If the Senate bill passes, what’s next? – The Senate will vote today on its first steps toward passing a financial reform bill. Any financial reform bill that passes the Senate still needs to be reconciled with the House bill. Bloomberg reports two major — but manageable — differences between the House and Senate version. The Senate bill includes a plan to study how to implement Obama’s “Volcker Rule” banning proprietary trading by banks, named after former Fed Chairman Paul Volcker, who’s advising the president. The administration came up with the Volcker rule after the House had passed its bill. The Senate bill permits such a ban when the Fed finds a threat to the safety and soundness of the company or to national financial stability. Both bills propose a Consumer Financial Protection Agency; the Senate bill has the consumer protection bureau at the Fed, and the House bill proposes a standalone agency.
This week’s firework display – The Senate Permanent Subcommittee on Investigations (PSI) – the folks that brought you Joe McCarthy and Joe Valachi – will reportedly hear testimony from the CEO of Goldman Sachs and the trader at the heart of the suit recently filed by the SEC. PSI is conducting a series of hearings on Wall Street and the Financial Crisis, but it is expected that questions to the Goldman witnesses will include questions about the SEC allegations. PSI has already released four emails which reportedly contradict previous statements by Goldman officials that the investment bank did not aggressively bet against the housing market. According to the LA Times these and other emails to be released are likely to further fuel the backlash against Goldman and come as seven top executives prepare to be grilled at a high-profile Senate hearing Tuesday about the legendary Wall Street firm’s role in the financial crisis.
In case you missed the Goldman-Financial Reform Connection, Sunday’s Washington Post explains the aim of the financial reform is to prevent a repeat of the recent crisis that nearly brought down the financial system. Two columns over, the Post reports that the Senate’s findings suggest that Goldman’s behavior was indicative of a larger pattern of duplicitous conduct resulting in the economy’s collapse. The suit against Goldman has received incredible attention; a Google search of “Goldman abacus SEC” returns more than 900,000 references. Goldman is defending vigorously and publicly which ensures — to the absolute delight of financial reform advocates — that voters will equate “Wall Street” with “greed and avarice” for at least the next few weeks.
We don’t often find ourselves in the position of defending Obama advisors against the Washington Post, but fair is fair. The print version of Sunday’s Washington Post (A6) notes that “As part of the Clinton Administration, Timothy F. Geithner and Lawrence H. Summers supported a major piece of legislation that regulated the financial industry. Now top advisors to Obama, these two officials are pressing for a bill that would make amends for the 1999 law that unshackled Wall Street by breaking down the walls between commercial and investment banks.” This is more than a little bit unjust, as the 1999 bill enacted “a prudential framework for the affiliation of banks, securities firms, and other financial service providers”, a very broad spectrum of activities now permitted for banks and securities firms. The proposed Volcker Rule has the far more limited impact of barring banks that receive federal support from engaging in activities that the regulators deem to be speculative activity unrelated to “basic bankservices.”
Could the Administration’s priming the economy also be creating the market to sell their GM stock? – Questions remain about the motivation of the timing of GM’s early payoff of TARP debt last week, which boosted the Administration’s move toward financial reform and perhaps increased the value of its 60% holdings in GM. “Part of what led to the crisis in our auto industry – and one of the main causes of the economic downturn – were problems in our financial sector,” the President said.
Treasury Secretary Geithner said that GM was “on a strong path to viability.” GM issued no press release about the action, but the White House just happened to have a full paper available that same day. It’s really not a story, as GM reported last year that it would use TARP funds to pay off the debt, and that these funds had always been committed to pay the debt by June. Despite the fact that in April, 2010, GM reported losses of $4.3 billion and “hoped” to turn some profit in 2010, positive rumors of a GM IPO are now swirling. If the GM early payback and the Administration’s cheerleading was merely timed to support the financial reform vote, then perhaps it is just politics as usual. But if government officials prompted the early repayment, or otherwise used government resources or power, with the intent of stimulating or influencing market interest in GM shares, there could be serious questions of propriety, if not legality.
The Government may be looking to sell its AIG shares too – Businessweek coincidently reports this week that the U.S. government, majority owner of American International Group Inc. after rescuing the insurer in 2008, is considering a two-year plan to dispose its stake, said a person with knowledge of the discussions. The proposal involves converting preferred stock into common shares for sale on the open market. If there is sufficient investor demand, the Treasury Department plan reportedly could be announced as early as the fourth quarter of 2010. Treasury has invested about $47 billion in the insurer. AIG was one of the few winners of the financial sector Friday when its shares rose 4 percent after reports that the government was planning to shed its stake.
Any “buy” decisions of AIG stock may be complicated, however, as AIG is reportedly considering going after Goldman Sachs on losses from $6 billion of insurance deals, while AIG may also be required to pay to defend the SEC suit for Goldman, under directors and officers insurance policies AIG sold to Goldman. If AIG sues Goldman, will the AIG D&O policy require AIG to defend Goldman against AIG? We are looking for some three way GM-AIG-Goldman connection and will get back with you as soon as we can.
The Administration got Health Care, will likely get Financial Reform, but Climate Change hits a snag – The uncharacteristically bipartisan climate change legislation — written by South Carolina Republican Senator Graham, Massachusetts Democrat Senator Kerry and Connecticut Independent Senator Lieberman — was expected to be made public this week. Bloomberg now reports that Senator Graham has pulled out, protesting what he called a “cynical ploy” by Democrats to focus instead on immigration. The bill, a revised version of the “cap & trade” bill that died after passing the House last year, included$54 billion in government-backed loan guarantees for the nuclear industry, carbon emissions penalties tailored to specific economic sectors, expanded offshore drilling, tax breaks for big manufacturers and an end to the EPA’s authority to regulate carbon.
Speaking of Health Care, the AP now reports that 4 million Americans — the vast majority of them middle class — will have to pay a penalty if they don’t get insurance. Penalties start in four years and two years later, persons without insurance will be fined $695 or 2.5 percent of their household income, whichever is greater, by the IRS. About 75% of those required to pay fines in 2016 will have incomes below $59,000, according to the CBO projections, resulting in the government collecting about $4 billion a year in fines from 2017 through 2019.