Progressive Breakfast: Wall Street Feels A Tremblor

The daily Progressive Breakfast serves up what progressive movement members need to know to start their day. Bill Scher will return Monday.

Wall Street did feel a bit of an earthquake on Thursday as a result of actions in Washington, but whether the shaking did more than rattle some gold-plated dishes remains a hotly debated question. The progressive assessment, backed by some mainstream commentators, is that we're still barely nicking the flawed foundations of how Wall Street operates.

Still, there were qualified cheers for the moves by the House Financial Services Committee to create a consumer watchdog agency that would police some financial institutions and for actions by both the White House and the Federal Reserve to rein in Wall Street CEO pay practices.

The Wall Street Journal's reporting [1] on the House committee bill:

The agency would be charged with policing consumer financial products and practices, such as mortgages, credit cards, and overdraft fees, regardless of whether they are offered by banks, finance companies, or most any other type of firm. Democrats have argued that a lack of consumer protection helped fuel the financial crisis, pointing to the defaults on subprime mortgages that nearly toppled Wall Street.

... "We now have a standalone consumer protection agency that has very significant powers," said Rep. Barney Frank (D., Mass.), who is chairman of the Financial Services Committee.

Just one Republican, Rep. Michael Castle (R., Del.), voted for the bill, with many of the rest saying Democrats were creating a federal bureaucracy that would take away consumers' ability to make their own financial choices. "If the Democrats really comprehended what they just did, they would not have supported it so eagerly," said Rep. Scott Garrett (R., N.J.).

Reuters reports [2] that in spite of the disappointments the bill received praise from a source progressives respect:

Elizabeth Warren, the top watchdog for the government's $700 billion bailout program and early advocate of the consumer agency, voiced delight the powerful banking lobby was unable to knock down the wider plan.

"When I first came to Washington with the idea of this agency, everyone told me 'the banks always win, quit now because the banks always win.' They didn't win today," Warren told reporters.

Campaign for America's Future co-chairman Robert Borosage [3] said that Frank deserved credit for resisting relentless efforts by the financial services industry to weaken the bill or kill it altogether. But even with Frank's efforts:

The Committee limited enforcement authority for 98 percent of the nation’s banks, which control 20 percent of assets; exempted auto loan and insurance products; and omitted provisions to enforce important community lending standards. Most damaging, it replaced President Obama's proposed independent oversight board with an advisory committee of financial regulators who failed to protect the American public from Wall Street in the first place.

The House bill is a good first step. It should be strengthened on the floor of the House. It will take a major mobilization to protect it against obstruction in the Senate.

David Dayen at Firedoglake [4] says:

The auto dealer exemption is probably the worst amendment in the entire Financial Services Committee markup on regulatory reform. You can make a case for some of the other amendments, and Rep. Frank said on Rachel Maddow’s show last night that the committee will pass the reform bill today that gives Democrats and the Administration “90% of what we wanted.” But this is part of that other 10%. Auto financing is typically the second-largest purchase a family makes, behind housing, and the horror stories of auto loan customers being ripped off are voluminous. The amendment was authored by Rep. John Campbell (R-CA), a former auto dealer who has been ripped by consumer groups [5] for having major conflicts of interests. (He used to receive rent payments from six auto dealerships, two of which are still in business and provide him income. He's also received $170,000 in campaign contributions from auto dealerships.)

Dayen also reports that Change Congress has an act.ly petition [6] demanding that Congress cancel the exemption from oversight for car dealers.

Bloomberg News [7] on the pay actions:

Both the Treasury and the Fed are seeking to rein in the excessive risk-taking blamed for triggering a recession that has cost 7.2 million American jobs. The danger is that the oversight once exercised by shareholders and directors will now be replaced by the government, economists said.

... “Regulatory reform is really up for grabs right now,” said Richard Sylla, a financial historian at New York University’s Leonard N. Stern School of Business. The Fed’s announcement, coming on the same day as the Treasury’s, “is almost a part of their campaign to say ‘Yes, we can do this.’”

... The Fed’s guidelines, while less rigid than Feinberg’s rules, are more far-reaching, applying even to banks like Goldman Sachs Group Inc. and JPMorgan Chase & Co. that have returned government aid. The central bank doesn’t impose pay caps or bans on particular practices. The guidance is aimed instead at discouraging banks from adopting practices that might endanger the federal deposit insurance fund or the larger financial system. “Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Fed Chairman Ben S. Bernanke said in a statement yesterday.

... The Fed’s rules will not take effect for months while the agency considers public comments and makes revisions. Banks won’t have the luxury of waiting. The Fed expects them to start reviewing their pay practices immediately. It also plans to launch a review of compensation at the 28 largest banks, which it didn’t name.

New York Times columnist Joe Nocera [8] says the pay moves won't bring fundamental change to Wall Street. That's something, he writes, "only shareholders can do."

[I]t’s worth noting that certain contentious pay issues were either ignored or shoved under the rug. Ken Lewis [9], the soon-to-be-retired chief executive of Bank of America [10], has declined to take a salary in 2009, at Mr. Feinberg’s urging. But he is still going to get around $70 million in retirement pay — which Mr. Feinberg could do nothing about. And so Mr. Lewis will soon join the ranks of other top Wall Street executives who walked away with millions after doing a miserable job. That’s the kind of pay practice that makes people justifiably angry.

And the American International Group [11] is contractually obliged to make bonus payments of nearly $200 million in March 2010. The company has promised to try to reduce that amount by 30 percent. But once again, there is nothing Mr. Feinberg can do because those bonuses were already written into contracts — and there is a high likelihood that the bonuses will create another furor in Congress, just as they did earlier this year.

Washington Post columnist Steven Pearlstein makes an interesting point [12] about the argument that the pay controls will cause the reined-in banks to lose the talent they need to stay competititve.

They may be right, of course, but if it turns out that these pay rules wind up steering the riskiest activity to smaller, more focused institutions whose failure won't require them to be bailed out by the taxpayer, that might be a good thing.

After all, we know what happened when the button-down commercial bankers were let loose a decade ago to start competing with, and behaving like, investment bankers. And we can be pretty sure what will happen in the future if Citigroup, J.P. Morgan Chase and Goldman Sachs continue down the path of competing with, and acting like, hedge funds.

Indeed, there are tentative signs that what Pearlstein predicts is already beginning to happen:

Credit Suisse Group AG this week introduced two new mechanisms that ties the bonuses of managing directors to share price performance over four years and returns on equity over three years. One plan adjusts down if the employee’s business unit losses money. The firm, based in Zurich, has also shut down business lines where risk-adjusted returns were too low.

“We have closed down some businesses that had very good profit potential but the returns weren’t there given the risks, like commercial mortgage-backed securities,” Paul Calello, CEO of the firm’s investment banking unit and a member of the executive board, said in an interview yesterday. Compensation “needs to be aligned with the strategy of the firm,” he said.

The Credit Suisse model may prove a template for rival banks, said Mark Poerio, a partner focusing on compensation at

Paul, Hastings, Janofsky & Walker LLP in Washington. “Hopefully Wall Street will follow that lead,” he said.     

Dean Baker argues in The Huffington Post [13] today:

This is a good first step, but it is only a first step. The pay caps involve only a relatively small number of people in an industry where hugely bloated salaries are the norm. Even in these cases it is too early to know that the pay caps will actually prove to be binding. After all, Wall Street's main craft is evading regulations and taxes. It is entirely possible that those clever Wall Street boys will find a way to get around whatever pay restrictions Mr. Feinberg puts in place.

Baker repeats what he's been arguing for some time: Perhaps the most important tool to bring Wall Street back to its senses and to get some public benefit from Wall Street's money games is a financial transactions tax. Unfortunately, "an FTT will not get an airing in a Congress where the banks continue to wield enormous power. Congress will only consider an FTT, as opposed to more regressive proposals like a national sales tax, if the public demands it."

You can make that demand—and other demands for fundamental change on Wall Street—next week at the Showdown in Chicago. On our blog, AFL-CIO President Richard Trumka [14] lists four key demands: the creation of a strong Consumer Financial Protection Agency, a council of regulators to identify and fix systemic risks that could threaten the entire financial system, open regulation of such "shadow markets" as hedge funds and derivatives, and reform of corporate governance and CEO compensation.

Terrance Heath blogs on OurFuture.org this morning [15]:

If you're tired of hearing about the recovery you can't feel, while seeing headline after headline about how well Goldman Sachs is doing ... If you're enraged that the same banksters we bailed out are doing everything in their power to stop much-needed consumer protection, and you're ready for a showdown, come to Chicago and tell the banksters "No!"

Public option ebbs and flows

Jonathan Cohn at The New Republic [16] this morning captures the atmosphere around the health care debate during the past 24 hours.

Thursday was as crazy a day as I've seen in Washington. The flurry of legislative activity over the public insurance option--and the flurry of media coverage it generated--made it difficult to keep up and, at times, to separate truth from rumor or hyperbole.

But over the course of the day, one thing became increasingly clear. At least for the moment, the debate isn't over whether to include a public option. It's over what kind.

But whatever kind of public option there is, there are reports [17] that Sen. Olympia Snowe will oppose it. McJoan at Daily Kos reacts: [18]

All these months Baucus and the administration have been courting her for this, she's waving her own veto pen. Presumably, it will be her trigger or nothing, but with momentum gaining behind a much stronger opt-out option, she's threatening to take her marbles and go home. Last week Tom Harkin asked whether 52 Democratic Senators should bend to the will of 5. But they should also be questioning whether the 52 Democratic Senators should be bending to the will of one Republican.

It's time for Harry Reid to dust off the reconciliation procedures book. If Snowe is going to side with AHIP and the rest of the Republicans, they're going to have to do this without her.

Both TPM [19] and The Huffington Post [20] highlight Sen. Arlen Spector's prediction on MSNBC that Democrats can pass a public option bill without Snowe. Via TPM:

"We have 60 votes without Sen. Snowe, so we can still invoke cloture and move to a vote on the public option," he said. Some moderate Democrats, he added, might oppose the public option, but they'd still vote for cloture.

On Snowe, he said, "I hope we have her, but we may be able to do it without her." 

David Dayen at FDL posted a rundown [21] on the state of play on the public option midday Thursday that noted House Speaker Nancy Pelosi at a news conference "sounded like she was still searching for votes" for a "robust" public option bill. The co-chair of the Progressive Caucus, Rep. Raul Grijalva, is quoted as saying there appear to be at least 210 votes for such a bill in the House —which leaves eight more votes to be nailed down.

Cohn notes that today "brings another caucus meeting and there, perhaps, the House Democrats will make a final decision about which way to go. There isn't much time, given the schedule Pelosi wants to keep. She wants to unveil a bill early next week and, perhaps, have a floor vote the week after that. The leadership has already sent language over to the Congressional Budget Office for scoring. As one staffer says, "it's all locked in--except for the public plan."

Obama Speech Headlines Major Day For Climate Bill

Politico previews the day in climate: [22] "Massachusetts Democratic Sen. John Kerry, the lead sponsor of a Senate climate bill, plans to meet with Senate Majority Leader Harry Reid on Monday to set a timeline for committees to finish work on the legislation – possibly as soon as Thanksgiving. And Environment and Public Works Chairwomen Sen. Barbara Boxer said she plans to release new sections of the climate bill that she co-authored with Kerry on Friday. The release of her bill comes as the EPA is set to release a study of the economic impact of the Senate version of the global warming legislation. While Democratic senators make their push in Washington, Obama will deliver a speech on clean energy and climate change at the Massachusetts Institute of Technology ... on Thursday, West Virginia Sen. Rockefeller indicated that the [Kerry-Boxer coal] provisions would be insufficient to gain his support. 'There is no deal on coal,' he said on Thursday."

EPA expected to deliver positive cost estimate. CQ: [23] "Sponsors of a Senate climate change bill anticipate that a preliminary EPA cost estimate of the legislation due Friday will diminish fears about the expense of creating a cap-and-trade system."

Grist's David Roberts encourages enviros to retain some swagger: [24] "...greens have the Big Mo. There’s a self-reinforcing cycle of positive stories happening. Deniers and delayers are on the defensive. It feels good! Yes, it’s certain to change, and change again, over the course of the long fight in the Senate. But confidence is everything. Greens aren’t used to being the ones with muscle and momentum, but now that they’ve got them the thing to do is get a little swagger. Nothing succeeds like success, and nothing is more powerful in politics than the aura of inevitability."

Grist's Jonathan Hiskes questions if tomorrow's worldwide 350.org rallies will unify or fracture environmental movement: [25] "350.org is taking a big-tent approach to activism on its International Day of Climate Action this Saturday, inviting anyone who wants to help to join a climate-change demonstration, or create one of their own. That open invitation means not everyone will be pushing the same message. In fact, a trio of groups will use the day, and the number 350, to highlight their opposition to ... cap-and-trade, the mechanism integral to the clean energy bill in Congress and to the United Nations approach."

Researchers pen W. Post oped arguing we can afford to cut down carbon levels to 350: [26] "With investments of roughly 1 to 3 percent of global gross domestic product, or $600 billion to $1.8 trillion, we could rapidly transition from oil and coal to renewables and clean energy sources, including wind and solar, and replenish global forests, which would help trap billions of tons of carbon. These efforts would create jobs and stabilize the climate in the process. Fluctuations or changes in some factors, such as the price of oil, could mean these investments might actually save us money."

Scientists discover accounting problem that overstated carbon benefits of biofuels. NYT: [27] "In emission calculations, all fuel derived from plants and other organic sources — including ethanol — is generally treated as if it has no effect on carbon dioxide in the atmosphere, even though though biofuels do emit carbon dioxide when burned. This might make sense if the source of the fuel were, say, a crop of corn grown on barren land specifically for use as fuel, because the crop would have absorbed carbon dioxide as it grew, offsetting what it emits when ultimately burned. But if an existing stand of forest land is cleared for fuel, its ability to absorb carbon dioxide is lost, and the net balance of the gas in the atmosphere goes up." Time adds: "'Biofuels can be an important part of the portfolio of climate-change activities,' [28] says Steve Hamburg, chief scientist for the Environmental Defense Fund and a corresponding author on the second Science paper. 'But we have to make sure we incentivize the right way, or we could end up with perverse outcomes.'"