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The Text of President Obama's Wall Street Speech:

I'm afraid I don't have time to comment on it at the moment, but in case you are interested in reading the as-released text of President Obama's September 15, 2009 speech on Wall Street, on financial regulation reform, it is here at the New York Times.

Overall, and despite the large amount of stuff sent by the administration to Congress since the release of the Treasury White Paper, I am disappointed that financial regulation reform is not really moving very far, very fast, and is subject to three enormous weakeners - the speed with which fear that gripped everyone a year ago at this time recedes into a mere memory mostly of catastrophes avoided and hence discounted, the lobbying force of the financial services industry when it deals with Congress, and the fact that long term financial services reform - while always, of political necessity, on a backseat from dealing with the recession - is actually farther down the list of the Obama administration's domestic policy issues than I would like, after health care reform, and issues related to the recession and stimulus, bailout of the auto unions, etc..

Everyone seems agreed, so far as I can tell, that not only will Fannie and Freddie not be addressed until next year, other fundamental reform issues will not be dealt with by Congress, either. And when they finally do, the sense, not so much of urgency, but instead that fundamental changes are needed, has largely evaporated. Yet the incentives remain as perverse as they were before; the question is whether there is a supply of funds and a market of sufficient opacity, short-termism, and too-big-to-fail-icity that it can do what the mortgage markets did mid-decade. Greed is rapidly replacing - has already replaced - fear in all the wrong places. Those places are principally, of course (a) Wall Street, for whom externalized risk and moral hazard are back, without fundamental changes in the regulatory or compensation rules and with an ever-firmer belief in the USG-put, and (b) Congress, making its rent-seeking calculations, meaning, how much its members will be able to benefit from making available the USG-put.

(Update: The NYT economix blog has a good series of short reactions to the speech. And the NYT room for debate blog (in which I sometimes participate on national security matters) has a discussion of why financial reform has stalled, as I indicate above.)

Houston Lawyer:
I for one find it hard to believe that any sentient being is disappointed that this Congress is not hastily moving toward more financial regulation. Nothing would revive the animal spirits of the market more than an announcement that no such regulation will be enacted.

Spoken by someone who advises his clients on Sarbanes-Oxley compliance.
9.14.2009 4:54pm
PersonFromPorlock:
On the other hand, there seems to be a real possibility developing that the voters will "throw the rascals out" in 2010. Maybe putting off the reforms until there's a reformed (or at least frightened) Congress isn't entirely a bad thing.
9.14.2009 4:55pm
stevesturm:
I, on the other hand, am just fine with financial 'reform' not moving very fast. Given the likelihood (with history to guide us) that whatever Congress does won't help and will likely make things worse, I prefer the status quo.

And I disagree that government needs to 'fix' Wall Street, other than to get out of the way. Take away the USG 'put' and financial institutions as a group will get their own act together: they're start being more careful about what they buy and from whom, they won't blindly hand money over to hedge fund managers, they won't make bets that could cause the firm to implode, they'll align compensation with the long-term interests of the firm and so on.
9.14.2009 5:01pm
Allan Walstad (mail):
I'm with the posters above, especially Stevesturm. Given that just about everything Obama has done and is promising to do will make things much worse in the long run, he can push the whole shebang down into a hole and cover it up as far as I'm concerned.
9.14.2009 5:08pm
Splunge:
Kill two birds with one stone. Sign everyone in Wall Street up for the Obamacare "public option" health-care plan.
9.14.2009 5:12pm
Mark N. (www):
stevesturm: The problem is that it's not clear how to abolish the USG put. To convincingly abolish it in a way that actually changes behavior, there needs to be a widespread belief among financial-services firms that they will not in fact be bailed out, subsidized, loan-guaranteed, or otherwise saved, either today or by a future administration. Otherwise firms will operate under the assumption that, sure, everyone is talking tough today, but when push comes to shove the next time a recession rolls around, the bailouts will be back. This is compounded by the fact that, even if the government initially resists intervention, if a recession lasts more than a minimal length of time, voters tend to vote in pro-intervention governments (e.g. tossing out Hoover for FDR). So it's very hard to convincingly promise that the government will not intervene--- because evidence is that it either will, or will be replaced with one that will. And there's therefore little reason for financial firms to act as if the government wouldn't intervene.

I think any practical approach has to at least concede some interventions and figure out how to manage and limit them. Deposit insurance up to some modest cap, for example, is not likely to go away, but is also something I can live with. Some attempt to reduce the emergence of "too big to fail" institutions may help, also, by reducing the root causes of the pro-intervention demand. If there are no, or few, too-big-to-fail institutions, it's more politically plausible to, in fact, let institutions fail.
9.14.2009 5:14pm
troll_dc2 (mail):
I disagree with all of you. I do not want banks that are Too Big To Be Allowed To Fail. Id o not want banks that don't ahve enough capatial and that have to depend on government to support them.

I think that Secretary Geithner is simply incompetent. I cannot think of a single thing tht he has done right. For all of his background, he is out of his league.

The real answer, for those of you who mindlessly oppose any regulation, is to break up the largest banks. It is time to enforce again the federal law that limits a single bank to no more than 10 perent of the nation's deposits.
9.14.2009 5:16pm
Mike& (mail):
Goldman Sachs is Barack Obama's largest campaign contributor. It's paid off well.

Nothing would revive the animal spirits of the market more than an announcement that no such regulation will be enacted.

You mean Goldman Sachs would use its market-manipulating software to cause a market panic? Sure, that's a risk. Let Goldman crash the market. Then Wall Street would see real reform, as the populist outcry would demand criminal prosecutions.
9.14.2009 5:19pm
wm13:
Since greed on Wall Street and rent-seeking in Congress are certain to be with always, any reform will necessarily be structured by those forces. Hence it's unclear if any actually feasible reform would be a good idea. I suggest doing nothing unless and until investors and depositors demonstrate the superiority of some other country's regulatory regime by moving their investment capital there. Since that hasn't happened, I conclude that the U.S. regimen is as good as anyone else's, and doesn't need fundamental change.
9.14.2009 5:22pm
Tim Nuccio (mail) (www):
Short sell, NOW!!!!
9.14.2009 5:27pm
Angus:
Interesting that most of the comments just use this as an opportunity to bash Obama or the Dems in Congress rather than address the problem.

IMHO, what really needs to be done is some aggressive splitting of banks into smaller, separate units like what was done to the Bells in the telephone industry. Except we should not let them re-merge as has happened with the Bells. "Too Big To Fail" means "Too Big" period.
9.14.2009 5:57pm
EH (mail):
If banks are not allowed to hold more than 10% of the nation's assets, then a loophole would be found that allowed an umbrella company to accumulate a bunch of sub-10% banks. It'd be only a temporary reorganization and ultimately just another level of indirection...unless lawmakers allowed themselves to think far enough ahead and though as many possibilities as they could find.
9.14.2009 6:37pm
first history:
......financial institutions as a group will get their own act together: they're start being more careful about what they buy and from whom, they won't blindly hand money over to hedge fund managers, they won't make bets that could cause the firm to implode, they'll align compensation with the long-term interests of the firm and so on.

And what evidence in the recent past says this will happen? When left to their own devices, the banks and investment firms have done the exact opposite. They continue to pursue the same strategy as they have in the past:


One investment gaining popularity is a direct descendant of the mortgage-backed securities that devastated many banks last year. To get some lesser performing assets off their books, banks are taking slices of bonds made up of high-risk mortgage securities and pooling them with slices of bonds comprised of low-risk mortgage securities. With the blessing of debt ratings agencies, banks are then selling this class of bonds as a low-risk investment. The market for these products has hit $30 billion, according to Morgan Stanley.


And Wall Street has a new twist on "death panels":



After the mortgage business imploded last year, Wall Street investment banks began searching for another big idea to make money. They think they may have found one.

The bankers plan to buy "life settlements," life insurance policies that ill and elderly people sell for cash — $400,000 for a $1 million policy, say, depending on the life expectancy of the insured person. Then they plan to "securitize" these policies, in Wall Street jargon, by packaging hundreds or thousands together into bonds. They will then resell those bonds to investors, like big pension funds, who will receive the payouts when people with the insurance die.

The earlier the policyholder dies, the bigger the return —though if people live longer than expected, investors could get poor returns or even lose money.

Either way, Wall Street would profit by pocketing sizable fees for creating the bonds, reselling them and subsequently trading them. But some who have studied life settlements warn that insurers might have to raise premiums in the short term if they end up having to pay out more death claims than they had anticipated.


It won't be a Washington bureaucrat that chooses who lives and who dies, but watch out for that Lincoln Town Car as it pulls up in front of your house. It may be your investment advisor coming to "collect."
9.14.2009 6:47pm
ChrisTS (mail):
Angus:

Interesting No surprise that most of the comments just use this as an opportunity to bash Obama or the Dems in Congress rather than address the problem.
9.14.2009 7:03pm
Mike& (mail):
No surprise that most of the comments just use this as an opportunity to bash Obama or the Dems in Congress rather than address the problem

And...With a Goldman Sachs controlled White House and Congress...We're going to "address" the problem...How?
9.14.2009 7:05pm
stevesturm:
first history: nice selective editing to leave out from my quote the section about taking AWAY the USG put. From the article you link to, these firms still believe the government will rescue them if/when they screw up... and they're acting accordingly.

MarkN: no institution can become 'too big to fail' on its own, they all require someone to lend them money (whether depositors, trading partners, the Fed or some other institution). I believe that without the USG put there would be a hesitation to extend that much credit to a single institution.
9.14.2009 8:20pm
Allan Walstad (mail):
Angus and ChrisTS: I for one am an equal opportunity pol basher. Bush/Obama is turning out rather like Hoover/FDR. Hoover did dumb stuff and FDR did dumb on a grander scale. Maybe that would have been reversed if their terms had been reversed.
9.14.2009 8:32pm
first history:
stevesturm:

Hardly selective editing. You say that if the government refuses to back the companies, they will behave. What evidence is there that financial firms will actually believe that the government won't intervene again? The firms are already "big to fail," and Congress and the Administration (any Administration, both Republican and Democratic) will always seek to find ways to benefit their constituents. Mark N. is correct, there is nothing to convince the financial firms that a bailout won't occur again.

How do you propose to "take away the USG 'put'" (and enforce it) to convince financial firms to change their behavior?
9.14.2009 8:51pm
Elliot123 (mail):
You want more stuff moving very far and very fast?
9.14.2009 9:00pm
Toby:
Along with no banks that are too big to fail, (sure 10% sounds good) how anput no entity (including government) that controls 10% of the economy...
9.14.2009 9:20pm
Angus:
And...With a Goldman Sachs controlled White House and Congress...We're going to "address" the problem...How?
I'm confused. I thought the meme this week was that Obama and the Dems in Congress were protectionist, anti-business communists. Being a business crony in Wall Street's pocket expired as a meme last week, right?
9.14.2009 9:59pm
Eli Rabett (www):
Felix Salmon has an interesting take


And then there's Obama's promise that any future bailouts will have to be repaid — if not by the company being bailed out, then by its competitors:

"If taxpayers ever have to step in again to prevent a second Great Depression, the financial industry will have to pay the taxpayer back -- every cent."

The financial industry. This is big, and important. Because what it does is it turns the whole industry — every bank, every banker, every hedge fund manager — into a mini-regulator, the eyes and ears of the systemic-risk regulator. All too often, those with eyes to see try to monetize their insights, rather than sounding a more general alarm. But if they ultimately end up paying for the cost of any bailout, they might stop just quietly putting on short positions, and start taking their analysis to the Fed instead. Which, under Obama's plan, will have the ability and authority to put an end to activities which pose major systemic risk.


Would that it was so
9.14.2009 11:32pm
scattergood:
While this is a legal blog primarily, I think people are really missing the big economic issue that Obama's plan entails.

We got into this mess with DECADES of borrowing which inflated asset prices of every class. It wasn't a Dem or a Repub thing, it was everybody.

Now that the private sector of our economy have said, um, no thanks to much more lending and borrowing, the Gov't has had to step in to keep the lending stream of money open.

By announcing 'regulation' to keep banks and other financial institutions from taking on too much risk, Obama's plan will only hamper the private sector from taking on the borrowing and lending role that the Gov't has taken on. Thus, the plan cements the long term role of the Gov't not only in 'regulating' but in 'operating' the economy.

Now let me be clear, I am not suggesting that the private sector SHOULD borrow and lend like the drunkards they were over the past 40 years, but only that Obama's plan flies in the face of the admin's stated goals of unfreezing lending and borrowing in the private sector.

So says somebody who trades money for himself and his clients every day.
9.15.2009 12:40am
Tarpoholics Anonymous (mail):
It takes a series of surgeries over years to separate conjoined twins (SEC and Wall Street).

The only thing that truly irritates/terrifies fraudster bankers, auditors, and corporate executives more than a smart federal prosecutor is a smart plaintiffs' securities lawyer.

I say, let investors and their counsel beat up on Wall Street for a while. They're good at it. They bust Wall Street heads all day long. So, I say: support the end of Central Bank and Stoneridge. Require all settlements to include corporate governance reforms. Let the invisible hand guide corporate accountability and anti-financial fraud policy.

Otherwise, anyone care for some extra TARP with the next collapses to occur after the energy sector "suddenly" falls apart post-carbon disclosure regs. Anyone? Anyone?
9.15.2009 2:24am
Ricardo (mail):
The real answer, for those of you who mindlessly oppose any regulation, is to break up the largest banks. It is time to enforce again the federal law that limits a single bank to no more than 10 perent of the nation's deposits.

This regulation is still in place as far as I know. The largest depository bank in the U.S. is Bank of America and its share of total U.S. deposits is around the 10% mark. The problem is not depository banks though, which have managed to keep afloat for the most part, but investment banks and "universal banks" like Citigroup with huge i-banking and securities trading divisions.

Goldman Sachs is Barack Obama's largest campaign contributor. It's paid off well.

According to this, University of California is number 1. Hank Paulson was the CEO of Goldman before he left to join the Bush Treasury Department. While CEO, Paulson was critical to cutting a deal with China in order to get one of just a handful of investment banking licenses the Chinese government was granting to foreign banks. I'd say Goldman's influence runs pretty deep in both parties.
9.15.2009 8:21am
Allan Walstad (mail):
A quote from Obama in our local newspaper today:

"We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis."

What foul irony.
9.15.2009 12:47pm
Jinny (mail) (www):
I have already seen it somethere...
Jinny
9.18.2009 9:10pm

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