The President on Financial Reform

I had the honor of being invited to the President's speech on financial reform this morning at Cooper Union. The speech was somewhat general, but that is probably to be expected when talking for a short time about a complex issue and a massive chunk of legislation.

(N.B.  I'm writing this up before looking at any of the press coverage so I can present my impressions "untainted" by the conventional wisdom.)

Two important points that I was glad to hear. First, he noted that resolution authority could be paid for ex ante or ex post, and people could legitimately disagree over which was better, but you needed to find a way to make sure the financial industry paid for its own resolution. I think this is right, and reflects the realistic options. I know some suggest we can simply put the big financial firms into bankruptcy without doing anything more, but if Paulson and Bush couldn't stomach that (after one attempt), I don't know who could. The broader consequences of that intellectually pure approach will never be politically palatable.

Second, he refused to demonize derivatives, which would have been the easy political move. He explained that there are legitimate uses for derivatives, but the real issue was bringing transparency to the market, so it would be clear to all if somebody like AIG went off the deep end in terms of counterparty risk and exposure.

The one thing I would have liked to have seen was some support for the safe harbor reforms now percolating through Congress, such as Senator Bill Nelson's proposal. This amendment is not perfect, and I've explained what I think works as a compromise position, but amendments of this sort are a big step in the right direction, and get the issue on the table.