Backers defend AZ crackdown on illegal immigrants

April 15, 2010

Jonathan J. CooperSupporters of the nation's toughest crackdown on illegal immigration, on the verge of approval in the Arizona Legislature, say the state law is necessary to help stamp out crime and keep citizens and law enforcement officers safe.
The measure would make it a crime under state law to be in the country illegally. It would also require local police officers to question people about their immigration status if there is reason to suspect they are here illegally.
Immigrants unable to produce documents showing they are allowed to be in the U.S. could be arrested, jailed for up to six months, and fined $2,500.
"No longer will we sit by and let our citizens be killed, maimed, injured (and) hurt," said Republican state Sen. Russell Pearce, who sponsored the measure.
But civil rights activists warn that Arizona is inviting rampant racial profiling and police-state tactics.
"That is an unprecedented expansion of police power," said Alessandra Soler Meetze, executive director of the American Civil Liberties Union of Arizona. "It's giving police officers a green light to harass anyone who looks or sounds foreign."
The ACLU and immigrant rights groups are demanding Republican Gov. Jan Brewer veto the measure if it reaches her. The Republican has not announced whether she will sign it, but said she is a strong supporter of pragmatic immigration laws.
Her predecessor, Janet Napolitano, a Democrat who is now President Barack Obama's Homeland Security secretary, vetoed similar proposals.
Current law in Arizona and most states doesn't require police to ask about the immigration status of those they encounter. And many police departments prohibit officers from inquiring out of fear that immigrants won't cooperate in other investigations.
The law also would crack down on employment for illegal immigrants by prohibiting people from blocking traffic when they seek or offer day labor on street corners. Also, a judge could fine a city for not enforcing the immigration law vigorously enough.
The new measure would be just the latest crackdown of its kind in Arizona, which has an estimated 460,000 illegal immigrants.
Pearce, the bill's sponsor, has been the driving force behind Arizona's tough new measures, including a law copied in other states that punishes companies caught knowingly hiring illegal immigrants. He insists the measures are aimed at enforcing immigration laws, not racial profiling.
"I believe handcuffs are a great tool, but you have to put them on the right people," said Pearce, a former cop who can list the local officers killed or wounded by illegal immigrants. "Get them off the police officers and put them on the bad guys."
Supporters of the crackdown also point to Phoenix's high kidnapping rate, which law enforcement says is fueled by immigrant and drug smugglers who snatch their rivals or their family members as a way to collect unpaid debts, make quick money or as retaliation for earlier abductions.
Anger over the porous Mexican border mounted last month when an Arizona cattle rancher was shot to death. Investigators said he may have been killed by drug runners working for cartels based in Mexico.
The new measure is supported by police unions representing rank-and-file officers, who deny they would engage in profiling.
It is opposed by police chiefs, who worry that the law would be too costly, that it would distract them from dealing with more serious problems, and that it would sow such distrust among immigrants that they would not cooperate with officers investigating other crimes.
Legal immigrants fear the law would give officers easy excuses to stop them, and that even U.S. citizens could find themselves detained if they can't prove their legal status.
"When they come up with these things, it doesn't matter if I'm here legally," said Jose Melendez, a 55-year-old naturalized U.S. citizen from Guadalajara, Mexico. "If they see a Mexican face and a Mexican name, they'll ask for papers."
Anti-immigration activists say the larger goal is to discourage illegal immigration by making the U.S. inhospitable.
"Most illegals would leave on their own if they felt the U.S. was serious about our laws," said William Gheen, president of Americans for Legal Immigration Political Action Committee.
House Republicans passed the bill on a party-line vote Tuesday. The Senate approved it in February but must vote on changes made in the House before sending it to the governor.
___
Associated Press Writer Felicia Fonseca in Flagstaff, Ariz., contributed.

Poll: 78 percent don't trust big government

Trust numbers 'rarely get this low,' survey sponsor says

 

 

By LIZ SIDOTI

The Associated Press

updated 7:56 p.m. ET, Sun., April 18, 2010

WASHINGTON - Can you trust Washington?

Nearly 80 percent of Americans say they can't and they have little faith that the massive federal bureaucracy can solve the nation's ills, according to a survey from the Pew Research Center that shows public confidence in the federal government at one of the lowest points in a half-century.

The poll released Sunday illustrates the ominous situation facing President Barack Obama and the Democratic Party as they struggle to maintain their comfortable congressional majorities in this fall's elections. Midterm prospects are typically tough for the party in power. Add a toxic environment like this and lots of incumbent Democrats could be out of work.

The survey found that just 22 percent of those questioned say they can trust Washington almost always or most of the time and just 19 percent say they are basically content with it. Nearly half say the government negatively effects their daily lives, a sentiment that's grown over the past dozen years.

This anti-government feeling has driven the tea party movement, reflected in fierce protests this past week.

"The government's been lying to people for years. Politicians make promises to get elected, and when they get elected, they don't follow through," says Cindy Wanto, 57, a registered Democrat from Nemacolin, Pa., who joined several thousand for a rally in Washington on April 15 — the tax filing deadline. "There's too much government in my business. It was a problem before Obama, but he's certainly not helping fix it."

Majorities in the survey call Washington too big and too powerful, and say it's interfering too much in state and local matters. The public is split over whether the government should be responsible for dealing with critical problems or scaled back to reduce its power, presumably in favor of personal responsibility.

About half say they want a smaller government with fewer services, compared with roughly 40 percent who want a bigger government providing more. The public was evenly divided on those questions long before Obama was elected. Still, a majority supported the Obama administration exerting greater control over the economy during the recession.

'Rarely gets this low'
"Trust in government rarely gets this low," said Andrew Kohut, director of the nonpartisan center that conducted the survey. "Some of it's backlash against Obama. But there are a lot of other things going on."

And, he added: "Politics has poisoned the well."

The survey found that Obama's policies were partly to blame for a rise in distrustful, anti-government views. In his first year in office, the president orchestrated a government takeover of Detroit automakers, secured a $787 billion stimulus package and pushed to overhaul the health care system.

But the poll also identified a combination of factors that contributed to the electorate's hostility: the recession that Obama inherited from President George W. Bush; a dispirited public; and anger with Congress and politicians of all political leanings.

"I want an honest government. This isn't an honest government. It hasn't been for some time," said self-described independent David Willms, 54, of Sarasota, Fla. He faulted the White House and Congress under both parties.

In the short term, the deepening distrust is politically troubling for Obama and Democrats. Analysts say out-of-power Republicans could well benefit from the bitterness toward Washington come November, even though voters blame them, too, for partisan gridlock that hinders progress.

In a democracy built on the notion that citizens have a voice and a right to exercise it, the long-term consequences could prove to be simply unhealthy — or truly debilitating. Distrust could lead people to refuse to vote or get involved in their own communities. Apathy could set in, or worse — violence.

'Nothing wrong' with distrust
Democrats and Republicans both accept responsibility and fault the other party for the electorate's lack of confidence.

"This should be a wake-up call. Both sides are guilty," said Sen. Claire McCaskill, D-Mo. She pointed to "nonsense" that goes on during campaigns that leads to "promises made but not promises kept." Still, she added: "Distrust of government is an all-American activity. It's something we do as Americans and there's nothing wrong with it."

Sen. Scott Brown, a Republican who won a long-held Democratic Senate seat in Massachusetts in January by seizing on public antagonism toward Washington, said: "It's clear Washington is broken. There's too much partisan bickering to be able to solve the problems people want us to solve."

And, he added: "It's going to be reflected in the elections this fall."

But Matthew Dowd, a top strategist on Bush's re-election campaign who now shuns the GOP label, says both Republicans and Democrats are missing the mark.

"What the country wants is a community solution to the problems but not necessarily a federal government solution," Dowd said. Democrats are emphasizing the federal government, while Republicans are saying it's about the individual; neither is emphasizing the right combination to satisfy Americans, he said.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

The State of Hypocrisy

April 18, 2010

By Ruben Navarrette

SAN DIEGO -- In the late 1990s, I took a job writing for a newspaper and moved to Arizona.
At least I think it was Arizona. The place I remember bears little resemblance to the one you hear about today.
Back then, nativists were on the political fringe; now they're becoming mainstream. Republicans were anxiously reaching out to Hispanics; now GOP legislators are making Hispanics anxious with race-baiting measures to end affirmative action. Political leaders, including the Republican governor, had torpedoed efforts to bring before voters a ballot initiative that would have denied education and social services to illegal immigrants; now Arizonans are in such a punitive mood that they would easily approve such a measure.
Back then, none other than Maricopa County Sheriff Joe Arpaio was quoted as saying there wasn't much his deputies could do about illegal immigration since being in the country without documentation wasn't a crime; now Arpaio is so bent on rounding up illegal immigrants that even after the Obama administration stripped him of the authority to determine someone's legal status, he kept on doing it.
And perhaps most significantly, back then the business community was so desperate for labor that it was doing everything but recruiting illegal immigrants and offering them signing bonuses to make beds, cook meals, build homes and otherwise help construct a paradise in the desert; now that a lot of the work has been done, Arizonans want to portray themselves as innocent victims of an invasion. Fifteen years ago, Arizonans wanted cheap labor; today, they want your sympathy.
Arizona lawmakers think they're showing how tough they can be in passing a harsh new law that makes it a state crime to be in the United States without the proper legal documents. But really, all they're doing is showing their hypocrisy. If the legislators who voted for this law were serious about trying to curb illegal immigration, they would cut off the job magnet. The Arizona Legislature focused on employers a few years ago, but the effort was aimed at companies as opposed to individuals. Start locking up soccer moms for hiring undocumented housekeepers or Paradise Valley lawyers for outsourcing their yardwork and then we'll talk.
The new legislation, billed as one of the strictest anti-illegal immigration laws in the country, would grant police the power to stop anyone suspected of being in the country illegally and verify their immigration status.
Arizona Gov. Jan Brewer, a Republican intent on scoring political points by railing against illegal immigrants, will likely sign the bill. And, shortly thereafter, the lawsuits will fly as critics try to get the law tossed out by the courts. There's a good chance of this happening. The law appears to be an unconstitutional power grab by the state that usurps the authority of the federal government to establish and enforce U.S. immigration policy. It will also almost certainly lead to racial profiling of Latinos, including those born in the United States.
This bill is as bad as they come. Not surprisingly, it is the brainchild of state Sen. Russell Pearce, who has spent years teaching Arizonans division. By tapping into a fear of foreigners, Pearce has successfully scared up votes, headlines and political contributions. Some lawmakers accomplish those things through visionary leadership, courageous acts and soaring rhetoric. People like Pearce do it by pandering to racists and playing to the lowest common denominator.
The real tragedy in all this is that the bill, which professes to take a hard line against illegal activity, will almost certainly produce much more of it. By proposing a law that deputizes every local and state law enforcement officer in Arizona to enforce immigration law, Pearce has single-handedly destroyed the trust between law enforcement agencies and the immigrant communities they have spent years trying to better serve. Good luck finding people who are willing to report crimes and be interviewed as witnesses now that they are afraid they might be arrested or deported. That makes these communities easy prey for criminals and makes the job of law enforcement much harder.
This measure is not wise, or helpful or defensible. In fact, in many ways, it's a surefire recipe for disaster. And it's also the kind of thing that the Arizona I'm familiar with would never have considered.

ruben.navarrette@uniontrib.com

Copyright 2010, Washington Post Writers Group

The Real Story of Americans' Immigration Views

April 18, 2010

By David Paul Kuhn

Americans support legal immigration and oppose illegal immigration.
But another picture often emerges from the chattering class. Americans' opposition to illegal immigration is wrongly described as opposition to immigration itself.

Immigration is America's most contentious of unresolved issues. The public remains divided over aspects of the issue. They do, however, understand the issue. Yet all too often Americans' fairly sophisticated view of immigration is simplified. And that simplification tends to skew the facts.
Friday's New York Times exemplified the problem. The nation's premier newspaper reported on a new immigration study. "In 14 of the 25 largest metropolitan areas," the story read, "more immigrants are employed in white-collar occupations than in lower-wage work like construction, manufacturing or cleaning.
"The data belie a common perception in the nation's hard-fought debate over immigration -- articulated by lawmakers, pundits and advocates on all sides of the issue -- that the surge in immigration in the last two decades has overwhelmed the United States with low-wage foreign laborers," the Times continued.
But the study's findings actually substantiate those "common perceptions."
The public perceives illegal immigrants as significantly more likely to be "low-wage foreign laborers" and add to the ranks of those relying on public and private social services. However, cherry pick the facts and another conclusion could be reached.
"Overall, 48 percent of immigrants work in white-collar jobs-managerial, professional, sales, and administrative support. By comparison, 52 percent work in service, blue-collar, or farming, fishing and forestry jobs," according to the nonpartisan Fiscal Policy Institute study, commissioned by the Times. This is the picture that emerges from all 25 cities studied.
The Times conflates views on legal and illegal immigrants. The issue is not what it reports, but what the Times does not.
Only about one in 10 illegal immigrants work in white-collar professions, the study concluded.
"There is no doubt that undocumented workers are much more likely to be in lower skilled jobs and much more likely to have less education," said David Kallick, the principal author of immigration analysis. The authoritative 2009 Pew Hispanic Center study -- that Kallick's analysis relied upon to track unauthorized immigrants' employment -- sheds more light on the gap between legal and illegal immigrants.
Pew found that 35 percent of legal immigrants have at least a bachelor's degree, three points above the level for the U.S.-born workforce. By comparison, less than half as many illegal immigrants, 15 percent, have a bachelor's degree.
The differences between legal and illegal immigrants are inseparable from how Americans view the two. In 2007, with Washington debating immigration reform, polling organizations looked more deeply into the issue. An ABC News poll asked if illegal immigrants help or hurt the country. It asked the same question about legal immigrants. A majority of Americans, 54 percent, said illegal immigrants "do more to hurt the country." Yet 59 percent said legal immigrants "do more to help the country."
The same trend is visible in key swing states like Ohio. About two-thirds of Ohioans said illegal immigrants "hurt the country" while nearly three-quarters believe legal immigrants "help the country," according to a Quinnipiac poll in 2007.
The "why" behind this legality fault line is more complicated. Americans' concern about legal status is intractable from the correlated issues.
It's not generally a matter of job competition. At least a majority, 56 percent, believe that illegal immigrants "mostly take jobs that nobody wants," according to a 2007 Los Angeles Times/Bloomberg poll. Other polls show more than two-thirds share this view.
There is however an absence of detailed data on the Great Recession's impact on the jobs issue. At least two-thirds of all job losses in the recession are among blue collar workers. And as studies indicate, most illegal immigrants are blue collar.
We do know from a recent M.I.T. and Harvard study, also citied by the Times, that six in 10 Americans oppose an increase in low-skilled immigration. And as noted above, illegal immigration strongly correlates to low-skilled immigration.
Cultural protectionism is likely not a major factor either. A 2007 Gallup poll, while it failed to differentiate legal status, clarifies this point. Based on six issues, Gallup asked Americans "whether immigrants to the United States are making the situation in the country better or worse?" The only issue that a plurality said "better," 40 percent, was "food, music and the arts." The majority said "worse" on the issues of crime and taxes.
Taxes especially evoke why, to Americans, illegal immigration concerns social services. More than two-thirds of voters view illegal immigrants as a significant strain on the U.S. budget, according to a recent Rasmussen poll.
Moreover, according to a 2006 Rasmussen poll, about six in 10 Americans favor an immigration policy that "welcomes all immigrants except national security threats, criminals, and those who would come here to live off the U.S. welfare system." Illegal immigrants are ineligible for welfare. But "welfare system" tends to be a catchall for the public's anxiety about strained safety nets (such as the use of emergency rooms for healthcare needs).
The poverty rate for adult illegal immigrants is 21 percent, compared to 13 percent for legal immigrant adults and 10 percent for U.S.-born adults, according to Pew.
Pew also finds that 47 percent of illegal immigrants are not high school graduates, compared to only 22 percent of legal immigrants and 8 percent of Americans.
This is one reason immigration is such a divisive issue. It relates to many of the most contentious issues. We know from polls that a majority of Americans believe illegal immigrants in the nation will, and should, be offered a path to citizenship or be allowed to stay as guest workers. Notably, polls show they favor such a policy in conjunction with increased border security. The 2007 LA Times/Bloomberg poll placed the number in favor of citizenship at six in 10. A 2009 CBS/New York Times poll found that 44 percent, the plurality, favor a path to citizenship while 22 percent favor a guest worker status. Americans appear to link the immigration issue to the hotly debated subject of safety nets, from welfare to healthcare, perhaps for this reason. They believe it's likely many illegal immigrants will one day become eligible for these programs. About six in 10 illegal immigrants lack health insurance, more than twice the level for legal immigrants and about six times the rate of U.S. adults.
In fact, most Americans view the availability -- or the potential availability -- of safety nets as magnet for illegal immigration. The recent Rasmussen poll found that about two-thirds of voters believe that the "availability of government money and services draw illegal immigrants" to the nation.
Some read this desire to limit illegal and low-skilled immigrants as callus. But the United States has unique problems. It is the only first world nation that shares a land border with a third world nation (providing Turkey is considered second world). Yet it is also uniquely open to immigrants. The United States accepts more legal immigrants as permanent residents than all other nations combined, according to a 2006 Department of State report.
It's clear Americans favor more skilled legal immigrants. Far more difficult is creating a policy that meets that public desire. There are several proposals in Congress to encourage the immigration of highly skilled or well-educated immigrants. It will be an uphill battle.
Back in 2007, with Congress mired in the immigration debate, a bipartisan Senate proposal for a "merit-based system" infuriated some activists. The proposal would have used a point system to weigh desired skills, similar to programs used from England to Australia to Canada.
"At best, Congress might set up a pilot program. That's probably the best scenario for points system advocates," said Cornell University's Stephen Yale-Loehr, one of the nation's leading experts on immigration law and an advocate of a merit-based system. But Yale-Loehr added, "It's probably unlikely. Points systems are very contentious."
The most active advocates for immigration reform are Hispanic groups. These groups also strictly oppose a merit-based system.
Hispanics are disproportionately represented among illegal and blue collar immigrants. That means a merit-based path to citizenship would disproportionately disfavor Hispanics. About six in ten illegal immigrants are from Mexico. In total, more than three quarters of illegal immigrants come from Central and South America, Pew finds.
Of course, low-skilled immigrant workers remain crucial to the U.S. economy. No serious merit-based proposal blocks low-skill immigrants or refugees. It's a matter of emphasis.
And so it is also, at minimum, a matter of emphasis for the public as well. Americans' preference for skilled legal immigrants concerns both "skill" and "legal." But too many focus on the latter and ignore the former.
In the end, all sides agree that the immigration issue will prove exceedingly difficult to resolve in the years to come. But resolution is surely impossible if we don't properly understand what Americans view as the issue.
David Paul Kuhn is the Chief Political Correspondent for RealClearPolitics and the author of The Neglected Voter: White Men and the Democratic Dilemma. He can be reached at david@realclearpolitics.com and his writing followed via RSS.

Arizona Clears Strict Immigration Bill

By MIRIAM JORDAN

Arizona lawmakers on Tuesday passed one of the toughest pieces of immigration-enforcement legislation in the country, which would make it a violation of state law to be in the U.S. without proper documentation.
It would also grant police the power to stop and verify the immigration status of anyone they suspect of being illegal.
The bill could still face a veto from Arizona Gov. Jan Brewer. A spokesman for Ms. Brewer said she has not publicly commented on the bill. Ms. Brewer, a Republican, has argued for stringent immigration laws.
Under the measure, passed Tuesday by Arizona's lower house, after being passed earlier by the state Senate, foreign nationals are required to carry proof of legal residency.
Immigrants' rights groups roundly criticized the bill. "The objective is to make life miserable for immigrants so that they leave the state," said Chris Newman, general counsel for the Los Angeles-based National Day Laborer Organizing Network. "The bill constitutes a complete disregard for the rights of nonwhites in Arizona. It effectively mandates racial profiling."
The bill's author, State Sen. Russell Pearce, was in a committee session Tuesday and couldn't be reached, his offices said. Mr. Pearce, a Republican, represents the city of Mesa, in Maricopa County, whose sheriff, Joe Arpaio, has gained a national reputation for his tough stance on immigration enforcement. A spokesman for Mr. Arpaio didn't return a request for comment.

The bill is different from an earlier version, giving protections for church and community organizations from criminal prosecution for transporting or harboring illegal immigrants.
In a statement, Tuesday Rep. John Kavanagh (R-Fountain Hills) called the measure "a comprehensive immigration enforcement bill that addresses the concerns of our communities, constituents and colleagues."
"This updated version gives our local police officers the tools they need to combat illegal immigration, while protecting the civil rights of citizens and legal residents."However, human rights groups are certain to challenge the measure in court, said Joe Rubio, lead organizer for Valley Interfaith Project, a Phoenix-based advocacy group, calling it "an economic train wreck." He added that "Arizona's economic recovery will lag way behind the country's if we keep chasing away our workforce. Where do the legislators think business will find workers?"
The bill in some ways toughens up a situation that the Obama administration had tried to roll back. Under a program known as 287g, some local law enforcement agencies were trained to enforce federal immigration laws by checking suspects' immigration status.
Mr. Arpaio, the Maricopa county sheriff, had been one of the most aggressive enforcers of 287g. However, the Obama administration in recent months has sought to scale back that program, and had reduced the resources it made available to Mr. Arpaio's office and others.
—Tamara Audi contributed to this article.

Obama Speech Aims at ‘Risky Decisions’ on Wall Street (Update1)

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By Roger Runningen and Edwin Chen

April 21 (Bloomberg) -- President Barack Obama will say tomorrow that new financial-industry regulations are needed so the country’s economic system isn’t at the mercy of “risky decisions” on Wall Street, his spokesman said.
“Financial reform is something that is born out of an economic collapse that started on Wall Street and spread to Main Street America,” White House press secretary Robert Gibbs said today in previewing the president’s address at New York’s Cooper Union.
Obama’s speech will “remind the American people what’s at stake,” Gibbs said. The president wants rules for financial markets “so that we don’t find ourselves at the mercy of a series of risky decisions as we have in the past.”
The president is giving the address as he and Democratic leaders push to get legislation through Congress by next month. The House passed its version last December. The Senate is poised to take up legislation sponsored by Connecticut Democrat Christopher Dodd, the chairman of the Banking Committee.
Obama is tentatively scheduled to speak just before noon.
Brian Gardner, senior vice president for Washington research at Keefe Bruyette & Woods Inc., said the speech is primarily a vehicle for Obama to campaign for passage of the legislation and isn’t likely to offer new policy directions.
“I don’t think Wall Street is expecting any kind of olive branch on the substance of the legislation, but I think folks on the street would like to see cooler rhetoric,” Gardner said. “I’m not sure that they’re going to get it.”
Wall Street Culture
Obama said in an interview with CNBC today that Wall Street’s culture hasn’t changed much. Financial firms will have to accept updated rules because it’s “unacceptable” to continue using taxpayer money to rescue banks, he said.
The “core” of the administration’s regulatory overhaul is assurance “that we don’t have to bail out firms if they acted recklessly, that we can unwind them in an orderly fashion that protects the economy as a whole, that taxpayers aren’t on the hook,” Obama said.
The other main elements are regulations governing the derivatives market to make it more transparent and an independent agency to protect consumers, he said.
The president is returning to the site where, during the 2008 campaign, he outlined his proposals for a new regulatory regime.
Obama blames a lack of effective regulation for failing to stem the worst financial crisis in two generations, which brought down Bear Stearns Cos. and Lehman Brothers Holdings Inc. and prompted a $700 billion bailout of the financial industry.
Negotiations on Bill
Senate Republicans have signaled a softening in their opposition after lobbying by the president and other administration officials and the Securities and Exchange Commission’s announcement last week that it was suing Goldman Sachs Group Inc. for fraud linked to derivatives.
All 41 Senate Republicans signed a letter last week vowing to oppose the legislation as it stood after passing Dodd’s committee. Negotiations on the measure are continuing, including whether to drop a $50 billion industry-supported fund the government would use to break apart failed, systemically important firms.
The fund has been a focal point of Republican objections, and administration officials have said it wasn’t part of Obama’s original proposal, suggesting they wouldn’t fight its elimination.
Republican Support
“I have an awful lot of Republicans who are willing” to vote for the regulatory bill, Dodd said today in an interview with Bloomberg Television. “The question is whether the leadership will allow them to do it.”
Senator Richard Shelby of Alabama, the ranking Republican on the banking panel, said he and Dodd are close to an agreement on the legislation.
Senate Republican Leader Mitch McConnell, of Kentucky, who last week called the regulation legislation “fatally flawed,” told the Louisville Courier-Journal there has been a more conciliatory tone in talks as progress is made on a compromise.
“I’m optimistic,” he in an interview published today.
Dodd’s measure, which may come to the Senate floor as soon as next week, would create an independent regulator within the Federal Reserve that would guard consumers against abuse and deception in such instruments as mortgages, credit cards or loans. It would also create the mechanism to unwind systemically important financial firms when they fail.
The Senate Agriculture Committee today approved a separate measure that would require U.S. lenders such as JPMorgan Chase & Co. and Bank of America Corp. to spin off their swaps trading desks.
To contact the reporters on this story: Roger Runningen in Washington at rrunningen@bloomberg.netEdwin Chen in Washington at Echen32@bloomberg.net
Last Updated: April 21, 2010 18:02 EDT

Clinton Calls Advice He Got on Derivatives ‘Wrong’ (Update1)

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By Joshua Zumbrun

April 19 (Bloomberg) -- Former President Bill Clinton said his Treasury Secretaries Robert Rubin and Lawrence Summers were wrong in the advice they gave him about regulating derivatives when he was in office.
“I think they were wrong and I think I was wrong to take” their advice, Clinton said in an interview on ABC’s “This Week” program broadcast yesterday.
Their argument was that derivatives didn’t need transparency because they were “expensive and sophisticated and only a handful of people will buy them and they don’t need any extra protection,” Clinton said. “The flaw in that argument was that first of all, sometimes people with a lot of money make stupid decisions and make it without transparency.”
“Even if less than 1 percent of the total investment community is involved in derivative exchanges, so much money was involved that if they went bad, they could affect 100 percent of the investments,” Clinton said.
Today, Douglas Band, a counselor to Clinton, clarified the former president’s comments in a statement.
“Reflecting on a derivatives debate that occurred 12 years ago, President Clinton inadvertently conflated an analysis he received on a specific derivatives proposal with Chairman Greenspan’s arguments against any regulation of derivatives,” the statement said.
Obama Package
Tighter regulation of derivatives trading is part of a package of financial reforms being pushed by the Obama administration against Republican opposition. The Senate is debating a bill introduced by Banking Committee Chairman Christopher Dodd that would also give the federal government the authority to unravel institutions whose failure threatens the financial system.
In the interview, Clinton also said the Bush administration contributed to the financial crisis with lax regulation.
“I think what happened was the SEC and the whole regulatory apparatus after I left office was just let go,” Clinton said. If Clinton’s head of the Securities and Exchange Commission, Arthur Levitt, had remained in that job, “an enormous percentage of what we’ve been through in the last eight or nine years would not have happened,” Clinton said.
‘Vigorous Oversight’
“I feel very strongly about it,” Clinton said. “I think it’s important to have vigorous oversight.”
Levitt is a director of Bloomberg LP, parent of Bloomberg News. Levitt and Rubin declined to comment. Press aides for Summers didn’t respond to requests for comment.
Summers, director of Obama’s National Economic Council, said in a Bloomberg Television interview last week that the Obama administration supports “the principles that derivatives need to be traded in the sunshine, that there needs to be centralized clearing.”
In April 8 testimony before the Financial Crisis Inquiry Commission, Rubin said “derivatives should be subject to collateral and margin requirements, standardized derivatives should be exchange traded, and customized derivatives should have a clearinghouse or, at least, greater disclosure requirements.”
Clinton also said that Republicans who controlled Congress would have stopped him from trying to regulate derivatives. “I wish I had been caught trying,” Clinton said. “I mean, that was a mistake I made.”
Clinton said Republicans will fall short of retaking Congressional majorities in the 2010 election.
‘Less Dramatic’
“I think the outcome is likely to be far less dramatic than it was in ‘94,” Clinton said. In the 1994 election, after Clinton’s second year as president, the Republicans captured majorities in the House and Senate. “If history is any guide they should make a few gains, but I -- I don’t expect them to win in either house.”
Clinton said that Obama should appoint a progressive to the Supreme Court. “Because Justice Stevens was part of the four-person progressive block, he will of course nominate someone who will be part of that,” Clinton said, referring to retiring Justice
Clinton, 63, said both he and his wife, Secretary of State Hillary Clinton, 62, are too old to be a good choice for the court, and that the president should pick someone 10 or 15 years younger. He also suggested considering candidates who don’t have judicial backgrounds.
Best Judges
“Have we gone too far in this process that assuming only judges can be elected? That somehow you’re not qualified if you weren’t a judge.” Clinton said. “Some of the best justices in the Supreme Court in history have been nonjudges.”
Clinton also said that as he began preparing for the anniversary of the 1995 bombing of a federal office building in Oklahoma City, he saw “a lot of parallels” between the early 1990s and today.
“Both the feeling of economic dislocation and the level of uncertainty people felt,” Clinton said. “The rise of kind of identity politics. The rise of the militia movements and the right-wing talk radio.”
“A lot of the things that have been said create a climate in which people who are vulnerable to violence -- because they are disoriented like Timothy McVeigh was -- are more likely to act,” Clinton said.
McVeigh, a former U.S. Army member, on April 19, 1995, detonated a truck bomb outside the Alfred P. Murrah federal building in Oklahoma City, killing 168 people. McVeigh was executed in 2001.
“We all have to be careful,” Clinton said. “We ought to remember after Oklahoma City.”
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net
Last Updated: April 19, 2010 19:05 EDT

Senate Panel Approves Plan to Make Banks Spin Off Swaps Desk

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By Phil Mattingly

April 21 (Bloomberg) -- The Senate Agriculture Committee approved derivatives legislation that would require U.S. lenders such as JPMorgan Chase & Co. and Bank of America Corp. to spin off their swaps trading desks.
The panel voted 13-8 to back a bill drafted by Committee Chairman Blanche Lincoln, an Arkansas Democrat. Senator Charles Grassley, an Iowa Republican, joined Democrats in approving the measure. The provision to make lenders separate swaps trading from commercial bank operations has been among the most contentious issues as lawmakers weigh new rules for Wall Street.
Grassley’s vote provided a rare bipartisan sign in the Senate debate over financial-industry regulations. Grassley said his vote today doesn’t mean he supports the broader legislation sponsored by Senate Banking Committee Chairman Christopher Dodd. Dodd, a Connecticut Democrat, is negotiating a bipartisan deal on the larger bill with Alabama Senator Richard Shelby, the banking panel’s top Republican. Lincoln’s derivatives measure would be merged into the broader bill, she told reporters today.
“The derivatives piece is significant, but that larger bill has a number of flaws that need to be resolved before I’d support it,” Grassley said in a statement after the vote.
Lawmakers are weighing derivatives oversight after bets made by American International Group Inc. brought the New York- based insurer to the brink of failure in 2008, forcing the U.S. government to pledge more than $182 billion in assistance.
Lincoln’s bill would bar companies that deal in swaps, a form of derivative, from bank privileges such as accessing the Federal Reserve’s discount lending window, emergency liquidity functions and the Federal Deposit Insurance Corp.’s deposit guarantee.
‘Small Fixes’
“This is no time for small fixes or tweaking around the edges,” she said in a statement before the vote. “This is the time for bold change and big decisions about the future of our country and the global financial system.”
Lawmakers from both parties have expressed concern about the spinoff proposal and Commodity Futures Trading Commission Chairman Gary Gensler has refused to support it, saying “the Federal Reserve and the Treasury has to think through these issues.”
“The Senate Agriculture Committee voted out a bipartisan bill that will bring derivatives trading out of the dark, provide strong oversight of market participants, and combat fraud, abuse and manipulation,” Treasury Secretary Timothy F. Geithner said in a statement.
The spinoff provision of Lincoln’s bill would cut banks’ ability to lend and could drive derivatives markets overseas, said Kenneth E. Bentsen of the Securities Industry and Financial Markets Association, a Washington trade group.
Antithetical
“At a time when borrowers are already finding it difficult to obtain credit, limiting financial institutions’ ability to lend seems antithetical to the goals of comprehensive reform legislation,” Bentsen, Sifma’s executive vice president for public policy and advocacy, wrote in an April 20 letter to Lincoln and Senator Saxby Chambliss of Georgia, the Agriculture Committee’s ranking Republican.
The bill would require mandatory clearing and exchange trading for standardized derivatives. Parties in over-the- counter trades would be required to put up increased capital.
Chambliss said Lincoln’s bill would put undue burden on institutions such as AgriBank FCB and CoBank ACB.
“All the sudden they are going to be treated like Goldman Sachs or JPMorgan,” Chambliss said.
Gensler, who has advocated requiring all derivative trades be cleared and traded on exchanges, said any additional exemptions would only open doors to more.
“Fundamentally the choice we’re dealing with is, every exemption from clearing makes it a little more likely that a taxpayer will have to stand behind a bailout,” Gensler said.
To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net.
Last Updated: April 21, 2010 14:47 EDT

Obama readies for Wall Street tough talk

By Sam Youngman - 04/21/10 02:01 PM ET

President Barack Obama will likely hit Wall Street with another round of criticism in his speech Thursday.
The president has grown increasingly harsher in tone when he speaks of the financial industry.

White House spokesman Robert Gibbs hinted Wednesday that Wall Street could be subject to more tough talk for its past abuses and excessive bonuses when the president speaks.
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Obama was highly critical of bankers during his last trip to Wall Street. In his September speech Obama told bankers he was prepared to step in to stop their “reckless behavior” from doing more harm to the economy.

Thursday’s speech comes days after the Securities and Exchange Commission sued Goldman Sachs for fraud, claiming the company defrauded investors.

Obama will speak at Cooper Union in New York City, where he will also make the case for financial reform.

Rhetoric on that topic has heated up in the Senate this week as both parties try to negotiate legislation.

Gibbs claimed Wednesday the White House has made progress in winning GOP support for financial regulatory reform.

He said the negotiations in the Senate have reached "a critical period of time," and Republicans have realized that opposing reform is a political loser.

"I think clearly some Republican opposition has become overcome," Gibbs said.

Republicans last week accused the White House of withdrawing its Democratic negotiators from the table, but in the days since, GOP Senate leadership has signaled a willingness to discuss reform.

Gibbs said he believes "that in the Republican caucus in the Senate there is a desire to get this done." But Gibbs said he wasn't sure if that desire "goes to the top" and Senate Minority Leader Mitch McConnell's (R-Ky.) office.

On Tuesday, a Gallup poll found a majority of Americans support tighter government regulations when "Wall Street" firms are specified as the target.

In the poll, 50 percent of Americans backed more government regulations for "Wall Street" firms versus 46 percent who want stricter controls of "large banks and major financial institutions."

-- Vicki Needham contributed to this article.

Obama Unleashed

How a calm, reasonable president gets exercised about … financial regulation.

By John Dickerson
Posted Tuesday, April 20, 2010, at 11:58 PM ET

---

The weekly presidential radio address is a sleepy tradition. On Saturday, though, the president said something that may have caused people to wake up and take notice. Obama called the Senate Republican Leader Mitch McConnell "cynical and deceptive" for asserting that financial regulatory reform legislation now under consideration in Congress would lead to future bailouts.
President Obama usually keeps it vague. His disagreements are with "some people" or those who want to "defend the status quo." It's usually clear whom he's talking about, but Obama, like all presidents, generally adds a little soft padding to stay presidential and above it all. That aloofness irritated some of his Democratic allies during the health care fight. They were glad he finally took the fight to Republicans in the end and appeared ready to keep the pressure there. They like that he's doing it again now with McConnell. This is an election year, after all. "If he'd done this a little earlier on health care, maybe it would have passed sooner," said one veteran Democrat involved in the fall campaigns.
The president benefits from being specific in this case because he has a story to tell about McConnell. His charge is not merely that the GOP leader is mischaracterizing the financial reform legislation. The president is charging that McConnell is in the pocket of Wall Street bankers. "It turns out Mitch McConnell thinks differently," Obama told Democratic donors after explaining why he supports the legislation. "I don't know exactly what happened, but he and the chairman of the Senate [electoral] committee went up to Wall Street, had a pow-wow with them, and came away—the next thing we knew they were all opposed to financial-regulatory reform. I don't know the nature of the conversation but I'm hoping that they will do the right thing."
Why respond so directly? No one else could do the job. If this were the debate over health care legislation, the president might be letting Democratic leaders fight it out. But in this case the White House does not want to risk losing the fight to define the legislation. The "Wall Street bailout" charge is perhaps the most toxic one in American politics right now. It inspires conservatives, irritates independents, and depresses liberals. In a political campaign where Democrats seek to position themselves as defenders of the common people against insurance companies and Wall Street banks, the characterization could not risk getting muddied.
On a policy level, the White House argues that the president used such strong language because McConnell was suggesting taxpayers would foot the bill for future bailouts when the legislation is designed to do the opposite—it would require banks to pay to liquidate failing institutions. Their case was rather thoroughly supported by Republican Sen. Bob Corker of Tennessee. "This fund that's been set up is anything but a bailout," he said. "It's been set up to provide upfront funding by the industry so that when these companies are seized, there's money available to make payroll and to wind it down while the pieces are being sold off."
The pressure seemed to be working. Sen. McConnell on Tuesday seemed to pull back from his previous opposition to the legislation, acknowledging that "both parties agree on this point: no bailouts." Senior Republican leadership aides said that McConnell spoke out against reform so strongly because he felt Democrats were not negotiating in good faith. Now that negotiations have restarted, they say, his goal has been achieved. Democrats characterize this position as a climb-down and recognition that the politics were against him.
Obama will add more fodder to this debate Thursday in a speech on Wall Street reform at Cooper Union. Will he be as tough on Wall Street as he has been on McConnell, whom he says is doing its bidding? White House aides say the speech will be to the American people, setting the stakes for the legislation they see with a clarity reminiscent of George W. Bush's position on Iraq. You're either with American families or with Wall Street.
If he plays true to type, Obama will take the balanced tone he has tried to apply throughout—decrying the excessive bonuses and risk-taking by banks while championing the need for vibrant financial markets. This has the added advantage of not overly offending the bankers who gave so generously to his campaign and the Democratic Party. But some of his allies say the moment calls for the same sharpness against Wall Street that he used with McConnell. That would help push the legislation and make a statement about what Democrats stand for. As the White House knows, polls show that talking about restraining Wall Street only makes this legislation more popular.
If he needs a model, Obama might refer to Woodrow Wilson, another president known for his cerebral approach. In 1910, just before running for governor of New Jersey, Wilson gave a lecture about self-sacrifice which Obama could actually lift word-for-word today:

Banking is founded on a moral basis and not a financial basis. The trouble today is that you bankers are too narrow-minded. You don't know the country or what is going on in it and the country doesn't trust you. You are not interested in the development of the country. … You take no interest in the small borrower and the small enterprise which affect the future of the country, but you give every attention to the big borrower and the rich enterprise. … You bankers see nothing beyond your own interests. … You should be broader minded and see what is best for the country in the long run.

Though Obama has said Wall Street bankers are trying to kill reforms that will protect the rest of the country, it's hard to imagine him offering this kind of peppery rhetoric. He also won't be able to match the setting. Wilson gave the speech to an audience of Wall Street bankers. J.P. Morgan was sitting right next to him.
Become a fan of Slate and John Dickerson on Facebook. Follow us on Twitter.John Dickerson is Slate's chief political correspondent and author of On Her Trail. He can be reached at slatepolitics@gmail.com. Follow him on Twitter.

All the President's Goldman men

Emanuel: Goldman crowd gave almost $80,000 for his runs for Congress.

By MICHELLE MALKIN

Last Updated: 1:34 AM, April 21, 2010

Posted: 1:16 AM, April 21, 2010

While President Obama assails the culture of greed and recklessness practiced by the men of Goldman Sachs, his administration is infested with them. The White House can no more disown Government Sachs than Obama can disown Chicago politics.
Obama is headed to Wall Street tomorrow to demand "financial regulatory reform" -- just as the US Securities and Exchange Commission has filed civil suit against Goldman Sachs for mortgage-related fraud.
Question the timing? Darn tootin'.
As the New York Post reported Tuesday, the Democratic National Committee immediately bought sponsored Internet ads on Google that direct Web surfers who type in "Goldman Sachs SEC" to Obama's fund-raising site.
"It's time to hold the big banks accountable," the DNC message bellows.
Democrats are silent on the $994,795 in Goldman Sachs campaign cash that Obama bagged in the 2008 presidential race. The class-warfare Dems are also mum on all the president's Goldman men sitting in the catbird's seat:
* Goldman Sachs partner Gary Gensler is Obama's Commodity Futures Trading Commission head. He was confirmed despite heated congressional grilling over his role, as Reuters described it, "as a high-level Treasury official in a 2000 law that exempted the $58 trillion credit default swap market from oversight. The financial instruments have been blamed for amplifying global financial turmoil."
Gensler said he was sorry -- hey, it worked for tax cheat Treasury Secretary Tim Geithner -- and was quickly installed to guard the henhouse.
* Goldman kept White House Chief of Staff Rahm Emanuel on a $3,000 monthly retainer while he worked as presidential candidate Bill Clinton's chief fund-raiser, as first reported by Washington Examiner columnist Tim Carney. The financial titans threw in another $50,000 to become the Clinton primary campaign's top funder.
Emanuel received nearly $80,000 in campaign contributions from Goldman during his four terms in Congress -- investments that have reaped untold rewards, as Emanuel assumed a leading role championing the trillion-dollar TARP banking bailout law.
* Former Goldman lobbyist Mark Patterson serves under Geithner as his top deputy and overseer of TARP bailout -- $10 billion of which went to Goldman Sachs.
Paul Blumenthal of the Sunlight Foundation, a Washington-based think tank devoted to transparency in government, noted that, while Patterson agreed to recuse himself on any Goldman Sachs-related issues or related policy concerns, it "still creates a serious conflict for Geithner, as Treasury is being partly managed by a former Goldman lobbyist. Geithner is also placed in a tough position considering that his chief of staff is limited in the areas in which he can work (supposedly)."
* National Economic Council head Larry Summers reaped nearly $2.8 million in speaking fees from many of the major financial institutions and government bailout recipients he now polices, including JP Morgan Chase, Citigroup, Lehman Bros. and Goldman. A single speech to Goldman in April 2008 brought in $135,000.
Summers has prior experience negotiating government-sponsored bailouts that benefit private concerns. In 1995, he spearheaded a $40 billion Mexican peso bailout that bypassed Congress.
Summers personally leaned on the International Monetary Fund to provide nearly $18 billion for the package. Summers' boss, then Secretary of the Treasury Robert Rubin, was former co-chairman of Goldman -- the Mexican government's investment banking firm of choice.
Rubin continues to mentor another of his former employees with regular visits and chats -- Treasury Secretary Geithner, who was head of the New York Federal Reserve in 2008 when it ordered bailed-out AIG not to disclose its sweetheart payments to big banks including, you guessed it, Goldman Sachs.
As Obama harangues Wall Street to clean up its house, all the president's Goldman Sachs men have their feet on the coffee table at his.
malkinblog@gmail.com

What’s Missing in the Financial Rules Bill

April 20, 2010, 7:06 pm

By THE EDITORS

Win McNamee/Getty Images Soon after he took office, President Obama gave a speech at the White House calling for regulation of the financial industry. With him, in February 2009, are Barney Frank, Christopher Dodd and Timothy Geithner.

President Obama will be in New York on Thursday to lobby for the Democrats’ effort to overhaul financial regulations, as Senator Christopher Dodd, the chairman of the banking committee and sponsor of the legislation, and Treasury Secretary Timothy Geithner try to gain the support of centrist Congressional Republicans for the measure.
So far Republican support is hard to come by, and, on the other side, some Democrats say the bill is not strong enough. What is wrong with the bill, from both perspectives? Are there ways to improve it?

• Peter J. Wallison, American Enterprise Institute and ex-Treasury counsel
• Simon Johnson, M.I.T. professor and co-author of “13 Bankers”
• Tyler Cowen, economist, George Mason University
• Mark Thoma, economist, University of Oregon

You Can’t Ignore the Marketplace

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. He was general counsel of the Treasury and White House counsel in the Reagan administration.
What’s missing from the Dodd financial regulation bill is any recognition that there is a competitive market out there that can be distorted or destroyed. The bill authorizes the Fed to regulate all “systemically important” nonbank financial institutions, with the power to control the capital, liquidity and permissible activities of the country’s largest securities firms, insurance companies, bank holding companies, hedge funds, finance companies and others.

This bill was designed by people who know or care little about how competitive markets function.

All these firms compete with one another — for customers, investors and credit. The Fed, never having regulated a hedge fund or an insurance company, is now supposed to set the capital levels, liquidity requirements and permissible activities for each type of business and for each individual institution.
If it increases the capital requirements for, say, hedge funds, it will affect their ability to compete with securities firms or bank holding companies. If an insurance company wants to enter the business of insuring municipal securities, it will be fought by bank holding companies, which already do this business. In other words, competitive issues will be fought out at the Fed or in Congress instead of the marketplace.

Finally, and perhaps most important, the bill would regulate the largest financial institutions because, in theory, their failure could trigger a systemic breakdown. This means they are, by definition, too big to fail. All these institutions will thus have significant advantages over their smaller competitors, especially in obtaining credit.
Because they will be seen as less risky, they will have access to more credit at lower cost. They will also have advantages in selling their products. Imagine an insurance company being able to tell its potential customers that, because it is regulated by the Fed and too big to fail, the policies it offers are safer than those of its smaller competitors.
This bill could only have been designed by people who know or care little about how competitive markets function.

A Tougher Cap on Size

Simon Johnson, a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics, is the co-author of “13 Bankers: The Wall Street Takeover and The Next Financial Meltdown.”
Senator Dodd’s financial reform bill is missing a huge piece of the puzzle. The Obama administration proposed in January to cap the size of our biggest banks going forward, so they cannot pose an even larger threat to the economy than that which we faced in September 2008.
This was a good idea, but it should have gone further. Why would anyone think that today’s size of banks is the right place to stop? After all, it is the banks at their current size who brought us such disaster. And the largest six banks have only become bigger since the crisis — actually, as a direct result of the way the Bush and Obama administrations handled the bailout.

But the most striking fact is that this part of the Volcker Rules has completely failed to make it into the Dodd bill. There is a provision in the bill that regulators can break up large banks but only “as a last resort.” This is very weak and essentially meaningless in today’s context where big banks have great political power.

The amendment proposed by Representative Paul Kanjorski to the House bill was a definite improvement — putting more power in the hands of regulators and also more pressure on them to act preemptively on megabanks that pose risks to the system. But events have moved on considerably since that time — as seen most dramatically by the Securities and Exchange Commission charges against Goldman Sachs last week.
Two months ago, Senator Ted Kaufman was pushing the frontier with tough rhetoric about fraud at the heart of Wall Street. Now his views are completely mainstream. And Senator Kaufman insists, for example, in a speech on Monday that (among many other things) our biggest banks need to be broken up — there is simply no other way to make the financial system significantly safer.
Senator Sherrod Brown will almost certainly have an opportunity to introduce an amendment that would implement a hard size cap on big banks. For all our futures, it is of the highest importance that this amendment succeeds.

Congress Is the Problem

Tyler Cowen is a professor of economics at George Mason University. His blog, Marginal Revolution, covers economic affairs.
The main thing missing from the current bill being proposed by Senator Christopher Dodd — or indeed any of the relevant alternatives — is the idea of a better, more intelligent and more accountable Congress.

Bank regulation depends on the quality of the bureaucracy and the periodic attention of a responsible legislature.

Plenty of blame has been levied at the Fed, the regulatory agencies and, of course, the banks themselves. But political scientists sometimes refer to Congress as “the keystone of the Washington establishment” and for good reason. Congress oversees the budget of just about everyone else and sets the standards for their performance. It can be said that each Congress gets the regulatory regime it deserves.
Let’s consider an example of why there is no “once and for all” regulatory solution and why regulatory discretion cannot be avoided. Many commentators criticize the Dodd bill for failing to sufficiently tighten restrictions on bank leverage. That point is well-taken, but just passing restrictions on leverage — and making no further changes — probably won’t have the intended effect. The more binding the leverage restrictions, the more banks and other intermediaries will, sooner or later, recreate implicit leverage off the balance sheet.

It’s fine to call for maximum transparency, but mostly that’s just wishing for a different world. Activities off the balance sheet are off the balance sheet for a reason and it is hard to squeeze many of them into traditional accounting conventions. Nor should we try to ban off-balance sheet banking, as it would happen somewhere else around the globe or in some other part of the financial sector. Indeed many of these off-balance transactions limit rather than raise risk.
The upshot is that bank regulation is a tough slog: it depends on the quality of the bureaucracy and the periodic attention of a somewhat responsible Legislature. It is like a chess game whereby the private sector eventually finds a way around most of the binding regulations.
In the current debate, there’s far too much attention paid to how we are reshuffling the regulatory boxes and what restrictions we are putting down on paper. It’s the daily reality of regulation that matters and right now the U.S. Congress simply isn’t up to the job.

Controlling Bubble Damage

Mark Thoma is an economics professor at the University of Oregon and blogs at Economist’s View.
While we should certainly do our best to prevent bubbles through legislative and regulatory changes, and to prevent other problems like fraud, legislative and regulatory remedies can never ensure that the financial sector will be free of bubbles in the future. Thus, it’s important for financial reform legislation to limit the damage that bubbles can do.

We need leverage limits that are independent of regulators put in charge under an administration.

An important factor determining the amount of damage a bubble can do is the amount of leverage in the financial system. The more leverage there is, the bigger the crash. For this reason, limits on leverage are essential.
Senator Dodd’s proposal does allow regulators to set limits on leverage, but that is not enough. This crisis demonstrates that trusting the judgment of regulators who are subject to ideological and regulatory capture can lead to insufficient oversight. We need strict upper bounds on leverage — 15 to 1 for example — limits that are independent of the regulators put in charge under any particular administration

The other place that the legislation could do better is in limiting the size of banks. There is no convincing evidence that banks need to be as large as allowed under the Dodd legislation for the financial system to function efficiently. However, limits on bank size may not protect the financial system from a meltdown. If small banks are exposed to common risks or sufficiently interconnected, then many small banks could fail simultaneously and mimic the failure of a large bank, something that has happened in the past.
Reducing size is no guarantee of safety. But limiting bank size does limit the political power of financial institutions. Imposing regulations such as strict limits on leverage is much more difficult when banks are politically powerful, and that alone is sufficient reason to enact strict limits on bank size.

Financial Debate Renews Scrutiny on Banks’ Size

Stephen Crowley/The New York Times

Senators Edward E. Kaufman Jr., left, and Carl Levin during a financial hearing last week.

By SEWELL CHAN

Published: April 20, 2010

WASHINGTON — One question has vexed the Obama administration and Congress since the start of the financial crisis: how to prevent big bank bailouts.
In the last year and a half, the largest financial institutions have only grown bigger, mainly as a result of government-brokered mergers. They now enjoy borrowing at significantly lower rates than their smaller competitors, a result of the bond markets’ implicit assumption that the giant banks are “too big to fail.”
In the sweeping legislation before the Senate, there is no attempt to break up big banks as a means of creating a less risky financial system. Treasury Department and Federal Reserve officials have rejected calls for doing so, saying bank size alone is not the most important threat.
Instead, the bill directs regulators to compel the largest banks to hold more capital as a cushion against losses. It sets up a procedure intended to allow big banks to fail, with the cost borne not by taxpayers but by the biggest financial institutions.
As the debate over the regulatory overhaul heated up this week, a populist minority in both Congress and the Fed requested a revisit to the size issue. They would like to go beyond a provision in the bill, suggested by Paul A. Volcker, the former Fed chairman, and supported by President Obama, that would seek to keep banks from growing any larger but not force any to shrink.
“By splitting up these megabanks, we by definition will make them smaller, safer and more manageable,” Senator Edward E. Kaufman Jr., Democrat of Delaware, said in a speech Tuesday.
The president of the Federal Reserve Bank of Dallas, Richard W. Fisher, broke ranks with most of his colleagues within the central bank last week, declaring, “The disagreeable but sound thing to do regarding institutions that are too big to fail is to dismantle them over time into institutions that can be prudently managed and regulated across borders.”
There also has been concern about the size of banks from Republicans who believe in free-market principles. Several senators from the South and West — Richard C. Shelby of Alabama, Johnny Isakson of Georgia, John Cornyn of Texas and John McCain of Arizona — have expressed a desire to revisit the 1999 repeal of the Glass-Steagall Act, the Depression-era law that separated commercial and investment banking.
Alan Greenspan, the former Fed chairman, has entertained the idea of splitting up the banks but has stopped short of advocating it.
“If they’re too big to fail, they’re too big,” he said in an October speech.
He added: “In 1911, we broke up Standard Oil. So what happened? The individual parts became more valuable than the whole. Maybe that’s what we need.”
In January, the White House embraced a proposal by Mr. Volcker that would ban banks that take customer deposits from running their own proprietary trading operations, or making market bets with their own money. It would also limit the share of all financial liabilities that any one institution can hold — besides deposits — but it would be up to regulators to set the limit.
A federal law enacted in 1994 already addresses size by restricting any bank from holding more than 10 percent of the nation’s deposits, although several of the largest banks have been granted waivers from that requirement or used loopholes to evade its intent.
The Volcker proposal resembled an amendment by Representative Paul E. Kanjorski, Democrat of Pennsylvania, that would let regulators dismantle financial companies so large, interconnected or risky that their failure would jeopardize the entire system. The amendment was part of a regulatory overhaul that the House adopted in December, largely along party lines, and is also in the Senate version in a modified form.
At a hearing on Tuesday about the bankruptcy of Lehman Brothers, which caused credit markets to seize up in September 2008, the Fed chairman, Ben S. Bernanke, reiterated that his preference was to limit the risky behavior of banks rather than break them up.
“Through capital, through restrictions in activities, through liquidity requirements, through executive compensation, through a whole variety of mechanisms, it’s important that we limit excessive risk-taking, particularly when the losses are effectively borne by the taxpayer,” Mr. Bernanke said.
But when Mr. Kanjorski pressed him on whether regulators should be allowed to break up big banks, he replied, “It’s something that would be, on the whole, constructive.”
Representative Brad Sherman, Democrat of California, added: “We should go further and not just allow, but require, regulators to break up firms that have reached a certain size.”
What is not in doubt is that the crisis increased the size and importance of the six largest banks: Bank of America, Citigroup, JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley.
During the crisis, Bank of America swallowed Merrill Lynch, JPMorgan Chase bought Bear Stearns and Wells Fargo acquired Wachovia. Goldman and Morgan converted to bank holding companies to gain access to lending from the Fed’s discount window.
In 1995, the assets of the six largest banks totaled 17 percent of the nation’s gross domestic product. Now they have assets amounting to 63 percent of G.D.P. Measured another way, the share of all banking industry assets held by the top 10 banks rose to 58 percent last year, from 44 percent in 2000 and 24 percent in 1990.
Gary H. Stern, the co-author of “Too Big to Fail: The Hazards of Bank Bailouts,” said policy makers largely ignored the warnings contained in the title when the Brookings Institution published the book in 2004.
Mr. Stern, who retired last year as president of the Minneapolis Fed, is lukewarm about the bill. “It tries to address the problem but it’s half a loaf at best,” he said. “It doesn’t address the incentives that gave rise to the problems in the first place.”
In Mr. Stern’s view, ending “Too Big to Fail” should subject uninsured creditors — bondholders — to losses if the bank fails. Without that fear, he said, unsecured creditors will not exert discipline on the banks by monitoring their risk-taking and pricing their loans appropriately. Mr. Stern said the bill in the Senate is vague about how such creditors would be treated if the government were to seize and dismantle a failing bank.
Simon Johnson, an M.I.T. professor, has been leading the intellectual charge to break up banks. In his book “13 Bankers,” he urged that no financial institution be permitted to control more than 4 percent of G.D.P. and no investment bank more than 2 percent. All six of the big financial institutions exceed those limits.
Forbidding taxpayer bailouts, as the Senate bill proposes, is worth little more than the paper it is on, Mr. Johnson argues. “When push comes to shove, will the government save these guys?” he asked. “I don’t know anybody who doesn’t think they’d save Goldman if Goldman were to suddenly run into trouble.”