This is not just theory; it is a lesson we learned, at great expense, during the Savings and Loan crisis of the 1980s

TO BE NOTED: From The Guardian:

"America's socialism for the rich

The US has a huge corporate safety net, allowing the banks to gamble with impunity, but offers little to struggling individuals

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• • Joseph Stiglitz
  • guardian.co.uk, Friday 12 June 2009 20.00 BST
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With all the talk of "green shoots" of economic recovery, America's banks are pushing back on efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details – and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past.

The old system worked well for the bankers (if not for their shareholders), so why should they embrace change? Indeed, the efforts to rescue them devoted so little thought to the kind of post-crisis financial system we want that we will end up with a banking system that is less competitive, with the large banks that were too big too fail even larger.

It has long been recognised that those America's banks that are too big to fail are also too big to be managed. That is one reason that the performance of several of them has been so dismal. Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors). Normally, when a bank fails, the government engineers a financial restructuring; if it has to put in money, it, of course, gains a stake in the future. Officials know that if they wait too long, zombie or near zombie banks – with little or no net worth, but treated as if they were viable institutions – are likely to "gamble on resurrection". If they take big bets and win, they walk away with the proceeds; if they fail, the government picks up the tab.

This is not just theory; it is a lesson we learned, at great expense, during the Savings and Loan crisis of the 1980s. When the ATM machine says "insufficient funds", the government doesn't want this to mean that the bank, rather than your account, is out of money, so it intervenes before the till is empty. In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes the government must provide additional funds; sometimes it looks for a new investor to take over the failed bank.

The Obama administration has, however, introduced a new concept: too big to be financially restructured. The administration argues that all hell would break loose if we tried to play by the usual rules with these big banks. Markets would panic. So, we not only can't touch the bondholders, we also can't even touch the shareholders – even if most of the shares' existing value merely reflects a bet on a government bailout.

I think this judgment is wrong. I think the Obama administration has succumbed to political pressure and scaremongering by the big banks. As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks.

Restructuring gives banks a chance for a new start: new potential investors (whether in equity or debt instruments) will have more confidence, other banks will be more willing to lend to them and they will be more willing to lend to others. The bondholders will gain from an orderly restructuring, and if the value of the assets is truly greater than the market (and outside analysts) believe, they will eventually reap the gains.

But what is clear is that the Obama strategy's current and future costs are very high – and so far, it has not achieved its limited objective of restarting lending. The taxpayer has had to pony up billions, and has provided billions more in guarantees – bills that are likely to come due in the future.

Rewriting the rules of the market economy – in a way that has benefited those that have caused so much pain to the entire global economy – is worse than financially costly. Most Americans view it as grossly unjust, especially after they saw the banks divert the billions intended to enable them to revive lending to payments of outsized bonuses and dividends. Tearing up the social contract is something that should not be done lightly.

But this new form of ersatz capitalism, in which losses are socialised and profits privatised, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity – and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so.

Some have called this new economic regime "socialism with American characteristics". But socialism is concerned about ordinary individuals. By contrast, the US has provided little help for the millions of Americans who are losing their homes. Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. And, when they lose their jobs, most lose their health insurance too.

America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance and now to cars, with no end in sight. In truth, this is not socialism, but an extension of longstanding corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection.

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don't break them up, then we have to severely limit what they do. They can't be allowed to do what they did in the past – gamble at others' expenses.

This raises another problem with America's too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate and then to have taxpayers pay for the cleanup. Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.

Copyright: Project Syndicate, 2009"

The most biting critique of the plan is likely to be that it failed to disrupt the political influence of the banks

From Free Exchange:

"Did the Obama banking plan fail?

Posted by:

Economist.com | WASHINGTON

Categories:

Financial markets

EZRA KLEIN notes the quiet demise of the PPIP legacy asset plan and asks an important question—has the Obama administration's banking plan failed? Mr Klein suggests it has, noting that 1) PPIP was meant to discover the prices of the so-called toxic assets, and it hasn't, and 2) even if PPIP didn't discover asset prices it was meant, in combination with the stress tests, to reveal definitively which banks were insolvent, and it hasn't. True, we still have the stress test results, he says, but the adverse scenario in those tests included an unemployment rate of 8.9%, which we've already jumped through. Given that we know neither the value of the assets or the solvency of banks, it seems clear to Mr Klein that the banking plan has failed.

Here's something on which we can agree—insomuch as the goal of the banking plan was to determine the value of toxic-assets and determine definitively which banks were solvent, the banking plan has failed. But that doesn't tell us very much. We didn't want to know the value of the assets or the solvency of banks just because; that information was presumably important for some other reason, namely, it was viewed as crucial to the stabilisation of the banking system to learn one or both of these variables.

And in that sense, I think there are a number of ways in which the administration's plan has succeeded, if only by luck, and some other ways in which it is too early to tell, but no meaningful ways in which it can be said that the strategy has failed.

How has it succeeded? Well, it has generated, or coexisted with, or managed not to derail the calming of interbank lending markets, all without requiring the hundreds of millions of additional bail-out dollars that were widely deemed necessary for the task. It's not easy to lay sole responsibility for this at the administration's feet—both the Federal Reserve and the natural trajectory of the recession (particularly stability in equity markets) helped significantly—but the administration absolutely had the ability to err in ways that would have kept markets in crisis mode. They didn't, which must be judged as a success.

How else did the administration succeed? The Fed and the Treasury managed to provide the market with meaningful information about the absolute and relative status of financial institutions without blowing anything up. There are a lot of things we don't know, but there are some important things that we do know, with certainty, as a result. We know which banks are really and truly healthy. We know which banks might not be, but we also know that the Obama administration is committed to assisting them in ways that will not disrupt markets. And we know which firms have some serious issues, and that the administration isn't afraid to move toward back-door nationalisation in those cases. This, again, must be judged as success.

There are matters on which the jury is still out. We don't yet know whether predicted loan losses are optimistic or whether banking stability is likely to stick, but that would have been an issue with any solution to the banking crisis. A Swedish-style intervention would not have eliminated the possibility that a deeper-than-expected recession would have caused the government's bill to explode, potentially destabilising financial markets or the broader economy. It might also have caused market disruption immediately upon its intervention. It's difficult to know how this will play out, but impossible to declare failure at this point.

Other questions remain open. Will the administration's plan ultimately lead to the reduced effectiveness of financial markets, thanks to moral hazard concerns or excess debt or some other factor? Possibly, but we can't know now, and these questions would apply to alternative policy choices. Did the administration fail by selling stimulus before a banking rescue, thereby expending political capital and limiting the aggressiveness with which it could take on the banking system? Back in March I might have said yes; now I would say no, but not until the recession is long over will we be able to assess this properly.

The most biting critique of the plan is likely to be that it failed to disrupt the political influence of the banks, thus ensuring that forthcoming regulatory measures are too weak. We can't rule on this until the regulatory reform package is in, but it's also difficult to say anything given the recursively determined nature of the question. In other words, given a Congress captured by banking interests, how free a hand did the administration have to smash banking interests as part of a banking rescue? The administration might have failed to rein in the bankers via nationalisation, but only because the bankers could apply pressure on legislators to deny the administration the authority to nationalise.

I can understand giving the administration's banking strategy a number of different marks depending on what kind of curve one is using (that is, how one weighs political constraints and the influence of outside factors), but the one grade it should not receive is an F. At worst, Barack Obama and Tim Geithner have earned themselves Incompletes."

Me:

Don the libertarian Democrat wrote:

June 8, 2009 21:09

Has Richard Posner started posting here? All of a sudden, Free Exchange is like a ticker tape. Actually, what's impressive with Posner is not so much the number of posts, but their length. Each post is an essay.

"1) PPIP was meant to discover the prices of the so-called toxic assets"

What this means is discover the price at which buyers and sellers can agree. It was an attempt to close to the gap between bid and ask through a subsidy, not open Pandora's Box or Schrodinger's Box, say, discovering a hitherto unknowable question. The problem now is simple: The sellers are more inclined to hold onto the assets. Since the economy seems to be stabilizing, and the stress test are now basically seen as a government guarantee, the price on the TAs has gone up. However, the buyers, hedge funds, for example, aren't inclined to up their price, even with the subsidy. And this answers:

"2) even if PPIP didn't discover asset prices it was meant, in combination with the stress tests, to reveal definitively which banks were insolvent, and it hasn't."

On the contrary, it has given the government guarantee of these banks the seal of approval. That's why the banks themselves are less inclined to sell, and more inclined to buy.

By the way, this reaction signals inflation, and so it does add credence to QE, if you believe, as I do, that QE, in order to work, needs to lead to a real perception of inflation down the road. I seem to be agreeing with Bernanke and Geithner, at least on this.

“The banks get it,” Mr. Fine said. “They understand you need a strong political action committee to get access to the fund-raisers.

Man acts from motives relative to his interests; and not on metaphysical speculations.

TO BE NOTED: From the NY Times:

"Back to Business
Ailing, Banks Still Field Strong Lobby at Capitol

By STEPHEN LABATON

WASHINGTON — As he often does, President Obama took the opportunity in a bill-signing ceremony last month to remind Congress “to do what we were actually sent here to do — and that is to stand up to the special interests, and stand up for the American people.”

But Mr. Obama did not mention that the measure he was signing, the Helping Families Save Their Homes Act, was missing its centerpiece: a change in bankruptcy law he once championed that would have given judges the power to lower the amount owed on a home loan.

It had been stripped out three weeks earlier in a showdown between Senate Democrats and the nation’s banks, including many that are getting big government bailouts.

As Congressional Democrats and the White House crow about multiple victories over the financial industry, including new rules for credit card issuers, banks are quietly savoring an even bigger victory of their own.

The defeat of the bankruptcy proposal is a testament to the enduring influence of banks, even as the industry struggles financially and suffers from its role in the economic crisis.

It also shows that in the coming legislative battles that will shape the future of the economy, the financial industry — through a powerful and well-financed lobbying force — may have a far stronger hand to play than might seem evident.

Documents and interviews with lawmakers, lobbyists and administration officials show that the banks defeated the bankruptcy change — the industry picturesquely calls it the “cramdown” provision — by claiming that it would push up interest rates and slow the housing market’s recovery, even though academic studies have countered such claims.

The industry also steadfastly refused offers to negotiate over a weaker version. And it poured millions of dollars into lobbying: four of the industry’s top trade groups spent nearly as much on lobbying in the first three months of this year as they did in all of 2001.

But an industry strategy of dividing the Democrats had the most success.

One target was Senator Mary Landrieu, the moderate Democrat from Louisiana. On April 1, about 30 bankers from Louisiana crowded into a room off the Senate floor to press their view that the bankruptcy measure would force them to raise mortgage rates and hurt the very homeowners Congress was seeking to help.

Donnie Landry, a senior executive vice president at MidSouth Bank of Lafayette, La., recalled that last year Ms. Landrieu had “not been very receptive to some of our concerns. But this time she could not have been more cordial,” even helping them get to see Senator Christopher J. Dodd, the Connecticut Democrat who is the chairman of the Senate banking committee, while they were at the Capitol.

Ms. Landrieu was among 12 Democrats joining 39 Republicans to vote against the measure, while Mr. Dodd was one of the 45 Democrats and independents who supported it — still 15 votes shy of the 60 needed to shut off a filibuster.

Aaron Saunders, a spokesman for Ms. Landrieu, told reporters at the time that the senator had voted against the measure because of the concerns raised by Louisiana bankers that the provision could cause mortgage rates to rise.

Throughout it all, the banks took advantage of the Obama administration’s seeming ambivalence. Despite its occasional populist rhetoric, the White House was conspicuously absent from weeks of pivotal negotiations this spring.

“This would have been a much different deal if Obama had pressed it,” said Camden R. Fine, head of the Independent Community Bankers of America and one of the chief lobbyists opposing the bankruptcy change. “The fact that Obama effectively sat it out helped us a great deal.”

Surprising Ease

In the end, the banks’ startling success in defeating the provision, which was pushed hardest by Senator Richard J. Durbin, Democrat of Illinois, caught even their lobbyists by surprise. Not only did they defeat the cramdown provision, but the banks walked away with billions in new bailout money.

The housing bill Mr. Obama signed on May 20 saves banks and credit unions at least $13 billion in special fees that they would have had to pay to replenish dwindling deposit insurance funds.

The outcome left some Democrats frustrated and fuming. “This is one of the most extreme examples I have seen,” said Senator Sheldon Whitehouse, Democrat of Rhode Island, shortly before the vote, “of a special interest wielding its power for the special interest of a few against the general benefit of millions of homeowners and thousands of communities now being devastated by foreclosure.”

The lament was a far cry from the outlook in January, when banking lobbyists believed their situation was hopeless. Some 10,000 homes were being foreclosed on every day. A new president who had campaigned in favor of the proposal — and who co-sponsored similar legislation as a senator — was about to take office.

While Republicans had defeated the measure in 2008, Congress was now more solidly in Democratic hands.

The industry’s worst fears began to come true in early January when Senator Charles E. Schumer announced that he had persuaded Citigroup to endorse the idea. Mr. Schumer had held discussions with Vikram S. Pandit, Citigroup’s chief executive, and Lewis B. Kaden, a vice chairman. Mr. Schumer then spoke to other top executives, including Jamie Dimon, chief executive of JPMorgan Chase, hoping to peel more big banks away from the opposition.

Housing advocacy groups argued that it was unfair that bankruptcy judges have had the authority since 1978 to modify mortgages on vacation homes, farms and even luxury yachts, but not on primary residences. They also argued that a string of federal programs to help reduce foreclosures had been ineffective because of resistance by lenders and investors who own pools of loans, all of whom stand to lose money when a mortgage is modified.

Those arguments won the day in the House, which adopted the legislation on March 5 by a 234-191 vote.

In the Senate, where Republicans were looking for a chance to recoup after narrowly failing to block Mr. Obama’s huge stimulus package, the banks argued that the proposal interfered with their contractual rights.

But the real threat was to their profits. The proposal would have shifted negotiating power to the millions of troubled homeowners who could use the threat of bankruptcy to wrest lower monthly payments from lenders. The banks claimed that that would force them to raise rates.

That claim is in dispute. For one thing, the legislation would not have applied to new mortgages.

Moreover, until a Supreme Court decision in 1993, some bankruptcy judges had modified mortgages on primary residences, and recent studies by Adam J. Levitin, an associate law professor at Georgetown University Law Center, concluded that those modified mortgages did not result in increases in lending rates.

Still, Mr. Durbin knew he had a fight on his hands. Within his own party, moderates were badly split. Some, like Senator Tim Johnson of South Dakota and Senator Thomas R. Carper of Delaware, represent states that are the corporate home to major banks. The industry has showered both lawmakers with campaign cash.

Senator Carper’s three largest contributors this election cycle have been executives and political action committees at Citigroup, Bank of America and JPMorgan Chase, according to the Center for Responsive Politics, which tracks money and politics. Out of the $4.6 million he has raised, some $375,000, or 8 percent, has been from banks, credit unions and related trade groups.

Senator Johnson has raised about $6.2 million, of which at least $280,000, or 4.5 percent, has come from groups opposed to the legislation.

Compromise Falls Flat

To win industry support in enlisting more of his colleagues, Mr. Durbin approached the trade associations.

Shortly after negotiations began, the American Bankers Association abandoned the talks, saying there was no compromise they could ever support. Soon after, Mr. Fine’s community bankers also left the talks, having refused a demand by Mr. Durbin to publicly announce support for the principle of allowing bankruptcy judges to reduce mortgage payments.

Mr. Durbin next sought a compromise with credit unions and three large banks — Bank of America, JPMorgan Chase and Wells Fargo. In April, at a delicate stage in the talks, Mr. Durbin gave the banks a proposed compromise that was marked not to be circulated, a senior Congressional aide involved in the talks recalled.

Within six minutes, the memo was distributed to the entire Republican caucus — along with a warning from Senator Mitch McConnell of Kentucky, the minority leader, to stay away from it. The compromise went nowhere.

While Mr. Obama reaffirmed his support for the proposal shortly after becoming president, administration officials barely participated in the negotiations, a factor that lobbyists said significantly strengthened their hand. Lawmakers who have discussed the issue with the administration said that the president’s senior aides had concluded that a searing fight with the industry was simply not worth the cost.

Moreover, Timothy F. Geithner, the Treasury secretary, did not seem to share Mr. Obama’s enthusiasm for the bankruptcy change.

Mr. Geithner was lobbied by the industry early. Two days after he was sworn in, he invited Mr. Fine from the community bankers to his office for a private meeting. The association, with influential members in every Congressional district, is one of Washington’s most powerful trade groups.

A senior adviser to Mr. Geithner said the administration supported the cramdown proposal, but it preferred that distressed homeowners seek to modify their loans through the Treasury’s new $75 billion program, which rewarded banks if they modified home loans, rather than through bankruptcy court.

Mr. Durbin acknowledges that it was a mistake not to call on the administration for help.

“If I would have known how it would unfold, I would have called on the White House earlier to get involved,” he said.

Deal Now, Pay Later

While Mr. Durbin had trouble rounding up Democratic votes, Republican leaders kept their members — and potential renegade banks — in line.

Senator Jon Kyl, the Arizona Republican leading the charge against the bankruptcy change, told bankers there would be consequences if they dealt with the Democrats. According to an April 20 e-mail message between industry officials in touch with Mr. Kyl, he told them “not to make a deal with Durbin and then come looking to Republicans when they need help on something like regulatory restructuring.”

In an interview, Mr. Kyl, the Senate’s No. 2 Republican, did not recall whether he had made the statement, although he remembered telling bankers that he could not defend them if they did not first defend themselves. “I very pointedly said, ‘Don’t make a deal with Durbin on this. You don’t need to. If he has the votes he wouldn’t be dealing,’ ” Mr. Kyl recalled.

There was no counterweight to that legislative muscle. Bankrupt homeowners do not have a political action committee or lobbyists.

Mr. Fine reports that the political action committees run by his association alone have built a war chest of nearly $2 million, a 40 percent jump over the last year, even though members have had to cut other expenses in the recession.

“The banks get it,” Mr. Fine said. “They understand you need a strong political action committee to get access to the fund-raisers. That’s where the lawmakers are.”

Carl Hulse contributed reporting, and Kitty Bennett contributed research."

We need to remember that much financial innovation over the past 30 years was economically beneficial

TO BE NOTED: From the NY Times:



"The Way We Live Now
Diminished Returns

By NIALL FERGUSON

If financial crises were distributed along a bell curve — like traffic accidents or people’s heights — really big ones wouldn’t happen very often. When the hedge fund Long-Term Capital Management lost 44 percent of its value in August 1998, its managers were flabbergasted. According to their value-at-risk models, a loss of this magnitude in a single month was so unlikely that it ought never to have happened in the entire life of the universe. Just over a decade later, many more of us now know what it’s like to lose 44 percent of our money. Even after the recent stock-market rally, that’s about how much the Standard & Poor’s 500 index is down compared with October 2007.

Financial crises will happen. In the 1340s, a sovereign-debt crisis wiped out the leading Florentine banks of Bardi, Peruzzi and Acciaiuoli. Between December 1719 and December 1720, the price of shares in John Law’s Mississippi Company fell 90 percent. Such crashes can also happen to real estate: in Japan, property prices fell by more than 60 percent during the ’90s.

For reasons to do with human psychology and the failure of most educational institutions to teach financial history, we are always more amazed when such things happen than we should be. As a result, 9 times out of 10 we overreact. The usual response is to introduce a raft of new laws and regulations designed to prevent the crisis from repeating itself. In the months ahead, the world will reverberate to the sound of stable doors being shut long after the horses have bolted, and history suggests that many of the new measures will do more harm than good. The classic example is the legislation passed during the British South-Sea Bubble to restrict the formation of joint-stock companies. The so-called Bubble Act of 1720 remained a needless handicap on the British economy for more than a century.

Human beings are as good at devising ex post facto explanations for big disasters as they are bad at anticipating those disasters. It is indeed impressive how rapidly the economists who failed to predict this crisis — or predicted the wrong crisis (a dollar crash) — have been able to produce such a satisfying story about its origins. Yes, it was all the fault of deregulation.

There are just three problems with this story. First, deregulation began quite a while ago (the Depository Institutions Deregulation and Monetary Control Act was passed in 1980). If deregulation is to blame for the recession that began in December 2007, presumably it should also get some of the credit for the intervening growth. Second, the much greater financial regulation of the 1970s failed to prevent the United States from suffering not only double-digit inflation in that decade but also a recession (between 1973 and 1975) every bit as severe and protracted as the one we’re in now. Third, the continental Europeans — who supposedly have much better-regulated financial sectors than the United States — have even worse problems in their banking sector than we do. The German government likes to wag its finger disapprovingly at the “Anglo Saxon” financial model, but last year average bank leverage was four times higher in Germany than in the United States. Schadenfreude will be in order when the German banking crisis strikes.

We need to remember that much financial innovation over the past 30 years was economically beneficial, and not just to the fat cats of Wall Street. New vehicles like hedge funds gave investors like pension funds and endowments vastly more to choose from than the time-honored choice among cash, bonds and stocks. Likewise, innovations like securitization lowered borrowing costs for most consumers. And the globalization of finance played a crucial role in raising growth rates in emerging markets, particularly in Asia, propelling hundreds of millions of people out of poverty.

The reality is that crises are more often caused by bad regulation than by deregulation. For one thing, both the international rules governing bank-capital adequacy so elaborately codified in the Basel I and Basel II accords and the national rules administered by the Securities and Exchange Commission failed miserably. It was the Basel system of weighting assets by their supposed riskiness that essentially allowed the Enronization of banks’ balance sheets, so that (for example) the ratio of Citigroup’s tangible on- and off-balance-sheet assets to its common equity reached a staggering 56 to 1 last year. The good health of Canada’s banks is due to better regulation. Simply by capping leverage at 20 to 1, the Office of the Superintendent of Financial Institutions spared Canada the need for bank bailouts.

The biggest blunder of all had nothing to do with deregulation. For some reason, the Federal Reserve convinced itself that it could focus exclusively on the prices of consumer goods instead of taking asset prices into account when setting monetary policy. In July 2004, the federal funds rate was just 1.25 percent, at a time when urban property prices were rising at an annual rate of 17 percent. Negative real interest rates at this time were arguably the single most important cause of the property bubble.

All of these were sins of commission, not omission, by Washington, and some at least were not unrelated to the very considerable political contributions and lobbying expenditures of the financial sector. Taxpayers, therefore, should beware. It is more than a little convenient for America’s political class to blame deregulation for this financial crisis and the resulting excesses of the free market. Not only does that neatly pass the buck, but it also creates a justification for . . . more regulation. The old Latin question is highly apposite here: Quis custodiet ipsos custodes? — Who regulates the regulators? Until that question is answered, calls for more regulation are symptoms of the very disease they purport to cure.

Niall Ferguson is a professor at Harvard University and the Harvard Business School and the author most recently of “The Ascent of Money: A Financial History of the World.”

t banks receiving federal bailout funds spent over $13 million lobbying against consumer interests and for the financial benefit of their executives

TO BE NOTED: From EconomPic Data:

"It Pays to Lobby

FireDogLake reports:

An FDL review of lobbying reports for the first quarter of 2009 reveals that banks receiving federal bailout funds spent over $13 million lobbying against consumer interests and for the financial benefit of their executives.

In the first quarter of 2009, banks such as Bank of America, JP Morgan and Wells Fargo that received billions in taxpayer assistance focused their lobbying efforts on defeating attempts to regulate credit card practices, specifically caps on interest rates. They also lobbied extensively to prevent legislation that would have allowed bankruptcy judges to write down mortgage principle ("cramdown"), which FDL examined yesterday. At the same time, they lobbied on behalf of their executives to be paid without limit.

Below is a chart of bailout funds received as a multiple of that $13mm spent on lobbying in the quarter.



Don't feel too bad for Credit Suisse... while the lowest "multiple", that $580k still got them $400mm. Not too shabby.

Posted by Jake"

safe harbor gives the servicers (a.k.a. the banks) freedom to make changes without fear of getting sued

From:

Friday, May 1, 2009 at 10:29 am

The Senate cramdown of mortgage cramdowns

Posted by Justin Fox | Comments (1) | Permalink | Trackbacks (0) | Email This

Noam Scheiber has a nice explanation of why mortgage cramdowns lost out in the Senate Thursday but safe harbor for mortgage servicers will probably make it into law.

Both provisions are about making it easier to change the terms of troubled mortgages—in particular by reducing the amount owed to reflect the collapse in home values over the past couple of years. In both cases, opponents objected that the changes mess with the sanctity of contracts and will discourage investors from buying mortgages, thus pushing rates higher than they would otherwise be. In fact, it's far from certain that mortgage rates would rise as a result of either change. But no matter. Scheiber's story is about the politics, not the merits:

With cramdowns, both the banks and investors (hedge funds et. al.) were united against giving bankruptcy judges the power to change mortgage terms, while safe harbor gives the servicers (a.k.a. the banks) freedom to make changes without fear of getting sued, so they're all for it even though the investors hate it. And in Washington, divide and conquer remains perhaps the most important rule of political success. Safe harbor it is, then."

Me:

1. donthelibertariandemocrat Says:
   Friday, May 1, 2009 at 2:47 pm

   There seems something odd about asking banks to make money, and then asking them to take losses on bonds and mortgages. On the other hand, we're in a tangled web of government actions that Raymond Smullyan couldn't explain.

   My view is that, since AIG, unless somebody gets a bailout or subsidy, they become very principled and hard to negotiate with. There's a kind of implicit greasing that's expected for compromise. The government's answer is to try and turn these holdouts into Uriah Heep, which, in some cases, isn't a bad characterization.

   I like the idea of cramdowns, but for the fact that, in a downward move like the one we're experiencing in home prices, I don't trust anyone to know how to fairly set the price or terms of a house. In other words, it might simply delay foreclosure, and not stop it.

still the most powerful lobby on Capitol Hill. And they frankly own the place

TO BE NOTED: From Salon:

"Top Senate Democrat: bankers "own" the U.S. Congress Dick Durbin's confession ought to be major news, yet it won't be. Why not?

Glenn Greenwald

Apr. 30, 2009 |

Sen. Dick Durbin, on a local Chicago radio station this week, blurted out an obvious truth about Congress that, despite being blindingly obvious, is rarely spoken: "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place." The blunt acknowledgment that the same banks that caused the financial crisis "own" the U.S. Congress -- according to one of that institution's most powerful members -- demonstrates just how extreme this institutional corruption is.

The ownership of the federal government by banks and other large corporations is effectuated in literally countless ways, none more effective than the endless and increasingly sleazy overlap between government and corporate officials. Here is just one random item this week announcing a couple of standard personnel moves:

Former Barney Frank staffer now top Goldman Sachs lobbyist

Goldman Sachs' new top lobbyist was recently the top staffer to Rep. Barney Frank, D-Mass., on the House Financial Services Committee chaired by Frank. Michael Paese, a registered lobbyist for the Securities Industries and Financial Markets Association since he left Frank's committee in September, will join Goldman as director of government affairs, a role held last year by former Tom Daschle intimate, Mark Patterson, now the chief of staff at the Treasury Department. This is not Paese's first swing through the Wall Street-Congress revolving door: he previously worked at JP Morgan and Mercantile Bankshares, and in between served as senior minority counsel at the Financial Services Committee.

So: Paese went from Chairman Frank's office to be the top lobbyist at Goldman, and shortly before that, Goldman dispatched Paese's predecessor, close Tom Daschle associate Mark Patterson, to be Chief of Staff to Treasury Secretary Tim Geithner, himself a protege of former Goldman CEO Robert Rubin and a virtually wholly owned subsidiary of the banking industry. That's all part of what Desmond Lachman -- American Enterprise Institute fellow, former chief emerging market strategist at Salomon Smith Barney and top IMF official (no socialist he) -- recently described as "Goldman Sachs's seeming lock on high-level U.S. Treasury jobs."

Meanwhile, the above-linked Huffington Post article which reported on Durbin's comments also notes Sen. Evan Bayh's previously-reported central role on behalf of the bankers in blocking legislation, hated by the banking industry, to allow bankruptcy judges to alter the terms of mortgages so that families can stay in their homes. Bayh is up for re-election in 2010, and here -- according to the indispensable Open Secrets site -- is Bayh's top donor:

Goldman is also the top donor to Bayh over the course of his Congressional career, during which Bayh has received more than $4 million from the finance, insurance and real estate sectors:

In a totally unrelated coincidence -- after the Government, as Matt Taibbi put it, enacted "a bailout program that has now figured three ways to funnel money to Goldman, Sachs"-- this is what happened earlier this month:

Goldman reports $1.8 billion profit

Goldman Sachs reported a much stronger-than-expected first-quarter profit Monday, bouncing back from its worst quarter as a public company. . . .

In reporting its results a day earlier than expected, New York-based Goldman said it earned $1.81 billion, or $3.39 a share, for the quarter ended March 31. Analysts surveyed by Thomson Financial were looking for a profit of $1.64 a share.

Goldman shares, which have surged more than 70% during the past month, continued rising late Monday, gaining about 4.7% for the day.

Nobody even tries to hide this any longer. The only way they could make it more blatant is if they hung a huge Goldman Sachs logo on the Capitol dome and then branded it onto the foreheads of leading members of Congress and executive branch officials.

Of course, ownership of the government is not confined to Goldman or even to bankers generally; legislation in virtually every area is written by the lobbyists dispatched by the corporations that demand it, and its passage then ensured by "representatives" whose pockets are stuffed with money from those same corporations. Just as one example, as Jane Hamsher reported about Bayh:

Bayh's little "lobbyist problem" is considered by many to be what tanked his Vice Presidential aspirations. His wife Susan earns about $837,000 a year serving on seven corporate boards, among them Wellpoint, a health insurance company for which Bayh helped secure a $24.7 million dollar grant. She's on the board of ETrade, even as Bayh is on the Senate Finance Committee.

Bayh wants people to believe he's a "moderate" who sits in the "center."

Center of K Street, maybe.

Meanwhile, the only citizen protests relating to this mass robbery are driven by anger at the government for treating bankers too harshly and unfairly -- one of the most classic manifestations of what Taibbi, in a separate piece, so aptly calls the "peasant mentality":

After all, the reason the winger crowd can’t find a way to be coherently angry right now is because this country has no healthy avenues for genuine populist outrage. It never has. The setup always goes the other way: when the excesses of business interests and their political proteges in Washington leave the regular guy broke and screwed, the response is always for the lower and middle classes to split down the middle and find reasons to get pissed off not at their greedy bosses but at each other. That’s why even people like [Glenn] Beck’s audience, who I’d wager are mostly lower-income people, can’t imagine themselves protesting against the Wall Street barons who in actuality are the ones who fucked them over. . . .

Actual rich people can’t ever be the target. It’s a classic peasant mentality: going into fits of groveling and bowing whenever the master’s carriage rides by, then fuming against the Turks in Crimea or the Jews in the Pale or whoever after spending fifteen hard hours in the fields. You know you’re a peasant when you worship the very people who are right now, this minute, conning you and taking your shit. Whatever the master does, you’re on board. When you get frisky, he sticks a big cross in the middle of your village, and you spend the rest of your life praying to it with big googly eyes. Or he puts out newspapers full of innuendo about this or that faraway group and you immediately salute and rush off to join the hate squad. A good peasant is loyal, simpleminded, and full of misdirected anger. And that’s what we’ve got now, a lot of misdirected anger searching around for a non-target to mis-punish . . . can’t be mad at AIG, can’t be mad at Citi or Goldman Sachs. The real villains have to be the anti-AIG protesters! After all, those people earned those bonuses! If ever there was a textbook case of peasant thinking, it’s struggling middle-class Americans burned up in defense of taxpayer-funded bonuses to millionaires. It’s really weird stuff.

One might think it would be a big news story for the second most-powerful member of the U.S. Senate to baldly state that the Congress is "owned" by the bankers who spawned the financial crisis and continue to dictate the government's actions. But it won't be. The leading members of the media work for the very corporations that benefit most from this process. Establishment journalists are integral and well-rewarded members of the same system and thus cannot and will not see it as inherently corrupt (instead, as Newsweek's Evan Thomas said, their role, as "members of the ruling class," is to "prop up the existing order," "protect traditional institutions" and "safeguard the status quo").

That Congress is fully owned and controlled by a tiny sliver of narrow, oligarchical, deeply corrupted interests is simultaneously so obvious yet so demonized (only Unserious Shrill Fringe radicals, such as the IMF's former chief economist, use that sort of language) that even Durbin's explicit admission will be largely ignored. Even that extreme of a confession (Durbin elaborated on it with Ed Schultz last night) hardly causes a ripple.

* * * * * *

Here's Jane Hamsher, with Rachel Maddow, in February, assessing the motives of people like Evan Bayh and analyzing who owns and controls them (begins at the 3:00 minute mark):

-- Glenn Greenwald"

Investment bankers had become the most powerful political lobby in the country

TO BE NOTED: From the FT:

"Labour’s affair with bankers is to blame for this sorry state

Published: April 24 2009 20:24 | Last updated: April 24 2009 20:24

In Wednesday’s Budget statement, Alistair Darling acknowledged that even on his optimistic assumptions a decade was needed to repair Britain’s public finances. The UK government’s reputation for economic competence was already in tatters; the chancellor of the exchequer has now laid it definitively to rest. How did the New Labour project end in such disaster?

The answers lie not in unpredictable global events but closer to home. The government failed to deal effectively with the reform of public services and conducted an indecent love affair with the financial services industry. These two apparently unrelated errors, allied with hubris, proved to be a fatal combination.

When Labour came to power in 1997, dissatisfaction with public services such as health, education and transport was widespread, and justified. For two decades not enough money had been spent, particularly on capital projects. This underspending had contributed to weak and demoralised management, reservations about which led to a fear that simply allocating more cash would provide poor value for money.

There were two possible directions of reform. One – it might be described as Blairite – decentralised management authority and financial responsibility. The other – it might be described as Brownian – tightened centralised control and imposed performance targets on managers, with associated sticks and carrots. Both approaches were pursued, inconsistently, but overall with more Brown than Blair. When, by 2000, there was little to show in the way of beneficial results, the decision was made to spend lots more anyway. There were some service improvements, but the concern that the extra money would not be well spent proved largely justified.

The reasons targets do not work are evident from any study of the failure of planned economies. You can require people to meet goals, but that is not at all the same as encouraging them to meet the objectives behind the goals. By emphasising targets you undermine both their motivation and their ability to achieve these more fundamental underlying goals. In a delicious irony, a major victim of this process would be the Treasury itself. Here is how it happened.

The government’s principal fiscal target was to balance current expenditures with revenues over an economic cycle. This makes sense as a generalised objective: but not as a binding constraint. The financial services sector boomed from 1998 to 2000 and the government benefited from a surge of revenues. The tide then receded. But by mechanically averaging spending and receipts over the cycle, earlier revenues could be used to offset the later splurge in spending. When this resource started to run out, the Treasury redefined the economic cycle to claim compliance with the target.

This is where the two stories become linked. We now know that many of the banking profits of that period were illusory. But they generated substantial revenues from corporation tax and income tax on bonuses. The real funding gap was wider even than it appeared.

But the illusion was at its most influential at the highest levels of government. Investment bankers had become the most powerful political lobby in the country and there was no vestige of political support for action to restrain City excess. Light touch regulation was not just a matter of policy but a matter of pride.

What would have happened if the Financial Services Authority or Bank of England had sought to block the competing bids from RBS and Barclays for ABN Amro – a contest which, we now know, would bankrupt the bank that won the race? The phones in Downing Street would have been ringing insistently and it is easy to imagine the government’s response.

Little has changed. The government continues to see financial services through the eyes of the financial services industry, for which the priority is to restore business as usual. For a time in 2008, it seemed possible to argue that a package of temporary support for the banking industry, combined with substantial recapitalisation of the weaker players, might stabilise the financial sector and prevent serious knock-on effects.

But the problems of banks are much deeper than were then acknowledged and the destabilisation of the real economy has happened anyway. Government now provides taxpayers’ money to financial services businesses in previously unimaginable quantities. But there is no control over the use of the money, no insistence on structural reform or management reorganisation, no safeguarding of the essential economic functions of the financial services industry and no accountability for the damage that has been done.

It is as though the teenage children and their friends were to wreck the house and then demand that the grown-ups clean up before the next party. Their parents are too intimidated to do anything more than ask Uncle Adair to keep an eye on them and excoriate the hapless Fred who made off with some of the silver.

On Wednesday, Mr Darling gave the impression of an honest man who would have much preferred to have been somewhere else, as befits someone caught in a trap not of his own devising. We need a comprehensive reappraisal of both the fiscal framework and the economic and political role of the financial services sector. The crippling consequence of inability to admit error is the impossibility of learning from past mistakes.

johnkay@johnkay.com"

unreasonable for banks to try and get out of TARP free of charge

TO BE NOTED: From the WSJ Via The Epicurean Dealmaker Via Clusterstock:

"Financial Firms Lobby to Cut Cost of TARP Exit

By DAMIAN PALETTA and DEBORAH SOLOMON

WASHINGTON -- The banking industry is aggressively lobbying the Treasury Department to make it less costly for financial institutions to get out of the Troubled Asset Relief Program.

The move could prove controversial for the banking industry, which is busy deflecting criticism about higher fees it is charging consumers for credit cards and other products and services.

At issue are "warrants" the government received when it bought preferred stock in roughly 500 banks over the past six months as part of TARP. The warrants allow the government to buy common stock in the banks at a later date so taxpayers can receive more of a return on their investment when the banking industry recovers.

More

• Lenders Set to Get Stress-Test Results
• TARP Still Falls Short on Key Issues
• Economists Seek Breakup of Big Banks
• Heard: Geithner Faces Payback Time
• Vote: Should U.S. let banks pay less to exit TARP?

Many banks want to return their TARP money and, as part of that effort, want to expunge the warrants. To do that, banks must either buy them back from the government or allow the Treasury to sell them to private investors.

Today, most of the warrants are essentially worthless, because their exercise price is higher than where most banks' stocks are trading. But the government believes the warrants still have value, since they give the Treasury the right to buy common stock at a set price for 10 years.

Bankers say it is unfair to charge what amounts to a "prepayment penalty," which makes it additionally onerous to escape TARP. Bank representatives say the cost of buying back the warrants could be equivalent to paying 60% annual interest on short-term loans. That, they argue, would exacerbate banks' existing problems.

"It is a reduction in capital, and I think it defeats the original purpose of the program," said Bob Jones, chief executive of Old National Bancorp, which has already paid back the government's $100 million investment in the company.

The Evansville, Ind., firm plans to buy back the warrants if it can agree on a price with the Treasury.

To buy back warrants, banks must provide the government with a third-party valuation assessing their worth. If the government disagrees, the bank and the Treasury enter into a negotiation. If they can't agree, the Treasury must try to sell the warrants to private investors.

Bank representatives argue they should be allowed to escape their contractual obligation to buy back the warrants because the TARP itself has also changed, including the addition of compensation rules.

"It's fundamentally wrong and unfair for a contract to be changed that much," said Douglas Leech, chairman and CEO of closely held Centra Bank in West Virginia, which recently repaid a $15 million investment and had to pay an additional $750,000 to extinguish warrants associated with the transaction.

Many more banks have expressed interest in repaying the government aid, including Goldman Sachs Group Inc. and J.P. Morgan Chase & Co.

It is unclear how sympathetic Congress or the Treasury is to the industry's call. The American Bankers Association sent the Treasury a letter last week asking for the ability for banks to be able to withdraw from the program without having to pay "an onerous exit fee."

At a congressional hearing Tuesday, Treasury Secretary Timothy Geithner said he supports the idea of allowing some banks to repay the TARP money because it "helps differentiate, it helps show progress."

Barbara Roper, director of investor protection at the Consumer Federation of America, a consumer group, said it is unreasonable for banks to try and get out of TARP free of charge.

"I don't think they're in a very good position to tell us what they should and shouldn't have to do as conditions to get back the money that hard-pressed consumers are paying to bail them out," she said.

Government officials say they aren't trying to be unreasonable with banks, but that the U.S. wants to make sure it is getting fair value for the warrants.

Write to Damian Paletta at damian.paletta@wsj.com and Deborah Solomon at deborah.solomon@wsj.com"

undermine the value of the collateral by allowing cram-downs, you make the loans riskier and banks will price that risk accordingly by rates going up

TO BE NOTED: From the NY Times:

"Banks Sway Bills to Aid Consumers

By STEPHEN LABATON and ERIC DASH

WASHINGTON — They may be held in low esteem around the nation, but the country’s largest banks still wield considerable influence in Washington.

The banks have made it difficult for Congressional Democrats and the White House to give stretched homeowners a stronger hand in negotiating lower monthly payments on mortgages and to prevent credit card companies from imposing higher fees and interest rates.

Having won some early skirmishes by teaming with Republican allies, the banks now appear to have the upper hand and may wind up killing — or at least substantially diluting — both pro-consumer measures.

To turn the tide, Democrats are calling in their big gun — President Obama — to pressure the executives at the largest credit card lenders. In coming weeks, officials say, the administration intends to make a major push on consumer finance issues, possibly including tough new lending standards for homeowners seeking mortgages.

Mr. Obama is set to meet at the White House on Thursday with executives from American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services, JPMorgan Chase and others to discuss what officials say are abusive credit card fees and practices.

During the presidential campaign, Mr. Obama made an issue of what he considered excessive credit card fees, but he has been largely silent on the matter since his arrival in Washington. As a candidate, he also favored legislation to make it easier for troubled homeowners to use bankruptcy court to ease the terms of their mortgages, a proposal he again endorsed last month.

Despite the president’s support and strong Democratic majorities in Congress, both proposals are in jeopardy because of lobbying by banks and their trade groups, particularly in the Senate.

On Wednesday, the House Financial Services Committee is expected to approve credit card legislation proposed by senior Democrats that would reduce many of the fees and limit the ability of the companies to charge penalties. The legislation puts into law most of the credit card restrictions adopted last year by the Federal Reserve, although the industry strongly opposes the bill because it says it believes a law would be harder to overturn than a regulation.

But the bill, sponsored by Representative Barney Frank, the Massachusetts Democrat who heads the Financial Services Committee, and Representative Carolyn B. Maloney, a New York Democrat, faces an uncertain future in the Senate. A tougher counterpart to the House bill was adopted on a narrow, party-line vote in the Senate banking committee three weeks ago. It has yet to find any Republican support, which would be necessary for it to survive.

The banking industry has also succeeded in working closely with Republicans to water down and then block a measure that would give bankruptcy judges greater authority to modify mortgages, including reducing principal payments. Senate Republican leaders say they have the support of all 41 of their members — enough to kill the provision by making it impossible to get the 60 votes necessary to cut off debate.

Senate Democrats, hoping to resolve the impasse, have opened negotiations in recent days, but not with their Republican counterparts. Instead, in an effort to divide the industry, the Democrats, led by Richard J. Durbin of Illinois, Charles E. Schumer of New York and Christopher J. Dodd of Connecticut, have been in talks with Bank of America, JPMorgan Chase and Wells Fargo, along with a group of credit unions. The lawmakers’ hope is that those institutions would exert pressure on Republican lawmakers and reluctant Democratic moderates.

Even if those negotiations are successful, the Democratic lawmakers are still likely to water down the bankruptcy bill further in the industry’s favor.

Before the negotiations, Citigroup had been the only major bank to support the bankruptcy measure, often referred to as “cram-down” legislation because it would give judges the authority to dictate terms to lenders and investors who own mortgages bundled into securities.

“The cram-down provision, if it became law, would raise the costs of all mortgages for everyone,” said Edward L. Yingling, president and chief executive of the American Bankers Association. “It’s a fact that if you undermine the value of the collateral by allowing cram-downs, you make the loans riskier and banks will price that risk accordingly by rates going up.”

Supporters of the bankruptcy measure had been planning to tie it to another banking bill that the industry favors.

That legislation would make permanent the temporary increase in deposits guaranteed by the Federal Deposit Insurance Corporation, to $250,000 from $100,000. It would also increase the F.D.I.C.’s credit line with the federal government to $100 billion, from $30 billion, thus enabling regulators to reduce a proposed special premium the banks will owe the F.D.I.C. later this year by more than 50 percent — a $7.7 billion savings.

But as the opposition to the cram-down provision has firmed in recent days, senators say there is a growing recognition that the bankruptcy measure might have to be detached and voted on separately. Democratic lawmakers have already agreed to the industry’s demand that the bankruptcy provision be unavailable to homeowners if a lender offers to modify a mortgage through the Treasury Department’s new foreclosure mitigation program. And over the objections of Ms. Maloney, a House subcommittee handed the industry a significant victory when it delayed the effective date by a year. Ms. Maloney said that she expected the measure to move swiftly though the House, but that it faced an uncertain future in the Senate unless it got some Republican votes.

“We need bipartisan support in the Senate,” she said. “We got 84 Republicans in the House on the same bill last year.”

Republican supporters of the industry have been helped in part by the decision by some Democratic campaign committees, fearful of voter reaction, to reject contributions from banks that have received bailout money.

Some prominent Democrats, including Nancy Pelosi, the House speaker, also are refusing donations from bank political action committees. Mr. Frank will not take money from employees of banks that received bailout funds.

Republicans “are never going to beat the Democrats in the fund-raising game in D.C. as long as they are the minority,” said Sam Geduldig, a lobbyist for several banking trade associations at Clark Lytle & Geduldig. “To the extent the Republicans can show they can impact policy, it causes professional donors and lobbyists to look at them in a different light, as opposed to when they just got bludgeoned” in the last election."

recipients of the bankers’ largesse wrote the legislation that regulates them, and most recently, the legislation that bailed them out

TO BE NOTED: From Forbes:

"Helping Hands
Wall Street's Favorite Senators
Joshua Zumbrun, 04.14.09, 12:10 PM ETWashington, D.C. -

Washington, D.C. -- In the heyday of high finance, long before bailouts and TARP, bankers were not just buying yachts and mansions, they were donating lavishly to their senators too.

Who got the most? No surpirse, Senators who sit on the committees that write legislation for the banks. The recipients of the bankers’ largesse wrote the legislation that regulates them, and most recently, the legislation that bailed them out.

At the center of the banking industry in Washington is the Senate’s Banking, Housing and Urban Affairs Committee. And which politicians raise the largest share of their campaign money from the financial industry? None other than Sen. Chris Dodd, D-Conn., the chairman of the committee, and Sen. Richard Shelby, R-Ala., the committee’s ranking Republican.

In Pictures: Wall Street's Favorite Senators

In the last six years, both Dodd and Shelby collected over one-third of their political contributions from the industry, a larger share than any other senators, according to the Center for Responsive Politics, which compiles public data from the Federal Election Commission.

To find the senators most dependent on the bailed out sectors of the economy, Forbes.com ranked senators by the share of their campaign contributions that came from the finance, insurance and real estate industries between 2003 to 2008, covering everyone in the Senate’s most recent election.

We used the share of contributions from finance, insurance and real estate, rather than the total, because politicians from large states must raise more overall, and as the size of overall fundraising grows, so does the share from finance.

In fact, the largest total beneficiaries of the finance industry were, unsurprisingly, Barack Obama, John McCain and Hillary Clinton. In the course of running two-year-long massive national campaigns, the presidential candidates collected tens of millions from the financial industry. But if that money disappeared, they’d still have had hundreds of millions left over from everyone else.

Business as usual in Washington? No doubt. But Simon Johnson, a former Chief Economist for the International Monetary Fund and senior fellow at the Peterson Institute says the political influence of bankers is a serious concern. In fact, he says, it’s the sort of thing you might see in an emerging market suffering through a banking crisis.

“The financial sector boom that happened in the United States and in other countries had this characteristic very much like an emerging market boom,” said Johnson in a presentation at the Peterson Institute on Tuesday, “At first it makes sense, at first you have some efficiency gains, you’re generating sensible profits. Then the sector gets more politically powerful, it’s able to take control of its own regulatory destiny ... and it does that in a way that feeds into further concentration of political power.”

Bankers, it would seem, are not particularly partisan. The 10 that depend the most on the financial industry for their political contributions roughly mirror the breakdown of the senate (which consists of 56 Democrats, two independent senators who vote with the Democrats, 41 Republicans and one empty seat): Five are Democrats, four are Republicans, and one is Joe Lieberman, I-Conn., who caucuses with the Democrats.

Nine sit on either the Senate Banking or Senate Finance committee, where they’re responsible for much of the legislation that governs the industry. Though some of these contributions come from Political Action Committees, the bulk of the contributions come from employees of the companies, not directly from the companies themselves.

“The banks are the heart of the matter, and it’s the political power of the banks that presents the most substantial problem to this administration in terms of moving forward with sensible policies,” says Johnson.

In Pictures: Wall Street's Favorite Senators"

The proposed restrictions on these so-called short sales follow a lobbying campaign by financial institutions

TO BE NOTED: From the NY Times:

"Some Revile Plan to Limit Short-Selling

By STEPHEN LABATON

WASHINGTON — Responding to the depressed financial markets, regulators for the second time in less than a week are preparing to take steps that could have the effect of temporarily shoring up stock prices. But in the process, some critics say, the measures could undermine the integrity of the markets.

On Wednesday, the Securities and Exchange Commission plans to announce several proposals to permanently restrict traders from making bets that stock prices will decline when those prices are already dropping.

The proposed restrictions on these so-called short sales follow a lobbying campaign by financial institutions and other companies, which have experienced sharp declines in their stock prices, and their allies in Congress.

Short-selling is the practice of borrowing stock and selling it in the hope that its price declines. If it does drop, then the seller profits by buying it back at the lower price and returning the borrowed shares.

Some companies and Wall Street executives have blamed short-selling for needlessly accelerating declines in stock prices and contributing to the demise of companies like Bear Stearns and Lehman Brothers.

Other market players disagree. They say short-sellers are the market’s whistle-blowers, and their stock trades and skeptical analyses of corporate balance sheets are essential to the efficient functioning of the markets. Many large investors also use short-selling techniques as a hedge to protect them against losses in declining markets.

Officials were working through the weekend to draft several possible rule changes, including a tougher variation of a former rule that prohibited short sales while a stock price was declining. That rule, known as the uptick rule, was put in place in 1938 in response to the market turbulence of the Great Depression. It was repealed two years ago. The uptick rule was more restrictive for short-sellers trading stocks listed on the New York Stock Exchange than those trading on Nasdaq. But one of the new proposals could change that and make it more onerous for short-sellers on all exchanges.

The S.E.C. also plans to announce that it is considering a proposal by the major exchanges that would impose restrictions on short-selling only after a stock suffers a daily drop by a specified percentage.

Last year the commission imposed a series of temporary and hastily drafted restraints on short-sales after heavy pressure from Wall Street and the Treasury secretary at the time, Henry M. Paulson Jr.

The move this week follows the decision last Thursday by the Financial Accounting Standards Board to give banks greater discretion in putting a value on their sharply declining mortgage securities.

The standards board initially resisted making changes to the so-called mark-to-market rules, but quickly relented after its chairman, Robert H. Herz, came under withering attack by lawmakers.

The slumping financial markets have been rebounding steadily in the last month for many reasons, including the regulatory and legislative decisions in Washington. The Dow Jones industrial average closed on Friday above 8,000, a major gain from the 6,500 level of four weeks ago.

Examining short-selling practices has been a high priority for the S.E.C.’s new chairwoman, Mary L. Schapiro. She said in a recent interview that even before she arrived at the commission, she had heard from thousands of investors and others that the elimination of earlier restrictions had led to greater market volatility.

“This is a tough issue and that’s why we’re going to be very deliberative,“ she said last Friday. “You won’t see emergency orders or midnight proclamations. We want to go through the regular rule-making process and understand whether there is a nexus between removing” the earlier restrictions and undermining investor confidence.

There has also been growing political pressure for the commission to act.

A bipartisan group of six senators, led by Senator Edward E. Kaufman, Democrat of Delaware, has demanded tighter restrictions over short-sellers. Mr. Kaufman, who took the seat of Vice President Joseph R. Biden Jr., made short-selling restrictions the first piece of legislation he introduced.

But supporters of unfettered short-sale trading have said that the practice is a convenient scapegoat and that new restrictions are simply punishing traders who have legitimate reasons for believing that some companies have had overvalued stock prices.

They have also said that the changes in the accounting rules and the proposals to restrict short-sellers threaten to undermine the independence of the regulators and show their willingness to buckle under heavy political pressure.

“It’s unsettling that Washington continues to focus its efforts on issues that have nothing to do with causing the crisis such as short-selling or stricter and more transparent accounting measures,” said James Chanos, president and founder of Kynikos Associates, a hedge fund company that specializes in short-selling. “If anything, both practices should be encouraged.”

Officials said that one of the proposals to be announced on Wednesday would be based on the best bid price of a share of stock and the other on the last price. The different approaches reflect the differences between the Nasdaq trading rules, a dealer’s market where stocks are traded electronically at ranges set by hundreds of market makers, and the New York Stock Exchange, a modified auction market, where the price is set centrally.

The purpose of the old rule was to prevent short-sellers from accelerating a declining market. Under that rule, short-sellers had to execute their initial trade at or above the last trade, as long as that trade was higher than the previous transaction, for companies listed on the New York Exchange.

But for Nasdaq companies, short-sellers could sell at any price so long as the trade was executed after the “best bid” price of the share had been raised from the previous best bid. As a result, the uptick rule had a far more limited effect for short-sellers interested in trading the stock of Nasdaq-listed companies.

In recent days, the commission has received comments about the plans to curtail short-selling. In an about-face, the operator of the New York Stock Exchange, NYSE Euronext, joined by several other large and small exchange operators, asked the commission to reinstate a version of the old uptick rule. The exchange said it was necessary to curtail abusive short-selling that had harmed investors and listed companies.

But in proposing to repeal the old rules two years ago, the New York exchange wrote that “short-sale price restrictions have become not only unnecessary, but also their continued maintenance will serve only to interfere with the mechanisms of an efficient market.”

Larry Leibowitz, an executive vice president at the N.Y.S.E., said the exchange’s new view was the result of its experience over the last year.

“We have seen conditions that we never saw before,” Mr. Leibowitz said. But opponents of the restrictions said that the temporary rules from last year might have briefly halted some stock declines, but that they were counterproductive.

“When you have these sorts of restrictions you may have a little spark in the market,” said Eric W. Hess, general counsel of Direct Edge, which claims to be the third-largest stock market in the United States. “But that perception quickly evaporates.”