Open for Questions: Wall Street Reform

Jesse Lee:
Hi, everybody, I’m Jesse Lee,
online program instructor here at the White House.
Thanks again for joining us. I’m always happy to work with Ustream keep an eye on the chat in here, take
the questions. I’m here with Austan Goolsbee. We are talking about Wall Street
reform, the President gave a major speech in New York
City just yesterday and took some questions in advance
off of of Facebook also. So we have questions in the chat, we’ll get to some of the questions before, and Austan, do you want to say
just a couple of words on the speech yesterday? Austan Goolsbee:
Well, the President went
back to Cooper Union in New York where
he was more than two years ago before Lehman failed before
the big crisis began. And he unfortunately had to be
delivering the same message which was we really, really need
to reform the regulatory system that supervises our
financial institutions. Back then he was saying we need
to do this so that we don’t have a big financial crisis. We had that financial crisis,
and now the time has come to bring this thing into the
hangar, be done with it. The President outlines
several key aspects. I’m sure people may ask
about some of them, but essentially let’s end
the system of bail-outs. Let’s protect consumers. Let’s get derivatives out of
the dark and out in the open. Let’s limit the risky
activities that banks can take, and let’s get to a situation which is better for financial institutions themselves and for
the economy in the long-run which is we have got strong
oversight, laying out rules of the road, and we
grow from there. So, I think everybody is pretty
hopeful that we are going to get regulatory reform, that we
are going to do that in the bipartisan way, because I think
maybe not the leadership, but ordinary members of Congress,
I think they are going
to look at the bill. They are going to say this
is exactly what we need. Financial institutions ought
to clean up their mess, not the American people. Jesse Lee:
All right, we’ll start with someone we got off Facebook earlier. It’s from Katie Reeves, what steps could be taken to prevent Wall Street from creating projects like
CDO’s that regulators and other people do not even understand. Austan Goolsbee:
Well, you know, this is what
Katie is raising here is one of the things that went dreadfully
wrong and caused this financial crisis. We had a massive proliferation
of supercomplex instruments and the CDO’s most of the worst ones
were based on subprime or all day or other mortgages, and so
I would say there are at least three steps in the chain to
prevent steps, stuff like that from blowing up. The first is you establish the
most robust, most comprehensive consumer protection for
financial products that we have ever had in this industry. So you would have cleaned up the
first layer of mortgages and they would not have been able to
engage in some of the practices that they were engaged in, that,
put the mortgages at risk. Second, in this bill for
securitizations which are things like the these instruments are
based on, the creator of the security would have to
retain some ownership. So what happened in this crisis
is people would generate these things based on, say,
mortgages that they knew were
going to fail. But they would
just sell them off. They got paid right off the bat. And then they couldn’t care
less whether they were going to default or not. We have to get away from that
model so the people who create it got to retain some ownership
so that they have got the quote, unquote, skin in the game and
have an incentive to make sure that the right people
are getting the money. And then the third is that
there’s a layer of the regulator looking at the institutions
and looking at what banks are allowed to do in the course of
the what is called the “Volcker Rule” which would make sure that companies had enough money on their balance sheets so that if
something goes wrong they have got the capital there to back
themselves up and that there are certain kinds of risky things
that they would be doing that they wouldn’t be allowed to do. So I think a series of steps
would help prevent some of that stuff from blowing up. Jesse Lee:
One of the reasons I like
doing it with Austan here is he is a tough guy, take questions
like this from Bret Holbert. Why are you trying to
expand the strangle hold this opressive regime has on
this country and on business? Austan Goolsbee:
Well, thank you for
your comments Bret. And thank you for taking the time to listen to our questions. Obviously, we are going to have
a little bit of a disagreement if — and I know Bret Holbert
there are a lot of people who would think that way. I don’t see how you can look at
the last eight years
and even before that, the massive ripping up of
the rules of the road that took place which directly led to the
financial crisis, and say, well, we really ought to stick with
the status quo or loosen up the rules even more that somehow
they had a stranglehold on the financial system. To me that’s almost the
opposite of what happened. They stopped mining the store
and the carjackings began. You know, you got to have rules
of the road, you’ve got to make sure that we have free
and fair competition. Now nobody, and the President
made clear that he does not believe that we in any way
should have the government running the financial system. The only way we got into this
situation that we had to bail out some of these people and the
bail-out which began under the last administration exists
only because the system failed completely. That’s why we need a new system. It doesn’t hurt as I said at the outset, and as the President said in New York, it doesn’t
hurt the free market, it doesn’t undermine your belief in capital
markets or private business that you have sensible oversight
of the financial system. In fact it’s completely
vital that you have it. The thing that undermines
the private sector more than anything else, was that the
public completely lost trust in financial markets and pulled
all of their money out. That’s what led to
the financial crisis. So, you know, I appreciate
Bret’s comments, but I think he’s off-base on that one. Jesse Lee:
All right. Yeah, not to overstep my moderator rule here, but an analogy that occurred to me the
other day was when you looked at baseball and the whole steroids
controversy, when there were loopholes in the rules and the
testing and everything, you have a situation where some
players were using it and the other players felt like they
had to do it just to compete. Austan Goosbee:
Right. Jesse Lee:
And that’s not a
good situation — Austan Goolsbee:
That’s not good for the players, and we saw similar dynamics in this boom time where the folks that were
cutting the corners the most, they were making great money,
because gaming the system was extremely profitable if nobody
is enforcing the rules. And in a world like that you’re
punishing the people for playing by the rules because they got
to compete against people who aren’t. So without setting the rules of
the road, you’re going to be on a path for problems. Jesse Lee:
All right. One question I got from Lisa Fischer in the chat, and maybe you can get some context of what she’s talking about here, because it’s been a big debate, what other options exist for funding the 50
billion-dollar winddown fund if it is removed because of
legislative compromise? Austan Goolsbee:
Okay, this key —
this is a keypoint. For anybody who hasn’t been following this in detail. This legislation that’s winding
through Congress that they are going to vote on has had a
prefunded 50 billion-dollar fund. Now that fund was a bipartisan
idea that Republicans and Democrats had come up with
expressly so that taxpayors would not be on the hook for
any kind of money that might be needed in the financial crisis. This is important
on two dimensions. One no taxpayer money, period,
the banks pay that money out of their own pockets. And two, that cannot
be used for a bail-out. It’s not — you cannot forbidden
outlaw to be used for propping up any financial institution. The money can only be used
for funeral expenses, for liquidating the company, or
breaking it up in pieces and selling it off with the
management fired and the shareholders wiped out. That is what the prefunding was. Now the President feels
extremely strongly that banks must pay for the messes that
they create, not the American taxpayer. If we don’t want to do that
prefunded, we can do it postfunded. But the key principle is that
it’s got to be the financial institutions paying,
not the taxpayer. So there are a number of
different ways you could do that. But as long as we make that
point clear, and as long as we cannot use the money for
bail-outs and prop-up’s, you know the President is open to
all sorts of different ideas. Jesse Lee:
All right. And you know one of the things that a lot of this debate was initially about was the new agency to protect consumers. That’s something that’s been
kind of left out from a lot of the debate lately. This relates to us from
Maneesh Rengossa (phonetic) He says President Obama please
urge Congress to include payday lending reform measures in
the financial reform bill. Austan Goolsbee:
Well, Maneesh (phonetic) has got a good point that when you look at consumer protection, there’s
a whole variety of things. We have talked in this very spot
about credit card reforms and all of the things that the
Consumer Protection Agency and the credit card bill have done
to protect consumers from outrageous fees and
various practices. Some of these card issuers have.
There are a bunch of things on mortgages. If you’ve ever bought a house
you know there’s hundreds of pages of documents, and even if
you’re a lawyer you can’t even understand what
a lot of it says. But payday lenders, check
cashing services, a whole bunch of consumer financial products
need to be encompassed in this thing. There was a bill in the House
which had an exemption for payday lenders. My understanding is there
is no such exemption in the legislation, that we
are going forward. I think Maneesh (phonetic) is on
to something. We have got to incorporate that. Jesse Lee:
That’s right. I’ll try to drop a link to this in a chat. But if you search White for payday lenders, you’ll quickly find blog posts
from our deputy communications director Jenn Psaki made it
clear that the President has a clear line on this and he’s not
going to tolerate a carve out for that. Speaking of which Zach — I
won’t try to pronounce the last name — but he says please
provide a summary of what is in the bill for the populus to read so we can know the truth. I’ll say this is also
on White You can find it pretty quickly. I’ll get the URL. Why don’t you get just kind of a
brief outlay of the kind of key sections of this. Austan Goolsbee:
Okay. I’ll give you
a few points. I would encourage anybody
interested in this to go to the White House website and read
about it because you can get more detail than I’m
going to be able to say. I think several of the most
important points on this are number 1, establishing the
most — the strongest most comprehensive consumer
protection agency in U.S. financial history. We have never had something
as strong as that. It consolidates what is
currently spread out over seven different agencies, and it is
not the central focus of any of those agencies, consolidates
it all in to one central place where both the regulator can
be held accountable and the financial companies can
be held accountable. Second thing, it’s going to
do is end the too big to fail regime and bailouts period,
bailouts are outlawed. If we ever get into trouble
the financial company must be liquidated or broken up. All of the managers get fired
and all of the shareholders lose their money. It’s extremely important
that we do that. That’s what is called the
resolution authority which is the nice way to say wipe these
guys out which is we resolve them and we resolve
their problems. Third it looks
at derivatives. The 600 trillion-dollar
market for what are called over-the-counter derivatives
which are derivatives that trade in the dark, that we know nothing about and are virtually unregulated. The President has insisted that
we get those out of the dark into the sunlight and under
the regulatory umbrella. We wouldn’t normally care
because you say who trades in that? The regular people don’t trade
derivatives, but everybody has perked up real quick on AIG
because of these dark pools of derivatives, require hundreds of
billions of dollars of the U.S. government; otherwise they
threaten to blow up the entire financial system. So we have to move the
derivatives out of the “Volcker Rule,” would limit the ability of banks and financial institution to grow too big as
a share of the system and would restrict what official banks are
allowed to do, that if you have access to the FDIC and safety
net which is provided by the American people, you shouldn’t
be using that subsidy to just invest for your own account in
your own speculative investment. So it would prevent that. And the President has also as he
said in his Cooper Union speech been out front on giving
shareholders more say to express their voice on the compensation
of the leaders of financial institutions and other
public companies. So I would say those
are some keypoints. But there are many others. It’s pretty comprehensive
legislation, but those ones are pretty important. Jesse Lee:
All right. Let’s see, Jay Thomas says
Geithner briefly discussed stockholder oversight in
the bill yesterday morning. Please elaborate. Austan Goosbee:
Okay. I assume that means the stockholder oversight on executive compensation, so
that’s the say on pay type of legislation which would give
shareholders the ability to voice a vote of no confidential
we say on the compensation packages of management. Now the President’s remarks the
Cooper Union said neither he nor the government nor anybody
begrudges managers and executives who get paid
for their performance. I think what’s confused a lot of
people is to look at the years these financial companies have
had, how could that be termed performance, why are they
getting paid what they get paid when they had these epically bad
years and they threatened to blow up the entire economy. This would give shareholders
the right to say, hey, wait a minute, we think
this is a bad idea. There are a few companies now
that have voluntarily adopted these “say on pay” resolutions
and the board of directors take those extremely seriously. If your shareholders say we
think this person is being paid too much and the wrong form
is not being rewarded for performance, they are being
rewarded for messing things up, they have a chance
to express that. Jesse Lee:
All right. Now this one is a little wonky for me, so maybe you can dewonk
it a little bit. C.T. Meyer (phonetic) asked how can we equitably clarify asset evaluation without returning to
mark-to-market accounting. Austan Goolsbee:
Okay. This gets into some accounting rules. Why don’t I take a step back
instead of getting into the technicals, take a step back. One of the things that happened here, is we ceased to be able to trust the numbers that were coming out
and people were hiding things. This is on both sides
that this matters. On one side as the market
collapsed banks started having to value their assets, marking
to market they call it, value the assets and as the prices are
plunging the rating agencies are saying wait, maybe you’re not,
you’re not in as good of shape as we thought so we are
going to downgrade you. The other banks lending the
money, were money market funds, various people that lend money
to banks that they loan out say. They kind of panicked and that
led to the financial crisis that people said if we can’t trust
the numbers we don’t know if we want to give you our money. I think a lot of this financial
reform is about ways to re-establish the public trust,
ways to hold accountable, not just the banks, but the
regulators, the rating agencies a number of others, so that
will give them an incentive to provide fully accurate
information and that helps get you around some of this
mark-to- market problem. Jesse Lee:
And that actually leads into
a kind of broader I think very intuitive question which is how
will this reform function if the next administration appoints
a fox to guard the hen house. Austan Goolsbee:
Well, if you appoint — we have
learned repeatedly throughout the history of the country
ununfortunately, that if you appoint people who are
explicitly trying to get rid of regulations or to not enforce
regulations that are on the book, that are on the books,
you’re in a tough spot. I mean one way to get around
that is to make explicit rules that would be, that would be in
the law, but even then if people are going to actively try to
undermine those laws, I think it’s hard, you’re in a
hard spot In my view the
most effective way to get the regulators to do what
is intended in the law is to put in place a system where they can
be held accountable so if you take consumer protection and
the consumer protection agency. As I mentioned, right now those
functions are spread over seven different agencies. In none of those seven different
agencies is this the main thing that they do. So if you or the bank
regulator at the OCC and you have a consumer protection
within your body, but the main thing you do is bank regulation
you’re going so have a tendency to kind of skimp on that. Because nobody’s butt is in the
seat and being held accountable. If you have a consumer
protection agency, where there’s somebody appointed, whose job
is to protect consumers, and if credit card company start
abusing the law or not following what is in the credit card bill
they will go to that person and say what are you doing. The law states that they must
observe A, B, C practices and they are not doing it. And ultimately that’s the public
pressure that can get the foxes to settle down if they are
in charge of the hen house. Jesse Lee:
I think that was
a great explanation. We are going to take
one more question. I don’t know if it’s a softball. It kind of is. David Rose asked on Facebook
earlier, Austan Goolsbee on the job training knows nothing
and it’s helping to ruin our country. But then look at all of the
other fools working for the administration. Austan Goolsbee:
That’s our last question. Thanks a lot. First of all, let me say that
wasn’t phrased as a question, so I don’t have to answer it. Jesse Lee:
The reason I wanted to ask
you that, is you know a lot of of times we have these chats and
we don’t actually know about the bio of the person sitting
here answering the question. Why don’t you talk a little bit
about your expertise and maybe a little bit about the very long
process that it took to get this bill developed and get
to where we are now. Austan Goolsbee:
Okay. I am an economics professor from
the University of Chicago school of business. I’m on leave. I’m at the Council of Economic Advisers which is made up of economists who are on leave from universities and economic experts in different areas. We took part in the formulation
of the financial regulatory white paper/blue print
which came out last summer. I’m also the chief economist
of the president’s economic recovery advisory board which
is headed by Paul Volcker and comprised of a number of
financial experts and regulators. You have Roger Ferguson
was vice-chair of the Fed. Bill Donaldson
was head of the SCC. Volcker himself was head
of the Fed obviously. And so we have tried to bring
in experts from all different venues within the economic,
within the financial system, academics policymakers,
regulators. When we formulated what the
key principles would be. And the financial crisis started
more than two years ago. So as I say on this legislation,
we have been talking for a long time debating the issues. It’s time to bring
that to an end. I think the sentiments that we
are a full and we no nothing, everybody is entitled
to their opinion. I think we have tried in this
administration to reach out to bring in all sorts of viewpoints
and to try to disstill that into something that would work
and protect the system. As a last note I guess what
I would say is the financial institutions and a few of the
financial institutionings and a few of the special interests are
lob being as hard as they can. They have spent hundreds
of millions of dollars. They have hired five lobbyists
per member of Congress. Trying to put loopholes back
into this regulatory reform. Trying to protect the status
quo that has been extremely generous and extremely lucrative
to a very small number of institutions. We cannot afford to do that. Where the we is not the
administration, it’s the American people, and
the he can economy. We cannot afford to let this go
back to what it was that got us into this mess. If you look out the window, more
than 8 million people have lost their jobs in this recession;
deepest since the depression. And they have lost their jobs in
a recession fueled by financial crisis. So say what you want about me,
but together we have got to do this and I think ultimately
everyone knows that, even the financial institutions
themselves know that we can’t go back to the status quo because
that’s what got them into crisis, not just the economy. So I hope that everybody
will go to Will read about the bill. Will talk to their leadership,
Congress, anyone about their concerns that we reform the
financial system and prevent this kind of thing
from happening again. And I appreciate
your time watching. Jesse Lee:
Yep, thanks so much and
thanks so much Austan, I look forward to do it again.

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