Financial reform: the first vote – Reuters reports that Sen. Ben Nelson (D-Neb.) broke with party ranks on Monday and voted against opening Senate debate on a financial reform bill. Nelson’s action means that the Democrats lack the votes to go forward and that the bill will be blocked, at least for now. Democrats must pickup at least two Republicans to prevail and clear the way for consideration of the bill. Sen. Richard Shelby (R-Ala.) said Monday morning the Republicans had the 41 votes they needed to stop Democrats from beginning debate on the Senate floor on a bill to overhaul financial regulation, but he suggested it was unclear how long the GOP unity would last.“I believe that 41 Republicans – for right now – are going to stand together. I wish we’d stand together, period.” Republicans know that there is a significant political price to pay for opposing financial reform; even if the opposition may be well intentioned. According to a new ABC News/Washington Post poll out Monday, 65% of adults surveyed nationwide said they support regulatory reform, while 31 percent oppose it. Sixty-nine percent said in the poll that they support “increasing federal oversight of the way banks and other financial companies make consumer loans, such as mortgages and auto loans, and issue credit cards.”
Senator Nelson rebuffed on derivatives – The Wall Street Journal reported today that Senate Democrats agreed Monday to eliminate a provision from their derivatives bill pushed by Warren Buffett’s Berkshire Hathaway Inc. The Senate Agriculture Committee had inserted language into its derivatives bill last week at the request of Sen. Ben Nelson (D-Neb.) that would have exempted any existing derivatives contracts from new collateral requirements. That language was not in the bill passed by Senate Banking Committee in March and work was underway to reconcile differences in the banking and agriculture bills. The Journal reports that Treasury Department officials opposed the language contending that regulators needed more discretion and Berkshire argued that existing derivatives were legal contracts that can’t be retroactively amended. Senator Nelson, who was a key vote on the health care bill in exchange for federal payments of Nebraska Medicaid expenses (the now famous “Cornhusker Kickback”), did not get his derivatives language, and – as noted above – voted against opening Senate debate on the financial reform bill
Goldman Sachs – The second shoe drops – Businessweek reports that Goldman Sachs Group Inc. was sued last week by shareholders over the collateralized-debt obligation that prompted the SEC suit earlier his month. In Richman v. Goldman Sachs Group Inc., a San Diego-based law firm filed an action on behalf of two investors charging Goldman, it’s CEO, CFO and President with omitting and/or misrepresenting material facts concerning Goldman’s participation in structuring the CDO. The Washington Post has reported that a divided SEC approved its suit after Commissioners Kathleen L. Casey, a former top Capitol Hill aide, and Troy A. Paredes, a wunderkind law professor, were skeptical that the evidence showed that Goldman had misled its sophisticated investors who should have known what they were doing. The two commissioners warned against bringing the SEC suit and voted against approving it.
With friends like these – Goldman’s CEO and the trader involved with the CDO are still scheduled to voluntarily testify before a Senate Permanent Subcommittee on Investigations (PSI) tomorrow, despite the chorus of politicians pillorying Goldman as a poster child for financial reform. PSI Chairman U.S. Sen. Carl Levin telegraphed how those hearings will go when he said today that Goldman Sachs “helped run the conveyor belt” of toxic mortgages that led to the 2008 economic crisis, and accused the investment firm of misleading clients and the public about its profits from the collapse of credit markets. Goldman emails that were released by the Subcommittee last week were cited by senior White House adviser Lawrence Summers as examples of the greater need for transparency in financial markets.
Refusing to comment on the SEC suit against Goldman, Summers did see it appropriate to note “This underscores what is at the centre of the president’s vision here: the importance of transparency, the importance of things being in the open, the importance of it being known who is in a position to benefit from what.” President Obama has made clear that Goldman is a perfect example of why his financial reform is needed. “Every member of Congress is going to have make a decision,” Obama said.“Are they going to side with the special interests and the status quo, or are they going to side with the American people?”
Goldman Sachs – Can a third shoe drop? In yet another related development, Investment News reports that the inspector general of the SEC will investigate the timing of the announcement of the SEC’s case against Goldman. Congressman Darrell Issa (R-Cal) and seven other Congressmen sent a letter to the IG on Friday asking for the inquiry. The timing of the announcement coincided with various Democratic attempts to push for passage of pending reform legislation in the Senate, Mr. Issa wrote, and “fueled suspicion that the Commission … may have engaged in unauthorized disclosure or discussion of Commission proceedings in order to affect the debate over financial regulatory legislation currently pending” before the Senate. The Chair of the SEC, the Secretary of the Treasury and even the President himself have all specifically denied that there was any collusion or cooperation between the administration and the SEC, which is meant to operate as an independent agency. IG David Kotz, who wrote a blistering report on the SEC’s mishandling of the $8 billion Stanford ponzi scheme released the same day as the Goldman suit, has promised to determine if there was any undue influence involved.
Just who’s in the driver’s seat? – In a development related to Administration coordination – but thankfully not related to Goldman – Senators Charles Grassley, (R-Iowa) and Richard Shelby, (R-Ala) are suggesting that General Motors may have mislead the public by continuing to claim as part of its advertising blitz that the auto giant has repaid its government loans “in full.” Senator Grassley wrote a letter last week to Treasury Secretary Timothy Geithner expressing his concerns and asking for more information about why the company was allowed to use bailout money to repay bailout money. As we reported yesterday, GM publicly reported last year that it would pay the debt with other TARP funds, but the questions now are whether there are issues with truth-in-advertising laws, which prohibit advertisements that are “likely to mislead consumers.” The FTC has not made any comment on the specific GM ads. We wonder more about the Administration’s cheerleading of the GM “non-announcement.” Acknowledging they are pretty busy with a number of other matters, but perhaps the SEC can ask 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, which are owned by the government and intended to be sold as soon as possible.
Speaking of the public sale of shares obtained from the bailout – Dow Jones reports that the Treasury Department said Monday that its first sales of Citigroup stock will cover up to 1.5 billion shares, about 20 percent of the 7.7 billion shares of Citigroup common stock that the government owns. Citigroup closed Friday at $4.80+ a share, which means that the sales of the shares that the US Government bought at $3.25 a share, could net a handsome profit on the deal. The Treasury Department had been a rather passive shareholder of Citi, statingthat it “believes it would be inappropriate to use its power as shareholder to advance a position on matters of public policy.”