Yet More House Finance Hearing Geithner Liveblog, Part Two
First liveblog thread here.
Castle: I want to address what you didn’t address. Collins, stability management council. Unanimous agreement we need to do something. Fed has certain authority now, I worry about conflicts there. I would hope that careful thought is given to being inclusive. To have some of the entities being regulated at table. I don’t want iron fisted hand making all these decisions.
[Can we put labor at the table, Mr. Castle??]
TG: Three different issues. Division of labor. Checks and balances. As is now case under FDIC. Can’t vest authority within one entity. Another set of issues, cooperation across regulator authorities. Much more integration. Not vested in one place. Third, who should be responsible. We have to make sure the people who are responsible are competent to regulate. Not Treasury. In a fire, the fire station needs to understand the neighborhood, don’t want to convene committee. Pragmatic case, authority for crisis management matched with systemic risk.
[Again, why did you send someone–Steven Rattner–who knows nothing about the auto industry to resolve it??]
Grayson: How difficult the decisions we make today. Balance sheet earlier this month. AIG had an exposure to the yield curve of $500B, five times greater than it ever had in equity. Why didn’t anyone stop from accumulating that risk.
TG: AIG was allowed to build up through complex structures huge amounts of risk. No competent authority. No choice but to come in and unwind.
Grayson: Last 10Q. Fannie Mae accumulated over $250B in derivatives.
TG: Not something I could respond to as carefully. Fannie and Freddie, large set of risks they have to hedge. More powerful supervisor. Not infer from looking at one piece of 10K.
Grayson: It’s all exposure, in June over 1.5 trillion. If that contributed to failure, what point should have someone said enough is enough.
TG: You can’t measure risk and exposure by looking at that.
Grayson: Substantive rules to prevent this kind of risk.
TG: Capital capital capital. Greater cushion. Best solution these things. Not something market’s gonna provide on its own.
Grayson: If AIG subject to margin calls, never have gotten here.
TG: Margin regime, AIG hold more capital in regards to risk. Derivatives, much more conservative.
Grayson: Rules you see being put in place.
TG: If an entity were to rise to a level, it could pose systemic risk. Brought within framework similar to large regulated institutions.
Grayson: Someone will say enough is enough.
TG: constrain risks.
Royce: Wind down power. You’d be able to take over any large firm. Permanent TARP authority. How would you have handled creditors?
TG: Two types of authorities. Intervene. Wind down. Figure out best way to absorb losses. In event default would cause systemic consequences to put in capital guarantee liabilities. Has to be made high threshold. Demonstrate consequences would be systemic.
Royce: All borrowing presumed in market. Moral hazard. GE. They won NBC. Consequences over at treasury. How do you handle these decisions.
TG: [doesn’t answer NBC question] blatherblatherblahter
Royce: My presumption is guarantee large firms borrow at lower price. In text of bill, FDIC appropriate over insurance.
Minnick: Ag committee, systemic regulator, is this consistent?
TG: Take a careful look and get back to you?
Minnick: WRT new mechanism for creating liquidity [public private]. Concerned, need for capital, that this regime not underprice these assets. Under regulatory scheme, if initial auctions produce prices that are at low end of fair market value, additional leverage into system to increase bid prices to point where solution doesn’t exacerbate.
TG: More leverage would help. Relative to alternatives. Better than what we have today. Absence of financing.
[Then why are BoA and Citi buying these up?]
Minnick: All want taxpayer to be treated fairly. TO extent that financial institutions getting less than fair price.
TG: You’ve got tradeoffs right.
Paul: Excess leverage, pyramiding of debt. Look at easy money from Fed and aritifically low interest rates. Everybody knows I’m a proponent of free market. Not free markets got us into this trouble. In other areas we never automatically resort to regulation. Press, it would be prior restraint. Innocent until proven guilty. If there were a reasonable respect for rule of law, taxpayer, burden of proof on govt. Prove that someone broke these regulations.
[in which Geithner tries to show patience with Paul.]
TG: I’ve never been a regulator. We need to be very skeptical that regulators can fix these problems. Banks vulnerable to runs. Have to impose limits.
Paul: How can we make it like criminal govt proves guilty of crime. Innocent until proven guilty.
TG: I’m not sure I can give adequate answer.
Kanjorski: Oppty to answer Royce’s question. Gaps, not an announcement until April 20, when you’ll come back. What covered institutions. Insurance. Proposed legislation. Suggestion is that it won’t significantly change from what the present status is. State v. federal jurisdiction. If you have oppty answer Royce.
TG: Change regulatory treatment of insurance companies?
Kanjorski: Federal treatment of insurance companies.
TG: Come back soon in more detailed proposals. Good case for optional federal charter. I’d welcome a chance to talk about in as much detail as you’d like.
Frank: If you think any difference to deal with life insurance and property and casulty.
Biggert: "Legacy loans."
TG: 5 asset managers. security side. On loan side, entity that FDIC now uses on resolution process. Auction process for investors to come in and take equity stake.
Biggert: Competition? Ability to successfully manage legacy loan?
TG: Complicated set of questions. Best thing to come before you and walk you through it.
Biggert: So much of our problem, regulators didn’t catch it. Failure of communication. Homeland security, katrina. Seems to me, when we asked questions of Greenspan, he didn’t answer and he said he didn’t know.
TG: Can’t let the regulated be part of their regulation. Can’t put in body which is designed to put regulation in place. You need these regulatory agencies working together. There’s a very strong case to make for coordination.
Frank: If anybody suffers from absence of communication from regulators.
Waters: I want to ask about the products on the market. Why not talk about elimination of various products. We regulate. Why don’t we talk about AltA, why are CDS good products? Not allowing certain products on the market?
TG: People always innovate around what govt prohibits. More effective way to regulate. Make sure institutions are strong enough and protected from predatory behavior. Need to have clearer standards regulated more effectively. If you do it by banning certain things, just be chasing next innovation.
Waters: Scrutiny before they come on the market. Asset management. 5 firms indicated in plan. Women-owned and minority owned businesses. Dumping a lot of money into the economy. Want everyone to participate. Why can’t we look at this a little bit closer. Figure out how we get more women and small firms rather than begging the five.
TG: I’ll look at it more carefully.
Waters: How the dollars have been put out there. FDIC. Banks doing their own underwriting. Small firms to get a crack at?
TG: A lot I don’t understand. Will pass onto Bair.
Waters: Why can’t we eliminate CDS.
TG: I don’t think it’d help. It’d deprive people of a tool to make things safer. Put on exchanges, provide much more transparency. If you just ban them, something else would evolve like that.
Waters; I wish that in the thinking that goes on about these markets. Some deeper thought about not allowing things to come on market. It’s better that you look at that than let something get out there.
Manzullo: Fed, individual applicant.
TG: Important powers.
Manzullo: Very powerful federal agency could have curbed subprime abuse. Teaser and cheater mortgages. Did not act. Reason I bring that up. You want to start yet another powerful agency. Example where federal agency did not act.
TG: You’re right.
Manzullo: Super regulatory system. How many entities can you envision having to be at position where they coudl be seized? 100, 1000, 10,000?
TG: Congress would have to provide standards. Those largest institutions. Grave risks.
Manzullo: Company by company on whether they can be seized.
TG: We have to do better. System does not work.
Manzullo: How many companies, how intimate?
TG: Broad principles.
Manzullo: Do you realize how radical this is?
TG: Prudent, carefully designed.
Manzullo: If it’s prudent and carefully designed, you’d have answers to my questions. Guideline and framework.
Frank: THere will be no law passed that will regulate insurance rates.
Cleaver: No legislation. As specifically as you can can you let me know PPIF process of pricing assets and whether or not bid process can be conducted in way that is auditable. How do we handle settlement.
TG: Best to have FDIC to walk you through that.
Cleaver: Let’s go to lunch.
“… why did you send … Steven Rattner–who knows nothing about the auto industry to resolve it?” – Marcy
Well, they sent Bush to be POTUS and look how well that worked out ? /s
So far we have heard Geithner defend the most egregiously pernicious financial instrument out there, the naked CDS, and we have yet to hear word one about the single most important regulatory step to shore up our financial system, the re-imposition of Glass-Steagall. This should tell you everything you need to know about Geithner, these hearings, and regulatory reform.
the media has plenty of restraints Rep Paul…plenty …we witnessed those restraints in the run up to that war based on a “pack of lies”
Senator Dorgan ” we need regulation, its not a four letter word..we need effective regulations”
There are many things screwy about Geithner’s testimony but one that bothers me is that he is arguing that there is no problem with CDSs. Writers of CDSs just need to carry bigger reserves to cover them. But how big would such reserves have to be? In a general downturn or post-bubble would any reasonable reserve levels be able to cover the CDS action? Wouldn’t we still have AIGFP? Maybe it would have cost us a few billion less but a few billion off a $183 billion is not really a solution, is it?
Nor does this get at counter CDSs. Could AIGFP simply buy CDS coverage in place of reserves? But isn’t that also a shell game? An AIGFP would have coverage on paper but would it have it in reality? In a post-bubble downturn, all that risk would still be out there. Someone has to hold it. If any of AIGFP’s writers for their CDS coverage defaulted, AIGFP would be essentially where it is now, just with more paper transactions.
You’re right – what is the actual potential downside of the instrument. AIGFP created mathematical models that were totally bogus. Would a regulatory authority have any kind of capacity to adequately analyze these instruments and not have the wool pulled over its eyes.
Hugh, you have a better grasp of these things than I do, so I wanted to ask… Why isn’t anyone talking about short selling? My understanding of CDS (naked or not) is that people hedging their bets via CDS may hold the position where they have an incentive to see a company’s stock fall. This leads to the perverse situation where some people win big in the financial sector by tanking the real economy. Not only does Timmy love CDS, but I’m guessing he doesn’t see anything fundamentally wrong with shorting the market either.
It seems to me we should not only ban CDS, but short selling as well. We need to remove financial incentives for destroying an otherwise perfectly fine company. Am I wrong in that view? Is there some genuine value to the real economy from short selling?
I agree. This hearing could have covered so much and in fact covered so little. Even if short selling were allowed, why was there no discussion of bringing back the uptick rule, meaning you couldn’t short sell a declining stock to push its price further down? That seems a perfectly reasonable constraint for me and still allows short selling as part of price discovery. But not one word about it.
Yep. Another hearing, another disappointment. I feel compelled to watch, but they are always such a waste of time.
OT re Stanford Financial fraud [via TalkingPointsMemo comment today]:
“On May 5th, 2006, President Bush issued a memorandum that was published in the Federal Register that ceded power to newly appointed DNI chief, John Negroponte, the right to avoid the laws of the financial world and the SEC Act of 1934 if it was needed for “national security”. Dawn Kopecki reported on it when she was with BusinessWeek in that same month.”
As we used to say on the NJ-NY waterfront; Any major crim activity has to be protected at some level by “the authorities”, Fed or local.
Note relevance to funding of covert ops.
Maxine Waters asks about swaps. Geithner says that something else would just come up to take their place. Hello, Geithner, that’s the point of regulation, to you know, say that no you can’t do that or yes, you can.
If you accept Geithner’s argument, what is the point of regulation at all since players will just come up with something else. Just stupid.
I get the impression this was a much better hearing. The questions did not grandstand and we learned something.
I get the impression that Geitner has not figured it out yet. New instruments will come their flaws will not become evident until they blow up. Mathematical modeling is great until you figure out that the variables used to creat the model have no basis in reality.
The solution is (perhaps too) simple: no regulation, no taxpayer dollars.
Well, it is over and all I can say is what an incredible waste. Geithner is not proposing regulation but oversight, the same kind of oversight we got with the TARP late, woefully incomplete, and without any tangible results.
There were a few vague statements about increasing reserve requirements but this appeared to be nothing more than window dressing and could probably be easily evaded.
And again and again and again. No mention, not one that I heard, of Glass-Steagall.
Instead to top it off, we got Geithner giving a half-assed, blow off defense of swaps. They do things that people want to do. And if we outlaw them, people will just find a way of doing the same thing anyway.
It is really looking like the impossible has happened. We really can have a Treasury Secretary worse than Henry Paulson.
Not sure he is there yet, He is trying to figure something out not there yet though.
I’ve been watching a part of this hearing and must say I am impressed by the lack of the normal political BS that goes on in these hearings.
I must also say the my impression of Geithner has actually improved a little from listening to some of his answers. He seems to know a lot about the details – certainly compared to most of the witnesses on this stuff.
I’m in and out, so it’s helpful to get this assessment from you.
But I did catch one bit of Geithner saying that he couldn’t respond clearly to one question b/c it was simply too complex, but they’d be bringing in ALL regulators at some point — which I took as a hopeful sign.
Still, it’s hard to know how many CDOs are being written as we watch, eh?
AMEN, I don’t trust anyone in the BIG MONEY game.
I’m not even sure I trusted my banker when I got my first loan for a new car 50 years ago, but at least I knew HE would be holding my loan and not some entity a million miles away.
Maybe I didn’t trust him but I sure had a little fear of God in me if I didn’t make a payment on time!!
One other thing that irked me about the hearing…
In his opening statement Timmy referred to “fraud on a dramatic scale”. Yet aside from a brief mention by Maxine Waters, not one Congress member followed up on that statement. It seems to me one should have asked what steps are being taken right now to investigate and potentially prosecute rampant fraud. That should have been followed up with a question of how the new regulatory structure would effectively curtail that fraud. And finally, how the new regulations in the future could be applied to prevent future fraud and hence a repeat of what got us here.
And one more thing while I’m at it. I found it really disturbing that Geithner was simply not going to go along with the notion that there is inherent instability in “too big to fail”. He doesn’t believe they need to limit the size of these companies they just need better constraints. Uh. Huh. He should have just cut to the chase and said “Goldman Sachs makes way too much money in mergers and acquisitions to limit such transactions in the future”. There. That’s not so hard is it? The government serves the interests of GS, so all you annoying little taxpayers better just STFU and hand over your cash…
Gad, doing that liveblogging is a lot of work!
EW,
I’ve been away for a few days and just caught up on reading here and the posts at the Lake.
Thanks so much for all of your work. You are an amazing watchdog of government and policy.