The New York Times had a good look yesterday at how big financial companies are lobbying Washington to not be labeled “systemically important” by regulators.
It kicks off with a nice lede:
It is not very often that business people head to Washington to explain how unimportant they are.
And reports that firms are lobbying even though the criteria for what will trigger a systemically important designation aren’t yet known, which means that these firms are almost surely lobbying to water down those criteria, not just to exempt themselves.
So what should systemically important mean? At base it’s pretty easy: If a company’s collapse would threaten to bring down the markets, then it’s systemically important. To put it another way, if the government would seriously consider bailing out a company rather than letting it go bankrupt, then it’s systemically important and should be held to much stricter standards.
Of course, most people who don’t run giant companies or rely on them for campaign donations think that if any company is too big to fail, it’s too big to exist. These firms should just be busted up until they’re small enough not to threaten everyone else and benefit from implicit government subsidies.
That’s not going to happen, but if these regulations are implemented well, they would increase TBTF companies’ cost of doing business enough to offset the massive backstop subsidies they get from taxpayers. That would incentivize companies to slim themselves down by increasing their costs and help smaller companies compete with them. Don’t hold your breath.
In part that’s because it’s harder to figure out in a non-panic situation who would be bailed out in a panic. For one, the extent of a firm’s interconnectedness, a critical component of whether it’s too big to fail, sometimes is only fully apparent after a panic begins. It’s clear that regulators should err on the side of being heavy-handed here. Better to ensnare a few big firms that wouldn’t be a problem than to let ones that would slip through. But it’s also clear that they won’t—at least if the history of the Obama administration and its current push for 2012 cash from Big Finance are reliable indicators, and I think they are.
The Times reports that some of the companies lobbying Washington on their relative unimportance are General Electric, Hartford Financial Services Group, Allstate Corporation, John Paulson’s hedge fund, Citadel, Larry Summers’ old bosses at D.E. Shaw, bond goliath PIMCO, and mutual fund companies like BlackRock and Fidelity. Companies that actually make stuff are lobbying, too, like General Electric, Caterpillar, and Boeing.
Sorry, GE, but you’re automatically systemically important because you got bailed out in the last go-round. GE was so systematically important that they bailed it out even though it wasn’t a bank and didn’t face bank-level regulation, “capitalizing on the federal safety net while avoiding more rigorous regulation” in the words of ProPublica and the Washington Post two years ago.
So, too is The Hartford:
In May, the Hartford Financial Services Group sold off a thrift it bought in 2009 to secure billions of dollars of bailout funds designated for banks. In February, the Allstate Corporation sold a similar bank that had made it eligible for aid, though it decided not to accept the cash.
The gall of that company, $300 billion in assets, is something to see.
Finally, this kicker is terrific (emphasis mine):
Meanwhile, several large financial companies are finding sympathetic ears in Washington. Barney Frank, the ranking member of the House Financial Services Committee and one of the chief architects of the new rules, said he did not believe life insurers and mutual-fund companies were risky enough to require heightened supervision.
“If you look at it, they weren’t the causes of the problems,” said Mr. Frank, the Massachusetts Democrat whose political region is home to many mutual fund and insurance companies.
Excellent.
That gets to the heart of the problem, doesn’t it? (UPDATE: See below for James comments and my responses)
But is Barney right, or not? Were insurers and mutual-fund companies part of the financial catastrophe or not? Because if not, I object to the strong implication by you, @Ryan, and the NYT that Barney Frank is somehow dishonest and corrupt. You and Mr Dash there at the NYT present absolutely no evidence of this slur.
This is the kind of psuedo-journalism that makes people cynical. It makes people think that all politicians are corrupt, and that is decidedly not the case. In effect, you are immunizing the politicians that are *actually* corrupt by this kind of casual, half-joking accusation.
Please soften your language. You are a better journo than this, @Ryan.
#1 Posted by James, CJR on Mon 13 Jun 2011 at 04:23 PM
And @Ryan, please see your colleague Greg Marx's "A Broken Lede" where he discusses this kind of bad journalism in another context --claiming the government is "broke" when it isn't, and why it is bad journalism. It applies to your piece here as well, I'm sorry to say.
#2 Posted by James, CJR on Mon 13 Jun 2011 at 04:29 PM
The American Insurance International Group was at the core of the crisis, James, as were money market mutual funds that are critical components of the shadow banking system and which suffered a bank run when Lehman went down.
#3 Posted by Ryan Chittum, CJR on Tue 14 Jun 2011 at 12:20 AM
@Ryan,
1) With due respect, in the NYT quote, Barney specified "life insurers." To the best of my knowledge, AIG is not a life insurance company. And many "mutual-fund companies" were the victims of the financial dealings of AIG, Goldman Sachs, et al-- just ask some prospective retirees who saw their retirement accounts (invested in these mutual funds) suffer breathtaking losses because they had been invested (unbeknownst to them) in these CDS. Can we not differentiate between these bad players and smaller financial companies?
2) Mitch McConnell (R-KY) is very knowledgeable about the horse race industry, and looks out for their interests as a Senator from Kentucky. Chuck Grassley (R-IA) and Tom Harkin (D-IA) are both very knowledgeable about agriculture, and do a lot of work on behalf of the agriculture industry in their state. Are you suggesting that it is inherently dishonest for representatives to work on behalf of the major industries in their respective jurisdictions, and this dishonesty is due to campaign contributions and lobbyist activity?
3) Are you suggesting that Congressman Barney Frank (D-Mass.) is dishonestly protecting life insurance companies and mutual fund companies from regulation because they have given him campaign money? That would be bribery, wouldn't it? Are you implying that Barney Frank has been "bought off"? Where's your evidence of that slur?
Seems like when you flatly accuse a politician of corruption, you should present your reader with evidence to support your accusation. By waving this broad brush of meta-corruption in your final graf, you are leading your reader to conclude something for which you present no evidence.
I would ask you to revise your final paragraph, pointing out that representatives from a state work on behalf of industries in their state as part of their elected duties, and there may be a fine line between honestly working on behalf of the industry and being unduly influenced by their campaign contributions. And leave out the hyperbole about bringing "the whole house of cards down on you."
Respectfully,
James
#4 Posted by James, CJR on Tue 14 Jun 2011 at 06:16 AM
There are times I like Barney, and there are times I don't:
http://www.youtube.com/watch?v=NZJzy_BzRoI
He's a better politician than most, which equates to faint praise.
I agree that AIG isn't just a life insurance company and that it was the deregulation of that insurance industry that allowed AIG to diversify, define itself as a thrift, offer CDS products to Wall Street, and distort the perception of risk well beyond what it should have been.
However, when Barney Frank is talking about "life insurers", is he talking about the companies with CDS desks and a bank or two in their pocket, or is he talking about insurance companies with insure life and health only? If he's using the label "life insurers" the same way republicans use the label "small business" then we have a problem.
As for mutual funds, it's not really the funds themselves that need supervision, it's the ratings agencies they rely on. And, as the youtube video above points out, he hasn't been so good on that front.
#5 Posted by Thimbles, CJR on Tue 14 Jun 2011 at 07:06 PM
James,
You're right re Frank representing constituents. I'll concede that since he represents a good chunk of the industry, my language about the "heart of the problem" isn't right. But that point also assumes that this kind of regulation is not in the best interests of the vast majority of Frank's constituents, including many of the insurance companies themselves (rather than, say, the handful of executives who run them), and I don't agree with that.
And yes, I am saying if Frank's top 10 campaign contributors weren't all FIRE companies like Fidelity, State Street, Bank of America, New York Life, and Liberty Mutual, but were instead things like the AFL-CIO, Consumers Union,etc., that his stance on the issue at hand would be tougher. Of course I can't know that. I can't read his mind.
But I don't know how you can get around the idea that our system of campaign finance is corrupting. Some are worse than others (and Frank being in a safe seat makes him more independent), but it corrupts the entire system and that's why powerful interests are looked after disproportionately.
Fidelity banks on Barney Frank. Honchos host fund-raiser for finance panel’s chief
R
#6 Posted by Ryan Chittum, CJR on Tue 14 Jun 2011 at 07:40 PM
@Ryan, thanks for responding. And thanks for the update on your piece. I appreciate it.
You make some excellent points, and I certainly don't disagree with you on the subject of campaign finance. I sincerely wish there was another way. I don't know and can't offer any solutions to the problem, but the Supreme Court has weighed in, and they have been unequivocal. It is what it is.
But I'm really making a point about the journalism here. It isn't just you -- you are an outstanding journalist and I admire your work -- but these broad-brush innuendos that many journos make about the generic politician are cynical and unfair to the honest politician and to your readers, who look to you for information on what these people are up to. When you jokingly imply broad corruption, your readers aren't in on the joke.
You know how you dislike constantly being bludgeoned with the "liberal bias" meme? Broad-brush accusations of being a commiesocialistnazijournolister? And the high-horse liberal moralizing about cocktail party weenies and stenography? It's unfair to you, and it's unfair to your honest, hardworking colleagues, and it immunizes the really bad journalists among you from rightful embarrassment from their hackery. It equates your work with the worst of your colleagues. Not only is it not fair, but it isn't constructive to the goal of achieving excellence in journalism.
You are in the business of media criticism, and when you do what you do, you present specific examples -- quotes, background, context -- of bad journalism on the business beat. I think you are one of the best in that respect. You don't jokingly accuse the generic business journalist of stenography and/or liberal bias. Yet you and your colleagues frequently imply corruption in politicians without evidence.
How can we hold bad politicians accountable for corruption if people believe they are *all* corrupt? That's what results from these pervasive casual innuendos of wrongdoing. It reduces the shock value of bad acts. In fact, this kind of conceit on the part of journalists make them uninterested in pursuing stories about actually corrupt politicians.
#7 Posted by James, CJR on Wed 15 Jun 2011 at 07:39 AM
(SIDE NOTE: On Frank. I don't know what is in the best interests of his constituents. Many of them work for these companies, or otherwise benefit from their large presence in their communities. Maybe some other politician would be "tougher" on them, who knows? Do we need tougher regulation of Fire Insurance companies? I don't know.
But let's take Mitch McConnell and the horse racing industry just to get outside the financial industry for an example. Now, the tradition of horseracing and breeding of thoroughbreds runs deep in Kentucky. It is a major source of pride and identity to people of Kentucky. Kentuckians expect McConnell to advocate and promote the thoroughbred racing industry in Washington. Going "easy" on the horse racing industry is good for the industry, and good for Kentucky.
We all expected former Senator (now esteemed VP) Joe Biden to favor the credit card industry. And he did, he voted for the execrable US Bankruptcy Reform Act. That doesn't mean these Senators were corrupt, it means they were working for interests of their constituents, which include the major industries within their state.
Should politicians with major industries in their jurisdiction be barred from sitting on committees that conduct oversight of that industry? I don't know the answer to that.)
#8 Posted by James, CJR on Wed 15 Jun 2011 at 08:00 AM
Ryan claims: Of course, most people who don’t run giant companies or rely on them for campaign donations think that if any company is too big to fail, it’s too big to exist
Says who?
Another day, another commie fabrication in Chittumland.
#9 Posted by padikiller, CJR on Wed 15 Jun 2011 at 10:16 AM