The Throes of Change
By Chris ClairI have been keeping up as best I can with the developments surrounding negotiations in the United States and Europe with respect to government reform of the financial system. And when I say “as best I can,” I mean “barely.”
Just today we learned that reform for hedge funds in Europe is pretty much dead until the fall. In the short-term, European Union legislators seem unable to bridge the divide between how mainland Europe would like to treat hedge funds (one passport to allow distribution in all of Europe or no passport at all) and how the United Kingdom would like them treated (the broad Europe-wide passport or, failing that, country-by-country passports). The U.K., with the bulk of Europe’s hedge fund industry, understandably wants to make it easier for hedge funds to operate from there.
Here in the United States, House and Senate negotiators are still talking, trying to beat a self-imposed deadline of today (June 24) to hammer out what financial reform will look like. While there appears to be agreement on some key points including bank capital requirements and moving most derivatives trading on-exchange and routing it through centralized clearinghouses.
Unresolved, as of late in the afternoon, was the fate of Democratic Arkansas Sen. Blanche Lincoln’s proposal to force banks to get out of the swaps dealing business and the so-called Volcker Rule, which would require banks to close their proprietary trading desks. Bank lobbyists and FOBs in Congress (that’s Friends of Banks) were working to block the Lincoln proposal and weaken the Volcker Rule.
The struggle in Europe and here in the U.S. is indicative of the times in which we live. On the one hand we’ve seen massive failures in the financial system that have negatively affected smaller investors who rightly feel they are at the mercy of a system being gamed by big players. At the same time there are many who feel that government intrusion into the financial system in the ways that have been proposed would cripple the financial system, restrict innovation and weaken the economy.
The tension between the two sides is natural. On Friday we can talk about outcomes. Right now, the devil remains in the details. How those details play out in the next few hours will determine what kind of financial system we have going forward.
June 25th, 2010 at 9:53 am
Meanwhile, the latest effort to change the favorable tax treatment of “carried interest” seems to have disappeared.
Republicans have successfully filibustered the American Jobs and Closing Tax Loopholes Act of 2010:
http://www.bloomberg.com/news/2010-06-24/senate-republicans-block-u-s-jobless-aid-extension-buyout-manager-tax.html
This bill was mostly debated over extending-help-to-jobless grounds on the one hand, and its-way-too-expensive grounds on the other. The carried-interest issue was piggybacked on all that. But the gist of it is that a change that had seemed nearly inevitable to some in the industry has again become evitable — the already-privileged keep their tax breaks.
Personally, I’m a laissez-faire kind o’ guy. I’m not at all reconciled to the philosophical principles behind the progressive taxation of income. But that does not mean that so long as an income tax system is in place that I’m going to support unwarranted carve-outs from an income tax [on what is clearly ordinary income from their labor] on behalf of the privileged.
So I find the repeated defeat over a period of years now of what seems to me a common-sense reform proposal, distressing. For a clear statement of the relevant points from three years ago, see here:
http://www.theconglomerate.org/2007/07/the-academic-co.html