MnIndy file photo

Sen. Al Franken has picked up two Republican cosponsors for his amendment to fix the credit rating industry. Sens. Chuck Grassley (R-Iowa) and Roger Wicker (R-Miss.) are backing the bill, saying it would create an important barrier against conflicts of interest in the industry. The amendment is being considered as part of a financial reform package being debated in the Senate.

Franken’s amendment picked up the support of Grassley on Tuesday.

“If the credit rating agencies are going to make a contribution to market integrity, then they can’t be compromised,” he said in a statement. “This amendment creates a firewall so that a rating agency can be selected independent of an issuer. It goes after conflicts of interest between rating agencies and issuers, and that’s a very important area where due diligence was missing leading up to the financial crisis of 2008.”

Grassley joins Wicker, who last week praised Franken for introducing the amendment and signed on as a cosponsor.

“Credit-rating agencies have made so many mistakes in the past, and we must assure their ratings are accurate,” Wicker said. “A well-functioning marketplace requires an accurate and credible credit-rating system because it is the primary signal investors use to assess the creditworthiness of certain investments. In the past, rating agencies were too willing to rubber-stamp an excellent score for complex securities that were not well-understood and were not deserving of a triple-A rating.”

“A bank executive who seeks to maximize short-term gain at the expense of solvency is not just putting his bank’s shareholders and creditors at risk, but also the US taxpayer and the FDIC deposit insurance fund,” said the letter. “By seeking to foreclose that possibility, the FDIC continues to earn the kind of public trust that is so lacking throughout the regulatory community.”

The letter continued: “While it would be nice to presume that large banks are chastened by their recent need to beg the public for capital, it is clear that financial services executives ‘just don’t get it.’”

Employee compensation is one of several reforms the FDIC is entertaining in the wake of Wall Street’s financial meltdown and the public’s sustained mistrust of financial sector leaders who received large bonuses following a taxpayer bailout. The agency is seeking public comment about the new rules.

“I believe this [Advance Notice of Proposed Rulemaking] suggests a good approach by targeting compensation structures, rather than levels of compensation,” Bair said in a statement. “It contains no features which would limit the amount of compensation paid to employees. And I feel that the supervisory efforts underway can be strengthened by the FDIC’s effort to provide incentives for banks to achieve higher standards.”

The full text of the House members’ letter:

Sheila Bair
Chairman
Federal Deposit Insurance Corporation
550 Seventeenth Street, NW, Room 6076
Washington, DC 20429

Dear Chairman Bair,

We write to applaud you for taking an important step towards holding bank executives accountable for risky, destructive behavior. If your proposal to tie deposit insurance premiums to executive compensation structures is enacted, banks will be charged more for deposit insurance if their executives gamble with the firm’s money. Our constituents feel that executives on Wall Street have looted their banks, and then have billed taxpayers “for services rendered.” They have lost confidence in other regulators. Thanks to you, finally it seems as though there’s a cop on the beat on Wall Street.

A bank executive who seeks to maximize short-term gain at the expense of solvency is not just putting his bank’s shareholders and creditors at risk, but also the US taxpayer and the FDIC deposit insurance fund. By seeking to foreclose that possibility, the FDIC continues to earn the kind of public trust that is so lacking throughout the regulatory community.

On the specific question of whether pay packages contribute to risk, it should by now be quite obvious that a financial institution that pays its executives with a ‘heads I win, tails you lose’ pay package is likely to destroy itself. We saw this during the Savings and Loan crisis, during the bailout of Long Term Capital Management, and during the most recent financial crisis. Paul Volcker, Bill Black, Simon Johnson, and other economists and observers have made this point.

It’s also clear, as well, what happens when executives have well-designed pay packages. When “bulge bracket” investment houses were private partnerships, executives were leery of putting their own capital on the line in risky schemes. This created a natural barrier against reckless and risky behavior. When Wall Street firms began going public, and offloading risk onto shareholders, executive behavior suffered. Now that these firms can gamble with money from the Federal Reserve and from taxpayers, executive behavior is even worse.

While it would be nice to presume that large banks are chastened by their recent need to beg the public for capital, it is clear that financial services executives “just don’t get it”. Lloyd Blankfein of Goldman Sachs recently claimed that his firm is ‘doing the lord’s work’. Harvard Business School Professor and Goldman Board member Bill George just compared bankers who lose gargantuan amounts of money to professional athletes and movie stars. The large bank lobby has worked furiously to water down reform; the Securities Industry and Financial Markets Association is resisting a mild fee on large banks, and aggressively sought loopholes in derivatives legislation.

Unlike those at community banks, executives at large Wall Street banks have consistently displayed cavalier attitudes towards risk. Despite large bonuses on Wall Street and the gnashing of teeth among regulators, very little seems to have changed as of yet. We applaud Chairwoman Bair and the FDIC for breaking this damaging cycle of passivity, and taking the first real steps to rein in dangerous executive compensation structures. According to Section 7 of the Federal Deposit Insurance Act, the FDIC clearly has the authority to use any factor it “determines relevant” when assessing the probability that the Deposit fund will incur a loss with respect to any specific institution. Compensation structures are certainly relevant in terms of understanding the risks that these banks are incurring.

We disagree with Comptroller John Dugan’s dissenting statement on this. Comptroller Dugan’s argument is that higher insurance deposit costs are unnecessary merely because Congress is debating granting authority to rein in executive pay, and that the Federal Reserve is working on the problem. He also argues that there is no evidence that executive compensation structures contribute to losses in the Deposit Insurance Fund. These arguments seem meritless. In light of recent history, trusting the Fed to rein in banker pay is like asking an arsonist to guard the armory. His argument that there is “no evidence” compensation structures contribute to institutional risk might have credibility if his own agency had shown any interest at all in stemming the ‘epidemic of mortgage fraud’ that the FBI noted as early as 2004. As is, his arguments simply justify the continued looting of large banks by their executives.

Our constituents are demanding action, not idle chatter. In Congress, we are debating what steps to take. In the meantime, we appreciate outstanding judgment that Chairwoman Bair, Vice Chairman Martin Gruenberg, and Thomas Curry have shown in carrying out their duty to the public.

Regards,

Alan Grayson
Michael Capuano
John Conyers
Lloyd Doggett
Keith Ellison
Bob Filner
Luis Gutierrez
Marcy Kaptur
William Lacy Clay
Eric Massa
Brad Sherman
Jackie Speier
Pete Stark

Photo: WDCpix

Former Sen. Norm Coleman has been hitting the trail to promote the new think tank he’s heading up. The American Action Network hopes to take advantage of the recent Supreme Court ruling overturning rules about political giving by corporations, Coleman told the New York Times. The group also has plenty of ties to — and support from — Wall Street.

Coleman’s group has been slow to get off the ground with news of its founding more than six months ago. Here’s what former Sen. Dave Durenberger had to say to MinnPost’s Erik Black back in August:

“Texas money is also funding a start-up non-profit called America’s Action Network, which is designed to give definition to a principled ‘role of government’ approach to the Republican Party’s future. In the process, its founders hope to leave some of the ‘other issues’ like those which firmed ‘the base’ in the social values arena behind. New president of the right-of-center group will be former Minnesota Republican Senator Norm Coleman. This will place two Minnesota Republicans in the national political spotlight as Governor Tim Pawlenty seeks to similarly define the next national GOP for what he calls ‘Sam’s Club’ Americans.”

ThinkProgress gives a more in-depth report on the backgrounds of Coleman’s new Wall Street partners.

Robert K. Steel
Former Goldman Sachs Exec & Wachovia CEO
Robert Steel spent close to 30 years with Goldman Sachs before joining his Goldman colleague Henry Paulson in the Treasury Department. Steel and Paulson helped ensure that Bush’s 2008 Wall Street bailout would leave Goldman “among the biggest beneficiaries of the $700 billion U.S. plan.”

Kenneth Langone
Home Depot Founder, Investment Banker
Wall Street titan Kenneth Langone was called “The Man Behind Grasso’s Payday” after NYSE Chairman Richard Grasso was awarded $139.5 million amidst controversy over Wall Street excesses in 2004. Langone, chair of the compensation committee, defended the exuberant pay, arguing that Grasso was entitled to the amount. Then-NY AG Eliot Spitzer filed a lawsuit against the NYSE — including Langone — charging that “the board of the NYSE was misled about parts” of Grasso’s compensation. In 2004, a businessman in Florida also sued Langone for $1.8 billion. The suit charged him with “conspiring to interfere and interfering with business relationships,” as well as “extortion, defamation, fraudulent misrepresentation, and violations of the Florida Antitrust Act and the Racketeer Influenced and Corrupt Organization Act.”

Ed Gillespie
Fmr RNC Chairman, Lobbyist
Ed Gillespie’s lobbying firm includes a host of clients whose interests are grounded in Wall Street: Enron, Citibank, Bank of America, Zurich Financial, the U.S. Chamber of Commerce, and the “clean coal” front group ACCCE.

Fred Malek
Thayer Capital Partners Founder
Fred Malek is a super-wealthy Republican operative who got his start with the Nixon administration. The former co-owner of the Texas Rangers with George W. Bush was responsible for a 1972 scheme that was investigated by the Senate Watergate Committee to politicize broad segments of the federal government in favor of reelecting Nixon. In 2004, Malek “was fined $250,000 for what the SEC called a ‘fraudulent scheme.’”

Coleman told the New York Times that the recent Citizens United court ruling opening the doors for corporate campaign giving would be a boon to his new group.

“This [Obama] administration as well as Citizens United — when you combine the two the prospects for funding these types of efforts are greatly enhanced,” Mr. Coleman said.

And Coleman took to Fox News this week to talk about AAN:

Photo details: Flickr/Eric Richardson, DU.com/Kadie

Americans’ anger over AIG’s publicly funded executive bonuses may make this the last “Why are we not rioting?” post. First, one more observer remarks on the stateside calm, blaming low levels of unionization while seeing sparks of resistance in hundreds of homeowners picketing a mortgage financier’s Connecticut home. But there’s union help in spreading the word about anti-AIG-themed economic protests planned for Thursday at sites across the country. They’ll have to draw the advertised 10,000 to the streets without us: The Minneapolis protest is set for “500 Griswold St, Detroit, MI,” time TBA.

As usual, California is ahead of the curve, with a lightly attended anti-AIG demonstration yesterday, documented here. Another protest at Wall Street will take place April 3-4.

None of it will likely reach the heights Fox’s Sean Hannity hoped for late last month with an online poll asking which sort of revolution (right wing, natch) viewers prefer:

Any further description would spoil the punchline, so we’ll just say… watch it.

A CNN poll earlier this week said that 60 percent of Americans believe we are headed for a depression.

Yesterday afternoon I talked with MnIndy’s favorite business/economics journalist, Doug Henwood of Left Business Observer (who also hosts a weekly radio show on WBAI in New York and KPFA in Berkeley that’s archived at the LBO site), to see what he’s thinking about the economy and about the panic in credit markets, which so far seems unfazed by the bailout bill or by any of the other measures the Fed and the Treasury have undertaken. (We last spoke with Henwood about the economy in September, a day after Lehman Brothers went under and AIG got bailed out; that interview is here.)

“I think there’s certainly the risk of a severe recession,” Henwood tells MnIndy. “I don’t know where you put the dividing line between a severe recession and a depression. An unemployment rate of 10 percent is a severe recession. An unemployment rate of 15 percent starts looking like a depression. But that’s kind of arbitrary.

“Certainly the risk of something really nasty looks the highest it’s been since the end of World War II. There have been a couple of instances in the past where it looked like we were teetering at the edge and then managed to avoid it.

“The fact that the level of panic in the markets looks so high despite all these extraordinary interventions is a little scary. Now, on the other hand, if you want to draw some comfort from that, sometimes when people are thinking the world is coming to an end, that can be a sign that we’re close to the bottom. Or that we’re closer to the bottom than we are to the beginning.”

There’s a transcript of the interview below.

Listen: Doug Henwood on the troubles (15:21)

Minnesota Independent: I wanted to start by hearkening back to the last time we talked, a day or so after Lehman Brothers went down. You said at the time that the bad scenario–the situation we needed to watch out for–was one in which the credit markets, bank-to-bank and bank-to-business lending, dried up. That seems to be happening now as I read Nouriel Roubini and others on the crisis. What is going on with the credit markets?

Doug Henwood: They’re pretty much frozen up. The inter-bank market is virtually completely frozen. They quote interest rates, but they’re pretty meaningless because there’s no loan volume. Banks are basically refusing to deal with each other because they don’t trust each other. They’re just hoarding their cash and putting it into government securities. We’re also seeing signs that lending to business is drying up — the commercial paper market is contracting very rapidly. Commercial paper is a form of unsecured borrowing by large corporations, financial and non-financial, that is usually a very large market. And it’s usually blue-chip corporations who normally would not have a difficult time borrowing. But that market is contracting.

The Federal Reserve has just announced some support facility for the commercial paper market, so we’ll see if that does anything to kick-start the market. But it looks like there’s just a general atmosphere of panic that’s causing anybody with money to hold on to it. And it doesn’t appear that there’s any change in that psychology imminent.

MnIndy: Are people rushing to get out of credit markets part of the problem here?

Henwood: Yeah, at some point this becomes self-fulfilling, because everyone gets scared and they run away, and the running away drives down the prices and drives up interest rates and drives down stock prices. And people look at that and say, “Oh my god, it’s falling apart.” It’s a vicious cycle that keeps feeding on itself.

The whole point of government intervention in situations like this is to break that cycle — to put some sort of floor under prices and also some floor under the decline in confidence. So far, despite very extraordinary measures — not just the bailout that passed last week, but all the central bank activities around the world — to pump money into the markets, pump reassurance into the markets, very innovative lending by the Federal Reserve and other central banks … They’re clearly pulling out all stops, and have made it clear they will continue to pull out all stops, and maybe even find more stops to pull out if they haven’t exhausted the supply completely.

That has not yet put a floor under prices or provided much foundation for confidence. It may; historically, for the last couple of decades, government bailouts have always succeeded. They haven’t necessarily been able to prevent recessions, but they have been able to prevent panics from just completely unwinding everything.

But so far, not so good.

MnIndy: Why are banks freezing up in their lending to each other, in simple terms? Because they’re afraid of each other’s solvency, of all the bad paper on their books?

Henwood: Yeah … This is all really uncharted territory. The original problem, as everyone knows now, was a lot of bad mortgage debt. But on top of all those bad mortgage debts, the investment banks built an enormous structure of very heavily leveraged and opaque instruments. Now that is coming undone, and very rapidly. And nobody knows, really, how bad it is. The danger of leverage, which is a fancy word for borrowed money, is that it’s wonderful on the way up. The borrowed money can really juice things up on the upside. But when things turn down, it accelerates things as they head back down to earth.

That’s what’s happened. I think a lot of these very heavily leveraged structures are imploding. A lot of progressives who opposed the bailout, for example, say that if we just get money to the mortgage borrowers who can’t meet their obligations, then that would protect everything else. But in fact there are all these other leveraged structures that are imploding as well, and that’s what the bailout and all the other extraordinary gestures are intended to address.

But the scale is so huge, and the level of panic is so high, and the possibility of disaster is so frightening, that people are just — it’s everyone for themselves.

MnIndy: Why does the bailout package that was passed last week, and for that matter, the $630 billion in new funds that the Fed injected earlier in the week, to less notice — why have they had so little impact on this?

Henwood: It’s been a short period of time, for one. I’ve noticed that people, even as sophisticated as Paul Krugman, have been saying the bailout is a failure. Well, the thing is less than a week old, so it’s a little early to judge.

The history of past banking crises and government bailouts is that these sometimes take years to work out. Our own savings and loan rescue took several years. The Nordic banking crises of the early ’90s took several years to work out. The Japanese banking crises of the ’90s, which were never really adequately addressed with any kind of government package, took more than a decade to work out.

So we don’t really know. The whole idea is that this is supposed to make things less bad. But it can’t make things good, and it certainly can’t do anything overnight. But I think it’s also just the scale of the problem. There’s just so much leverage in the system, and this is where the regulators — the central banks, our Federal Reserve, the Treasury, independent regulatory agencies — just failed so miserably. They let this borrowing, this leveraging, all these opaque instruments, get so out of control. They could have stopped this five years ago, but they didn’t. Especially back during the Greenspan years. Greenspan thought that whatever the markets do is okay. Who is he, a mere human, to doubt the collective wisdom of the market? So he stood back and even cheerled onward as all these structures were being laid on. Now they’re being undone.

The best hope is that they can be undone at a reasonable pace so it doesn’t all come crashing down overnight, [instead] it gets spread over the course of several years. That would, I think, mitigate the economic impact somewhat.

But we’re already in a recession, I think, and it looks like it’s only going to get deeper in the coming months. We haven’t really had a deep recession in the United States since the early 1980s. We had a fairly mild one in the early ’90s, a fairly mild one in the early ’00s. We did have slow recoveries from those recessions; it took awhile to get out of them. But they were not deep. The economy did not contract greatly and the unemployment rate did not rise all that dramatically. For consumer markets in the early ’00s, there was virtually no consumer recession at all. The housing markets, which are usually hit in a recession, barreled ahead. Car sales, which are also usually hit hard in recessions, and durable goods purchases, also usually hit in recessions — that didn’t happen.

So we haven’t had a consumer recession of any kind in this country for about 17, 18 years, and we haven’t had a really broad, deep recession in about 25, 26 years. It looks like we’re overdue for one of those. It could be a shock to many people.

MnIndy: During the debate that led to the passage of the bailout bill last week, there were a lot of words of assurance that the taxpayers will do all right in the long run. The Treasury will get most of this money back, might even make money. And yet, as far as I can tell, very few concrete protections were written into the bill. What’s your understanding of the protections we have for the public investment here?

Henwood: They look — at least in the language of the bill, they don’t look all that reassuring. But one thing about the whole structure is that the bill gave the secretary of the Treasury very broad discretion to do what he wants to. Barney Frank said the other day that it also means the secretary of the Treasury can buy stock in corporations, in banks that are in trouble.

Now, the history of these bailouts — there’s a very interesting review of the history of these banking crises and bailouts that came out a couple of weeks ago from a couple of IMF economists. Their conclusion was that buying bad assets, which was Paulson’s original proposal, doesn’t work as well as just directly injecting fresh capital into banks. That certainly wasn’t Paulson’s original intention, but apparently the way Congress wrote the legislation, they can do that.

The thinking on Wall Street, as far as I can tell, is that while Paulson might not do that, Paulson will be history in a few months, and it’s highly likely that if we happen to have a new Democratic administration and a new secretary of the Treasury, they will take that equity route. It’s not only more effective, according to a survey of the historical evidence, but it also offers the taxpayers an upside. If they manage to stem the crisis, or limit its effects, the banking sector will eventually recover and the stocks of the banks will rise again.

Looking at the history of some comparable bailouts in the Nordic countries and Japan, we see that stock markets continue to fall for a year or two after a banking crisis begins, but then they begin to rise, often rather dramatically. So there is a good possibility that if the government buys stock in these troubled institutions, and they manage to turn themselves around, then the Treasury can — if not make money in this deal, at least recoup a lot of what it spent. So I think there’s a good chance that this $700 billion price tag is a ceiling, and we may actually get away with less than that. We don’t know, but that is a possibility, and a not completely outlandish possibility.

MnIndy: Doug, last question. And again, I’ll go back to our talk in September. You said then that you thought the chance this would descend to something catastrophic for the real economy, something like a depression — which, according to a CNN poll this week, 60 percent of the public thinks we’re headed for — was not a terribly near possibility. Three weeks down the road, would you still say that, or is all the panic likelier to be self-perpetuating at this point?

Henwood: You know, it’s really hard to say. I think there’s certainly the risk of a severe recession. I don’t know where you put the dividing line between a severe recession and a depression. An unemployment rate of 10 percent is a severe recession. An unemployment rate of 15 percent starts looking like a depression. But that’s kind of arbitrary.

Certainly the risk of something really nasty looks the highest it’s been since the end of World War II. There have been a couple of instances in the past where it looked like we were teetering at the edge and then managed to avoid it.

The fact that the level of panic in the markets looks so high despite all these extraordinary interventions is a little scary. Now, on the other hand, if you want to draw some comfort from that, sometimes when people are thinking the world is coming to an end, that can be a sign that we’re close to the bottom. Or that we’re closer to the bottom than we are to the beginning.

So some of the signs of panic are suggesting that maybe people are getting a little carried away with the worry. I don’t know. It’s very risky. There’s a possibility that those high levels of anxiety are actually contrary indicators.

But on the other hand, there’s a serious risk that things could come unraveled. There’s just a whole lot of problems out there, and we may not have the luxury of dealing with them in a comfortable fashion at a time we choose. They may just come crashing down all at once. If enough people think we’re heading into a depression and they stop spending money, that runs the risk of becoming self-fulfilling. It’s a scary time. There’s no doubt about it.

Excerpt:

“In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now…. This is really an economic Pearl Harbor. That sounds melodramatic, and I’ve never used that phrase before, but this really is one. When $40 billion of Treasury bills are sold, like they were last week, 7-day Treasury bills, at a yield of 1/20 of 1 percent, that means the whole country, or a lot of the country, is at the point of putting their money under the mattress. You’re only 1/20 of 1 percent away from where it’s better to put the money under the mattress. You don’t want 300 million Americans putting their money under the mattress. This economy doesn’t work well without the lubrication of credit. And trust. And that’s been lost.”

“This bill does not effectively address the issue of what the taxpayers of our country will actually own after they invest hundreds of billions of dollars in toxic assets. This bill does not effectively address the issue of oversight because the oversight board members have all been hand picked by the Bush administration. This bill does not effectively deal with the issue of foreclosures and addressing that very serious issue, which is impacting millions of low- and moderate-income Americans in the aggressive, effective way that we should be. This bill does not effectively deal with the issue of executive compensation and golden parachutes. Under this bill, the CEOs and the Wall Street insiders will still, with a little bit of imagination, continue to make out like bandits.”

Read the Sanders column.

Krugman’s first-blush reaction: “I think that Congressional leaders know that it’s a bad bill, but feel compelled to defend it, because they’re (rightly) scared of the financial consequences of a second rejection. And to some extent economists like myself are in the same position; I think I called it the ‘hold your nose caucus.’ So am I for the bill? Yuk, phooey, I guess so. And I’m very angry at Paulson for putting us in this position.”

An Alternative Minimum Tax (AMT) patch, a mental health parity bill, a package of tax break extensions, and tax breaks and relief for victims of natural disasters, specifically Hurricane Ike. These don’t sound like they have any relation to the relief of an financial crisis, but, as of today, they will all play a major role…. At the heart of the tacked-on legislation is a combination of an AMT patch and tax break extensions for corporations and renewable energy investments. Senate Democrats, most prominently Sen. Max Baucus, believe that the inclusion of these measures will help draw the support of House Republicans who previously voted down Monday’s bailout bill. However, this measure is already drawing the ire of House Democrats, including Blue Dogs and Majority Leader Steny Hoyer.

The AMT/tax break extension package was previously passed by the Senate, but House leaders, pushed by Hoyer and the Blue Dogs, intended on shelving the proposal due to its failure to abide by pay-as-you-go rules (providing offsetting cuts to go with revenue reductions). The inclusion of the package in the bailout bill will revive the animus between the two Democratic factions. Hoyer has already stated that the inclusion of the “tax extenders” is “controversial” and was included only because “they thought that’s the only way they could get it passed.” Of course, the Blue Dogs, being prominent supporters of the bailout bill, may find themselves in a situation where this compromise is the best they can get.

Lovely. And Barack Obama wants to claim the lead in forcing passage of this bill because…?