The central error in the popular post-crisis consensus was the idea that naive believers in the self-policing efficiency of markets led us over the precipice. Greenspan was painted as the high priestof this laissez-fairy-tale delusion, and people seized on a moment when he appeared to plead guilty: Under the pressure of congressional questioning, he confessed to a “flaw” in his pro-market ideology. What Greenspan meant was that all belief systems — whether pro-government or pro-market — are imperfect. But that subtlety was lost. Quoted and requoted without proportion or context, Greenspan’s purported mea culpa threatened to define his legacy.
.. Bestsellers by two Nobel Prize-winning behaviorists — Daniel Kahneman and Richard Thaler — encouraged people to see the crisis as proof that this new science had been ignored, as did contributions from the sublime storyteller Michael Lewis.
.. Contrary to myth, Greenspan himself never believed that markets were efficient. In his youth, he wrote lucidly about bubbles and crashes and regarded market inefficiencies as so obvious that he sought to exploit them by day trading
.. As Fed chairman years later, Greenspan frequently reminded his colleagues that periods of prosperity could be punctured by “irrational exuberance” in financial markets.
.. political constraints, not intellectual failures, prevented policymakers from curbing the housing mania. Nobody remembers that in 2001 the Greenspan Fed banned the most abusive subprime mortgages, for the good reason that the ban was circumvented. But why was it circumvented? The answer is that the capture of Congress by financial lobbies ensured the balkanization of regulation into an alphabet soup of agencies, many of them underfunded and ineffective.
.. Nonbank mortgage lenders, for example, came under the authority of the Federal Trade Commission, which had no resources to conduct preemptive supervision. Small wonder that the sharp practices in the industry became egregious, or that nonbanks continue to dominate today’s mortgage business.
.. The Greenspan Fed also tried to force more capital into the banks it supervised, but it soon realized that this would drive risk-taking into various “shadow banks” that lay outside its authority
.. Greenspan also pushed for tougher regulation of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (a.k.a. Fannie Mae and Freddie Mac), the government-backed mortgage giants, presciently observing that they posed “a systemic risk sometime in the future.” Fannie’s lobbyists hit back with a TV ad warning Congress not to back the Greenspan plan. That buried it.
.. The important lesson of the crisis is not that markets are fallible, which every thoughtful person knew already. It is that essential regulations — the sort that the supposedly anti-regulation Greenspan actually favored — are stymied by fractured government machinery and rapacious lobbies.
.. Even today, the financial system has multiple overseers answerable to multiple congressional committees, because all this multiplying produces extra opportunities for lawmakers to extract campaign contributions.
.. Vast government subsidies still encourage Americans to take big mortgages; Fannie Mae and Freddie Mac still operate, despite endless talk of breaking them up. And although post-2008 regulations have ensured that banks are better capitalized, the lobbyists are pushing back. Merely a decade after the Lehman bankruptcy brought the world economy to its knees, the Trump administration is listening to them.
Where Banks Win Big Under the Mnuchin Plan
Changes to capital requirements under new Treasury proposals would free up billions in cash on banks’ balance sheets
The Treasury Department’s proposals to overhaul financial regulation offer banks, especially the biggest, potentially significant relief when it comes to how much capital they must hold... That would answer banks’ biggest complaints in the post-financial crisis era—that excessive capital requirements are holding them, as well as lending, back...If the Treasury’s changes were adopted, they could allow banks to return more capital to shareholders, which in turn would boost returns on equity and possibly further bolster stock-market valuations. The downside, say critics, is that this could weaken banks’ loss-absorbing buffers and threaten confidence in the financial system... Current rules say the biggest banks must hold capital equal to at least 5% of their total leverage exposure
.. Treasury is proposing that banks be allowed to exclude some holdings from that measure, namely cash deposited at central banks, U.S. Treasury debt, and some of the money held at clearinghouses related to derivatives... The House recently passed the so-called Choice Act, which would allow banks to opt out of stringent regulation if they maintained a leverage ratio of at least 10%... At J.P. Morgan alone, the shortfall to 10%, which currently would be about $105 billion, would fall to about $60 billion or less... The largest “global systemically important banks,” known as G-SIBs, are required by U.S. regulators to hold an additional capital buffer.. This charge varies, but will average 2.8 percentage points
An Ayn Rand-Loving Banker Huddles With Donald Trump
President-elect met Monday with John A. Allison IV, a fierce champion of free markets
.. As chief executive of BB&T Corp., he distributed copies of Ms. Rand’s “Atlas Shrugged” to senior officers and influenced BB&T’s charitable arm to fund classes about the moral foundations of capitalism at a number of colleges... He also has said that bank regulations that came out of the 2010 Dodd-Frank Act are too onerous, and proposed significantly raising capital levels as a way to weed out bad banks... Mr. Allison was unafraid to criticize his rivals or his regulators. In an interview during his final weeks as BB&T CEO, he complained that “til really very recently, we were told over and over that if we just had as good a risk management (model) as Wachovia, then we would do very well.”.. “A lot of folks didn’t understand the conservatism of BB&T until the crisis, but they appreciated it after.”
Nation’s Biggest Banks Would All Withstand Recession, Fed Says
Next week, they will all have to pass another type of test from the Federal Reserve that is a more subjective measure of the banks’ planning and management processes. In the past, these so-called qualitative reviews have tripped up banks including Citigroup, which failed in 2014 even after demonstrating it had adequate capital.
.. On top of that, several Fed officials have recently said that for the nation’s biggest banks, future tests will become even more difficult, with stricter capital requirements.
.. “We need to have those eight most systemically important institutions more resilient than other banks in the economy,” he said.
.. Investors have worried that weakening employment could bring about an end to a period of low defaults, particularly in automobile lending and credit cards — which have been two areas of growth for the banks.