Recommending Readings for #FinReg Observers

My position on financial regulation has dramatically changed in the past 2 years since I began following the TARP bailout debates. I think we need smarter regulation and in particular, a systemic risk regulator with tools and resources to prevent Too Big To Fail and future taxpayer bailouts from happening again.

I have spend many hours watching CSPAN hearings, searching in the Congressional Record for historic references to “derivatives,” working on the Crashopedia web site and reading several books on derivatives, the great depression, and economic history. I would recommend several books to others who are following this debate and wanted to be informed by scholars and by history itself about what we are really facing in this debate on Wall Street reform.


13 Bankers: Wall Street Takeover; Next Financial Meltdown (2010) by Simon Johnson, James Kwak

A Demon of our own Design (2007) by Richard Bookstaber

Beckoning Frontiers (1951) by Marriner Eccles

The Big Short (2010) by Michael Lewis

Crisis Economics: A Crash Course in the Future of Finance (2010) by Nouriel Roubini & Stephen Mihm

Infectious Greed (2003) by Frank Partnoy

Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash (2007) by Charles R. Morris


“Recipe for Disaster: The Formula That Killed Wall Street” by Felix Salmon (Wired Magazine, 2-23-09)

Intractibility of Financial Derivatives (Blog Post)

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#FinReg A Front Row Seat

I came to Washington DC this week on business, working on family history content partnerships with a half dozen major federal agencies, and also to attend the American Library Association conference which starts tomorrow. But my trip coincided with the House/Senate reconciliation conference on Wall Street Reform. And today is the day they are supposed to discuss derivatives, which I consider the central part of the reform bill.

I blogged last month about how worried I was that this reform process would be derailed by the powerful financial lobby. In particular, the Volcker rule is at risk of being gutted and the Blanche Lincoln amendment, which I consider the single most important part of the proposed regulatory reform is at risk of being killed.

Senator Lincoln (I had the privilege of shaking her hand today) seems to be the focus of all the attention of the congressional staffers, the media, and the bankers/lobbyists who are here – maybe 200-300 of them – waiting to see what is going to happen. Will she give in to all the pressure? Or will she stand firm on her position that the big banks, who derive huge profits from derivatives trading, spin out their derivatives operations, which will lead to the biggest restructuring of Wall Street in decades?

It’s 10:20 pm, and the discussions on derivatives (and I’ve heard there are 110 to 200 proposed amendments) has not even started – and yet it was supposed to happen today. It is approximately 79 degrees here in the Dirksen Senate Building room S106, but no one is leaving. We are all waiting for Chairman Frank to bang the gavel and start the debate.

He just banged the gavel, and Senator Dodd is now speaking about the Volcker Rule. And he also mentioned Section 716 and derivatives and suggested that these could be discussed for the next few hours. So it sounds like everyone expects to stay here till the early hours of the morning. I think I’m here for the duration. This is historic and I don’t want to miss the final vote.

A couple hours ago I was a little surprised – because I knew nothing about this particular financial instrument – that an amendment added tonight by Rep Scott Garrett (R-NJ) may lead to the creation of a market in the United States for “Covered Bonds” – an increasingly popular instrument used in Europe, which allows for the securitization of mortgages. The difference between covered bonds and the kinds of “mortgage-backed securities” which have wrought such damage the past two years to the global economy is that with covered bonds, the assets remain on the issuing firms balance sheet. This may mean that there will be better underwriting standards since they are not selling off all the risk to (potentially unwary) investors. I just don’t know enough about this market yet. Based on the volume of covered bonds being issued in Europe – which are at record levels – this could quickly lead to a multi-hundred billion dollar market for these bonds in the U.S. So I guess it shouldn’t be surprising that Wall Street would find a way – in this process to restrict and reform their activities – create an entirely new and potentially lucrative new market at the same time.

But, their main lobbying effort surely is to kill the Blanche Lincoln amendment and that has yet to be taken up by this conference committee. Or if it has been, it has been done privately (see this Reuter’s report from an hour ago) and will likely go the wrong way.

I’m hoping she has a few stones to sling from her purse, but I’m afraid in this modern scenario there are Five Goliaths – banks whose collective assets are approaching the size of the entire US GDP.

Corporate profits from the financial sector have grown from 13% of all domestic corporate profits from 1978 to 1987 to an average of 30% from 1998 to 2007. (Source: 13 Bankers, by Simon Johnson). The financial sector has spent nearly $5 billion in the past ten years on campaign contributions and lobbying, and has reportedly hired dozens of former members of Congress to help in this all-important current lobbying effort. The money and effort being invest to defeat the Lincoln Amendment is huge – even if it would be a helpful step towards reducing “systemic risk” in the global financial system. I have no idea – and little hope – that it will survive in any meaningful form.

Michael Greenberger, a scholar and former CFTC official, says if we adopt the wrong measures tonight we could end up with regulation in name only or no regulation at all. That is what I’m most worried about tonight.

I actually don’t have a front row seat to this very interesting and historic scene – I’m on row 5. It has been very interesting to see all my favorite CSPAN characters in person today. It’s a great country that allows an average citizen to watch these proceedings in person. I’ve met several Washington veterans today who have explained several things to me about how things work here. I certainly committed a faux pax by not wearing a tie today (though I am wearing a suit jacket). I thought I was the only man here without a tie, but I have spotted one journalist who is also tie-less. Next time I’ll know better.

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