3 posts tagged “political oversight”
A simple three page document, urgently requested by the Secretary of the Treasury to stem the imminent destruction of the United States financial system, turns into a four hundred and fifty one page tome. The remit of the action required is expanded to include such diverse measures as exemption for duty on arrows designed for children. In seeking to serve their constituents’ interests the political process has been shown up for all that is lacking in America today.
This was an appalling view of the politicians at work. Under the cover of ‘democracy’ and ‘oversight’ they inserted elements that would dilute the aim and the meaning of this provision. Make no mistake, the bailout was still authorized and went through. The politicians’ addenda made a mockery of legislative process, their agreement to the plan in the end made a mockery of their protestations, and the pork provisions at the end made a mockery of seeking resolution of matters in the name of the common good or the commonwealth. This affair just reveals why it is so hard to get straight talk and straight actions from Washington lawmakers.
Yesterday evening saw a substantive and comprehensive debate. The emphasis was international affairs but the beginning was abruptly changed to include some coverage of the financial crisis engulfing the country. This was a subject that both were happy to give general and non-specific answers to – not wanting to touch such a live issue they dug deep on their respective record on retrenchments in public spending.
This debate, the subject of which was foreign affairs, was always considered McCain happy hunting ground. And he sure commanded the territory, he barrickaded Obama with history lessons, his own longevity in public office, his military expertise, and the names of obscure dictators the world over. As a learned professor teaching his student who has not done the set reading he explained Ronald Reagan’s response to the Soviet Union as well as critiquing the sainted President’s Lebanon policy.
Under such a comprehensive bombardment Obama held up well. He agreed with McCain just enough, drew clear water between their policies just enough and looked professional enough. The foreign policy of the United States, which is so important to outsiders and even an increasing number of US after 9/11, is not going to be the basis on which this election is won. Maybe foreign policy is a sine qua non of being a President, but it is not the ultimate test.
The gyrations of Wall Street are far from finished. The Federal Reserve’s insertion into the ownership structure of AIG was as much a measure to avert international market meltdown as well as a hard-nosed business deal. The Fed effectively took control of 79.9% of the company for a loan facility of 85 billion dollars. This is very different from the Bear Stearns deal that may well cost the Fed a great deal (the bank’s losses being socialized) but the Fed does not gain from any bounce back in the value of that institution (the profits being privatized).
The AIG deal results in a senior loan on the balance sheet of the company: And the cost is considerable. AIG is being charged 850 basis points on top of the three month LIBOR rate. This is a substantial amount of interest. This will be an incredible burden on the company but it is also a reflection of the fact that its underlying assets are valuable and that it simply needs the liquidity to meet its obligations while it sells these off. This was a deal that was struck at ‘one minute to midnight’ so the Fed could have dictated any terms that it had wanted.
All eyes now will be on how quickly the company can be either unwound from its global positions, recover the value of its once enormous balance sheet, liquidated or extricated from the grasp of the Fed. The truth is that no one knows which way this will go. Recovery will restore faith in the markets, failure will erode confidence in the markets. Ultimately this crisis will affect not only the primary landscape of the financial services space but also the secondary regulatory environment that politicians impose on the markets. Calls by politicians for more ‘security’ or ‘certainty’ in the market cannot be regulated for but must be continuously priced by the market on a risk adjusted basis.
The new economic landscape will take time to emerge. Investment banks seem to have had their day. They can no longer withstanding the volatility that the market can create. More regulation seems inevitable as politicians will need to be seen to be doing more ‘policing’ of the markets. But care must be made to appreciate that (although somewhat counterintuitive) it is volatility that, in the long run, creates the platform for the most stability in our socio-economic environment.
