Wonkbook: U.S., Europe split on FinReg; more drilling oversight; industry and regulation
Dylan Matthews is writing Wonkbook while Ezra is in China.
The U.S. and Europe are taking different approaches to FinReg. Can this work in a global economy? Meanwhile, Obama promises stricter rules governing offshore drilling. And Steve Pearlstein thinks industry should stop fighting regulation.
Welcome to Wonkbook.
The U.S. and Europe are out of step on FinReg, report Anthony Faiola and Brady Dennis: "The Europeans are also worried about a provision that could force U.S. banks to spin off their lucrative trade in financial instruments known as derivatives. The Europeans, who have a one-stop-shopping banking culture that allows firms to conduct a vast array of businesses under one roof, are ready to resist any effort at setting a global precedent excluding banks from the derivatives business. Even in the United States, the derivatives provision sponsored by Sen. Blanche Lincoln (D-Ark.) has powerful adversaries in government and industry, and it may be eliminated from the final bill."
Obama will toughen drilling rules, report Jonathan Weisman and Jeffrey Ball: "Administration officials say those changes will include new permitting procedures to ensure rig safety. Additional inspections of the rigs will be required, in part to verify that safety features and environmental precautions accepted during the permitting process were in place. Those regulatory changes are detailed in a 30-day review that was ordered by the president last month and due on his desk on Thursday. Interior Secretary Ken Salazar is expected to reveal many of the review's recommendations during congressional testimony on Wednesday."
Industry can learn to love regulation, writes Steve Pearlstein: "The big flaw in the business critique of regulation is not so much that it overstates the costs, but that it understates its benefits -- in particular, the benefits of avoiding low-probability events with disastrous consequences. Think of oil spills, mine explosions, financial meltdowns or even global warming. There is a natural tendency of human beings to underestimate the odds of such seemingly unlikely events -- of forgetting that the 100-year flood is as likely to happen in Year 5 as it is in Year 95. And if there are insufficient data to calculate the probability of a very bad outcome, as is often the case, that doesn't mean we should assume the probability is zero."
Table of Contents: Ben Bernanke is lobbying against greater Fed oversight (and other FinReg news); BP will make a last-ditch attempt to plug the leak today (and other energy news); home prices are still falling (and other economic news); and the Senate is looking to help public transit systems (and other domestic policy news).
Ben Bernanke is fighting FinReg provisions subjecting the Fed to more scrutiny, reports Luca di Leo: "The Fed is waging a battle against a proposal approved by the House in December that would subject the U.S. central bank's decisions to audits by the Government Accountability Office, an investigative arm of Congress. Mr. Bernanke is strongly opposed to the measure, which is part of the government's broader efforts to overhaul financial regulation. A central bank subject to political influence could be pressed to keep interest rates low in order to boost the economy and employment, Mr. Bernanke said."
Little was accomplished in the GOP-Obama FinReg meeting, report Paul Kane and Shailagh Murray: "Brownback said Obama explained several times that he is 'under pressure from his left' on major issues, including climate change. Obama asked Republicans to be willing to take some of the same kind of criticism from their right flank in working toward bipartisan accords, other senators said. Sen. Bob Corker (Tenn.), still smarting over his failed negotiations with Democrats over the financial regulation bill that the Senate approved last week, said he challenged Obama on his request for bipartisan cooperation."
Barney Frank has named the House Democrats in FinReg conference committee, reports Carrie Budoff Brown: "He said he settled on a formula based largely on seniority: the six subcommittee chairmen and Rep. Carolyn Maloney (D-N.Y.), the chairwomen of the Joint Economic Committee. 'I believe I have criterion that does not reflect either badly — or well for that matter — on anyone,' Frank wrote. The group includes Reps. Paul Kanjorski of Pennsylvania, Luis Gutierrez of Illinois, Maxine Waters of California, Melvin Watt of North Carolina, Gregory Meeks of New York, and Dennis Moore of Kansas."
The U.S. wants global capital regulations, reports Binyamin Appelbaum: "The Obama administration is pursuing an international agreement to make banks hold significantly larger reserves, which it regards as essential to increase the stability of the global financial system. It wants to complete the negotiations, which are being coordinated by the Basel Committee on Banking Supervision, by the end of the year. The world’s largest banks have responded with consternation, arguing that the proposed standards would tie up too much money that otherwise could be used for lending, a loss that would curtail economic growth."
Germany is toughening its ban on speculative trading, reports Jack Ewing: "The new draft law, released by the German Finance Ministry on Tuesday, expands the ban on so-called naked short selling to all stocks that have their primary listing in Germany, as well as on European government bonds. The law would also ban naked short selling of the euro, and enshrine a ban on use of so-called credit default swaps to bet against European government bonds. 'Turbulence in the markets for European Union government bonds and the volatility of the euro have reached a new dimension,' the text of the legislation said, adding that the law is aimed at forms of trading that exaggerate market moves."
We need a bank tax, write Viral Acharaya and Matthew Richardson: "There is only one way out of this dilemma and that is to force these firms to internalize the systemic costs they impose on the rest of the economy. This way, financial institutions like Barclays will organically choose to become less systemic and much of this risk will be held by non-essential firms like regional banks, private equity and hedge funds, mutual funds, or the proverbial Norwegian village, et cetera. The economically optimal, and most effective, way to make these firms feel the pain is to tax each financial institution an amount equal to the expected systemic costs of a crisis multiplied by that institution's percentage contribution to financial sector losses."
David Leonhardt has four suggestions for the financial reform bill. Here he is on Fed oversight: "Despite the Fed’s failures, Congress is giving it vast new powers, largely because there is no better alternative. Most important, the Fed will decide how much debt banks can take on, a standard that will help determine how well they weather the next crisis. Yet neither the Fed’s leaders nor President Obama, who reappointed Mr. Bernanke, has explained why we should believe the Fed has learned from its errors. Congress can do better. The Senate bill calls for an audit of the Fed’s actions during the crisis (which were, in fact, pretty heroic). Why not expand the time frame to the run-up to the crisis?"
Two great tastes that taste great together interlude: All Girl Summer Fun Band and a hedgehog.
BP will try to plug the oil leak with a "top kill" today, report Joel Achenbach and Steven Mufson: "The most critical moment in the oil spill crisis in the Gulf of Mexico is at hand, as BP engineers armed with 50,000 barrels of dense mud and a fleet of robotic submarines are poised to attempt a 'top kill' maneuver to plug the gushing well a mile below the surface. It's far from a sure bet. 'It has been done successfully in the past, but it hasn't been done at this depth,' Kent Wells, the oil company's senior vice president of exploration and production, told reporters in a conference call Tuesday."
Prospects grow bleaker if the "top kill" doesn't work, report Guy Chazan and Neil King: "If this procedure fails, the company and millions of Gulf Coast residents could have to wait until August for a relief well to be finished. The prospect of oil gushing into the gulf for another two to three months has spooked investors, who have wiped around $30 billion off BP's market value since the Deepwater Horizon drilling rig caught fire and sank last month. Analysts say BP's plummeting share price reflects a worst-case scenario: that oil continues to gush unabated into the gulf, driving up clean-up costs and potential liability, and threatening BP's hold over some $37 billion of Gulf of Mexico leases."
It could be that the spill just isn't fixable, writes David Roberts: "Once we know that accidents can be catastrophic and irreversible, it becomes clear that there is no margin of error. We're operating a brittle system, unable to contain failure and unable to recover from it. Consider how deepwater drilling will look in that new light. The thing is, we're already operating in those circumstances in a thousand different ways -- it's just that the risks and the damages tend to be distributed and obscured from view. They're not thrust in our face like they are in the Gulf. We don't get back the land we destroy by mining. … We don't get back islands lost to rising seas."
Minerals Management Service regulators regularly took oil industry gifts, reports David Fahrenthold: "The report, released Tuesday by the Interior Department's inspector general, does not directly relate to the Deepwater Horizon oil rig, which sank after an explosion April 20 and set off a massive spill in the Gulf of Mexico. It details misconduct in the service's Lake Charles, La., office, which oversaw a different region of the gulf, and covers up to 2008, before the problem well was approved.…One official inspected four platforms owned by one company at the same time he was negotiating for a job at that firm."
BP had warning signs hours before the rig explosion, reports Stephanie Kirchgaessner: "A memo released by Democrats on the House energy committee said that BP has found three “flow indicators” from the well before the explosion, one of which occurred 51 minutes before the blast, a time when more fluid began to flow out of the well than was being pumped in. When the pump was shut down, 41 minutes before the explosion, the well continued to flow instead of stopping, and drill pipe pressure “unexpectedly increased”. Then, just 18 minutes before the explosion, abnormal pressures were observed by the rig crew. Eleven men died as a result of the explosion."
BP acknowledges not heeding this warning as a "fundamental mistake", reports Stephen Power: "Oil giant BP PLC told congressional investigators that a decision to continue work on an oil well in the Gulf of Mexico after a test warned that something was wrong may have been a 'fundamental mistake,' according to a memo released by two lawmakers Tuesday. The document describes a wide array of mistakes in the fateful final hours aboard the Deepwater Horizon—but the main revelation is that BP now says there was a clear warning sign of a 'very large abnormality' in the well, but work proceeded anyway."
Nissan's new electric car has already sold out, reports Nick Bunkley: Nissan’s chief executive, Carlos Ghosn, said Tuesday that the company had already received 19,000 orders in the United States and Japan for the electric car that it would start selling at year-end. More than six months before the car, the Nissan Leaf, arrives at dealerships, the preorders mean that the car is sold out for this year and that the company might stop taking reservations, Mr. Ghosn said during a visit to the Detroit Economic Club."
Party Down interlude: Henry gets a pep talk.
Housing prices are still weak, reports Sara Murray: "Home prices have pulled out of their recession free-fall but remain weak as concerns linger about the strength of the economic recovery. A composite index of 20 cities showed prices fell 0.5% in March from the prior month, not adjusted for seasonal fluctuations, according to an S&P/Case-Shiller report released Tuesday. The drop marked the sixth-straight month of decline. But another report Tuesday showed consumer confidence strengthened in May as the improving labor market buoyed Americans' hopes for further economic gains."
Germany and the E.U. are sparring on how to save the euro, reports James Kanter: "The European Commission president, José Manuel Barroso, on Tuesday accused the German government of lacking leadership during the euro crisis and describing its plans to rewrite the European Union’s rulebook as 'naïve.' In an uncharacteristically blunt intervention, Mr. Barroso took issue with German proposals to change the European Union’s Lisbon Treaty so that punishments can be increased for countries, like Greece, that break the rules governing euro countries. He also suggested that the alarm in the markets, which has destabilized the euro, might have been calmed by quicker assurances of German support."
At least one regional Fed chair thinks the European crisis could spread to the U.S., reports Michael Powell: "James Bullard, president of the Federal Reserve Bank of St. Louis, traveled to London and assayed a noticeably careful defense of the global economy in a speech. He did not discount the risk of a financial contagion jumping the Atlantic, given the weakened state of global finances and the risky nature of the bailouts. Governments and central banks must strive to re-establish credibility, he said, even as markets shake and gyrate. “This new threat to global recovery will probably fall short of becoming a worldwide recessionary shock,” he said."
European countries are trying to pare their deficits, report Matthew Saltmarsh and Elisabetta Povoledo: "Fearful of becoming the next Greece, European governments are lining up to demonstrate to investors, who have long helped finance their spending, that an era of austerity has begun. The latest example is Italy, which on Tuesday joined Britain, Spain, Portugal and other European Union members in announcing plans to cut billions to help close yawning budget deficits. Yet markets have given little sign of a let-up in pressure. European stocks continued to slide Tuesday as the Euro Stoxx 50 benchmark index closed down 2.73 percent."
The European Central Bank is facing increased criticism, reports Landon Thomas: "So far, the bank’s reluctance to do anything that might seem to compromise its independence has been interpreted by many investors as a sign of indecision. That view has been bolstered as evidence mounts that the central bank’s bond-buying program may not replicate the stabilizing infusions by the Federal Reserve, the Bank of England and the European Central Bank itself in 2008 and 2009."
Europe threatens America's financial sector, not its real economy, writes Daniel Gross: "The threat to America's real economy posed by Europe's travails is manageable. It's the threat to the nation's financial economy, which can then quickly spill over into the real economy, that bears watching. As Reuters reported, 'Goldman Sachs estimated total U.S. bank exposure to Greek, Portuguese and Spanish debt at $90 billion.' That's not a huge amount for big U.S. financial institutions."
World cinema interlude: Werner Herzog voices a plastic bag.
The Senate might provide $2 billion for transit agencies, reports Melanie Trottman: "The bill, introduced with the support of seven Democratic co-sponsors including Sen. Chuck Schumer (D., N.Y.) and lawmakers from New Jersey, Ohio and Illinois, would allow transit agencies nationwide to use federal money to reduce fares and restore service cuts made after January of last year. The proposal's prospects aren't clear at a time when Congress is under pressure to cut federal spending. The bill would allow transit agencies to use the federal money to prevent future service cuts and fare boosts through September 2011."
Sheer confusion sunk a teacher bailout bill, reports David Rogers: "A $23 billion emergency proposal to forestall threatened layoffs of public school teachers is now a likely casualty of this approach. In a letter to Democratic leaders May 13, Education Secretary Arne Duncan endorsed the funding, urging Congress to add the money to a pending war funding bill in the Senate. But the White House never forwarded a budget request and was conspicuously silent on the whole teachers funding issue when it issued its endorsement of the underlying $58.8 billion bill this week."
Obama is sending 1,200 National Guard troops to police the border, report Michael Shear and Spencer Hsu: "President Obama will deploy 1,200 National Guard troops and request an extra $500 million to secure the Mexican border, his administration said Tuesday, a move dismissed by Republicans as insufficient to win their cooperation on an overhaul of the nation's immigration system. By reinforcing the 340 Guard members already monitoring border crossings and analyzing intelligence, the initiative echoes 2006's Operation Jump Start, in which President George W. Bush devoted 6,000 guardsmen to a two-year commitment in support of the Border Patrol."
Experts are blasting the doc fix bill, reports Sarah Kliff: " 'It’s one of the worst pieces of legislation I’ve ever seen,' said Stuart Altman, a former adviser to Congress on Medicare who now teaches health policy at Brandeis University. 'I don’t think I’ve ever felt so vindictive about a piece of legislation in my life.' 'It’s a charade,' said Henry J. Aaron, a health policy analyst at the Brookings Institution. 'Congress takes care of things but doesn’t actually do anything. They haven’t been willing to write up the full cost of changing the system, so the projected deficits don’t look as bad as they are.' "
Kent Conrad is worried about this week's tax credit and jobless benefit bill, reports Corey Boles: "Sen. Kent Conrad, chairman of the Senate Budget Committee, said Tuesday he has concerns with the size of a large tax and benefit bill Democratic leaders hope to pass this week, casting doubt on the chances of the legislation being approved. Mr. Conrad (D., N.D.) said the current net cost of the measure to public finances -- $141 billion over a five-year period -- was too high. …The legislation renews a series of popular tax credits aimed at businesses and individuals. The cost of these extensions is offset by tax increases elsewhere in the U.S. budget."
The House is ready to fight for limits on debit card fees, reports Michael Crittenden: "A bipartisan group of House lawmakers hopes to capitalize on surprise Senate support to give retailers more leverage over banks on the charges attached to debit-card transactions. 'The game has changed,' Rep. Peter Welch (D., Vt.) said Tuesday. 'Once we got that strong bipartisan vote it made a big difference.' The Senate in a broader financial overhaul legislation last week included an amendment that would allow the Federal Reserve to regulate the fees card companies charge retailers for accepting debit cards."
The public cares about jobs, not the deficit, writes Harold Meyerson: "It's not that the American people aren't concerned about the deficit. But in poll after poll, they make clear that their No. 1 concern is jobs. Forty-seven percent of respondents to a Fox News poll this month, for instance, said they were concerned with the economy and jobs, while just 15 percent acknowledged concern over the deficit and spending. Eighty-one percent of respondents to a Pew Research Center poll from this month thought it 'very important' for Congress to address the jobs situation -- more than for any other topic. 'There is no significant difference across party lines,' Pew reported."
-- Dylan Matthews is a student at Harvard and a researcher at The Washington Post.
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