Sen. Byron Dorgan: the Good and the Bad

by Dollars and Sense

Sen. Byron Dorgan (Dem.-N.D.) got some good press from Huffington Post a couple of days ago; turns out back in 1999 Dorgan was one of the only senators to vote against repeal of the Glass-Steagall Act (the Depression-era law that established a firewall between commercial banks, investment banks, and insurance companies):

The footage of him speaking on the Senate floor has become something of a cult flick for the particularly wonky progressive. The date was November 4, 1999. Senator Byron Dorgan, in a patterned red tie, sharp dark suit and hair with slightly more color than it has today, was captured only by the cameras of CSPAN2.

"I want to sound a warning call today about this legislation," he declared, swaying ever so slightly right, then left, occasionally punching the air in front of him with a slightly closed fist. "I think this legislation is just fundamentally terrible."

The legislation was the repeal of the Glass-Steagall Act (alternatively known as Gramm Leach Bliley), which allowed banks to merge with insurance companies and investment houses. And Dorgan was, at the time, on a proverbial island with his concerns. Only eight senators would vote against the measure -- lionized by its proponents, including senior staff in the Clinton administration and many now staffing President Obama, as the most important breakthrough in the worlds of finance and politics in decades.

"It was more like a tidal wave in 1999," the North Dakota Democrat recalled of that vote in an interview with the Huffington Post. "You've seen the roll call. We didn't really have to deal with push back because they had such a strong, strong body of support for what they call modernization that the vote was never in doubt... The title of the bill was 'The Financial Modernization Act.' And so if you don't want to modernize, I guess you're considered hopelessly old fashioned."

Other senators to vote against the repeal: Barbara Boxer, Barbara Mikulski, Richard Shelby, Tom Harkin, Richard Bryan, Russ Feingold, and the late Paul Wellstone. HuffPo also cites a few other people who got it right, including Edward Kane, a finance professor at Boston College, Jeffrey Garten, a Clinton Commerce undersecretary, and Ralph Nader. (No mention of D&S, which opposed the repeal consistently (e.g. here, where Jim Campen said "dominant effect is likely to be a further concentration of economic and political power, and the use of this power to benefit the new financial giants at the expense of the rest of us."). Read the full HuffPo article here.

It seems Sen. Dorgan is an inconsistent watchdog, however. Firedoglake recently reported that Dorgan voted against the "cramdown" legislation that would have allowed bankruptcy judges to write down the value of first mortgages (we reported on this here and here). Turns out Dorgan's wife lobbied against the cramdown legislation on behalf of the American Council of Life Insurers:

One of the key votes against "cramdown" in the Senate came, surprisingly, from Byron Dorgan of North Dakota. According to an FEC lobbying report filed by the American Council of Life Insurers, Dorgan's wife Kimberly worked for them as a lobbyist to defeat the measure during the first quarter of 2009 (PDF).

The Amercan Council of Life Insurers (ACLI) represents 373 insurance companies. Headed by former Oklahoma governor Frank Keating, they account for 93 percent of the U.S. life insurance industry's total assets.

In testimony before the Senate Committee on Banking, Housing and Urban Affairs on March 17, 2009, Keating expressed opposition to letting bankruptcy judges write-down the principle of first mortgages to current values because it "could potentially trigger significant downgrades to life insurers’ Triple-A rated residential mortgage-backed investments." (PDF)

It is estimated that 8 million homeowners will be foreclosed upon in the next four years. According to a study by Credit Suisse, the bill would have reduced foreclosures by 20% with no cost to taxpayers. The Center for Responsible Lending (PDF) says that foreclosures on subprime loans through the end fo 2009 will result in a decline in property value for homes in the surrounding areas of $352 billion, or an average of $8,667 per home.

The American Council of Life Insurers PAC also made $119,300 in campaign donations during the first quarter of 2009, including $1000 to Max Baucus, who voted against the measure. They also contributed to Blue Dog and New Democat Coalition PACs.

The Honest Leadership and Open Government Act of 2007 requires that lobbying disclose "whether they held what is referred to as an 'official covered position' – such as a congressional seat or staff level job or an executive level position in the executive branch – at any point in the last 20 years." The 1Q 2009 lobbying report filed by the ACLI does not disclose any of these relationships.

Read the full article.

Labels: Byron Dorgan, cram down, Glass-Steagall, Gramm-Leach-Bliley

 

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5/13/2009 12:27:00 PM 0 comments

 

The Greed Fallacy

by Dollars and Sense

You can't explain a change with a constant.

This posting is by D&S Associate Arthur MacEwan.

Various people explain the current financial crisis as a result of "greed." There is, however, no indication of a change in the degree or extent of greed on Wall Street (or anywhere else) in the last several years. Greed is a constant. If greed were the cause of the financial crisis, we would be in financial crisis pretty much all the time.

But the financial markets have not been in perpetual crisis. Nothing close to the current crisis has taken place since 1929. Yes, there was 1987 and the savings-and-loan debacle of that era. The current crisis is already more dramatic—and threatens to get a good deal worse. This crisis emerged over the last decade and appeared full-blown only at the beginning of 2008 (though, if you were looking, it was moving up on the horizon a year or two earlier). The current mess, therefore, is a change, a departure from the normal course of financial markets. So something has to have changed to have brought it about. The constant of greed cannot be the explanation.

So what changed? The answer is relatively simple: the extent of regulation changed.

As a formal matter, the change in regulation is most clearly marked by the Gramm-Leach-Bliley Act of 1999, passed by the Republican-dominated Congress and signed into law by Bill Clinton. This 1999 act in large part repealed the Glass-Steagall Act of 1933, which had imposed various regulations on the financial industry after the debacle of 1929. Among other things, Glass-Steagall prohibited a firm from being engaged in different sorts of financial services. One firm could not be both an investment bank (organizing the funding of firms' investment activities) and a commercial bank (handling the checking and savings accounts of individuals and firms and making loans); nor could it be one of these types of banks and an insurance firm.

However, the replacement of Glass-Steagall by Gramm-Leach-Bliley was only the formal part of the change that took place in recent decades. Informally, the relation between the government and the financial sector has increasingly become one of reduced regulation. In particular, as the financial sector evolved new forms of operation—hedge funds and private equity funds, for example—there was no attempt on the part of Washington to develop regulations for these activities. Also, even where regulations existed, the regulators became increasing lax in enforcement.

The movement away from regulation might be seen as a consequence of "free market" ideology, the belief as propounded by its advocates that government should leave the private sector alone. But to see the problem simply as ideology run amok is to ignore the question of where the ideology comes from. Put simply, the ideology is generated by firms themselves because they want to be as free as possible to pursue profit-making activity. So they push the idea of the "free market" and deregulation any way they can. But let me leave aside for now the ways in which ideas come to dominate Washington and the society in general; enough to recognize that deregulation became increasingly the dominant idea from the early 1980s onward. (But, given the current presidential campaign, one cannot refrain from noting that one way the firms get their ideas to dominate is through the money they lavish on candidates.)

When financial firms are not regulated, they tend to take on more and more risky activities. When markets are rising, risk does not seem to be very much of a problem; all—or virtually all—investments seem to be making money. So why not take some chances? Furthermore, if one firm doesn't take a particular risk—put money into a chancy operation—then one of its competitors will. So competition pushes them into more and more risky operations.

The danger of risk is not simply that one investment—one loan, for example—made by a financial firm will turn out badly, or even that a group of loans will turn out badly. The danger arises in the relation between its loans (obligations to the firm), the money it borrows form others (the firm's obligations to its creditors) and its capital (the funds put in by investors, the stockholders). If some of the loans it has made go bad (i.e., if the debtors default), it can still meet its obligations to its creditors with its capital. But if the firm is unregulated, it will tend to make more and more loans and take on more and more debt. The ratio of debt to capital can become very high, and, then, if trouble with the loans develops, the bank cannot meet its obligations with its capital.

In the current crisis, the deflation of the housing bubble was the catalyst to the generally crumbling of financial structures. The housing bubble was in large part a product of the Federal Reserve Bank's policies under the guidance of the much-heralded Alan Greenspan, but let's leave that issue aside for now.

When the housing bubble burst, many financial institutions found themselves in trouble. They had taken on too much risk in relation to their capital. The lack of regulation had allowed them to get in this trouble.

But the trouble is much worse than it might have been because of the repeal of the provisions of Glass-Steagall that prevented the merging of investment banks, commercial banks, and insurance companies. Under the current circumstances, when trouble develops in one part of a firm's operations, it is immediately transmitted throughout the other segments of that firm. And from there, the trouble spreads to all the other entities to which it is connected—through credits, insurance deals, deposits, and a myriad set of complicated (unregulated) financial arrangements.

AIG is the example par excellence. Ostensibly an insurance company, AIG has morphed into a multi-faceted financial institution, doing everything from selling life insurance in rural India to speculating in various esoteric types of investments on Wall Street. Its huge size, combined with the extent of its intertwining with other financial firms, meant that its failure would have had very large impacts around the world.

The efforts of the U.S. government may or may not be able to contain the current financial crisis. Success would not breathe life back into the Lehman Brothers, Bear Stearns, and who knows how many other major operators are on their deathbeds. But it would prevent the financial crisis from precipitating a severe general depression; it would prevent a movement from 1929 to 1932.

The real issue, however, is what is learned from the current financial mess. One thing should be evident, namely that greed did not cause the crisis. The cause was a change in the way markets have been allowed to operate, a change brought on by the rise of deregulation. Markets, especially financial markets, are never very stable when left to themselves. It turns out that the "invisible hand" does some very nasty, messy things when there is no visible hand of regulation affecting the process.

The problem is that maintaining some form of regulation is a very difficult business. As I have said, the firms themselves do not want to be regulated. The current moment may allow some re-imposition of financial regulation. But as soon as we turn our backs, the pressure will be on again to let the firms operate according to the "free market." Let's not forget where that leads.

Arthur MacEwan is professor emeritus of economics at UMass-Boston and is a Dollars & Sense Associate.

Labels: AIG, bailout, Bear Stearns, credit crisis, Glass-Steagall

 

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9/18/2008 06:06:00 PM 0 comments