Sunday

Treasury Secretary Timothy Geithner is set to appear on George Stephanopoulos’ morning talk show. He will be followed by former Federal Reserve Chairman Alan Greenspan.

Monday

Sen. Dick Durbin, D-Ill. is giving the keynote speech an event at the Center for American Progress Action Fund on how to stop foreclosures. The subtext of Durbin’s appearance is the reincarnation of loan modification cramdowns in bankruptcy, a reform measure Durbin and other Democrats could not get passed in the Senate earlier this year. The event runs from 12pm to 2pm.

Tuesday

Senate Banking Committee is holding a hearing at which regulators will offer their opinions on the Obama administration’s regulatory restructuring proposals. The first panel will include Federal Deposit Insurance Corp. Chairman Sheila Bair; Fed Governor Daniel Tarullo; Comptroller of the Currency John Dugan and Office of Thrift Supervision Director John Bowman. The second panel will include former FDIC Chairman Gene Ludwig; the Brookings scholar Martin Baily; and Rick Carnell, a professor at the Fordham University School of Law.

Elsewhere, Treasury will be releasing a company-by-company breakdown of data on loan modifications in an attempt to pressure banks into performing more of them under the Obama administration’s loan mod and refinance plans.

Andrea Beltratti and René Stulz, of Bocconi University and The Ohio State University, respectively, compared banks in 20 different countries for their stock price performance both before and during the financial crisis. Using a variety of measurements, they concluded that banks that faced tougher capital standards during the housing boom saw their share prices rise far more modestly than less tightly governed banks. Once the crisis hit, however, banks with higher capital requirements did not see their stock values plunge like other less restrained banks. In short: banks with higher capital requirements and more independent boards were able to ride out the crisis better, the economists concluded.

But stricter regulation—which is not the same thing as higher capital requirements and was used as a separate variable by the authors —did not always lead to better stock performance. Beltratti and Stulz posited that stronger regulators may have intervened more during the crisis “at the expense of shareholders.”

Pandering to shareholders, however, turned out not to be such a great idea. “Banks with more shareholder friendly boards, which are banks that conventional wisdom would have considered to be better governed, fared worse during the crisis,” the authors wrote.

There was a point in the course of the financial crisis at which regulators, investors and even the public realized that a bank’s share price was more important to its survival than ever before. Suddenly, “tangible common equity” replaced “Tier 1 capital” as the latest catch phrase. By the time the Treasury Department and the Federal Reserve performed stress tests on the 19 largest U.S. banks, TCE had completely overshadowed Tier 1 as the preferred measure of health. That dynamic adds value to Beltratti and Stulz’ findings. Before the crisis hit, it may have been less conceivable that stock price could be as important as a performance indicator.

But paradoxically the capital requirements that saved banks relied on Tier 1 standards, not on TCE. Going forward, then, it’s unclear whether this study would support a return to Tier 1 as a standard or a further embrace of TCE.

In some senses, it doesn’t matter: Capital is capital, and the study’s bottom line is actually about losses, not gains: Banks that catered to their shareholders lost big. If anything, the study supports arguments for an overhaul of corporate governance and perhaps even executive compensation.

The image has endured, however; nearly a month after it first appeared, the Goldman-as-cold-blooded-marine-monster concept is still bobbing merrily on the surface of public debate about executive pay, bailouts and bank earnings. And more than any other vehicle for populist outrage so far, including the phantom executive pay limits Congress tried to impose on banks (the House Financial Services Committee reported out another, significantly weaker attempt today), it seems to be taking a material toll.

Exhibit A: Goldman’s decision to pay the Treasury Department’s full asking price of $1.1 billion for its Tarp warrants last week, believed to be largely motivated by image concerns. This news produced a phenomenon so rare and surprising that it deserves attention even a week after it happened: During a House Financial Services Committee hearing on the Tarp warrants issue, the committee’s ranking Republican Spencer Bachus warmly agreed with Elizabeth Warren, the Harvard professor whose consumer products regulation proposal is the scourge of Washington conservatives.

Warren, who was testifying before the Committee that day in her capacity as the chairman of the Tarp Congressional Oversight Panel, said Goldman’s agreement to pay full price for its warrants “proves that oversight works,” giving credit to her committee for having called out the first few banks’ warrant purchase prices as too low. “I agree with you,” Bachus said later, praising Warren’s panel. “Oversight worked.”

But the image of a giant bloodsucking squid may have had more impact than any oversight – and may continue to do so. As long as the image stays intact in the media (it was repeated again today in a column by Michael Lewis satirizing Goldman critics) as a creature the bank itself fears, the squid may be the most powerful motivator there is toward palliative moves like the warrant repurchases.

Animal metaphors as a policy lever are nothing new in the banking world. The National Association of Realtors helped fuel its campaign several years ago against bankers’ efforts to win real estate brokerage powers by showing an image of an Octopus reaching out to grab peoples’ homes. The group even handed out buttons and magnets with the Octopus, labeled “The Big Grab.” It’s worth noting that NAR ultimately won the fight.

Perhaps policymakers should take a hint. Could the White House get away, for instance, with calling any mortgage servicer who refuses to modify enough loans a raging wildebeest of doom, trampling the most delicate and slow-growing of grasses—the U.S. housing market? Animal nightmares may be all the leverage they have left.

Sunday

At 7pm, Federal Reserve Chairman Ben Bernanke will appear in a town-hall forum with PBS’ Jim Lehrer for an hour-long session, “Bernanke on the Record.” The forum will take place in front of an audience at the Federal Reserve Bank of Kansas City. Excerpts from the program will be broadcast on Lehrer’s show News Hour over the coming week.

Monday

House Financial Services Committee Chairman Barney Frank, D-Mass., will address the National Press Club at 12:30pm. His speech will discuss the future of financial regulation.

Tuesday

House Financial Services will mark up a bill to regulate executive compensation. The markup will begin at 9:30am.

Meanwhile, the Senate Banking Committee will hold a 9:30am hearing on restructuring insurance regulation. Witnesses have yet to be announced.

Treasury officials will be meeting with the heads of the 25 largest mortgage servicers to discuss the progress ( " target="blank">or lack thereof) they’ve made in modifying loan terms for delinquent borrowers.

Wednesday

The House Financial Services Subcommittee on Housing and Opportunity will hold a 10am hearing on “academic perspectives on the future of public housing.” Witnesses have yet to be announced.

Thursday

The Federal Deposit Insurance Corp.'s advisory committee on economic inclusion will meet to discuss prize-linked savings programs bringing underbanked consumers into the mainstream.

1:01pm: Federal Reserve Chairman Ben Bernanke is giving his opening statement. He's saying systemically important institutions should be subject to special regulation. There should be "a more macro-prudential" perspective for that area of regulation, too.

Bernanke is running through ways to deal with systemically important firms, with a resolution authority that lets the government impose haircuts on creditors and counterparties.

1:03pm: Bernanke spent most of his time on the systemically important regulation issues and skipped right over consumer protection. He says there's definitely a need for better consumer protection and supervision of international firms, but he isn't offering details. He ends by saying decisions by committee aren't efficient.

1:06pm: Federal Deposit Insurance Corp. Chairman Sheila Bair has begun her remarks. Will she also demur, as Bernanke did, from criticizing the consumer protection proposal?

"To end too big to fail, we need" a resolution mechanism, Bair is saying. It should by funded by assessments.

We also need "a better structure for supervising systemically important instutions." She backs the oversight council--a difference from Bernanke's assertion that the council wouldn't work.

Bair: "The FDIC strongly supports the creation of a new consumer protection agency," she says, "the administration's proposal would be even more effective if it included tougher oversight" for non-bank financial institutions. But Bair says she doesn't support taking away consumer protection oversight from bank regulators. It would be too disorganized, she says.

1:09pm: Comptroller of the Currency John Dugan is up now. "The OCC supports many elements of the proposal," he says, including a systemic risk monitoring council. And a resolution authority. And the Fed's role as a consolidated supervisor.

1:11pm: Dugan says giving the Fed the power to override bank supervisors' authority goes "much too far."

Dugan: "We support the proposal to effectively merge the Office of Thrift Supervision with the OCC," Dugan says. He adds that the OCC supports an agency like the consumer protection agency but he does not like the idea that consumer protection oversight would be taken away from the banking agencies. "I believe it makes sense to consolidate all consumer protection rulewriting," he says. But "bank supervisors must have meaningful input into the process."

He doesn't like the idea of repealing federal preemption. "This repeal of the uniform federal standards option is a radical change," he says. "These costs will ultimately be borne by the consumer."

1:14pm: The consumer protection rules don't give bank supervisors enough authority. The bank regulators should have more board seats on the new agency, Dugan is saying.

1:16pm: OTS Director John Bowman has begun his remarks. "The OTS supports the fundamental objectives at the heart of this proposal," he says. But does each proposed change address a real problem in the financial system? "One federal agency whose central mission is the regulation of consumer financial products should" have rule writing authority for all consumer products, Bowman is saying. The new agency should have enforcement authority over non-banks.

Bowman: We also have to close regulatory gaps. And address "too big to fail." The government should not have to prop up too big to fail companies.

1:19pm: Wow. Bowman did NOT voice an explicit objection to getting rid of the OTS.

1:21pm: North Carolina Banking Commissioner Joseph Smith, Jr., is has begun his remarks. He says the too big to fail proposals don't go far enough. And that the consumer protection agency wouldn't give states enough authority to make their own consumer protection rules.

1:24pm: Rep. Brad Sherman, D-Calif., is saying he doesn't want the new consumer products regulator interfere with the relationships between attorneys, accountants and their clients.

Sherman thinks the new consumer products regulator should enforce the law; not write it.

Sherman: On credit rating agencies, it's not so important who paid the credit rating agencies for a particular rating, but who selected them.

1:27pm: Sherman says the President should appoint regional Fed presidents. He also says all naked swaps should be banned.

1:29pm: Sherman wants Bernanke to say whether there could be a limit on future bailouts of systemically important companies.

Bernanke has begun to respond to him. "I do not support presidential appointments of regional Fed presidents," he says. On limits of bailouts, "I would certainly be open to subordinate the 13.3 authority to the requests of the resolver."

1:30pm: Rep. Michele Bachmann, R-Minn. is up now. She wants to know whether the General Accountability Office to audit the Fed.

Bernanke replies that the GAO has authority over almost all of the Fed's lending authorities and financial management programs anyway. "The concern that I have with the bill" to oversee the Fed, he says, is that it doesn't exempt monetary policy decisions from audits.

Bachmann: So, no?

Bernanke: The GAO can have broad authority, just not over monetary policy?

Bachmann: I'm worried about how the reg restructuring proposal fails to address the government sponsored enterprises.

Bair: None of us has much to do with the GSEs.

1:35pm: Bachmann, on resolution authority: Geithner said that the post-resolution assessment will improve moral hazard. But if other people have to pay for it, how is that true? What about the creditors?

Bernanke: We support a haircut for the creditors.

1:37pm: Rep. Gregory Meeks, D-N.Y. has asked about the effects of the financial crisis on emerging market economy. Wow. This committee is not usually so outwardly focused.

Bernanke is giving him a quick report on emerging market economies. He says their troubles won't affect the U.S. much.

Meeks: How would we be able to handle another Lehman Brothers?

Bair: With the resolution authority.

1:43pm: Rep. John Campbell, R-Calif., is asking Bernanke about how many firms would receive systemic oversight supervision. And if a firm didn't want to be scrutinized as systemically important, it could just spin off parts of itself and downsize, right?

Bernanke: Right.

Campbell: Hey regulators, do you all agree that the consumer products regulator's enforcement authority is wrong, that the authority should be somewhere else?

Everyone nods. Rep Barney Frank, D-Mass., reminds them that the Congressional recorder cannot hear nods.

1:47pm: The hearing is adjorning in a rather disorderly fashion. Bachus jumps in as Frank is closing and says he wants Bernanke back before them in September. Frank agrees before pounding the gavel.

10:36am: Rep. Paul Kanjorski, D-Pa., has begun his opening statement. As he called the hearing into session, House Financial Services Committee Chairman Barney Frank, D-Mass., said hearings on consumer protection would take place in September.

Kanjorski, with first colorful image of the day: "By sprinkling their magic dust on toxic assets, ratings agencies turned horse manure into fools' gold."

10:39am: Rep. Jeb Hensarling, R-Tx., has come out swinging in his opening statement, saying that the right regulatory restructuring plan can't come out of the wrong explanation for the cause of the financial crisis. It wasn't deregulation, he says, but "dumb regulation." He's also accusing the Obama adminsitration of "sweeping Fannie [Mae] and Freddie [Mac] under the rug." As for consumer protection, he calls the proposed new regulator one of the greatest assaults on consumer rights I have witnessed."

Hensarling: I prefer Rep. Spencer Bachus's plan, which adds to the bankruptcy code to allow for the resolution of large, systemically important institutions.

10:42am: Frank calls the charge "that Fannie Mae and Freddie Mac are being ignored" a "startling misconception." They were being ignored before the crisis, he says, and dives into his well-worn recitation of the history of failed government sponsored enterprise reform.

10:44am: Republicans are on a new, strong message this morning, pushing their alternative to the administration's reg restructuring proposals. They've got their own proposals for consumer protection: a department that focuses on disclosures and fraud penalties.

10:46am: Rep. Melvin Watt, D-N.C.: A compromise is when nobody is happy. "I haven't heard anybody who is completely satisfied with what has been proposed. That probably suggests that we have hit the right balance if we do what the administration has proposed."

Watt says the industry "grossly overstated" the potential problems with a consumer protection agency, and he urges everyone to "come to the table" and try to work out the problems they have with the proposal.

10:49am: Rep. Edward Royce, R-Calif., has gone back to disputing the history of the housing bubble. Frank cuts him off quickly.

10:51am: Rep. Gary Miller, R-Calif., is calling for a change in the way accounting standards are set.

10:52am: Rep. Scott Garrett, R-N.J., points out that the industry isn't the only contingent objecting the the consumer protection regulator.

10:53am: Geithner has begun his opening statement. Apparently the Committee plans to recess for a vote after Geithner finishes.

Geithner: "The President decided we needed to move quickly" on regulatory restructuring before the memory of the financial crisis begins to fade.

He has zeroed in on the conusmer protection regulator issue. The old system failed, he says, because "all of the federal financial services regulators have higher priorities than consumer protection."

10:56am: Geithner is saying the "only viable solution" for consumer protection is to house oversight and regulation in "a single entity."

If consumer protection responsibilities are divided, regulatory arbitrage could continue, Geithner says.

10:59am: Geithner: "Resolution authority is essential."

11:01am: Geithner is on to the Federal Reserve now; he's insisting that the proposal both giveth and taketh away Fed power.

11:03am: Committee hastily recesses. Stay tuned.

11:41am: Hearing has reconvened. Frank has declared that he will continue to review the history of failed GSE reform before beginning to question Geithner.

11:44am: "I was struck to note that there's been a lot of debate about whether to have a consumer protection agency and who should be the systemic risk regulator," Frank says, addressing Geithner. "Your critics seem to be aligned with the socialist governemnt in London while the conservatives over there are on the opposite side...When you cross the Atlantic I guess things get reversed."

Frank continues by dismissing the Republican claim that a consumer protection regulator is a bad idea because all of the banking regulators are against it. He calls the bank regulators' consumer protection powers "pristine" because "they have never been used."

11:47am: Rep. Spencer Bachus, R-Ala., has begun his questioning by saying he hopes Geithner can come back another time and talk about reg restructuring. But right now he's asking about Fannie Mae.

He's talking about Fannie's losses. "The biggest loss of all, $85 billion that we extended to Freddie and Fannie. I see no prospect on getting that back," Bachus says.

He has continued by listing big bailouts: the auto industry, Bear Stearns, AIG. He wants Geithner to go through the bailout numbers and describe the real losses.

Geithner: Some areas of the system are very damaged and others aren't. But we can't, this month or even this year, give you a detailed estimate for the losses we'll really see on these. "Some of these programs are making money."

11:52am: Kanjorski's got the floor now. "We're sort of wearing that seat out with your presence, Mr. Secretary," he tells Geithner. Finally, someone is talking about the reg restructuring proposal. Kanjorski isn't happy with the proposal to regulate ratings agencies. He thinks the user pay model should be scrapped; Geithner responds, "I don't see a viable alternative."

Kanjorski: How soon should we enact these reforms?

Geithner: They need to be done as a package together. "I think it's very important we move this year." There is a lot of resistance and opposition and if we wait it will get harder and hard to find consensus.

11:54am: Kanjorski says House FS Committee is working on an insurance bill and wants to know whether the same crisis could occur again without a federal insurance regulator.

Geithner: We can't afford to allow AIG-like behavior to take place again, that's true. Federal oversight is important.

11:56am: Hensarling is up now. He's joking that if he had more than five minutes he and Geithner could actually talk about things they agree on. Geithner quips: "I could use my time to do that."

But Hensarling has moved on. He's back on the GSEs, talking about their contribution to the housing crisis. Now, the GSEs' share of the origination market has increased. This is a central issue of this crisis, and you're not focusing on it, he tells Geithner. There's nothing about the GSEs in this regulatory restructuring proposal.

Geithner: "Congress, in its wisdom, passed legislation that for the first time provided modern authority" over the GSEs back in 2008. And it's true, we still have to think about their future.

"We're rarely accused of insufficient ambition," Geithner presses. He's saying GSE reform isn't the most important thing now.

"Let's speak about another ambition, then, of the administration," Hensarling fires back. Now he's on to the consumer protection regulator. He wants to know what other products, besides subprime mortgages, contributed to the financial crisis.

Geithner: There were a lot of products in mortgages and credit cards that were bad.

12:00pm: Geithner makes an important counterpoint to the claim that the consumer protection agency would impose new restrictions on consumer freedom. The regulatory powers it would hold already exist; they're jstu going to be consolidated.

12:04pm: Rep. Carolyn Maloney, D-N.Y. started out by asking about commercial real estate loan problems. Now she's back on the consumer protection agency. She says she supports both the new consumer protection agency and the regulators' claims that consumer protection duties should remain with them. That system would be a "check and balance," she says.

Geithner: We can't have a new consumer protection agency with no enforcement authority. And if you leave that enforcement authority with the existing regulators, it will not fix the problem that led to the financial crisis: nobody was paying attention.

Maloney: "I would move the enforcement to the protection agency" but leave rule-writing with the bank regulators "as a back-up."

12:08pm: Rep. Randy Neugebauer, R-Tx., is asking Geithner why Bernanke disagrees with his claim that consumer protection should be taken away from the Fed and given to a new regulator.

Geithner replies that the regulators are just doing their job by protesting the loss of their consumer protection authorities.

12:09pm: Neugebauer: But if you're going to have a separate agency, won't that just be more expensive and cumbersome?

Geithner: There are experts scattered across the bank regulatory landscape right now; we want to consolidate them because "overall, supervision was inadequate." I can't say how much that would cost, but the resources are already there.

Neugebauer: But isn't this government trying to limit the choices of the people?

Geithner: Look, I hate limiting choice too. But that's not what proposing. We just think "there should be a set of standardized, simple-to-understand disclosured products available to consumers." They can choose to use them or not.

12:12pm: Rep. Maxine Waters, D-Calif., is praising the consumer protection agency proposal.

She's got "speaking engagements in New Jersey, Tennessee, and other places" to promote the consumer protection agency.

But now let's focus, she says, on job creation. Unemployment among minorities is high. "I'm very interested in doing everything I can do to help create jobs." I want minorities to participate in programs the Treasury has developed, such as the Public-Private Investnemtn Partnership.

Look at Magic Johnson, for example, and what he's been able to do, showing people that you can go into minority communities, you can help generate business, and you can create jobs.

12:17pm: Waters: Are you going to have a new PPIP announcement soon?

Geithner: We're not fully operational yet. Our firms are still trying to raise capital for the program.

12:18pm: Rep. Shelley Moore Capito, R-W.V., says community bankers are worried they won't have the flexibility to offer customized consumer products if a consumer regulator starts to control the products available.

Geithner: "I don't think there's any credible risk" of that happening.

12:22pm: Geithner is telling Capito that community banks will actually benefit from a consumer products regulator because it will offer a "level playing field" with non-bank lenders. There won't be the same pressure to compete with people who are evading regulations altogether.

12:23pm: Watt reiterates his support for the consumer protection agency. "I'm not closing my mind to concerns that are raised," he adds. "Three things I want to ask you about which I think have some merit...The examination authority...Will you work with me and us...to make sure that the consumer protection examinations are coordinated with the prudential examinations so that we don't end up with duplicative examinations in there?"

Geithner: "We're proposing to put the prudential supervisor on the board of--"

Watt: "That's the second point here, the resolution of potential conflicts, which I have asked many people to tell me what those conflicts are" and I haven't gotten any good answers, "Will you work with me to make sure that when there is some kind of conflict there is an appeal or review mechanism, I thought it was going to be in the Financial Services Oversight Council" but "I don't see it particularly addressed there."

Geithner: We will work with you on that. We've proposed to deal with that on two levels: The FS Oversight Council and the consumer products regulator's board.

Watt: "Will you work with me to make sure that there's no presumption of liability for products that are issued that are not the so-called 'plain vanilla' products?" People shouldn't think they are going to get sued for offering non plain-vanilla products simply because they are not considered plain vanilla.

Geithner: Yes.

12:28pm: Royce has begun his questioning by taking up the GSE history again. It's as if half of the Committee members are in a different hearing and Geithner isn't sitting there.

12:31pm: Royce has moved on, finally. "There are several problems with the current, Balkanized state regulatory system," he's saying. "It appears we may be taking a step back in the banking sector" as we approach regulatory restructuring because it provides the ability for state regulations to go beyond the federally established ones. Won't this make banking go the way of insurance?

Geithner: "We thought about it alot; what we laid out was our best judgment." We didn't want to deprive states of the ability to go beyond that.

Actually, did Geithner just give in a little on the preemption issue? His response to Royce's concern was kind of lame. He emphasized that the administration had spent a lot of time on the consumer protection proposal and that he would be happy to keep working on the issue to "find the right balance."

12:34pm: Now Frank has interjected: They're going to end Geithner's panel soon and bring in the other regulators. They'll have Geithner back in September.

12:35pm: Rep. Al Green, D-Tx., says community bankers are worrying about paying "for the sins of others." They don't want to have to pay more in insurance premiums. Can you offer them some comfort? He asks Geithner.

"I think they have a point," Geithner replies. "The basic costs" must be shared more equitably, he says.

12:39pm: Garrett tried to make a joke but nobody got it. Now he's asking Geithner to explain his comments about bank regulators' defense of their consumer protection powers. "It really puts us in a hard situation when agencies come forward...doing it not for the good of the country or the economy but because it's their perogative..." Geithner says it's a judgment call. "Consider the source?" Garrett offers. "Exactly," says Geithner.

12:42pm: Garrett is worried about consumers not being able to access more customized products. Geithner is insisting that institutions won't be restricted from offering a range of products.

Now he's asking about systemic resolution authority. "Under the proposal...it seems as though you're beginning to identify them with a set of parameters." Also, if you just assess systemically important companies to pay for the resolution power, won't that be dangerous?

Geithner: The largest institutions need to have more conservative restraints on capital requirements and leverage. To do that, you have to be able to apply differentially higher charges...but also we "deeply understand the moral hazard risk."

12:45pm: Frank cuts Geithner off mid-sentence. Now Rep. David Scott, D-Ga., is asking about the fate of small, minority owned and women-owned businesses in regulatory restructuring. "If we don't make a special effort to make sure they have the opportunity to compete, and if it doesn't come from the top, it just doesn't get done."

Scott has moved on: "Some in the banking industry, it seems to me, are reverting back to some of the very practices that got us into this mess." The executive compensation packages and bonuses are way up again.

Geithner: "We do not believe we can go back" to the way executive compensation used to be. That's why we have a new exec comp reform proposal. But it also has to be in the context of broader regulatory reform.

12:48pm: Scott now says banks aren't lending and wants to know how Geithner can make them do that.

Geithner: Banks need access to capital themselves. We also have to make sure the broader credit markets are working. "I do think its important, given what the cumulative judgments of our banks across the country did to our economy" that banks try to win back popular confidence.

12:50pm: Rep. Michasel Castle, R-Del., is asking about regulatory arbitrage.

Geithner explains that Countrywide and Washington Mutual changed their charters from bank charters to thrift charters to seek lower standards of enforcement. "That's one example," but there were others.

Castle: "Should we be looking at legislation to change that?"

Geithner: Um, yes. That's what our regulatory restructuring proposal is. Ending the thrift charter is a good idea.

Castle: "Is it your view that every new product that a bank would issue would have to go through an approval process?"

Geithner: "Absolutely not...the core of our proposal" is that broad standards and practices should be adopted.

12:55pm: Castle: Existing regulators aren't happy with the change. And they're starting to do a better job than they were in the past.

12:56pm: Frank dismisses Geithner and calls the other witnesses--Bernanke, Bair, Dugan, Bowman and Smith--to the table. We're going to jump to a new window for the second half of the hearing. Follow along from the BankThink home page!

Small banks are having a harder time than their giant counterparts in dealing with CRE loan losses because they can’t absorb the chargeoffs as easily, according to a post on Bank Lawyer’s Blog this week.

“Aggressive write-downs usually mean aggressive hits to capital, and in many cases community banks are disproportionately affected by write-offs that a large bank could take in stride,” wrote blogger Kevin Funnell. “Moreover, as we've seen thus far from the federal bank regulators, especially the FDIC, massive CRE write-offs are a prelude to a death spiral for banks that are ‘too small to save.’”

Paradoxically, community banks, Funnell wrote, are drawn to CRE lending “as one of the few avenues” in retail banking “left open to them where they can not only make decent money but provide better (i.e., more personal) service to the borrower than many of the big banks.”

If the country’s largest banks have gotten big enough to drown out small banks in the retail banking sphere, and if the smallest banks really have been driven into a riskier, narrower area of lending by this phenomenon, then it’s worth wondering whether there’s an anti-competitive element built into the largest of the large. If there aren’t legal grounds now for challenging this status quo, then there may be after the Obama plan bestows more “Tier 1” privileges upon a select few.

Some are beginning to wonder if the administration should use the regulatory restructuring effort to construct more solid controls on “too-big-to-fail,” so as to keep the majority of the country’s banks from becoming definitively too small to compete.

But last time we checked, a Freddie exec is the last person who can expect to have much say over his company’s future. The Obama administration was quick to utilize the GSEs, which have been in public conservatorship since last fall, in its attempts to stem the foreclosure crisis. But the administration appears to be in no hurry to grant entities more independence.

Haldeman acknowledged some element of this constraint right away: “I totally get the function of the regulator and the need to have the approval and the involvement of the regulator in much of what Freddie does,” he told the Banker.

That arrangement may last longer than Haldeman has let himself imagine, however. A recent strategic report from the GSEs’ direct regulator, the Federal Housing Finance Agency, offered not even hint of detail on the structure of the two companies in the future. It did list as a goal, however, the " target="blank">continued use of the GSEs to further housing policy goals.

And although Haldeman clearly expects a seat at the table, the fate of Fannie and Freddie will remain in the hands of strategists in the White House for the foreseeable future. Haldeman will be lucky if he gets any say at all.

For more from the new Freddie head, look for a profile in tomorrow’s Banker.

Describing CIT’s $3 billion lifeline from private bondholders yesterday, American Public Media’s Marketplace argued that the Obama administration’s nudging the private sector into action was designed to provide grounds on which to refuse future bailouts—perhaps of companies larger than CIT—and force the market to step up to the plate.

The radio program quoted International Risk Analytics CEO Dennis Santiago, who said, “We could get back to the normal state of affairs where companies come and go and do their thing in the normal free market process.”

In other words, the same maneuvers that before seemed foolhardy, such as letting Lehman Brothers fail, could work better now. That would be a political dream for the Obama folks.

But Chris Low, the chief economist at First Horizon National Corp.'s FTN Financial, saw the CIT incident as a risky game of chicken between bondholders and the government.

“The bondholders were clearly waiting to see what the government would do and it wasn’t until the White House made it clear that they were going to do nothing that the bondholders got together to figure out what they could do,” Low said in an interview.

He disagreed with claim that the strategy could work for a larger company. In the case of CIT, he said, the administration perhaps felt it could stomach a failure because officials didn’t view it as systemic.

The choice would not be as easy for a behemoth, however.

“If ‘too-big-to-fail’ were a factor here, then we’d be in the same position that we found ourselves when Merrill was going down, where regulators found themselves in a position where there really wasn’t anything they could do,” Low said.

He argued a new systemic resolution authority would have eased the process for both CIT and larger firms, and would still encourage private-sector bailouts. Now, in the absence of such an agency, policymakers face two drastically different scenarios: An appealing private rescue or a costly, harried government bailout.

“If they had the authority to put them into receivership,” Low said, “they would have started moving towards putting them into receivership and the bondholders would have realized they stood to lose more than they had gained, and they would have put up the $3 billion.”

Peter Eavis touches on this interplay today in the Wall Street Journal’s “Heard on the Street” column. But while agreeing with Low that a systemic resolution framework is needed, he warned that the process for taking over institutions should not be overly standardized, and should allow for cases like CIT’s where creditors lend a hand.

“Why don't the Treasury's overhauls provide a framework encouraging creditors to banks to take orderly haircuts in such situations?” he wrote.

So even though the government may have effectively kept the market guessing with CIT, the need for Congress to create a resolution authority is still there. Without it, Low is right: the game of chicken the public and private sectors play is just as dangerous as ever.

Tuesday

The House Financial Services Committee will hear testimony from Bernanke starting at 10am as mandated by the Humphrey-Hawkins Act, which requires the Fed chairman to report to Congress twice-yearly. Some predict the testimony will focus on how—and possibly when—the Fed plans to extract itself from its quantitative easing policies. Later, the committee will hold a “too-big-to-fail” hearing starting at 2pm. Witnesses have yet to be announced.

The House Oversight Committee will hear from the inspector general for the Troubled Asset Relief Program, Neil Barofsky for a 10am hearing called “Following the Money.”

Wednesday

Bernanke will appear before the Senate Banking Committee at 10am. Meanwhile, House Financial Services will hear from regulators in the morning in a hearing focusing on regulators’ perspectives on the Obama administration’s regulatory restructuring proposals. There are two similar hearings scheduled with regulators this week, and the committee has not released witness lists for either one yet. At 2pm, the Financial Services Subcommittee on Oversight will hold a hearing on Tarp oversight.

And House Oversight’s Domestic Policy subcommittee is looking at “the misuse of mandatory arbitration to collect consumer debts” in a hearing starting at 2pm.

Thursday

At 10:30am the Fed will hold an open meeting to discuss proposed changes to Regulation Z under the Truth in Lending Act. The changes deal with mortgage loans and home equity lines of credit.

Senate Banking will tackle systemic risk regulation at a 9:30am hearing whose witnesses include Federal Deposit Insurance Corp. Chairman Sheila Bair; Fed Governor Daniel Tarullo and Securities and Exchange Commission Chairman Mary Schapiro. Witnesses for a second panel will be announced soon.

Friday

House Financial Services will hold another hearing on regulators’ views of the new regulatory restructuring proposals. The difference, so BankThink is told, is that the regulators testifying today will not be the same people who testified Wednesday.

Both arguments have merit. There’s little indication that the firm’s demise would cause a Lehman Brothers-style panic in the markets, but a New York Post story this morning gives evidence that CIT’s exit from mid-market commercial lending would indeed hit certain industries hard (the story also says JPMorgan Chase is considering purchasing part of CIT’s lending business).

There’s a narrower area in which CIT’s importance is also up for debate: Small Business Administration lending. CIT used to rank among the top-10 SBA lenders in the country. In the 2008 fiscal year, which ended last October, CIT was the top SBA lender, making a total of 865 loans worth $525 million. But when the secondary market for SBA loans ground to a halt late last fall, CIT’s lending volume crashed. Its business model included heavy reliance on the secondary market for fresh capital to lend, and when the option to sell the guaranteed portions of SBA loans disappeared, so did CIT’s SBA lending program. Since Oct. 1, CIT has made just 92 loans worth $67 million. Its now ranks 16th on SBA’s list, but even as the top SBA lender CIT only captured 5.5% of the market share.

With more small businesses in trouble and unemployment on the rise, it wouldn’t be hard to claim that every SBA lender counts. The Obama administration has already demonstrated its interest in the SBA as a tool for affecting economic recovery; allowing CIT to go bankrupt may greatly impact that effort. So while CIT may not be too big to fail, officials could be making a mistake in their claims that it is not too interconnected.

Some studies, like this recently released white paper by researchers at the Boston Fed, are providing backing for the claim that loan mods aren’t working. Many borrowers are redefaulting; foreclosures continue to rise and servicers don’t see an economic benefit in lowering borrowers’ payments and principle. Housing Wire reported last week that temporary moratoria on foreclosures imposed by Fannie Mae and Freddie Mac and some private servicers didn’t do much good, either. Regulators like the Office of the Comptroller of the Currency and the Federal Housing Finance Administration have also condemned loan mod programs as ineffective.

But hey, anyone remember IndyMac? Last we checked the redefault rate on that loan mod program was clocking in at just 12%. Would that make it the exception that proves the rule or the only well-executed loan-mod program?

The question is, should policymakers and the administration be focused on helping borrowers make payments now or forcing meaningful loan mods?

Included in the August issue of U.S. Banker (which was put to bed this week) is a list of the top 100 mid-tier bank holding companies, ranked by three-year average return on equity from 2006 through 2008. But to get to that 100, the editors had to bend the rules a bit.

Initially, the plan was to publish a ranking of the top 200, classifying mid-tiers as those banks with between $2 billion and $6 billion of assets. But when we received the data from SNL Financial LC, we found two problems: no longer are there even 200 banks and thrifts in that $2 billion to $6 billion universe; and many of the banks and thrifts in that class performed so poorly in 2008 that their three-year average ROE was actually in negative territory.

(Time for a quick disclaimer: SNL’s list includes public banks and thrifts traded on major exchanges, bulletin boards and pink sheets, as well as privately held institutions that file with the Securities and Exchange Commission. Privately held institutions that don’t file with SEC are not included.)

Anyway, we then decided to widen the field a bit, to include banks and thrifts with up to $10 billion of assets, but that didn’t give us much more to work with. As of Dec. 31, there were fewer than 150 banks and thrifts in this group, and many of them had returns on equity below zero.

After briefly contemplating expanding the field again, to banks with assets of up to $20 billion, we decided to ditch the whole top-200 idea and go with a top 100 instead. So here it is, the top 100 banks and thrifts with $2 billion to $10 billion of assets, for calendar years 2006, 2007 and 2008. (page 1, page 2.) The list doesn’t include 2009 numbers year-to-date, and for some of these banks that’s a good thing. I won’t name names, but I feel confident in saying that some of them won’t make next year’s top 100. Or maybe by then it’ll be the top 50.

Monday

The House Financial Services Committee will hold a 2pm full committee hearing on “preventing unfair trading by government officials. No witness list has been released.

Tuseday

The Senate Banking Committee will hold a 9am hearing looking at the proposed new consumer protection regulator. Witnesses include Honorable Assistant Treasury Secretary for Financial Institutions Michael Barr; Connecticut Attorney General Richard Blumenthal; American Bankers Association President and Chief Executive Edward Yingling; Travis B. Plunkett, the legislative director for the Consumer Federation of America; and Sendhil Mullainathan, a Harvard economist.

Meanwhile, at 10am, the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises will look at oversight of the Securities and Exchange Commission, a hearing for which witnesses have yet to be announced.

Wednesday

Financial Services will hold a 10am hearing offering banking industry representatives a chance to voice their views on the Obama administration’s regulatory restructuring proposal. No witnesses have been announced yet. At 2pm, the Subcommittee on Housing and Opportunity will convene a hearing on ways to preserve government assistance for affordable housing.

At 2:30pm, the Senate Banking Subcommittee on Securities, Insurance and Investment will hold a hearing on regulating hedge funds. SEC Director Andrew Donohue will testify first. The second panel will include industry representatives: James Chanos, the chairman of the Coalition of Private Investment Companies; Trevor Loy, a general partner at Flywheel Ventures; and Joseph Dear, the chief investment officer of the California Public Employees’ Retirement System.

Thursday

At 10am the House Committee on Oversight and Government reform will pick up its inquiry into the machinations of the merger between Bank of America and Merrill Lynch late last year. Last month, the committee heard testimony from Federal Reserve Chairman Ben Bernanke, in a deeply unsatisfying hearing that focused narrowly on whether Bernanke threatened to fire BofA CEO Ken Lewis if Lewis tried to back out of the Merrill deal. This time, former Treasury Secretary Henry Paulson will be the sole witness, and he is guaranteed to be questioned about whether he lied to officials in a deposition, in which he allegedly said Bernanke had told him about the intent to fire Lewis under certain circumstances.

Senate Banking will convene a 9:30am hearing on preventing foreclosures. The first panel of witnesses will be made up of regulators: Assistant Treasury Secretary for Financial Stability Herb Allison and senior Housing and Urban Development official Bill Apgar. The second panel will consist of bankers and credit counselors: President and CEO of the Bridgeport, Conn. Housing Development Fund Joan Carty; Mary Coffin, the head of Wells Fargo’s mortgage servicing division; Allen Jones, a manager at Bank of America Home Loans; and Diane E. Thompson, of counsel at the National Consumer Law Center. The committee’s Web site says there may be other witnesses announced later.

House Financial Services will hold a 10am hearing giving consumer advocates a chance to discuss the Obama administration’s proposals. Witnesses have yet to be announced.

The man behind the “Bankslaughter” plan, Guardian columnist Paul Collier, proposed the British government lay out a set of criminal laws governing bank management. “Fear of jail would discourage excessive risk,” he reasoned. A trial of managers of a failed bank would unfold similarly to that of a person accused of manslaughter. Intent to harm wouldn’t be a factor in the case; rather the question would be whether the executives managed the bank irresponsibly.

Since his column ran, other commentators have joined the discussion. Reuters’ Felix Salmon gave the idea a thumbs up on his blog this week, while blogger John Carney called it “a terrible idea that needs to be nipped in the bud before some populist lawmaker tries to make a garden party out of it.” Then the braniacs over at The Baseline Scenario (well, one of them—James Kwak) walked readers through the possibilities for translating the “bankslaughter” to fit into the American legal system.

While BankThink is withholding judgment about whether “bankslaughter” is a cool or revolting idea, we have to admit that Kwak makes a convincing argument for its compatibility with well-established legal practices here in the U.S., namely torts.

Readers, it’s up to you: Could holding bankers criminally liable for negligence in court work? Would the threat of a criminal conviction be effectively scarier than the constant threat of civil lawsuits with monetary penalties? And how has criminal prosecution changed Wall Street? Despite the fact that one can be sent to jail for insider trading, for instance, the practice endures. Just sayin’…..

“The more important point is the risk that this agency creates could end up harming consumers. That’s the message we’re trying to get out. It could end up stifling creativity, innovation and access to credit and capital,” Scott Talbott, the senior vice president of government affairs at the Financial Services Roundtable told BankThink (he’s also quoted in the WP story today). Of the Harry and Louise idea, he added: “It’s simply an option that we’re thinking about—nothing has been planned.”

Nevertheless, Talbott said, lobbying to head off the creation of the consumer products regulator is beginning “now.”

Two things: One, some lobbyists are already disowning the campaign as the WP presents it—they say it isn’t as cohesive a front, and that not every group thinks a TV ad campaign is necessary.

Two: Given what else is on TV right now, does anyone really think a Harry and Louise-style campaign would work? The media environment has changed considerably since the 1990s. Fox News has likely already turned a great deal of its viewers against the idea of a consumer products regulator, which represents more government, but even Fox has to compete with a prevailing view that financial firms can’t be trusted.

Other TV ads are actually articulating that notion. The Financial Industry Regulatory Authority, a self-regulatory body, just launched a series of radio and TV ads that warns consumers that not every broker is telling the truth. Meanwhile, Charles Schwab has been airing cartoon-styled “Talk to Chuck” commercials in which financial consumers talk about the epiphanies they’ve had about previous financial advisors giving them a raw deal. And Ally Bank, the new brand that has emerged from the tattered GMAC Financial Services, is (ironically enough) promoting itself through a series of spots depicting children indignantly rejecting unfair “special offers” based on their obvious logical inconsistencies.

And what of Harry and Louise the actual characters? They’ve already been expropriated to the other side: They appeared in a 2008 commercial put out by healthcare advocacy groups asking the presidential candidates to focus first on healthcare reform.

There’s a lot of material out there telling consumers that they should be wary of the things banks try to sell them. Lobbyists on the other side of that sentiment could be facing a Sisyphean challenge.

Think about it: Struggling borrowers who ruin their credit in exchange for a loan mod are taking themselves out of a pool of future potential loan customers. They won’t be able to easily take out other kinds of consumer loans in the future—at least until they’ve repaired their scores—and banks will have a solid argument for curtailing their access to credit. What will this mean for the overall economy and for banks’ business? Probably nothing good. Bankers are already complaining of mixed messages from regulators about whether they should lend more or lend more prudently. With a growing number of mortgage holders whose credit behavior looks terrible on paper those two forces will be in even stronger opposition.

Wouldn’t doing more loan mods earlier be a positive move for banks, then? The market may have the answer eventually. But by then it could be too late.

Monday

The FDIC will hold a roundtable to discuss its proposal for new rules to govern private equity investments in failed banks. The agency declined to release a list of participants.

Wednesday

The Senate Banking Committee will hold a hearing at 2pm on ”the effects of the economic crisis on community banks and credit unions in rural communities.” Witnesses include Independent Community Bankers of America representative Jack Hopkins, the CEO of CorTrust Bank, N.A. in Sioux Falls, S.D.; Credit Union National Association representative Frank Michael, the CEO of Allied Credit Union in Stockton, Calif.; American Bankers Association representative Arthur Johnson, the CEO of United Bank of Michigan in Grand Rapids; and Peter Skillern, the executive director of the Community Reinvestment Association of North Carolina.

Thursday

The House Financial Services Committee will hold a hearing on new legislation, the Tarp for Main Street Act of 2009. No witnesses have been announced. Later, the committee will convene a 2pm hearing on balancing the Federal Reserve’s monetary policy duties with a potential systemic risk regulatory role. The committee has not yet released a witness list.

Friday

At 10am, Treasury Secretary Timothy Geithner will testify before a joint hearing held by Financial Services and the House Agriculture Committee on regulating derivatives. The hearing will take place in the Cannon building, room 345.