Wednesday, September 17, 2008

Redeux


September 17, 2008

McCain Laboring to Hit Right Note on the Economy

VIENNA, Ohio — On Monday morning, as the financial system absorbed one of its biggest shocks in generations, Senator John McCain said, as he had many times before, that he believed the fundamentals of the economy were “strong.”

Hours later he backpedaled, explaining that he had meant that American workers, whom he described as the backbone of the economy, were productive and resilient. By Tuesday he was calling the economic situation “a total crisis” and denouncing “greed” on Wall Street and in Washington.

The sharp turnabout in tone and substance reflected a recognition not only that Mr. McCain had struck a discordant note at a sensitive moment but also that he had done so with regard to the very issue on which he can least afford to stumble.

With economic conditions worsening over the course of this year and voter anxiety on the rise, Mr. McCain has had to labor to get past the impression — fostered by his own admissions as recently as last year that the subject is not his strongest suit — that he lacks the experience and understanding to address the nation’s economic woes.

In the most recent case, he first sought to explain away his remarks about the economy’s fundamental soundness by saying he had been referring to the American people, almost daring his Democratic rival, Senator Barack Obama, to contradict him on that score. But within hours his aides were scheduling appearances for him Tuesday on all the morning television news shows so that he could try to erase the notion, being promoted aggressively by Democrats, that he was out of touch.

His campaign also sent to reporters the text of a speech he was delivering later Monday that included much starker language about the nation’s financial troubles, and by Tuesday had produced a new advertisement asserting that his experience and leadership were necessary in a “time of crisis.” Aides and advisers repeated to anyone who would listen the words that Mr. McCain has frequently spoken following his comments about the economy’s fundamental strengths: that “these are very, very difficult times.”

Beyond striking a more populist tone and more explicitly acknowledging the nation’s economic problems, his campaign also began an effort Tuesday to cast him as a strong leader with profound experience on economic issues, given his service on the Senate Commerce Committee, where he was chairman for six years. That effort quickly hit a pothole when one of his economic advisers suggested that he had helped to create the BlackBerry, by virtue of his role in brokering telecommunications legislation; the McCain campaign later disavowed that, calling the suggestion “boneheaded.”

For much of this year, Mr. McCain has seemed to struggle to strike a balance between conveying the optimism that many voters want in their leaders, and the I-feel-your-pain empathy that they crave during hard times. His task is complicated by the tension between his plans to continue many of the economic policies of the unpopular incumbent Republican president he hopes to succeed, and his pledges to improve the American economy and shake up Washington.

As recently as January, Mr. McCain argued at a Republican debate that Americans were better off than they were eight years ago; by this summer he had released an advertisement that said “we’re worse off than we were four years ago.”

His first big speech on the mortgage crisis warned against excessive government intervention; a month later he released his plan for government action to help people keep their homes.

And a tour on which he embarked in July to emphasize his understanding of Americans’ economic pain was overshadowed when one of his top economic advisers, former Senator Phil Gramm of Texas, was quoted as saying that the United States was only in a “mental recession” and had become “a nation of whiners.”

The most recent episode began Monday morning at a rally in Jacksonville, Fla., where Mr. McCain spoke of the troubles in the financial sector.

“There’s tremendous turmoil in our financial markets and on Wall Street,” he said. “People are frightened by these events. Our economy, I think still, the fundamentals of our economy are strong. But these are very, very difficult times. And I promise you we will never put America in this position again. We will clean up Wall Street. We will reform government. And this is a failure.”

His statement about the strength of the economy’s fundamentals was one he has made for nearly a year now, usually adding that times are tough or people are hurting. And in some ways, given that the recession that many have feared all that time has yet to be officially proclaimed, he has been borne out.

But his repeating the remark on Monday, even as the bankruptcy of Lehman Brothers was helping send the stock market plunging to its steepest loss since the terrorist attacks of 2001, quickly became a political problem.

His campaign swung into action then, to try to put the remark “in context,” as one top aide said, and to push back against what the McCain organization deemed unfair attacks coming from the Obama camp. In short order Mr. McCain’s campaign sent reporters the advance text — a step usually reserved for major speeches or pronouncements — of remarks he planned to deliver in Orlando, Fla., on Monday afternoon proclaiming that “the American economy is in crisis” and redefining what he had meant when he spoke about the “fundamentals.”

On Tuesday morning, Mr. McCain was interviewed for CBS, ABC, NBC, Fox News, CNN, MSNBC and CNBC. Again and again, he explained that he understood the “crisis” and called for a new commission to study it, modeled on the one that investigated the Sept. 11 attacks.

On the NBC News television program “Today,” Matt Lauer asked Mr. McCain how he could say that “the fundamentals of our economy are strong” while his campaign was releasing an advertisement that said the economy was in crisis.

“Well, it’s obviously true that the workers of America are the fundamentals of our economy, and our strength and our future,” Mr. McCain replied. “And I believe in the American worker, and someone who disagrees with that — it’s fine. We are in crisis. We all know that. The excess, the greed and the corruption of Wall Street have caused us to have a situation which is going to affect every American. We are in a total crisis.”

Mr. McCain’s economic adviser, Douglas Holtz-Eakin, told reporters Tuesday that the senator, who has often favored deregulation, would push for new regulations as president.

“This story line that people want to write that somehow McCain himself or the McCain campaign doesn’t understand what’s going on with the economy is wrong,” Mr. Holtz-Eakin said. “You shouldn’t run for president by denigrating everything in sight and trying to scare people. Let’s be accurate. This is an economy that has serious problems.”

By the end of the day, the campaign had gone back on offense. Here in Vienna, outside Youngstown, Mr. McCain noted at a joint rally with his running mate, Gov. Sarah Palin, that Mr. Obama had originally chosen a former head of the recently bailed-out Fannie Mae to lead his vice-presidential search (though the head of Mr. McCain’s search committee was himself a past lobbyist for Fannie Mae).

And Ms. Palin said that Mr. Obama’s “tax plans really would kill jobs and hurt small businesses and make even today’s bad economy look like the good old days.”

Elisabeth Bumiller contributed reporting from Washington, Adam Nagourney and Larry Rohter from Florida, and Brian Stelter from New York.

McCain Attacks Wall Street Greed—While 83 Wall Street Lobbyists Work for His Campaign

In the past few days, as the economic crisis has deepened, Senator John McCain has been decrying the excesses of Wall Street. At a campaign rally in Tampa on Tuesday, he vowed that he and Alaska Governor Sarah Palin, if elected, "are going to put an end to the reckless conduct, corruption, and unbridled greed that have caused a crisis on Wall Street." He noted that the "foundation of our economy...has been put at risk by the greed and mismanagement of Wall Street and Washington."

He blasted CEOs who "seem to escape the consequences." He denounced Wall Streeters who "dreamed up investment schemes that they themselves don't even understand" and who used "derivatives, credit default swaps, and mortgage-backed securities" to try "to make their own rules." He excoriated Fannie Mae and Freddie Mac for gaming the system. And he slammed financial industry lobbyists for misguiding members of Congress. "I can promise you the days of dealing and special favors will soon be over in Washington." On Wednesday morning, after the federal government committed $85 billion to prevent the collapse of the American International Group (AIG) insurance conglomerate, McCain again assailed irresponsible corporate executives. "We need to change the way Washington and Wall Street does business," he proclaimed.

McCain has been quick with fiery, populist-tinged speeches. But one thing has been missing: any acknowledgment that McCain's own campaign has been loaded with the type of people he's been denouncing. (The McCain campaign did not respond to a request for comment; we will update the post if they do.) As Mother Jones previously reported, former Senator Phil Gramm, McCain's onetime campaign chairman, used a backroom maneuver in late 2000 to slip into law a bill that kept credit default swaps unregulated. These financial instruments greased the way to the subprime meltdown that has led to today's economic crisis. Several of McCain's most senior campaign aides have lobbied for Fannie Mae and Freddie Mac. And the Democratic National Committee, using publicly available records, has identified 177 lobbyists working for the McCain campaign as either aides, policy advisers, or fundraisers.

Of those 177 lobbyists, according to a Mother Jones review of Senate and House records, at least 83 have in recent years lobbied for the financial industry McCain now attacks. These are high-paid influence-peddlers who have been working the corridors of the nation's capital to win favors and special treatment for investment banks, securities firms, hedge funds, accounting outfits, and insurance companies. Their clients have included AIG, the newest symbol of corporate excess; Lehman Brothers, which filed for bankruptcy on Monday sending the stock market into a tailspin; Merrill Lynch, which was bought out by Bank of America this week; and Washington Mutual, the banking giant that could be the next to fall. Among these 83 lobbyists are McCain's chief political adviser, Charlie Black (JP Morgan, Washington Mutual Bank, Freddie Mac, Mortgage Bankers Association of America); McCain's national finance co-chairman, Wayne Berman (AIG, Blackstone, Credit Suisse, Fannie Mae, Freddie Mac); the campaign's congressional liaison, John Green (Carlyle Group, Citigroup, Icahn Associates, Fannie Mae); McCain's veep vetter, Arthur Culvahouse (Fannie Mae); and McCain's transition planning chief, William Timmons Sr. (Citigroup, Freddie Mac, Vanguard Group).

When cable news shows air footage of McCain railing against greedy execs and the lobbyists who rig the rules for the benefit of Wall Street dealmakers, there ought to be a crawl beneath him listing these lobbyists. (Talk about a fair and balanced presentation.) Short of that, here's the list of the McCain aides and bundlers who have worked for the high-finance greed-mongers McCain has pledged to take on. So far, it seems, none of them have been cast out of the campaign. If McCain were serious about his outrage, he might throw these money-changers out of his own temple.

Phil Anderson: American Council of Life Insurers, Aetna, AIG, New York Life, MassMutual, VISA

Rebecca Anderson: Aegon, American Council of Life Insurers, Cigna, Barclays, Credit Suisse First Boston, HSBC

Stanton Anderson: The Debt Exchange

David Beightol: Allstate, Amerigroup, Charles Schwab, HSBC

Rhonda Bentz: VISA

Wayne Berman: American Council of Life Insurers, AIG, Americhoice, Shinsei Bank, Blackstone, Carlyle Group, Broidy Capital Management, Credit Suisse Securities, Highstar Capital, VISA, Ameriquest Mortgage, Fannie Mae, Freddie Mac, Fitch Ratings

Charlie Black: JP Morgan, Washington Mutual Bank, Freddie Mac, Mortgage Bankers Association of America, National Association of Mortgage Brokers

Judy Black: Colorado Credit Union League, Genworth Financial, Bay Harbour Management, Merrill Lynch

Kirk Blalock: Credit Union National Association, Financial Executives International, American Insurance Association, Mutual of Omaha, Zurich Financial Service Group, Fannie Mae, Federal Home Loan Bank of San Francisco

Carlos Bonilla: Financial Services Roundtable, Freddie Mac

Christine Burgeson: Citigroup

Mark Buse: Freddie Mac, Goldman Sachs, Manufacturers Life Insurance Company

Nicholas Calio: Citigroup, Managed Fund Association, Fannie Mae, Merrill Lynch, The Investment Company Institute, TIAA-CRE, Securities Industry and Financial Markets Association

Ben Nighthorse Campbell: Amscot Financial Corporation, Community Financial Services Association, Fidelity National Financial

Andrew Cantor: American Insurance Association, Merrill Lynch

Alberto Cardenas: Fannie Mae

James Courter: Goldman Sachs, Donaldson Lufkin & Jenrette, Investment Company Institute, Merrill Lynch

David Crane: Financial Services Roundtable, PriceWaterhouseCoopers, Deloitte & Touche, KPMG, Ernst & Young, Bank of America, Association of Corporate Credit Unions, Freddie Mac

Dan Crippen: Merrill Lynch, National Multi-Housing Council

Arthur Culvahouse: Fannie Mae

Bryan Cunningham: Arch Capital Group

Alfonse D'Amato: AIG, Freddie Mac

Doug Davenport: Federal Home Loan Bank of San Francisco, Goldman Sachs, VISA

Ashley Davis: Prudential Financial, American Financial Group, American Premier Underwriters, Great American Insurance Company

Mimi Dawson: MassMutual

Melissa Edwards: Freddie Mac, National Association of Real Estate Investment Trusts, Access to Capital Coalition

Chris Fidler: American Bankers Association, Milcom Venture Partners, National Association Real Estate Investment Trusts

Samuel Geduldig: American Bankers Association, American Institute of CPAs, America Gains, Berkshire Hathaway, Consumer Bankers Association, Ernst & Young, Financial Services Roundtable, Investment Company Institute, PriceWaterhouseCoopers, Prudential Financial, Sovereign Investment Council, Fidelity Investments, FMR Corp.

Benjamin Ginsberg: Massachusetts Mutual Life Insurance, AIG Technical Services

David Girard-Dicarlo: American Financial Group, American Premier Underwriters

Juleanna Glover Weiss: RJI Capital, American Institute of CPAs, BNP Paribas, Ernst & Young, PriceWaterhouseCoopers

Slade Gorton: Allstate Insurance, Hannan Armstrong Capital

Phil Gramm: UBS Americas

John Green: Laredo National Bank, Alternative Investment Management Association, AIG, Blackstone Group, Carlyle Group, Citigroup, Credit Suisse Group, Fannie Mae, Icahn Associates, FMR Corp., AFLAC, VISA

Janet Grissom: American Institute of CPAs, NYSE, Merrill Lynch

Kristen Gullott: San Diego Credit Union

Kent Hance: Stanford Financial Group, Municipal Capital Markets Group, Inc.

Vicki Hart: American Financial Services Association, Citigroup, Investment Company Institute, Lehman Brothers, Merrill Lynch, New York Stock Exchange, VISA, Carlyle Group, Credit Suisse, Federal Home Loan Bank of Indianapolis, Goldman Sachs, National Association of Government Guaranteed Lenders, Stanford Group, Lloyd's of London, National City Corp.

Richard Hohlt: Capmark Financial Group, Fannie Mae, JP Morgan Chase and Co., Student Loan Marketing Association, Washington Mutual, Guaranty Bank & Trust, Peachtree Settlement Funding, Dime Savings Bank of New York

Gaylord Hughey: Heartland Security Insurance Group

Kate Hull: Credit Union National Association, Fannie Mae, Federal Home Loan Bank of San Francisco, Zurich Financial Services, American Insurance Association, Financial Executives International

James Hyland: American Insurance Association, Seattle Home Loan Bank, Self Help Credit Union, National Association of Bankruptcy Trustees, Merrill Lynch, Mortgage Investors Corp., Federal Home Loan Bank of Indianapolis, Freddie Mac, New York Stock Exchange, Citigroup, VISA

Aleix Jarvis: Credit Union National Association, Fannie Mae, Federal Home Loan Bank of San Francisco, Financial Executives International, Mutual of Omaha, American Insurance Association, Zurich Financial Services

Greg Jenner: American Council of Life Insurers, JG Wentworth, UBS, VISA, PriceWaterhouseCoopers

Frank Keating: American Council of Life Insurers

Steven Kuykendall: California Bankers Association

William Lesher: Chicago Mercantile Exchange, Commerce Ventures, Rabobank International

Thomas Loeffler: Citigroup, Fannie Mae, Investment Company Institute, World Savings and Loan Association, United Services Automobile Association (USAA)

Kelly Lugar: RJI Capital Strategies

Peter Madigan: Arthur Andersen, Bank of New York, Broadridge Securities Processing, Charles Schwab, Deloitte and Touche, Goldman Sachs, International Employee Stock Option Coalition, Mastercard, NYSE, Fannie Mae, Merrill Lynch, PNC Bank

Mary Mann: MassMutual

Paul Martino: Morgan Stanley, Baker Tilly

Jana McKeag: Venture Catalyst

Alison McSlarrow: Fannie Mae, Hartford

Mike Meece: Georgetown Partners

David Metzner: Ernst & Young, Harbinger Capital Investments, Prudential, Public Financial Management, Western Union

Susan Molinari: Freddie Mac, American Land Title Association, Association of Consumer Credit Unions, Beacon Capital Partners, College Loan Corp, Coventry First, E-Trade, Financial Services Roundtable, Rent-A-Center

John Moran: Cerberus Capital Management, American Council of Life Insurers, Accenture

John Napier: Freddie Mac

Susan Nelson: AIG, San Antonio Credit Union

Paul Otellini: Ernst & Young, Financial Services Forum

Steve Perry: Charles Schwab, Hoover Partners, HSBC, National Stock Exchange

Nancy Pfotenhauer: American Land Title Association, Mortgage Bankers Association

Elise Pickering-Finley: Credit Suisse, DE Shaw, Hartford Financial Services, Research In Motion, Retail Industry Lenders Association, URL Mutual

James Pitts: Advanced Association for Life Underwriting, AETNA, American Council of Life Insurers, AIG, Council of Insurance Agents and Brokers, Debt Advisory International, Financial Services Coordinating Council, GE Financial Assurance, Hartford Life, Jefferson Pilot Financial, Kenwood Investments, MassMutual, Mutual of Omaha, New York Life, UNUM Provident, VISA, PMI Group

Tim Powers: AP Capital, Genworth Financial, Retail Industry Lenders Association, E-LOAN, General Electric Mortgage Insurance

Walter Price: Wachovia

Sloan Rappoport: Friedman, Billings, Ramsey Group, Inc. (FBR), Trafelet Delta Funds

Hans Rickhoff: Capital One, Investment Company Institute, United Services Automobile Association (USAA)

Kathleen Shanahan: New York Stock Exchange

Andrew Shore: Accenture, Retail Industry Lenders Association, Barclays, Bond Market Association, Credit Suisse, TPG Capital

Katie Stahl: Alliance for Investment Transparency, Ares Management, Fairfax Financial Holdings, Uhlmann Financial Group

Milly Stanges: TIAA-CREF

Aquiles Suarez: Fannie Mae

Don Sundquist: Freddie Mac, The Hartford

Peter Terpeluk: JP Morgan Chase, Ernst & Young, Prudential

Fred Thompson: Equitas

Jeri Thompson: American Insurance Association

John Timmons: National Association of Federal Credit Unions

William Timmons Sr.: American Council of Life Insurers, Citigroup, Dun & Bradstreet, Freddie Mac, Vanguard Group

Vin Weber: Agstar Financial Services, AKT Investment Corp., American Institute of CPAs, Ernst & Young, Freddie Mac, Louis Dreyfus Corp, PriceWaterhouseCoopers

Jeffery Weiss: JP Morgan

Tony Williams: Russell Investment Group, American Life Inc., Northwestern Mutual

David Corn, Jonathan Stein, and Nick Baumann

September 17, 2008
Op-Ed Contributor

A Failure Tax

New Haven

AS venerable American financial institutions topple like dominoes, the concept of “too big to fail” is being sorely tested. Bear Stearns gets help. Lehman Brothers does not. The Federal Reserve and the Treasury Department are acting like insurance claims adjusters, selectively providing assistance when a company’s failure seems too much for the financial markets to withstand.

Why not make investment banks and other companies pay premiums for this catastrophic risk insurance? The government already provides flood, bank and crop insurance. Unlike participants in those programs, however, the companies that qualify for “too big to fail” insurance do not pay for the privilege.

Designing this too-big-to-fail insurance would be tricky but feasible. The potential economic impact of financial companies’ failure and the risk in their portfolios would have to be evaluated to determine which companies would be required to obtain this protection, and to calibrate premiums.

The goal should be to limit the contagion of failure rather than to prevent failure itself. Thus the payouts, which could still take the form of loan guarantees to parties willing to cover the failing institutions’ obligations, should not go to shareholders, who would lose all or most of their equity, but to counterparties — the banks, hedge funds and pension funds that are jeopardized by default. Still, these parties must share in the losses to reinforce the need for due diligence in securities transactions.

Critics might denounce institutional risk insurance as a tax. But so what? Forcing companies to pay for undesirable side effects is routine. The risk of a financial meltdown introduced by companies intertwined through Byzantine financial transactions imposes a burden on the government as real as pollution. The premiums could cover the costs of better regulation, a trade most stockholders would happily make today.

What’s truly radical is that government officials are empowered to determine when corporate failure is not tolerable. The question now is who should pay for the intervention.

Jonathan G S Koppell is the director of the Millstein Center for Corporate Governance and Performance at Yale.

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