BW:Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you
regret that decision?Clinton:No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn't signed that bill.
BW:Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?
Clinton: Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.
Clinton on the repeal of Glass-Steagall
The NYT's critique of Geithner's financial system reforms
"...Mr. Geithner called for all large hedge funds and private equity firms to register with the Securities and Exchange Commission, a move that could bring much-needed disclosure and oversight to vast pools of capital that fed the bubble economy. But the S.E.C. would not have the full authority to resolve all concerns. Rather, it would report its findings up what could turn out to be a convoluted chain of regulatory command. [So, too little regulation of hedge funds]
"...Mr. Geithner called for oversight of unregulated derivatives, like the credit default swaps at the heart of the debacle at American International Group. But he made a troubling distinction between “standardized” derivatives and “non-standardized” ones, and proposed different regulation for each. That looks like a loophole disguised as a new rule. Derivatives, now swapped one-on-one, ad infinitum across the financial system, need to be traded on a fully regulated exchange, period. [Same goes for derivatives and CDS's]
[And now for the Gramm-Leach-Bliley narrative...]
"...firms, like A.I.G., have proved dangerous mainly because of their involvement in a web of often conflicting financial practices and products. The A.I.G. financial unit that sold credit default swaps did not have the wherewithal to make good on its obligations, but leeched off the AAA rating of the company’s strong insurance business.
"...Mr. Geithner...called for a single powerful regulator to police the most powerful institutions, presumably intervening to require more capital whenever sheer size and conflicting activities appear threatening. In the all-too-likely event that firms would get too big to fail anyway, he called for new government powers to seize and restructure them, if failure seemed imminent.
"No one disputes that this authority is needed in today’s world to avoid calamitous bankruptcies and bailouts. The aim would be to make such takeovers as orderly as a bank seizure by the Federal Deposit Insurance Corporation.
The important question, however, is whether, in a reformed future, any firm should even come close to getting too big — too diverse, too interconnected — to fail. Geithner’s plan assumes that such firms will be a feature of the financial landscape going forward. That is a radical shift in perspective. [Wow. "Radical shift in perspective" is putting it mildly. It's a rejection of the basic left/NYT narrative about G-L-B as the basic cause of the crisis.]
Depression-era legislation, after all, prevented financial firms from mixing commercial banking with investment banking and insurance. Only in the last 10 years — with the passage in 1999 of the Gramm-Leach-Bliley Act — have such financial supermarkets been allowed to re-emerge.
Supporters of Gramm-Leach-Bliley recognized that too-big-to-fail firms posed a risk of taxpayer bailouts. Their concerns were soothed by a belief that market discipline, combined with innovative ways to reduce risk — namely derivatives like credit default swaps — would mitigate the danger. [Interesting idea here, that CDS's were thought of as a way of mitigating the risks of G-L-B and the "too big to fail" issues that might result from it. I had never heard that before, though it sounds plausible.] We now know that discipline failed and the innovations actually amplified risk greatly.
"In some cases, these big firms allowed ever more financial risk to be piled on ever-thinner cushions of capital. That helped to juice Wall Street profits, but did it really outweigh the disadvantages that are now so painfully evident in taxpayer-funded bailouts?
"If there is no proven way to reduce the systemic risk in big and interconnected firms, why should they be allowed to exist? It would take some time to dismantle them, so the government should, in the meantime, be granted the resolution authority to seize them if needed. But that should not substitute for a debate on whether such firms should be allowed to exist at all.
"The urgency to repair the financial system is mainly political. Crises create intense public awareness and with it, the opportunity for change that reform-minded officials do not want to squander. [Never waste a crisis to push through an agenda that may or may not have something to do with it.] Even lawmakers who would prefer the status quo feel the pressure to act.
"But does anyone understand with specificity what brought on the financial meltdown? Can the lawmakers and other officials charged with writing the new rules explain the transactions, interactions, norms, products and relationships that got us in this mess? Can anyone parse how much of the crisis is due to regulatory failure, how much to recklessness and greed, how much to fraud and manipulation? Why, exactly, did Goldman Sachs get $12.9 billion in the A.I.G. bailout?
Without the answers, which we do not yet have, Congress and the administration cannot be confident that they are coming up with the right reforms. [I agree with everything in this paragraph. An honest, public debate is necessary, though any that would take place would be political and nasty. Why GS got money from the AIG bailout is an excellent question.]
"It is clear, however, that there is bipartisan resistance to a thorough investigation of what caused the collapse. There have been hearings galore. But they are often little more than hazings of corporate executives and government officials. Even the illuminating hearings have not been connected in a meaningful way that will help us all understand what went wrong. [All very true. The hearing have been useless; nothing more than an opportunity for Barney Frank to display his various psychological pathologies. The Dems don't want to do anything because they are invested in the status quo. Many in the GOP are equally invested, and those who aren't are clueless, to put it charitably. The pathetic display this past Friday was a perfect example of GOP cluelessness.] [END OF QUOTE]
There's more, and I may get back to it. It's interesting to see that the left are as unhappy with Geithner as those of us on the right. Kudos to the NYT for being honest about the Geithner disaster; their attempt to soften it by starting with the pluses fools no one.
Job Losses From Obama Green Stimulus Foreseen...
For every new position that depends on energy price supports, at least 2.2 jobs in other industries will disappear, according to a study from King Juan Carlos University in Madrid. U.S. President Barack Obama’s 2010 budget proposal contains about $20 billion in tax incentives for clean-energy programs. In Spain, where wind turbines provided 11 percent of power demand last year, generators earn rates as much as 11 times more for renewable energy compared with burning fossil fuels. The premiums paid for solar, biomass, wave and wind power - - which are charged to consumers in their bills -- translated into a $774,000 cost for each Spanish “green job” created since 2000, said Gabriel Calzada, an economics professor at the university and author of the report. “The loss of jobs could be greater if you account for the amount of lost industry that moves out of the country due to higher energy prices,” he said in an interview. Spain’s Acerinox SA, the nation’s largest stainless-steel producer, blamed domestic energy costs for deciding to expand in South Africa and the U.S., according to the study.
The coming ARM explosion
A wave of resetting adjustable rate mortgages had been poised to add to the flood of foreclosures as their rates jumped.
Some 420,000 hybrid ARMs are scheduled to reset in 2009, according to the Treasury Department. A year or so ago, it seemed that many of these loans were going to see their interest rates reset to as high as 12% or more.
But then interest rates started falling, hitting lows they hadn't seen in 37 years.
"Many people are actually seeing their adjustable rates fall," said Barry Glassman, a financial adviser with Cassady & Company. "Some loans are resetting even lower than some fixed-rate loans."Adjustable rate mortgages start out with a two or three year period of low introductory rates, sometimes called "teaser rates." After that, the interest rates start to adjust according to a set schedule - sometimes as often as monthly or as little as once a year - until the mortgage is paid off.
For the most part, this was a recipe for disaster. Many homeowners took out ARMs because they couldn't afford the monthly payments that came with a 30 year fixed-rate loan. They were counting on having the value of their homes appreciate and then refinancing. Instead, home prices have plunged a record 18.2% according to the S&P/Case-Shiller index.
...The adjustments are calculated by adding what's called a margin, which is a number of percentage points agreed to when the mortgage is first issued, to an index.
The index that most hybrid ARMs are tied to is the London Interbank Offered Rate (Libor). So, homeowners whose loans are resetting will get new interest rates equal to their margins, which range from about three percentage points for the lowest risk borrowers to six percentage points for those who at higher risk, plus the current Libor rate.
In 2007 when Libor rates hovered near 6% there was a great deal of concern about so-called exploding ARMs that would jump from 7% to as high as 12%. But with Libor now at less than 2% - loans are resetting at under 8%
...when Libor rates rise again, as they inevitably will, resetting adjustable loans will inflict a great deal of pain.
...While the threat of traditional ARMs has been somewhat defused, another breed of exotic mortgage - option ARMs - will undoubtedly force more people out of their homes.
...Fitch Ratings, which rates mortgage backed securities, estimates there are about $200 billion worth of option ARMs out there, with nearly $30 billion scheduled to reset in 2009 and $70 billion in 2010.
These mortgages, also known as negative amortization loans, permit borrowers to make minimum monthly payments that don't even cover interest costs, much less any of the loan balance. Teaser rates were sometimes as low as 1%, even though the actual interest rate being charged was much higher - closer to 8%.
And most option ARM borrowers choose to make the minimum payments, which means that the difference between that and the full payment gets tacked on to the balance of the loan, so that the principal grows over time instead of shrinking.
Borrowers are permitted to make minimum payments for as long as five years (although the minimum will increase after the first 12 months), or until the balance grows to 110% to 125% on the loan's original principal. When that happens, the lender automatically turns the loan into a normal, fixed-rate, fully amortizing mortgage which require much-higher monthly payments to pay down the loan balance.
Option ARM borrowers are in for a double-whammy; jumping interest rates and ballooning balances. So a $200,000 loan, which originally only cost about $643 a month at the minimum payment, could become a $250,000 loan at 8% interest requiring a monthly payment of $1,834.
Did the Fed...
One answer:
...the Fed's artificial lowering of short-term interest rates and the resulting substitution by consumers to ARMs triggered the bubble and subsequent crisis