Walt Minnick makes his case for financial market reform

Michael Boss

The last time I sat down to an interview with Congressman Walt Minnick was in February 2009 (What’s eating Walt Minnick?). During that interview we discussed the financial crises that had virtually paralyzed America’s credit markets, and that led Congress late in the Bush Administration to enact the Troubled Asset Relief Program (TARP).

Nearly two years later, TARP, along with subsequent economic stimulus measures promoted under the Obama administration, has been increasingly characterized as emblematic of what is wrong with Washington: Big Government largess on behalf of Wall Street elite. What remains etched in the mind of Walt Minnick, however, is a dinner he had with his friend of 40 years, Henry (Hank) Paulson shortly after Paulson had left his position of Secretary of the Treasury, and early in Walt’s assumption of his Congressional post. During that memorable evening, Paulson recounted the weeks in September 2008 when America’s financial markets peered into the abyss of a meltdown to rival that of the Great Depression.

While then necessity of TARP has become a matter of lively debate, particularly as the November elections loom on the horizon, Minnick is dismissive of Congressional colleagues who hold to the view that financial reform represents unnecessary government meddling with the genius of the free market to manage its destiny, and that of the American economy. Said Minnick, “Very few of my colleagues on either side of the aisle think that the take away (from the financial crises) is that nothing needs to be done - and those that do are a minority opinion…and an uninformed one.”

During his dinner with Minnick, Paulson had reflected, “I’m the last investment banker that will ever be a CEO of Goldman Sachs.” More than a wistful observation, Minnick saw his friend’s comment as a telling indictment of how the U.S. financial market got into its current predicament: the ascendancy of traders over investors. Said Minnick, “Investment bankers have a fiduciary responsibility to their clients - traders have an obligation only to what is going to make them the most money. This is what is wrong with Wall Street.”

During our interview at the offices of the Idaho Business Review, Minnick discussed the importance of restoring balance to the functioning of Wall Street and the banking industry to once again serve as engines of capital formation and credit.

“Wall Street is the most efficient mechanism that sophisticated minds have been able to create to take the individual savings of a business or household and ‘recycle’ those funds as capital to promote new business, expand an existing business, or support a new technology. That’s what Wall Street does - but it can only be a fully competitive market if the institutions are making decisions based on risk that is proportionate to their ability to guess wrong and still survive, and if there is enough transparency that both sides of a transaction have equal and fair access to information about the transaction and markets.”

What ended up happening on Wall Street, Minnick went on to elaborate, is that “Institutions got so big that they bent or violated those principles - so big that nobody else could play - and they had monopolistic or oligarchic power or took risks like AIG where they bet on credit default swaps. There was no transparency, and people who were supposed to assess risk shifted that responsibility to buyers - so called ‘liar loans.’ The market just wasn’t functioning.”

In recent years, Minnick noted, consolidation in the banking industry created a level of capital concentration that increased the level of “counter party risk” in the financial market - the greater likelihood of a “cascading group of failures” caused when one institution is unable to pay back a short term debt to another, causing the lending institution to default on its debt to yet another lender, etc. While government intervention and taxpayer dollars staved off a financial Armageddon, Minnick is worried that catastrophe could still be waiting around the corner.

“The only thing we know about financial crises is that they appear periodically, they come from out of the blue, and they develop very rapidly. We could have another financial crises at least as severe as this recent one, caused by sovereign countries that don’t pay their debts or commercial real estate loans that go bad. What would happen if China were to blockade Taiwan and dump U.S. financial instruments to prevent our intervention? We’d better have in place a regulatory system that prevents institutions from being overwhelmed without taxpayers taking the loss.”

For Minnick, effective financial market reform begins with a premise that might not sit well with hard line laissez faire advocates: the belief, as the Congressman puts it, that “the financial market if left totally without oversight or supervision is not going to lead to transparency, free competition, or taking risks larger than [banks] can afford to take if they guess wrong. If we’ve learned nothing else from this latest crises, we’ve learned two things: first, every financial institution needs a regulator looking over its shoulder to insure that they have the self-discipline to keep from taking too much risk, and second, that we have laws in place that shift the burden to shareholders and lenders if an institution does fail.”

Minnick is emphatic about the need for immediate legislative action, and he expressed disappointment that legislative action should be susceptible to partisan point scoring, let alone debate over its necessity.

“I absolutely reject that this isn’t needed, and I don’t want to put myself, my constituents and my country through this again,” Minnick said. “But since there are knowledgeable people on both sides, I’m optimistic that we can come up with a bill that may not be perfect but that will give us a set of tools we need. My concern is that legislation will be too timid.”

Minnick’s sense of urgency notwithstanding, he is unwilling to accept everything contained in the current bills making their way through Congress. “I think it is silly, for example, to have to parallel regulators of complex financial securities, the SEC and the Commodities Futures Trading Commission who have to act in parallel and agree because each has half of the jurisdiction rather than combining them. A futures contract is the same whether it is a security, a currency, or an agricultural commodity.”

“We need to do more consolidating of bank regulators as well,” Minnick continued. “Overall, however, the bills being considered are light years better than no bill, and they will give us most of the answers that the best thinkers on the topic have recommended. I want to take out things that are politically expedient but bad long term policy, or that will drive financial institutions into unregulated markets. That would be totally counterproductive.”

This last point forms the crux of Minnick’s argument that financial market reform should emphasize regulatory discretion rather than legislative micro-management of the economy.

“Some of the derivatives legislation in the Senate bill would drive that business to Europe, Asia, or some other markets,” Minnick explained. “There is a danger that large financial institutions will go where it is cheapest and least restrictive to do business, and this would be detrimental to the ability of American business to access capital. We need to work in concert with other financial markets to prevent this, and this means that statutes need to be broad enough to convey authority to knowledgeable regulators. We can’t make the rules unduly proscriptive.”

While Congressman Minnick remains optimistic that Congress can find the political will to restore needed balance to financial markets in order to avoid, or at least mitigate, future crises, one casualty of the recent crisis remains outside the immediate power of legislative solutions: consumer trust. For decades, Main Street has viewed Wall Street as a vital engine of equity creation - a way for the “little guy” who puts in his or her “9-to-5″ to invest in the broader economic activities of American business, and in the process to be a participant in that economic activity. The events of the past two years have betrayed that trust, and long term the most positive outcome of the legislative challenges facing Congressman Minnick and his colleagues on both sides of the Congressional aisle will be to help restore it.

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