Thoughts & Comments
Geithner's Delusion
He thinks Dodd-Frank is likely to prevent the next big financial crisis. News flash: It won't.

Thomas Brown  ( about me )
Posted 03/02/2012
bankstocks.com
tbrown@bankstocks.com

In his op-ed in today’s Wall Street Journal, Tim Geithner informs us that the effectiveness of the Dodd-Frank Act will depend “on the quality of judgment of regulators . . . as they flesh out the remaining reforms” by writing the new rules the law requires. Yes. Well. That’s reassuring, isn’t it?

You’ll forgive me if I don’t share the same faith in the soundness of judgment of our nation’s financial regulators that the Secretary of the Treasury seems to have.  The regulators were the ones, after all, who stood by and did nothing to prevent some banks    from aggressively expanding into subprime mortgage lending. They were the ones who allowed the GSEs to liberalize their underwriting requirements in order to facilitate even more subprime lending. And they were the ones too, who, by keeping interest rates low for so long, facilitated the housing bubble in the first place. But not to worry! Tim Geithner now promises us that Dodd-Frank will prevent the next crisis from happening, since its implementation will be guided by . . . the sound judgment of the financial regulators!  

Geithner’s piece this morning is a load of twaddle. First, he seems to not have straight how and why the credit crunch happened to begin with. It wasn’t the collapse of Bear Stearns that kicked it off in earnest. (JPMorgan stepped in with help from the government and took over Bear in an orderly fashion.) It wasn’t ARM re-sets that set off waves of defaults (short-term rates were so low at the time that the re-set rates weren’t much higher than the teasers). The problem wasn’t the $600 trillion derivatives market, regardless of how they were funded. It was subprime mortgages. The banking system wrote way too many of them, and on ridiculously easy terms. And the banks did this not because the government was powerless to stop them. The banks did it in part because the government was encouraging subprime lending, in the name of “expanding home ownership,” I’m not one of those people who believes federal housing policy was the sole cause of the subprime crackup. There’s plenty of blame to go around, from flawed ratings-agency models to misguided compensation systems. But, please, don’t tell me that regulators’ hands were tied as the problem came to a head. The government was no bystander; it played an active part in creating the mess.

In the meantime, the Dodd-Frank law that Geithner says we should all shut up and stop complaining about won’t do much to prevent the next crisis, and has plenty of provisions that are irrelevant to the task. The Durbin Amendment, for instance, which regulates debit card interchange, is an old-fashioned government stickup of the banks that has nothing to do with safeguarding the system. And how does the CFPB’s planned regulation of debt collectors and payday lenders relate to preventing the next crackup ? The Volcker Rule, meanwhile, is a solution in search of a problem. One would think that one lesson policymakers might have come away with following the crunch is that the asset side of bank balance sheets should be more broadly diversified, not less so. That underlying problem, remember, was that too many institutions owned too much of the same thing—residential mortgages or related securities. Yet the implicit logic of the Volcker Rule is that the government knows better than banks themselves what they should prudently invest in. Well, we all saw how that worked out last time.  

Geithner seems to think that Dodd-Frank will be some sort of cure-all in preventing another financial crisis. It won’t be. All the law does is add a new thick layer of bureaucracy to a regulatory system that was manifestly unable to spot and prevent problems the last time around. Geithner’s faith in “the quality of judgment of regulators” is almost touching in its innocence. It’s also nutty. Should financial regulation be reformed? Of course. The prior system was 80 years old and designed to oversee a financial industry that in many ways no longer exists. But rather than ramming through reforms in the heat of the moment, which Geithner believes was so laudable, maybe some cool deliberation and debate is in order, so that Congress might come up with a solution that will actually work. Meanwhile, Geithner’s mindless griping that we should pipe down and go along with this Dodd-Frank monstrosity is outrageous.  

What do you think? Let me know!


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SW Pilgrim Posted On 3/2/2012 12:58:58 PM

Right on. Not one of the supervisory Alphabet Agency beaurocrats lost their job, much less, pension benefits--and they're hiring. You should do an indepth on the multiple supervisory costs(especially the Patriot Act-relateds) as a % of assets and revenue and the amount of fees necessary just to stay even with 2010. SWP

NW Coaster Posted On 3/2/2012 1:19:45 PM

Geithner = Peter Principle personified. Carrying water for "the re-election campaign" at this point; not exhibiting the candor one would like to see from the Secretary of the US Treasury.

Ole Posted On 3/2/2012 1:19:56 PM

Again, what's up with your former favorite, FIRST MARBLEHEAD?

Ole Posted On 3/2/2012 1:19:57 PM

Again, what's up with your former favorite, FIRST MARBLEHEAD?

Ole Posted On 3/2/2012 1:21:26 PM

Again, what's up with your former favorite--First Marblehead? Pump and dump operation? Please send me a list of all your buys and sells, and dates of, this stock. I'm writing an article on pump and dump.

Oy Posted On 3/2/2012 1:22:58 PM

"Rammed through?" Just how much discussion and foot-dragging and revanchist obstructionism must legislation go through to not be "rammed through"?

Barney's Frank Posted On 3/2/2012 1:25:27 PM

Tim forgot to mention that Dodd Frank doesn't even address the root cause of the problem -- Fannie & Freddie. Nevermind!

grover13 Posted On 3/2/2012 1:26:33 PM

Tom- correct on many counts. But again, you really don't understand how the repeal of Glass-Steagal really kicked off what became the proliferation of subprime. For someone who is supposed to be an expert in banking, I am astounded that you keep missing this point. Subprime existed well before the mid-2000s. It was originated actively in the 80s and 90s, and on a stready growth curve. Then, suddenly in 2000, subprime originations quadrupled from the previous year. Not coincidentally, the Graham/Leech/Bliley act was passed the previous year. The subprime growth at that point was driven by Wall Street banks. Why? It's not like they weren't trading them before; we know from Liar's Poker the history of mortgage trading on Wall Street goes into the mid-80's. This is why- with Glass-Steagal gone, INVESTMENT BANKS COULD NOW PLAY ON BOTH SIDES OF THE FENCE. Prior to 2000, all they could do was bid on mortgages originated by banks, just like everyone else in a crowded market. After Graham/Leech/Bliley, now they were allowed to originate their own mortgages, AND peddle them as securities. They were enabled to feed their own machine- and that's exaclty what they did. Bear Stearns owned EMC. Lehman owned ALS and BNC. Merrill bought Franklin. Further enabled by everything else you mentioned (rates too low, rosy rating agencies, etc.), they then grew the Alt-A market (read: Liar Loans) starting in 2002. It was only after everyone else saw the gobs of money that Wall Street was making that the likes of WaMu, Freddie, Fannie, and everyone else and their brother started clamoring for their fair share. Granted, the regulators absolutely failed there as well. But it all started with the repeal of Glass-Steagal. The Volcker rule is ABSOLUTELY NECESSARY as a safeguard. It's not perfect, but it needs to be in place.

Ken Greenberg Posted On 3/2/2012 1:26:37 PM

Tell it like it is, Tom. I'm sick of our elected officials manipulating the system and contributing to the crisis, and then blaming everybody else. It's like they're all in their Teflon raincoats. Much of Dodd-Frank is a diversion so we'll think they're really doing something meaningful.

Jerry Plant Posted On 3/2/2012 1:32:52 PM

I agree with your comments and conclusions as well. However, I would add to the list of culprits responsible for the subprime mortgage problem the underwriting process which in many instances was performed by people with no recourse on the paper, and who were compensated based on the number of loan originations created for the upstream and packaging process. If you were going to solve the problem at its source, you shoud require skin in the game and capital on the part of the originators.

Bill Dunnell Posted On 3/2/2012 1:33:25 PM

Well done Tom. Here in Seattle back in the 2002 time frame the Federal Home Loan Bank of Seattle came under the leadership of a local politician who dramatically ramped up lending to low income earners in order to give them access to the american dream of home ownership. In a couple of years the institution saw masive losses and needed regulators to come in and clean the place up. Meanwhile the politician CEO, who was a nice guy and very popular, was allowed to slip away with a pension and no blame. Little did we know that the same thing was happening at Fannie/Freddie but on a much larger scale. The new bank laws will not prevent do gooders from pushing bankrupt social policy on the business community.

jsc173 Posted On 3/2/2012 1:47:44 PM

Dodd-Frank is more likely to cause the next financial crisis than solve it. We still have no idea whatsoever about CFPB's plans and how much extra time away from running their business bankers are going to have to spend to attend to CFPB's examinations, in addition to the audits and examinations they now endure. Sheer lunacy.

rivvir Posted On 3/2/2012 2:07:51 PM

Tom, grover's got it right. You still don't understand. How could you? You couldn't figure it out while the crisis was red hot, and lost all that money. While i wasn't invested in you i was invested with you, having some of the same stocks you were promoting because you just didn't see. Including Ole's thrice cited fmd (which i still have, rather, i bought back into, much lower than it is now). You and my former idol heebner, who famously pronounced the banks weren't exposed back around march, before things started totally falling apart in july. It looks to me as if you still don't understand what hit us. At least i got out of these things while you were still promoting, and i have bought into a number of them, including that fmd, much lower than where i sold, much lower than they are now, when the oft quoted pendulum did its thing in the opposite direction. Barney's is your type guy. He really thinks fannie and freddie were the problem, not how and why they wound up being run as they were. I guess you believe the same. What makes you guys unable to change your thinking when reality dictates your thinking needs changing? You're stuck on the concept that reality gets it wrong at times, but never you. Was it "bankrupt social policy" or bonuses greed that got the banks to write the majority of mortgages, and got all those ultimately worthless, and worse, swaps into play?

jack Posted On 3/2/2012 2:12:33 PM

No one says the CFPB's planned regulation of debt collectors will prevenmt the next crack up. It does however provide some level of protection against the unscrupulous acts of many financial institutions. You continue to loose credibility with me as you comment about the CFPB. I agree that many parties were to blame for the collapse of the system but at the end of the day if banks and Wall Street are allowed to do whatever they please then many consumers will get the shaft. I am not a bleeding liberal, just someone who sees things from both sides. Perhaps you should try to do the same. We should talk some day.

Hightide Posted On 3/2/2012 4:00:22 PM

Grover13, great summation. I think Mr. brown might be carrying water for the GOP.

tom brown Posted On 3/2/2012 5:02:47 PM

grover13 You may not understand the Volcker Rule; it would have changed the magnitude of the crisis very little.

grover13 Posted On 3/2/2012 5:25:36 PM

Tom, Thanks for replying. So then, set me straight....if Graham/Leach/Bliley had no impact, then why did the investment banks only dramatically increase subprime volume after that legislation passed? What access did they have to originate their own mortgage pipelines prior to that point? I'm fairly confident the answer is "None", as Glass-Steagal prohibited it. If you have knowledge to the contrary, please share. That being said....prior to 2005, a sudden souring of the mortgage market would have lost a lot of investors a lot of money- but not toppled the system. That was accomodated when SEC genius Chairman Cox deregulated further, and allowed investment banks to increase their leverage from roughly 12-1 to over 30-1 ratios. Then when the market did go sour, everyone crumbled under the sheer magnitude because they were all levered to the hilt. There are contributors all throughout the system to the perfect storm that became our financial crisis of the century. But it all started when Glass Steagal was repealed. It needs to be reinstated.

Dodd-Frank Posted On 3/3/2012 9:34:15 PM

Ole, you must be a complete idiot. Congrats!

Dodd-Frank Posted On 3/3/2012 9:34:32 PM

Ole, you must be a complete idiot. Congrats!

living in cfsa Posted On 3/4/2012 9:59:01 PM

the CFPB is not only hiring the same regulators that failed us during the housing crisis, but also giving them a big raise. if you think the new CFPB/Bureau will prevent the next crisis, you simply don't get it. the Bureau at best gives a false sense of security. the Bureau's agenda is not to fend off the next crisis, but to execute the commander in chief's political agenda, all in the name of doing right be the little guy. what do we have thus far? Banks charging fees to close bank accounts, no more free checking, bank accounts with fees 30% higher, average NSF fees higher, and so on. the consumer is getting killed by this so called consumer protection Bureau. on the business side, businesses are absolutely paralyzed by dodd-frank. that is why they are so cautious to lend (or simply not lending). businesses are just trying to make heads and tails out of this terribly written, extremely complex, arbirtrary, vague, and ambiguous regulatory montrosity. it's simple math...higher costs to lend, less lending = higher cost, less lending. and, collection agencies already have their hands tied. they can't even call a cell phone number for a customer that their customer didnt' give to them using standard dialer technology. they have to be licensed by nearly every state, be audited by nearly every state, and now have the bureau to deal with too. same applies to so many other areas of dodd frank, including payday lending, consumer lending, open ended credit, credit cards, etc. All of these areas already have mounds of laws to contend with, and the Bureau is another layer but in the worst way. the words 'abusive' and 'deceptive' are based on this new idea of behavioral economics which simply states the consumer doesn't know better and it's business' responsibility to warn them appropriately...to even withhold services to them. these standards are new and destructive. anyone who thinks dodd frank is good for the economy doesn't know a damn thing about it. we a

JRG Posted On 3/5/2012 9:35:04 AM

Other than rebublican talking points What factual ecvidence do you have to prove that the the Government encouraged sub prime lending and that this was a major cause of the financial crisis? The bipartsan Financial Crisis Inquiry Commision found that the CRA (the usual republican scapegoat for this argument) was not a material cause. In the last two years before the crisis, most of the subprime mortgages and pretty much all of the CDOs and credit default swaps were underwritten in the private sector. There were multiple complex causes of the crisis, poor regulation being one of them but a review of the data would indicate that the private sector was mostly to blame

Question Posted On 3/6/2012 9:46:01 AM

JRG: Do you deny the government's (both dems and republicans) policy to encourage and increase home ownership via subprime lending? If you agree that government played some role w/wall st., I don't think citing a "government commission" report necessarily breeds a lot of confidence (I don't care if they call it bi-partisan) when it comes to correctly assigning responsibility. Additionally, I don't believe it was a unanimous vote on the final report. In my view after working in the financial services industry for over 35 years, consumers, GSEs, wall st., rating agencies, and money managers were all greedy participants (direct and indirct participants in the mortgage security food-chain) with the government (in my view for votes) and the fed promoting and encouraging the environment.

JW Posted On 3/7/2012 12:23:24 AM

Larry Summers was right... there are no adults left in the White House.

JRG Posted On 3/7/2012 10:40:54 AM

To Question Just because its a government report you imediately discredit it ! Did you read the report? Tell me where you disagree and why -show me the data where the report got it wrong. There is a tremendous amount of external data available that supports the report's conclusions. The commision had ten members and there was one dissent by Peter Wallison of the AEI who had already taken a position before the commission started that the government was largely to blame. Is anyone surprised that he disented? The analysis on his dissent that I have read largely discredits it. The majority of subprime origination durring the two years before the crisis was done by comapnies like Countrywide that were not subject to CRA. Does anyone really believe that all these crap mortgages and securities were developed and originated because the goverment wanted to suport home ownership? The government may have created the environment and failed to properly regulate but the private sector was the perpetrator.
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