Take Notice

We're only an hour into the bank CEO testimony before the House Banking committee, and we've already seen two clear examples of the real political power of Congress.

Chairman Frank urged all the banks to voluntarily adopt a moratorium on foreclosure until the Treasury Department can announce its foreclosure relief program. This makes a certain amount of sense, if that program is imminent -- but it's also problematic. How long will it be before Treasury makes its announcement? Once the banks stop foreclosures, won't they expose themselves to criticism if they resume them? Won't the precedent become, forebear until we can fix this or that? Outside the banks, an indefinite foreclosure moratorium stops the only process currently in place to work the real estate markets to a more stable basis. The overhang of housing approaching foreclosure is a substantial discouragement to buying and investing in housing.

Likewise, the Chairman told the banks that while Treasury can't retroactively change the terms of the capital infusions, the banks can voluntarily comply with new requirements on items like compensation. And if they don't like those terms, they can return the capital. Perhaps Treasury doesn't think such returns a good idea? After all, the initial infusions were widely distributed to minimize the negative reputational affects of accepting that capital, with a view to enabling those that really needed the funds to accept them.

The Chairman will control the flow of enormous wealth through his influence over the coming revision of these banks' regulations and the Treasury's deployment of substantial funds to address the industry's problems with losing assets. Banks resist his "requests" at their peril.

Maybe these various ideas of his are sensible. But I don't notice any institutional check on them, beyond public notice, public consideration of their merit, and public speculation as to the Chairman's motives. And of course, there is the possibility of "requests" that are not publicly reported or disclosed.