The Argument Against a Government Resolution Authority

Argues against the proposal to authorize government agencies to resolve failed or failing "systemically important" nonbank financial institutions as a way to avoid systemic breakdowns. Compares scenarios for government resolution authority and bankruptcy

Emerging competition and risk-taking incentives at Fannie Mae and Freddie Mac

This paper examines two major forces that may soon increase competition in the U.S. secondary conforming mortgage market: (1) the expansion of Federal Home Loan Bank mortgage purchase programs and (2) the adoption of revised risk-based capital requirements for large U.S. banks (Basel II). The authors argue that this competition is likely to reduce the growth and relative importance of Fannie Mae and Freddie Mac and hence their franchise values and effective capital. Such developments could, in turn, lead to more risky behaviors by these two GSEs. It is this last consequence that warrants greater regulatory awareness.

The Financial Crisis Inquiry Commission and the Politics of Governmental Investigations

In May 2009, Congress passed the Fraud Enforcement and Recovery Act which created the Financial Crisis Inquiry Commission, an independent, bipartisan panel tasked to examine the causes of the current financial and economic crisis in the United States. Franklin Roosevelt never created an independent commission to investigate Wall Street, but the Pecora hearings, the eponymous investigation of Wall Street wrongdoing run by a former New York prosecutor, captivated the country. For sixteen months in the worst depths of the Great Depression, Ferdinand Pecora paraded a series of elite financiers before the Senate Banking and Currency Committee. In one hearing after another, he chronicled how the leaders of Wall Street had manipulated stocks, dodged taxes, fleeced their shareholders, and collected enormous bonuses for peddling shoddy securities to unsuspecting American investors. Sensational headlines galvanized public opinion for reform and created the climate in which Congress was able to re-shape much of the modem structure of federal financial regulation. In the first hundred days of Roosevelt\u27s administration, Congress passed the Banking Act of 1933. Earlier, Congress had passed the Securities Act of 1933. A year later came the Securities Exchange Act of 1934. Now, more than a year after the FCIC released its final report, it is clear that the Commission did not live up to the legacy of its Depression-era predecessor. It was not until six months after the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted that the FCIC released its report on the causes of the financial crisis. This article compares the politics that underlay the FCIC investigation with those not only of the Pecora investigation but with those of what is generally perceived as a more successful independent commission—the National Commission on Terrorist Attacks upon the United States (the 9/11 Commission). When Congress created the FCIC it rejected proposals to conduct a congressional investigation more in line with the Pecora investigation and instead chose to model the FCIC explicitly on the 9/11 Commission. This paper highlights two reasons why the FCIC was not the Pecora investigation redux and why it failed to achieve the same consensus as the 9/11 Commission. The first explanation involves how the goals for these different investigations were defined. As explained in more detail in Section II, the Pecora investigation appears to have represented an innovative and novel application of congressional investigatory power. While the Pecora probe was ostensibly designed to investigate conditions in the securities markets in preparation for potential legislation, it differed from prior congressional efforts because its motivation was external to the legislature. The second reason why the FCIC hearings never looked like the Pecora hearings was because the former\u27s design and structure bore absolutely no resemblance to the latter. Rather than being an investigation by a standing congressional committee subject to the near dictatorial control of the committee\u27s chair, the FCIC was an independent, bipartisan commission that needed consensus to operate effectively. As explained in Section III, the FCIC was subject to the same limitations and political pressures that beset the 9/11 Commission\u27s investigation. Both commissions faced numerous obstacles to conducting vigorous investigations: the partisan selection of commissioners combined with broad commission mandates, woefully small budgets, short time frames for conducting their investigations, and weak subpoena powers. The 9/11 Commission\u27s chairman, former New Jersey Governor Thomas Kean, went so far as to argue that his commission was designed to fail

The Financial Crisis Inquiry Commission and the Politics of Governmental Investigations

In May 2009, Congress passed the Fraud Enforcement and Recovery Act which created the Financial Crisis Inquiry Commission, an independent, bipartisan panel tasked to examine the causes of the current financial and economic crisis in the United States. Franklin Roosevelt never created an independent commission to investigate Wall Street, but the Pecora hearings, the eponymous investigation of Wall Street wrongdoing run by a former New York prosecutor, captivated the country. For sixteen months in the worst depths of the Great Depression, Ferdinand Pecora paraded a series of elite financiers before the Senate Banking and Currency Committee. In one hearing after another, he chronicled how the leaders of Wall Street had manipulated stocks, dodged taxes, fleeced their shareholders, and collected enormous bonuses for peddling shoddy securities to unsuspecting American investors. Sensational headlines galvanized public opinion for reform and created the climate in which Congress was able to re-shape much of the modem structure of federal financial regulation. In the first hundred days of Roosevelt\u27s administration, Congress passed the Banking Act of 1933. Earlier, Congress had passed the Securities Act of 1933. A year later came the Securities Exchange Act of 1934. Now, more than a year after the FCIC released its final report, it is clear that the Commission did not live up to the legacy of its Depression-era predecessor. It was not until six months after the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted that the FCIC released its report on the causes of the financial crisis. This article compares the politics that underlay the FCIC investigation with those not only of the Pecora investigation but with those of what is generally perceived as a more successful independent commission—the National Commission on Terrorist Attacks upon the United States (the 9/11 Commission). When Congress created the FCIC it rejected proposals to conduct a congressional investigation more in line with the Pecora investigation and instead chose to model the FCIC explicitly on the 9/11 Commission. This paper highlights two reasons why the FCIC was not the Pecora investigation redux and why it failed to achieve the same consensus as the 9/11 Commission. The first explanation involves how the goals for these different investigations were defined. As explained in more detail in Section II, the Pecora investigation appears to have represented an innovative and novel application of congressional investigatory power. While the Pecora probe was ostensibly designed to investigate conditions in the securities markets in preparation for potential legislation, it differed from prior congressional efforts because its motivation was external to the legislature. The second reason why the FCIC hearings never looked like the Pecora hearings was because the former\u27s design and structure bore absolutely no resemblance to the latter. Rather than being an investigation by a standing congressional committee subject to the near dictatorial control of the committee\u27s chair, the FCIC was an independent, bipartisan commission that needed consensus to operate effectively. As explained in Section III, the FCIC was subject to the same limitations and political pressures that beset the 9/11 Commission\u27s investigation. Both commissions faced numerous obstacles to conducting vigorous investigations: the partisan selection of commissioners combined with broad commission mandates, woefully small budgets, short time frames for conducting their investigations, and weak subpoena powers. The 9/11 Commission\u27s chairman, former New Jersey Governor Thomas Kean, went so far as to argue that his commission was designed to fail

Reforming Fannie and Freddie: Privatization is the Way

Fannie Mae and Freddie Mac are unique and controversial participants in the housing finance system of the United States. Because of these enterprises' government charters, the financial markets believe that the federal government is unlikely to allow Fannie and Freddie to fail to honor their debt obligations, and they are thereby able to borrow more cheaply in credit markets; in turn, they lower interest rates for residential mortgages. If the financial markets are right, however, Freddie and Fannie also create a contingent liability for the government. Though there are positive externalities from their activities, those benefits are modest at best. Recent reforms are steps in the right direction; but privatization would be a superior policy choice

Focusing on Fannie and Freddie: The Dilemmas of Reforming Housing Finance

Fannie Mae and Freddie Mac are unique and controversial participants in the housing finance system of the United States. Because of these enterprises' federal government charters, the financial markets believe that the government would not allow Fannie and Freddie to fail to honor their debt obligations, and they are thereby able to borrow more cheaply in credit markets; in turn, they lower interest rates for residential mortgages. If the financial markets are right, however, Freddie and Fannie also create a contingent liability for the government. Though there are positive externalities from home ownership, the Fannie/Freddie route is far too broad and unfocused to address those externalities effectively. Privatization, accompanied by targeted federal assistance for potential first-time low- and moderate-income home buyers, would be a superior policy direction