Sunday, July 22, 2012

GUILD HALL | Hamptons Institute on U.S. Economy

Hamptons Institute at Guild Hall. L to R: Joe Nocera, Ken Miller, Cyrus
Amir-Mokri, Joseph Perella (iPhone photo by JT Marlin).
At Guild Hall in East Hampton this afternoon the Hamptons Institute presented an appraisal of the future of the U.S. economy. The Hamptons Institute is partnered with the Roosevelt Institute. The event, sponsored by the Tarr Family and the Chubb Group and its agent Dayton Ritz & Osborne, was billed as a bipartisan conversation. But the most far-reaching proposal I have heard for regulatory reform came not from the Democrats on the panel but from the sole Republican.

Joe Nocera, Op-Ed columnist for the New York Times served as moderator. He asked for views about Dodd-Frank. What else can be done to rein in Wall Street? Is the anger at Wall Street justified? Are U.S. banks are better off than European ones?

Ken Miller, President and CEO of Ken Miller Capital and a Democrat, was the most outspoken and progressive. He thinks Dodd-Frank is a step forward, and the Treasury has a good team in place, but Dodd-Frank won't solve the basic problem of over-leveraging. Wall Street firms raise risks as they seek higher returns through leverage. He thinks the culture of Wall Street must change - there is too much "short-termism". The problem for regulation is that it must be ubiquitous. Dodd-Frank addresses the symptoms, not the causes. On the issue of anger at Wall Street, he thinks that it is justified although many other players are to blame for the meltdown. He thinks the Board of Directors of Lehman should have been more vigilant. In his final comments, he said that China is facing some short-term problems but has a strong economic outlook. The U.S. problem he sees as one of timidity in solving problems because a small number of voters in swing states will decide the 2012 presidential election.

Cyrus Amir-Mokri,  Assistant Secretary for Financial Institutions at the U.S. Treasury, shocked everyone in the room (just kidding) by saying that he supported President Obama's policies and believed that Dodd-Frank was being implemented in valuable ways to institute stronger regulatory reform and bringing "shadow banking" into the "light of day". He said that even Republicans agreed that rules of the road are necessary for the financial sector and that the task of the Treasury and other regulators is to control the negative externalities that come from the risk-taking activities of Wall Street firms. Dodd-Frank does, he says, address the "Too Big to Fail" issue. Dodd-Frank will create clearer consequences for shareholders and for management - capital rules, liquidity rules, risk management principles, counterparty disclosure. What Washington is attempting to do is restore confidence in a system that had lost public confidence. The economy has not been performing as well as everyone has hoped, but job growth has been positive every month since the initial losses following on the Bush Administration.

Joseph Perella,  Chairman and CEO at Perella Weinberg Partners, was the designated Republican on the panel. He thinks we can't go back to Glass-Steagall because the economy has become more complex and Wall Street has moved from partnership to public ownership. He wonders whether regulation can work. He summarized the prevailing Too Big to Fail system succinctly:
It's like a Las Vegas Casino where the croupiers keep their winnings but the House takes the losses.
It's hard, he said, to regulate ambition. There must be a high price for failure, as there used to be. Shareholder activists are seeking to limit compensation when returns are low. He thinks President Obama has moved too far to the left (another surprise). In his summary he said that the economy was wiped out and it will take a long time to recuperate.

Comment on the Q&A. At the Question and Answer period, I pointed out that a one-time president of Guild Hall, William H. Woodin, was FDR's first Treasury Secretary, and I asked the panel why FDR got so much more done in his first 100 days than President Obama did. Joe Nocera responded that not all FDR's innovations were such a good idea, using as an example the Bank Holiday. But (as I did not respond, since there were others waiting to ask questions) most states already had taken bank holidays because the banks didn't have enough currency to pay all the customers. During the national Bank Holiday that was declared when FDR was inaugurated, Woodin had the Treasury's Bureau of Engraving and Printing run the presses overtime and he had $2 billion in bills delivered by trucks over the weekend, with movie cameras filming the printing and deliveries for the benefit of U.S. movie audiences. The Treasury also sent out examiners to determine the solvency of each bank, beginning with the money-center banks, the 1933 equivalent of recent stress tests. The Glass-Steagall Act of 1933 lasted nearly 70 years as the centerpiece of the financial system and the Steagall part (setting up deposit insurance and the FDIC) is still in place. Secretary Woodin (along of course with FDR) was a crucial cheerleader during the months in 1933 that Senator Carter Glass instituted his wall around the banking hen-house as a condition of the deposit insurance that was promoted by Rep. Henry B. Steagall. It took nearly 70 years for the foxes to find their way back into the banking hen-house, and less than five years more for this to bring down the global financial system.

As Joe Perella was leaving, I asked him if he had any idea how the Canadian regulators manage to control their big banks. He said:
It's very simple. The Canadian bank regulators are represented at the Board meetings of the banks.
Mr. Perella's approach to Too Big to Fail makes sense to me. Transparency and accountability in one stroke. This was my big takeaway from the seminar.

Further Comment: I don't recollect any reference either to Neil Barofsky or Gretchen Morgenson at the Hamptons Institute panel meeting. But this morning Morgenson wrote a devastating summary of Neil Barofsky's new book, Bailout (Free Press). Barofsky was the special inspector general for the Troubled Asset Relief Program (TARP). Here's one snippet on his experience:
Government officials, he says, eagerly served Wall Street interests at the public's expense, and regulators were captured by the very industry they were supposed to be regulating.
This story is not unfamiliar. But it is, as Morgenson says, "deeply depressing." Joe Nocera pointed out that it took the Pecora Committee time to stir up the Congress into the determination to reform the financial system as it did in 1933 - and I could add that it took six years for the Bankers' Panic of 1907 to translate into the creation of the Federal Reserve System in 1913. But our communication systems are much better than they were 80 and 100 years ago - we should not be taking so long. Dodd-Frank was not enough and is not being implemented fast enough.

I checked out the report that regulators are or have a right to send representatives to board meetings of  banks in Canada. From my followup research, the key is that they "have the right". It's an option. The Office of the Suprintendent of Financial Institutions routinely gets a copy of all board documents - the agenda, minutes and exhibits. Also, regulators send a representative to the board of the Canada Mortgage and Housing Corporation.

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