Keep An Eye On This

As much of the content of the traditional media rankles many of us, the editorial decisions should as well. Dozens of potentially game-changing stories go unreported while the Umbrage Brigade on cable talk about what Joe Wilson said about Jimmy Carter or whether Michelle Obama is overstepping her boundaries by talking about health care (I caught that one today). Meanwhile, the biggest financial crisis in 70 years just happened, and even people who consider themselves well-informed don't understand the entire story. The Congress enacted the Financial Crisis Inquiry Commission (some are calling it the new Pecora Commission, given its similarity to the Depression-era commission of that name led by chief investigator Ferdinand Pecora), headed by former California Treasurer and gubernatorial candidate Phil Angelides, and they held their first public session yesterday. The meeting was introductory in nature, but Tim Fernholz came away with a few thoughts.

• Given the membership [PDF], I worried that the committee would be beset with partisan bickering and/or clashing ideologies, like the Congressional Oversight Panel. The COP, appointed by Congress to provide oversight of the bank rescues, is regularly undermined by dissents from Representative Jeb Hensarling, whose deeply conservative economic views preclude almost any reasonable discussion about regulation and finance. But though some tensions showed, I though the conservative New Pecora commissioners seemed open-minded; former Bush administration economic official Keith Hennessey and McCain economic adviser Douglas Holtz-Eakin made productive comments, though Peter Wallison, a more doctrinaire conservative than either of the other two, seemed to have his mind made up about the financial crisis, essentially blaming Fannie Mae and Freddie Mac right from the outset. He may be the poison pill on this committee.

• Most surprising was Vice-Chairman Bill Thomas, a former Republican Congressman and Committee Chair. Thomas seemed to agree broadly with Chairman Phil Angelides goals of non-partisan fact-finding, and went out of his way to compliment the views of every member of the commission. He even singled out Commissioner Brooksley Born, who strongly advocated regulating derivatives during the Clinton administration, telling her that the crisis would have been much more manageable had her advice been acted on. Later, asked by a reporter if the issue of regulating markets would divide the committee, Thomas stepped forward to say that he thought regulatory reform was inevitable and that making it work correctly was critical. Though it is easy for him to say that now, Thomas' early impressions are much less doctrinaire than had been anticipated.

• One concern: There is no liberal economist on the committee, while there are three conservative economic thinkers in Hennessey, Holtz-Eakin and Wallison. The Democratic appointees have regulatory, legal, political and private business experience, but no specific economic expertise.

• Early in the week, the New Pecora Commission announced the appointment of Thomas Greene as its Executive Director. Greene, a lawyer, has done complex investigatory work both in Washington, D.C. and in California, coordinating anti-trust and securities investigations in a variety of venues. The appointment is critical; recall that the Pecora Commission was named after it's executive director, Ferdinand Pecora, not the members of congress who constituted the actual committee. And more talent is coming: As Greene hung around after the hearing, several different people, including several lawyers, approached him about working for the commission.

The FCIC will hold hearings and issue regular reports between now and December 2010. This needs to be watched. We all have a sense that the banksters turned Wall Street into their private gambling hall and took huge risks, secure in the knowledge that they could get the government to bail them out if things went awry. Currently there have been no prosecutions of the major players in the scandal, no accountability to any degree, and a year later, Wall Street appears to be going back to their same old ways, entirely at our expense. Michael Hirsh believes that this commission offers one last chance to make the record public, and use it as a lever to change the system. He's not optimistic, however. The ideological shadings of the commission and Angelides' wariness of using the subpoena power he's been given worry him (I actually think Angelides can be a lot tougher than Hirsh or anyone gives him credit for). But he offers a glimmer of hope.

Still, Angelides and his team may yet surprise us. It's happened before. The history of "blue ribbon" commissions like this one is rich and storied in Washington; one of them, in 1942, was led by an obscure senator from Missouri who was also seen as a political hack at the time. His name was Harry Truman, and he turned his commission on defense malfeasance into a ticket into the White House and the history books [...]

What we do need, however, is a parade of witnesses who will provide what's been missing so far in this crisis—a prominent outlet for public outrage. In the last nine months, the Obama administration and the grandees in Congress have been designing solutions without much input from the outside, often using experts from Wall Street (especially "Government Sachs"). It's pretty much been a closed system. Even Paul Volcker, considered perhaps the greatest Federal Reserve chairman in history (now that the Alan Greenspan era looks much worse retrospectively), has been all but ignored by the president he is advising. Volcker has been making a series of speeches around the country calling for sensible changes to the structure of Wall Street that the administration and Congress are not yet considering. He wants federally guaranteed bank deposits to be cordoned off from heavy risk-taking and proprietary trading. Volcker wants banks, in other words, to be barred from behaving like hedge funds. "Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," Volcker told a corporate group Wednesday in Los Angeles. He should be invited to Washington to say the same thing.

I can remember a time when commissions like these, from the Pecora Commission to the Truman Commission to Watergate to Iran-Contra to even the 9-11 Commission, were major public news, followed intensely by the media. You'd think that a similarly designed commission tasked with uncovering the greatest loss of wealth in world history would generated more than a few words on the cable news crawl. But we have to make this important, too. The FCIC may fall into partisan bickering, or it may create some powerful narratives about the criminal enterprise on Wall Street. But none of it will matter if nobody pays any attention.

Imagining The Paul Volcker Treasury Department

Paul Volcker was pretty heavily involved with the Obama transition team, and certainly had the ear of the Administration at some point. I don't know the status of that now. But hopefully they pick up on this article in the Wall Street Journal:

Former Federal Reserve Chairman Paul Volcker on Wednesday said banks should operate in a much less risky fashion, including not making trading bets with their own capital, comments that could provoke intensified debates over the future of financial regulation.

Mr. Volcker, who currently is chairman of the White House's Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client's behalf instead of making bets with their own money through internal units that often act like hedge funds.

"Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," he said in a speech to the Association for Corporate Growth in Los Angeles [...]

Mr. Volcker said banks should be banned from "sponsoring and capitalizing" hedge funds and private-equity firms, which are largely unregulated. He also said "particularly strict supervision, with strong capital and collateral requirements, should be directed toward limiting proprietary securities and derivatives trading."

He also said collateral and leverage restrictions against the largest nonbank financial institutions "may be needed."

That's because it isn't, it's just become a growth center for banks that can operate like a casino and get the government to bail them out if things go wrong.

Volcker is basically advocating a similar version of the reforms that came out of the Great Depression. Then, banks were separated into commercial and investment entities under the Glass-Steagall Act, and bank holding companies could not own other financial firms. That came out of the Pecora Commission recommendations, which dug up so much of Wall Street's corrupt practices that the necessity of reform could not be refuted.

In a Volcker Treasury Department, instead of Tim Geithner, we would have a chance to make these the starting points for reform, and invigorate the modern-day Financial Crisis Inquiry Commission, or Angelides Commission, to dig deep and look into what the financial firms did to nearly destroy the economy. The banksters would be fending off the cries for reform instead of using their lobbying arms to channel them in business-friendly ways.

Now wouldn't that be nice?

...Matt Taibbi says that Volcker was basically beached after the campaign along with a lot of the other more progressively minded economic advisers. It sounds pretty right.

Rumblings On The Ocean Floor

If today's stories are to be believed, we have what looks to be a sea change in American politics.

First, we'll see major financial re-regulation:

The Obama administration plans to move quickly to tighten the nation’s financial regulatory system.

Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.

Broad new outlines of the administration’s agenda have begun to emerge in recent interviews with officials, in confirmation proceedings of senior appointees and in a recent report by an international committee led by Paul A. Volcker, a senior member of President Obama’s economic team.

A theme of that report, that many major companies and financial instruments now mostly unsupervised must be swept back under a larger regulatory umbrella, has been embraced as a guiding principle by the administration, officials said.

Some of these actions will require legislation, while others should be achievable through regulations adopted by several federal agencies.

During the campaign, Obama talked frequently about regulating financial entities for what they do and not what they say they are. The Volcker Report basically flows from that, and it means that the party's over for Wall Street and the shadow banking system. Just enforcing what's on the books would be a start, but this signals something more sweeping.

In the LA Times, there's a hint that cap and trade is on the way.

The Obama administration is pushing forward with plans to aggressively limit greenhouse gas emissions and fight global warming despite fears that the move could further slow the recessionary economy.

The administration plans to portray the limits as a boost for America's "clean energy economy," according to congressional leaders and energy experts who have talked with top Obama advisors. The move would spur competition and promote investment in renewable alternatives to imported oil, the government will argue.

At issue is the so-called cap-and-trade initiative, under which the government would set limits on carbon emissions by power plants, factories and other installations, but allow those who emit more to buy or trade permits with companies and facilities that emitted less than the prescribed limit.

The relevant committees are talking about a bill by Memorial Day. My view is that we can't afford NOT to institute some controls that price carbon, otherwise emitters will continue to push greenhouse gases into the atmosphere, and the resultant effects on our climate, on natural disasters, on the coastlines, would be catastrophic and extremely costly, much more than the expected rise in energy prices.

Now, if Obama can recognize that bailouts aren't solving the financial crisis and that instead of giving Wall Street more play money, we just have to swallow our ideological pride and nationalize the banks for a time, then we'll really have change we all can believe in.