Action and dysfunction in the Beltway swamp. E-mail tips to firstname.lastname@example.org.
Screwing over young voters is not a particularly wise idea, and much less so with only four months until a presidential election. (It should go without saying that it’s also terrible policy).
Accordingly, Republicans and Democrats in the Senate are approaching a deal to keep federal subsidized student loans—in which the government pays students’ interest while they are still in school—from seeing a 100 percent interest rate increase on Sunday, from the current 3.4 percent to 6.8 percent.
The crucial context here is that Republicans really don’t think the government should subsidize student loans at all, but have been brought along by political realities.
During the debt ceiling showdown last summer, House majority leader Eric Cantor proposed that the government should stop paying loan interest rates while students are in school, and that the burden should fall to students themselves. That would effectively end the Stafford subsidized program at issue now. The conservative Club for Growth is still advocating an end to the program, and will be scoring the vote.
House Republican leaders initially said they would try to prevent the rate increase, but were pushed forward when Democrats started beating them up—and when even Mitt Romney said he supported an extension of the low rate.
Accordingly, House Speaker John Boehner whipped up a bill that would extend the low rate and pay for it by raiding preventive care programs created by the healthcare reform, which Republicans derisively refer to as an “Obamacare slush fund.” Thirty House Republicans still voted against that proposal, but it passed.
Last month in the Senate, Harry Reid matched the partisan pay-for with one of his own: he proposed a bill that extended the low rate and paid for it by ending a loophole that allowed very wealthy Americans to hide their income and pay less payroll taxes.
The stalemate stood here for weeks, and slowly evolved towards a compromise. Republicans dropped the idea of raiding preventive care money, Democrats dropped the proposal to close the tax loophole, and now we’re looking at pay-fors involving pension funding and tinkering with the post-graduation interest accrual for students. A vote could come as early as today in the Senate.
That’s welcome news, but I can’t help but wonder if Democrats gave in to easy in the name of getting a deal done. They had two winning political issues on their side—helping students and taxing the wealthy. Would Republicans have dared to sacrifice help for students, particularly on the altar of less funding for preventive healthcare? We’ll never know.
The push to remove JPMorgan Chase CEO Jamie Dimon and other financial-sector executives from the Federal Reserve Boards of Governors came inside the walls of the Fed on Monday, as noted economist Simon Johnson presented officials there with a petition and urged them to change the structure of the important boards.
At the twelve regional Federal Reserve banks, there are nine-member boards of directors. Six of the seats are selected by banks from the region—three directors to represent their interests, and then three directors, picked by the banks, that will allegedly represent “the public’s interest.”
Dimon sits on the Federal Reserve Bank of New York and has become a poster boy for activists seeking to keep bankers off the Boards of Governors. The petition that Johnson, a professor at the Massachusetts Institute of Technology, presented to Federal Reserve staffers has nearly 38,000 signatures, and asks that he resign or be removed.
The essential conflict of interest is that the Federal Reserve is charged with maintaining the safety and soundness of Wall Street banks, and executives at those institutions often resist such changes in the name of riskier gambles and bigger profits. Moreover, in recent years the Fed has handed out over $4 trillion in zero-interest loans to many of those banks. (JPMorgan Chase received $390 billion in emergency funds during the bailouts, and $29 billion to buy Bear Stearns).
“Frankly, I think Jamie Dimon should have resigned in the spring of 2008 when JPMorgan Chase acquired Bear Stearns with financing provided in part by the Federal Reserve,” Johnson said on a conference call shortly after his meeting. “I think to any outsider, anyone with knowledge of how corporate governance operates in general in the United States, or best practices around the world, this looks like a related-party transaction, and typically you would step down from the board of directors when something like this was in the works.
“It is surprising and very uncomfortable to many people, including many people who are close to the Federal Reserve system, that Jamie Dimon has continued in this position.”
But while Johnson was happy that Federal Reserve staffers, including General Counsel Scott Alvarez, met with him, he wasn’t necessarily encouraged by the discussion.
“I have not felt optimistic about either Jamie Dimon resigning or the Federal Reserve, both at the New York level or the Board of Governors level—changing its policies in a substantial way, in a way that would help to restore confidence in the integrity of the system,” Johnson said. “I’ve not felt that optimistic for quite some time, and there’s nothing that happened today, unfortunately, that changed my lack of optimism.”
What should be done if the Supreme Court strikes down the Affordable Care Act’s individual mandate?
If the Court does anything—which, of course, it should not—it would likely only remove the mandate and possibly the associated insurance company regulations and subsidies for purchasing insurance. Striking down the entire law would be a dramatic and unlikely step, even for this conservative bench.
So where would the law stand if the mandate disappears, and what could be done to patch it?
Many Democrats and their political allies have been publicly and privately talking up the benefits of the Affordable Care Act outside the mandate—like the Medicaid expansion, the ongoing creation of state exchanges for buying health insurance, the various cost-control measures in the bill—and downplaying the severity of losing it.
“There’s been entirely too much attention paid to the mandate, and not enough attention paid to what the law will do and the ways that it’s already benefiting millions and millions of Americans,” Ethan Rome, executive director of the progressive coalition Health Care for America Now, which was instrumental in getting the law passed, told me in a phone interview. “The sport of speculation about what the Court will do is in overdrive, and as part of that, people are overthinking how to make the law work if one thing or another about it is changed.”
But there’s no doubt that if the Supreme Court indeed guts the mandate, it would create a political opportunity for more reform of the healthcare system. Seventy-seven percent of Americans want another reform attempt even if part of the law is struck down, and President Obama has been privately telling donors his administration would probably make another run at improving it. House minority leader Nancy Pelosi is on board too. And who really thinks that, even if it remains untouched, the Affordable Care Act represents the pinnacle of health reform?
Here’s a quick look at some policy options to move the ball forward on healthcare reform if the mandate is struck down:
Helping the uninsured to buy coverage. The idea behind a mandate was that by increasing the number of people buying insurance, it would lower the costs for everyone else—both by broadening the base of premium payments, and reducing the external costs of the uninsured seeking treatment in emergency rooms. More urgently, since the ACA required insurance companies to provide coverage to people with pre-existing conditions, it had to have a mechanism to ensure that people wouldn’t just wait until they got sick and then purchase insurance.
But if the mandate is gone and you can’t force people to buy coverage, there are several ways you might be able to entice them to do so:
Subsidies. In the House version of the Affordable Care Act, a surcharge on the wealthy would help fund subsidization of health insurance for people who couldn’t afford it. Annual household income in excess of $350,000 but less than $500,000 would be have a 1 percent surcharge attached; annual household income in excess of $500,000 and less than $1 million would have a 1.5 percent surcharge; and annual household income in excess of $1 million would have a 5.4 percent surcharge. Thursday on Capitol Hill, House minority leader Nancy Pelosi said that in the event the mandate is struck down, “there could be something passed in the Congress, similar to what we had originally in the House bill, which was a surcharge on the wealthy to pay for aspects of [coverage].”
Employer auto-enrollment. Under the ACA as it stands now, large employers (with 200 or more employees) must automatically enroll workers in a health insurance plan, though the workers can opt out if they want to. By making enrollment the default position, we can catch more young and healthy people who might decline to select a plan in the name of a bigger paycheck. One idea for further expanding coverage without a mandate is to extend auto-enrollment to smaller employers, and possibly even ones that don’t offer health insurance. In the words of the Government Accountability Office, this might further “overcome individuals’ inertia in choosing a plan.” If an employer doesn’t offer coverage, it would be forced to help an employee enroll in a plan through the state exchange markets. While it would no doubt help patch some holes left by the absence of a mandate, there’s an obvious problem to this solution—it affects only people with a job, and most people without health insurance are unemployed.
Age rating. The government could entice young and healthy people to buy coverage by allowing health insurers to charge them less, which is known as age rating. The ACA allows insurance companies to charge the elderly only a maximum of three times more than the young, but if that ratio were revised upward, it could make health insurance more attractive to the healthy. But the flipside is that it would necessarily make coverage for the elderly even more expensive, and as Ezra Klein notes, age rating hasn’t done much for affordability of coverage in New Jersey, where it’s been in place since 2008.
Penalties for not buying coverage. Aside from helping people buy coverage, you can penalize them for not doing so. That’s what the individual mandate does, instituting penalties ranging from $695 for poor Americans to $12,500 for wealthy ones for not obtaining health insurance. You can create penalties in other, smaller ways without a mandate—though we should note that these aren’t particularly progressive options. If you think of the uninsured as being all free-riders, then penalties make sense. But again, a majority of the uninsured are either too poor to afford insurance or don’t have a job that offers it, and are often both. So penalizing them further isn’t terribly helpful.
State-level mandates. If the Supreme Court rules that the federal government cannot mandate health insurance coverage, it doesn’t mean that individual states can’t do it. Many probably would, especially if the pre-existing condition regulations remain in place. Even Governor Scott Walker—a rabid opponent of “Obamacare”—said recently that he would explore “guaranteed issue” of health insurance in Wisconsin. “Certainly not a federal mandate,” Walker. “[But] I think those are debates people can have at the state level.”
Tax penalties for uncompensated care. If the federal government wasn’t allowed to institute a broad set of penalties for not buying coverage, it could create new taxes for going to an emergency room and receiving charity coverage without insurance. The GAO outlines a few ways to do this: by instituting the tax on everyone, but waiving it when an individual presents proof of insurance, or by taxing the uncompensated care directly. This would indeed make free-riders more likely to buy insurance, to avoid heavy tax penalties, but if you consider someone who lost their job and thus their health insurance, laying extra taxes on them after a heart attack really isn’t a wonderful policy.
Open enrollment periods. If you receive coverage through your employer, you’re probably familiar with these. Health insurance companies and employers will join together to offer periodic and finite enrollment periods for insurance of varying cost and coverage—the idea is to prevent people from picking the cheapest plan and then bumping up their coverage if they get sick. One approach to creating a soft mandate is to expand open enrollment periods—the ACA already institutes annual open enrollment, but some proposals advocate making open enrollment happen only every two years or even every five years to create even stronger incentives to get insurance. One could still buy coverage after open enrollment, but would face financial penalties for doing so. (Such proposals have exemptions for people with “qualifying life events,” i.e., becoming an adult, giving birth, changing jobs or getting a divorce).
Making health coverage part of your credit rating. This is contained in a GAO report outlining several post-mandate policy options dreamed up by a variety of experts, academics and industry officials. I’m only including it here to point out what an awful idea it is. The proposal is to essentially lower your credit score if you don’t have health insurance. Yes, it would probably bring some free riders into the insurance pools, but destroying the credit of unemployed people with no health insurance is terrible public policy. Another idea in the GAO report is to make possession of health insurance a condition for receiving certain government benefits, such as a federal college loan. This is terrible for the same reason.
Thinking progressively and outside the box. After considering how regressive penalties for not buying insurance can be, you might realize a dirty little Democratic secret, if you haven’t already: the individual mandate isn’t all that progressive. Yes, it makes the Affordable Care Act work better, and should be preserved. Yes, the Supreme Court would unmistakably enter into a new period of activist overreach if it strikes it down. But remember this was originally a Republican idea.
So what are some truly progressive alternatives to the mandate?
An obvious answer is single-payer health insurance. Former Labor Secretary Robert Reich wrote in March that if the Supreme Court strikes down the individual mandate but leaves the pre-existing condition requirement in place, “Obama and the Democrats should say they’re willing to remove that requirement—but only if Medicare is available to all, financed by payroll taxes.”
The political will for a single-payer system almost certainly doesn’t exist right now, however. (Though Democrats could start nudging towards it, for example by lowering the Medicare eligibility rate to 55).
In the meantime, the public option might be the best viable option for a progressive improvement of the healthcare system—and one that would seem much more attractive if the Supreme Court guts all or part of the ACA. More so than any of the aforementioned incentives, and more so than a punitive individual mandate, the public option would be extremely compelling for the uninsured, offering a lower cost and more protections than most private insurance plans.
In 2010, when it was clear the public option was dead in the Senate, President Obama promised progressives he would return to fight for it later on down the road. He should be held to that promise, particularly if a key part of his bill is struck down—and frankly, even if it isn’t.
As the House Financial Services Committee hearing into recent failures at JPMorgan waned, bank CEO Jamie Dimon finally said what had already been obvious to everyone—he didn’t want to be there. “These are complex things that should be done the right way, in my opinion in closed rooms,” Dimon said. “I don’t think you make a lot of progress in an open hearing like this.” In the closed room, Dimon said, everyone would be “talking about what works, what doesn’t work, and collaborating with the business that has to conduct it.”
Dimon is indeed quite effective in closed rooms. He’s received personal audiences with Treasury Secretary Timothy Geithner to push back against a strong Volcker rule, and his staff has enjoyed several more. The closed rooms at JPMorgan are populated by throngs of former Congressional staffers and even former members. The bank has plied current members with millions in donations, including over $522,000 to the Senate Banking Committee, where Dimon testified last week, and $168,000 to members of the House Financial Services Committee just this year.
This works well for Dimon and his allies. The financial services industry was unable to defeat the Dodd-Frank legislation in public view because overwhelming numbers of Americans supported the bill—it was arguably the only popular piece of regulatory legislation in the Obama era—but Wall Street has operated in closed rooms over the past two years to delay and weaken the rules. Before the London Whale catastrophe, Dimon was on the brink of achieving a weak Volcker Rule that would allow a wide variety of risky proprietary trading.
Dimon admitted during today’s hearing that the moment he realized how large the losses at the bank were, he knew he’d end up in front of Congressional committees and that the Volcker Rule would become a hot topic of conversation. He presumably knew how serious of a problem this would be: a public flogging could revive popular opposition to weak Wall Street rules and draw unwanted attention to the backroom dealings.
This is why last week’s love-fest in the Senate was so troublesome—it was a valuable missed opportunity for Democrats in particular to focus and mobilize public attention towards stronger regulation of the financial sector.
Unfortunately for Dimon, Wednesday’s panel of House members wasn’t nearly as friendly. And though the questioning was somewhat rambling and occasionally misinformed, there were several instances of righteous populist anger focused at Dimon.
Before Dimon even appeared, during a panel of regulatory chiefs, Commodity Futures Trading Commission head Gary Gensler put the problem in easy-to-understand terms.
“The swap market lacks necessary street lamps,” he said. “I think the American public still isn’t safe on these roads until we get the rules of the road in place. I think the America public was bystanders to taking on excessive risk in 2008, and we still have been.”
There was a big headline from the interrogation of the regulators. Each one—from the Securities and Exchange Commission, the CFTC, the Federal Deposit Insurance Corporation, the Office of the Comptroller of Currency, and the Federal Reserve Board of Governors—admitted that they didn’t learn about the losses at JPMorgan Chase until they read about it in the paper. This should focus the attention of the public on the still-inadequate staffing levels and deeper pro-industry philosophies at our top agencies. Journalists were writing about the London Whale positions before it even went bad—why couldn’t the OCC, which has inspectors at the bank, see the same?
Once Dimon appeared, he was battered with populist anger. Representative Gary Ackerman (D-NY) had perhaps the best monologue, about the unnecessary nature of the propriety trading Dimon seeks to protect. He delivered it to an extremely huffy Dimon:
I used to think that all of Wall Street was on the level, that it facilitated investing, that it allowed people and institutions to put their money into something that they believed in and believed would be helpful and beneficial and grow and make money and especially help the economy and on the side create a lot of jobs and be good for our country and good for America.
Now a lot of what we’re doing with this hedging—and you can call it protecting your investment or whatever, but it is basically gambling—you’re just betting that you might have been wrong. It doesn’t help anything succeed anymore, doesn’t encourage anything anymore. It creates the possibility that people say, ‘Do these guys really know what they’re doing if they’re now betting against their initial bet and if you go and hedge against your hedge?—which means you’re betting against your bet against your first bet—it seems to me you’re throwing darts at a dartboard and putting a lot of money at risk just in case you were wrong the first time. I don’t see how that creates one job in America.
It wasn’t just Democrats, either—Republican after Republican filleted Dimon with tough questions about recklessness at his bank and on Wall Street. (The very notable exception was committee chairman Representative Spencer Bachus, who has received more money from JPMorgan Chase than any other donor except one over his career and consistently interrupted even members of his own party when they went too hard on Dimon).
Dimon was asked repeatedly about the dangers of proprietary trading (which he continued to broadly over-over-over define, even saying at one point that “Every time we make a loan, it’s proprietary.”) He was asked why his bank didn’t lend more to small businesses, why he believed his bank wasn’t too-big-to-fail, if his pay would be clawed back because of the big losses, even about why he paid janitors in Houston only $8.35 per hour when he made over $19 million last year. Representative Brad Miller repeatedly pressed Dimon on his oversight of the losses and subsequent statements to investors, which if he answered in the wrong way would put Dimon in danger of prosecution under Sarbanes-Oxley. (He’s theoretically in danger already anyhow).
I think the questioning could have been a little more focused, hitting repeatedly and simply on the issue of proprietary trading. With so many disparate lines of questioning, Dimon was able to use the five-minute time limit and filibuster into the next questioner.
But just as Mitt Romney prefers income inequality be discussed in “quiet rooms,” Dimon would have certainly preferred that this happen in a closed room. He understood the dangers. But it didn’t.
The question is, What comes next? Will reformers inside and outside Congress keep public attention focused on the dangers of proprietary trading by federally backed banks, and on the ongoing weakening of the Volcker rule? I’m not naïve enough to think one tough hearing changed the landscape, but it at least presents a roadmap forward for advocates of tougher regulation—take the conversation out of the shadows and into the light.
Our post–Citizens United campaign finance system isn’t perfect—one might say, horrifically corrupted—but it would work a lot better if regulatory agencies enforced existing rules. The Federal Elections Commission, for example, has not issued a single rule related to Super PACs, and is refusing to take action on a wide variety of apparent infractions, like coordination between campaigns and the outside money groups. As Senator Sheldon Whitehouse told Talking Points Memo this morning, “Some of the referees have taken themselves off the field on this and that’s allowing the special interests to rule-break with relative impunity.”
The FEC remains inert in large part because it’s evenly split between Democrats and Republicans, and they can’t agree on anything. President Obama should have been able to make several appointments by now, thus breaking the deadlock, Senate gridlock has thwarted any attempt to do so—and actually, the only attempt the White House made to fill an FEC seat was blocked by Senators Russ Feingold and John McCain because they felt the pick supported only the status quo.*
We noted earlier this year that good-government groups have been pushing the White House to force new commissioners onto the FEC, either through recess appointments or by aggressively trying to move the Senate. The groups launched a petition on the White House website, which reached the necessary 25,000 signatures that demand an administration response.
That response came yesterday, and it wasn’t very encouraging. It basically just said, “we’ll tell you when we tell you”:
“While the Administration doesn't comment publicly about the President's personnel decisions before he makes them, the Obama Administration is committed to nominating highly qualified individuals to lead the FEC,” Special assistant to the president for justice and regulatory policy Tonya Robinson said. “The agency, and the system of open and fair elections that the FEC is charged with protecting, deserve no less.”
The response then went on to blame Congress for not enacting stronger campaign finance laws, which it appears unable to do. (That’s what Whitehouse was lamenting to TPM this morning). That’s certainly fair, but that doesn't excuse the White House from taking action.
"There are so many problems with our current campaign finance system that the least President Obama could do is make sure the agency overseeing it is in working condition," said Adam Smith of Public Campaign. "Appointing new commissioners to the FEC is something he could easily do right now."
Recall that when the Obama campaign announced it would be embracing the use of a Super PAC, it claimed to be doing so reluctantly and that it would simultaneously push for a better campaign finance system. FEC reform would have been a good way to prove it was serious.
NOTE: An earlier version of this story said Republicans in the Senate blocked Obama's nominee, not McCain and Feingold. Thanks to Sean Parnell for the correction.
(AP Photo/Matt York)
After years of complaints from immigration rights groups about the administration’s deportation policy—which is expected to toss 400,000 immigrants from the country this year—the White House announced a significant policy shift this morning. The Department of Homeland Security said that young people (between 16 and 30) who have no criminal histories will be issued work visas allowing them to find work and stay in the country.
Despite the stark-naked political motivations—to win over Latino voters and box out Congressional Republicans, who have been talking about introducing legislation with similar intent—the policy change is still meaningful. (And it shouldn’t really be a surprise that politicians do things for political reasons, though I think undocumented young people could legitimately wonder why this wasn’t enacted two years ago, when it was clear the DREAM Act was dead in Congress).
Under the new policy, as many as 800,000 young undocumented immigrants could stay in the country indefinitely if they are between 16 and 30, have no criminal histories, have been in the country for at least five continuous years, and graduated from high school (or obtained a GED, or served in the military). Under those qualifications, they can obtain a two-year visa with no limits on how often it can be renewed.
This is doubtless a huge relief to many people who came to the country without documentation when they were young and have known no other home, and have been trying to build a life while under constant fear of deportation.
Unlike previous easements of deportation policy, like last summer’s announcement that only people with criminal histories would be targeted, this shift is important because the government will issue work visas conferring legitimate legal status on people instead of just granting an understanding that they won’t be deported. Also, the policy is affirmative, meaning one can approach DHS and apply for the visa instead of waiting to be caught by authorities.
But there are several important caveats. Since this is an executive action, it could (and likely would) be reversed by President Romney in six months. Granted, the administration had no choice to go this route, since House Republicans have already declared the DREAM Act dead, but undocumented young people still know they are walking on shaky ground even with the new policy.
Previous administration efforts to ease deportations also create reasons to be skeptical. Though the administration claimed it would exercise discretion and deport only those with violent criminal histories, deportations only dropped an almost imperceptible two percent.
Without question, the new policy isn’t enough and the undocumented need a comprehensive immigration strategy to be enshrined through legislation. But with Republicans like Rubio already saying the new policy is “welcome news,” the administration may be pulling the debate to the left and making a comprehensive solution more likely.
In fifty years, when historians look back upon the current era of unbridled financial sector influence on American government—unless all historians are by then employed at CitiBankofAmericaChaseOne Institutions of Higher Learning™—Wednesday’s hearing of the Senate Banking Committee will be an instructive example of our perverse power structure.
Jamie Dimon, CEO of the JPMorgan Chase, the country’s largest bank, appeared before the committee after a clear screw-up: traders at JPMorgan placed a series of complex bets that resulted in $2 billion in losses and counting.
This should be of great concern to the Senate. Since deposits at JPMorgan Chase are backed by the federal government, risky market gambling could create the need for another massive public bailout of a normally profitable private bank.
But instead, a vast majority of the Senators at Wednesday’s hearing repeatedly praised Dimon’s wisdom and executive acuity while politely soliciting his opinion on how he thought his own bank should be regulated. That shouldn't be too surprising if one examines the bank's political giving--members of the committee received $522,088 of the bank's cash in recent years, with $296,557 going to Democrats and $285,531 to Republicans. (See the graphic above).
And Dimon happily played the part. To underscore who is the boss, he first demanded and received a one-week delay in the hearing after being summoned by the chairman, Senator Tim Johnson, and then showed up on the appointed day wearing cufflinks with the presidential seal to take questions from his underlings.
“We’re here quizzing you,” Senator Bob Corker (R-TN) explained to Dimon in a typical exchange. “If you were sitting on this side of the dais, what would you do to make our system safer than it is, and still meet the needs of a global economy like we have?”
Rather than focusing on the clear and present danger presented by JPMorgan’s risky financial maneuvers, Corker then invited Dimon to opine on the “societal good” of his bank, and asked, “What would society be like without these institutions?” (Dimon eagerly expounded on the value JPMorgan chase provides to the public, particularly “mothers and veterans.”)
Instead of pressing for tougher controls, Senator Mike Crapo (R-ID) asked Dimon, “What should the function of the regulators be?”
Some Senators even asked Dimon what regulations he’d like to dismantle. “I would like to come away from the hearing today with some ideas on what you think we need to do, what we maybe need to take apart that we’ve already done, to allow the industry to operate better,” said Senator Jim DeMint (R-SC).
At one point, after being overloaded with invitations to help out, Dimon offered that “me and lots of other folks, we’ll do whatever you want, we’ll even get apartments down here. Let’s go through [the regulations] in detail.”
But in a different world, Dimon should have had to navigate some tough terrain. His bank’s error makes a strong case for tough regulation of high-stakes financial gambling at commercial banks, and he had to pretend it didn’t.
The important context is that two years ago, the financial industry lost a legislative fight over the Volcker Rule, which would prohibit risky, proprietary trading by federally insured banks. But the rule is still being written by regulators who are trying to navigate a complicated question: How do you permit simple hedging—where a bank makes financial bets against some assets to protect itself in the event of a downturn—but disallow larger-scale, profit-driven betting?
JPMorgan’s position was that the massive losses they incurred were a simple hedge against existing bank positions, which somehow went bad through incompetence by lower-level executives. In Dimon’s telling, the bank originally took out credit default swaps—that is, financial instruments similar to insurance that would pay off if a certain company or index went sour—in order to safeguard the bank’s assets.
“If you look at the position, what it was meant to do is—in benign environs, maybe make a little money, but if there was a crisis, like Lehman, like Eurozone, it would reduce risk dramatically by making money,” Dimon said.
Perhaps that was the original intent, but JPMorgan traders in London began layering very complex bets on top of it, and even began selling insurance on a large index, the IG9, instead of buying insurance. (Hedge funds caught wind of this position, bought a lot of JPMorgan insurance on the IG9, and proceeded to pummel its value, thus incurring massive losses at the bank.)
Dimon needed to pretend that what happened was simple incompetence, a hedge gone wrong, and not a desire to make profit through trading—that would be a direct violation of the spirit of the Volcker Rule and might cause regulators to beef it up. (Financial investigator William Black calls this overly broad definition “hedginess,” a tribute to Stephen Colbert’s characterization of the Bush administration’s “truthiness.”)
Here’s Senator Jack Reed (D-RI) trying to pin Dimon down on this point—an unfortunately rare moment during the hearing:
REED: In 2011 or '12 at some point, the bet was switched. And now you started rather than protecting your credit exposures, taking the other side of things—selling credit protection. Which seems to me to be a bet on the direction of the market unrelated to your actual credit exposure in Europe, which looks a lot like proprietary trading designed to generate as much profit as you could generate. [This] seems to be inconsistent, again, if this is simply a risk operation and you’re hedging a portfolio. How can you be on both sides of the transaction and claim that you’re hedging?
DIMON: I think I’ve been clear, which is—the original intent was good. What it morphed into I’m not going to try to defend. Under any name, whatever you call it, I will not defend it. It violated common sense in my opinion.
This was Dimon’s refrain throughout the hearing—that a good idea somehow “morphed” into a bad one, almost as if it was a cancer that nobody could predict nor control. “The way it was contrived between January, February and March, it changed into something I cannot publically defend,” he said at another point.
Would a strong Volcker Rule have prevented this evolution towards risky proprietary bets? Of course it would have, but Dimon has been the lead proponent to make sure it doesn’t, personally visiting the Treasury Department several times this year and spending over $10 million on behind-the-scenes lobbying in the past two years.
When asked directly if a strong Volcker Rule would have prevented the losses, Dimon gave a response that harkened an image of Sylvester the Cat professing innocence as yellow feathers dangle on the edge of his lips. “I don’t know what the Volcker rule is, it hasn’t been written yet. It’s very complicated,” Dimon said. “It may very well have stopped parts of what this portfolio morphed into.… I just don’t know.”
His bank’s influence runs deeper than even the donations given to a majority of the committee and visits to the Treasury. JPMorgan also employs at least eight lobbyists that used to work on the Senate Banking Committee, and one current committee staffer used to work for the bank.
This aggressive lobbying and donation strategy was, as yesterday’s hearing demonstrated, a successful hedge of a different kind—one that seems to be protecting the bank’s backside after steep losses in both the balance sheet and public perception. Several protesters erupted into chants of “Stop foreclosures now” and “This man is a crook,” but were quickly escorted out by US Capitol Police and arrested so the hearing could begin.
JPMorgan Chase CEO Jamie Dimon will appear before the Senate Banking Committee on Wednesday to answer questions about his bank’s risk management, or lack thereof—how was it that a too-big-to-fail institution took dangerous gambles that recently resulted in multibillion-dollar losses?
But there are deeper questions likely to come up as well. One is why Dimon is allowed to sit on the New York Federal Reserve’s board of directors, along with several other titans of finance. At the twelve regional Federal Reserve Banks, there are nine-member boards of directors. Six of the seats are selected by banks from the region—although, somewhat hilariously, the banks are supposed to pick three directors to represent their interests, and then three directors to represent “the public’s interest.”
But if the job of the Federal Reserve is to maintain the safety and soundness of Wall Street banks—a task often at odds with the banks’ short-term, greed-driven motives—why are the heads of those institutions allowed to be a part of it at all?
Some new data released Tuesday by Senator Bernie Sanders puts this inherent conflict of interest in sharp relief. Sanders revealed, for the first time, detailed information about which bank executives benefited from Fed actions during the financial crisis, and how much they got.
The Dodd-Frank legislation, thanks to a provision inserted by Sanders, required the nonpartisan Government Accountability Office to study these conflicts of interest at the Fed and issue a report. It did so in October, issuing a detailed study which found that allowing members of the banking industry be on the Federal Reserve’s board of directors creates “an appearance of a conflict of interest” and poses “reputational risks” to the Federal Reserve System.
The GAO laid out several conflicts of interest, but was not required to name specific institutions—but that’s what Sanders released today. He found that during the crisis, at least $4 trillion in zero-interest Federal Reserve loans went to the banks of at least eighteen current and former Federal Reserve regional bank directors.
JPMorgan got a quite a few handouts from the Fed while Dimon sat on the board of directors, Sanders notes. It received $390 billion in emergency Fed funds while it was being used as a clearinghouse for emergency lending programs. It got $29 billion to acquire Bear Stearns, and got an eighteen-month exemption from risk-based leverage and capital requirements. JP Morgan also got the Fed to take risky assets off the Bear Stearns balance sheets before it was acquired.
One might argue that these actions would have been taken anyhow—to, for example, help repair the damage Bear Stearns was causing financial markets. And every major financial institution received money from the Fed at some point during the crisis. But it’s incredibly hard to argue Dimon and others should have seats at the Fed while it’s negotiating these goodies with their banks.
Among the other conflicts revealed by Sanders’s report:
Jeffrey Immelt, the CEO of General Electric, served on the New York Fed’s Board of Directors from 2006‐11. General Electric received $16 billion in low-interest financing from the Federal Reserve’s Commercial Paper Funding Facility during this time period.
In 2008, the New York Fed approved an application from Goldman Sachs to become a bank holding company, giving it access to cheap Fed loans. During the same period, Stephen Friedman, who was chairman of the New York Fed at the time, sat on the Goldman Sachs board of directors and owned Goldman stock, something the Fed’s rules prohibited. He received a waiver in late 2008 that was not made public. After Friedman received the waiver, he continued to purchase stock in Goldman from November 2008 through January of 2009 unbeknownst to the Fed, according to the GAO.
Sanford Weill, the former CEO of Citigroup, served on the Fed’s board of directors in New York in 2006. During the financial crisis, Citigroup received over $2.5 trillion in total financial assistance from the Fed.
James M. Wells, the chairman and CEO of SunTrust Banks, has served on the board of directors at the Federal Reserve Bank in Atlanta since 2008. During the financial crisis, SunTrust received $7.5 billion in total financial assistance from the Fed.
James Rohr, the chairman and CEO of PNC Financial Services Group, served on the Fed’s board of directors in Cleveland from 2008–10. PNC received $6.5 billion in low-interest loans from the Federal Reserve during the financial crisis.
The full report is here.
Sanders and Senator Barbara Boxer have introduced legislation that would end these conflicts of interest by prohibiting anyone who works for, or even invests in, companies that are eligible for aid from the Federal Reserve from sitting on a board of directors. Sanders singled out Dimon when announcing his legislation late last month. “How do you sit on a board, which approves $390 billion of low-interest loans to yourself?” Sanders said. “Who in America thinks that makes sense?”
Sanders also spoke to MSNBC’s Dylan Ratigan Tuesday afternoon about the conflicts:
Brooksley Born, a former head of the Commodity Futures Trading Commission, and Democratic members of Congress hold a press conference outside the US Capitol to speak out against CFTC budget cuts advanced by Republicans. Photo by George Zornick
If you held a contest to determine the most important government agency nobody’s heard about, the Commodity Futures Trading Commission would be a strong gold medal contender. Charged with overseeing commodity futures and options markets—which, when the CFTC was created in 1974, mainly involved agricultural futures—the agency now oversees the absolutely massive financial derivatives market on Wall Street, as well as oil futures markets.
This means that the relatively tiny agency has tremendous influence over the financial sector’s biggest money machine—one that has already helped bring down the world economy once within the past few years. And oil speculation is a significant factor in driving the prices Americans pay at the pump.
But perhaps taking advantage of the CFTC’s obscurity, Congressional Republicans have made a brazen attempt to slash the agency’s budget and reduce staff. The House Appropriations Subcommittee on Agriculture sent out a budget that provides only $180.4 million to the CFTC, which is a $24.6 million cut from last year’s already anemic funding level. This is well below the $308 million in President Obama’s budget request, which supporters of Wall Street reform universally agree is still too low anyhow. The Republican request would likely lead to lay-offs at the agency, according to Congressional staffers familiar with the matter.
Late last week, Congressional Democrats—and one former head of the CFTC—gathered outside the Capitol building to communicate the gravity of the cuts, especially at a time when the Dodd-Frank reforms are expanding the agency’s mandate.
“The House Appropriations subcommittee’s failure to increase the CFTC’s budget to reflect these increased responsibilities—and indeed its irresponsible proposal to cut the CFTC’s budget by $25 million—are efforts to eviscerate vitally important financial regulatory reform and to cater to the interests of Wall Street rather than the needs of the American people,” said Brooksley Born, who ran the agency from 1996 to 1999.
“What the Republicans are doing is voting to take the cops off the beat. Wall Street is incapable of policing itself,” said Representative Ed Markey. “The invisible hand of Wall Street markets has waved off concerns, waved off regulations, and then reaches into our pockets and takes our money.”
The CFTC regulates index-based credit default swaps and interest rate swaps, which are bets on very complex arrays of factors—the value of entire indexes, or credit arrangements between entities. The Securities and Exchange Commission handles the relatively simpler single-name credit default swap, which is just a bet on the default of a single entity.
The Dodd-Frank bill required that the CFTC write new rules to make these trades open and transparent—right now, they are conducted on the phone, which is an easy way for people on Wall Street to mislead investors (and each other, and often and somewhat accidentally their own firm) about the true value of the already complex financial products.
Alexis Goldstein has an in-depth breakdown of this issue here, but essentially the CFTC is working on creating a framework for market participants to freely trade derivatives in a transparent fashion. It’s an enormous market of several hundred trillion dollars, and creating that framework is just one part of the CFTC’s responsibilities.
Enforcement is also a lot of work—the failure of MF Global has created a huge drain on the agency’s resources, because substantial chunks of the staff had to investigate missing futures custom funds from one of the company’s subsidiaries, according to Congressional staffers familiar with the matter. The JPMorgan imbroglio also appears to be getting a lot of attention from agency staff.
As noted, the CFTC also oversees the oil futures markets, in which speculators can easily monkey with the global price of gasoline. The St. Louis Federal Reserve found that speculation in oil markets was the second-largest factor in the past decade’s price increases, behind demand.
Yet the CFTC has a relatively tiny budget, compared to other regulatory agencies, and has grown only 10 percent since the 1990s. This is despite a massive explosion in the size of the products it regulates—Representative Sam Farr of California estimates that the CFTC budget represents six seconds of trading on the derivatives market.
And now, the budget cuts planned by Republicans. They are remarkable given that Wall Street regulation and high gas prices are volatile elections issues, but Democrats think Republicans believe nobody will notice.
“The [Dodd-Frank] legislation is too popular to repeal, but one can kill it by not funding it. It’s a death by a thousand nicks,” said Farr at least week’s news conference. “The president’s ask isn’t that much money, but without it, it can cripple the regulators. Make no mistake about this, the swap dealers don’t want it to be regulated.”
The proposed budget cut is also astonishing given the massive risk that unregulated derivatives pose to the financial system, demonstrated quite clearly less than four years ago.
“There’s one question every American should ask,” said Representative Gerry Connolly. “Given the meltdown that occurred in 2008, given the fragility of the world economy, given the fact that so many European banks hold too much European sovereign debt, given our recent economic performance numbers when you look at a [derivatives market] margin…valued in excess of $600 trillion—unregulated, with this action, what could go wrong with that?”
This morning, House Speaker John Boehner’s spokesman blasted out an e-mail titled “ ‘A Suicidal Tetrahedron’? ‘The Dodecahedron of Mutually-Assured Destruction’?”
It wasn’t a tribute to an obscure work of the late Ray Bradbury but rather a fairly accurate description of the Democratic Party’s scrambled position on another darkly named event: Taxmageddon, the year-end expiration of the Bush tax cuts.
“Folks—The conflict among Washington Democrats over stopping the largest tax hike in history is now far too complicated to be described by the usual ‘circular firing squad’ cliché,” wrote the spokesman, Michael Steel. He noted that President Obama, Nancy Pelosi and Chuck Schumer, Kent Conrad (the Senate Budget Committee chair), Bill Clinton and Larry Summers all have varying proposals for dealing with the expiration of the Bush tax cuts.
Steel is being a bit disingenuous when he invokes Clinton and Summers, since for one thing they have no actual say on policy, but more importantly, didn’t really break from anyone. All Clinton said was that he felt the post-election lame-duck Congress would probably have to briefly extend the tax cuts while the parties worked out a deal; he wasn’t, as Republicans tried to claim, saying the Bush tax cuts should be permanently extended.
But that doesn’t mean the Democratic Party actually has a coherent stance on tax policy—and it should really come up with one quickly, since the Republican policy is well known and easy to understand: tax cuts for everyone.
For Democrats, Obama stakes out the left side of the party debate: the White House reiterated this week it will not extend the Bush tax cuts for earners over $250,000, even temporarily.
Pelosi and Schumer, meanwhile, are pushing for the expiration of tax cuts for those earning over $1 million, because they think it will be a simpler public relations task. “The 250 [cutoff] never made it.… If we can get the $1 million people, and above, to pay their fair share, we get a lot of money,” Pelosi said last week. “If that’s easier for the public to understand, then we should go that route.”
Conrad, the powerful chair of the Senate Budget Committee, said last week that it “might make some sense” to extend all of the Bush tax cuts temporarily while the parties hammer out a solution—the same thing Clinton said. Conrad didn’t state a preferred outcome, though he did suggest Congress would “fundamentally reform the current corporate and individual tax system.”
This strikes me as a looming disaster and massive strategic miscalculation. How can Democrats not have a coherent battle plan for the biggest legislative face-off in recent memory?
Should Democrats prevail in November, how will they enforce a mandate on tax reform if different parts of the party were calling for substantially different things?
The party needs a coherent message on taxes, and should probably embrace one that isn’t so reactive. All current plans propose the extension of some Bush tax cuts and the retirement of others. But as several people have already pointed out, the smart move here would be saying to hell with the Bush tax cuts, and advancing a new Obama tax package—a program of progressive tax restructuring that substantially reduces the deficit while making the tax code more equitable.
The party can pair this with a plan to defuse the other ticking time bombs set to detonate on New Year’s Eve: the deep cuts forced by the budget sequesters mandated by the debt ceiling deal, and the expiration of the payroll tax and extended unemployment benefits.
If Democrats run on a coherent plan for Taxmageddon and win, they have a good chance of implementing it. If Obama keeps the White House, holds the Senate, and wins back the House, he can enact a tax policy pretty freely—a tax package would be exempt from the filibuster in the Senate under reconciliation.
But if the party is divided, history shows that Republicans will exploit those divisions to skew the outcome in its direction. A scrambled Democratic Party is even more dangerous if the election has a mixed outcome: say, Obama in the White House, but Republicans keep the House of Representatives. There will have to be serious negotiations, and Democrats won’t be able to present a unified front.
Elected members of the Democratic Party aren’t the only ones who need to get this together, either. There’s been precious little outside pressure from progressives to get Democrats to form a coherent Taxmageddon policy. Progressives should either present a plan and demand Democrats get behind it, or at least press for some clarity about the party’s ideas while drawing red lines around unacceptable concessions.
Absent that pressure, progressives could expend a tremendous amount of energy to re-elect Democrats in November, only to see them turn around the very next month and entrench a terrible tax policy that is only mildly less regressive than the Bush tax cuts.
There’s real danger here. Sure, election year Obama wants to raise taxes on people earning over $250,000. But recall that last summer Obama was apparently willing to extend all of the Bush tax cuts and even lower some top rates in exchange for $800 billion in revenue from “closing loopholes”—a nebulous, and perhaps impossible, goal.
Katrina vanden Heuvel and Robert Borosage made a persuasive argument in this week’s issue for a sustained inside/outside game from progressives to “expand the limits of the current debate.” If Taxmageddon isn’t a good place to start, I’m not sure what is.