June 25, 2010
Moratorium Won’t Reduce Drilling Risks By JOE NOCERA
“This case asks whether the federal government’s imposition of a general moratorium on deepwater drilling for oil in the Gulf of Mexico was imposed contrary to law. Before the Court is the plaintiffs’ motion for preliminary injunction. For the following reasons, the motion is GRANTED."
So began a stinging 22-page decision, issued this week by a Federal District Court judge, Martin L. C. Feldman. He was rejecting, pretty much out of hand, the Obama administration’s plan to place a six-month moratorium on all drilling projects in the Gulf of Mexico. It would have amounted to a shutdown of 33 deepwater rigs, the kind that can drill the deepest and are the most complex to operate — and the kind that can cost well over $500,000 a day even when they’re just sitting idle.
The plaintiffs consisted of a group of companies that make their money servicing gulf drilling operations; they were led by a shipping company, Hornbeck Offshore Services, which employs 1,300 and has spent nearly $700 million in the last five years building a new generation of ships for use in the gulf. “We saw this as putting our Gulf of Mexico business model at risk,” said Samuel Giberga, the company’s general counsel.
But he also believed that the administration’s edict violated the law. The secretary of the interior, Ken Salazar, had failed to take into account the enormous economic pain that would be inflicted on the gulf region by such a moratorium, as he was required to under the law, Hornbeck argued. The administration was punishing deepwater drillers that had complied with all the regulations surrounding deepwater drilling — and had gotten their permits fair and square. Right after the spill, Mr. Giberga told me, a government SWAT team had inspected all the other rigs — and found them to be safe. The Deepwater Horizon disaster notwithstanding, the federal government had failed to articulate any good reason why all the other rigs in the gulf had to be stopped as well.
And Judge Feldman agreed with Hornbeck on every count. Concluding that the decision to impose the moratorium was “arbitrary and capricious,” he wrote, “An invalid agency decision to suspend drilling of wells in depths of over 500 feet simply cannot justify the immeasurable effect on the plaintiffs, the local economy, the gulf region, and the critical present-day aspect of the availability of domestic energy in this country.”
Over the next few days, three things happened, all of them completely predicable. The Interior Department vowed to appeal. Gulf state politicians, starting with Bobby Jindal, the governor of Louisiana — whose state has suffered tremendously as a result of the BP accident — pleaded with the federal government to drop the appeal and allow drilling to continue. And environmentalists derided Judge Feldman’s decision.
“This is the Ninth Circuit, which is the go-to court for the oil and gas industry,” said Elgie Holstein, the oil spill response coordinator for the Environmental Defense Fund. “I fully expect it to be overturned on appeal.”
Robert F. Kennedy Jr., the president of Waterkeeper Alliance, told The Mobile Press-Register that drilling deepwater wells right now, “when we don’t even know what caused this accident, seems insane.” He added, “I don’t think anybody responsible would advocate more drilling right now.” And so on.
A simple six-month drilling moratorium. It sounds like such a sensible, obvious, uncontroversial thing to do in the wake of the worst environmental disaster in this nation’s history, doesn’t it? Turns out, it’s anything but.
•
As a percentage of the world’s oil production — some 84.5 million barrels a day — the 1.75 million barrels a day that is extracted from the Gulf of Mexico is not a huge number. (That’s why oil prices haven’t risen as a result of the Deepwater Horizon disaster.) But in terms of the country’s domestic production, it is extremely important. According to Gibson Consulting, a third of all United States oil production comes from the Gulf of Mexico.
What’s more, virtually every new well being drilled in the gulf is a deepwater well — because, after all, that’s where the oil is. “Oil from shallow waters peaked in the 1990s,” said Cutler Cleveland, a professor of geography and environment at Boston University. “And deepwater peaked five or six years ago. So now we are moving into ultra deepwater — over 5,000 feet.” And, he adds, 80 percent of the reserves that remain in the gulf are either in deep or ultra deepwater.
So the first point is: Until that glorious day comes that our cars are fueled by batteries and our homes are heated by solar power, we need as much domestic oil as we can get our hands on, oil that exists in the deep waters of the Gulf of Mexico. Shutting down drilling in the gulf — even temporarily — means we’ll be importing even more oil from other countries than we already do.
Nor is it clear, if the moratorium went into effect, the pullback would be all that temporary. For one thing, the moratorium is contingent on a special commission making yet more safety recommendations in six months, but there is no guarantee they’ll be done by then. Meanwhile, there are only so many floating rigs in the world, and Brazil, for instance, has just embarked on a $200 billion drilling program. (You read that right: $200 billion.) It takes a month to move an idle rig from the Gulf of Mexico to Brazil, where it will likely stay for years. So a six-month moratorium would quite likely have far greater effect on American oil production that it would seem at first glance.
Which also leads to a great irony: importing more oil via tankers will actually create more risk, not less. Between the 1970s and the Deepwater Horizon accident, a grand total of 1,800 barrels of oil were lost from rig accidents — an average of 45 barrels a year. That is an astonishing record. Ken Arnold, an expert who consulted with the Interior Department right after the BP spill — and a big critic of the moratorium — told me that much more oil is spilled in tanker accidents annually than from drilling rig accidents.
What’s more, he added: “The oil in those tankers was produced somewhere — somewhere that most likely has less regulation and less oversight than we have. We are not lessening the chance of a spill; we’re just transferring that risk to Nigeria and Brazil. We are not helping the world. We are just saying, ‘Brazil, we prefer to despoil your beaches, but not ours.’ ”
Then there are the battered gulf economies. It is easy enough, sitting here in New York, to argue that we should shut down oil drilling in the Gulf of Mexico for as long as it takes, to be absolutely sure we’ll never have another accident like the one we’ve just had. I hear Rachel Maddow making that point most every night these days.
But a shutdown doesn’t really affect our daily lives up here on the East Coast. In the gulf, one mainstay of the economy — fishing — has already been devastated. Do we really want to finish off the rest of the Gulf Coast economy by sidelining its other pillar, oil drilling? There is a reason politicians like Mr. Jindal are pleading for drilling to continue, despite the spill’s terrible effect on his state. They’re desperate. When an airplane crashes, and several hundred people die, the government doesn’t ground every airplane until it is sure all airplanes are safe. It would be too disruptive to the economy. Shouldn’t the same logic apply here?
What has become obvious in the aftermath of the accident is not so much that offshore drilling — even deepwater offshore drilling — is inherently unsafe. It is, certainly, risky, but so are many activities, like mining or flying an airplane. One reason there have been so few accidents over the years is that the incentive for doing things safely is enormous: mistakes can lead to death.
None of which is to say that the Deepwater Horizon disaster hasn’t pointed to problems with drilling, or that new safety measures don’t need to be added. Most of all, it shows the utter inadequacy on the part of both industry and government in containing accidents when they do happen. Precisely because of the industry’s incredible safety record over the years, everyone got complacent. But a six-month moratorium isn’t going to fix that either. What are needed are new ideas that can be debated and then enacted into regulation. One appealing idea I’ve heard is that deepwater rigs should be required to drill a relief well at the same time the exploratory well is being drilled. But that would also, of course, increase the cost of drilling for oil in the gulf.
In the end, the real problem with the six-month moratorium is that it allows us to continue to kid ourselves. It helps us create the illusion that, by regulatory fiat, we can make the extraction of fossil fuels a riskless endeavor. But that can never be true. Six months from now, whether or not the Interior Department succeeds getting Judge Feldman’s decision overturned on appeal, deepwater drilling will still be risky. Drilling thousands of feet into water, searching for dangerous natural gas and oil, contained in the earth under immense pressure, is inherently risky.
We would all be better off facing that fact squarely, instead of wishing it away under the guise of a moratorium.
Showing posts with label Nocera. Show all posts
Showing posts with label Nocera. Show all posts
Saturday, June 26, 2010
Saturday, June 19, 2010
BP Ignored the Omens of Disaster By JOE NOCERA
June 18, 2010
BP Ignored the Omens of Disaster By JOE NOCERA
“We have to get the priorities right,” the chief executive of BP said. “And Job 1 is to get to these things that have happened, get them fixed and get them sorted out. We don’t just sort them out on the surface, we get them fixed deeply.”
The executive was speaking to Matthew L. Wald of The New York Times, vowing to recommit his company to a culture of safety. The oil giant was adding $1 billion to the $6 billion it had already set aside to improve safety, the executive told Mr. Wald. It was setting up a safety advisory panel to make recommendations on how the company could improve. It was bringing in a new man to head its American operations — the source of most of the company’s problems — who would make safety his top priority. And on, and on.
That interview didn’t take place this week — a week in which BP was excoriated in Congress for the extraordinary safety lapses that led to the Deepwater Horizon rig disaster, while also being strong-armed by President Obama into putting $20 billion in escrow to compensate victims.
No, the interview took place nearly four years ago, after BP’s previous disaster on American soil, when oil was discovered leaking from a 16-mile stretch of corroded BP pipeline in Prudhoe Bay in Alaska. And that was just a year after a BP refinery explosion in Texas City, Tex., killed 15 workers and injured hundreds more.
Nor was the chief executive in question Tony Hayward, who spent Thursday before a Congressional panel ducking tough questions and evading personal responsibility — while insisting, absurdly, that as head of the company he had been “laser-focused” on safety. No, the interviewee was his predecessor and mentor John Browne, who had spent nearly 10 years at the helm of BP before resigning in May 2007.
Do you remember the Prudhoe Bay leak and the Texas City explosion? They were big news at the time, though they quickly faded from the headlines. BP was fined $21 million for the numerous violations that contributed to the Texas City explosion, and it was forced to endure a phased shutdown of its Alaska operations while it repaired the corroded pipeline, which cost it additional revenue.
In retrospect, though, the two accidents represented something else as well: they were a huge gift to the company. The fact that these two accidents — thousands of miles apart, and involving very different parts of BP — took place within a year showed that something was systemically wrong with BP’s culture. Mr. Browne had built BP by taking over other oil companies, like Amoco in 1998, and then ruthlessly cutting costs, often firing the acquired company’s most experienced engineers. Taking shortcuts was ingrained in the company’s culture, and everyone in the oil business knew it.
The accidents should have been the wake-up call BP needed to change that culture. But the mistakes and negligence that took place on the Deepwater Horizon in the Gulf of Mexico — which are so profound that everyone I spoke to in the oil business found them truly inexplicable — suggest that the two men never did much more than mouth nice-sounding platitudes.
Which also makes the disaster even more unforgivable than it already is. BP executives had four years to fix the company’s problems before an accident took place that was truly catastrophic. And they blew it.
•
Before the Deepwater Horizon tragedy, the greatest oil disaster in American history was the Exxon Valdez spill in 1989, which spewed 10.8 million gallons of crude into Prince William Sound in Alaska. (By comparison, the gulf blowout is pouring out that much oil every four or five days.) That experience was searing for the country — but it was also pretty searing for Exxon (now known as Exxon Mobil). “A low point in the history of the company,” Exxon Mobil’s chief executive, Rex Tillerson, called it when he testified before Congress on Tuesday.
There is a reason Exxon Mobil has not had a serious accident in the subsequent 21 years. Unlike BP, it used the accident to transform itself.
Immediately after the spill, Exxon pulled together some of its most respected executives and gave them a new assignment: figure out how to embed safety into the core of the company. The message was reiterated by the top brass, including the chief executive, whenever they visited a rig or a refinery. Processes were put in place that had to be followed at any Exxon facility anywhere in the world. Redundancies were built in. Workers were encouraged to bring safety concerns to their bosses. And the statistics bear out the genuineness of this cultural change: by every measure, Exxon Mobil has by far the best safety record in the industry. The company has become so safety-crazed that an Exxon Mobil cafeteria worker takes the temperature of the lettuce in the salad bar.
Compare that to BP’s record these last four years. On Thursday, during his day before an angry House energy subcommittee, Mr. Hayward was confronted with the fact that BP had been cited by the Occupational Safety and Health Administration for 760 “egregious willful” safety violations in its refineries. Mr. Hayward tried to slough this off by claiming that the violations had taken place in 2005 and 2006 — before, that is, he became chief executive and brought his “laser focus” on safety.
But Mr. Hayward was not telling the truth. According to the Center for Public Integrity, which obtained the data under the Freedom of Information Act, the violations all took place between 2007 and 2010, very much on Mr. Hayward’s watch. What’s more, the company violated something called O.S.H.A.’s “process safety management standard” — which is precisely what that BP advisory panel had been charged with examining after the Texas City explosion. In October 2009, O.S.H.A. fined BP an additional $87 million for refinery deficiencies. It doesn’t sound like the company took its advisory panel’s recommendations very seriously, does it?
Or take the Deepwater Horizon disaster itself, which was preceded by so many instances of corner-cutting and poor decision-making that an accident was practically preordained. Drilling one of the deepest wells in history, the project used only one strand of steel casing, when it should have used at least two. Halliburton recommended that BP use 21 “centralizers,” which help ensure that the well doesn’t veer off course as it goes deeper into the earth, but the company used just a half-dozen. BP failed to conduct a crucial test to make sure that the cement holding the well at the bottom of the sea was sturdy enough.
And the engineers for BP on board consistently ran roughshod over subcontractors like Halliburton, who openly worried that BP was making decisions that could have catastrophic consequences. “This is how it’s going to be,” one BP engineer reportedly said, overruling a contractor on the critical question of when to replace the drilling mud — which keeps explosive natural gas from flowing out of the well — with seawater.
What makes this all the more shocking is that BP was drilling what’s called a wildcat well, meaning it was drilling in an area that no other company had drilled before, so it had no knowledge of the conditions. For most oil companies, that would be all the more reason to take extra precautions. Yet BP did just the opposite.
Listening to Mr. Hayward’s responses on Thursday only reinforced the feeling that the company still didn’t understand what it took to instill a culture of safety. He kept saying that the blowout preventer was supposed to be a fail-safe mechanism that would keep the well from raging out of control. But other companies know that it is far too dangerous to depend on the blowout preventer alone and they build in additional safeguards, so that a problem can be dealt with long before the blowout preventer is needed. Asked about the lack of that important cement bonding test, Mr. Hayward blithely replied that he wasn’t a cement engineer so he couldn’t make a judgment about the decision.
Most telling of all, Mr. Hayward consistently denied knowing of any problems on the rig. As far as he knew everything was fine — until it wasn’t. But drilling a well offshore, miles into the earth, is one of the most dangerous activities in the world. Most companies will shut down a well at the first sign of serious trouble and kick the decision-making up to top management. The price of making a big mistake is simply too high. If Exxon Mobil had been running the Deepwater Horizon well, it is implausible that Mr. Tillerson would not have been informed of the problems. And he would also have had to approve any fix. That Mr. Hayward and his top deputies knew nothing about the problems on the Deepwater Horizon well is, by itself, a serious act of negligence.
Changing a company’s culture is always hard, no doubt about it. And it is especially hard for a company like BP, which has had such enormous success these last few years, reaping $14 billion in profits last year alone. For such companies, it often requires a crisis to change. Microsoft changed after its antitrust trial a decade ago. Tyco International changed after its chief executive, Dennis Kozlowski, went to jail. And chances are, BP is now going to change, too.
This time, the world’s attention will not quickly fade, as it did after the Prudhoe Bay spill. The financial hit, which several Wall Street analysts believe could top $100 billion, is going to be severe. The pressure from the United States government will be unrelenting.
All of this, of course, could have been avoided if the company had truly taken safety to heart four years ago. But it didn’t, and the Gulf Coast is suffering the consequences. Normally, I’d say “better late than never.” But it’s not. Not even close.
BP Ignored the Omens of Disaster By JOE NOCERA
“We have to get the priorities right,” the chief executive of BP said. “And Job 1 is to get to these things that have happened, get them fixed and get them sorted out. We don’t just sort them out on the surface, we get them fixed deeply.”
The executive was speaking to Matthew L. Wald of The New York Times, vowing to recommit his company to a culture of safety. The oil giant was adding $1 billion to the $6 billion it had already set aside to improve safety, the executive told Mr. Wald. It was setting up a safety advisory panel to make recommendations on how the company could improve. It was bringing in a new man to head its American operations — the source of most of the company’s problems — who would make safety his top priority. And on, and on.
That interview didn’t take place this week — a week in which BP was excoriated in Congress for the extraordinary safety lapses that led to the Deepwater Horizon rig disaster, while also being strong-armed by President Obama into putting $20 billion in escrow to compensate victims.
No, the interview took place nearly four years ago, after BP’s previous disaster on American soil, when oil was discovered leaking from a 16-mile stretch of corroded BP pipeline in Prudhoe Bay in Alaska. And that was just a year after a BP refinery explosion in Texas City, Tex., killed 15 workers and injured hundreds more.
Nor was the chief executive in question Tony Hayward, who spent Thursday before a Congressional panel ducking tough questions and evading personal responsibility — while insisting, absurdly, that as head of the company he had been “laser-focused” on safety. No, the interviewee was his predecessor and mentor John Browne, who had spent nearly 10 years at the helm of BP before resigning in May 2007.
Do you remember the Prudhoe Bay leak and the Texas City explosion? They were big news at the time, though they quickly faded from the headlines. BP was fined $21 million for the numerous violations that contributed to the Texas City explosion, and it was forced to endure a phased shutdown of its Alaska operations while it repaired the corroded pipeline, which cost it additional revenue.
In retrospect, though, the two accidents represented something else as well: they were a huge gift to the company. The fact that these two accidents — thousands of miles apart, and involving very different parts of BP — took place within a year showed that something was systemically wrong with BP’s culture. Mr. Browne had built BP by taking over other oil companies, like Amoco in 1998, and then ruthlessly cutting costs, often firing the acquired company’s most experienced engineers. Taking shortcuts was ingrained in the company’s culture, and everyone in the oil business knew it.
The accidents should have been the wake-up call BP needed to change that culture. But the mistakes and negligence that took place on the Deepwater Horizon in the Gulf of Mexico — which are so profound that everyone I spoke to in the oil business found them truly inexplicable — suggest that the two men never did much more than mouth nice-sounding platitudes.
Which also makes the disaster even more unforgivable than it already is. BP executives had four years to fix the company’s problems before an accident took place that was truly catastrophic. And they blew it.
•
Before the Deepwater Horizon tragedy, the greatest oil disaster in American history was the Exxon Valdez spill in 1989, which spewed 10.8 million gallons of crude into Prince William Sound in Alaska. (By comparison, the gulf blowout is pouring out that much oil every four or five days.) That experience was searing for the country — but it was also pretty searing for Exxon (now known as Exxon Mobil). “A low point in the history of the company,” Exxon Mobil’s chief executive, Rex Tillerson, called it when he testified before Congress on Tuesday.
There is a reason Exxon Mobil has not had a serious accident in the subsequent 21 years. Unlike BP, it used the accident to transform itself.
Immediately after the spill, Exxon pulled together some of its most respected executives and gave them a new assignment: figure out how to embed safety into the core of the company. The message was reiterated by the top brass, including the chief executive, whenever they visited a rig or a refinery. Processes were put in place that had to be followed at any Exxon facility anywhere in the world. Redundancies were built in. Workers were encouraged to bring safety concerns to their bosses. And the statistics bear out the genuineness of this cultural change: by every measure, Exxon Mobil has by far the best safety record in the industry. The company has become so safety-crazed that an Exxon Mobil cafeteria worker takes the temperature of the lettuce in the salad bar.
Compare that to BP’s record these last four years. On Thursday, during his day before an angry House energy subcommittee, Mr. Hayward was confronted with the fact that BP had been cited by the Occupational Safety and Health Administration for 760 “egregious willful” safety violations in its refineries. Mr. Hayward tried to slough this off by claiming that the violations had taken place in 2005 and 2006 — before, that is, he became chief executive and brought his “laser focus” on safety.
But Mr. Hayward was not telling the truth. According to the Center for Public Integrity, which obtained the data under the Freedom of Information Act, the violations all took place between 2007 and 2010, very much on Mr. Hayward’s watch. What’s more, the company violated something called O.S.H.A.’s “process safety management standard” — which is precisely what that BP advisory panel had been charged with examining after the Texas City explosion. In October 2009, O.S.H.A. fined BP an additional $87 million for refinery deficiencies. It doesn’t sound like the company took its advisory panel’s recommendations very seriously, does it?
Or take the Deepwater Horizon disaster itself, which was preceded by so many instances of corner-cutting and poor decision-making that an accident was practically preordained. Drilling one of the deepest wells in history, the project used only one strand of steel casing, when it should have used at least two. Halliburton recommended that BP use 21 “centralizers,” which help ensure that the well doesn’t veer off course as it goes deeper into the earth, but the company used just a half-dozen. BP failed to conduct a crucial test to make sure that the cement holding the well at the bottom of the sea was sturdy enough.
And the engineers for BP on board consistently ran roughshod over subcontractors like Halliburton, who openly worried that BP was making decisions that could have catastrophic consequences. “This is how it’s going to be,” one BP engineer reportedly said, overruling a contractor on the critical question of when to replace the drilling mud — which keeps explosive natural gas from flowing out of the well — with seawater.
What makes this all the more shocking is that BP was drilling what’s called a wildcat well, meaning it was drilling in an area that no other company had drilled before, so it had no knowledge of the conditions. For most oil companies, that would be all the more reason to take extra precautions. Yet BP did just the opposite.
Listening to Mr. Hayward’s responses on Thursday only reinforced the feeling that the company still didn’t understand what it took to instill a culture of safety. He kept saying that the blowout preventer was supposed to be a fail-safe mechanism that would keep the well from raging out of control. But other companies know that it is far too dangerous to depend on the blowout preventer alone and they build in additional safeguards, so that a problem can be dealt with long before the blowout preventer is needed. Asked about the lack of that important cement bonding test, Mr. Hayward blithely replied that he wasn’t a cement engineer so he couldn’t make a judgment about the decision.
Most telling of all, Mr. Hayward consistently denied knowing of any problems on the rig. As far as he knew everything was fine — until it wasn’t. But drilling a well offshore, miles into the earth, is one of the most dangerous activities in the world. Most companies will shut down a well at the first sign of serious trouble and kick the decision-making up to top management. The price of making a big mistake is simply too high. If Exxon Mobil had been running the Deepwater Horizon well, it is implausible that Mr. Tillerson would not have been informed of the problems. And he would also have had to approve any fix. That Mr. Hayward and his top deputies knew nothing about the problems on the Deepwater Horizon well is, by itself, a serious act of negligence.
Changing a company’s culture is always hard, no doubt about it. And it is especially hard for a company like BP, which has had such enormous success these last few years, reaping $14 billion in profits last year alone. For such companies, it often requires a crisis to change. Microsoft changed after its antitrust trial a decade ago. Tyco International changed after its chief executive, Dennis Kozlowski, went to jail. And chances are, BP is now going to change, too.
This time, the world’s attention will not quickly fade, as it did after the Prudhoe Bay spill. The financial hit, which several Wall Street analysts believe could top $100 billion, is going to be severe. The pressure from the United States government will be unrelenting.
All of this, of course, could have been avoided if the company had truly taken safety to heart four years ago. But it didn’t, and the Gulf Coast is suffering the consequences. Normally, I’d say “better late than never.” But it’s not. Not even close.
Monday, June 07, 2010
Wake-Up Time for a Dream By JOE NOCERA
June 7, 2010
Wake-Up Time for a Dream By JOE NOCERA
Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, began her week with a bit of honest heresy, the kind that only she, among all the bank regulators, seems willing to utter in the wake of the financial crisis.
Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers — a speech that got surprisingly little attention — Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.
“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.
She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers — and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.
She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.
She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.
The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.
Yet even now, it is difficult for the body politic to face this truth squarely, so intertwined is homeownership with the American Dream. Which is why Ms. Bair’s comments were so heretical. Maybe, she seemed to be suggesting, it’s time to break that link, painful though it would be. Maybe she’s right.
•
The idealization of homeownership by both the public and the federal government is hardly a recent phenomenon, of course. The Federal Housing Authority has been around since 1934. Fannie Mae was founded in 1938. After World War II, the G.I. Bill included modest loans allowing veterans to buy their first homes, according to Michael D. Calhoun, the president of the Center for Responsible Lending. For decades, the savings and loan industry existed solely to make loans to home buyers. In return, the government gave savings and loans certain regulatory advantages over the banks. The mortgage-backed security itself — which emerged in the 1980s, and made the securitization of mortgages possible — required the passage of a handful of laws, which Congress happily provided.
And every president, Democrat and Republican alike, trumpeted the virtues of homeownership for all Americans. Bill Clinton put numerical goals on the percentage increase he wanted to see in homeownership, and greatly increased Fannie and Freddie’s affordable housing goals. (Those goals had first been in put in place during the presidency of George H. W. Bush.) George W. Bush trumpeted his “ownership society”— and increased those housing goals. Fannie Mae, for its part, explicitly wrapped itself in the American Dream; anyone who opposed Fannie Mae was quickly labeled “anti-homeownership” by the company’s lobbyists.
Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”
But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.
Did government policy make the rise of the subprime lenders possible? You betcha. Over time, the federal government gradually loosened regulations and interest rate caps that allowed the business to first become viable and then to explode. And it completely bought into the idea that the subprime industry was a force for good, because it was expanding homeownership. This, of course, is something the mortgage originators encouraged. Angelo Mozilo, the founder of Countrywide Financial, was as vocal about his company making the American Dream possible as any Fannie Mae lobbyist.
But it was a lie. Gary Rivlin, my former colleague at The New York Times, has just published a scathing, important book, “Broke, USA,” which includes one shocking anecdote after another of people being conned into taking on mortgages, filled with hidden fees and adjustable rates, that they couldn’t possibly afford. The companies that did these things were not the outliers — they were the bulwarks of the industry: Household, Countrywide, New Century and a raft of others. And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts. After all, homeownership was on the rise!
Somewhat to my surprise, the housing activists I spoke to — people who had been in the forefront of trying to stop the subprime lenders — generally didn’t agree that homeownership should be de-emphasized. “Let’s not throw out the baby with the bathwater,” said John Taylor, the chief executive of the National Community Reinvestment Coalition. “I think owning a home is the most common way for working-class people to join the middle class.” Mainly, he said, that was because of a home’s appreciation, which gave people the opportunity for wealth creation that would otherwise have remained out of reach. Others mentioned additional societal benefits of homeownership, like stable neighborhoods. And homeowners had every incentive to keep their homes up, precisely because of the equity in their homes.
The academics I spoke to, however, were not so convinced that homeownership offered benefits to society that were so important they demanded federal subsidies. Especially since those subsidies were so huge, and so distorting to the economy. For instance, in 2009, according to the Congressional Budget Office, government subsidies for housing amounted to a staggering $230 billion.
“You hear all this rhetoric about stability caused by homeownership,” said Richard Florida, the author of “The Great Reset,” and a professor at the University of Toronto. “But the communities that survived the housing bubble the best were the ones that had the highest percentage of renters.”
Edward Glaeser, a professor at Harvard and a contributor to The Times’s Economix blog, said that if homeownership had to be encouraged — which he was not at all convinced of — it should be through a “flat homeowners’ tax credit” rather than a home mortgage deduction that essentially “bribes people to buy bigger houses.” What he says he really believes, though, is that renters offer plenty of social good themselves, helping creating vibrant cities. “The idea that homeownership is always great and renting is un-American is an awful state of affairs,” he said.
Obviously, the country is too psychologically invested in the idea of homeownership to ever abandon completely the homeownership ideal, or to put renting on a equal footing with owning. Which is why I found the most appealing idea to be Mr. Rivlin’s.
Despite having spent the last two years of his life reporting on the destruction wrought, in part, by the government’s unthinking push for ever more homeownership, he still wasn’t willing to abandon it completely. Rather, he thought the big policy mistake we had made as a culture was in promoting policies that encourage all home purchases, under any circumstance. “Why should the government help me buy a second home? Why should it subsidize a refinancing?” he asked. (I was amazed to discover that, if you qualify, you can actually get an F.H.A. loan for a refinancing.) “We have missed the essential piece,” he added. “The social good is in helping qualified first-time buyers own a home. That should be our goal. After that, people should be on their own.”
Right now, more than two years after the fall of Bear Stearns, which represented the beginning of the financial crisis, the federal government is more involved in the mortgage industry than it has ever been in its history. As wards of the state, Fannie and Freddie are insuring three out of every four mortgages. Most of the remaining 25 percent are being guaranteed by the F.H.A. As much as you might resent the fact that the taxpayers now have to pick up behind new Fannie and Freddie, the sad truth is that without them, no one in America would be able to buy a home.
Surely, that’s the logical culmination of decades of government policy promoting homeownership. Eventually, of course, the private market will return to the mortgage business, though it is hard to know when. Fannie and Freddie will be reconfigured in some way. But unless we change the way we think as a society about the virtues of homeownership, the fundamental fact will remain: the government will always be the backstop for the mortgage business, with the taxpayers always liable for the losses.
Is that really what we want?
Wake-Up Time for a Dream By JOE NOCERA
Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, began her week with a bit of honest heresy, the kind that only she, among all the bank regulators, seems willing to utter in the wake of the financial crisis.
Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers — a speech that got surprisingly little attention — Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.
“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.
She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers — and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.
She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.
She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.
The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.
Yet even now, it is difficult for the body politic to face this truth squarely, so intertwined is homeownership with the American Dream. Which is why Ms. Bair’s comments were so heretical. Maybe, she seemed to be suggesting, it’s time to break that link, painful though it would be. Maybe she’s right.
•
The idealization of homeownership by both the public and the federal government is hardly a recent phenomenon, of course. The Federal Housing Authority has been around since 1934. Fannie Mae was founded in 1938. After World War II, the G.I. Bill included modest loans allowing veterans to buy their first homes, according to Michael D. Calhoun, the president of the Center for Responsible Lending. For decades, the savings and loan industry existed solely to make loans to home buyers. In return, the government gave savings and loans certain regulatory advantages over the banks. The mortgage-backed security itself — which emerged in the 1980s, and made the securitization of mortgages possible — required the passage of a handful of laws, which Congress happily provided.
And every president, Democrat and Republican alike, trumpeted the virtues of homeownership for all Americans. Bill Clinton put numerical goals on the percentage increase he wanted to see in homeownership, and greatly increased Fannie and Freddie’s affordable housing goals. (Those goals had first been in put in place during the presidency of George H. W. Bush.) George W. Bush trumpeted his “ownership society”— and increased those housing goals. Fannie Mae, for its part, explicitly wrapped itself in the American Dream; anyone who opposed Fannie Mae was quickly labeled “anti-homeownership” by the company’s lobbyists.
Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”
But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.
Did government policy make the rise of the subprime lenders possible? You betcha. Over time, the federal government gradually loosened regulations and interest rate caps that allowed the business to first become viable and then to explode. And it completely bought into the idea that the subprime industry was a force for good, because it was expanding homeownership. This, of course, is something the mortgage originators encouraged. Angelo Mozilo, the founder of Countrywide Financial, was as vocal about his company making the American Dream possible as any Fannie Mae lobbyist.
But it was a lie. Gary Rivlin, my former colleague at The New York Times, has just published a scathing, important book, “Broke, USA,” which includes one shocking anecdote after another of people being conned into taking on mortgages, filled with hidden fees and adjustable rates, that they couldn’t possibly afford. The companies that did these things were not the outliers — they were the bulwarks of the industry: Household, Countrywide, New Century and a raft of others. And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts. After all, homeownership was on the rise!
Somewhat to my surprise, the housing activists I spoke to — people who had been in the forefront of trying to stop the subprime lenders — generally didn’t agree that homeownership should be de-emphasized. “Let’s not throw out the baby with the bathwater,” said John Taylor, the chief executive of the National Community Reinvestment Coalition. “I think owning a home is the most common way for working-class people to join the middle class.” Mainly, he said, that was because of a home’s appreciation, which gave people the opportunity for wealth creation that would otherwise have remained out of reach. Others mentioned additional societal benefits of homeownership, like stable neighborhoods. And homeowners had every incentive to keep their homes up, precisely because of the equity in their homes.
The academics I spoke to, however, were not so convinced that homeownership offered benefits to society that were so important they demanded federal subsidies. Especially since those subsidies were so huge, and so distorting to the economy. For instance, in 2009, according to the Congressional Budget Office, government subsidies for housing amounted to a staggering $230 billion.
“You hear all this rhetoric about stability caused by homeownership,” said Richard Florida, the author of “The Great Reset,” and a professor at the University of Toronto. “But the communities that survived the housing bubble the best were the ones that had the highest percentage of renters.”
Edward Glaeser, a professor at Harvard and a contributor to The Times’s Economix blog, said that if homeownership had to be encouraged — which he was not at all convinced of — it should be through a “flat homeowners’ tax credit” rather than a home mortgage deduction that essentially “bribes people to buy bigger houses.” What he says he really believes, though, is that renters offer plenty of social good themselves, helping creating vibrant cities. “The idea that homeownership is always great and renting is un-American is an awful state of affairs,” he said.
Obviously, the country is too psychologically invested in the idea of homeownership to ever abandon completely the homeownership ideal, or to put renting on a equal footing with owning. Which is why I found the most appealing idea to be Mr. Rivlin’s.
Despite having spent the last two years of his life reporting on the destruction wrought, in part, by the government’s unthinking push for ever more homeownership, he still wasn’t willing to abandon it completely. Rather, he thought the big policy mistake we had made as a culture was in promoting policies that encourage all home purchases, under any circumstance. “Why should the government help me buy a second home? Why should it subsidize a refinancing?” he asked. (I was amazed to discover that, if you qualify, you can actually get an F.H.A. loan for a refinancing.) “We have missed the essential piece,” he added. “The social good is in helping qualified first-time buyers own a home. That should be our goal. After that, people should be on their own.”
Right now, more than two years after the fall of Bear Stearns, which represented the beginning of the financial crisis, the federal government is more involved in the mortgage industry than it has ever been in its history. As wards of the state, Fannie and Freddie are insuring three out of every four mortgages. Most of the remaining 25 percent are being guaranteed by the F.H.A. As much as you might resent the fact that the taxpayers now have to pick up behind new Fannie and Freddie, the sad truth is that without them, no one in America would be able to buy a home.
Surely, that’s the logical culmination of decades of government policy promoting homeownership. Eventually, of course, the private market will return to the mortgage business, though it is hard to know when. Fannie and Freddie will be reconfigured in some way. But unless we change the way we think as a society about the virtues of homeownership, the fundamental fact will remain: the government will always be the backstop for the mortgage business, with the taxpayers always liable for the losses.
Is that really what we want?
Dubious Way to Prevent Fiscal Crisis By JOE NOCERA
Dubious Way to Prevent Fiscal Crisis By JOE NOCERA
So where were we?
Last November, when I took a temporary powder, the subject du jour — at least in this little corner — was financial regulatory reform. Today, eight months later (ouch!), as I return from my hiatus, the subject du jour is financial regulatory reform.
Back then, the question was whether Congress could muster the votes to even pass a reform bill. Health care dominated the body politic. Financial lobbyists were swarming. Senate Republicans were doing their foot-dragging thing. And so on.
Today, the question is a different one. Very soon, possibly as early as next week, House and Senate conferees will begin meeting to hammer out the compromises necessary to turn the bills they wound up passing in the interim into something President Obama can sign into law. There are plenty of differences between the House bill, which passed in December, and the Senate version that passed a few weeks ago, and there will be lots to haggle over in the conference committee. But broadly speaking, they’re not that different. They both contain a new consumer protection agency, and they both take the same general approach to everything from systemic risk to the ratings agencies.
And thus it’s not too early to ask: Will the bill that emerges from this conference do what it is intended to do? Will it prevent another crisis? Will it put an end to government bailouts? The painful answer is: probably not.
•
In the first place, there is nothing even remotely radical about anything in these bills. Nobody is suggesting setting up a new Securities and Exchange Commission, which reshaped Wall Street regulation when it was formed in 1934. Nobody is talking about breaking up banks the way they did in the 1930s with the passage of the Glass-Steagall Act. Nobody is even talking about a wholesale revamping of a regulatory system that so clearly failed in this crisis. “They are trying to attack the symptoms, instead of the basic issues,” said Christopher Whalen, managing director of the Institutional Risk Analyst. There is something oh-so-reasonable about these bills, as if Congress was worried that they might do something that would — heaven forbid! — upset the banking industry.
Credit derivatives? Banks will still be able to trade them, and peddle the most dangerous ones without using an open exchange. Credit rating agencies? Their wings are barely clipped. The consumer agency? It has potential, but it’s not nearly as strong as it should be. Too big to fail? Under the new regime, the banks will remain as big, and as interconnected, as ever. And just because the country is going to have a systemic risk council — consisting of the Treasury secretary and the top financial regulators — doesn’t mean the bills do anything to reduce systemic risk. They don’t.
If you drill down with me on a few provisions, you’ll see what I mean.
THE RATINGS AGENCIES Does anyone doubt that the willingness of the big three ratings agencies — Moody’s, Standard & Poor’s and Fitch — to slap AAA ratings on subprime junk played a huge role in the financial crisis? The shocking charges leveled this week at the Financial Crisis Inquiry Commission hearing by former Moody’s employees only reinforced the point. Moody’s analysts, they said, had knowingly handed out flawed ratings because top executives were pushing them to complete deals as fast as they could. They sold their souls for market share.
To solve this problem, Senator Al Franken of Minnesota inserted an amendment in the Senate bill that would end the practice of banks picking the agency to rate their securities; rather, an agency would be chosen at random, and the bank would be forced to accept its rating. But that is not the only problem — or even the primary one.
Ratings agencies are understaffed and underpaid. The best rating agency employees quickly gravitate to Wall Street. And the agencies have a long history of getting it wrong. Enron, WorldCom, Penn Central — the ratings agencies always seem to be a day late and a dollar short. Yet since the 1970s, the ratings agencies have been imbued with a special government status — Nationally Recognized Statistical Rating Organizations, they’re called — and a whole body of regulation has been written that revolves around ratings. Mutual funds, to cite one example, can hold only securities that have the highest investment-grade ratings.
The solution should be obvious, shouldn’t it? Just get rid of that special government status — and stop writing regulations that revolve around ratings. Believe it or not, S.& P. is in favor of such a solution. So why isn’t it in the bill? Because all those money market and pension funds much prefer the crutch provided by the ratings — that way, if anything goes wrong they can simply say “It was the rating agency’s fault.” And they’re the ones Congress listened to.
CONSUMER PROTECTION AGENCY The good news is that it hasn’t been completely gutted, despite the efforts of the Chamber of Commerce. The bad news is that it is a lot weaker than it ought to be. The “plain vanilla” option — showing consumers, for example, a 30-year-fixed mortgage alongside an option adjustable-rate mortgage — was tossed overboard long ago. A committee of bank regulators can veto any decision by the consumer agency. An astounding 98 percent of the nation’s banks — every bank with assets under $10 billion — are exempt.
And get this: the bill gives the Office of the Comptroller of the Currency the right to pre-empt state laws aimed at stopping predatory practices. This is the same regulator that used its pre-emption powers to moot laws passed by cities and states aimed at curbing the worst subprime excesses during the bubble. Not exactly confidence-inspiring.
“The consumer agency has some dings in it right now,” said Elizabeth Warren, the chairwoman of the Congressional Oversight Panel, who first broached the idea for the agency in an article she wrote as a law professor. “I think it still has what it needs to succeed, but it’s right at the edge,” she added. “If it is weakened any further, then it becomes a waste of time.”
DERIVATIVE REGULATION You’ve no doubt heard that the vast majority of derivatives will wind up on an exchange, where everyone can see their price and the risks can be toted up out in the open. Don’t get too excited. Most such derivatives will be products like interest rate swaps, which had no role in the crisis. Credit-default swaps, which played a major role in the crisis, are another story. In particular, the most complicated, one-of-a-kind — and most profitable — credit-default swaps will most likely stay in the shadows, which is exactly where the big banks want them to be. The profits the big banks make on these credit derivatives would drop substantially if these swaps were traded openly and, well, we can’t have that, can we? The banks actually argue that credit will be constrained if they are forced to put these swaps on an exchange. It’s like saying, if I can’t gouge you, I won’t lend to you. Nice little business model they’ve got there.
The bills try to come at these complex derivatives in other ways, primarily by clamping down on credit speculation and proprietary trading by banks. (That’s what the Volcker Rule is all about.) But I’m skeptical that the Volcker Rule will be effective, even if it becomes law, which appears likely. The line between what constitutes trading for one’s own account — proprietary trading — and what constitutes trading for one’s client, which would still be legal, is extremely murky. It is easy to imagine the banks classifying all sorts of activities as “servicing clients,” even if they happen to put lots of money in their own pockets.
Because credit-default swaps are a form of insurance — insuring against a default — they ought to be regulated like an insurance product, which would include walling them off from the rest of the bank and requiring that large amounts of capital be set aside to cover big potential payouts. But because that would inflict actual pain, it won’t happen. (The amendment introduced by Senator Blanche Lincoln of Arkansas into the Senate bill, which would have walled off derivative operations from the rest of the bank, has no chance of making it into the final bill.)
Perhaps the most troubling fact of all is that the bill will do very little to reduce systemic risk. Derivatives will still be a means of creating unacknowledged leverage in the system. Hedging activities between counterparties will still create immense interconnectedness. Capital — the greatest cushion of all against systemic risk — is barely mentioned in the bills; Congress is leaving that to an international body in Basel, Switzerland, that sets international capital standards — and didn’t exactly cover itself with glory with the rules it set prior to the financial crisis.
The bills’ supporters say that the new resolution authority will give regulators the tools to prevent future taxpayer bailouts. But let’s be honest: if a giant bank like Citigroup, with tentacles all over the world, most out of reach of United States regulators, were to become insolvent, you don’t think the Treasury Department would rush to bail it out? I do.
“When they say this is the greatest reform package since the 1930s, that is literally true,” said Simon Johnson, the co-author of “13 Bankers” and one of the leading critics of the United States response to the crisis. “But that tells you nothing. There haven’t been any reforms since the 1930s.”
Indeed, watching Congress struggle just to pass even these timid reforms gives one a greater appreciation for what Congress accomplished during the Great Depression. The current bills tinker with the status quo. The reforms in the 1930s actually forced banks to divest their investment banking divisions and outlawed all sorts of practices that were as common as selling credit-default swaps are today. No doubt the bank lobby of that era complained that their business would be ruined. But Congress went ahead and did it anyway.
I guess it’s easier to have a spine when you’re living through a Great Depression, and not just a Great Recession.
So where were we?
Last November, when I took a temporary powder, the subject du jour — at least in this little corner — was financial regulatory reform. Today, eight months later (ouch!), as I return from my hiatus, the subject du jour is financial regulatory reform.
Back then, the question was whether Congress could muster the votes to even pass a reform bill. Health care dominated the body politic. Financial lobbyists were swarming. Senate Republicans were doing their foot-dragging thing. And so on.
Today, the question is a different one. Very soon, possibly as early as next week, House and Senate conferees will begin meeting to hammer out the compromises necessary to turn the bills they wound up passing in the interim into something President Obama can sign into law. There are plenty of differences between the House bill, which passed in December, and the Senate version that passed a few weeks ago, and there will be lots to haggle over in the conference committee. But broadly speaking, they’re not that different. They both contain a new consumer protection agency, and they both take the same general approach to everything from systemic risk to the ratings agencies.
And thus it’s not too early to ask: Will the bill that emerges from this conference do what it is intended to do? Will it prevent another crisis? Will it put an end to government bailouts? The painful answer is: probably not.
•
In the first place, there is nothing even remotely radical about anything in these bills. Nobody is suggesting setting up a new Securities and Exchange Commission, which reshaped Wall Street regulation when it was formed in 1934. Nobody is talking about breaking up banks the way they did in the 1930s with the passage of the Glass-Steagall Act. Nobody is even talking about a wholesale revamping of a regulatory system that so clearly failed in this crisis. “They are trying to attack the symptoms, instead of the basic issues,” said Christopher Whalen, managing director of the Institutional Risk Analyst. There is something oh-so-reasonable about these bills, as if Congress was worried that they might do something that would — heaven forbid! — upset the banking industry.
Credit derivatives? Banks will still be able to trade them, and peddle the most dangerous ones without using an open exchange. Credit rating agencies? Their wings are barely clipped. The consumer agency? It has potential, but it’s not nearly as strong as it should be. Too big to fail? Under the new regime, the banks will remain as big, and as interconnected, as ever. And just because the country is going to have a systemic risk council — consisting of the Treasury secretary and the top financial regulators — doesn’t mean the bills do anything to reduce systemic risk. They don’t.
If you drill down with me on a few provisions, you’ll see what I mean.
THE RATINGS AGENCIES Does anyone doubt that the willingness of the big three ratings agencies — Moody’s, Standard & Poor’s and Fitch — to slap AAA ratings on subprime junk played a huge role in the financial crisis? The shocking charges leveled this week at the Financial Crisis Inquiry Commission hearing by former Moody’s employees only reinforced the point. Moody’s analysts, they said, had knowingly handed out flawed ratings because top executives were pushing them to complete deals as fast as they could. They sold their souls for market share.
To solve this problem, Senator Al Franken of Minnesota inserted an amendment in the Senate bill that would end the practice of banks picking the agency to rate their securities; rather, an agency would be chosen at random, and the bank would be forced to accept its rating. But that is not the only problem — or even the primary one.
Ratings agencies are understaffed and underpaid. The best rating agency employees quickly gravitate to Wall Street. And the agencies have a long history of getting it wrong. Enron, WorldCom, Penn Central — the ratings agencies always seem to be a day late and a dollar short. Yet since the 1970s, the ratings agencies have been imbued with a special government status — Nationally Recognized Statistical Rating Organizations, they’re called — and a whole body of regulation has been written that revolves around ratings. Mutual funds, to cite one example, can hold only securities that have the highest investment-grade ratings.
The solution should be obvious, shouldn’t it? Just get rid of that special government status — and stop writing regulations that revolve around ratings. Believe it or not, S.& P. is in favor of such a solution. So why isn’t it in the bill? Because all those money market and pension funds much prefer the crutch provided by the ratings — that way, if anything goes wrong they can simply say “It was the rating agency’s fault.” And they’re the ones Congress listened to.
CONSUMER PROTECTION AGENCY The good news is that it hasn’t been completely gutted, despite the efforts of the Chamber of Commerce. The bad news is that it is a lot weaker than it ought to be. The “plain vanilla” option — showing consumers, for example, a 30-year-fixed mortgage alongside an option adjustable-rate mortgage — was tossed overboard long ago. A committee of bank regulators can veto any decision by the consumer agency. An astounding 98 percent of the nation’s banks — every bank with assets under $10 billion — are exempt.
And get this: the bill gives the Office of the Comptroller of the Currency the right to pre-empt state laws aimed at stopping predatory practices. This is the same regulator that used its pre-emption powers to moot laws passed by cities and states aimed at curbing the worst subprime excesses during the bubble. Not exactly confidence-inspiring.
“The consumer agency has some dings in it right now,” said Elizabeth Warren, the chairwoman of the Congressional Oversight Panel, who first broached the idea for the agency in an article she wrote as a law professor. “I think it still has what it needs to succeed, but it’s right at the edge,” she added. “If it is weakened any further, then it becomes a waste of time.”
DERIVATIVE REGULATION You’ve no doubt heard that the vast majority of derivatives will wind up on an exchange, where everyone can see their price and the risks can be toted up out in the open. Don’t get too excited. Most such derivatives will be products like interest rate swaps, which had no role in the crisis. Credit-default swaps, which played a major role in the crisis, are another story. In particular, the most complicated, one-of-a-kind — and most profitable — credit-default swaps will most likely stay in the shadows, which is exactly where the big banks want them to be. The profits the big banks make on these credit derivatives would drop substantially if these swaps were traded openly and, well, we can’t have that, can we? The banks actually argue that credit will be constrained if they are forced to put these swaps on an exchange. It’s like saying, if I can’t gouge you, I won’t lend to you. Nice little business model they’ve got there.
The bills try to come at these complex derivatives in other ways, primarily by clamping down on credit speculation and proprietary trading by banks. (That’s what the Volcker Rule is all about.) But I’m skeptical that the Volcker Rule will be effective, even if it becomes law, which appears likely. The line between what constitutes trading for one’s own account — proprietary trading — and what constitutes trading for one’s client, which would still be legal, is extremely murky. It is easy to imagine the banks classifying all sorts of activities as “servicing clients,” even if they happen to put lots of money in their own pockets.
Because credit-default swaps are a form of insurance — insuring against a default — they ought to be regulated like an insurance product, which would include walling them off from the rest of the bank and requiring that large amounts of capital be set aside to cover big potential payouts. But because that would inflict actual pain, it won’t happen. (The amendment introduced by Senator Blanche Lincoln of Arkansas into the Senate bill, which would have walled off derivative operations from the rest of the bank, has no chance of making it into the final bill.)
Perhaps the most troubling fact of all is that the bill will do very little to reduce systemic risk. Derivatives will still be a means of creating unacknowledged leverage in the system. Hedging activities between counterparties will still create immense interconnectedness. Capital — the greatest cushion of all against systemic risk — is barely mentioned in the bills; Congress is leaving that to an international body in Basel, Switzerland, that sets international capital standards — and didn’t exactly cover itself with glory with the rules it set prior to the financial crisis.
The bills’ supporters say that the new resolution authority will give regulators the tools to prevent future taxpayer bailouts. But let’s be honest: if a giant bank like Citigroup, with tentacles all over the world, most out of reach of United States regulators, were to become insolvent, you don’t think the Treasury Department would rush to bail it out? I do.
“When they say this is the greatest reform package since the 1930s, that is literally true,” said Simon Johnson, the co-author of “13 Bankers” and one of the leading critics of the United States response to the crisis. “But that tells you nothing. There haven’t been any reforms since the 1930s.”
Indeed, watching Congress struggle just to pass even these timid reforms gives one a greater appreciation for what Congress accomplished during the Great Depression. The current bills tinker with the status quo. The reforms in the 1930s actually forced banks to divest their investment banking divisions and outlawed all sorts of practices that were as common as selling credit-default swaps are today. No doubt the bank lobby of that era complained that their business would be ruined. But Congress went ahead and did it anyway.
I guess it’s easier to have a spine when you’re living through a Great Depression, and not just a Great Recession.
Wake-Up Time for a Dream By JOE NOCERA
Wake-Up Time for a Dream By JOE NOCERA
Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, began her week with a bit of honest heresy, the kind that only she, among all the bank regulators, seems willing to utter in the wake of the financial crisis.
Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers — a speech that got surprisingly little attention — Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.
“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.
She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers — and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.
She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.
She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.
The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.
Yet even now, it is difficult for the body politic to face this truth squarely, so intertwined is homeownership with the American Dream. Which is why Ms. Bair’s comments were so heretical. Maybe, she seemed to be suggesting, it’s time to break that link, painful though it would be. Maybe she’s right.
•
The idealization of homeownership by both the public and the federal government is hardly a recent phenomenon, of course. The Federal Housing Authority has been around since 1934. Fannie Mae was founded in 1938. After World War II, the G.I. Bill included modest loans allowing veterans to buy their first homes, according to Michael D. Calhoun, the president of the Center for Responsible Lending. For decades, the savings and loan industry existed solely to make loans to home buyers. In return, the government gave savings and loans certain regulatory advantages over the banks. The mortgage-backed security itself — which emerged in the 1980s, and made the securitization of mortgages possible — required the passage of a handful of laws, which Congress happily provided.
And every president, Democrat and Republican alike, trumpeted the virtues of homeownership for all Americans. Bill Clinton put numerical goals on the percentage increase he wanted to see in homeownership, and greatly increased Fannie and Freddie’s affordable housing goals. (Those goals had first been in put in place during the presidency of George H. W. Bush.) George W. Bush trumpeted his “ownership society”— and increased those housing goals. Fannie Mae, for its part, explicitly wrapped itself in the American Dream; anyone who opposed Fannie Mae was quickly labeled “anti-homeownership” by the company’s lobbyists.
Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”
But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.
Did government policy make the rise of the subprime lenders possible? You betcha. Over time, the federal government gradually loosened regulations and interest rate caps that allowed the business to first become viable and then to explode. And it completely bought into the idea that the subprime industry was a force for good, because it was expanding homeownership. This, of course, is something the mortgage originators encouraged. Angelo Mozilo, the founder of Countrywide Financial, was as vocal about his company making the American Dream possible as any Fannie Mae lobbyist.
But it was a lie. Gary Rivlin, my former colleague at The New York Times, has just published a scathing, important book, “Broke, USA,” which includes one shocking anecdote after another of people being conned into taking on mortgages, filled with hidden fees and adjustable rates, that they couldn’t possibly afford. The companies that did these things were not the outliers — they were the bulwarks of the industry: Household, Countrywide, New Century and a raft of others. And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts. After all, homeownership was on the rise!
Somewhat to my surprise, the housing activists I spoke to — people who had been in the forefront of trying to stop the subprime lenders — generally didn’t agree that homeownership should be de-emphasized. “Let’s not throw out the baby with the bathwater,” said John Taylor, the chief executive of the National Community Reinvestment Coalition. “I think owning a home is the most common way for working-class people to join the middle class.” Mainly, he said, that was because of a home’s appreciation, which gave people the opportunity for wealth creation that would otherwise have remained out of reach. Others mentioned additional societal benefits of homeownership, like stable neighborhoods. And homeowners had every incentive to keep their homes up, precisely because of the equity in their homes.
The academics I spoke to, however, were not so convinced that homeownership offered benefits to society that were so important they demanded federal subsidies. Especially since those subsidies were so huge, and so distorting to the economy. For instance, in 2009, according to the Congressional Budget Office, government subsidies for housing amounted to a staggering $230 billion.
“You hear all this rhetoric about stability caused by homeownership,” said Richard Florida, the author of “The Great Reset,” and a professor at the University of Toronto. “But the communities that survived the housing bubble the best were the ones that had the highest percentage of renters.”
Edward Glaeser, a professor at Harvard and a contributor to The Times’s Economix blog, said that if homeownership had to be encouraged — which he was not at all convinced of — it should be through a “flat homeowners’ tax credit” rather than a home mortgage deduction that essentially “bribes people to buy bigger houses.” What he says he really believes, though, is that renters offer plenty of social good themselves, helping creating vibrant cities. “The idea that homeownership is always great and renting is un-American is an awful state of affairs,” he said.
Obviously, the country is too psychologically invested in the idea of homeownership to ever abandon completely the homeownership ideal, or to put renting on a equal footing with owning. Which is why I found the most appealing idea to be Mr. Rivlin’s.
Despite having spent the last two years of his life reporting on the destruction wrought, in part, by the government’s unthinking push for ever more homeownership, he still wasn’t willing to abandon it completely. Rather, he thought the big policy mistake we had made as a culture was in promoting policies that encourage all home purchases, under any circumstance. “Why should the government help me buy a second home? Why should it subsidize a refinancing?” he asked. (I was amazed to discover that, if you qualify, you can actually get an F.H.A. loan for a refinancing.) “We have missed the essential piece,” he added. “The social good is in helping qualified first-time buyers own a home. That should be our goal. After that, people should be on their own.”
Right now, more than two years after the fall of Bear Stearns, which represented the beginning of the financial crisis, the federal government is more involved in the mortgage industry than it has ever been in its history. As wards of the state, Fannie and Freddie are insuring three out of every four mortgages. Most of the remaining 25 percent are being guaranteed by the F.H.A. As much as you might resent the fact that the taxpayers now have to pick up behind new Fannie and Freddie, the sad truth is that without them, no one in America would be able to buy a home.
Surely, that’s the logical culmination of decades of government policy promoting homeownership. Eventually, of course, the private market will return to the mortgage business, though it is hard to know when. Fannie and Freddie will be reconfigured in some way. But unless we change the way we think as a society about the virtues of homeownership, the fundamental fact will remain: the government will always be the backstop for the mortgage business, with the taxpayers always liable for the losses.
Is that really what we want?
Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, began her week with a bit of honest heresy, the kind that only she, among all the bank regulators, seems willing to utter in the wake of the financial crisis.
Deep in a speech she delivered Monday before the Housing Association of Nonprofit Developers — a speech that got surprisingly little attention — Ms. Bair listed her three main recommendations to “put the mortgage industry on a sounder footing.” The first two were the usual suspects: better consumer education and protection, and a reformed securitization market. Her third proposal, however, was a shocker, taking dead aim at one of the most sacrosanct tenets of American politics: the lofty goal of homeownership.
“For 25 years federal policy has been primarily focused on promoting homeownership and promoting the availability of credit to home buyers,” Ms. Bair said. She mentioned some of the many subsidies home buyers get, including the home mortgage interest deduction and the ability to deduct property taxes.
She tossed in Fannie Mae and Freddie Mac, the two “G.S.E.’s” (government-sponsored entities) whose role as a guarantor and securitizer of mortgages greatly expanded the ability of mortgage originators to make loans to home buyers — and which are now, of course, in federal conservatorship, with taxpayers holding the bag for their gargantuan losses.
She also pointed out that during the bubble, when anyone with a pulse could get a mortgage, the percentage of Americans owning homes rose to an unprecedented 69 percent, a number that was greeted with bipartisan hurrahs, but which turned out to be “unsustainable,” Ms. Bair said.
She concluded: “Sustainable homeownership is a worthy national goal. But it should not be pursued to excess when there are other, equally worthy solutions that help meet the needs of people for whom homeownership may not be the right answer.” Like, you know, renting.
The point is: the financial crisis might well have been avoided if we as a culture hadn’t invested so much political and psychological capital in the idea of owning a home. After all, the subprime mortgage business’s supposed raison d’être was making homeownership possible for people who lacked the means — or the credit scores — to get a traditional mortgage. It’s also why bank regulators and politicians were so willing to avert their eyes from the predations and excesses of the subprime companies.
Yet even now, it is difficult for the body politic to face this truth squarely, so intertwined is homeownership with the American Dream. Which is why Ms. Bair’s comments were so heretical. Maybe, she seemed to be suggesting, it’s time to break that link, painful though it would be. Maybe she’s right.
•
The idealization of homeownership by both the public and the federal government is hardly a recent phenomenon, of course. The Federal Housing Authority has been around since 1934. Fannie Mae was founded in 1938. After World War II, the G.I. Bill included modest loans allowing veterans to buy their first homes, according to Michael D. Calhoun, the president of the Center for Responsible Lending. For decades, the savings and loan industry existed solely to make loans to home buyers. In return, the government gave savings and loans certain regulatory advantages over the banks. The mortgage-backed security itself — which emerged in the 1980s, and made the securitization of mortgages possible — required the passage of a handful of laws, which Congress happily provided.
And every president, Democrat and Republican alike, trumpeted the virtues of homeownership for all Americans. Bill Clinton put numerical goals on the percentage increase he wanted to see in homeownership, and greatly increased Fannie and Freddie’s affordable housing goals. (Those goals had first been in put in place during the presidency of George H. W. Bush.) George W. Bush trumpeted his “ownership society”— and increased those housing goals. Fannie Mae, for its part, explicitly wrapped itself in the American Dream; anyone who opposed Fannie Mae was quickly labeled “anti-homeownership” by the company’s lobbyists.
Indeed, conservatives tend to view the affordable housing goals imposed on Fannie and Freddie as the central reason for the credit crisis. “In order to increase homeownership, Fannie and Freddie were required to decrease their standards,” said Peter Wallison, a fellow at the American Enterprise Institute and perhaps the country’s leading critic of the G.S.E.’s. “We made a big mistake in trying to force housing onto a population that couldn’t afford housing.”
But, to my mind, that view is only half-right. Yes, people got loans who had no hope of paying them back, and that was insane. But Fannie and Freddie’s affordable housing goals — which the G.S.E.’s easily gamed — were not the main reason. Rather, it was the rise of the subprime lenders — and their ability to get even their worst loans securitized by Wall Street —that was the main culprit. Fannie and Freddie lowered their standards mostly because they were losing market share to the subprime originators.
Did government policy make the rise of the subprime lenders possible? You betcha. Over time, the federal government gradually loosened regulations and interest rate caps that allowed the business to first become viable and then to explode. And it completely bought into the idea that the subprime industry was a force for good, because it was expanding homeownership. This, of course, is something the mortgage originators encouraged. Angelo Mozilo, the founder of Countrywide Financial, was as vocal about his company making the American Dream possible as any Fannie Mae lobbyist.
But it was a lie. Gary Rivlin, my former colleague at The New York Times, has just published a scathing, important book, “Broke, USA,” which includes one shocking anecdote after another of people being conned into taking on mortgages, filled with hidden fees and adjustable rates, that they couldn’t possibly afford. The companies that did these things were not the outliers — they were the bulwarks of the industry: Household, Countrywide, New Century and a raft of others. And when state officials tried to crack down on these unseemly practices, the Office of the Comptroller of the Currency, instead of investigating, blocked their efforts. After all, homeownership was on the rise!
Somewhat to my surprise, the housing activists I spoke to — people who had been in the forefront of trying to stop the subprime lenders — generally didn’t agree that homeownership should be de-emphasized. “Let’s not throw out the baby with the bathwater,” said John Taylor, the chief executive of the National Community Reinvestment Coalition. “I think owning a home is the most common way for working-class people to join the middle class.” Mainly, he said, that was because of a home’s appreciation, which gave people the opportunity for wealth creation that would otherwise have remained out of reach. Others mentioned additional societal benefits of homeownership, like stable neighborhoods. And homeowners had every incentive to keep their homes up, precisely because of the equity in their homes.
The academics I spoke to, however, were not so convinced that homeownership offered benefits to society that were so important they demanded federal subsidies. Especially since those subsidies were so huge, and so distorting to the economy. For instance, in 2009, according to the Congressional Budget Office, government subsidies for housing amounted to a staggering $230 billion.
“You hear all this rhetoric about stability caused by homeownership,” said Richard Florida, the author of “The Great Reset,” and a professor at the University of Toronto. “But the communities that survived the housing bubble the best were the ones that had the highest percentage of renters.”
Edward Glaeser, a professor at Harvard and a contributor to The Times’s Economix blog, said that if homeownership had to be encouraged — which he was not at all convinced of — it should be through a “flat homeowners’ tax credit” rather than a home mortgage deduction that essentially “bribes people to buy bigger houses.” What he says he really believes, though, is that renters offer plenty of social good themselves, helping creating vibrant cities. “The idea that homeownership is always great and renting is un-American is an awful state of affairs,” he said.
Obviously, the country is too psychologically invested in the idea of homeownership to ever abandon completely the homeownership ideal, or to put renting on a equal footing with owning. Which is why I found the most appealing idea to be Mr. Rivlin’s.
Despite having spent the last two years of his life reporting on the destruction wrought, in part, by the government’s unthinking push for ever more homeownership, he still wasn’t willing to abandon it completely. Rather, he thought the big policy mistake we had made as a culture was in promoting policies that encourage all home purchases, under any circumstance. “Why should the government help me buy a second home? Why should it subsidize a refinancing?” he asked. (I was amazed to discover that, if you qualify, you can actually get an F.H.A. loan for a refinancing.) “We have missed the essential piece,” he added. “The social good is in helping qualified first-time buyers own a home. That should be our goal. After that, people should be on their own.”
Right now, more than two years after the fall of Bear Stearns, which represented the beginning of the financial crisis, the federal government is more involved in the mortgage industry than it has ever been in its history. As wards of the state, Fannie and Freddie are insuring three out of every four mortgages. Most of the remaining 25 percent are being guaranteed by the F.H.A. As much as you might resent the fact that the taxpayers now have to pick up behind new Fannie and Freddie, the sad truth is that without them, no one in America would be able to buy a home.
Surely, that’s the logical culmination of decades of government policy promoting homeownership. Eventually, of course, the private market will return to the mortgage business, though it is hard to know when. Fannie and Freddie will be reconfigured in some way. But unless we change the way we think as a society about the virtues of homeownership, the fundamental fact will remain: the government will always be the backstop for the mortgage business, with the taxpayers always liable for the losses.
Is that really what we want?
Saturday, September 12, 2009
Lehman Had to Die So Global Finance Could Live By JOE NOCERA
September 12, 2009
Talking Business
Lehman Had to Die So Global Finance Could Live By JOE NOCERA
What if they’d saved Lehman Brothers?
What if, a year ago this weekend, the government and the banking industry had somehow found a way to keep Lehman from filing for bankruptcy? How might that have changed the course of the financial crisis?
We know, of course, what did happen; it is seared in our memory. On Monday, Sept. 15, 2008, when the news broke that, despite nonstop efforts that weekend, there would be no last-minute reprieve for Lehman, à la Bear Stearns, all hell broke loose.
The stock market tanked, dropping more than 500 points that day. The Reserve Primary Fund, a money market fund that held Lehman bonds, “broke the buck.” Shortly afterward, the American International Group nearly collapsed, and had to be bailed out with an extraordinary $85 billion loan from the government. Morgan Stanley was rumored to be next. Banks all over Europe were teetering. There were even fears about the stability of mighty Goldman Sachs. On Wall Street — indeed, in financial capitals all over the Western world — the panic was palpable.
Ever since that weekend, most people, including me, have viewed the decision by Henry Paulson Jr., the Treasury secretary at the time, and Ben Bernanke, the Federal Reserve chairman, to allow Lehman to go bust as the single biggest mistake of the crisis. Never mind that the two men have insisted ever since that they had no other option; surely, they could have created some options if they’d wanted to. Or so goes the conventional wisdom.
Christine Lagarde, France’s finance minister, for instance, called the decision “horrendous” and a “genuine mistake.” According to David Wessel, author of a book about the crisis, “In Fed We Trust,” the head of the European Central Bank, Jean-Claude Trichet, has said the same thing in private. He quotes one of Mr. Trichet’s aides as saying, “It never occurred to us that the Americans would let Lehman fail.” In speeches and articles, in books and television appearances, commentators of every political stripe have pointed to the Lehman bankruptcy as the event that turned the subprime crisis into a full-blown financial collapse.
As we approach this anniversary, though, I’ve begun to question that conventional wisdom. Yes, the fall of Lehman Brothers set off a contagion of panic. And I’m still convinced that Mr. Paulson and Mr. Bernanke could have found a way to save Lehman had they been so inclined (more on that in a moment). But I’ve become convinced that, if Lehman had been saved, the collapse would have occurred anyway.
John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.” I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.
•
A week ago, a Reuters reporter traveled to Richard Fuld’s vacation home in Ketchum, Idaho, to see if the former Lehman chief executive would say anything about the anniversary. (When Mr. Fuld walked outside to meet her, he said, “You don’t have a gun; that’s good,” according to the reporter.)
Standing in his driveway, leading, as ever, with his chin, Mr. Fuld talked about the “pummeling” he had taken for presiding over the bankruptcy. “They’re looking for someone to dump on right now and that’s me,” he said. “The facts are out there. Nobody wants to hear it, especially not from me,” he added.
Mr. Fuld’s bitter remarks reflect the way many former Lehman executives feel, even now, about the fact that their firm was the only one to go under during the crisis. After all, they say, Lehman’s mistakes — too much leverage, an overreliance on shaky real estate assets, playing down the risks on its balance sheet — were the same mistakes just about every firm made. Bear Stearns made those mistakes — and was rescued. Citigroup made those mistakes — and was rescued.
What’s more, they say, in the months and weeks leading up to the September crisis, the firm, realizing that it might need a Plan B, proposed that it be allowed to become a bank holding company. It also asked for access to the Fed’s discount window, which is reserved for troubled banks. (What Lehman didn’t do, however, despite the repeated urging of Mr. Paulson, was find a partner with deep pockets or raise additional capital.) These are the “facts” Mr. Fuld was referring to when he spoke the Reuters reporter.
But Timothy Geithner, then New York Fed president, now Treasury secretary, didn’t like the idea of letting an investment bank become a bank holding company — so he said no. Immediately after the Lehman default, however, that is exactly what he allowed Morgan Stanley and Goldman Sachs to do, which helped stabilize both firms.
Of course, politics played a role, too. Congress had no stomach for another bailout on the heels of the takeover of Fannie Mae and Freddie Mac just a week before Lehman weekend. In his book, Mr. Wessel, the economics editor of The Wall Street Journal, quotes Mr. Paulson as saying in a conference call, “I’m being called Mr. Bailout. I can’t do it again.”
Although Mr. Paulson would later say that he had no legal authority to save Lehman Brothers, it seems pretty clear from Mr. Wessel’s account that he wasn’t really looking for any authority. He wanted to send a message. That Monday morning, in announcing the Lehman default, Mr. Paulson told the media: “I never once considered that it was appropriate to put taxpayers’ money on the line” to save Lehman Brothers.
For all of these reasons and more, former Lehman executives tend to feel that the process that led to the firm’s bankruptcy was profoundly unfair. I’ve heard the word “tragic” more than once. And I agree with them: it was unfair — and, certainly for the people who lost their jobs, even tragic. Lehman Brothers was simply in the wrong place at the wrong time. But for the sake of the financial system, it was also the luckiest thing that could have happened.
In the months between Bear Stearns and Lehman Brothers, Mr. Paulson and Mr. Bernanke had approached Congressional leaders about the need to pass legislation that would give them a handful of additional tools to help them deal with a larger crisis, should one ensue. But they quickly realized there was simply no political will to get anything done. After Lehman, however, Mr. Paulson and Mr. Bernanke were able to persuade Congress to pass a bill that gave the Treasury Department $700 billion in potential bailout money — which Mr. Paulson then used to shore up the system, and help ease the crisis. Even then, it wasn’t easy; it took two tries in the House to pass the legislation. Without the crisis prompted by the Lehman default, it would have been impossible to pass a bill like that.
That is one reason the Lehman default turned out to be a good thing. Here’s another: If Lehman had been sold to Bank of America, as originally planned, some other firm — no doubt bigger, and posing more danger to the global financial system — would have failed instead. By then, there was simply too much panic in the air. A crisis of some sort was inevitable.
Mr. Paulson, recall, wanted Wall Street to come up with its own solution for saving Lehman. But as the chief executives sat around the big conference table at the New York Fed all weekend, they kept worrying about who would be next. They talked openly about whether Merrill Lynch could last much longer. (Mr. Paulson bluntly told John Thain, Merrill’s chief executive, that he needed to find a buyer, which is why Bank of America turned its attention to Merrill and away from Lehman.) And there were rumblings that A.I.G. was in trouble. Why were they so reluctant to pitch in to save Lehman? They were worried that they might be next.
In truth, a Merrill or A.I.G. default would have created something akin to a financial nuclear bomb — much worse than Lehman’s filing for bankruptcy. Merrill was a much bigger firm, with deep roots on Main Street thanks to its “thundering herd.” A.I.G. was the world’s largest insurance company, whose credit-default swaps were propping up half of Europe’s banks. (By buying A.I.G.’s swaps, European banks could evade their capital requirements.) Lehman, by contrast, was a smaller firm, with practically no ties to Main Street. The risks it posed to the system were real — but smaller.
Almost everyone I’ve ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman.
It would be nice to be able to say that officials at Treasury and the Federal Reserve understood this at the time. But of course they didn’t. Throughout history, people have stumbled their way through crises, not fully understanding the potential consequences of their actions, hoping the choices they make turn out to be the right ones.
Mr. Bernanke is a well-known student of the Great Depression, which guided many of his actions during the crisis. Mr. Paulson showed immense tenacity once the crisis struck. History, I now believe, will praise their efforts in subduing the collapse. But the Lehman default?
You know the old saying: Sometimes, it’s better to be lucky than good. A year ago this weekend, it turns out, was one of those times.
Talking Business
Lehman Had to Die So Global Finance Could Live By JOE NOCERA
What if they’d saved Lehman Brothers?
What if, a year ago this weekend, the government and the banking industry had somehow found a way to keep Lehman from filing for bankruptcy? How might that have changed the course of the financial crisis?
We know, of course, what did happen; it is seared in our memory. On Monday, Sept. 15, 2008, when the news broke that, despite nonstop efforts that weekend, there would be no last-minute reprieve for Lehman, à la Bear Stearns, all hell broke loose.
The stock market tanked, dropping more than 500 points that day. The Reserve Primary Fund, a money market fund that held Lehman bonds, “broke the buck.” Shortly afterward, the American International Group nearly collapsed, and had to be bailed out with an extraordinary $85 billion loan from the government. Morgan Stanley was rumored to be next. Banks all over Europe were teetering. There were even fears about the stability of mighty Goldman Sachs. On Wall Street — indeed, in financial capitals all over the Western world — the panic was palpable.
Ever since that weekend, most people, including me, have viewed the decision by Henry Paulson Jr., the Treasury secretary at the time, and Ben Bernanke, the Federal Reserve chairman, to allow Lehman to go bust as the single biggest mistake of the crisis. Never mind that the two men have insisted ever since that they had no other option; surely, they could have created some options if they’d wanted to. Or so goes the conventional wisdom.
Christine Lagarde, France’s finance minister, for instance, called the decision “horrendous” and a “genuine mistake.” According to David Wessel, author of a book about the crisis, “In Fed We Trust,” the head of the European Central Bank, Jean-Claude Trichet, has said the same thing in private. He quotes one of Mr. Trichet’s aides as saying, “It never occurred to us that the Americans would let Lehman fail.” In speeches and articles, in books and television appearances, commentators of every political stripe have pointed to the Lehman bankruptcy as the event that turned the subprime crisis into a full-blown financial collapse.
As we approach this anniversary, though, I’ve begun to question that conventional wisdom. Yes, the fall of Lehman Brothers set off a contagion of panic. And I’m still convinced that Mr. Paulson and Mr. Bernanke could have found a way to save Lehman had they been so inclined (more on that in a moment). But I’ve become convinced that, if Lehman had been saved, the collapse would have occurred anyway.
John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.” I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.
•
A week ago, a Reuters reporter traveled to Richard Fuld’s vacation home in Ketchum, Idaho, to see if the former Lehman chief executive would say anything about the anniversary. (When Mr. Fuld walked outside to meet her, he said, “You don’t have a gun; that’s good,” according to the reporter.)
Standing in his driveway, leading, as ever, with his chin, Mr. Fuld talked about the “pummeling” he had taken for presiding over the bankruptcy. “They’re looking for someone to dump on right now and that’s me,” he said. “The facts are out there. Nobody wants to hear it, especially not from me,” he added.
Mr. Fuld’s bitter remarks reflect the way many former Lehman executives feel, even now, about the fact that their firm was the only one to go under during the crisis. After all, they say, Lehman’s mistakes — too much leverage, an overreliance on shaky real estate assets, playing down the risks on its balance sheet — were the same mistakes just about every firm made. Bear Stearns made those mistakes — and was rescued. Citigroup made those mistakes — and was rescued.
What’s more, they say, in the months and weeks leading up to the September crisis, the firm, realizing that it might need a Plan B, proposed that it be allowed to become a bank holding company. It also asked for access to the Fed’s discount window, which is reserved for troubled banks. (What Lehman didn’t do, however, despite the repeated urging of Mr. Paulson, was find a partner with deep pockets or raise additional capital.) These are the “facts” Mr. Fuld was referring to when he spoke the Reuters reporter.
But Timothy Geithner, then New York Fed president, now Treasury secretary, didn’t like the idea of letting an investment bank become a bank holding company — so he said no. Immediately after the Lehman default, however, that is exactly what he allowed Morgan Stanley and Goldman Sachs to do, which helped stabilize both firms.
Of course, politics played a role, too. Congress had no stomach for another bailout on the heels of the takeover of Fannie Mae and Freddie Mac just a week before Lehman weekend. In his book, Mr. Wessel, the economics editor of The Wall Street Journal, quotes Mr. Paulson as saying in a conference call, “I’m being called Mr. Bailout. I can’t do it again.”
Although Mr. Paulson would later say that he had no legal authority to save Lehman Brothers, it seems pretty clear from Mr. Wessel’s account that he wasn’t really looking for any authority. He wanted to send a message. That Monday morning, in announcing the Lehman default, Mr. Paulson told the media: “I never once considered that it was appropriate to put taxpayers’ money on the line” to save Lehman Brothers.
For all of these reasons and more, former Lehman executives tend to feel that the process that led to the firm’s bankruptcy was profoundly unfair. I’ve heard the word “tragic” more than once. And I agree with them: it was unfair — and, certainly for the people who lost their jobs, even tragic. Lehman Brothers was simply in the wrong place at the wrong time. But for the sake of the financial system, it was also the luckiest thing that could have happened.
In the months between Bear Stearns and Lehman Brothers, Mr. Paulson and Mr. Bernanke had approached Congressional leaders about the need to pass legislation that would give them a handful of additional tools to help them deal with a larger crisis, should one ensue. But they quickly realized there was simply no political will to get anything done. After Lehman, however, Mr. Paulson and Mr. Bernanke were able to persuade Congress to pass a bill that gave the Treasury Department $700 billion in potential bailout money — which Mr. Paulson then used to shore up the system, and help ease the crisis. Even then, it wasn’t easy; it took two tries in the House to pass the legislation. Without the crisis prompted by the Lehman default, it would have been impossible to pass a bill like that.
That is one reason the Lehman default turned out to be a good thing. Here’s another: If Lehman had been sold to Bank of America, as originally planned, some other firm — no doubt bigger, and posing more danger to the global financial system — would have failed instead. By then, there was simply too much panic in the air. A crisis of some sort was inevitable.
Mr. Paulson, recall, wanted Wall Street to come up with its own solution for saving Lehman. But as the chief executives sat around the big conference table at the New York Fed all weekend, they kept worrying about who would be next. They talked openly about whether Merrill Lynch could last much longer. (Mr. Paulson bluntly told John Thain, Merrill’s chief executive, that he needed to find a buyer, which is why Bank of America turned its attention to Merrill and away from Lehman.) And there were rumblings that A.I.G. was in trouble. Why were they so reluctant to pitch in to save Lehman? They were worried that they might be next.
In truth, a Merrill or A.I.G. default would have created something akin to a financial nuclear bomb — much worse than Lehman’s filing for bankruptcy. Merrill was a much bigger firm, with deep roots on Main Street thanks to its “thundering herd.” A.I.G. was the world’s largest insurance company, whose credit-default swaps were propping up half of Europe’s banks. (By buying A.I.G.’s swaps, European banks could evade their capital requirements.) Lehman, by contrast, was a smaller firm, with practically no ties to Main Street. The risks it posed to the system were real — but smaller.
Almost everyone I’ve ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman.
It would be nice to be able to say that officials at Treasury and the Federal Reserve understood this at the time. But of course they didn’t. Throughout history, people have stumbled their way through crises, not fully understanding the potential consequences of their actions, hoping the choices they make turn out to be the right ones.
Mr. Bernanke is a well-known student of the Great Depression, which guided many of his actions during the crisis. Mr. Paulson showed immense tenacity once the crisis struck. History, I now believe, will praise their efforts in subduing the collapse. But the Lehman default?
You know the old saying: Sometimes, it’s better to be lucky than good. A year ago this weekend, it turns out, was one of those times.
Saturday, August 08, 2009
It’s Time to Stay the Courier By JOE NOCERA
August 8, 2009
Talking Business
It’s Time to Stay the Courier By JOE NOCERA
So you think your business has problems.
Consider the plight of John E. Potter, the chief executive of the second-largest employer in America. On the one hand, he has a guaranteed monopoly for much of his business. On the other hand, monopoly or not, the combination of the Internet and the recession is absolutely crushing his company, just as it is for so many other companies across the country. His last quarter’s results, which were announced on Wednesday, revealed a loss of $2.4 billion. The business is on track to lose a staggering $7 billion in 2009, on around $68 billion in revenue. That’s practically General Motors territory.
What can he do to fix the situation? Surprisingly little. His employees have clauses in their union contracts that forbid layoffs. Nor can he renegotiate their gold-plated benefits, the way, say, the auto companies did when their backs were against the wall. Political pressure makes it nearly impossible to shut down any of his company’s 34,000 facilities, no matter how outmoded or little used. He can borrow money, but under the law, he can add only $3 billion in debt a year — an amount that isn’t going to come close to covering his losses.
Oh, and get this. Every year between now and 2016, he has to put aside over $5 billion to finance health benefits for future employees. You read that right: future employees. There isn’t another business in the country that finances benefits for employees it hasn’t even hired yet.
Welcome to John Potter’s world. He’s the nation’s postmaster general. Yes, that’s right: for the last nine years, he has run the United States Postal Service, which, since 1970, when it stopped being a government department and started becoming self-sufficient, has been the oddest of ducks. It is expected to operate as a business, turning a profit and so on, and yet it is still subject to Congressional oversight and all sorts of legal constraints, like that ridiculous health benefit prefinancing for future employees, which was part of a big 2006 postal reorganization bill. (Its main purpose, it would seem, is government accounting: those funds get counted against the federal deficit.)
Even so, until recently, Mr. Potter had had a pretty successful run. A smart, likable, lifelong Postal Service executive, he got it through the anthrax crisis early in his tenure. He saw it through 9/11 (in no small part by engaging Federal Express to fly long-distance mail during the day, when its planes were empty, something it still does). He has overseen productivity gains and, according to a poll conducted by Rasmussen Reports, a rise in customer satisfaction. Between 2001 and 2006, he even eliminated the Postal Service’s $11.3 billion debt. That year, 2006, was also when demand for mail service peaked, with 210 billion pieces delivered.
But the last few years have been brutal. The Postal Service lost more than $5 billion in 2007, and another $2.4 billion in 2008. And, of course, it is on track to lose that whopping $7 billion in the current fiscal year. (Its fiscal year ends in September.) The amount of mail being sent is dropping like a stone — it will be down to 175 billion pieces in 2009. Mr. Potter has reduced the Postal Service’s head count to 650,000, from 800,000, almost entirely through attrition. He has cut costs every way he can think of. And still the losses mount.
A few weeks ago, the Government Accountability Office added the Postal Service to its list of “high risk” federal agencies, meaning that it is in such dire straits that it needs “to restructure to address its current and long-term financial viability.” Indeed, if something doesn’t change by the fall, the Postal Service will have to renege on those health benefit prepayments — despite its legal obligation to pay them — or start missing payroll. “U.S.P.S. must align its costs with revenues, generate sufficient earnings to finance capital investments, and manage its debt,” the G.A.O. said. Just like any real business would.
“If you are asking me to run it like a business, give me the same tools that someone would have in the private sector,” Mr. Potter said when I spoke to him recently.
But as I discovered on Thursday, when I watched a Senate hearing on the current Postal Service crisis, that’s not likely to happen. For one thing, Mr. Potter isn’t really asking for the tools he needs to turn the Postal Service into a real business. He is asking Congress to relieve it from the health prepayments, which he is likely to get, at least temporarily. He is also asking that the Postal Service be allowed to reduce mail service to five days a week, and to eliminate some postal branches. These aren’t exactly revolutionary ideas — yet they are viewed as highly controversial in Congress, which frets that constituents might get angry if the local postal branch closes.
But even if Mr. Potter were to get his way on these two items, they would still be only stop-gap measures that fail to tackle the bigger question. As the Internet continues to erode the use of snail mail, does the Postal Service’s business model still make sense? Do we even still need the government to deliver the mail anymore?
•
To me, the answer is obvious: no.
Think for a minute about the mail that comes into your home. In the modern age, very little of it is personal mail. The vast majority is commercial mail of some sort — advertisements, bills, movies from Netflix or catalogs. Once upon a time, said Rick Geddes, an associate professor in the department of policy analysis and management at Cornell University, the postal service was viewed as “a way to bind together the nation. In subsidizing mail service to rural communities you were keeping them connected to the rest of the country.” But today, he added, “it is kind of silly to say we are binding together the nation through advertisements and catalogs.”
These days, the main justification for keeping the postal service as a quasi-government entity is the belief that no private company would be willing to deliver the mail to sparsely populated rural areas of the country. People fear that it would be a little like airline deregulation: communities that weren’t large enough to justify flights in the newly deregulated environment lost their carriers.
But that mission of universal service has all but blinded just about everyone connected with the Postal Service. Congressmen — many of whom, after all, come from rural areas — are loath to give the Postal Service too much free rein for fear that Mr. Potter’s minions will start shutting down post offices. (Never mind that 2,000 of them serve fewer than 100 people each.) The postal unions, with their no-layoff clauses, have used universal service to justify benefits so generous the Postal Service would save $600 million just by bringing them in line with other federal employees.
As for Mr. Potter himself, while he may want more freedom to run the Postal Service like a real business, he, too, seemed surprisingly wedded to outmoded ideas about mail service in America. “This country needs to have and to protect universal service,” he said. “Our business is all about making sure every American can stay connected with every other American.”
I failed to ask him the obvious follow-up question: Don’t e-mail messages now do that?
For most of us, of course, it does — and that will increasingly to be the case, as broadband makes it way into, yes, even those rural areas that everyone is so worried about. Michael A. Crew, a professor of regulatory economics at Rutgers told me that that while the Postal Service’s “short-term situation is bleak, its long-term situation is really bleak.” He is one of a number of experts who say they believe that even when the recession ends, the Postal Service’s woes won’t be over. As businesses look to save money in the recession, for instance, they are starting to do end-arounds the Postal Service. Online bill-paying is become ever more popular. Evite is starting to replace mailed invitations to parties. None of that business is ever coming back.
Which is why, instead of trying to find short-term, piecemeal solutions to the current crisis, those involved in managing and overseeing the Postal Service ought to be thinking harder thoughts about blowing up its business model. Maybe the Postal Service should turn itself into a giant outsourcer, handling some tasks but handing out others, for a fee, to more efficient companies. Maybe the government should allow companies to bid on lucrative urban delivery — with the proviso that they also deliver to rural areas. Maybe some areas should get mail deliveries less frequently than others. Maybe there should be radically different pricing structures. Maybe it should even lose its monopoly on first-class mail. I mean, why not?
Mr. Geddes, the Cornell professor, says he believes that the only solution is for the Postal Service to become “just another company” — lose its monopoly, shed its bureaucratic mind-set, become able to negotiate freely with its unions, and answer to shareholders instead of Congress, which is always going to resist significant change that might upset a constituent. Only when that happens will it be able to bring its costs in line with its revenue.
“The post office is not broken,” Mr. Potter insisted. But surely it is. And its current crisis brings to mind Rahm Emanuel’s line that you never want a serious crisis to go to waste.
Alas, here in the middle of its worst financial crisis ever, the Postal Service and Congress seem utterly intent on wasting it.
Talking Business
It’s Time to Stay the Courier By JOE NOCERA
So you think your business has problems.
Consider the plight of John E. Potter, the chief executive of the second-largest employer in America. On the one hand, he has a guaranteed monopoly for much of his business. On the other hand, monopoly or not, the combination of the Internet and the recession is absolutely crushing his company, just as it is for so many other companies across the country. His last quarter’s results, which were announced on Wednesday, revealed a loss of $2.4 billion. The business is on track to lose a staggering $7 billion in 2009, on around $68 billion in revenue. That’s practically General Motors territory.
What can he do to fix the situation? Surprisingly little. His employees have clauses in their union contracts that forbid layoffs. Nor can he renegotiate their gold-plated benefits, the way, say, the auto companies did when their backs were against the wall. Political pressure makes it nearly impossible to shut down any of his company’s 34,000 facilities, no matter how outmoded or little used. He can borrow money, but under the law, he can add only $3 billion in debt a year — an amount that isn’t going to come close to covering his losses.
Oh, and get this. Every year between now and 2016, he has to put aside over $5 billion to finance health benefits for future employees. You read that right: future employees. There isn’t another business in the country that finances benefits for employees it hasn’t even hired yet.
Welcome to John Potter’s world. He’s the nation’s postmaster general. Yes, that’s right: for the last nine years, he has run the United States Postal Service, which, since 1970, when it stopped being a government department and started becoming self-sufficient, has been the oddest of ducks. It is expected to operate as a business, turning a profit and so on, and yet it is still subject to Congressional oversight and all sorts of legal constraints, like that ridiculous health benefit prefinancing for future employees, which was part of a big 2006 postal reorganization bill. (Its main purpose, it would seem, is government accounting: those funds get counted against the federal deficit.)
Even so, until recently, Mr. Potter had had a pretty successful run. A smart, likable, lifelong Postal Service executive, he got it through the anthrax crisis early in his tenure. He saw it through 9/11 (in no small part by engaging Federal Express to fly long-distance mail during the day, when its planes were empty, something it still does). He has overseen productivity gains and, according to a poll conducted by Rasmussen Reports, a rise in customer satisfaction. Between 2001 and 2006, he even eliminated the Postal Service’s $11.3 billion debt. That year, 2006, was also when demand for mail service peaked, with 210 billion pieces delivered.
But the last few years have been brutal. The Postal Service lost more than $5 billion in 2007, and another $2.4 billion in 2008. And, of course, it is on track to lose that whopping $7 billion in the current fiscal year. (Its fiscal year ends in September.) The amount of mail being sent is dropping like a stone — it will be down to 175 billion pieces in 2009. Mr. Potter has reduced the Postal Service’s head count to 650,000, from 800,000, almost entirely through attrition. He has cut costs every way he can think of. And still the losses mount.
A few weeks ago, the Government Accountability Office added the Postal Service to its list of “high risk” federal agencies, meaning that it is in such dire straits that it needs “to restructure to address its current and long-term financial viability.” Indeed, if something doesn’t change by the fall, the Postal Service will have to renege on those health benefit prepayments — despite its legal obligation to pay them — or start missing payroll. “U.S.P.S. must align its costs with revenues, generate sufficient earnings to finance capital investments, and manage its debt,” the G.A.O. said. Just like any real business would.
“If you are asking me to run it like a business, give me the same tools that someone would have in the private sector,” Mr. Potter said when I spoke to him recently.
But as I discovered on Thursday, when I watched a Senate hearing on the current Postal Service crisis, that’s not likely to happen. For one thing, Mr. Potter isn’t really asking for the tools he needs to turn the Postal Service into a real business. He is asking Congress to relieve it from the health prepayments, which he is likely to get, at least temporarily. He is also asking that the Postal Service be allowed to reduce mail service to five days a week, and to eliminate some postal branches. These aren’t exactly revolutionary ideas — yet they are viewed as highly controversial in Congress, which frets that constituents might get angry if the local postal branch closes.
But even if Mr. Potter were to get his way on these two items, they would still be only stop-gap measures that fail to tackle the bigger question. As the Internet continues to erode the use of snail mail, does the Postal Service’s business model still make sense? Do we even still need the government to deliver the mail anymore?
•
To me, the answer is obvious: no.
Think for a minute about the mail that comes into your home. In the modern age, very little of it is personal mail. The vast majority is commercial mail of some sort — advertisements, bills, movies from Netflix or catalogs. Once upon a time, said Rick Geddes, an associate professor in the department of policy analysis and management at Cornell University, the postal service was viewed as “a way to bind together the nation. In subsidizing mail service to rural communities you were keeping them connected to the rest of the country.” But today, he added, “it is kind of silly to say we are binding together the nation through advertisements and catalogs.”
These days, the main justification for keeping the postal service as a quasi-government entity is the belief that no private company would be willing to deliver the mail to sparsely populated rural areas of the country. People fear that it would be a little like airline deregulation: communities that weren’t large enough to justify flights in the newly deregulated environment lost their carriers.
But that mission of universal service has all but blinded just about everyone connected with the Postal Service. Congressmen — many of whom, after all, come from rural areas — are loath to give the Postal Service too much free rein for fear that Mr. Potter’s minions will start shutting down post offices. (Never mind that 2,000 of them serve fewer than 100 people each.) The postal unions, with their no-layoff clauses, have used universal service to justify benefits so generous the Postal Service would save $600 million just by bringing them in line with other federal employees.
As for Mr. Potter himself, while he may want more freedom to run the Postal Service like a real business, he, too, seemed surprisingly wedded to outmoded ideas about mail service in America. “This country needs to have and to protect universal service,” he said. “Our business is all about making sure every American can stay connected with every other American.”
I failed to ask him the obvious follow-up question: Don’t e-mail messages now do that?
For most of us, of course, it does — and that will increasingly to be the case, as broadband makes it way into, yes, even those rural areas that everyone is so worried about. Michael A. Crew, a professor of regulatory economics at Rutgers told me that that while the Postal Service’s “short-term situation is bleak, its long-term situation is really bleak.” He is one of a number of experts who say they believe that even when the recession ends, the Postal Service’s woes won’t be over. As businesses look to save money in the recession, for instance, they are starting to do end-arounds the Postal Service. Online bill-paying is become ever more popular. Evite is starting to replace mailed invitations to parties. None of that business is ever coming back.
Which is why, instead of trying to find short-term, piecemeal solutions to the current crisis, those involved in managing and overseeing the Postal Service ought to be thinking harder thoughts about blowing up its business model. Maybe the Postal Service should turn itself into a giant outsourcer, handling some tasks but handing out others, for a fee, to more efficient companies. Maybe the government should allow companies to bid on lucrative urban delivery — with the proviso that they also deliver to rural areas. Maybe some areas should get mail deliveries less frequently than others. Maybe there should be radically different pricing structures. Maybe it should even lose its monopoly on first-class mail. I mean, why not?
Mr. Geddes, the Cornell professor, says he believes that the only solution is for the Postal Service to become “just another company” — lose its monopoly, shed its bureaucratic mind-set, become able to negotiate freely with its unions, and answer to shareholders instead of Congress, which is always going to resist significant change that might upset a constituent. Only when that happens will it be able to bring its costs in line with its revenue.
“The post office is not broken,” Mr. Potter insisted. But surely it is. And its current crisis brings to mind Rahm Emanuel’s line that you never want a serious crisis to go to waste.
Alas, here in the middle of its worst financial crisis ever, the Postal Service and Congress seem utterly intent on wasting it.
Subscribe to:
Posts (Atom)