Wednesday, July 21, 2010

Sheila Bair, Financial Reform, and Fannie and Freddie: Of Sound and Fury

President Obama has signed into law the Dodd Frank financial reform law. 

The most needed provision of the new law is its authority to resolve failing non-banks procedures along the lines of the FDIC's bank failure resolution process when the non-bank poses systemic risk The FT's Tom Braithwaite interviews Sheila Bair, Chairman of the FDIC, in this video (10m 19sec) "about how she is going to implement the new powers that were given to her by the new legislation on financial reform."

In an unrelated(?) story, Congressman Issa has dug up some very interesting facts about two non-banks not covered by Dodd-Frank.  The Financial Times' Suzanne Kapner reports "Countrywide Financial made 153 “VIP” loans to Fannie Mae executives, in an effort to win goodwill from the giant mortgage finance company, according to a letter released on Tuesday by a US congressman.

"An additional 20 VIP loans were made to Freddie Mac employees, the other large government-sponsored buyer of home loans, according to the details released by Darrell Issa, a California Republican."

Senator Dodd was a recipient of two of Angelo's VIP loans.

Which brings us to the most interesting question about the financial reform package.  The President assures us this will end future bailouts.  Unfortunately, the President left the job of constructing a bill to Congress.  Congress gave us a 2,300 page rewrite of financial regulation and it contains is no solution to the Freddie Mac and Fannie Mae problem.  Here is the biggest sinkhole in the federal bailout and not a word!  I guess Congress did not want to mess with the Financial Industrial Complex.  Incidentally (?), Senator Dodd and President Obama were the two biggest recipients of campaign contributions from Fannie and Freddie sources.   Dr. Blair prudently sidestepped a question on this amazing omission.  Neil Murphy, an eminent banking authority, loved to ask "Other than that, Mrs. Lincoln, how was the play?"  I can hear him ask it again.

But do not worry!   Suzanne Kapner  writes, "Barney Frank, a Massachusetts Democrat, has said that he plans to start work on new legislation when Congress returns from its August recess. The White House is expected to submit plans for fixing the system by early next year."

"To-morrow, and to-morrow, and to-morrow,
Creeps in this petty pace from day to day,
To the last syllable of recorded time;
And all our yesterdays have lighted fools
The way to dusty death."

1 comment:

Karl Peterjohn said...

Poetry combined with economic analysis. What a delightful academic oxymoron.

I am delighted to leave these comments as a small token of appreciation for your masterful presentation at lunch Friday. Thank you for this talk.

I hope that you will be willing to come back for an update at sometime in the future. I'll see how my economic portrait is painted at that time.

One small but interesting exception with your presentation. You can pick up any Wall St. Journal and get a listing of the producer prices for commodity items in their commodity listings. When I use my "Peterjohn family index," based upon the prices contained in this paper, I find that the 20 items that my family regularly uses sees a significant increase in prices in the last year. This is not reflected in either the CPI or PPI indexes.