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Kaufman
Connection - Highlights of Ted's work for Delaware

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If we are still making any progress at all [on banking reform], it is
because of the noble efforts of a small number of United States
senators.
Most notable has been the work of Senator Ted
Kaufman

--

Simon Johnson, MIT professor, former chief economist at the
International Monetary Fund and author of *13 Bankers*


*Project
Syndicate [link 1]

A Man against the Machine

By Simon Johnson

May 17,
2010*

WASHINGTON, DC Americas financial sector has shown
renewed strength in recent months political strength, that is by
undermining most of the sensible proposals for banking reform that remain on
the table. If we are still making any progress at all, it is because
of the noble efforts of a small number of United States senators.


Most notable has been the work of Senator Ted Kaufman, a Democrat
from Delaware (yes, a pro-business state), who has pressed tirelessly
to fix the most egregious problems in the US financial sector.
Kaufman understands that successful reform requires three ingredients:
arguments that persuade, the ability to bring colleagues along, and a good
deal of luck in the form of events that highlight problems at just the
right time. On two fronts, Kaufman has against long odds actually
managed to make substantial steps.


Long before it became
fashionable, Kaufman persisted with the idea that the US real estate boom
was fueled in part by pervasive fraud within the
mortgage-securitization-derivatives complex, effectively at the heart of Wall Street. This
thesis is now gaining much broader traction major newspapers now
report a broadening criminal probe by the federal government and by
New Yorks state attorney general into the US financial sectors
residential lending and related securities practices.


With
Senators Patrick Leahy and Chuck Grassley, Kaufman worked last year to pass a
bill providing timely resources to federal law enforcement agencies
working on recent financial fraud. More recently, Kaufman was
devastating in his cross-examination of Goldman Sachs executives. Senator Carl
Levin, chairman of the subcommittee that heard their testimony,
evidently seeing eye to eye with Kaufman, was just as tough after a
year-long investigation of Washington Mutual, Goldman, and the abject failures
of bank regulators and credit rating agencies.


Kaufman
scored an even bigger coup with his warnings about the dangers of the
explosive growth of high-frequency trading, which is little understood by
Americas main financial watchdog, the Securities and Exchange
Commission (SEC), and poses systemic market risk. His concerns appear to have
been vindicated by the 20-minute shutdown of trading in New York on
May 6, when the stock market completely failed in its most basic
function: price discovery between buyers and sellers.


We do not yet
know what combination of black-box computer programs and electronic
trading algorithms, interacting across more than 50 market centers,
caused this catastrophe. But our lack of knowledge itself confirms how far
our regulatory and surveillance capabilities have fallen behind
financial innovation.


Kaufmans approach with speeches on the
Senate floor as a central feature seemed irrelevant or even quaint
to critics even a few weeks ago. No significant Wall Street voices
acknowledged his concerns preferring instead to praise the equity
markets as a shining example of well-functioning technology.


Now
people get it. As Senator Mark Warner graciously acknowledged, The
Senator from Delaware sounded an early warning signal that the massive
amounts of investments that had been made by certain firms to try to get
what appears to be a fractional millisecond advantage in the trading
process might come back and haunt us all... Ive been proud to follow
his lead.


The SEC was once a great and powerful independent
agency. It fell on hard times in recent decades and is only beginning
to get its act together under new leadership. Yet it still does not
routinely collect the data that it needs trades by time and customer
to understand the actions and impact of large traders. Kaufman has
consistently pressed them to do more and do it much faster; to be sure,
they and many others are now listening.


On a third issue,
the results so far are mixed. Kaufman championed the case for making
Americas biggest banks smaller, as part of comprehensive
financial-reform efforts. His advocacy helped build support and forced a Senate floor
vote on an amendment, co-sponsored with Senator Sherrod Brown, that
would have imposed a hard cap on banks size and leverage (debt
relative to assets).


The amendment was moderate and entirely
reasonable, yet it went down to defeat, 33-61, also on May 6. It might have
gained more support just a few days later after senators witnessed
the bailout of the giant eurozone banks. Still, it has strengthened
backing for another amendment, sponsored by Senators Jeff Merkley and Carl
Levin, which would restrict proprietary trading by megabanks for
their own account coincidentally a practice that is presumed to be a
large and dark part of high-speed trading.


The deeper and
overriding point of Kaufmans critique of our system is the need for tough
laws. We cannot merely rely on regulators to do the right thing. In
particular, regulators have no chance to look over the horizon and act
preventively when markets are opaque, and when powerful Wall Street
interests (and their Capitol Hill allies) can circle the wagons and
claim that there is no problem.


Unfortunately, despite his
newfound prominence on the national stage, Kaufman will be out of office at
the end of this year he was appointed to fill Vice President Joe
Bidens seat at the end of 2008 and committed at that time not to run
for re-election.


When he goes, dangerous elements on Wall
Street will no doubt breathe a sigh of relief. Lets hope that by then he
will have helped move the consensus permanently among his colleagues
preparing the ground for further congressional action aimed at a
serious tightening of safeguards over the financial sector.


Kaufmans lasting legacy will be a simple and powerful idea that reasonable
people increasingly find to be self-evident: relying on deregulation
and self-interest in todays complex, opaque markets will manifestly
fail to produce a reasonable allocation of capital or support
entrepreneurship and growth. We must write and enforce laws that restore
credibility to our financial markets.


----------------------
footnotes
----------------------
[link 1]
http://www.project-syndicate.org/commentary/johnson8/English


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