The Wall Street Journal fronts news that a plan is taking shape within the Bush administration to turn the Federal Reserve into a regulatory “supercop” in what would be the most sweeping changes in financial regulation since the Depression.
The Journal says Treasury Secretary Henry Paulson’s plan would create an agency to monitor states’ home-lending regulation, create a federal regulator for insurance companies, merge some of the existing agencies, and make the Fed responsible for looking for and acting against “all threats to the stability of the nation’s financial system.”
The Financial Times puts the news on page two and says in its lede that “its recommendations may be more notable for what they do not seek to tackle.”
The FT reports that the plan only proposes that the Fed act when the whole market is endangered, not if “one bank or brokerage was taking on excessive risk.” The paper says the plan also doesn’t address the practice of creating AAA-rated securities out of junk mortgages or the trillions of dollars of complicated derivatives that no one seems really to understand and which are the Wild West of the financial system.
Why trust the Fed?
Bloomberg goes high with the elephant in the room that the WSJ and FT don’t get to: the handoff of big-time power to the Fed, one of our most undemocratic and least-transparent government institutions.
“It would be Congress and the president essentially giving a blank check to a regulator over which they have very little power,” said Michael Greenberger, a professor at the University of Maryland in Baltimore and a former CFTC official.
But the plan is more likely a bid to steer the conversation—Bush is an unpopular lame duck and the Democrats don’t seem inclined to cooperate:
Rep. Barney Frank of Massachusetts, the Democrat who chairs the House Financial Services committee, said he found the plan encouraging. But he said that for the rest of this year, lawmakers need to devote all their energy to stabilizing the mortgage-market turmoil rather than determining broader fixes. “It’s too close to an election and it’s a very major thing,” he said.
Another Dem, former Treasury Secretary Lawrence Summers, has our Makin’ Sense Quote of the Day:
“It’s probably a bad idea to spend too much time debating the organization of the fire department while the fire is still burning and no independent investigation of the cause of the fire has yet been completed.”
To be fair, Paulson says as much, too.
Regulatory cluster-&%$!#
If you’re still wondering how things have gone so wrong in the markets, the Journal has an illuminating few paragraphs on the soon-to-be-former regulatory environment that has prevailed for years:
There’s widespread consensus that the current patchwork regulatory system doesn’t work. One problem is that overlapping jurisdictions lead regulators to court the regulated. A year ago, for instance, at a Honolulu hotel, the heads of three federal regulatory agencies charged with guarding the soundness of America’s banks addressed 3,000 community bankers and delivered this message: We’re the ones you want regulating you…
Each agency—OTS, the Federal Deposit Insurance Corp. and the Comptroller of the Currency—implied it would be more pleasant to deal with than the others on the stage.
“It’s not a good idea to have people competing with each other, particularly if they’re competing in laxity,” says Hal S. Scott, professor of international financial systems at Harvard Law School.
It does indeed put a new spin on “free-market competition.” The WSJ doesn’t say if this is a result of the business-friendly Bush administration or if it predates it.
NYT’s BS detector sharp
The New York Times fronted its Paulson analysis on Sunday, and even though it gave its competitors a head start, it still stands as the best—and most skeptical—overview of the plan. It notes that private equity and hedge funds would be regulated for the first time, but that regulation would be limited to collecting information until its too late and the crisis is upon us. The WSJ in a C1 story, though, says hedge funds aren’t the “target of any specific new regulations” but two sentences later says the plan gives them an “overseer”, which they haven’t had previously.
The NYT calls Paulson’s plan BS, saying it’s an attempt to fend off stricter regulation rather than impose it, quoting the secretary as saying he doesn’t think regulators are to blame (apparently at all) for the financial crisis. In a sharply worded rebuke of Paulson, the Times exposes the folly of this worldview:
The Treasury says that it and other federal regulators still believe a principle it enunciated a year ago, “that market discipline is the most effective tool to limit systemic risk.”
That discipline was largely lacking when the problems were being created, but now has returned with a vengeance, leaving banks with securities of dubious value that cannot be sold at any price that even approaches what they were thought to be worth only months ago.
Is the Fed up to the task?
The WSJ, also on page one, says the “Fed’s ‘Supercop’ Role May Give It Headaches.” No, such a job wouldn’t be easy, but somebody’s gotta do it.
Under the Paulson plan, which is unlikely to be adopted as proposed, the Fed would retain, for now, authority to write consumer-protection rules on things such as credit-card disclosures and the terms of high-cost mortgages—despite accusations from consumer groups and Democrats that its failure to do so allowed many homeowners to get subprime mortgages they couldn’t afford.
In Mr. Paulson’s “optimal” scenario, the Fed eventually would surrender its supervision of state-chartered banks and bank-holding companies to the new agency and become a “market stability regulator.” The Fed, Mr. Paulson said in an interview Saturday, “would have broad powers so they could go anywhere in the system they needed to go to preserve that authority.”
In that role, it would be able to lend to any important institution while seeking information from them, which Mr. Paulson considers more reflective of a financial system spread among brokerages and other nonbanks as well as traditional, commercial banks.
The Times in its Sunday A1 story, though, is more concerned about the headaches the Fed has given everyone else, reporting that “some fear that the central bank’s role in creating the current mess will undercut its ability to clean it up.”
“The Fed oversaw this meltdown,” said Michael Greenberger, a law professor at the University of Maryland who was a senior official of the Commodity Futures Trading Commission during the Clinton administration. “This is the equivalent of the builders of the Maginot line giving lessons on defense.”
Hey brother, can you spare a Food Stamp?
The NYT fronts a story saying that the number of Americans getting food stamps is about to hit an all-time high of 28 million, something it pegs to the “economic slowdown.”
But a quick look at its own chart shows food-stamp usage has been growing every year but last year (which saw a slight drop) since Bush took office in a recession—something the Times in part explains away by noting how programs that promote enrollment have increased in recent years and that legal immigrants have had some eligibility restored.
But our money is on these two paragraphs for the real cause:
Because they spend a higher share of their incomes on basic needs like food and fuel, low-income Americans have been hit hard by soaring gasoline and heating costs and jumps in the prices of staples like milk, eggs and bread.
At the same time, average family incomes among the bottom fifth of the population have been stagnant or have declined in recent years at levels around $15,500, said Jared Bernstein, an economist at the Economic Policy Institute in Washington.
A family of four is eligible for food stamps if it earns less than $27,600 a year.
The Times concedes that as a percentage, which is what really matters because of population growth, the real record is still held by 1994, though it doesn’t say what those numbers are. Also, based on the recession that we’re all but unanimously acknowledged to be in, you’d think the percentage increase come October from the year earlier would be higher than 0.7 percent, but the NYT doesn’t question that government estimate.
Beats eating at Subway
The Journal fronts a look at how marketing campaigns have boosted the popularity of a radical weight-loss procedure called gastric banding—which is a surgery that essentially ties off the stomach to reduce its capacity to hold food. Hey, if the drug companies can sell us all day long on mind-bending meds, why can’t doctors sell us on body-bending surgeries? (We’re not actually in favor of this. Just think of all the before-and-after-photo campaigns.)
Gastric banding exploded after 2006, when Inamed was acquired by Allergan, best known for the antiwrinkle drug Botox. Allergan bought Inamed for its portfolio of cosmetic medical devices, but “we quickly realized the real jewel was Lap-Band,” David E.I. Pyott, chief executive officer, said recently at Allergan’s offices in Irvine, Calif.
In November 2006, Allergan began advertising the Lap-Band directly to consumers, an unusual tactic for a surgical device. The company aired a television commercial featuring a distressed woman trying to “tame” a roaring lion pulling her to the refrigerator.
The campaign was an immediate success: Within a week, visits to Allergan’s Lap-Band Web site had increased nearly fivefold. Sales of Lap-Band and other obesity-intervention devices soared 50% last year to $270 million, making them Allergan’s fastest-growing product line.
Enter Johnson & Johnson. Last September, J&J’s Ethicon Endo-Surgical unit received FDA marketing approval to sell its band, dubbed Realize. In recent months, J&J has been bringing obesity surgeons to weekend training sessions to teach them how to implant the device. Bariatric surgeons such as Alan Wittgrove of La Jolla, Calif., who once pooh-poohed banding, say that J&J’s efforts are validating banding as an option.
HUD head rolls
The WSJ reports in an A3 scoop that Housing and Urban Development Secretary Alphonso Jackson is set to step down today, something it calls a “blow to the Bush administration’s efforts to tackle the housing crisis.” His move comes amid allegations of improprieties in a Philadelphia development deal.
This ought to bring up some very interesting housing-bust-era confirmation hearings come nomination time.
Lehman defrauded
The FT reports on its front page that Lehman Brothers says it was defrauded of some $350 million by ex-employees of a Japanese trading company called Marubeni. The WSJ on C1 says the fraud “could be one of the biggest and boldest in recent corporate history.”
As if Lehman didn’t have enough on its plate:
The loss from the alleged scheme comes as Lehman is contending with other issues that have battered its shares. Though the bank says it is well-capitalized and denies rumors that it is facing funding problems, speculation that it could be the next financial firm headed for rocky times in the continuing credit crunch has sent its shares down 34% in the past month.
The new career path
The Chicago Tribune takes an in-depth look at the “era of unsteady work” as seen through the story of one worker:
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.Like millions of experienced workers caught in a sea change in labor markets, he is learning to navigate a revolving-door world of employment and just-in-time hiring. An engineer who began his career in the 1970s, before lifetime jobs vanished, Foss never wanted to become his own boss. But that, de facto, is who he is becoming, learning skills that don’t come naturally to him: networking, branding and promoting himself, juggling one job while keeping an eye out for the next.
