The Trade: In Brown-Vitter Bill, a Banking Overhaul With Possible Teeth

Michael Reynolds/European Pressphoto AgencySenators David Vitter, left, and Sherrod Brown have introduced a bill that would require banks to set aside more capital to cover potential losses.

The biggest banks have done an excellent job of delaying and undermining the Dodd-Frank financial overhaul law and staving off criminal investigations into wrongdoing.

Maybe, just maybe, they’ve been too successful.

Senators Sherrod Brown, Democrat from Ohio, and David Vitter, Republican from Louisiana, introduced a bill last week that calls for two things: making the giant banks much safer and tying regulators’ hands to prevent them from using taxpayer money to save a failing financial institution.

If the bankers who blew up the financial world had been held accountable, the popular fury that fuels this bill would have dissipated by now. And if Dodd-Frank were fully in place today, instead of being bogged down in the courts and in the halls of Washington regulatory offices, there would be no political momentum behind such an effort.

Now, we will see whether the bill is simply a barbaric yawp of anger at the big banks or something with actual force. It probably won’t get passed, but its underlying premise cannot be dislodged from the Washington conversation.

The Brown-Vitter bill calls for the banks with more than $500 billion in assets — I’m looking at you, JPMorgan Chase, Citigroup, Bank of America, Wells Fargo, Goldman Sachs and Morgan Stanley — to have capital reserves of 15 percent. That’s a much higher standard than exists today, especially because the current requirements have weak definitions of capital and total asset size.

The banks have rounded up a bunch of critics, led by the likes of the law firm Davis Polk & Wardwell and the lobbying firm Hamilton Place Strategies, the volume of their lamentations most likely in direct proportion to the hourly rate they bill their clients. They invoke terrifying, talismanic statements: the bill is a “punishment” to big banks. It is simplistic, impossible, will render American banks “uncompetitive,” lead to financial crises and probably cause tooth decay.

This naïve bill would force the giant banks to raise too much capital and would hurt the economy as the companies were forced to shrink or break up. Standard & Poor’s is one of the observers warning of a financial crisis. And who better to know than the people who brought us the last one?

Goldman Sachs and S.& P. estimate the big banks might be forced to raise $1 trillion or more. That’s a lot, so much that the leviathans’ agents cry out that they couldn’t sell that much stock. But they don’t have to raise it all at once. And they can retain their earnings and stop paying dividends in addition to selling shares.

In putting that argument forward, they don’t realize they make Senator Brown’s and Senator Vitter’s case for them. If investors are so terrified of the big banks that they won’t buy their stock, that’s a terrific problem. Most of the big banks trade below their net worth, an indication that investors don’t trust them. Brown-Vitter might actually help banks by restoring that trust.

The Brown-Vitter bill serves as a good time to remind defenders of big banks what bank “capital” is. As Professors Anat Admati and Martin Hellwig have pointed out in their indispensable book “The Bankers’ New Clothes,” capital is not a rainy-day fund. It’s not stored away in a vault somewhere, never to be touched. Capital — the rest of us know it as “equity,” like the down payment on a house — is simply money that absorbs losses. The more money a bank raises from shareholders, the more profit it keeps on hand, the less it has to borrow and the more solid it is. The bank can still lend that money. And if JPMorgan Chase doesn’t lend to some small business, perhaps a regional or community bank will.

There might be some trade-offs to higher capital requirements, but we know there are costs to lower ones: financial crises. Some try to argue that the banks faced a liquidity crisis in 2008, what we call a run on the bank. Yes, that was true in the autumn of 2008. But the crisis didn’t start then. It started in the late summer of 2007. If the banks had been more solidly capitalized, there would have been fewer panicked investors.

Banks desire as little capital as they can get away with. It’s easier to make higher returns on equity with greater debt. Often management is paid in stock. But society as a whole doesn’t benefit from banks that are running with too much leverage. They collapse.

So, it is better to have higher equity capital. But Brown-Vitter doesn’t go far enough. The bill’s definition of equity could be tighter. It still contains bookkeeping entries called intangible assets and deferred tax assets, which don’t absorb losses.

But, gratifyingly, Brown-Vitter does tighten up the definition of assets. Capital is the numerator and assets are the denominator. Both need to be made as solid and trustworthy — and resistant to manipulation by banks or regulatory capture — as they can be. When calculating assets, Brown-Vitter tightens up rules on things like how the banks measure their exposure to derivatives.

Oh, the critics shout, this is just a backdoor way of making banks smaller. The bill’s authors fail to understand that diversity of exposure saves gargantuan banks, they say. This requires a slap to the side of the head and a one-word rebuttal: Citigroup. Citi blew up because of its exposure to collateralized debt obligations. That exposure was dismissed and misunderstood by the top ranks because it was seemingly small as a portion of the bank’s balance sheet. It was wonderfully diversified into all kinds of investments, which didn’t help at all. Sure, small banks are less diverse. But when they collapse, the problem is more manageable.

Brown-Vitter inhibits regulators from using risk-weighting of assets, where banks and regulators determine which kinds of investments are safe and require little capital behind them. Davis Polk declared that getting rid of risk-weighting is “too blunt,” somehow immune to the absurd spectacle of lawyers opining on proper risk management.

In fact, risk-weighting has a storied history of blunder. Residential mortgages and sovereign debt, like that of, say, Greece, were once viewed as carrying little risk. Risk-weighting encourages banks to crowd into assets thought to be safe, in that way making them unsafe. It lulls them, and regulators, into a false sense of confidence. Perhaps throwing out risk-weighting might lead lots of banks to buy stuff that is known to carry risk. It’s far better to have them piling into investments that are known to be risky and count those purchases with a clearer, less manipulated number. Then, regulators need to pay attention, which, call me crazy, is their job.

Brown-Vitter also ties regulators’ hands on whether they can pour taxpayer money into failing banks. Here, it’s less plausible. Dodd-Frank has given regulators resolution authority, which gives them the power to unwind failing institutions and impose losses on the shareholders and creditors. Brown-Vitter tries to eliminate what Dodd-Frank skeptics see as too much regulatory flexibility.

It’s a noble idea. But the problem, as Paul A. Volcker has pointed out, is that if JPMorgan Chase is truly failing, it’s almost a certainty that Citi and Bank of America are going down, too. And taxpayers would then have to step in in some fashion.

So, taxpayers are implicitly on the hook for the financial sector, even with Brown-Vitter.

That’s why we need the biggest banks to have truly clear and understandable balance sheet fortresses.

Janet L. Yellen, Possible Fed Successor, Has Admirers and Foes

Jim Watson/Agence France-Presse — Getty ImagesJanet Yellen, second from left, is viewed as a logical candidate to succeed Ben Bernanke, left, as chairman of the Federal Reserve when his term ends in 2014.

WASHINGTON — In July 1996, the Federal Reserve broke the metronomic routine of its closed-door policy-making meetings to hold an unusual debate. The Fed’s powerful chairman, Alan Greenspan, saw a chance for the first time in decades to drive annual inflation all the way down to zero, achieving the price stability he had long regarded as the central bank’s primary mission.

Born: Brooklyn, Aug. 13, 1946

Education: B.A. in economics, Brown University, 1967; Ph.D. in economics, Yale University, 1971

Career Highlights: Assistant professor at Harvard, 1971-76; economist with the Fed’s Board of Governors, 1977-78; joins faculty at University of California, Berkeley, 1980; member, Fed’s Board of Governors, 1994-97; chairwoman, Council of Economic Advisers, 1997-99; chief executive, Federal Reserve Bank of San Francisco, 2004-10; vice chairwoman, Federal Reserve, 2010-present

But Janet L. Yellen, then a relatively new and little-known Fed governor, talked Mr. Greenspan to a standstill that day, arguing that a little inflation was a good thing. She marshaled academic research that showed it would reduce the depth and frequency of recessions, articulating a view that has prevailed at the Fed. And as the Fed’s vice chairwoman since 2010, Ms. Yellen has played a leading role in cementing the central bank’s commitment to keep prices rising about 2 percent each year.

Ms. Yellen is now widely viewed as a logical candidate to succeed the current Fed chairman, Ben S. Bernanke, when his term ends in January 2014. She has worked closely with him in shaping and building support for the Fed’s campaign to stimulate the economy and bring down unemployment.

But some of Ms. Yellen’s critics remain wary. They worry that she would not be sufficiently concerned about the possibility that inflation will accelerate as the economic recovery gains strength. If nominated, she could face opposition from Senate Republicans who have repeatedly expressed concern that the Fed’s campaign would destabilize financial markets and make controlling the pace of inflation more difficult.

“I think people read Janet Yellen’s speeches as saying that she puts a higher weight on joblessness compared to inflation” than the typical member of the Fed’s policy-making committee, said Vincent Reinhart, formerly the head of the Fed’s monetary policy staff and now the chief United States economist at Morgan Stanley. “And that includes Ben Bernanke.”

He added, however, that her nomination would be unlikely to shake financial markets because she already exercises considerable influence, so any shift in policy would most likely be modest.

Moreover, Ms. Yellen’s personal qualities, highlighted by the 1996 episode, have helped her win supporters even among her ideological opponents.

“She makes an argument on the merits and she sticks with it,” said Alan Blinder, an economics professor at Princeton nominated to the Fed alongside Ms. Yellen in 1994. “And she’s good at articulating an argument in a way that doesn’t leave people on the other side hopping mad at her.”

Despite their disagreement at the time, Mr. Greenspan said that he continued to hold Ms. Yellen in high regard. “I did listen to her more carefully because she articulates her position in a way that you can follow it analytically,” he said in an interview. “Intuitions are useless. Janet’s conversation and her presentations were factually based, and that always got my attention.”

If confirmed, Ms. Yellen would become the first woman to lead a major central bank. She is 66, seven years older than Mr. Bernanke. She would be 71 by the end of a four-year term as chairwoman. But she remains in good health, and friends say that, like other prominent women of her generation, she regards herself as being in the prime of a late-blooming career. Nor would she be the oldest person to lead the Fed. Mr. Greenspan began his fifth and final term in 2004 at 78.

Ms. Yellen, slight, white-haired and described by one colleague as a “small lady with a large I.Q.,” does not loom like Paul Volcker nor cut like Mr. Greenspan. Her personal style more closely resembles Mr. Bernanke’s soft-spoken manner. The force of her arguments can catch people by surprise.

Kevin Hassett, a staff economist at the Fed when Ms. Yellen arrived in 1994, recalled that she started to eat lunch regularly in the staff cafeteria to subvert the hierarchical system that limited communication between Fed governors and the vast army of research economists. Other governors had tried to change the rules but Ms. Yellen, he said, found a way around them.

“It showed a kind of grace and wisdom that is very unusual in Washington,” said Mr. Hassett, now a fellow at the right-leaning American Enterprise Institute.

BP Trial Opens, With Possible Deal in Background

James P. Roy, the lead lawyer of private plaintiffs, started the trial with a scathing attack on BP for ignoring multiple signs of problems on the rig and in routine maintenance of safety tests and equipment that led to the Macondo well accident.

“BP made a series of decisions to save time and money that substantially increased risk,” Mr. Roy told a packed courtroom. He said the decisions were typical of “a culture of profit and production over safety.”

In more than an hour of testimony, Mr. Roy noted that BP had decided to employ single-walled drill pipe, which provided inferior barriers to leaks, and it decided that it was not necessary to circulate drilling mud, a method designed to strengthen cement, before installing a seal on the well. He reminded the court that BP opted against conducting a cement bond test, an acoustics test that could have identified the gas that had leached into the piping during the well cementing process.

And finally, he said, using information that has previously been described in numerous government and private reports since the accident, BP ignored the results of a failed pressure test shortly before the well was sealed and blew out.

But Mr. Roy also argued that Transocean, the owner and operator of the Deepwater Horizon rig, had failed to adequately train its employees in emergency operations, and Halliburton was deficient in testing and mixing the cement to seal the well.

The first phase of the trial, which was expected to last three months under Judge Carl J. Barbier of Federal District Court in New Orleans, will determine whether BP or its contractors were “grossly negligent” in causing the accident. The private plaintiffs in the trial, including thousands of businesses and individuals, are suing for damages from all the companies.

In his opening statement, Michael Underhill, the Justice Department’s lead attorney, said the government would prove that BP was grossly negligent. “Reckless actions were tolerated by BP, sometimes encouraged by BP,” he said. “These damages were caused by actions that cannot be seen as anything but inexcusable behavior.”

He discussed a phone call between Donald Vidrine, a BP supervisor on the rig who has already been criminally charged, with Mark Hafle, an onshore engineer, in which Mr. Vidrine described problems with a critical test less than an hour before the explosion. But neither man took action to stop operations to prevent the eventual blowout.

Separately, details of a settlement offer by federal and state officials to the oil company began to emerge over the weekend. The plan, worth a total of $16 billion, would limit the fines paid by BP under the Clean Water Act to $6 billion, a proposal that could help reduce its tax liability, one person briefed on the plan said Sunday, speaking on the condition of anonymity.

BP would also pay $9 billion in penalties to cover damages to natural resources as well as the cost of restoration, that person said. The remaining $1 billion would be set aside in a fund that could be tapped if unanticipated environmental damages related to the spill developed.

No one at BP, the Justice Department or the states involved has commented on any settlement proposal, but several lawyers briefed on the negotiations said that a $16 billion proposal had been made. The affected states are Alabama, Florida, Louisiana, Mississippi and Texas, although only Alabama and Louisiana are participating in the trial.

Even if settlement talks slow or stall, the proposal represents a big breakthrough for several reasons, lawyers briefed on the talks said. For one, it represents the first time that Louisiana, which was hardest hit by the spill and would receive the largest payout of any state from a settlement, has participated in an offer.

In addition, the proposal signals the first agreement among states and the federal government on two other crucial issues: a rough plan for how the states would divide any settlement money, and how the settlement would balance fines and penalties against BP.

BP pleaded guilty last year to 14 criminal charges, including manslaughter; admitted negligence in misreading important tests before the blowout; and agreed to pay $4.5 billion in fines and other penalties. The Justice Department has also filed criminal charges against four BP employees.

Last February, a trial to resolve claims against BP by individuals and businesses affected by the spill was delayed by Judge Barbier on the eve of trial because of settlement talks. BP subsequently agreed to create a fund now valued at $8.5 billion to settle those claims. However, numerous individuals and businesses chose not to participate and are also parties to the trial that started Monday.

Gun Shop Owners Report Spike in Sales as Enthusiasts Fear Possible New Laws

At Bud’s Gun Shop in Maryland, a message on the Web site said that customer service was “completely overwhelmed” and it discouraged customers from calling or e-mailing.

And on GunBroker.com, an Oracle .223 that normally retails for around $650 had been bid up to $1,175 with three days left in the auction.

With gun-control legislation getting more serious discussion than it has in years, gun sales are spiking as enthusiasts stock up in advance of possible restrictions.

Gun sales have been increasing over the past five years, with marked increases around the 2008 and 2012 elections, and after mass shootings like the one in Aurora, Colo., and now in Newtown, Conn.

“The largest factor by far is fears over a potential change in gun laws — that’s what’s driving most guns enthusiasts or even first-time buyers to go buy a gun,” said Nima Samadi, senior guns and ammunition analyst for the research firm IBISWorld.

There is increasing demands for guns in the United States. Last year, the Federal Bureau of Investigation conducted 16.45 million background checks for firearm sales through the National Instant Criminal Background Check System, a 14 percent jump from the previous year. In the first 11 months of this year, the bureau conducted 16.8 million background checks, a record since the system’s founding in 1998.

Since the shootings at Sandy Hook Elementary School in Newtown, though, a few companies associated with gun sales have backed away. Cerberus Capital Management put the company that makes the Bushmaster, a gun used in the shootings, up for sale on Tuesday, saying, “The Sandy Hook tragedy was a watershed event that has raised the national debate on gun control to an unprecedented level.”

Dick’s Sporting Goods temporarily ceased selling all guns in its location closest to Newtown, and has also put a hold on sales of so-called modern sporting rifles, which include semiautomatic guns, nationwide.

And Deseret Digital Media, which owns KSL.com, a Web site that has been criticized by Mayor Michael R. Bloomberg for allowing unregulated gun sales, said it was suspending classified advertisements for guns.

Elsewhere, though, consumers are hurrying to buy guns, leading to some models being out of stock, warnings of shipping and customer-service delays, and significant premiums on assault rifles.

“We are seeing a total madhouse of buying everything in sight,” said Bob Irwin, owner of the Gun Store, a Las Vegas shooting range and retailer. Thursday, he said, was the largest sales day in the history of the store, which has been open for 30 years. “We have not only a run on the guns, but a run on ammunition.”

Mr. Irwin has begun limiting how much of some types of ammunition customers can buy, and he has canceled employees’ days off to handle the demand.

Walmart, the largest retailer of guns and ammunition in the United States, indicated that several semiautomatic guns were out of stock at locations across the country. Kory Lundberg, a spokesman, said the company was not sold out of guns altogether, but had low inventory in some situations. Walmart carries guns in about half its stores, and about one-third carry so-called modern sporting rifles, the category including the Bushmaster and other AR-15 weapons.

Other retailers around the country were selling out of guns and accessories. On Friday on ImpactGuns.com, the Bushmaster .223 was out of stock. Davidson’s, a supplier to gun retailers, placed a notice on its Web site that said it was seeing “unprecedented demand,” and at MidwayUSA.com, more than 100 parts for AR-15 guns were out of stock and on back order.

On AR15.com, a gun-enthusiast Web site, a user posted that a barrel for a gun disappeared from an online shopping cart overnight, and is now on back order. Another user, named warplg8654, responded, “Dealers can’t keep anything in stock for what I think are obvious reasons given the current political climate.”

When a user called JazzFan asked whether paying a $100 premium for a Stag Model 3 was a good deal, another user said that seemed “reasonable with all of the panic buying.”

Gavin Gear, the founder of the enthusiast site Northwest Gun, said gun owners were feeling “apprehension.”

“People are trying to think ahead, and if they want to own a particular firearm and they think it’s going to be outlawed or restricted, they’re more likely to buy now,” he said.

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