Archive for the ‘Financial Markets’ Category

Our Emotional Senate?

So financial reform certainly beats health care reform in terms of drama and action Via Open Left:

2. Susan Collins and Ben Nelson on board, but progressives blocking passage
Republican Susan Collins, and uber-ConservaDem Ben Nelson came out in favor of cloture today.

If all other Democrats held together, this would mean there are enough votes for cloture to succeed. However, many progressives–Cantwell (reinstating Glass–Steagal), Dorgan (ending naked credit default swaps), Harkin (capping ATM fees at $0.50), Merkley (reinstating Volcker rule), Levin (same as Merkley) and others–remain angry that their strengthening amendments have not received votes, and as such are not promising to support cloture. In fact, Cantwell just said she does not support cloture, as of right now.

Progressive anger over this turned into chaos–or as close as the Senate ever gets to chaos–on the floor last night. Tom Harkin openly angry at Harry Reid, Senators huddled every which way to strategize, strange procedural moves were employed (see bullet point below for the prime example), and more. Ryan Grim and David Dayen have good rundowns of the events.

Everything related to HRC took forever and never seemed to include any surprises on either the House and Senate floor. Pretty much every vote turned out as predicted, the changes happened in the in between periods. The little bits of drama were in the various of periods of wringing out votes. Don’t know if all the drama will make for a better bill, but it’s a lot more interesting then the endless debates about pulling together. Maybe it’s just the absence of Joe Lieberman’s oxygen depleting presence as a central figure in the debate.

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Taxing Wall Street – event review

(Intro by Jeremy) I see Chris just posted something about international speculation taxes. Closer to home, proposals are floating around in both the House (DeFazio) and Senate (Harkin) to impose a similar transaction tax of financial speculation. The Center for American Progress hosted an event on the issue last Tuesday, and our intern James Hazzard wrote the following review of the event:

Facing persistent revenue shortfalls and motivated by a healthy amount of populist anger directed towards Wall Street, Democrats in Congress are considering the unprecedented step of raising taxes in the midst of a recession. The concept gaining steam is a transaction tax, which would take a small percentage from every stock, futures, and credit trade. The tax is expected to raise $150 billion dollars annually, half of which will go to job creation and transportation issues while the other half will go directly to paying down the deficit.

In response to this proposal, the Center for American Progress (CAP) opened a snow-bound forum last Tuesday morning titled “Taxing Wall Street.” Moderated by Greg Ip of The Economist, the forum focused on the possible economic impacts of the Democrats’ proposal.

Mr. Ip, the U.S Economics Editor for The Economist, started off the discussion by filling in the history of a transactions tax. Beginning in 1934, the SEC has applied an extremely small tax upon every transaction to help offset its operating costs. Louder discussions of a transactions tax began in 1972, and have become especially potent over the past several years. Both Great Britain and the International Monetary Fund are considering similar taxes, although the Obama administration currently appears cold to the idea.

Michael Ettlinger, Vice President for Economic Policy at CAP, emphasized the necessity of a transactions tax. Even with a complete freeze on discretionary spending, the country is still running a chronic deficit. Taxes must be raised or entitlement programs must be cut, and the latter is extremely unlikely. For Ettlinger, the core question isn’t whether or not there should be a tax, but would the tax cripple the financial services industry? The answer is no. The tax is light, would have a negligible effect on long-term investments, and would only take a small amount of money out of a huge industry.

Dean Baker, Co-Director of the Center for Economic and Policy Research (and featured speaker at our recent Green Bank briefing), focused on the behavioral implications of the tax. The last 30 years of technological development have not skipped over the financial industry, and has become significantly cheaper to make trades. If the Democrats’ proposed tax increase were to be instituted, it would put costs back into the levels of the early 90’s. Dr. Baker argues that such costs would not only leave the financial system in perfect health, but improve behavior. Higher transaction costs will discourage highly risky trades but leave safe transactions untouched, and encouraging long-term behavior in the stock market is key to avoiding another collapse.

The last speaker was Ellen McCarthy, Managing Director of Government Affairs at the Securities Industry and Financial Markets Association (essentially the Wall Street trade association). McCarthy argued as “the other bookend” of the debate by attacking the proposal. She argued that instead of punishing Wall Street, the tax would be passed along to the American household by the traders. While the tax will change short-term behavior, it will also reduce the liquidity of stocks and make the market less flexible in response to crises. And, of course, such a tax would hurt employment in the financial sector.

During the Q&A session, the discussion focused on whether or not Wall Street deserved to be taxed. Dean Baker, while defending the tax, acknowledged that taxes can’t just be applied on the basis of being deserved – the government wouldn’t make any money. Michael Ettlinger argued that the tax wasn’t specifically directed to punish Wall Street – that was just the language of the bill. The real danger in Wall Street isn’t derivative trading, but speculative and destructive behavior. The forum concluded with Ettlinger arguing that any legislation that imposes a transaction tax without additional reforms would be innocuous. Wall Street needs to be transparent before it can be taxed.

Taking $150 billion out of an industry worth hundreds of trillions of a dollars isn’t likely to cripple it, and it’s pretty likely that the American people can get behind this small fee. But this is a small battle in a much wider war over financial system reform. The final success or failure of this tax will likely depend on the resolution of issues entirely separate from a transactions tax, issues like much-need regulation reforms designed to bring hedge fund and derivatives transactions out of the shadows (a weak version of such a measure has passed the House). At least we can be somewhat assured that if everything works out, and the tax does get imposed, our society will not be brought to its knees by a quarter of a percent tax.

To watch the video from the forum, visit the Center for American Progress website.

“Seems Like”

More from the SOTU (emphasis added):

They don’t understand why it seems like bad behavior on Wall Street is rewarded, but hard work on Main Street isn’t; or why Washington has been unable or unwilling to solve any of our problems

The Federal government did a bail out, but didn’t nationalize, or set conditions on executive pay. Today Wall Street and the banks have recovered much more then the public at large. So how else are people supposed to see things?

Obama did a good job laying out a vision for improvement moving forward, but there’s no point in soft selling the last year.

-Chris

This Is Why People Hate Big Banks

They say no good deed goes unpunished, and a recent event that happened in my presence is a true testament to that statement. Well, at least that’s the case when large financial institutions are concerned. I think you’ll agree that this story is yet another example of an industry completely consumed by the destructive forces of unchecked greed and inimical to the common good.

So I’m visiting my family in NYC for Thanksgiving weekend. Yesterday afternoon, my sister was walking outside our building when she saw a wallet on the ground. The wallet contained $60 and two credit cards. Unfortunately, no ID cards that would have provided us with an address. Sure, she could have left it on the ground, or taken the money and left it, or even turned it into the guard of our building. Many if not most would have done one of those things. But my sister knows how terrible it is to lose one’s wallet, and decided to be a good samaritan.

She first checked the building guest sheet to see if this woman, who we’ll call Alice, had signed in recently by chance. No luck there. Then, she came upstairs and looked her up in the phone book. An NYC land line number popped up, but the number was disconnected. So the next idea was to call the credit card companies to see if they’d be able to help.

So my sister called American Express, figuring they’d have an active contact number at which to reach their customer. They were moderately helpful, agreeing to call Alice and let her know of the situation. But three hours later there was no response from Alice, so it’s unclear whether they actually did make that follow-up and pass on the information she needed to get her money and cards back.

Then, my sister tried Chase (now owned by JP Morgan). There, the reception was much more hostile. The representative refused to take down any information or make a call to help out their respected customer. This despite the fact that a very simple action could have saved both my sister and Alice a great deal of hassle.  Such an act of good faith was clearly not within standard company protocol, said the customer “service” rep. My mother jumped in indignantly and quickly demanded to speak to a supervisor. The supervisor, of course, repeated the same line. The only possible reason both Chase employees could have said the same thing is that corporate higher-ups decided to categorically deny any requests for help that were not officially approved at high levels, because that would limit the company’s liability. Instead, the still-powerless supervisor suggested my sister go to the police. That’s what she ended up doing, but it took an unnecessary extra hour to do so, and exposed my sister to some risk that she would end up with some blame for anything that may have disappeared from the wallet. Thankfully, the officer at the local station was very friendly, also pissed at Chase’s selfish intransigence, and agreed to call them again to more officially demand their help as a law-enforcement authority. Apparently that worked more effectively, because today we received a call from Alice expressing her deep gratitude.

I suspect most of you would agree that my sister’s experience with Chase was unfortunately more of the norm than the exception when dealing with big banks. Maybe Chase’s unofficial customer service policy of “fuck off” makes sense from a pure short-term bottom-line perspective, but it also helps explain why they and their fellow financial institutions are deeply unpopular these days. Regardless of whether they took federal bailout money (and for the record, JPMorgan did in the Bear Stearns fiasco), the industry most directly responsible for our current economic woes has a great deal of nerve treating its customers like chattel and expecting the American people to sit back while they enjoy their massive profits during a deep recession.

The ancient Greeks had a word for this sort of behavior: hubris.

The Downside of Social Responsibility

(Note from Jeremy: the author of this post, Julian Friedland, is a friend of mine and a Business Ethics professor at Eastern Connecticut State University. He writes at the blog Business Ethics Memo, and I will be reposting his commentary here from time to time.)

Cross-posted here.

The NYT just ran an interesting report on an interview with Jeffrey M. Peek, CFO of CIT, a bank on the brink of bankruptcy in part because it acted more responsibly during the mortgage bubble:

Perhaps Mr. Peek’s real failing was that he didn’t take enough foolish risks. Although Mr. Peek was a former top Merrill Lynch executive, he didn’t lead CIT into bundling mortgages into toxic derivatives, he didn’t get into credit-default swaps, he didn’t create a trading desk that swung for the fences and he didn’t build a company that was so big that it posed systemic risk. In other words, he acted a little too responsibly. So when CIT’s moment of crisis arrived, the F.D.I.C. looked it over and decided it wasn’t too big to fail. To Mr. Peek’s surprise, it turned out to be too small to save.

That is deeply ironic. And explains much on the roots of the economic crisis. Banks it would seem–that are still standing–gambled shrewdly that even under a collapse, they would remain (if not become) too big too fail. It’s not clear that even with this attitude CIT would have become too big to fail, but this is a sobering reminder of how smaller and more responsible companies get left out of the bailouts. The Fed should step in at times like this.