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Straight Talk From a Bank Lobbyist

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At this week's Agora Financial Investment Symposium in Vancouver, put on by The Daily Reckoning newsletter, one of the more intriguing speeches came from Andrew Lowenthal, a powerful Washington banking lobbyist.

Yes, a real, live bank lobbyist. I sort of felt like biologist viewing a new species for the first time: "Oooh, so that's what they look like." Frankly though, I was impressed. Lowenthal was dead honest, concise, and provided some great information that I think you Fools will enjoy. Below is a partial transcript of his speech; this was a rush transcript, so I may not have gotten every word down exactly.

On lobbyists: The reason people are so aware of lobbyists is because we're incredibly transparent. You can find out anything about me. My agenda is out there for you to see.

On regulation: We like to think the assault on enterprise comes from Washington. The truth is that it comes from the financial services industry itself. They argued for so long about the ability of markets to enforce discipline, yet they were the first ones to ask to be spared of their own bad decisions. And they made a lot of bad decisions.

They want you to think this was some really complex ordeal that led to the crash. It wasn't. It's not as complicated as they've led you to believe. Most of it was really simple: they invested in long-term assets using overnight funding. It was a Ponzi scheme that fell apart. Simple.

I don't think our government is the problem. Most people don't worry about government on a day-to-day basis. That's a good thing. In countries with dysfunctional governments, people have to think and worry about their governments every day, not knowing what's going to be seized or confiscated. It's not like that here, whether people pretend it is or not.

That's one reason I'm very bullish on America. There's a lot of uproar right now, but this is nothing new. There's never been a time in history when we haven't thought that we were at the brink of the end of the world. Never. Every election I've ever been involved with has been "the most important election in history." At some point it's not. It's just the path of history. There's this fear that we're going to hand over our lives to JPMorgan Chase (NYSE: JPM  ) , Goldman Sachs (NYSE: GS  ) , Bank of America (NYSE: BAC  ) , and Citigroup (NYSE: C  ) . That just isn't going to happen. It's not that bad out there, folks.

On problems with the Fed: Most of our government is very transparent. I can find out exactly how much we spend on Guantanamo, trade pacts with China, what we're spending on prescription drug coverage, or what the budget of the CIA is. Most of it is all out in the open.

But you can't find anything out about what the Fed does with our money. They won't tell you. To let you know the truth would undermine faith in the system, they say. It's not like that anywhere else in the government. With the Fed, we're told, "Close your eyes and listen to those brilliant men over there." It's dangerous.

On systemic risk: Before the crisis, people thought hedge funds were the systemic risk. But ask any hedge fund that did business with Lehman Brothers where the risk was. The risk was with the brokers, not the hedge funds. These [brokerages] are so dependent on trading profits that they can't survive the next 24 hours without more capital. With a company like US Steel (NYSE: X  ) , they need several years to see their return after investing in a project. Traders don't have that. It's 24 hours. That's incredibly dangerous.

On too big to fail: Left unregulated, big banks have a huge advantage against anyone who isn't too big to fail. If investors lend to a big bank, there's no risk. That pricing advantage cannot be left untouched. In the wake of the regulatory burdens that will fall on them are clawbacks of the advantages they receive. That's a good thing. They've been conferred upon them a huge advantage they don't deserve. The market should price for risk. That's what we need to get back to. People are getting outsized rewards for taking too much risk. That will change.

Left out of financial regulation: Venture capital (VC) was largely left out of the regulatory regime. That's very interesting. VC is not part of the Volcker Rule. It can still deliver outsized returns. And money flows to the path of least resistance, so I'd look for an influx of venture capital dollars going forward. That's not an intentional consequence, but the fact is money goes where regulation isn't.

Where you can invest after financial regulation: Community banks were pretty much left alone in the regulatory bill. They'll have same regulatory scheme they currently have. And they're very familiar with their regulations. Same with monoline entities: Jefferies (NYSE: JEF  ) , Edward Jones, Lazard, pure insurance companies -- those are basically left alone. There's an opportunity there as regulations sit on big guys and make them more static. Another interesting opportunity is the exchanges. Driving business toward centralized clearing will benefit all the exchanges.

Losers of financial reform: Mid-sized depository banks -- those with assets between $50 billion and $500 billion. They'll face the weight of regulation, but they're not too big to fail. Some of them are nimble enough to compete against static bigger banks, but it won't be easy.

And your thoughts? Share 'em in the comment section below.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (25)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 23, 2010, at 5:51 PM, Gorm wrote:

    1) Investors know they can make bad bets and lose their investment.

    2) Investors rightly expect there are protections accorded them in accurate financial reporting so they invest based on fact, not illusions some CEO and CFO conjure up.

    3) Institutions are chartered to do business by our government because it serves some useful purpose to US, not them. We are not prey!!

    4) Tolerating TBTF, dual banking charters, derivative trading that function more like bets than prudent, useful hedges, excessive leverage all invite disaster.

    And this disaster is not just investors taking a hit. What we are risking is our total economic being, our standard of living, our way of life.

    Recently read that Glass Steagal comprised a mere 18 pages yet this financial reform bill constitutes 2300 pages and STILL it will be years haggling between factions to learn what the Act accomplishes.

    Bottom line, GS does not spend $400M a year in lobbying for nothing.

  • Report this Comment On July 23, 2010, at 8:05 PM, xetn wrote:

    Also left out of the new regulation was the "Audit The Fed" provision that would have made the Fed more transparent. But we can't have anyone looking over the shoulders of that august body of inflation addicts. You know, the ones that denied a recession was starting in 2007, who denied there was a real estate bubble, who believe that fighting too much debt and too low interest rates is to use much, much more debt and zero interest rates.

    Last, but certainly not least, this is the group that already had complete regulatory oversight of the entire banking system in the US.

    From their own "play book" we get:

    "The Federal Reserve System: Purposes and Functions." In addition to recklessly manipulating the money supply and causing boom-and-bust cycles for more than ninety years (including the Great Depression and the current one), the Fed "has supervisory and regulatory authority over a wide range of financial institutions and activities." That’s an understatement if ever there was one. Among the Fed’s "functions" are the regulation of:

    Bank holding companies

    State-chartered banks

    Foreign branches of member banks

    Edge and agreement corporations

    U.S. state-licensed branches, agencies, and representative offices of foreign banks

    Nonbanking activities of foreign banks

    National banks

    Savings banks

    Nonbank subsidiaries of bank holding companies

    Thrift holding companies

    Financial reporting procedures

    Accounting policies of banks

    Business "continuity" in case of economic emergencies

    Consumer protection laws

    Securities dealings of banks

    Information technology used by banks

    Foreign investment by banks

    Foreign lending by banks

    Branch banking

    Bank mergers and acquisitions

    Who may own a bank

    Capital "adequacy standards"

    Extensions of credit for the purchase of securities

    Equal opportunity lending

    Mortgage disclosure information

    Reserve requirements

    Electronic funds transfers

    Interbank liabilities

    Community Reinvestment Act sub-prime lending demands

    All international banking operations

    Consumer leasing

    Privacy of consumer financial information

    Payments on demand deposits

    "Fair Credit" reporting

    Transactions between member banks and their affiliates

    Truth in lending

    Truth in savings

    All of this financial market regulation and regimentation was in full force during the Greenspan era.

    Source: Thomas DiLorenzo: professor of economics at Loyola College in Maryland.

    Since the Fed's creation, the value of the dollar (purchasing power) has dropped over 95%. And now, we are rewarding this stellar performance with more power.

    As Mark Twain once said: "Suppose you were and idiot. And suppose you were a member of congress, but I repeat myself".

  • Report this Comment On July 23, 2010, at 9:25 PM, dc46and2 wrote:

    Some very candid comments by Lowenthal. Thanks for sharing.

  • Report this Comment On July 24, 2010, at 9:32 PM, neutrinoman wrote:

    "They invested in long-term assets using overnight funding." I wish I had said that.

    Of course, now no one out there will give them overnight funding to do that any more. So the Fed gives them overnight funding.

    Our central bank is now the enabler. That's why they need an audit, then another, then another ....

  • Report this Comment On July 26, 2010, at 12:41 AM, MFMerlin wrote:

    I wonder if Mr. Lowenthal made any comments regarding Freddie and Fannie?

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