Fed Opposed by Left and Right
On its front page today, the Washington Times reports that expanded powers for the Federal Reserve are being opposed by “odd allies.” The Fed’s imperial over-reach for additional regulatory powers is being opposed by Democrats and Republicans, and liberals and conservatives alike. As well it should be. As Senator Shelby observed, “Anointing the Fed as the systemic-risk regulator will make what has proven to be a bad bank regulator even worse.”
The regulation of financial services failed conspicuously to prevent the worst financial crisis since the Great Depression. The Fed failed most conspicuously as it was charged with oversight of all the major banks, including notably Citigroup and Bank of America. Bank regulation now functions to insulate banks from the consequences of their own bad acts. The regulatory system enables banks to engage in excessive risk taking.
The Obama Administration and Chairman Barney Frank of the House Financial Services Committee propose that an expanded role for the Fed and generally more of the same will improve matters. Instead, the proposed legislation will worsen the situation by codifying the status of the major financial institutions as “too-big-to-fail.” It would thereby provide them with special legal status. We have all seen this movie and how it ends. Fannie Mae and Freddie Mac had such a status and collapsed. Do we need 20 more such disasters?
Three cheers for all those opposing this destructive piece of legislation. End “too-big-to-fail” instead.
U.S. Cutting Pay for Bailed Out Company Executives
According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:
NEW YORK — The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.
The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.
The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.
But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.
This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.
I debate this further on CNBC:
C/P The Hill
Filed under: Finance, Banking & Monetary Policy; General
Congress Just Raised Our Credit Card Fees
Technically, it was the companies which raised their fees. But they did so to anticipate new legislative restrictions on fees taking effect. Congress wanted to cut costs for consumers, but ended up costing them instead.
Credit card companies are raising interest rates and fees seven months before new rules go into effect that will limit their ability to do so, much to the irritation of Congress and consumer advocates.
Chase, for instance, will raise the minimum payment required of some of its customers from 2 percent to 5 percent of the statement balance starting in August. Chase and Discover have increased the maximum fee charged for transferring a balance to the card to 5 percent of the amount, up from 3 and 4 percent, respectively. Bank of America last month raised the transaction fee for balance transfers and cash advances from 3 to 4 percent. Card issuers including Bank of America and Citi also continue to cut limits and hike up rates, which they have been doing with more frequency since January.
“This is a common practice and will continue to be common, because issuers can do these things for really no reason until February,” said John Ulzheimer, president of consumer education for Credit.com, which tracks the industry. “It’s what I call the Credit Card Trifecta — lower limits, higher rates, higher minimum payments.”
It’s not just the top card issuers making changes. Atlanta-based InfiBank, for example, will raise the minimum annual percentage rate it charges nearly all of its customers in September “in order to more effectively manage the profitability of our credit card account portfolio in a very challenging economic environment,” said spokesman Kevin C. Langin.
The flurry of activity, which the banks say is necessary to shore up their revenue losses, has irked members of Congress, who passed a new credit card law, which was signed by President Obama in May. The law, among other things, would prevent card companies from raising rates on existing balances unless the borrower was at least 60 days late and would require the original rate to be restored if payments are received on time for six months. The law would also require banks to get customers’ permission before allowing them to go over their limits, for which they would have to pay a fee.
One hates to think of what additional “help” Congress plans on providing for us in the future.
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Regulatory Studies
Fed to BoA: ‘We Will Not Leave You in the Lurch’
Thursday, the House Committee on Oversight and Government Reform questioned Ken Lewis about Bank of America’s purchase of Merrill Lynch and the subsequent injection of tens of billions of taxpayer funds into Bank of America.
While much of the hearing focused on Lewis’ leadership of Bank of America, the hearing also touched upon the more important questions of government regulators pressuring BoA to purchase Merrill even after BoA realized that Merrill’s losses were greater than expected.
One of the basic tenets of sound regulation, exercised in the public interest, is that regulators remain at “arm’s length” from the entities they regulate. As defined by Black’s Law Dictionary, “arm’s length” relates to “dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.”
If anything, it appears that BoA and the federal government were in a bear hug, rather than at arm’s length. As described in Lewis’ notes on one of his many conversations about the Merrill deal with Fed Chairman Ben Bernanke, Bernanke told Lewis, “We will not leave you in the lurch.” Given the funds subsequently injected into BoA, one can say that Chairman Bernanke is at least a man of his word.
One of the significant problems arising from extensive government ownership of private entities is that in regulating those entities, the government no longer has the ability to be a neutral, objective arbitrator. Whether it is BoA or GM, government officials will come under increasing pressure to see a positive return on the taxpayer’s investment. One should not be surprised if that pressure manifests itself by government officials favoring the very companies they have invested in.
While BoA has been saved, it appears that the rule of law has been “left in the lurch.”
Filed under: Finance, Banking & Monetary Policy; Government and Politics
If You Like Fannie Mae, You’ll Love Auto Mac
While Bank of America and Citi grabbed most of the attention in the recently released bank “stress tests” one of the biggest capital holes to be filled is that of GMAC, which under the stress test’s relatively light assumptions will need to raise another $11.5 billion in capital.
As one of the smaller of the stressed tested banks, and having almost no trading and counterparty risk — and hence little or no systemic risk, GMAC would hardly seem the candidate for any additional bailout funds. Were GMAC to fold, our financial markets would hardly notice. Who might notice is our auto manufacturers.
Just as easy credit inflated our housing market, it was easy credit — who can forget 0% financing — that lead the auto sales boom of the early 2000’s. Just as many see Fannie and Freddie — along with help from the Federal Reserve — as leading us to a housing recovery, many also see GMAC as being at the heart of any recovery in the auto industry.
Given the state of the auto industry and the increasing level of defaults on auto loans, the safe bet is that GMAC will have a tough time rasing the needed $11.5 billion from non-governmental sources.
Once the government becomes a majority owner of GMAC, its only a matter of time until its focus shifts from re-bulding its financial health to expanding the American Dream of auto-ownership.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
The Joys of Stock Ownership
I happen to own shares in Bank of America, so I’ve just received a proxy statement for the upcoming annual meeting. The Board of Directors recommends that I authorize them to vote my shares FOR an uncontested slate of candidates for the board. Usually I go along with such proxy requests.
But this time I thought: Why should these people get something like $250,000 a year to take orders from President Obama and Secretary Geithner? It’s become pretty clear that the Obama administration intends to use the bailout money to control private companies. He intends to tell companies what cars to make, how much to lend, how much to charge for credit cards, what to pay their executives, what kinds of bonuses are acceptable, and other crucial management decisions.
So I decided to write in “Barack Obama” for all 18 positions on the Board of Directors. However, neither the paper ballot nor the online ballot allowed for write-ins. I guess the official slate will win. But make no mistake. Obama’s the boss.
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