08:45 am
The Foxes Monitoring the Fox Guarding the Hen House
I took some time to review the latest iteration of the bailout bill last night. I’m neither a lawyer nor an economist, and I’m not going to pretend to understand the entire bill. I’ll leave that to far more capable analysts. I recommend starting with Hilzoy, who, among other things, reminds us about what is at stake here.
But one thing did stand out.
Section 104 of the bill establishes the Financial Stability Oversight Board, which is supposed to monitor the Secretary of the Treasury’s implementation of the bailout. Section 104(b) defines the Board’s membership:
(1) the Chairman of the Board of Governors of the Federal Reserve System;
(2) the Secretary [of the Treasury];
(3) the Director of the Federal Home Finance Agency;
(4) the Chairman of the Securities [and] Exchange Commission; and
(5) the Secretary of Housing and Urban Development.
So let me get this straight. The vaunted oversight function, which has been one of the Democrats’ main arguments in favor of the revised bill, is going to include Henry Paulson, the man the board is supposed to monitor and Ben Bernanke, the man who has been his wingman throughout this exercise in destroying boosting market confidence.
Who are the other three members? James B. Lockhart III (FHFA), Christopher Cox (SEC), and Steve Preston (HUD). Let’s take a brief look at excerpts from their official biographies:
Christopher Cox is the 28th Chairman of the Securities and Exchange Commission. . . . For 10 of his 17 years in Congress, Chairman Cox served in the Majority Leadership of the U.S. House of Representatives. He. . .served in a leadership capacity as a senior Member of every committee with jurisdiction over investor protection and U.S. capital markets, including the House Energy and Commerce Committee (as Vice Chairman of the Oversight and Investigations Subcommittee); the Financial Services Committee; the Government Reform Committee (as Vice Chairman of the full Committee); the Joint Economic Committee; and the Budget Committee.
James B. Lockhart, III, is the Director (CEO) and Chairman of the Oversight Board of the Federal Housing Finance Agency, regulator of Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. He assumed that position with the signing of the Housing and Economic Recovery Act on July 30, 2008. He remains the Director of OFHEO, which is now part of FHFA. . . . Mr. Lockhart co-founded and served as managing director of NetRisk, a risk management software and consulting firm serving major financial institutions, banks, insurance companies and investment management firms worldwide. He has an extensive background in financial services management including insurance, investment banking and pensions. He has served as Senior Vice President, Finance, at National Reinsurance, Managing Director at Smith Barney, Treasurer of Alexander & Alexander, and as Assistant Treasurer of Gulf Oil in Europe and the U.S.
Steve Preston was sworn in as the 14th Secretary of the U.S. Department of Housing and Urban Development (HUD) on June 5, 2008. . . . Secretary Preston has an extensive financial and capital markets background. Prior to overseeing SBA, Secretary Preston was Executive Vice President of The ServiceMaster Company, where he also served as chief financial officer during a period of expansion, restructuring and significant change in the regulatory environment. During the first half of Preston’s private sector career, he was a senior vice president and treasurer of First Data Corporation, and an investment banker at Lehman Brothers.
So the five people providing oversight of Paulson are Paulson himself, the guy who has backed every move Paulson has made (Bernanke), a man who, by his own admission, preferred “voluntary regulation” of the investment banking industry (Cox); a former banking and insurance industry consultant (Lockhart), and a former employee of Lehman Brothers (Preston).
This is like appointing the Central Committee of the Communist Party of the Soviet Union to undertake a performance evaluation of Stalin. Or choosing ZANU-PF to monitor human rights abuses committed by Robert Mugabe.
It’s not merely a case of the fox guarding the hen house; it’s aksing a pack of foxes to monitor a fellow fox as he guards the henhouse.
One more thing:
The chairperson of the Financial Stability Oversight Board shall be elected by the members of the Board from among the members other than the Secretary.
How much you want to bet it’s going to be Wingman Bernanke?
This is the oversight we were promised?
I remain deeply skeptical that this bailout is the one we need. Given Paulson’s own admission he could not spend more than $50 billion a month and given the fact that we are less than 120 days from a new President and even fewer than that from a new Congress, why give these shmucks anything more than $200 billion?
If things start to slide faster than that, Congress could come back into session to authorize more, or we could determine that we have bigger fish to fry than bailing out Wall Street. Either way, I don’t see why $250 billlion, followed almost immediately by another $100 billion is necessary now.
Screen shot: YouTube