Great article in the Huffington Post about the epic battle in DC between retailer lobbyists and bank lobbyists over the fee retailers pay when you use your credit card. My favorite quote:

One frustrated moderate Democratic senator asks to remain anonymous so he can speak freely about his legislative education. “I’m surprised at how much of our time is spent trying to divide up the spoils between various economic interests. I had no idea. I thought we’d be focused on civil liberties, on education policy, energy policy and so on,” the senator says. “The fights down here can be put in two or three categories: The big greedy bastards against the big greedy bastards; the big greedy bastards against the little greedy bastards; and some cases even the other little greedy bastards against the other little greedy bastards.”

You should definitely check out the full article; it’s a good read.

Exhibit A of why passing good policy isn’t enough, courtesy of Think Progress:

According to an analysis by the Wall Street Journal, the banks’ spending on lobbying in the first quarter of 2011 was actually higher than it was in the first quarter of 2010, when Dodd-Frank was actively being debated:

Wall Street and the financial industry spent more to lobby Washington in the first quarter of this year than a year ago when Congress was writing sweeping financial-overhaul legislation, according to a Wall Street Journal review of lobbying reports released Thursday. [...]

The disclosures show that 26 of the financial firms and trade associations that spent the most in 2010 collectively spent $27 million in the three months ending March 31, a 2.7% increase from the $26.3 million spent in the comparable period in 2010.

When the height of the Dodd-Frank debate was going on last summer, the banks spent $27.3 million over three months, barely more than they spent in the first three months of this year.

Even if we had laws that reigned in how much corporations could spend on direct lobbying, it still wouldn’t be enough. When folks have that much unchecked power they will always find ways to use it — as Georgia found out the hard way in 2002 when Wall Street stomped Georgia after it outlawed predatory mortgages. The only real solution is Checks and Balances.

Normally I’m too cynical to get pissed off when I read the news. But reading about how Wall Street’s looting local taxpayers made me so furious I’ve been stewing over how we let ourselves get so screwed. What would’ve happened if Obama had cut a tougher deal right at the start?

Take the bailout of AIG. In a scathing report, Neil M. Barofsky, special inspector general for the Troubled Asset Relief Program, recently charged that the Fed “refused to use its considerable leverage” and instead paid 100 cents on the dollar to AIG’s trading partners. It was in stark contrast to how Obama’s crew handled the banks during the Chrysler bailout (WSJ via Epicurious Dealmaker):

President Barack Obama’s auto task force heard a blunt message early this spring from J.P. Morgan Chase & Co., the largest lender to Chrysler LLC. In any deal to remake the troubled auto maker, Chrysler would have to repay its lenders all $6.9 billion it owed.

“And not a penny less,” said James B. Lee Jr., vice chairman at the bank, in a call to auto task-force boss Steven Rattner on March 29.

The next day, Mr. Obama called the banker’s bluff. The president stepped before a podium to announce that Chrysler could face a disorderly bankruptcy or even liquidation. His meaning was clear: If that happened, the lenders would get nowhere near $6.9 billion.

A few hours later, Mr. Lee called Mr. Rattner back. “We need to talk,” he said.

The banker’s about-face was a vivid example of the government’s tightening grip on a humbled financial industry. Pulling a trick from the hedge-fund playbook, the government used its leverage as the sole willing lender to Chrysler, either in bankruptcy court or out, to extract deep concessions from some of the country’s biggest banks.

Could we have done the same with AIG? Economics of Content says no — leverage doesn’t mean squat if you aren’t willing to use it.

This is also why the Fed paid Goldman and the other counterparties 100 cents on the dollar to terminate their CDS contracts with AIG, which [a Bloomberg article] portrays as some sort of gift to the banks. But the Bloomberg article also relies on the Immaculate Negotiation argument — how, exactly, was the Fed supposed to get the counterparties to agree to take a haircut? The Fed had just demonstrated to the entire world that it wasn’t willing to let AIG file for Chapter 11.

It’s an argument a lot of folks — including Geithner — have used to defend the Fed’s depending-on-the-kindness-of-strangers negotiating strategy.

But if threatening to let AIG fail wasn’t credible, the Fed had plenty of other leverage at its disposal. With Chrysler’s lenders, says investment banker & blogger Epicurious Dealmaker, the government

simply did what any hedge fund driven by fiduciary duty and self interest would have done if it held the reins: it dictated the terms it wanted to see, and it told the creditors to pound sand if they didn’t like it.

What if they’d done the same with AIG? Continue reading →

What happens when an economic model can’t straightforwardly deal with the role of power in the economy? You get bizarre ideas like the one presented in the New York Times.

Gretchen Morgenson, one of the smartest business writers around, asks what we’re going to do about the financial regulators who completely failed us.

Even though calamitous lending practices laid waste to the nation’s economy, surprisingly little has changed about how the financial arena operates and is supervised…. Senior regulators who stood idly by for years as financial firms built their houses of cards have been rewarded with even bigger jobs or are jockeying for increased responsibilities. The Federal Reserve Board, for example, wants to become the financial system’s uber-regulator, even though its officials did nothing as banks made deadly decisions to lend recklessly and leverage themselves to the max….

Yet those in the public sector ask us to believe that regulators who snoozed during the credit bubble will be alert to emerging problems on their beats when the next mania begins.

Her solution: a proposal by Prof. Edward J. Kane.

To bring accountability to regulatory performance, Mr. Kane suggests that financial supervisors take an oath of office in which they agree to perform four duties. First is the duty of vision, under which they would promise to adapt their surveillance practices to respond to the creative ways financial institutions hide their dubious practices. Regulators must also promise to take prompt corrective action, and to perform their work efficiently. Finally, there is what Mr. Kane calls the duty of “conscientious representation,” whereby regulators swear to put the interests of the community ahead of their own….

To ensure that regulators live up to the promises they make, Mr. Kane suggests that inspectors general at each agency be charged with regularly auditing the performance of financial overseers. A crucial component of those reviews would be exploring attempts by regulated entities to influence the officials who oversee them.

In doing so, we could strive for “perfectly virtuous” financial regulators:

“If real world supervisors were perfectly virtuous, they would make themselves politically and financially accountable for the ways in which they exercise their discretion,” he writes. “Perfectly virtuous supervisors would fearlessly bond themselves to disclose enough information about their decision making to allow the community or interested outsiders to determine whether and how badly they neglect, abuse, or mishandle their responsibilities.”

Maybe we could also get the regulators to wear togas?

Oaths and inspector generals vs. Wall Street is like me vs. Mike Tyson — not even a crack addict would have trouble figuring out who’s gonna win.

If you’re going to ratchet down Wall Street’s power to influence regulators, there are only 2 ways to do it: chop way back the size of Wall Street, or create checks and balances. The fact that someone as thoughtful and knowledgeable as Morgenson can’t see that — that she’d write a column about oaths and inspector generals — shows just how big the power blind spot is the conventional economic model.