Sen. Mark Warner: 'We're creating death panels'
I used some excerpts from this interview with Sen. Mark Warner yesterday. But I didn't want to do the thing where I get a senator on the record for half an hour and get him talking about his broad thinking and then only use the bits that are controversial. So here's thew transcript, edited lightly for clarity.Sen Mark
Ezra Klein: Let's start at the beginning. How did the financial crisis happen? What are we trying to prevent?
Mark Warner: There really weren’t any warning signals that we were getting over-leveraged. There really weren’t any official trip wires. And there was no ability to consolidate all these warning signals that were happening in the real estate market in a central location, to understand how overextended some of the investment banks were getting. There was no kind of systemic risk analysis. I don’t think there was complete enough appreciation of what a house of cards had been created. These instruments which supposedly better priced risk created this web that you pull the string on it and the whole thing almost collapsed.
EK: Take me back into that period, pre-TARP and maybe pre-Bear Sterns and imagine the Dodd bill is in place. What happens?
MW: First off, one of the parts of the bill that’s got no attention yet is the creation of the Office of Financial Research, which collects on a daily basis about all the transactions and can analyze them to see how they are interconnected. Second, there will be in place a systemic risk council that will be a place for firms that are systemically important, a series of trip wires so Bear wouldn’t have gone from, “Oh my gosh, it looks fairly healthy today" to a crisis comes and everybody is running for the doors and Bear moves from a liquidity crisis to a solvency crisis. The regulator can come in and place higher capital requirements. They can put in place contingent capital requirements so that a whole slug of debt can convert to equity. Third, we'll have these "funeral plans" in place where the companies have to develop a plan to unwind their firm and the regulators will have to bless that plan as sufficient. Citibank can't come and say, "We're too complicated, you can't take us down."
Finally, Lehman and those guys always thought that there would be some bailout and that bailout would be painful, but would be preferable, to bankruptcy. If we do this bill, resolution is going to be so painful that no rational management team would ever prefer it. And it appears the Republican leader either doesn't understand or chooses not to understand. But resolution means shareholders are wiped out, management wiped out. It means your firm is going away. At least in bankruptcy, there is some chance that some of your equity may be retained and may come out in a more modified form at the other end of the process. The resolution we’ve tried to create, Corker and I, means the death of the company.
EK: So resolution is more like execution.
MW: I like that! Barney Frank says, "You've heard of death panels? Well we're creating death panels." Look, if you haven’t spent the time with these issues, there’s an easy way to pop off with sound bite solutions that just don’t work. And I know at this point in the process Republicans need to be against stuff in order to negotiate. But it's laughable to say that $50 billion [the size of the "Orderly Resolution Fund"] is enough if a series of firms go down.
This gap funding may be enough to keep lights on for literally hours or days so you don't have flight from the firm where the value of this entity collapse upon itself. It's there because what we've heard is that the challenge in a crisis is to buy enough time to keep the lights on for a few days till you get the FDIC in here. You could make it smaller. Corker and I spoke about $25 billion. But remember, this is funded by the industry. The notion that it's taxpayer-supported is just plain wrong. And here's the hypocrisy of the Republican leader's comments. I can guarantee you that if there had not been some pre-funding, the critique would've been: “Look at these guys! They've left the taxpayers exposed! What's going to keep the lights on for these few days? It's going to be Treasury funds or Federal Reserve funds. The taxpayer will be exposed!”
EK: You wrote these provisions in consultation with Sen. Bob Corker, who hasn't committed to this final bill. To give the Republicans their due, was there a radically different Republican alternative that emerged during those discussions?
MW: No! We knew there might be a little flash point on this and we were saying some flexibility on the amount of the pre-fund, you know, the $150 billion the House has, might create some hazard, but this is laughable. People literally laugh at the notion that $25-50 billion is a bailout fund. Especially since it is industry financed. It goes back to my critique. Either they don't understand or they're choosing not to understand.
The place where there was discussion back-and-forth was the issue of how do we make sure that an overly aggressive administration doesn’t overuse resolution? So Corker pushed on two areas. One is how do you make sure you don’t use this ability to create industrial policy a la GM and the auto bailout? Originally, Corker's position was it could only be a depository institution. But they understood that if Goldman loses its bank holding company charter, it’s not like it's no longer systemically important.
So there was some discussion about limiting the scope to financial institutions and you had to have some appropriate checks before you could grab a hedge fund. So not only do we have the three keys that have to turn, but we’ve been working on judicial check so there's one more restriction on people going after a company they don't like. Frankly, the Treasury didn't like some of the things we put in, but I came to the conclusion that Corker was right on it.
EK: You mentioned trip wires a number of times. In my mind, that's something like if capital goes above 50 to 1 or 20 to 1, someone comes in. Or as Luigi Zingales has argued, if CDS spreads go above 100 basis points, someone comes in. As I read the bill, I don’t see the trip parts. I see where people can come in and where information is moving through the system, but nothing automatic where a regulator couldn't just ignore the problem, or as happened, decide that the data doesn't present a problem.
MW: That’s the question. It is the job of Congress to set the exact capital ratio? We don't necessarily want to enumerate what these exact levels will be. That's for the regulator. But this is like health-care reform: How it's implemented is going to be terribly important. If we pass a variation of this bill that has these and the regulators don’t come back with trip wires that make sense, I’m not going away.
EK: But this is what scares people. On health-care reform, it was easy to see how reform remained a continual process. There are interest groups and committed legislators and advocacy organizations and people getting angry about their premiums. The worry here is that we do this and we don't set sufficient guidelines and that works for 10 years while everyone is afraid of this process, but in 20 years, when the only people paying attention are bank guys trying to loosen the regulations, it all goes haywire.
MW: Tell me a regulator in the first year or so after legislation like this is passed that isn’t going to set aggressive standards. That’s going to become the standard. They’re going to do this in a tough way to start with. If they don't, then Corker and I will stick our nose in right away. But I don't think they'll say, well, Canada has a 20:1 leverage ratio, but we're going to allow 50:1.
Photo credit: By Alex Wong/Getty Images
April 15, 2010; 2:18 PM ET
Categories: Financial Regulation , Interviews
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