much.

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bobschacht October 24th, 2009 at 9:55 pm 6

Update:
Frank Rich has an Op-Ed piece in the NYT, Goldman Can Spare You a Dime,
published October 17, 2009. Most of the article is about Goldman Sachs, but in the second half of his op-ed piece, he offers this comment on the FCIC:

The only investigation in town is a bipartisan Financial Crisis Inquiry Commission created by Congress in May. It is still hiring staff. Its 10 members are dispersed throughout the country, and, according to a spokeswoman, have contemplated only a half-dozen public sessions over the next year. Such a panel, led by the former California state treasurer Phil Angelides, seems highly unlikely to match Congress’s Depression-era Pecora commission. That investigation was driven by a prosecutor whose relentless fact-finding riveted the country and gave birth to the Securities and Exchange Commission, among other New Deal reforms. Last week, we learned that the current S.E.C. has hired a former Goldman hand as the chief operating officer of its enforcement unit.

Bob in AZ

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bobschacht October 24th, 2009 at 10:07 pm 7

Update #2:
Katrina vanden Heuvel, in her “Editor’s Cut” in The Nation on 10/03/2009, posted an essay on The Fight for Financial Reform. She offered these observations about the FCIC:

That’s why the 21st century version of the Pecora Commission–the Senate Banking investigation into the causes of the 1929 Crash named after the chief counsel, Ferdinand Pecora–is so critical. The Pecora Commission exposed the crimes and abuses that led to the stock market crash, galvanizing the public and thereby opening the door to new regulatory reforms. Today’s Financial Crisis Inquiry Commission (FCIC) chaired by Phil Angelides was created by Congress and is charged with providing a historical account of what transpired to bring our economy to its knees. The Commission is comprised of six Democrats and four Republicans, and partisanship shouldn’t be a problem. Those responsible for the deregulation frenzy and the casino economy are found on both sides of the aisle–there is plenty of blame to go around.

Campaign for America’s Future co-director, Robert Borosage, writes, “The Angelides Commission–if it fearlessly lays out the facts, exposes the excesses, the deformed incentives, the frauds and crimes, that are at the root of the current crisis has the potential of playing a similar role to that of Pecora.”

Sorry about those extra slashes before apostrophes and end-quotes; they’re not in the original, but for some reason the FDL editor inserts them, and I can’t remove them.

Bob in AZ

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iremember54 October 24th, 2009 at 10:15 pm 8

Hey Bob. Bipartisan aught to tell You something, these people are diametrically opposed on everything. So if both parties agreed on this it proves it will come to no end.

You forget that everything that happened on WAll Street was given the greenlight by the Congress who deregulated and let it happen.

They are just as responsible as the Banks and Wall Street, as co- conspiritors to the problems. It’s very seldom people place blame on thenselves.

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bobschacht October 24th, 2009 at 10:19 pm 9

Update #3:
One of the most recent notices about the work of the FCIC is Facing The Financial Crisis Inquiry Commission, published on October 16. In the first half, he observed that

Themes are already emerging around the FCIC efforts, even though the commission’s first hearings won’t take place until December and won’t report to Congress until December 2010. One is a variation of the Reagan era’s “what did he know and when did he know it?” This applies both to regulators (e.g., the Federal Reserve, in response to unconstrained lending) as well as to financial institutions in which fund managers privately described the sub prime mortgage market as “toast” while publicly declaring investments in related mortgage bonds to be “safe.”

Another key theme involves information volume. The FCIC’s goal is to “conduct a full and fair investigation.” To that end, commission chairman Phil Angelides is calling for an investigation that parallels the work of the 9/11 Commission, which conducted over 1,200 interviews, reviewed over 2.5 million pages of documents, and held 12 days of public hearings — a lot of information for the 10-member commission to review.

Finally, reform. The FCIC is charged with determining the cause of the crisis, not designing or suggesting reforms for the future. Still, the commission’s findings will most likely influence future financial regulations just like the Pecora Commission did in the 1930s, when it investigated the Wall Street crash of 1929. Among other reform measures, that commission ultimately led to the formation of the Securities Exchange Commission.

He then concludes by worrying that the end result will be more icky regulations that will stifle the market. ISTM the market over the past 10 years has needed some “stifling,” which might have prevented it from running off the road last September.

Bob in AZ

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bobschacht October 24th, 2009 at 10:48 pm 10

Update #4:
Morgan Lewis Co. published a 5 page pdf report on the FCIC’s first meeting,
The Financial Crisis Inquiry Commission: The FCIC’s First Public Meeting and Its Path for the Future (September 25, 2009). The first few pages provide an interesting account of the Commission’s first meeting, with details not summarized above, including:

* Details about the background of Thomas Greene, the Commission’s Executive Director;

* Details about the FCIC’s timetable for the next few months, including the goal of having its website up and running by the end of October (to answer my own question @ 4)

* Details about the FCIC’s Whistleblower protection program, and the observation that “some commission members already have been actively encouraging whistleblowers to contact the FCIC.”

The last few pages are interesting for a very different reason: Morgan Lewis wants to offer their services to companies that may be the object of inquiry, offering to help them get their shit together, including whistleblower issues (I’m paraphrasing, of course.) And guess who appears at the top of the list of Morgan Lewis attorneys? Why, it’s our old friend, Fred Fielding! His phone number and email are provided for your convenience.

Again, I apologize for all the extra backslashes, which the FDL editor is inserting before apostrophes, etc. I have no idea of how to remove them, because they do not appear in my original text.

Bob in AZ

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iremember54 October 24th, 2009 at 11:17 pm 11

I wouldn’t brag on the 911 commission because they didn’t recomend stopping people from getting into this country in the ways those Highjackers got in.

Or not letting people in here on visa’s learn to fly and use all our systems the highjackers had at their disposal that allowed them to pull off the attack

Or that we should invade Saudi Arabia, because that is where most of them were from.

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foothillsmike October 25th, 2009 at 7:18 am 12

What the financial services sector can do for you and for your community
http://www.alternet.org/workplace/143485/after_the_billionaires_plundered_alabama_town,_troops_were_called_in_…_illegally

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Hugh October 25th, 2009 at 9:48 am 13

Obama’s reform program is no reform at all. The CFPA was the only positive aspect and it has been gutted. The new Pecora Commission is a question mark. I agree with iremember54 to the extent that much of what happened is already known, (I for one have been writing on this for some time). Similarly, we know what needs to be done. The big word missing from the quotes you cite from the commission is fraud. Fraud was everywhere and at all levels. The financial corps weren’t badly run. They were run as criminal enterprises. They, their management, and many of their employees need to be in jail or facing charges. This goes far beyond the capacity of a single commission.

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bobschacht October 25th, 2009 at 1:05 pm 14

In response to Hugh @ 13

These criticisms are not fair to the commission. You are ignoring the comment in the Harvard Law Blog, cited in the main body of my diary:

The criminal referral provision distinguishes this commission from the 9/11 Commission, which did not provide for referrals explicitly. The Financial Crisis Inquiry Commission would have had referral power even without an explicit provision. By including the provision, however, Congress created an expectation that the Commission will make referrals in appropriate cases. Besides increasing the potential for criminal liability, the Commission’s work could well create fact trails leading to civil enforcement and other regulatory and supervisory sanctions.

You are also ignoring the Commission’s charter, created by section 5 of the Fraud Enforcement and Recovery Act of 2009 (Public Law 111-21), signed into law by President Barack Obama on May 20, 2009.

This charter set the “functions of the Commission” as (emphasis added):

“To examine the causes of the current financial and economic crisis in the United States, specifically the role of

(A) fraud and abuse in the financial sector, including fraud and abuse towards consumers in the mortgage sector;…

So, let’s not write the Commission’s obituary before it has had a chance to do anything.

Bob in AZ

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readerOfTeaLeaves October 25th, 2009 at 1:46 pm 15

In response to Hugh @ 13

The big word missing from the quotes you cite from the commission is fraud. Fraud was everywhere and at all levels. The financial corps weren’t badly run. They were run as criminal enterprises. They, their management, and many of their employees need to be in jail or facing charges. This goes far beyond the capacity of a single commission.

Hugh, the more that I read and try to connect dots, that’s sure the way it looks to me as well.

This Commission needs to be tough, and serious, and leave no stone unturned. I don’t know whether that’s possible, and a staff of 10 strikes me as ludicriously small to address such a huge problem.

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bobschacht October 25th, 2009 at 4:16 pm 16

The cynicism greeting this commission is understandable. However, I offer another word of hope: Thomas Greene, as the Commission’s Executive Director, is a career prosecutor. According to the Morgan Stanley report cited in Update #4,

Greene served for more than twenty years in the California Attorney General’s office, including as Chief Assistant Attorney General of the Public Rights Division. He also chaired the Multi-State Antitrust Task Force for the National Association of Attorneys General, which coordinated the investigation and prosecution of major antitrust cases across the United States.

According to the Commission’s press release, Greene “has led complex investigations and prosecuted major cases in the fields of antitrust, consumer protection, energy and corporate responsibility, among others. He coordinated the multi-state antitrust remedies against Microsoft and led the team that prosecuted multiple civil cases against Enron and negotiated a $1.5 billion settlement with El Paso Natural Gas, concluding actions arising from California’s energy crisis.” Among other distinguished positions, Greene also previously served as the congressional representative to the Financial Accounting Standards Board and Special Counsel to the Chairman of the U.S. House of Representatives’ Subcommittee on Oversight and Investigations, a subcommittee of Rep. Henry Waxman’s (D-Calif.) Committee on Energy and Commerce.

Given Greene’s experience managing complex and wide-ranging investigations that implicate civil and criminal federal and state laws and sensitive political and public relations issues, he can be expected to effectively assist the commissioners in navigating important and complex procedural and substantive issues on matters that could be referred for or subject to further investigation by third parties, including Congress or prosecutors. Further, Greene likely will have preexisting relations with congressional staffers and members of Congress who are involved in parallel congressional investigations or drafting related reform legislation.

So, Greene is no cream puff. Let’s hope that he’s given room to roam.

Bob in AZ

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iremember54 October 25th, 2009 at 7:10 pm 17

SCUSE ME BUT AIN”T ALOT OF THOSE PEOPLE ON WALL STREET HAVARD GRADS.

Isn’t the shcool prayer PLUNDER PLUNDER PLUNDER.

Yea we all will clap at Harvard study.

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Hugh October 25th, 2009 at 7:45 pm 18

In response to bobschacht @ 14

I doubt that the commission is going to return criminal referrals on the tens of thousands who participated in and promoted the frauds that led to the housing bust and the financial meltdown.

I wrote on the makeup of the commission a few months ago when it was first announced. There may be one or two surprises, Brooksley Born, was certainly a great choice, but the Republicans are hacks and almost all of the Democratic picks are very Establishment types. None of this gets to the point that we know much of what went on, and the only reason we don’t know more is because of the opaque policies of the Fed and Treasury and their “accounting” changes which have allowed banks to cook their books.

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bobschacht October 25th, 2009 at 10:08 pm 19

In response to Hugh @ 18

Sorry I didn’t link to your post, Hugh. Please give us that link.

Bob in AZ

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