Posts Tagged ‘ Wall Street ’

British Deal Shows Private Investment Demand for High-Speed Rail

Wednesday, December 1st, 2010
Mark Reutter


PPI Fellow Mark Reutter is the former editor of Railroad History and author of Making Steel: Sparrows Point and the Rise and Ruin of American Industrial Might (2005, rev. ed.).

by Mark Reutter

This week, the British government will formalize an agreement with two Canadian pension funds with enormous implications for passenger train development in the United States. In return for the right to operate a high-speed rail line linking London with the Channel Tunnel for 30 years, the Ontario teachers and municipal employee pension funds have agreed to pay the UK government $3.4 billion.

The sale not only represents a big vote of market confidence in the future of high-speed rail, but points to a route for building and operating new train lines in the U.S.

In the wake of the equities meltdown, U.S. pension funds are seeking “safe havens” to invest, while states and the federal government are looking for ways to build expensive rail infrastructure in the face of record budget deficits.

Here’s a solution: Structure high-speed rail projects to attract pension funds and other institutional investors through operating concessions and other long-term cash-generating instruments.

Making Money While Generating Jobs

Consider the $133 billion Florida State Board of Administration, currently winding down its loss-generating equities portfolio and concentrating on core fixed income.

If the Florida State pension fund invested just 3 percent of its portfolio in the state’s high-speed rail line, that would generate $4 billion. That’s enough to cover both the $500 million shortfall in the high-speed segment between Tampa and Orlando (the Obama administration has already allocated $2.05 billion for this project) and the state’s portion of a Miami-Orlando route with excellent ridership potential.

Similarly, the California Public Employees’ Retirement System (CalPERS) has adopted a new investment policy with a targeted 3 percent allocation of assets, or about $7 billion, in infrastructure.

The proposed bullet train between Los Angeles and San Francisco is expected to generate as much as $3 billion in profits by 2030. By allocating some of its funds to the $40 billion rail project, CalPERS could enjoy a stable return while providing the Golden State with an enormous job-generating public work.

Other institutional investors, such as labor unions, could be attracted to rail partnerships and concessions that diversify their pension portfolios while providing direct economic benefits to their members.

Such new-style financing would require a marketplace with transparent trading and timely data, amounting to a new source of opportunity for the investment community. In a sense, Wall Street could come full circle to its origins as the exchange place for European capital seeking profit in American railway construction in the 19th century.

High Level of Investor Interest

Back to the Brits, it is crucial to note that the $3.4 billion interest in High Speed-1, the London-Channel link, exceeded the highest hopes of David Cameron’s coalition government, which inherited the initiative from Gordon Brown’s Labor government.

In the words of one commentator, the asset sale “came as a pleasant surprise” to observers who believed the UK government “would have to settle for knock-down prices” because of the world recession.

The auction also attracted many more bidders than expected. The Ontario Municipal Employees Retirement System and Ontario Teachers’ Pension Plan, allied with Borealis Infrastructure, beat a long list of potential buyers, including insurance giant Allianz and investment bank Morgan Stanley.

Borealis already operates the Detroit River freight rail tunnel between the U.S. and Canada on behalf of the pension funds. The Borealis group will receive a revenue stream from access charges paid by train companies using HS-1. In return, it will be responsible for preserving the line as a high-speed railway and to periodically improve track and structures to state-of-the-art standards.

Eurostar fields trains between London and Paris and London and Brussels. Deutsche Bahn, the German rail carrier, has announced plans to operate from London to Frankfurt and London to Amsterdam.

In addition to these services, the Borealis group has the right to sell access to other passenger carriers and to develop freight traffic.

Setting a Monetary Value on High Speed

The British approach marks a turning point. Prior to now, high-speed lines, such as France’s TGV and Spain’s AVE, were built and operated by government or government-directed entities. The profits or losses from high-speed trains were part of the financial profile of the larger rail systems.

Nearly all experts agree that fast trains earn higher per-mile revenues than conventional-speed trains and substantially more than commuter and branch-line services.

The British concession puts a monetary value on high-speed rail that can serve as a basis for a market in future railway concessions and stock sales in equipment and infrastructure-building companies.

HS-1 was one of the most expensive rail projects in the world due to extensive bridging, tunneling and station construction. Opened in November 2007, the 68-mile line cost $8.3 billion.

The concession sale returns 40 percent of the build cost to the British treasury. When the concession ends in 2040, the railway will revert back to the government, which expects to re-bid the property for an equal or higher price.

By this means, HS-1 will continue to return a dividend to taxpayers and, over the course of its 150-year-plus lifecycle, repay its construction cost, probably several times over.

This prospect differs from the scary scenario presented by U.S. critics (including the Republican governor-elects of Wisconsin and Ohio) who charge that high-speed rail is a money pit requiring long-term government subsidies to operate.

Summing up the rap against rail as “high-speed pork,” Washington Post columnist Robert J. Samuelson recently complained, “If private investors concurred [that fast rail was profitable], they’d be clamoring to commit funds; they aren’t.”

The high-speed chase by investors for High Speed-1 shows just how off track these critics are.

photo credit: Jason Pier

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Posted in Clean Energy and Modern Infrastructure, Daily Fix, Issues | 3 Comments »

Beware the Post-Election Over-Interpretations

Friday, October 15th, 2010
Ed Kilgore


Ed Kilgore is a PPI senior fellow, as well as managing editor of The Democratic Strategist, an online forum.

by Ed Kilgore

Individual elections have consequences beyond their immediate results, mainly in terms of the strategic lessons that are drawn from them by leaders of the two major parties and the news media. This may be particularly true in this midterm election, given the certainty of Republican gains after two big Democratic cycles.  But it is entirely possible to over-interpret elections as well, and I strongly suspect that will happen with this one.

Republicans and their media allies have a vested interest in exaggerating the “swing” that will have occurred from 2008, reinforcing their line that the 2006 and 2008 results were simply a referendum on the Bush administration’s policies—including their alleged heresies from “conservative principles”—and not an indictment of conservatism generally.

We will hear a lot on November 3 about the basic center-right nature of the country, and the punishment of Democrats for trying to implement their own platform without any sort of real mandate to do so.  And without question, some Democrats will exaggerate the results as well in order to argue that the Obama administration and congressional Democrats either failed to pay attention to the concerns of swing voters, or (more often) failed to keep the Democratic base engaged by compromising too much with Republicans or worrying too much about Wall Street.

But it’s important to keep in mind two crucial points about the arithmetic of this and other elections: (1) relatively small swings in public opinion can produce pretty big changes in results, particularly in the U.S. House, and (2) there is, and has always been, a different electorate participating in midterm as opposed to presidential elections, with the particular composition of the Democratic base making it particularly vulnerable to a midterm turnout swoon, regardless of any other factor.

On the first point, the current Democratic margin of 39 seats in the House could all but vanish if Republicans simply break even in the national House popular vote, and an advantage of five percent could swing 50 seats.  A variety of factors have vastly increased the number of competitive House seats this year (roughly doubling the number as compared to 2008), creating a larger “pool” of potential wins for Republicans.

But it’s the second point that matters most: turnout in midterm elections is inversely related to the age of voters, which is a big deal since the 2008 Obama vote varied very directly with age.  The dependence of Democrats in 2008 on Hispanics, another demographic famous for poor midterm voting, is also a problem.  But based on turnout patterns alone, it was a virtual certainty the very day after the 2008 elections—long before the Obama administration was in a position to do anything that offended a single voter–that Republicans would make significant midterm gains.  This reality is reinforced by current “likely voter” polls showing an electorate that gave a majority of its 2008 votes to John McCain.

Why does this matter in terms of interpreting what happens on November 2? Well, aside from reducing the real “swing” among participating voters, the turnout factor will reverse its effect going into 2012, creating an electorate a lot closer to the one we saw in 2008, and considerably improving Democratic prospects then.  Republicans who assume they can behave the same between 2010 and 2012 as they did between 2008 and 2010 may be in for a rude shock.  Additionally, Democrats who assume their disadvantage in midterm turnout is attributable to the administration’s failure to “energize the base” with more progressive policies or aggressive political tactics are missing the point that key components of the current base never, ever turn out for midterm elections in numbers matching older white voters.

Another result that is likely to be over-interpreted is the swing in independent voters, which most Republicans and many media pundits will attribute to some sort of swing-to-the-right among Independents or “overreaching” by Democrats.  Among the many problems in comparing the views and votes of self-identified independents over time is that this cohort is by definition a function of shifts in the number of people identifying as Democrats and Republicans.

Any “shift-to-the-right” among Independents is at least partially attributable to a profound reduction in the ranks of self-identified Republicans from 2006 on, which has only marginally reversed this year; this has the effect of making a lot of regular Republican voters of conservative outlook “Independents” by assertion.  Naturally they are going to vote Republican this year, because they just about always do.

The final area ripe for over-interpretation will be the perceived ideology of the two major parties.  Without question, hard-core conservatives will claim any GOP gains this year as final, definitive proof of their longstanding argument that only rigorous, consistent conservatism can create a Republican electoral majority.

There will be a less visible, but still distinct, argument by some progressives that Democrats need to move to the left (or at least move to a “populist” ideology and message) to win, emulating the Republican tactic. Such arguments from either direction almost certainly overestimate the extent to which voters pay close attention to the issue positions and ideological character of candidates, particularly in lower profile House races.

Yes, there will be a few races—notably the Senate races in Nevada and Kentucky—where the extremism of Republican candidates is so clear and notorious that ideology will be impossible to ignore in interpreting the results.  But by and large, the main consequence of this year’s lurch to the right in the GOP will be to push the party towards policies in office that will indeed backfire disastrously, both politically and in terms of their real-life effects.  That’s actually what happened to the GOP during the Bush years, even though conservatives want to believe it was insufficient conservatism that undid them.

And that gets back to my initial point: many people in politics use election results not to enlighten themselves and others, but to grind old axes.  Separating real from disingenuous post-election arguments will be an essential task for the reality-minded in both parties.

Photo credit: randomcuriosity

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Posted in Daily Fix, Political Memo | 1 Comment »

On Gibbs v. the “Professional Left”

Friday, August 13th, 2010
Will Marshall


Will Marshall is the president of the Progressive Policy Institute.

by Will Marshall

I returned yesterday from an overseas vacation to find Washington embroiled in furious controversy over Robert Gibbs’s gibes at the “professional left.” Somehow, the shock waves from this momentous development had failed to register in Corsica, which may be a gorgeous, sun-splashed rock in the Mediterranean, but is hopelessly apathetic about U.S. politics.

Fortunately for slackers like me, Washington’s chattering class is too busy for vacations. And cable TV never rests, keeping the vital discourse of democracy going even as Americans frolic heedlessly on beaches, lakes and mountains. Well, the fun’s over for me, so I might as well wade into the fray between the frazzled White House Press Secretary and his netroots tormentors.

For starters, it’s hard not to feel some sympathy to Gibbs, for whom watching cable TV is an occupational hazard. Too much of a bad thing, is, well, bad and it’s only human for Gibbs to vent about the ideological purism of talk show anchors and lefty bloggers who imagine that most Americans are pining for a full-throated liberal avenger in the White House. Real-life politics is nothing like The West Wing.

And Democrats might as well have it out now, the summer of their economic discontent, rather than, say, in October on the eve of the midterm. One truly silly argument is that Gibb’s criticisms of the administration’s “base” could alienate them and cause them to stay home on election day. In the first place, netroots types aren’t really the Democratic Party’s base.

They are a subset of liberals, who are themselves outnumbered by moderates and conservatives in the party. And they love to be attacked, because it validates their rather inflated sense of political self-importance. The worst thing you can do to the netroots is to ignore them.

In fact, every Democratic President in recent memory has been flayed by the hard left for lapses from orthodoxy. That is especially true of Franklin Roosevelt, the President many of today’s disappointed liberals say they wish Obama would be more like.

Like Obama, FDR was called a tool of Wall Street, a trimmer, an opportunist. He was bitterly assailed for trying to rescue and restore the free enterprise system rather than replacing it with central economic planning.

This drove leading liberal New Dealers like Rexford Tugwell and Harold Ickes to distraction. Here’s Tugwell:

“They [FDR’s liberal critics] are like Chinese warriors who decide battles, not by fighting, but by desertion…They rush to the aid of any liberal victor, and then proceed to stab him in the back when he fails to perform the mental impossibility of subscribing unconditionally to their dozen or more conflicting principles.” (Schlesinger, The Politics of Upheaval, 414)

And Ickes had some equally choice words for the perfectabilian demands of his fellow liberals:

“That so-called liberals spend so much time trying to expose fellow liberals to the sneering scorn of those who delight to have their attention called to clay feet…I get very tired of the smug self-satisfaction, the holier-than-thou attitude, the sneering meticulousness of men and women with whose outlook on economic and social questions I often regretfully find myself in accord. It seems to be a fact that a reformer would rather hold up to ridicule another reformer because of some newly discovered fly speck than he would to clean out Tammany Hall. Sometimes even the fly speck is imaginary.” (Schlesinger, The Politics of Upheaval, 413-414)

Gibbs has a point when he says that liberals undervalue Obama’s major political achievements. On the big matters that really count – the breakthrough on universal health care, the financial regulatory bill, getting out of Iraq on time, and placing liberal women on the Supreme Court (including the Court’s first Hispanic member) – Obama unquestionably has moved the needle in a progressive direction. But if history is any guide, it won’t matter – he’s still going to get pilloried by the congenitally insatiable left for something (For failing to close Gitmo, or embrace gay marriage, or demand amnesty for immigrants, etc.)

The fundamental problem with the left’s carping about Obama is the underlying assumption that their views are shared by a majority of the country: If only he would fight harder for structural transformations in American life, the latent progressive majority would spring into being and rally behind him!

This is sheer fantasy. If the country has moved in any direction over the past two years, it is to the center, and perhaps even the center right (excepting Republicans, who have surged lemming-like off the ideological cliff). What liberals see as overly tepid moves to restructure and stimulate the economy a healthy chunk of the increasingly cranky electorate, especially independences, see as overweening government intrusion.

The party’s leftists are obviously within their rights to criticize Obama when they think he deviates from the true path, just as centrists and conservatives are. And the dialectic between the President’s essential political pragmatism and left-wing fundamentalists is probably a healthy thing. It could force Obama to articulate more clearly the overarching philosophical framework that informs a Presidency that otherwise seems to proceed on the logic of serial pragmatism.

But ultimately, left leaning Democrats aren’t going to find a better horse to ride. And the more they flog Obama, the worse Democrats are likely to do this November.

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Posted in Daily Fix, Fixing Our Broken Politics | 6 Comments »

Make “Life Math” Mandatory in Our Schools

Thursday, May 27th, 2010
Kyle Bailey


Kyle Bailey is the former chief operating officer and interim executive director of the National Stonewall Democrats. He is chair of the Young Democrats of America LGBT Caucus and a participant in the 2010 New Leaders Council Institute-Atlanta.

by Kyle Bailey

The single greatest threat to our security and prosperity might not be terrorism or biological warfare — it just might be financial illiteracy. Our current economic crisis has myriad causes, but it can be traced to the failure of many Americans to make smart financial decisions. In light of this epidemic of financial recklessness, education leaders should consider making “life math” curriculum mandatory in our schools.

The standard mathematical curriculum in high schools — algebra, geometry, trigonometry, statistics, calculus — is designed to give students the building blocks necessary to further their education and, for some, eventually launch successful careers in science, medicine, engineering and other important fields. For the rest of us, mathematics beyond the basics is mental exercise that keeps us intellectually spry.

I had a great math teacher in high school, Mrs. Wanda Dostall, who helped me achieve the only “A” I ever earned in a math course. While I don’t remember a single algebraic or trigonomic function, the courses I took stimulated my critical thinking skills and challenged me to embrace complexity and search for answers. But that didn’t mean that I didn’t (frequently) ask the question (quietly to myself, and aloud), “When am I going to use this in the real world?”

And that’s why throughout high school, I looked forward to Mrs. Dostall’s “life math” course for seniors. ”Life math” was designed to give students the real-world math skills they would need to manage their personal finances and, hopefully, enjoy financial security. Unfortunately, school administrators decided the course was not “college preparatory” — and I never had the chance to take it.

It’s a shame because I, like most Americans, could have benefited from it. As an adult, I manage multiple checking and savings accounts, pay bills and taxes, and save for my retirement. I have multiple credit cards with varying interest rates. I have applied for and taken out loans, managed and paid down debt, purchased multiple types of insurance policies, and invested in the stock market – and these are just some of the many types of financial decisions that I have made, and many more that I will make in the future.

I also vote for leaders who make critically important financial decisions for our government and economy – they manage budgets, adjust tax rates, negotiate trade policies, administer jobs and safety net programs, regulate financial institutions, monitor fiscal policy, and so on.

This is real-world mathematics. But I never learned this type of real-world math in school. And to me, that’s problematic.

Why Financial Literacy Means a Better Citizenry

I remember Mrs. Dostall’s frustration with our high school’s decision to terminate the “life math” course. She understood that a course in financial literacy, while perhaps not “college preparatory,” was in fact “life preparatory,” and that the mathematics department in our public school had a responsibility to prepare young people for the real world.

I think she also understood that financial literacy is necessary to fulfill civic responsibility. Take a look at what’s been going on the last couple of years. Americans are angry about the Wall Street bailout, and rightfully so. But it’s not just the bailout that worries Americans. Our fiscal house is not in order. Our elected leaders spend more money on government programs, while they cut taxes. To fund the resulting budget shortfalls, they mortgage our future to China.

There’s much to be angry about, and sure, we can play the blame game. We can even attack government as the problem, as the right continues to do. Or, we can act like adults, face reality and own up to our own mistakes.

For too long, too many of us have chosen to live beyond our means. To get more non-essential goods and services too many of us can’t afford — but claim we can’t live without — we have amassed huge sums of debt. Too many of us have taken out loans we can’t pay off and taken on mortgage payments that consume half or more of our monthly incomes. We’ve made poor investments and failed to properly save for retirement.

And what’s really scary is that too many young Americans today, from the “me” generation of the ‘80’s through Generation X, were raised in working- and middle-class families that adopted materialism without consequence as a norm — a way of life that too many young Americans have come to expect.

If that’s not enough to convince you that we need our Mrs. Dostalls to once again teach “life math,” you can see how our poor financial decisions at home reflect the poor financial decisions made by our leaders in government and business. The culture of financial recklessness in Washington and on Wall Street is rooted in our own individual failings — and threatens the prosperity of all, including those who live responsibly and plan for the future.

I think Mrs. Dostall would tell us that we can prevent another prolonged recession; avoid another housing bubble, mortgage crisis and financial meltdown; restore fiscal responsibility; return to the surpluses we experienced in the Clinton years and pay down our debt; and secure our prosperity in a global economy. But for all that to happen, we must first take steps to increase our financial literacy, and make sure our government does the same and regulates Wall Street to balance short-term and long-term gains.

At age 27 with five years of experience in the workforce — and after some personal financial missteps — I am taking proactive steps to increase my own financial literacy. Looking back, I wish there had been a “life math” course available to me in high school, one that would have helped me understand how to create a realistic personal budget; taught me about credit, debt, loans and insurance; and given me lessons in investing for retirement. To equip the next generation with the skills and tools needed to succeed in the real world and chart our nation’s course to fiscal responsibility and prosperity, we should think seriously about making a “life math” curriculum mandatory in secondary education.

The views expressed here do not necessarily reflect those of the Progressive Policy Institute.

Photo Credit: Maximalideal/ CC BY-NC 2.0

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Posted in Daily Fix, New Schools for the 21st Century | 1 Comment »

Will GOP Block Wall Street Fix?

Tuesday, April 20th, 2010
Will Marshall


Will Marshall is the president of the Progressive Policy Institute.

by Will Marshall

As the Senate turns to financial reform this week, the big question is whether any Republicans will join in, or whether the party will stick to its new political doctrine of Maximum Feasible Obstruction.

This doctrine is predicated on the idea that Barack Obama, elected with nearly 53 percent of the vote, is a dangerous radical bent on extinguishing American liberties and importing Euro-style social democracy. It’s an idea so crazy on its face that many progressives are convinced that racism must lurk behind it.

Maybe, but some conservatives also convinced themselves that Bill Clinton maintained a secret airport in Arkansas to import narcotics from Central America. The right’s feral attacks on Clinton led a sympathetic Toni Morrison to dub him in a figurative sense “America’s first black president.”

Whether or not race is a factor, Republicans have evidently calculated that there is no political cost in withholding cooperation from Obama, at least on domestic issues. That may have been true of health care, which lost public support as the debate wore on. But fixing Wall Street is another matter.

The Pew Center for Research reported yesterday that Americans overwhelmingly favor (by 61-31) reform of financial rules, even as they evince growing skepticism of government activism. It’s pretty clear the public takes a “never again” stance toward bailing out Wall Street bankers, speculators and bonus babies.

That’s why Mitch McConnell, the GOP Senate leader, latched onto the theme that the bill crafted by Sen. Chris Dodd (D-CT) would actually make future bailouts more likely. President Obama blasted that “cynical and deceptive assertion” over the weekend, and McConnell yesterday seemed to back down.

Still, Democrats need Republican votes to bring a bill to the floor. The Washington Post reports this morning that Democrats are targeting Sens. Olympia Snowe and Susan Collins of Maine and Bob Corker of Tennessee. Bucking his party’s sullenly oppositionist temper, Corker has worked constructively with Sen. Mark Warner (D-VA) to offer sensible improvements to the Dodd bill.

That bill is snagged on GOP opposition to a new regulatory body, to be independent but lodged in the Federal Reserve, that would protect consumers of credit cards, mortgages and other loans from deceptive or predatory practices. Dodd has signaled a willingness to compromise on another controversial provision, an industry-financed $50 billion fund to liquidate bankrupt firms. And the New York Times reports today financial sector lobbyists have lavished contributions on members of the Agriculture Committee, which is grappling with a key provision to regulate derivatives.

During the health care debate, Republicans did not appear to be moved by the plight of Americans with no medical insurance. But financial reform involves something Republicans traditionally care deeply about – money. Where are the sobersided conservatives of yesteryear, who understood that the safety and soundness of our financial system is fundamental to America’s economic health? Striking the right balance between regulation and innovation, security and risk, is an urgent national priority that ought to engage responsible leaders in both parties.

If Republicans aren’t willing to set aside reflexive partisanship long enough to stand up for American capitalism, we really are in a world of political hurt.

Photo credit: http://www.flickr.com/photos/epicharmus/ / CC BY 2.0

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Posted in A New Framework for Growth and Equity, Daily Fix | 3 Comments »

The Dodd Plan Is Good — But It Can Be Made Better

Thursday, March 18th, 2010
Mike Derham


Mike Derham is chair of PPI's Innovative Economy Project.

by Mike Derham

Sen. Chris Dodd (D-CT), looking for a capstone to his 30-year career in the Senate, unveiled his vision for financial regulatory reform this week. The chairman of the Senate Banking Committee has long been dogged by claims that he’s in the pocket of the financial industry and hedge funds, but his plan is a robust effort to address the systemic issues that led to the 2008 financial crisis. While it’s far from perfect, the Dodd proposal is a good one that could be made even better with a few tweaks.

A robust Consumer Financial Protection Agency (CFPA) is vital. Concerns over creating a whole new bureaucracy have to be balanced against developing a consumer watchdog agency that has teeth to rein in subprime mortgages, hidden banking fees and the like. I got to hear Sen. Mark Warner (D-VA) talk about this with Sen. Bob Corker (R-TN) at a panel sponsored by the National Journal, where they described striking that balance by housing the CFPA in the Fed. The new autonomous agency would get Fed funding for its activities but would not fall under its oversight. That responsibility would fall on a CFPA director appointed by the president and confirmed by the Senate. This should give it enough independence from the financial institutions that fund the Fed to make the agency a real force for protecting consumers.

However, as described in the bill, the CFPA would exempt some lenders from oversight. An improvement would be to follow President Obama’s lead and create a CFPA that covers retail activities from all financial entities, including small banks, auto loan and mortgage originators (like Countrywide or GMAC), and payday lenders. The Department of Defense got military personnel protected from such lenders four years ago, finding that such loans “undermine military readiness, harm the morale of troops and their families, and add to the cost of fielding an all-volunteer fighting force.”

The Dodd bill includes the so-called Volcker rule, limiting the scope of bank activity, which I’ve argued before won’t make a real difference in prop trading, as banks can mask it behind market-making and client trading. However, the excess leverage tax in the Volcker rule — if properly beefed up — will discourage firms from becoming Too Big Too Fail (TBTF). And where the bill as envisioned doesn’t seem to rein in behemoths like Citi or Bank of America, increasing the capital requirements on overly large firms is a relatively easy fix, if the political pressure from bank lobbyists can be overcome.

The bill looks to wind down TBTF through a special financial panel of bankruptcy court, which would allow systemic risk overseers — envisioned in the bill as comprised of representatives from Treasury, the Fed and the CFPA — to take vulnerable firms into receivership and liquidation in times of crisis. The FDIC would manage a $50 billion fund that banks would pay into to provide liquidity in these situations. As envisioned, the treasury secretary petitions the court, the financial firm in question responds, and the court has 24 hours to decide. But a decision can be appealed to a Court of Appeal and then the Supreme Court, a process that could take up to 30 days. In a financial era in which multibillion dollar institutions like Merrill Lynch and Lehman Brothers can evaporate over the course of a weekend, giving management 30 days in which to stonewall means that an orderly wind-down as the new rule envisions is unlikely.

We’re waiting to see what will come from Sens. Jack Reed (D-RI) and Judd Gregg (R-NH) on derivatives, but the existing language encourages increased transparency and centralized clearing for standardized derivatives (the maligned CDS’s and the like) and increases margin requirements for non-standard derivatives. All trades being reported will help regulators understand the evolution of the financial system better.

The inclusion of a non-binding shareholder vote on executive pay will give shareholders a greater role in compensation. While it won’t solve the “heads I win, tails you lose” problem of Wall Street’s bonus structure, it will give outsiders more say on pay and hopefully check the worst excesses.

Like the CFPA and the chairman of the Fed, the proposed legislation would also make the New York Fed presidency a White House appointment. That role, which was vital at the height of the 2008 crisis when now-Treasury Secretary Tim Geithner held it, and was central in previous crises, like the LTCM meltdown of 1998, has long been seen as beholden to Wall Street. A presidential appointment would increase its independence form investment banks.

As presented, the Dodd bill has its flaws — in addition to the ones mentioned above, others have argued that political realities have compromised the force of the bill, and because it hasn’t addressed leverage, the seeds of an asset-bubble-driven crisis like the most recent one are still there. It’s true, as Sen. Dodd said when he announced the bill: “This legislation will not stop the next crisis from coming. No legislation can…” But this bill — with improvements — can give regulators the tools they need to address future crises in a more proactive manner.

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Posted in A New Framework for Growth and Equity, Daily Fix | 1 Comment »

One Step Forward, One Step Back

Friday, January 22nd, 2010
Mike Derham


Mike Derham is chair of PPI's Innovative Economy Project.

by Mike Derham

The White House yesterday announced new restrictions on banking activity, designed to address the issues that caused the crisis 15 months ago. Wall Street reacted by letting stocks fall 200 points, which initially would make you think the announcement must be right. The White House’s plan has two main parts: a limit on the scope of banking activity and a limit on the size of banks. One part makes sense, but as presented, the other should be re-thought.

Limit on Size – The good part is the limitation on the size of banks. This will include a tighter cap on the control of deposits. Currently no bank can control more than 10 percent of the nations deposits — but Bank of America got the Bush administration to waive that in 2007 to buy LaSalle. The administration’s proposal would have this cap include non-insured assets and other deposits. While this is a good first step, its effectiveness will be spelled out in the details. Bank of America is the only bank that exceeds the current cap, and almost 25 institutions could be considered “Too Big To Fail.”

Limit on Scope – At first blush, this seems to be a ban on banks taking FDIC-insured deposits – or having received TARP money – from engaging in proprietary trading. Prop trading is a major part of Wall Street activity, in which investment banks trade with “their own money.” That is, they engage in trading on their own behalf, not on the behalf of customers. The administration is right that a lot of this trading on prop desks is speculation. However, prop trading is also how investment banks and market makers engage in risk management and hedge positions. Banning prop trading by banks would severely curtail their market-making ability, and dry up liquidity on Wall Street faster than a sponge in the sun. Better than limiting the type of activity trading desks engage in would be to limit the amount of leverage they can use in that speculation.

The administration has said it is going to work with Congressional leaders in the coming weeks to spell this out in details. We’ll see if Congress is able to improve on these suggestions.

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Posted in A New Framework for Growth and Equity, Daily Fix | 2 Comments »

Taking It to the Banks

Thursday, January 14th, 2010
Mike Derham


Mike Derham is chair of PPI's Innovative Economy Project.

by Mike Derham

Following a week of trial balloons about a tax on banks and bankers, President Obama today unveiled a “financial crisis responsibility fee,” to be levied against 50 of our nation’s largest banks. While the tax will not be able to seriously address the deficits that the government faces – it’s expected to raise only $90 billion over 10 years – any tax on the financial system can affect the course of our economy. The details of the proposed tax have yet to be outlined. Compared to the alternatives, this tax is a good start – but it doesn’t go far enough.

In the discussion of taxing banks and bankers, a couple of possibilities have been floated, some of which can reap short-term political points, others of which have the potential to promote progressive policies:

Bonus tax – One of the easiest – and politically most satisfying – would be a tax on excess bonuses. The British exercised this option on London bankers this past year. Bonuses in the City above a certain amount were taxed at a 50 percent rate. Banks responded by threatening to move offshore and – when that threat rang hollow – doubled the bonus pool they paid out to bankers. The end result was that the bankers whose decisions led in part to the crisis were financially unharmed, the British government raised a relative pittance in taxes, shareholders in City banks took a hit (as the bonus pools were increased at their expense), and the underlying fault lines in the British banking system remain unaddressed.

Transaction tax – The worst of the options would be a tax on transactions. As discussed before, this would merely pour sand in our financial system, breaking it and slowing economic recovery.

Excess profits tax – A more appealing option would be a tax on excess profits. A defining aspect of the financial bubble of the last decade was the fact that financial profits were 40 percent of overall corporate profits – more than double the slice financials made up of profits in the 1980s. A tax on these excess profits would rein that in. But while this could be useful, as Simon Johnson points out, it would be fairly easy to game, and end up being ineffective.

Tax on assets – A tax on bank assets above a certain amount addresses not just political sentiment that banks have made it through the crisis unscathed, but also the fact that banks are too big to fail. Encouraging banks to “right-size” themselves would make our economy safer from the systemic risk imposed by banks like Citigroup or Bank of America – which are debilitated but whose failure would be economically catastrophic.

Excess leverage tax – Taxing the leverage that financial institutions use to increase returns would allow us to avoid situations like that faced a year and a half ago when Lehman Brothers – leveraged over 30:1 – collapsed over the course of a weekend. It would make banks “safer” but would leave them still too big. In the event a bank were to fail, it would still be a systemic threat to our economy. This would be a more targeted version than an assets tax, but it would be harder to implement — definitions of leverage differ – and if not properly defined would leave hedge funds, insurance companies and other “non-bank financial institutions” untouched, leading to a crisis like that perpetuated by Long-Term Capital Management in 1998 or AIG last fall.

The taxes unveiled today are a very tentative step down the path towards an effective tax on assets. But the administration’s proposal is too broad – affected institutions could be as small as $50 billion — and too light to be effective.

If the Obama administration were strictly looking to tax the problem of an outsized and dangerous financial industry out of existence, a combination of the last two taxes — properly implemented to cover the whole financial sector when looking at leverage and focused on banks that are bigger than, say, $300 billion when looking at assets — would be the most effective. But hastily implemented, they could have unintended consequences, crippling our economy while merely pushing the problem offshore. Coordination with the EU and other G-20 countries will be vital to help with the de-leveraging of our economy.

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