“The long-simmering feud between Democrats and the U.S. Chamber of Commerce has erupted into a full-scale war…
“‘Just this week, we learned that one of the largest groups paying for these ads regularly takes in money from foreign corporations,’ Obama said at a Thursday rally for Maryland Gov. Martin O’Malley. ‘So groups that receive foreign money are spending huge sums to influence American elections, and they won’t tell you where the money for their ads comes from.’
“R. Bruce Josten, the chamber’s executive vice president for government affairs, said in an interview Friday that the group ‘has never and will never’ use dues collected from overseas business councils, known as ‘AmChams,’ for U.S. political activities. He said the chamber is the victim of ‘a smear campaign’ orchestrated with the involvement of the White House.
“‘This is an outlandish act of desperation from people who are not able to run on their record,’ Josten said. ‘They have stooped to smear campaigns.’”
***
“But a closer examination shows that there is little evidence that what the chamber does in collecting overseas dues is improper or even unusual, according to both liberal and conservative election-law lawyers and campaign finance documents…
“Organizations from both ends of the political spectrum, from liberal ones like the A.F.L.-C.I.O. and the Sierra Club to conservative groups like the National Rifle Association, have international affiliations and get money from foreign entities while at the same time pushing political causes in the United States.
“In addition, more than 160 political action committees active in campaigning have been set up by corporations that are based overseas, including military contractors like B.A.E. Systems and pharmaceutical giants like GlaxoSmithKline, according to data from the Center for Responsive Politics, a nonpartisan research service…
“Richard L. Hasen, an election-law specialist at Loyola Law School in Los Angeles, said there were legitimate questions about whether foreign money could be making its way into campaigns, particularly because many groups are not required to disclose their donors. But he added, ‘I’ve seen no proof of the chamber funneling a penny of foreign money into U.S. elections.’”
***
“Obama’s ‘foreign money’ claims are bogus. They’re also pretty rich, considering how his 2008 campaign handled foreign credit cards. From that National Journal story: ‘The lack of a computerized address-verification system would allow the Obama campaign’s computers to accept online donations from U.S. citizens above legal limits, and to accept donations from foreigners who are barred by law from contributing at all.’ Perhaps its time to remind people of that issue again. Oh, wait, I just did!”
***
One of the big problems during the financial crisis was a bank run in the shadow banking system when doubts emerged about the safety of deposits.
In my last column at the Fiscal Times, I talked about an approach to solving the problem that involves having deposits in the shadow system backed (insured) by high quality collateral.
But high quality collateral is not the only option. Another way to do this is through a type of insurance along the lines of what the FDIC does for the traditional banking system, along with restrictions on eligibility for the insurance. In reaction to my column, and in support of the insurance approach, Morgan Ricks of Harvard Law School emails:
I enjoyed your Fiscal Times piece and am glad you're focused on this issue.
I'm a big admirer of Gary and Andrew's work, but I would encourage you to give some more thought to whether collateral requirements for repo are likely to do the trick. Here are a few things to consider:
- Many of the short-term liabilities of the shadow banking system were and are uncollateralized (think about Lehman's reliance on unsecured commercial paper -- the default of which caused the Reserve Fund to "break the buck," igniting the run on money market funds; and Citigroup's SIVs, which financed themselves in the unsecured markets).
- Money market investors do not want to take possession of collateral and dispose of it. Even if the collateral is high quality, they don't want the interest rate risk. That's not their business. They don't want to deal with the consequences of a counterparty default. This is why, in the crisis, many money market investors stopped rolling even those repos that were fully secured by Treasuries and agencies:
- See Chris Cox's testimony on Bear Stearns (here http://www.sec.gov/news/testimony/2008/ts040308cc.htm): "For the first time, a major investment bank that was well-capitalized and apparently fully liquid experienced a crisis of confidence that denied it not only unsecured financing, but short-term secured financing, even when the collateral consisted of agency securities with a market value in excess of the funds to be borrowed"
- See also FRBNY's repo task force report (here http://www.newyorkfed.org/prc/report_100517.pdf): “Discussions in the Task Force emphasized repeatedly that many Cash Investors focus primarily if not almost exclusively on counterparty concerns and that they will withdraw secured funding on the same or very similar timeframes as they would withdraw unsecured funding.”
- Even if collateral requirements reduce the likelihood of runs, how do we calibrate them -- what is the objective function? Presumably we think maturity transformation (fractional reserve banking) is a good thing -- it increases the supply of loanable funds by pooling otherwise idle cash reserves and deploying them toward productive investments. Risk constraints (such as collateral requirements) necessarily reduce this surplus -- there is a real social cost. How do we appraise the corresponding benefit? That is, how do we estimate the systemic instability associated with any given level of collateral requirements? My argument is that we can't. And by "we" I mean not just the government, but anybody.
My paper argues that we avoid these problems with an insurance regime; that financial firms outside the insurance regime should be disallowed from conducting maturity transformation (i.e., they would have to rely on term funding, not money market funding); and that we should develop functional criteria of eligibility for the insurance regime. (By the way, this is not the same thing as "extending" insurance to shadow banks.)
Anyway, these are things worth thinking about. I think the insurance approach needs more serious consideration than it has received -- it's a little lonely over here ...
Best,
Morgan Ricks
See here for nice summary of this approach and link to the underlying academic paper.
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