Friday, January 22, 2010

Banking Reform & Geithner

As we wrote yesterday, the new proposal to limit the scope and size of systemically dangerous banks appears to be very limited and vague.  We used the specific information of the background briefing after the announcement which indicated the size of banks would be limited "as is".  This is in line with the soft bank tax previously announced of 15 basis points on banks with $50 billion only to discover, despite the cries of anguish from bankers, that the bank tax is deductible on their corporate tax returns.

Much of the concern from the scope and limit proposals yesterday is circling around proprietary trading and how will proprietary trading be defined.  If everyone knew what comprised proprietary trading before yesterday, why is the definition so obscure today?  It is not just a matter of asking all the attorneys to leave the room, the smoky confusion is also emanating from the aft decks of the retreating banking fleet.  The banking analyst Meredith Whitney has questioned the meaning of scope and size with emphasis on proprietary trading.  In actuality, proprietary trading in easily defined by its operational  impact and purpose.

The absolute vagueness of yesterday's proposals have engendered a response that it is a political play and not designed to be a substantial reality.  Given the need for financial reform and the failure of Congress and the President to push any effective financial reform with real teeth to fruition, this new emphasis needs to be very real or the public will seek change elsewhere.

Of more concern is comments by Treasury Secretary Geithner would appear to further confirm that either the Administration is not serious or he is not on board with limiting the scope and size of banks, because he has voiced concern that the proposals, which he supposedly helped draft with Larry Summers and Paul Volcker, would sacrifice good economic policy.  Did anyone see Larry Summers at President Obama's announcement yesterday?  Of even more concern is Geithner's PBS interview in which he answered "No, this does not propose that" to a question is this meant the break up of big banks.

Any attempt at financial regulatory reform must include a definition of "systemically dangerous".  The term "Too Big To Fail" is bogus and misleading as we have discussed many times and as Joseph Stiglitz has enumerated on more than one occasion.  Systemically dangerous should not just be banks but any financial institution whether it is a hedge fund, insurance company, or some other company engaged in shadow banking.

This Administration has put forward too many proposals without specific details, which has allowed the lobbyists to mangle, neuter, and fulgaratively defenestrate originally content empty legislation.  It is time to be purposeful and definitive.

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