Cutting turf: Part 2, the sand traps
[Continued from yesterday's Part 1].
Yesterday we met beleaguered Treasury Secretary Tim Geithner, the Administration’s point person on comprehensive post-catastrophe fundamental financial and regulatory reform, who having attained a position of power finds himself opposed not by his enemies but rather by his ostensible friends, his frustration boiling over as reported in the Wall Street Journal:
“You won’t like me when I’m angry”
Neal Wolin, Treasury’s deputy secretary, said Mr. Geithner told regulators “they have the prerogative to express their views, but he wanted to make sure that, since everyone had agreed on the importance of achieving reform this year, everyone stayed focused on that goal.”
From that little phrase one can deduce much about Mr. Geithner’s administrative reform strategy, and where it is foundering. While the Journal’s article focused almost exclusively on the regulatory infighting rather than the substance, here in capsule form are the core elements:
The government’s proposal would empower the government, among other things:
[1] To take over and break up large financial companies
[2] To merge two bank regulators
[3] To toughen oversight of mortgages
Obviously Mr. Geithner convened all the lesser barons, with President Obama hovering as a looming authority figure, and swore them collectively to this vision of comprehensive financial reform (that I believe will necessarily create the Bank of Glass). Each participating bureaucratic laird so swore, right hand figuratively upraised, left hand behind his or her back, fingers crossed.
Government officials said Mr. Geithner had expected regulators to object to parts of the plan that threatened their power or authority, but Treasury officials appeared caught off guard at how much the criticism resonated with lawmakers.
It’s called ‘lobbying’ and its mother’s milk, ‘political contributions.’
“I swear allegiance, to myself, and to my re-election chances”
Mr. Geithner wanted to tell the attendees they shouldn’t let turf battles get in the way of fixing a system that is clearly broken, Mr. Wolin said.
I’m cutting through the muck whether anyone helps me or not
He declined to comment on Mr. Geithner’s tone and language.
We’re declining comment on the language
Mr. Geithner’s tone is a consequence of the inevitability effect, and the role in which he has been cast – the driver:
When a proposal becomes conceptually inevitable, all the stakeholders instinctively migrate into one of five roles.
1. The driver(s). The person or group compelling the activity forward. The driver, a visionary, sees riches and demons no one else sees. As such, he is single-minded: close.
2. The suddenly sober. They were joking around, playing the usual games, when suddenly the driver flung down the talisman of doom – and they realized, whoa, this is serious. And they did the right thing.
3. The Laocoons who want to win the recriminations. Realizing they are going to lose, they intend to make very clear they had no part of it. They may be wrong-headed but they are honorable and direct.
4. The reluctant bargainers. They didn’t want it, but now they realize that train has left the station. Having lost the war, therefore, they want to win the peace, or at least get a piece of the win.
5. The running-board scramblers. They weren’t necessarily going to push this car out of the muck, but once the wheels start rolling, they want to throw their piece of policy luggage on board.
Within the reluctant bargainers I should have identified a further subset – the empire-builders. Any time power is being centralized, any administrator worth her salt wants to increase her power, so if he’s in the likely centralizing agency, she’s all for standardization and consolidation, and if she’s out, it’s all about ‘checks and balances.’
With that in mind, turn with us now to Mr. Geithner’s verbal woodshed and listen for the participants’ positions to reveal themselves:
“You are talking about tremendous regulatory power being invested in whatever this entity is going to be,” Ms. Bair told the Senate Banking Committee last month. “And I think, in terms of checks and balances, it’s also helpful to have multiple views being expressed and coming to a consensus.”
When the Federal Reserve Board of Governors sets rates, that board debates and votes. So that process already works. When Ms. Bair, who is not on the Federal Reserve Board, speaks of “checks and balances,” one can safely read that as “I’d like a veto over Fed decisions.”
All of your decisions, that is
Officials from the Federal Reserve and the Office of the Comptroller of the Currency, meanwhile, have questioned the creation of a new federal agency to oversee consumer regulations, a move that would take away powers from both institutions.
Let me join them in shuddering. Consumer risk exposure is not greater in banking than any other sector of the economy, nor is protection of bank consumers intrinsically a financial-oversight role. Since banks are stores where people entrust money, bank regulation should be about assuring that money’s safety. Consumer protection isn’t unique to banking, nor intrinsic to it.
Administration officials say they aren’t worried about the overhaul’s prospects –
What else would they say?
– adding that there is consensus on key aspects, including the regulating of over-the-counter derivatives.
That’s merely agreeing to the obvious. Obviously we now need some levels of derivative regulation – but by itself that says nothing. What matters is whether the regulation is disclosure, minimum capital requirements, or approval, and if so in what form and by whom, which is the enormous political-turf question.
We definitely agree there’s some manure to slice up
Treasury officials say they expected a big debate over the complex legislation.
O those seers, who are so wise in the ways of
The first piece, which addresses executive pay, passed the House Friday.
That’s just the low-hanging political fruit, and the non-contentious element.
“The industry is already back to their pre-meltdown bonuses,” said White House Chief of Staff Rahm Emanuel.
Remember, Mr. Emanuel is sound-biter-in-chief for the President.
Sound bites? Ho hum
“We need to make sure we don’t slip back to risky behavior where the institutions have all the upside and the taxpayers have all the downside, which is why we need regulatory reform.”
That’s well said, and it’s the core issue. When agents have upside without downside, and principals have risk, then we get bad lenders making bad loans, GSEs overlevering themselves, and a host of financial implosions.
Plenty of turf for all of us
At a House hearing last month, Mr. Geithner said it was “perfectly reasonable and understandable” that different federal agencies would balk at giving up powers. “Frankly, all arguments need to be viewed through that basic prism,” he told the House Financial Services Committee.
In many ways our current banking regulation operates like the Articles of Confederation, where each regulator is akin to a sovereign state that can safely ignore what the others are doing, and may certainly ignore the dictates of any purported central regulator. Now what Mr. Geithner wants is to force through a new federal financial Constitution that makes the Federal Reserve the truly national supra-regulator:
The administration’s proposal would give the Fed broad discretion to supervise any major
One ring to rule them all, one ring to bind them.
One conference table to seat them all …
How power would be balanced between the Fed and this entity has emerged as a flash point, one that administration officials debated.
Ultimately, officials felt the regulatory structure needed a single point of accountability –
Instinctively I think that’s right. Today capital is at least national; banks are national; financial markets are wholly national. Regulators must always have a breadth of sweep as large as the markets they seek to regulate, otherwise the markets will flow to the boundaries just outside the unfavorable regulatory environment, and will arbitrage the differences between those environments.
If only I coulda got across the state line …
– arguing that one weakness in the government’s response to the financial crisis last year was clarity over which entities were in charge.
Correct; it was.
The administration has pushed for Congress to complete the overhaul by the end of the year. House Financial Services Committee Chairman Barney Frank (D., Mass.) and Senate Banking Committee Chairman Christopher Dodd (D., Conn.) have both said that remains the goal. Both men, however, have suggested the overhaul could change …
Translation: we’re completely with you … sort of.
The top Republicans on these committees, Sen. Richard Shelby (R., Ala.) and Rep. Spencer Bachus (R., Ala.), have also expressed skepticism over ceding too much power to the Fed.
“A rush to judgment where they basically throw these things together without any consensus is going to be a disaster,” Rep. Bachus said.
That’s never stopped us before.
And look how well it worked
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