Contributor Post Created with Sketch. On Rick Perry’s Plan to Reform Wall Street

 

PerrySpeechRick Perry has a financial reform agenda (via The Hill):

Former Texas Governor Rick Perry is taking a position to Hillary Clinton’s left on financial reform, and pushing for a policy to break up big banks staunchly advocated by Sen. Elizabeth Warren (D-Mass.). The GOP presidential candidate laid out his vision for Wall Street reform in a speech Wednesday. And among his policy proposals, Perry apparently advocated for the return of the Glass-Steagall Act, which established a firewall between traditional commercial banking and investment banking. … In remarks delivered in New York, Perry did not mention Glass-Steagall by name, but floated among several policy proposals one that is practically identical. … Perry also floated an alternate idea of requiring large banks to hold additional capital as a cushion, but the idea of cleanly separating commercial and investment banking was a signature provision of Glass-Steagall.

Perry also called on Congress to wind down housing giants Fannie Mae and Freddie Mac, but did not detail a process for doing so. There is bipartisan agreement that the current housing finance system, in which Fannie and Freddie guarantee the vast majority of new mortgages, is unsustainable, but coming up with a new system has been a significant challenge. … In the meantime, Perry said the two government-sponsored enterprises should be placed under stricter rules regarding the types of mortgages they can back, while encouraging private entities to adopt a bigger role in the marketplace. He also pushed for changes to the Consumer Financial Protection Bureau long favored by Republicans, including bringing its budget under congressional control and reworking its leadership structure.

It would be great if all the GOP 2016ers developed meaningful plans. Not only do we want to avoid future crises and bailouts, but also to purge the cronyism from the American political economy. Now I’ve written about the merits of larger capital cushions and banks funding themselves more through equity than debt. Indeed, the WaPo’s Max Ehrenfreund mentioned my work in his piece on the Perry proposal. Certainly, the Glass Steagall stuff is the eye catcher. Some thoughts on that:

It’s hardly obvious the Glass-Steagall repeal was to blame for the [Financial Crisis.] Certainly a direct causal link is tough to find. Both Bear Stearns and Lehman Brothers were investment banks that failed, while JP Morgan — both a commercial and investment bank — weathered the storm. And if Glass-Steagall’s mandated separation between commercial and investment banking still existed, the big commercial banks couldn’t have absorbed Bear and Merrill Lynch — nor could Goldman Sachs and Morgan Stanley have converted themselves to bank holding companies. But Glass-Steagall’s demise was hardly a non-event. As financial reporter Charles Gasparino has argued, when financial giants such as JP Morgan and Bank of America became oversized financial supermarkets, it nudged investment banks such as Bear, Lehman, Morgan Stanley, and Goldman Sachs to take bigger risks to compete. Economist Luigi Zingales thinks Glass-Steagall helped restrain Wall Street’s political power by giving commercial banks, investment banks, and insurers competing policy agendas. “But after the restrictions ended,” Zingales wrote in the Financial Times, “the interests of all the major players were aligned.” So when the financial crisis hit, Washington got the same collective, pro-bailout message from Manhattan. The megabanks spoke with one voice.

Anyways, here is the Perry campaign fact sheet.

There are 35 comments.

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  1. SParker Member

    If anyone knows a source for the Yale Club speech, do please post it somewhere. You’d think Steve Forbes would have done that.

    I see from the fact sheet that he’s suggesting “think about it” for the new Glass-Steagall and higher capital requirements as an alternative. That’s the second time this week I’ve heard the latter in regards to the problem from an intelligent person. That must mean something.

    I also note he’s getting praise (and not entirely clueless praise) from the New Republic. The end times are upon us. Armadillos shall lie down with 18-wheelers. And live to tell the tale.

    • #1
    • July 31, 2015, at 5:46 PM PDT
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  2. Rob Long Founder

    Wow. This is a pretty substantive set of proposals, especially this early in the campaign. I guess one of the outcomes of being (maybe unfairly) tagged as a lightweight in the last presidential cycle is, you come out swinging some very heavy policy ideas the next time around. Good for Perry.

    • #2
    • July 31, 2015, at 5:48 PM PDT
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  3. Doug Kimball Thatcher

    This is good, very good. Investment banks take huge risks and this is incompatible with government deposit guarantees and cheap Fed liquidity. I would take this a step further. Entities involved in investment banking activities should have a limited shareholder/equity base. I would define certain typical investment banking activities and preclude entities conducting these activities from legally avoiding personal liability. Partners/shareholders would be fully individually and severally responsible for their activities; take big risk, reap big rewards, but mess up and you’ve risked everything. Mortgage financing is a more difficult issue. Our housing market is now umbilically attached to cheap Fed liquidity (hence rates are entirely subsidized) and weaning our economy from this teat will be a near run thing. It’s good to have an eye on this and as interest rates rise, have a goal to move mortgage finance to the private banking sector. BTW, I would take limited liability protections from CPAs and lawyers as well, especially if their practice included public company clients, investment companies or regulated entities like banks or insurance companies.

    • #3
    • July 31, 2015, at 6:33 PM PDT
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  4. Tuck Inactive

    Rob Long:Wow. This is a pretty substantive set of proposals, especially this early in the campaign. I guess one of the outcomes of being (maybe unfairly) tagged as a lightweight in the last presidential cycle is, you come out swinging some very heavy policy ideas the next time around. Good for Perry.

    Good for Perry, bad for us.

    It shows a lack of understanding about what actually caused the problem in 2008: hint, it wasn’t a lack of Glass-Steagall.

    All the Wall Street firms that went under in 2008-2009 still followed the separation mandated by GS. None of the ones that had merged post-GS-repeal did. That should be enough to put that argument to bed.

    Arguing for a return to high-Progressive regulation is hardly what I was hoping for from Perry…

    He’s right about Fannie Mae and Freddie Mac, however, so I guess that’s good. They were a large part of the cause of the 2008 crisis.

    • #4
    • July 31, 2015, at 9:12 PM PDT
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  5. Big Green Inactive

    doug – I am not following you at all. Your comments are general platitudes with no specificity.

    What are the investment banking activities that would require a limited shareholder base? What is defined as limited? What are the “huge risks” investment banks make with depositor money? The repeal of Glass-Steagall had virtually nothing to do with the financial crisis as reference above. Further, commercial banking activities do not cross fund investment banking activities (securities underwriting, derivative transactions, structured finance, etc.).

    I know draconian solutions doesn’t make the pitchfork crowd feel good , but the solutions are very simple. Don’t subsidize housing, enforce higher capital requirements on commercial banks and limit free money from the Fed.

    • #5
    • July 31, 2015, at 9:17 PM PDT
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  6. starnescl Inactive

    One candidate talking specifics will tend to force others do so as well. This is a good thing.

    • #6
    • July 31, 2015, at 10:16 PM PDT
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  7. Could Be Anyone Member

    Dare I say, deregulate. To be honest I have no absolute knowledge of the American Economy but the current regulation structure overlaps and in many ways is meaningless. One example is the inflationary policy of the Federal Reserve and the minimum wage. One policy inflate the amount of currency in the market (ergo increasing the price of production and consumption) and the other is supposed to inflate the market floor wage to whatever is morally determined (many call it a living wage, a cute little campaign slogan).

    If one were to read up on inflation rates since the minimum wage was enacted and the rate it increases while also looking at median individual income you see that the inflation of the Fed beats the minimum wage all the time because (rather quite obviously) flooding the market all the time with money increases funds to spend from those who sell their bonds to the Fed and that money does (eventually) ripple through the economy. This isn’t even counting the sheer lack of detail of the federal minimum wage (states’ have the constitutional capacity to enact such legislation if they wish) which doesn’t account for the living conditions of every area.

    In this way the overbearing federal regulatory scheme (which has been building steadily since 1900), which is supposed to “level the playing field” (another cute slogan) stifles and in some cases outright restricts economic growth and competes with itself on certain “desired goals of the American people”.

    • #7
    • July 31, 2015, at 10:43 PM PDT
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  8. liberal jim Inactive

    At one time investment banks were private partnerships and the partners (management) gained and loss. When these companies were allowed to go public management shared in the gains, but the public absorbed almost all losses. People who are allowed to gamble with someone else’s money will naturally take less prudent risks than people who gamble with there own. Believing that one can devise some regulatory scheme that will negate this tendency is foolhardy.

    • #8
    • August 1, 2015, at 5:11 AM PDT
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  9. Guruforhire Member

    Anybody who brings up Glass-Steagal has disqualified themselves from adult conversation. Seriously, its nonsense.

    The repeal of Glass-Steagal made the recession less severe as the diversified companies did better and had fewer problems, and made the various engineered mergers to keep the system alive possible.

    Besides, I will resort to prison rules, if someone makes it so that USAA can’t offer me my insurance, banking, and investing in the same web portal. Yes, I will stab someone with a filed down toothbrush.

    There is a reason that Perry is losing. Uhg. Tedious.

    • #9
    • August 1, 2015, at 5:55 AM PDT
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  10. Bob Thompson Member

    Tuck: It shows a lack of understanding about what actually caused the problem in 2008: hint, it wasn’t a lack of Glass-Steagall. All the Wall Street firms that went under in 2008-2009 still followed the separation mandated by GS. None of the ones that had merged post-GS-repeal did. That should be enough to put that argument to bed.

    Perhaps it would be helpful if it were explained here why the conservatively managed institutions were the failures while the high-flyers survived, regardless of any effects from repeal of Glass-Steagall.

    • #10
    • August 1, 2015, at 6:00 AM PDT
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  11. Gumby Mark (R-Meth Lab of Demo… Thatcher

    If you look at the linked Fact Sheet you will see that Perry is, correctly, not claiming Glass Steagall had anything directly to do with the 2008 crisis. There are two rationales for reinstating GS. The first to reduce the risk from future collapses of financial institutions and the second to reduce the political influence of the largest banks as the extended quote in the article above references.

    • #11
    • August 1, 2015, at 6:52 AM PDT
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  12. jetstream Inactive

    More layers and quirks of macroeconomic distortions, mean more layers and quirks of negative unintended consequences.

    • #12
    • August 1, 2015, at 9:06 AM PDT
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  13. Doug Kimball Thatcher

    I grew up in finance before and after G-S. Entities making huge bets on securities should risk more than just some statutory capital limit. In my view, the bankers who take these risks and who earn such huge sums when these bets pay off, should risk their own capital when things go badly, all their capital. This would preclude typical corporate ownership. Likewise, banks, who receive the benefits and protections of federal deposit guarantees and incorporation, should not be allowed to risk failure by making speculative investments in securities. Banks have a more complex ownership; equity owners, depositors (in essence, unsecured lenders) and the federal guarantee agency. Why should the management of these companies be allowed to take massive securities risks, generally for their own benefit (massive compensation) and risk their company’s capital base and it’s ownership constituencies while taking such nominal personal risk?

    It’s not so much the cause of the last financial crisis that makes me pause here. I think I understand th0se circumstances as well as anyone (as I have chronicled here on Ricochet many times.) It is the aftermath. Investment banks, wounded by the crisis, quickly sought refuge; they acquired banks, incorporated, moved their operations into these banking shells to protect their remaining capital (and shelter their personal wealth) and stood in line for the big cash influx from recovery funds and cheap fed leverage. Now many of these banks have gone public, yet more capital to play with.

    • #13
    • August 1, 2015, at 9:49 AM PDT
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  14. jetstream Inactive

    The investment banks were mostly wounded by the Fed’s wrong headed policies .. the negative consequences of an inverted yield curve was obvious to everyone else.

    • #14
    • August 1, 2015, at 9:54 AM PDT
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  15. Doug Kimball Thatcher

    jetstream:The investment banks were mostly wounded by the Fed’s wrong headed policies .. the negative consequences of an inverted yield curve was obvious to everyone else.

    Their compensation for underwriting mortgage backed securities, retained interests the “high risk” tranches of mortgage participation pools, portfolio default swap guarantees and trades in the presumed annuities that were actually default swap proceeds – these were the investments that hit the floor in the financial crisis. The Fed was complicit in the existence of these investments only tangentally; it took a confluence of wishful thinking, political arrogance, ignorance of basic economics and “creative” financial instruments to make this crisis happen. It has more in common with Milken and Drexel Burnham than it does with Fed arrogance and stupid monetary policy. But I agree, the Fed was (and is) arrogant and stupid.

    • #15
    • August 1, 2015, at 10:51 AM PDT
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  16. Big Green Inactive

    Doug – I must ask, where did you grow up in finance? At an investment bank? I don’t think anyone is arguing that a system of privatized profits and socialized losses is a good one or desirable in any way, shape or form. That said, I still don’t think you understand the cause of the crisis and how investment banks or universal banks today.

    Again, note that commercial banking activities are not subsidizing investment banking activities, even when they are under the same roof.

    Instead of trying to play dictator, how about you don’t purchase the equity of a publicly traded investment bank because you think it is too risky but you let others do it if they so choose?

    Your last paragraph is simply astonishing. Name on North American investment bank that after the crisis, acquired a commercial bank, reincorporated into the commercial bank share and then went public? I can’t think of one. This paragraph looks entirely made up.

    • #16
    • August 1, 2015, at 11:07 AM PDT
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  17. Big Green Inactive

    Doug Kimball:

    Their compensation for underwriting mortgage backed securities, retained interests the “high risk” tranches of mortgage participation pools, portfolio default swap guarantees and trades in the presumed annuities that were actually default swap proceeds – these were the investments that hit the floor in the financial crisis.

    Actually, very little of the above is true. It wasn’t the “high risk” tranches of mortgage pools (CMBS) that hit the floor and caused the crisis. It was precisely the opposite…it was the “low risk” tranches with AAA ratings that turned out to be anything but low risk. The “high risk” tranches weren’t a problem at all as folks had appropriately reserved against them for the most part. The problem was reserving for (and having equity capital behind) the AAA rated securities as if they, in fact, were low risk. As we found out, they were not…that was the problem.

    Further I guarantee you if Fannie Mae and Freddie Mac weren’t standing by willing to purchase all those mortgages, a lot less of them would have been written.

    • #17
    • August 1, 2015, at 11:13 AM PDT
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  18. Doug Kimball Thatcher

    It was my impression that the underwriters of mortgage backed securities took the risky tranches as compensation (they were difficult to place in any case) for the deals they did. All mortgage backed securities suffered a market price failure (radioactive I think) as folks started to understand how difficult they were to unwind and how tied they were to very illiquid and awkward collateral to which they had no real access. But it was also my impression that other than the deals in play, the banks themselves did not have huge inventories of those instruments at the time of the crisis. Perhaps some did. Ouch.

    BTW. My days in corporate finance days go back to the eighties and nineties. I know that much has changed from those days. I wax for the times when partnerships ruled the day and banks were banks. I guess that genie is out of the lamp and has moved into a comfortable high rise. I stand corrected. I have no problem with public investment banks. Perhaps my real problem is with the deposit guarantee and with the Federal Reserve. And with Fannie and Freddy. All this printing of money.

    I also stand corrected on my comment on post crisis IPO’s. I couldn’t find any investment banks who did this. I think perhaps some finance companies did (Ally bank – formerly GMAC) under different circumstances. It seems the big investment banks had already gone public. And as for the merger business, the big Banks did the acquiring it seems, of the smaller securities firms. The big guys reorganized as bank holding companies when the Treasury Dept. opened that door for them. It seems they didn’t have to find an existing bank to reverse acquire. (I helped Fidelity find a federally chartered bank years ago to acquire for their business; I guess those rules changed.)

    • #18
    • August 1, 2015, at 12:13 PM PDT
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  19. jetstream Inactive

    Doug Kimball:

    jetstream:The investment banks were mostly wounded by the Fed’s wrong headed policies .. the negative consequences of an inverted yield curve was obvious to everyone else.

    Their compensation for underwriting mortgage backed securities, retained interests the “high risk” tranches of mortgage participation pools, portfolio default swap guarantees and trades in the presumed annuities that were actually default swap proceeds – these were the investments that hit the floor in the financial crisis. The Fed was complicit in the existence of these investments only tangentally; it took a confluence of wishful thinking, political arrogance, ignorance of basic economics and “creative” financial instruments to make this crisis happen. It has more in common with Milken and Drexel Burnham than it does with Fed arrogance and stupid monetary policy. But I agree, the Fed was (and is) arrogant and stupid.

    If it weren’t for the Fed policies of tight money combined with the inverted yield curve, what were poor investments could have been unwound peacefully. The near catastrophe that we were faced in 2008 and 2009 starting with the failures of Bear Stearns and Lehman Brothers and the near catastrophic deflation are entirely the fault of the Fed.

    Bad investments are made all the time, they only become disasters or near disasters with the help of the Fed and/or the Federal Government.

    At the time, I was neck deep trading in the markets and have an acute understanding of the cause and effects.

    • #19
    • August 1, 2015, at 12:47 PM PDT
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  20. ShellGamer Member
    ShellGamer Joined in the first year of Ricochet Ricochet Charter Member

    Big Green: Actually, very little of the above is true. It wasn’t the “high risk” tranches of mortgage pools (CMBS) that hit the floor and caused the crisis. It was precisely the opposite…it was the “low risk” tranches with AAA ratings that turned out to be anything but low risk. The “high risk” tranches weren’t a problem at all as folks had appropriately reserved against them for the most part.

    My experience is a little more consonant with Mr. Kimball’s. A lot of the AAA tranches were CDOs or similar structures that repackaged mezzanine tranches of RMBS. The rating agencies convinced themselves that further tranching could turn BBB/BB dross into AAA gold, but there was no real diversification added by the structure. So, not withstanding the rating, these were still high risk securities. The problem was compounded by manufacturing synthetic CDOs because the supply of mezzanine RMBS couldn’t keep up with demand.

    The banks didn’t retain high risk tranches because they wanted to–they couldn’t place the equity or C rated tranches. Notwithstanding the fact that they couldn’t find any buyers, those tranches went on their books at face value. They weren’t written down until the losses started to hit payment triggers.

    But other commenters are right; this had nothing to do with the repeal of G-S. G-S allowed banks to underwrite and trade in MBS. The GSEs and MBS were create for banks.

    • #20
    • August 1, 2015, at 2:32 PM PDT
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  21. ShellGamer Member
    ShellGamer Joined in the first year of Ricochet Ricochet Charter Member

    Doug Kimball: I would take limited liability protections from CPAs and lawyers as well, especially if their practice included public company clients, investment companies or regulated entities like banks or insurance companies.

    Know any former partners of Arthur Anderson? Ask them about limited liability.

    The code of professional responsibility prevents lawyers from limiting their liability for their own negligence. So if I commit malpractice, I’m personally liable without limits. What do we gain by making other attorneys in offices scattered throughout the country (or world) personally liable for my errors?

    Not that attorney malpractice played a big role in the financial crisis. The money went were it was supposed to go–there just wasn’t nearly as much money as anyone expected.

    • #21
    • August 1, 2015, at 2:39 PM PDT
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  22. ShellGamer Member
    ShellGamer Joined in the first year of Ricochet Ricochet Charter Member

    jetstream: If it weren’t for the Fed policies of tight money combined with the inverted yield curve, what were poor investments could have been unwound peacefully.

    Of course, the inverted yield curve, which Greenspan referred to as a “conundrum,” wasn’t part of the Fed’s policies. Keep this in mind next time someone tells you the Fed can produce real growth with a nominal GDP target. I worry we will see a repeat of the inverted curve when the Fed eventually tries to raise rates.

    But I don’t see why easy money would have helped. The crisis was tantamount to building a bonfire with billions of dollars. We had more houses and home improvement than we needed and easy money was encouraging us to build more. I don’t see a non-catastrophic way out of that situation.

    Also, money got very easy again at the end of 2007, but the crisis continued to mount.

    • #22
    • August 1, 2015, at 2:53 PM PDT
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  23. Doug Kimball Thatcher

    ShellGamer:

    Doug Kimball: I would take limited liability protections from CPAs and lawyers as well, especially if their practice included public company clients, investment companies or regulated entities like banks or insurance companies.

    Know any former partners of Arthur Anderson? Ask them about limited liability.

    The code of professional responsibility prevents lawyers from limiting their liability for their own negligence. So if I commit malpractice, I’m personally liable without limits. What do we gain by making other attorneys in offices scattered throughout the country (or world) personally liable for my errors?

    Not that attorney malpractice played a big role in the financial crisis. The money went were it was supposed to go–there just wasn’t nearly as much money as anyone expected.

    In fact I do know a few old AA partners. I’m not sure when they adopted limited liability status, no doubt it couldn’t save them, though they did manage to spin off their consulting group before the big exit. It would have been far worse for them had they all been liable personally. What did this cause? Sarbanes-Oxley for one. The PCAOB and government oversight instead of self regulation. Capital markets are now closed to smaller, profitable and aggressive companies and open to large, unprofitable companies. Each year a larger share of private company debt is government based. Go to one of the big banks these days for a corporate loan; they quickly jump to SBA programs or local government guarantee programs (entities that used to run the now nearly defunct IDB bond business are now in the bank loan subsidy business.) Or you get shuffled to the asset based lending guys. A straightforward line of credit is hard to get. The old bromide – banks only lend to those who don’t need the money – has never been more true.

    Now this is not all AA’s fault. Their clients played fast and loose and AA encouraged them, yes, but all the big firms have had their failures.

    Don’t you think that several liability would increase vigilance in self regulation? Partners would challenge risky strategies if they knew their net worth might be at risk?

    • #23
    • August 1, 2015, at 3:25 PM PDT
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  24. Big Green Inactive

    jetstream:

    \The near catastrophe that we were faced in 2008 and 2009 starting with the failures of Bear Stearns and Lehman Brothers and the near catastrophic deflation are entirely the fault of the Fed.

    This thinking needs to be stopped. The Fed and federal government policy shares plenty of blame for the crisis but the failure of Bear Stearns and Lehman were not ENTIRELY the fault of the Fed. That is just nonsense. Companies do indeed fail on their own and that isn’t always a bad thing. In fact, it is a feature of this incredible wealth generating machine we know as capitalism.

    • #24
    • August 1, 2015, at 4:41 PM PDT
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  25. Big Green Inactive

    ShellGamer:

    My experience is a little more consonant with Mr. Kimball’s. A lot of the AAA tranches were CDOs or similar structures that repackaged mezzanine tranches of RMBS. The rating agencies convinced themselves that further tranching could turn BBB/BB dross into AAA gold, but there was no real diversification added by the structure. So, not withstanding the rating, these were still high risk securities. The problem was compounded by manufacturing synthetic CDOs because the supply of mezzanine RMBS couldn’t keep up with demand.

    I don’t think you understood my post as we are basically saying the same thing. What I am saying is that the “high risk” tranches of RMBS (or CMBS) as defined by the investment banks slicing them up were not the problem. Those were appropriately reserved against and were actually a relatively small part of the overall pool.

    The issue was the AAA “low risk” tranches as defined by those investment banks (and credit rating agencies). Buyers of these (including other commercial and investment banks) treated them as they were AAA (low reserves and little capital against them) and they turned out to be very high risk.

    You are entirely correct about the “fake” diversification and that was precisely the problem.

    • #25
    • August 1, 2015, at 4:48 PM PDT
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  26. Big Green Inactive

    Doug – Fair enough. Facts are important and your willingness to admit a mistaken assertion(s) speaks well of your judgment and character. I hope I conduct myself as you have the next time I do the same…which will certainly happen to me sometime soon.

    • #26
    • August 1, 2015, at 4:52 PM PDT
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  27. Avik Roy Contributor

    Interesting discussion. For those who were looking for the full text of Perry’s remarks, they’re here:

    https://rickperry.org/reforming-wall-street

    (As many of you know, I am the senior advisor for Perry’s presidential campaign.)

    Regarding Glass-Steagall: the Gov agrees that G-S wasn’t responsible for the last crisis. But the goal here is to prevent the next crisis. To prevent bailouts in the future, one important goal is to make our banking system less concentrated, less complex, and more competitive. One way to do that is through requiring commercial and shadow banking institutions to be separate entities. However, it’s not the only way to get to that goal.

    Regarding liabilities for bank partners vs. publicly traded banks: this was an issue that we were concerned about as well. However, there are limited tools for forcing banks that are publicly traded today to return to partnership structures. What we can do, however, is exempt partnerships from burdensome reporting and compliance requirements like those in Dodd-Frank. After all, partnerships are likely to be more disciplined at risk-taking since the partners retain liability for failure. By exempting partnerships from Dodd-Frank and related regulations, banks have more incentive to remain as partnerships instead of IPOing. Gov. Perry recommended such an approach in his remarks.

    Broadly speaking, the goal of Gov. Perry’s plan is to reduce the scope and scale of federal banking regulation, but to focus what regulations are needed upon the true problems in our financial system and housing markets. Furthermore, Gov. Perry promised that if he is president, he will not bail out a single bank on Wall Street.

    • #27
    • August 1, 2015, at 5:12 PM PDT
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  28. ShellGamer Member
    ShellGamer Joined in the first year of Ricochet Ricochet Charter Member

    Doug Kimball: Don’t you think that several liability would increase vigilance in self regulation? Partners would challenge risky strategies if they knew their net worth might be at risk?

    As a general rule, several liability does nothing except make attorneys richer.

    AA proved that an accounting or law firm only has value as a going concern. AA suffered as much as possible as a result of Enron. I don’t see how they could have had a greater incentive for vigilance.

    When an organization reaches a certain size, you simply cannot know everything that’s going on. I think AA proves there are limits to the efficacy of vigilance.

    Also, nothing comes without cost. You’re a business man. How would you like it if your auditor had to clear every judgment call with the home office?

    Nothing my statements should be construed as support for Sarbanes-Oxley. This is a paradigm of Congress collecting reform ideas from “experts” and enacting them just to show they “get it.”

    • #28
    • August 1, 2015, at 6:24 PM PDT
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  29. ShellGamer Member
    ShellGamer Joined in the first year of Ricochet Ricochet Charter Member

    Avik Roy: But the goal here is to prevent the next crisis. To prevent bailouts in the future, one important goal is to make our banking system less concentrated, less complex, and more competitive. One way to do that is through requiring commercial and shadow banking institutions to be separate entities.

    Consider the case of AIG. It was completely separated from commercial banking. Yet it’s derivative positions still threatened (at least, according to the Paulson/Geithner narrative) to bring down several investment and commercial banks. All G-S does is change the relationship of banks to market intermediaries from parent/subsidiary to creditor/debtor.

    BTW, the are no “shadow banks.” This simply buys into Geithner’s excuse for why the Fed shouldn’t be held accountable for the crisis.

    So long as banks are the conduit for Fed liquidity (via the discount window and Fed Funds), they will be exposed to the risks of any liquidity dependent industry (such as investment banks and broker/dealers). More competition requires more banks; there is no other effective solution.

    • #29
    • August 1, 2015, at 6:34 PM PDT
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  30. jetstream Inactive

    ShellGamer:

    jetstream:

    Of course, the inverted yield curve, which Greenspan referred to as a “conundrum,” wasn’t part of the Fed’s policies. Keep this in mind next time someone tells you the Fed can produce real growth with a nominal GDP target. I worry we will see a repeat of the inverted curve when the Fed eventually tries to raise rates.

    But I don’t see why easy money would have helped. The crisis was tantamount to building a bonfire with billions of dollars. We had more houses and home improvement than we needed and easy money was encouraging us to build more. I don’t see a non-catastrophic way out of that situation.

    Also, money got very easy again at the end of 2007, but the crisis continued to mount.

    The Fed was absolutely the cause of the inverted yield curve. The inverted yield curve and the tight money during a time when deflation was underway was almost catastrophic. The were a lot of dynamics that affected interest rates like the carry trade with Japan.

    The Fed swings from one ignorant extreme to the opposite ignorant extreme. Recently the swings to tight money and high interest rates have almost been fatal to the economy.

    I lived the Fed inverted yield curve stupidity in the markets for almost 2 years and it just so thoroughly pisses me off that I can’t hardly discuss it without punching out my iMac.

    • #30
    • August 1, 2015, at 8:56 PM PDT
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