CNBC’s Maria Bartiromo had a very interesting interview lineup yesterday including Treasury Secretary Timothy Geithner, SEC Chairwoman Mary Schapiro, FDIC Chairwoman Sheila Bair, and Elizabeth Warren, Chair of the Congressional Oversight Panel for the federal TARP program (troubled asset relief program).
The top two takeaways: The administration isn’t going to break up the bank holding companies, and the administration is working on plans to overhaul Fannie Mae, Freddie Mac and even the Federal Home Administration.
There’s been a lot of pressure, both from the left and the right, to break up the too big to fail (TBTF) banks. But Secy. Geithner made it clear that the administration is going to stick to its proposals of stricter capital standards, stronger oversight and developing an estimated $50 billion bailout warchest (paid for by the banks themselves) that will be used to fund a bankruptcy type wind down of any part of the largest banks that fails.
Geithner said the regulations are aimed at making the largest banks financially stronger while allowing the government to set up what he described as “a firewall” around any part of these banks that fails.
What comes after that may have best been described by Bair, head of the FDIC and probably the person with the most experience in shutting down failed banks. Bair essentially described the process used by FDIC. You separate the good assets from the bad, bundle the good ones and sell them off–usually to another bank. The bad assets are also worked off, over time, and sold for what they can fetch.
Both Bair and Geithner made it clear that bank investors in the failed banks, or portions of a holding company containing bank units, will no longer be protected as was done in the recent bailouts. The same will be true for large financial but non bank institutions such as credit units within large manufacturing companies. An example of these would be GMAC, or GE Credit–or an insurance company such as AIG that decide to form financial product units.
As for credit default swaps, both Geithner and Schapiro said reform will put sunlight on who holds what swaps, and in what amounts, so that regulators won’t be caught off guard not knowing how much leverage is being used.
In terms of the recommendation for a Consumer Financial Products Agency, Warren said one problem now is that there are seven different regulatory agencies that have responsibility for consumer protection, in one form or another, and they haven’t been able to protect consumers from abusive sales practices and unfair contracts. Putting these employees at one agency, Warren said, will “concentrate them on one clear mission.” Such an agency will be “strong, viable and can get the job done,” Warren said.
Warren, a Harvard Law professor who has long championed stronger consumer protection regulation, has been publicly mentioned as a possible chairman for this yet to be formed agency, but she declined to respond when asked if she’d take the job. What she wasn’t asked by Bartiromo, unfortunately, was whether such an agency could be effective while housed with the Federal Reserve, one of the seven regulators that is supposed to protect consumers now. Early betting is that the agency will be under the Federal Reserve, an organization whose membership is made up of banks. And banks don’t like the idea of even having such an agency.
The Freddie, Fannie and FHA reform was not described in any real detail. But Geithner made it clear there would be major changes proposed by the administration. The Secretary repeated his assurance that current investors will be protected, but the implication is that reform may change that in some way.
Right now Fannie and Freddie are the biggest recipients of government support–more than $1.5 trillion–in one way or another. Called GSE’s or government sponsored enterprises, they are hybrids that are investor owned, but charged with a public mission. In this case a mission to make home mortgages as affordable as possible.
They are two of the least popular organizations in Washington DC because they’ve garnered almost as much taxpayer support between them as all the too big to fail banks combined. At this point, no one has proposed how the government can safely extricate itself from the relationship.
Warren was the clearest in her opinion of the two. “I don’t like the public/private” concept, she said, adding that “It’s time to pull the plug.”
So it’s pretty much “middle of the road,” for the Obama administration right now. They want more effective regulation that will prohibit a repeat of the 2008-09 financial collapse, but they are apparently willing to maintain the concentrated TBTF business model many believe is the root cause of the collapse.
Politically, this will be very interesting. Will financial regulatory reform turn out to be a bi-partisan effort in contrast to the partisan, and often ugly health care debate?
Probably, if for no other reason that big banks are the bad boys in the minds of most Americans. Neither party wants to be seen as a lackey for TBTF banks. But there will be disagreements. A likely one is that Republicans seem to be positioning themselves as supporters of eliminating the TBTF business model entirely and returning to some form of Glass Steagall where Investment Banks and Commercial Banks were kept separate.
If this turns out to be a popular position, and it could be considering that both the Democact left wing (Obama’s base support) and the Republican right wing want the banks dismembered, then the administration may have to re-design their proposal radically. Or at least convince the public that their proposals essentially do effectively separate investment banks and commercial banks, even if they are under the same corporate holding company structure. That might be a very tough sell, if for no other reason that doing so is a complicated process that most people may not at all understand.
TBTF banks may be the only group more unpopular than Congress. Kicking this group is an almost no lose position.
The second issue may involve the consumer protection idea. Here, the Democrats may have the upper hand because it is strongly favored by them. The progressive wing will want a separate, independent agency, not beholden to anyone who actually produces and sells financial products. Republicans on the other hand aren’t likely to take on the entire banking industry. They’ll smack TBTF banks forever, but banks of all sizes depend upon mortgage and credit products–the very core of what this new agency will investigate–and that is probably simply a too populist message for even a Tea Bagger Republican party.
And it is probably a too populist one for Obama too. He’ll do the agency, but probably cave in on it being truly independent. Which, from Beezer’s perspective, is too bad. Obama needs to show his foundation that he too, is progressive.