June 4, 2010 Issue 21 

Financial Regulatory Reform Bill 

The House and Senate were out of session this week due to the Memorial Day District Work Period. Consequently, the debate on financial reform remained mostly quiet, although committee staffers began the process of working with the White House and the Treasury Department to reconcile the differences between the House and Senate bills. On Tuesday, House Financial Services Committee Chairman Barney Frank (D-MA) said he was confident that a bill will be on President Obama’s desk by the Fourth of July. He also said he would like to see as many as seven conference committee meetings – broadcast by C-Span, ideally – with amendments voted on individually in open sessions. The initial work of the committee is expected to start next week and last through the end of the month. 

May Jobs Report Released 

On Friday, the Department of Labor released the May jobs report showing the U.S. economy added 431,000 jobs in May. However, only 41,000 of those jobs were from the private sector, and the remaining 411,000 were a result of temporary government jobs in the U.S. Census Bureau. The unemployment rate fell from 9.9% to 9.7%. Taking into account revisions to prior months, the U.S. economy added an average of nearly 200,000 jobs per month in the January-May period. In May, employment in professional and business services rose by 22,000. Manufacturing continued to trend up, rising by 29,000. Construction, a sector of the economy that remains soft, lost 35,000 jobs in May.

G20 Meeting In South Korea 

On Friday, the meeting of the G20 finance ministers and central bank governors began in South Korea’s southeastern port city of Busan. The meeting’s agenda focuses on global cooperation to improve financial and fiscal soundness. At the meeting’s outset, sources indicated the ministers would delay the implementation of tougher international banking regulations known as “Basel III,” which were due to be finalized by November. Disagreements over the regulations include the scale, scope, and timing of the increases in capital and liquidity banks will be required to hold, as well as the leverage they will be allowed. The U.S. and U.K. are pushing for tougher standards, but western and central European countries are opposing the stricter measures. Sources indicated that the U.K. and the U.S. are offering to delay the implementation of the Basel III reforms in a bid to ensure that the principles do not get watered down. Sources also indicated that France and Germany are seeking to reopen arguments thought to be settled last year in a bid to dilute capital requirements for their banks by allowing them to include deferred tax assets and minority interests in tier one capital. The Basel III rules were originally expected to be phased in by the end of 2012, but sources familiar with the discussions said that the new rules are now likely to be put in place between 2014 and 2016.

The G20 ministers are also likely to continue discussions on the timing of unwinding the monetary and fiscal policies they launched to cushion the crisis, and the Bank of Canada on Tuesday became the first G7 nation to raise its key interest rate. Canadian Minister Peter Flaherty restated Canada’s firm opposition to the idea of a bank levy to pay for any other financial bailout. He said he had written to his G20 counterparts last week detailing Canada’s proposal of “embedded contingent capital” to shore up banks’ balance sheets as an alternative to a global tax. The proposal discussed at the last G20 meeting was for an international bank tax to be levied in order to pay for a future financial crisis. On Friday, U.S. Treasury Secretary Timothy Geithner told reporters in Seoul, ” I don’t think we’re on the verge of a global consensus on bank levy yet.” The June meeting in South Korea is intended to advance discussion in preparation for the more important leaders’ summit June 26-27 in Toronto, Canada. 

Financial Crisis Commission Hearing 

On Wednesday, Warren Buffett appeared under subpoena, after first declining an invitation, before the Financial Crisis Inquiry Commission, a bipartisan commission that has been charged with examining the causes of the financial crisis and reporting to the Congress and the President. The Commission is chaired by former Democratic California Treasurer Phil Angelides and former Republican California Congressman Bill Thomas. Buffett testified that he did not know much about the credit rating market, even though the holding company he controls, Berkshire Hathaway, is the largest shareholder in Moody’s Investors Service, one of the three largest rating agencies. Moody’s was the subject of the daylong hearing, held in New York, as part of the commission’s examination of why rating agencies like Moody’s, Standard & Poor’s, and Fitch gave top investment grades to mortgage-related bonds that were later downgraded to junk after the housing collapse. Appearing for two hours of questioning alongside Moody’s chief executive, Raymond W. McDaniel Jr., Buffett declined several times to say whether Mr. McDaniel should have been fired for what proved to be inaccurate ratings. McDaniel testified that the drop in housing prices was without precedent, and therefore all but impossible to predict. At the end of the hearing, panel member Brooksley Born, the former chairwoman of the Commodity Futures Trading Commission, moved the discussion away from rating agencies to the derivative markets and asked Buffett if the market was “still a time bomb ticking away?” Buffett responded in the affirmative, indicating he was also concerned about the potential dangers in the derivatives market.

More Information 

If you have any questions regarding any of these issues, please contact: 

Matt Jessee, Policy Advisor
1 202 508 6341 Washington

Kip Wainscott, Associate Attorney
1 202 508 6172 Washington