Subject: Kaufman Hailed As "A Man Against the Machine"
From: "Senator Ted Kaufman" <[email-masked]>
To: "Hunter and Kathleen Biden" <[email-masked]>
Date: Tue, 18 May 2010 15:55:44 -0500

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Kaufman
 Connection - Highlights of Ted's work for Delaware

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“If we are still making any progress at all [on banking reform], it is
 because of the noble efforts of a small number of United States
 senators.
Most notable has been the work of Senator Ted
 Kaufman”

--

Simon Johnson, MIT professor, former chief economist at the
 International Monetary Fund and author of *13 Bankers*

*Project
 Syndicate [link 1]

A Man against the Machine

By Simon Johnson

May 17,
 2010*

 WASHINGTON, DC – America’s financial sector has shown
 renewed strength in recent months – political strength, that is – by
 undermining most of the sensible proposals for banking reform that remain on
 the table. If we are still making any progress at all, it is because
 of the noble efforts of a small number of United States senators.

 

 Most notable has been the work of Senator Ted Kaufman, a Democrat
 from Delaware (yes, a pro-business state), who has pressed tirelessly
 to fix the most egregious problems in the US financial sector.
 Kaufman understands that successful reform requires three ingredients:
 arguments that persuade, the ability to bring colleagues along, and a good
 deal of luck in the form of events that highlight problems at just the
 right time. On two fronts, Kaufman has – against long odds – actually
 managed to make substantial steps.

 Long before it became
 fashionable, Kaufman persisted with the idea that the US real estate boom
 was fueled in part by pervasive fraud within the
 mortgage-securitization-derivatives complex, effectively at the heart of Wall Street. This
 thesis is now gaining much broader traction – major newspapers now
 report a broadening criminal probe by the federal government – and by
 New York’s state attorney general – into the US financial sector’s
 residential lending and related securities practices.

 With
 Senators Patrick Leahy and Chuck Grassley, Kaufman worked last year to pass a
 bill providing timely resources to federal law enforcement agencies
 working on recent financial fraud. More recently, Kaufman was
 devastating in his cross-examination of Goldman Sachs executives. Senator Carl
 Levin, chairman of the subcommittee that heard their testimony,
 evidently seeing eye to eye with Kaufman, was just as tough after a
 year-long investigation of Washington Mutual, Goldman, and the abject failures
 of bank regulators and credit rating agencies.

 Kaufman
 scored an even bigger coup with his warnings about the dangers of the
 explosive growth of high-frequency trading, which is little understood by
 America’s main financial watchdog, the Securities and Exchange
 Commission (SEC), and poses systemic market risk. His concerns appear to have
 been vindicated by the 20-minute shutdown of trading in New York on
 May 6, when the stock market completely failed in its most basic
 function: price discovery between buyers and sellers.

 We do not yet
 know what combination of black-box computer programs and electronic
 trading algorithms, interacting across more than 50 market centers,
 caused this catastrophe. But our lack of knowledge itself confirms how far
 our regulatory and surveillance capabilities have fallen behind
 “financial innovation.”

 Kaufman’s approach – with speeches on the
 Senate floor as a central feature – seemed irrelevant or even quaint
 to critics even a few weeks ago. No significant Wall Street voices
 acknowledged his concerns – preferring instead to praise the equity
 markets as a shining example of well-functioning technology.

 Now
 people get it. As Senator Mark Warner graciously acknowledged, “The
 Senator from Delaware sounded an early warning signal that the massive
 amounts of investments that had been made by certain firms to try to get
 what appears to be a fractional millisecond advantage in the trading
 process might come back and haunt us all... I’ve been proud to follow
 his lead.”

 The SEC was once a great and powerful independent
 agency. It fell on hard times in recent decades and is only beginning
 to get its act together under new leadership. Yet it still does not
 routinely collect the data that it needs – trades by time and customer –
 to understand the actions and impact of large traders. Kaufman has
 consistently pressed them to do more – and do it much faster; to be sure,
 they and many others are now listening.

 On a third issue,
 the results so far are mixed. Kaufman championed the case for making
 America’s biggest banks smaller, as part of comprehensive
 financial-reform efforts. His advocacy helped build support and forced a Senate floor
 vote on an amendment, co-sponsored with Senator Sherrod Brown, that
 would have imposed a hard cap on banks’ size and leverage (debt
 relative to assets).

 The amendment was moderate and entirely
 reasonable, yet it went down to defeat, 33-61, also on May 6. It might have
 gained more support just a few days later – after senators witnessed
 the bailout of the giant eurozone banks. Still, it has strengthened
 backing for another amendment, sponsored by Senators Jeff Merkley and Carl
 Levin, which would restrict proprietary trading by megabanks for
 their own account – coincidentally a practice that is presumed to be a
 large and “dark” part of high-speed trading.

 The deeper and
 overriding point of Kaufman’s critique of our system is the need for tough
 laws. We cannot merely rely on regulators to do the right thing. In
 particular, regulators have no chance to look over the horizon and act
 preventively when markets are opaque, and when powerful Wall Street
 interests (and their Capitol Hill allies) can circle the wagons and
 claim that there is no problem. 

 Unfortunately, despite his
 newfound prominence on the national stage, Kaufman will be out of office at
 the end of this year – he was appointed to fill Vice President Joe
 Biden’s seat at the end of 2008 and committed at that time not to run
 for re-election.

 When he goes, dangerous elements on Wall
 Street will no doubt breathe a sigh of relief. Let’s hope that by then he
 will have helped move the consensus permanently among his colleagues –
 preparing the ground for further congressional action aimed at a
 serious tightening of safeguards over the financial sector. 

 Kaufman’s lasting legacy will be a simple and powerful idea that reasonable
 people increasingly find to be self-evident: relying on deregulation
 and self-interest in today’s complex, opaque markets will manifestly
 fail to produce a reasonable allocation of capital or support
 entrepreneurship and growth. We must write and enforce laws that restore
 credibility to our financial markets.

 

 

----------------------
footnotes
----------------------
[link 1]
 http://www.project-syndicate.org/commentary/johnson8/English

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