1150 Seventeenth Street, N.W., Washington, D.C. 20036
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Since the 1930s, the U.S. banking system has relied on government deposit insurance, with private investors providing capital in the form of equity and debt. The housing finance system has relied on government loan insurance, subsidies, and implicit guarantees from government-sponsored enterprises (GSEs). With the financial market panic that began
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in 2007, the government has vastly escalated its involvement, with explicit guarantees for bank debt, massive injections of equity to financial firms and GSEs, loss sharing agreements to support the liabilities of the largest banks, and investments in risk assets by the Federal Reserve. Has the U.S. financial system gone past the point of no return when it comes to government ownership and control of the banking system? Can policymakers and private investors reprivatize American finance? Should they? If so, how?
This event is cosponsored by AEI and the Professional Risk Managers' International Association.
| 1:45 p.m. |
Registration |
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| 2:00 |
Panelists: |
Jay Brinkmann, Mortgage Bankers Association |
| Robert A. Eisenbeis, Cumberland Advisors |
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| Mark Olson, Former governor of the Federal Reserve |
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| Joshua Rosner, Graham Fisher & Co. | ||
| Moderator: |
Alex J. Pollock, AEI | |
| 4:00 |
Adjournment |
WASHINGTON, NOVEMBER 12--In the aftermath of the federal government pouring $700 billion into more than 600 banks and more than $110 billion combined into Fannie Mae and Freddie Mac, the future of the private financial system is less than clear. On November 12, AEI and the Professional Risk Managers' International Association hosted a panel discussion that posed this question: "Is It Possible to Reprivatize the U.S. Financial System?"
Some panelists challenged the idea that there ever was a wholly private financial system toward which to revert. Jay Brinkman of the Mortgage Bankers Association noted that Fannie Mae and Freddie Mac always had a government guarantee. "I don't see how you [can] reprivatize what was originally public," said Brinkman.
Presenting a plan from the Mortgage Bankers Association, Brinkman proposed replacing these government sponsored enterprises with private, regulated institutions. Securities would receive government guarantees when created for conventional mortgages, not the high-risk products popular during the housing boom. In exchange for the guarantees, firms would pay insurance fees to the government, similar to the present fund for bank deposits. Robert Eisenbeis, the Chief Monetary Economist at Cumberland Advisors, expressed doubt that programmatic changes will be easy or effective."No statement about 'no more bailouts or guarantees' is credible at this point in time," said Eisenbeis.
"Two things that will happen are that we will have a [Congressional] bill and there will be a new regulatory agency. All previous responses have been that way," said former Federal Reserve Board Governor Mark Olson. According to Olson, Congress acts only in consensus or crisis, the later spurring action. Olson also pointed to the extreme actions by the Federal Reserve, cutting its headline interest rate to near zero and doubling its balance sheet, to demonstrate that government would rather "commit sins of commission than sins of omission" in an attempt to stabilize financial markets.
Congressional bills have already been proposed, including one released by Senate Banking Chairman Christopher Dodd, to protect against "systemic risk"--a term that several panelists, including Joshua Rosner, a managing director at Graham Fisher & Co., said has never been more than circularly or anecdotally defined. "Systemic risk is like that question to the Supreme Court about what defines pornography," said Rosner.
Most panelists explained that the technical components of reprivitizing the system could be conquered but that they would either be done in a way that creates the next crisis or be blocked by political interests. "In a crisis, finance becomes political finance. What we have to get out of this discussion is that politics looms large," said AEI resident scholar Alex Pollock, summing the views he heard in the question and answer session.
Speaker biographies
Jay Brinkmann is the chief economist and senior vice president of research and economics for the Mortgage Bankers Association, where his responsibilities include economic forecasting, mortgage industry analysis, benchmarking industry profitability, and providing support for legislative and regulatory initiatives. Previously, Mr. Brinkmann worked for Fannie Mae's Portfolio Strategy Group and was on the faculty of the business school at the University of Houston, where he specialized in financial institution regulation and energy derivatives markets. He has also served as a commercial banker, as the deputy chief of staff to Louisiana governor David Treen, and as a Capitol Hill press secretary. Mr. Brinkmann has published articles in numerous academic journals and on the op-ed page of the Wall Street Journal. He is frequently interviewed by newspapers and the major business networks on real estate finance topics.
Robert A. Eisenbeis is the chief monetary economist at Cumberland Advisors, where he advises the company's asset managers on U.S. economic and financial market developments and their implications for investment and trading strategies. Mr. Eisenbeis was formerly executive vice president and director of research at the Federal Reserve Bank of Atlanta, where he advised the bank's president on monetary policy for Federal Open Market Committee deliberations and directed basic research and policy analysis. Previously, he was the Wachovia Professor of Banking at the Kenan-Flagler School of Business at the University of North Carolina, Chapel Hill. He has also held senior positions at the Federal Reserve Board and Federal Deposit Insurance Corporation. Mr. Eisenbeis is a member of the Financial Economists Roundtable and a fellow of the National Association of Business Economics.
Mark Olson is cochairman of the board of Corporate Risk Advisors. He has spent more than forty years in the financial services industry, holding top-level executive positions in the public and private sectors. Mr. Olson joined Corporate Risk Advisors after three years as chairman of the Public Company Accounting Oversight Board, five years as a member of the Federal Reserve Board of Governors and the Federal Open Market Committee, and after serving as staff director of the Securities Subcommittee of the U.S. Senate Committee on Banking, Housing and Urban affairs. Mr. Olson is also a past president of the American Bankers Association. He spent more than a decade as a partner with Ernst & Young LLP (formerly Arthur Young & Company), where he became national director of the financial services regulatory consulting practice. Mr. Olson began his career in Minnesota, first at First Bank System (now U.S. Bancorp), then as legislative director for the state's banking affairs, and finally as president and CEO of Security State Bank, a community institution founded by his father in 1957.
Alex J. Pollock has been a resident fellow at AEI since 2004, focusing on financial policy issues, including housing finance, government-sponsored enterprises, retirement finance, corporate governance, accounting standards, and the banking system. Previously, he spent thirty-five years in banking, including twelve years as president and chief executive officer of the Federal Home Loan Bank of Chicago. He is the author of numerous articles on financial systems and the organizer of the "Deflating Bubble" series of AEI conferences. In 2007, he developed a one-page mortgage form to help borrowers understand their mortgage obligations. He is a director of Allied Capital Corporation, the Chicago Mercantile Exchange, the Great Lakes Higher Education Corporation, the International Housing Union for Housing Finance, and the chairman of the board of the Great Books Foundation.
Joshua Rosner is a managing director at the independent research consulting firm Graham Fisher & Co., where he advises regulators and institutional investors on housing and mortgage finance issues. Previously, he was the managing director of financial services research for Medley Global Advisors, the premier provider of policy information on monetary, fiscal, regulatory, and political developments to many of the world's leading banks, mutual funds, hedge funds, and other institutional investors. Mr. Rosner was among the first analysts to identify operational and accounting problems in the government-sponsored enterprises (GSEs), the peak in the housing market, the likelihood of contagion in credit markets, and the weaknesses in the credit rating agencies' collateralized debt obligation (CDO) assumptions. His work on GSEs, credit rating agencies, and mortgage markets has resulted in invitations to present both privately and publicly before numerous organizations, businesses, policymakers, legislators, and regulators. Mr. Rosner has coauthored papers on the risks of CDOs to the mortgage finance market and the risk of misapplication of ratings in the structured finance market. Prior to joining Medley, Mr. Rosner was an executive vice president at CIBC World Markets and a senior vice president at its predecessor firm, Oppenheimer and Company.
