Sorry, have been out of the loop for a few days, and missed the last round about that Republican primer on how to read the upcoming FCIC report. Four things.
1. One point of embarrassment for the GOP is that it is reported that the GOP commissioners stopped showing up for meetings (Shahien: “Hennessey and Holtz-Eakin, for example, have missed about half of the commission’s meetings since [early August], according to a person familiar with the panel’s activities.”)
One of the commissioners told Noah Kristula-Green of FrumForum that the GOP members stopped showing up to meetings because it didn’t work with their schedules:
Several news organizations are reporting on Democratic frustration that other members of the commission did not always show up for meetings. However, the commissioner who spoke with FrumForum said that this was a symptom of broader mis-management, ”I have attended every meeting that I could” he said, “When the chairman simply sends out new meeting times and never checks if you can make them, you’re going to have a problem.”
This wasn’t charity work. I don’t know about you, but the times I’ve been involved with hiring people for six figure salaries I’ve always expected that they’ll show up and do their work. From The FCIC Statue:
Each member of the Commission may be compensated at a rate not to exceed the daily equivalent of the annual rate of basic pay in effect for a position at level IV of the Executive Schedule under section 5315 of title 5, United States Code, for each day during which that member is engaged in the actual performance of the duties of the Commission…While away from their homes or regular places of business in the performance of services for the Commission, members of the Commission shall be allowed travel expenses…
Level IV annual rate is $153,200. So the Commission Chairs not only get travel expenses paid for but bill their daily rate at the equivalent of up to $153,200 a year. (What was the actual daily rate?) So I don’t feel particularly sad that they sometimes had to rearrange their schedule – this is why we paid them at such a high level.
But this is Exhibit A on why the GOP wins so many arguments – here I am complaining about how lazy and overpaid these four federal workers are!
2. Barry has 10 Questions for GOP Members of Financial Crisis Inquiry, including this important question I would have investigated further had I subpoena power and staff:
4. Prior to 2004, Investment Houses were limited to 12-to-1 leverage by the SEC’s net capitalization rule. In 2004, the 5 largest investment banks asked for, and received, a full exemption from leverage restrictions (known as the Bear Stearns exemption) These five firms all jacked up their leverage. What impact did this increased leverage have on the crisis?
We’ve talked about this issue at this blog before. So has Peter Wallison at the AEI America blog. Check this out (my bold):
There was no ruling by the SEC that permitted the five to increase their leverage ratios. First, the concern about leverage ratios should be put in perspective—something that was not done in the Labaton article. A leverage ratio is nothing more than the ratio of debt to equity. A leverage ratio of 33-to-1 (about 3 percent capital) is risky if the assets are subject to significant declines in value, and it is not risky if the assets are not likely to decline in value. As an example, a leverage ratio of 35-to-1 would not be a particularly risky ratio if the assets of the firm were U.S. government securities. The likelihood of a substantial drop in the value of those securities would be small, so carrying them with only a three-percent equity “cushion” is not taking much of a risk. Thus, the mere fact that the investment banks were, according to Labaton, leveraged at 33-to-1 does not mean much until we know what assets these funds were carrying.
But even assuming that the investment banks were taking risks, the data does not bear out a wholesale SEC abandonment of its responsibilities as outlined in the Labaton article. In a paper published this month, Eric Rosengren of the Federal Reserve Bank of Boston shows that—based on their 10-K reports—the leverage of the five investment banks rose from an average of 22-to-1 in 2003 (before the SEC took over their supervision) to a 31-to-1 ratio in 2007. An increase, to be sure, but without any knowledge of the quality of the underlying assets not a particularly stunning increase in risk-taking. It is important to recognize that the investment banks were not commercial banks; they were not backed by the U.S. government and had no insured deposits. Although their broker-dealer subsidiaries were subject to a net capital requirement in order to protect their customers’ accounts, it was expected that the parent companies would be risk-takers. The SEC, for that reason, was more likely to be interested in their liquidity position—their ability to meet their obligations as those obligations come due—than in their leverage.
His answer to question #4 seems to be none.
A few comments. First off, the leverage is directly related to the liquidity position due to the types of leveraging they did. But I like that a leverage increase from 22-to-1 to 31-to-1 is not a big deal because it is a private company with no insured deposits who the private market expected to be risk takers. The firms in question are Bear Stearns, Lehman Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley – how did that work out? The implication that their leverage and failure should only worry regulators in so much as they have insured deposits implies that the financial markets are perfectly self-regulating except for where the government rears its head.
He writes this in 2009, when three of those five firms are gone. I think this underlines the philosophy, that financial firm collapsing can have no contagion because in a private market there is no such thing, or if there is such a thing there is no reason to worry about it. Hence a focus on the GSEs, because what else is there to look at?
3. Like Felix Salmon, I’m awaiting to find what smoking guns Wallison has about the GSEs. I’m no defenders of the GSEs, a terribly leveraged and corrupt institution. One reason they didn’t get into subprime was because they had an accounting scandal in the early 00s that caused them to retrench. But this isn’t exactly an esoteric discussion – there have been several other investigations including the GSE Conservator’s Report which hasn’t found these smoking guns. I certainly hope this is a move to make the FCIC’s documents public.
I’m going to go out on a limb and say that Wallison’s smoking gun will involve redefining what a subprime loan is, an argument he’s been pushing for a while now.
4. Richard Green notes that Wallison was on the GSEs for not doing enough to lend to low-income borrowers. This was actually a long-standing critique from conservative think tanks. James Kwak found a Cato paper titled Should CRA Stand for “Community Redundancy Act”? – redundant because the CRA isn’t doing anything in the era of easy subprime lending. You see the same argument if you look at the Cato policy handbooks.
There’s also an interesting debate here underneath about whether the GSEs would explode on interest-rate risk, not credit risk. They eventually did explode on credit risk, which means the risks of a housing bubble and the risks of people not paying them back. But few in this space saw that – they were looking at the wrong directions. They saw subprime as this fantastic way of mitigating interest-rate risk that the GSEs wouldn’t take on; and if the GSEs were to explode because of credit risk, so would most of the financial sector….