Wednesday, April 28, 2010 | 2 a.m.
By now the causes of the financial crash that led to the Great Recession are well known.
Americans, including homebuyers and regulators, community banks and Wall Street titans, were like skiers blithely ignoring the risk of avalanche, while a few destructive firms lit explosives that got the cascade started.
In short: easy money, lax lending standards and government incentives puffed up the housing market, especially in states such as Nevada, California, Arizona and Florida. Lenders didn’t care if borrowers would repay, because they were just going to resell the loans to someone else. Rating agencies, paid by the people whose products they were rating, said those packaged loans were safe and tiptop.
But they weren’t. Once the loans failed and the foreclosures started, some big Wall Street firms stood to lose billions because of bets they had made that those bad mortgages wouldn’t fail. The bets, called “derivatives,” were largely unregulated and opaque — few people knew who owed what to whom. So the losses started, and huge Wall Street firms, including Lehman Brothers, failed, while others stood on the brink of collapse.
The country’s entire financial system was on the verge of freezing up, which would have crippled American capitalism.
If all that sounds complicated, bipartisan critics of the current system have a straightforward analogy for it: A casino in which taxpayers have to bail out the house because of its incompetence and greed.
So now Washington, which played a hand in creating the mess, aims to fix it. Although the two parties are engaged in some partisan gamesmanship, what’s remarkable about the current debate, especially in light of a new Senate Republican plan, is how similar the proposals for financial reform are. But at least two Nevada Republican contenders, including front-runner Sue Lowden, are rejecting that consensus.
Here, the Sun summarizes the plans and positions of Senate Majority Leader Harry Reid and his four major Republican challengers.
Sen. Harry Reid
Reid has tried to open debate on a bill principally authored by Sen. Chris Dodd, D-Conn., but so far failed to gain the 60 votes needed to overcome Republican opposition. At its core, the legislation would create a new agency to protect consumers from “unfair, deceptive and abusive financial products and practices,” including in mortgage lending, credit cards and consumer loans.
The bill would also impose new restrictions on banks and require that bigger institutions contribute to a $50 billion fund that Democrats say would be used to ensure an orderly liquidation of troubled firms so taxpayers would not be on the hook for bailouts as they were in 2008.
The bill also would establish new oversight of the derivatives market that went unchecked leading to the 2008 crisis. A derivative is a complex financial instrument — until now largely unregulated — that is a sort of bet between players on whether some asset is going to rise or fall in price.
Treasury Secretary Timothy Geithner told Congress that the Obama administration is working up its own plan for restructuring Fannie Mae and Freddie Mac, the government-backed mortgage giants that hold a majority of the nation’s home loans, but is waiting for more stability in the housing market.
In a written statement Tuesday, Reid said, “There will be more votes to proceed to debate this week, and Republicans will have more opportunities to show whose side they are truly on. Senate Democrats will continue to hold Wall Street accountable and fight to protect consumers in Nevada and across America.”
Before you ask Angle how Wall Street should be reformed, you need to ask her if it needs to be reformed.
“No,” she said in a written response. “Getting back to tried and true supply-side economics affectionately known as Reaganomics will give small business and international confidence in our economy.”
On this, Angle is quite literally alone, not just among Republicans running for Senate, but also among economists and finance experts — left, right and center. Although there’s disagreement about how to do it, policymakers in both parties agree Wall Street must be governed by rules that will enhance transparency and safety.
Angle, a former assemblywoman with an endorsement from a national Tea Party group, said she opposes regulating the derivative markets, creating a fund for winding down failed banks and establishing a consumer finance protection agency. Angle instead ticked off a list of talking points from her stump speech — calling for an audit of the Federal Reserve, abolishing the IRS code and eliminating Freddie Mac and Fannie Mae.
Asked what she would do to reform the financial system, Angle said she would want to use unspent stimulus money to pay down the federal deficit.
Pressed further on how, specifically, she would change how Wall Street operated, she said she was cautious to get too involved.
“I’m very careful that government does not belong in private business. If businesses are not doing best practice, they should be allowed to fail. They shouldn’t have been bailed out,” she said. “Those types of failures do correct problems. There are certainly bankers on Wall Street that benefited on both sides of this crisis. It was precisely because there was a thought process in Washington that they were too big to fail.”
It hardly needs to be said, but Angle would not vote to allow floor debate of the bill.
Chachas is well-suited among the candidates to offer insights on Wall Street — he made millions there as an investment banker before deciding to return to Ely, his childhood home, and run for Senate as a Republican.
In a detailed white paper, Chachas argues that our system for “monitoring and managing risk across highly interconnected financial markets” failed. In general, he argues for more transparency and market-based incentives for a more prudent financial services sector.
Chachas advocates for creating a new apolitical position — Risk Monitor — to keep watch on all systemic financial risk, ensuring that institutions haven’t made the kinds of risky bets that could imperil us all.
Derivatives should be traded on exchanges — not unlike stocks and bonds — so everyone in the market is aware of their prices. He believes if a bank packages mortgages together to sell them, it should retain some ownership as an incentive to make good loans.
Chachas would reform and eventually privatize Fannie Mae and Freddie Mac; force more transparency at the ratings agencies that gave good marks to bad investment vehicles; compel banks with their own trading operations to keep substantial reserves on hand in case a trade goes bad; and get banks on government support to pay employees in stock so their interests are aligned with that of shareholders.
Chachas says no firm should ever be “too big to fail,” and if the Risk Monitor believes the downside risk of an institution is too great, the regulator can “decompose” it.
Chachas acknowledged the problem of consumers taking on too much debt through high-interest credit cards and subprime mortgages. But his mistrust of government regulators has him questioning the efficacy of the proposed financial products regulator. “I don’t know what the right answer is. But I’m inherently mistrustful of the federal government overseeing all this,” he said in an interview Tuesday.
Chachas said he would have voted with Republicans to block debate from starting on the proposed bill. “You’ve got to vote ‘no’ to bring people back to the table to negotiate for something that’s better for the country,” he said.
Lowden, who said she would have voted with Republicans to block debate on the bill, said in a previous Sun interview that the meltdown was caused by too much, not too little regulation.
She stood by that laissez faire philosophy in written answers to Sun questions. Asked whether she favored reform, she replied, “Yes, but not the major reform being proposed by the Democrats. The No. 1 priority should be to protect the taxpayer,” though she didn’t elaborate.
Lowden opposes creation of a fund to help failed financial firms meet their commitments while the government uses an orderly process for liquidating it. Financial reformers have turned to this mechanism because the standard way failed firms are unwound, through the bankruptcy courts, is considered too slow, leading to panics while the onerous process gets bogged down in court.
Lowden says even though the banks would pay for the fund, it’s actually a hidden tax that will be passed on to consumers.
Lowden doesn’t favor a new consumer protection agency for financial products such as credit cards and mortgages because the government plays a role here, she said.
“It is not necessary to create another arm of government when many of these services are already provided by the Federal Reserve. We just need to provide the necessary assets and enforcement for consumer protection.”
Lowden did allow for more stringent regulation of derivatives but also praised them as the democratization of finance.
She also laid out general principles of any reform legislation: Not putting smaller, community banks at a disadvantage relative to bigger banks and minimum underwriting standards for home mortgages to prevent another major bubble.
Lowden concluded by quoting the Republican favorite, President Ronald Reagan: “Government is not a solution to our problem, government is the problem.”
Tarkanian, a lawyer and Las Vegas businessman, said he would have joined Senate Republicans and voted to block the Democrats’ bill from reaching the floor for debate.
Still, he said financial regulatory reform is “absolutely necessary” and he supports at least one key provision of the Democrats’ legislation: tougher rules on the trading of derivatives.
While he opposes another key provision, the creation of a federal consumer protection agency, Tarkanian said he supports the dissemination of more detailed financial information to consumers on mortgages and credit cards through existing government agencies.
He also called for the reinstatement of the Glass-Steagall Act to separate commercial and investment banks.
Like most Republicans, Tarkanian opposes a $50 billion bank-financed fund to help failed companies meet financial commitments while the government winds the institutions down. “This provision institutionalizes bailouts, creating what truly is a bottomless bailout,” he said. “We must get away from the bailout mentality that has taken over Congress since the first Wall Street bailout.”
Critics of this Republican opposition to bailouts say that although Republicans might in theory be against bailouts, if the financial system was again on the verge of collapse, they would change tune. Democrats say their plan makes a provision for an orderly process — paid for by banks — to unwind an insolvent institution in case it happens again.
Sun reporters Michael J. Mishak, David McGrath Schwartz and Lisa Mascaro contributed to this story.