Saturday, February 6, 2010

A Global Sheriff?

President Obama’s recent announcement regarding new federal financial sector regulation, known now as the “Volcker Rule,” is slowly making its way through the United States Senate. Recently boosted by the firm support of Senate Banking Chairman Christopher Dodd, its consideration and potential passage is only a small component of necessary financial reform. The recent financial meltdown occurred on a global scale and responding to the underlying causes must adopt a global vision. To this point in time, the United States has resisted supporting any type of international financial banking regulation.

In recent days, international financial leaders, including Obama administration financial advisor Larry Summers and British Prime Minister Gordon Brown, met in Davos, Switzerland to openly debate the need for global regulatory solutions. George Soros's proposal of the need for a “global sheriff,” gained currency in Davos, while Howard J. Davies of the British Financial Services Authority proposed a “financial WTO.” That these talks have occurred and are being taken seriously reflects the continuing global outrage over the bailed out investment banks in the United States and those banks’ continuing refusal to break from “business as usual” in connection with executive compensation and freeing up restricted credit flow.

Just as Wall Street promises to mightily resist the proposed “bank tax” and the recently announced “Volcker Rule,” these banks appear determined to fight against a new global regulatory regime. To avoid new U.S. financial regulation, “too big to fail” banks have threatened to move operations to countries with less restrictive financial regulations. This move toward “regulatory arbitrage” would allow banks to structure their businesses in ways that avoid or circumvent particularized regulation and make real the “fiction” that the United States regulatory tradition forces capital out of the U.S. To wit, Goldman Sachs has threatened to abandon its “bank holding company” status in order to circumvent the Volcker Rule’s sufficient deposits requirement. Recall that Goldman was able to survive the financial crisis because the Government bestowed “bank holding company” status upon Goldman.

The arrogance of Wall Street banks (through their leadership) is laid bare by their furious resistance to new financial regulation as announced by the Obama administration. It is now clear that many of the enormous gains made by Wall Street financial institutions during the past decade were ill-gotten. Left to their own devices, Wall Street leaders (amongst many other culprits) allowed greed, reckless decision making, irresponsible risk modeling, and rating agency capture to drive the economy to the brink of disaster. That they now resist new U.S. regulation and the potential adoption of global sheriffing is astonishing. When President Obama announced his potential bank tax, he suggested to U.S. investment banks that rather than spending millions of dollars resisting and sending scores of lobbyists to Washington, D.C. Congressional offices, perhaps the banks “might want to consider simply meeting your responsibilities.”


  1. Apparently, Goldman and JP Morgan are restricing CEO compensation. Goldman will reportedly pay its CEO $9 million for 2009 and JP Morgan is only going to pay its CEO $16 million (potentially) for 2009. Is Wall Street paying attention to the outrage that continues on Main Street.

  2. George Soros's proposal of the need for a “global sheriff,” gained currency in Davos ...

    Would this be the same George Soros who was found guilty of insider trading in France? The same man whose fund received a record fine for market manipulation in Hungary? The man accused by the leaders of 10 ASEAN nations of kicking off the Asian financial crisis by manipulating the international currency markets? Who crowed, "I'm having a very good crisis", as millions of people worldwide were suffering the effects of a financial disaster not of their making? Who has invested tens of millions of dollars in the Democrat Party and it's ancillary organizations like MoveOn and Media Matters? That George Soros? You'll pardon me if I treat any call form his ilk for a "global sheriff" with skepticism.

  3. These public private partnerships are very, very dangerous. The most rotten part of the financial system in the U.S. consisted of the government sponsored entities, Fannie Mae and Freddie Mac. They really kicked off this crisis.
    - George Soros, owner, Democrat Party

    It's interesting that Main Street's anger is so focused on Wall Street banks and investment firms while ignoring the greed and corruption at Fannie, Freddie and the UAW.

    When Fannie and Freddie announced the payment of executive bonuses totaling almost 43 million dollars the righteous defenders of financial virtue were silent. This despite the fact that these two GSE's were at the very heart of the crisis. Former executives are being investigated for fraud and US taxpayers are stuck with tens of billions of dollars of bad loans, while losses continue to mount. President Obama has recently given them a blank check payable by our children and grandchildren in order to cover the flood of red ink. The ultimate cost of this fiasco may exceed a trillion dollars.

    So far the bond market and the credit agencies have looked the other way as responsibility for the trillions of dollars of questionable assets these firms held are transferred to the U.S. taxpayer. Obama has ignored these liabilities in is budget, choosing to pretend that they do not exist, though he cynically counted their dividends. The charade can only go on for so long.

    What good is it having a regulatory framework and dedicated regulatory agencies when their findings are simply ignored by Congress because they are politically inconvenient? Listen as Democrats attack the regulatory authority responsible for oversight of Fannie and Freddie. These firms were responsible for creating the market for subprime and Alt-A mortgages. A market that was exploited by companies like Countrywide Financial.

  4. Chris Dodd (D) has been investigated for his relationship with the CEO of Countrywide, Angelo Mozilo, who was the target of civil fraud charges related to his mortgage activities. Why is Dodd writing financial regulations? And why have the Democrats been so reluctant to investigate, even though BofA, which acquired Countrywide, has signaled a willingness to cooperate? The involvement of high ranking members of Congress and the charges that evidence has been destroyed and tampered with screams out for a special prosecutor.

    We may, in fact, need a new regulatory framework but having politicians tainted through their ties to the very people responsible for the crisis is not the way to go. And while you may cast aspersions at the banking industry, under our system, everyone has a right to express their concerns over regulation that may impact them.

    I am personally far less concerned with how private companies choose to use their own assets than I am about using public money to bailout politically connected firms. What's needed is a well defined plan for disposing of a firms assets and obligations in bankruptcy and a firm message that no company is too big to fail.

  5. Is greed no longer one of the seven deadly sins? Even if it was not, it appears that many of these powerful Wall Street leaders would rather die in shame than live without corruption. How could we allow them to keep circumventing the wheel to avoid regulations and pass under the radar when our economic crisis has its roots in many of these companies? This is mind-boggling to me, and I agree with the President that maybe some of these companies should fulfill their obligations to better our economic crisis. However, in the event that they choose to move their operations to other countries, our government should ensure that we are not so quick to dry their tears when they come crying back for help!

  6. Who would pick this "global sheriff"? The idea of an international czar that would have a huge impact on our national economic system without the will of the Americn public being taken into effect seems a little scary and against some our founding principles.

  7. The resistance conveyed by these banks drives home the point that they truly could care less about the financial downturn and its global effects. If not for taxpayer dollars “bailing” them out of their dire situations, a good number of these financial institutions would instead be referred to as “too big to fail…almost”! A national, as well as global regulatory body would benefit the majority in moving forward with sound economic policies. Uniformity among these institutions would also be a benefit as this adds an element of transparency on what at least should be going on within the industry. The banks were using tailored financial practices to stay under the government’s radar all this time; and now they are telling us that if the government is going to actually pay attention to their industry, they’ll just pack up and continue in unregulated territory. “Either we do it in your face within your borders or we do it in your face, in someone else’s.”
    The banks have a detached approach from the real issue- that they have to change many fundamental practices. Until many of them get this and implement the necessary efforts to change, this game of tug and war will only continue.

  8. This post provides very interesting insight. While some action must be taken with regard to financial institution regulations, a "global sheriff" seems to be extreme and excessive. Hopefully, a balance can be created between excessive regulations of financial institutions and weak, ineffective regulations.