Wonkbook: Biggest leak ever; Geithner in Europe; scrapping the mortgage deduction

Dylan Matthews is writing Wonkbook while Ezra is in China.

The BP oil spill is now the biggest oil leak disaster in American history, stripping Exxon Valdez of its title. Meanwhile, Tim Geithner is coordinating banking regulation and austerity policies with Europe. And should we scrap the mortgage interest deduction?

Happy Friday. Welcome to Wonkbook.

Top Stories

The BP spill is largest in American history, report Jonathan Weisman, Guy Chazan and Stephen Power: "As authorities waited Thursday to see whether BP PLC's 'top kill' operation would stop the oil gushing from the company's broken well in the Gulf of Mexico, a federal panel of scientists made estimates of the spill that would rank it the worst in U.S. history, surpassing the Exxon Valdez disaster of 1989. … Between 12,000 and 19,000 barrels per day are estimated to be spilling into the waters of the Gulf, said U.S. Geological Survey director Marcia McNutt, the leader of an inter-agency team created to measure the size and rate of the spill following criticism that a previous estimate of 5,000 barrels a day was inaccurate."

Tim Geithner sees a "broad consensus" between the U.S. and Europe on FinReg, reports Judy Dempsey: " 'I think we’re in a very good position to reach agreement on a global framework that works,' Mr. Geithner said. 'The U.S. and Europe are in broad agreement on the importance of putting in place more conservative' approaches to taking risk, adding that there were already different systems in place. But there was, he stressed, the need for the right balance. 'We all agree you want to have more conservative constraints on leverage and capital,' Mr. Geithner said. The G-20 nations are trying to reach a consensus on new rules to avoid 'regulatory arbitrage' in which some banks or hedge funds move their activities to whatever location offers the loosest oversight."

The mortgage interest deduction doesn't accomplish its aims, writes Howard Gleckman: "The conventional wisdom says these tax breaks are important because A) they increase home ownership and B) homeowners are more engaged in their communities than renters. … We do know, however, that the deduction is not a very efficient way to encourage home ownership. Most benefits go to high-income households that would probably buy a house with or without the deduction. Since non-itemizers get no benefit from the deduction, it is not surprising that most of the subsidy goes to upper-bracket taxpayers."

Indie interlude: Beulah play "Your Mother Loves You Son."

Table of Contents: Republicans want an "open process" during FinReg conference committee (and other FinReg news); Obama issued a moratorium on new drilling (and other energy news); GDP and profit growth are suffering (and other economic news); and Congress is considering a pension bailout (and other domestic policy news).

FinReg

GOP senators on the FinReg conference committee are calling for greater transparency, reports Meredith Shiner: "The five GOP Senate conferees -- Richard Shelby of Alabama, Saxby Chambliss of George, Mike Crapo of Idaho, Bob Corker of Tennessee and Judd Gregg of New Hampshire -- called for increased transparency and accountability as the conference pushes toward getting a bill to the resident's desk by July 4. All five Republicans voted against the bill on the Senate floor. In the letter, the Republicans asked for public votes 'on all major issues,' as well as 'accountability for proposals' and a 'fair and open process.' "

Dick Durbin is going hard against credit card companies, report Taylor Rushing and Silla Brush: "Senate Majority Whip Dick Durbin (D-Ill.) on Thursday sent a terse letter to Visa and MasterCard, asking them to stop 'threatening' small banks and credit unions by “distorting” his legislation cracking down on swipe fees. Writing separately to Visa Inc. Chairman and CEO Joseph Saunders and MasterCard Worldwide CEO Robert Selander, Durbin accused the card giants of trying to intimidate small financial firms into opposing the amendment by warning them of changes to fee rates and operating rules. If the companies don’t stop, Durbin said, they could be investigated."

A major hedge fund manager has settled with the SEC, reports Gretchen Morgenson: "A tangled and protracted insider trading case that brought embarrassment to the Securities and Exchange Commission came to a close on Thursday when Arthur J. Samberg, a hedge fund industry giant, and Pequot Capital Management, the firm he founded, agreed to pay $28 million to settle fraud allegations. In settling with the S.E.C., Mr. Samberg, who is 69, also agreed to be barred from working as an investment adviser. He is winding down Pequot’s operations, a process that he began last year after the S.E.C. started its second investigation into the firm’s trading."

Treasury is optimistic about regulatory discretion, writes Noam Scheiber: "Treasury believes the new rules on capital will be more effective if regulators make them than if Congress had filled in the details itself. This is the case for a variety of reasons. For one, banks employ lots of smart people whose job it is to figure out how fudge the laws Congress passes. If Congress says banks have to hold Y level of capital, these geniuses will come up with reasons why something we didn’t previously think of as capital should now count as capital. Or why an amount that used to be thought of as half of Y should now be considered equivalent to Y. (Sounds hard to believe, I know. But these things happened a lot during the bubble years.)"

Low interest rates spurred on the May 6 stock sell-off, writes Mark Spitznagel: "This type of alignment among investors in risky positions is precisely what the central economic planners at the Federal Reserve intended when, in response to the historic credit collapse, they commanded interest rates to zero and signaled that they would prop up all risky assets. The profitability of an investment is simply its return on capital beyond the cost of that capital."

Banks can buy Washington for remarkably little, writes Simon Johnson: "Yet all this is actually very little money considering what is at stake. For a large firm actively engaged in derivatives trading, the stakes could easily be billions of dollars. For the big banks as a whole, the amount they will be allowed to earn (and pay themselves) as a result of the failure of these financial reforms is — conservatively speaking — in the tens of billions of dollars. In terms of modern Wall Street — for top bankers and for hedge funds — the political contributions needed to make a difference are chump change."

FinReg doesn't require enough skin to be put in the game, writes David Levine: "The reason the provision will be ineffective (and this probably explains why the industry has not fought this particular provision) is that issuers of subprime securities have long had the practice of not only retaining (roughly) a 5 percent ownership stake, but they made that 5 percent stake the most junior part of the structure. What I mean by junior, of course, is that the issuers who retained 5 percent would have to absorb 100 percent of the first 5 percent of losses. The current House and Senate legislation would require them to absorb only 5 percent of the first 5 percent of the losses -- 1/20th of the burden that was already in place because of industry practice."

Long-form interlude: Lynn Hirschberg profiles M.I.A.

Energy

Obama has announced a moratorium on new offshore drilling, report Jared Favole, Stephen Power, and Guy Chazan: "President Barack Obama, under pressure to step up response to the Gulf of Mexico oil disaster, on Thursday vowed tougher regulations for the oil industry and said he is suspending action on 33 exploratory drilling operations in the Gulf and canceling or temporarily suspending pending lease sales and drilling in Virginia and the Arctic. Mr. Obama also said the 'oil industry's cozy and sometimes corrupt relationship' with federal regulators underscores the need for more oversight."

The head of the Minerals Management Service has been ousted, report Michael Shear and Juliet Eilperin: "Under intense pressure to show that President Obama is taking action on the oil spill crisis, White House officials Thursday made clear that the top oil regulator at the Department of Interior had been forced out. Elizabeth Birnbaum, the director of the U.S. Minerals Management Service, was given the opportunity to work elsewhere in the government but resigned instead, officials said."

Obama insists he didn't know about Birnbaum's departure, report Eamon Javers and Carol Lee: "It was a remarkable moment in President Barack Obama’s press conference Thursday: just hours before, the head of the Minerals Management Service had left the top post at the agency that oversees offshore oil drilling. And yet, the president said he didn’t know whether Liz Birnbaum had resigned or been fired. 'Now, with respect to Ms. Birnbaum, I found out about her resignation today,' Obama said. 'So I don't know the circumstances in which this occurred.' "

The Coast Guard has authorized a protective sand barrier for the Gulf of Mexico, reports John Collins Rudolf: "Adm. Thad Allen of the Coast Guard on Thursday approved part of a plan by Louisiana officials to repel oil from the BP spill by building a barrier of dredged sand along islands off the state’s southeast coast. The decision allows Louisiana to immediately begin construction of barriers directly to the east and west of the Mississippi River. There, oil is already swamping the coast. Roughly half of an 86-mile barrier originally proposed by the state was approved, with construction authorized under an emergency permit granted by the Army Corps of Engineers."

Steve Pearlstein thinks BP isn't getting enough credit for its spill response: "From the start, the company has declared that it is ultimately responsible for what happened and responsible for making things right, waiving any liability limits it might be entitled to under federal law. The company's chief executive, Tony Hayward, moved from London to the gulf, personally overseeing operations, visiting with government officials and conducting regular news interviews where his contrition seemed genuine. At its own expense, the company mustered a private army, navy and air force to disperse the oil, contain the spill and clean up the damage on shore."

David Brooks thinks the spill shows that certainty is impossible with complex technological systems: "Over the past decades, we’ve come to depend on an ever-expanding array of intricate high-tech systems. These hardware and software systems are the guts of financial markets, energy exploration, space exploration, air travel, defense programs and modern production plants. These systems, which allow us to live as well as we do, are too complex for any single person to understand. Yet every day, individuals are asked to monitor the health of these networks, weigh the risks of a system failure and take appropriate measures to reduce those risks."

The EPA and CBO err in modeling climate change legislation, says Trevor Houser in an interview with David Roberts: "EIA's model, as well as EPA's and others, assumes that over the lifetime of the program, changes in investment between clean energy power generation and fossil fuels will net out, so they don't focus a lot of attention on quantifying the changes in investment that you see in a high-carbon vs. low-carbon future. In the U.S., those changes are pretty significant. In an emerging economy like China or India, the choice is between, Do I build a new coal-fired power plant or do I build a windmill? In the U.S., the question is, Do I continue with a coal-powered energy plant (95 percent of which were built before 1987) or do I replace that coal fleet with low-carbon generation?"

Personal essay interlude: "I Like You Like More Than Friends."

Economy

Profit and GDP growth are slowing, report Conor Dougherty and Jeff Bater: "U.S. corporations saw profits before tax and with inventory and capital adjustments rise 5.5% in the first quarter, slower than the 8% growth notched in the fourth quarter, the Commerce Department reported Thursday. First-quarter earnings grew 31% from the same period a year ago, the agency said. …The Commerce Department report also showed that gross domestic product, the sum of goods and services produced in the U.S., expanded at a 3% annual rate in the first quarter, lower than the government's earlier 3.2% estimate. Consumer and business spending were lower than previously estimated, while imports, which subtract from growth, were greater."

Investors aren't treating the eurozone as a unified market, reports Matthew Saltmarsh: "The failure of investors to treat the euro area as a unified market could set a dangerous precedent for the bloc’s future, according to the chief of UniCredit, the giant European cross-border lender. 'If I say I am not funding a company because it’s a Spanish company or a Greek company, we have a problem,' Alessandro Profumo, the chief executive, said. 'This is a way of thinking on the topic that could create serious problems.' Investors have been shunning euro zone assets, particularly those of the countries with the largest budget deficits, like Greece, Portugal and Spain. Many worry about the ability of those countries to service long-term obligations."

Hillary Clinton is urging higher taxes, reports David Sanger: "'The rich are not paying their fair share in any nation that is facing the kind of employment issues' that confront the United States and other nations, 'whether it is individual, corporate, whatever the taxation forms are.' Then she offered up an example. 'Brazil has the highest tax-to-G.D.P. rate in the Western hemisphere. And guess what? It’s growing like crazy. The rich are getting richer, but they are pulling people out of poverty. There is a certain formula there that used to work for us until we abandoned it — to our regret, in my opinion. My view is that you have to get many countries to increase their public revenues.' "

Wal-Mart is starting to move in on union territory, reports the Economist: "Big cities are an important target for Wal-Mart, which has already vanquished much of America. For the unions, cities are a last stronghold, oddities where labour still has enough muscle to take on a behemoth. Los Angeles has just one Wal-Mart. New York has none, though the company is plotting an assault there. Nowhere, however, is the battle more vicious than in the arena known as Chicago. The unions hope either to fend off Wal-Mart altogether or at least to force it to make concessions. Either would amount to a victory."

The latest stimulus bill shows Obama doesn't have a deficit reduction strategy, writes the Economist: "Whatever its merits, though, the stimulus bill also exemplifies the dangerous absence of any strategy for that long-term deficit despite, as one budget watchdog puts it, “this huge wake-up call” from Europe. In a show of fiscal fortitude, Mr Obama on May 24th did formally ask for new “rescission” authority: in essence, the ability to pluck bits out of spending bills for elimination, subject only to an up-or-down vote in Congress. It would be a watered-down version of the line-item veto presidents have long craved but the Supreme Court has found unconstitutional. Congressional leaders reacted coolly."

The future is here interlude: Foldable LCD displays.

Domestic Policy

Congress is weighing a pension bailout, reports John McKinnon: "Many multi-employer plans are struggling after years of financial hits and relatively light regulation. In the past two years, almost 400 plans have announced they are in bad condition, according to lawmakers. In response, some lawmakers are pushing a plan that would provide federal aid to a few of the ailing pension funds. But some conservatives and anti-union groups oppose the aid effort, arguing it could lead to a broader taxpayer bailout of the whole class of pensions, costing tens of billions of dollars."

Republican immigration proposals were defeated in the Senate, reports Paul Kane: "The most heated political issue in the debate has been Mexican border security after GOP complaints about mounting violence related to the smuggling of illegal immigrants, drugs and weapons. Democrats, who favor a new security proposal from Obama, turned back each Republican amendment, including an effort by Sen. John McCain (R-Ariz.) to put 6,000 more security troops on the border. The McCain measure, which needed 60 votes for approval, fell short on a 51 to 46 vote. He attracted the support of 12 Democrats, including several up for re-election in November: Sens. Michael Bennet (Colo.), Barbara Boxer (Calif.) and Blanche Lincoln (Ark.)."

The administration is sending out its first Medicare doughnut hole rebate checks, reports Julian Pecquet: "Health and Human Services Secretary Kathleen Sebelius said the federal government would start sending out the first $250 rebate checks on June 10 to Medicare beneficiaries caught by the so-called 'doughnut hole.' The term refers to a gap in coverage for Medicare recipients. About 8 million seniors a year reach the 'doughnut hole' threshold where they have to pay the full amount for their medications. The new healthcare law closes that gap over time so that seniors only have to pay a fraction of the full cost of their drugs. A little more than 4 million Americans are expected to get rebate checks this year."

The GOP has introduced a bill repealing health-care reform, reports Molly Hooper: "In all, 20 GOP lawmakers co-sponsored the repeal-and-replace bill, including House Minority Leader John Boehner (Ohio), Whip Eric Cantor (Va.), GOP conference Chairman Mike Pence (Ind.) and Blunt. Rep. Wally Herger (R-Calif.), the ranking member of the Ways and Means Subcommittee on Healthcare, formally submitted the bill.…'[It] would prevent an insurance company from denying new coverage to someone with prior coverage on the basis of a pre-existing condition. So if you lose the health insurance because you lose your job, move, get divorced or just want to change plans, you are protected,' Herger spokesman Matt Lavoie said."

We need to prevent huge teacher layoffs, writes Christina Romer: "Additional federal aid targeted at preventing these layoffs can play a critical role in combating the crisis. Such aid would be very cost-effective. There are no hiring or setup costs. The teachers are there, eager to stay in their classrooms. The American Recovery and Reinvestment Act of 2009 included some of this aid for 2009 and 2010. The recipient reports filled out by states and school districts show that, last quarter, Recovery Act funds supported more than 400,000 education positions. Furthermore, by preventing layoffs, we would save on unemployment insurance payments, food stamps and COBRA subsidies for health insurance, and we would maintain tax revenue."

Immigration actually reduces crime, writes Christopher Dickey: "This is not just a matter of random correlation being mistaken for causation. A new study by sociologist Tim Wadsworth of the University of Colorado at Boulder carefully evaluates the various factors behind the statistics that show a massive drop in crime during the 1990s at a time when immigration rose dramatically. In a peer-reviewed paper appearing in the June 2010 issue of Social Science Quarterly, Wadsworth argues not only that 'cities with the largest increases in immigration between 1990 and 2000 experienced the largest decreases in homicide and robbery,' which we knew, but that after considering all the other explanations, rising immigration 'was partially responsible.' "

Obama has a nuclear option to speed up the appointments process, writes Paul Light: "Any presidential post that remains vacant for six months should be automatically abolished as a presidential appointment. Once removed from the appointment's roster, it should be filled instead by a member of the career Senior Executive Service. This career executive should be given a 10 year fixed term and be removable only for serious cause. Ten years should give future presidents and the Senate plenty of time to rethink their behavior. Any position that is so trivial that it can remain open for six months is a position that should either be cashed out or filled with someone who intends to stay on the job."

-- Dylan Matthews is a student at Harvard and a researcher at The Washington Post.