From The State of the Union Address

About one-third of the way through the President's State of the Union Address on Wednesday night there came the following passage:

As hard as it may be, as uncomfortable and contentious as the debates may become, it's time to get serious about fixing the problems that are hampering our growth.

Now, one place to start is serious financial reform. Look, I am not interested in punishing banks. I'm interested in protecting our economy. A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes. But that can only happen if we guard against the same recklessness that nearly brought down our entire economy.

We need to make sure consumers and middle-class families have the information they need to make financial decisions. (Applause.) We can't allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy.

Now, the House has already passed financial reform with many of these changes. (Applause.) And the lobbyists are trying to kill it. But we cannot let them win this fight. (Applause.) And if the bill that ends up on my desk does not meet the test of real reform, I will send it back until we get it right. We've got to get it right. (Applause.)

Frankly, I'm not sure what this means. "Look," I'm not interested in pedantry for its own sake, but Obama now has two very different financial reform plans in the air. There is on one hand the plan that the Treasury Dept under Geithner put together in June of last year, which centers on enhanced wind-down authority for the Fed, bank capital requirements, the creation of a new consumer protection agency and the regulation of over-the-counter derivatives. Some of the elements in this plan did pass the House of Representatives on December 11.

There is on the other hand, a very different set of proposals, centered on the so-called Volcker Rule, which would bring back something like the old Glass-Steagal segmentationb of thebanking industry. I say "something like" with deliberate vagueness. It is not a simple return to Glass-Steagal. My point, though, is that Obama didn't announce this new plan until January 21, 2010. So there was obviously nothing like it in the bill passed by the House in December.

So, does the above passage mean that he is already retreating from the Volcker Rule, and that he is angling instead to take what he can get from the June Plan? Which one is the "real reform" that he says he would demand of any bill that ends up on his desk?

Damned if I know.

Cellulosic Ethanol

The Obama administration wants to encourage the production of cellulosic ethanol. As a story in today's WSJ (p. C2) tells us, this is a "cornerstone" of its plan to "curb greenhouse-gas emissions." Besides, it seems to have finally occurred to people that driving around on corn-based ethanol means burning what might otherwise have been somebody's food in one's car.

The story, by Naureen Malik, is devoted chiefly to the wariness of private investors to get into cellulosic ethanol, and concomitantly to the wariness of the Dept. of Energy to contribute money in this area until private investors have been lined up, in what Malik calls a "chicken-and-egg problem." (Psssst. Malik. Why consider it a 'problem'? It may be the optimal result -- the non-waste of taxpayers' dollars on a boondoogle.)

She quotes Arnold Klann, chief executive of BlueFire Ethanol Fuels, on the difficulties of finding investors for the projects he has in mind: "They all want to be the first to finance the second project, they won't finance the first."

After all these years, are we still talking as if "the first" cellulosic-ethanol project is a matter for the use of the future tense? The answer: because all the talk of break-throughs in the past has been just that: talk.
Here's a Motley Fool piece on the subject from nearly three years ago. Jack Uldrich was at that time encouraging "investors in ethanol companies such as Pacific Ethanol (Nasdaq: PEIX), Archer Daniels Midland (NYSE: ADM), and Aventine (NYSE: AVR), to begin boning up on cellulosic ethanol...."

Well, I don't suppose the reading could have done them a lot of harm, but there were other things they might more profitably have been boning-up on in terms of market-ready projects.

Two bankruptcy cases: what SCOTUS Won't Decide

The Supreme Court of the United States yesterday announced that it will not grant cert to bankrupt flatware maker Oneida, which sought to use its chapter 11 filing in 2006 to relieve itself of the obligation to make its payments to the Pension Benefit Guaranty Corp.

The ERISA says simply: "[T]here shall be payable to the corporation [PBGC], with respect to each applicable 12-month period, a premium at a rate equal to $1,250 multiplied by the number of individuals who were participants in the plan immediately before the termination date.” But the bankruptcy court agreed with Oneida that this was a pre-petition claim under chapter 11, subject to relief. This is a matter of enormous concern to many companies who find, as the population of the US (like that of much of the rest of the industrialized world) ages, that pension obligations are a significant burden.

It is a burden they have largely brought upon themselves. I don't know anything of Oneida's specific situation, but many US companies have used the prospect of juicy pensions as a way of easing otherwise difficult labor negotiations. The unions representing their workers were also complicit in this game, because they could present higher pension promises as a negotiating victory to their rank-and-file, without worrying much about whether those promises were funded or just hot air. So the bill comes due, and the restaurant's diners keep passing it around the table.

The 2d Circuit has since overturned the bankruptcy court's discharge, though, preserving the ERISA obligation. And it was the 2d Circuit decision whence the company sought a writ of certiorari. Now SCOTUS has let that ruling stand, leaving the other circuits free to go their own ways without guidance. Of course, if those other circuits follow the 2d Circuit's precedent, there will never be a need for SCOTUS to weigh in. This is one of a class of cases in which SCOTUS prefers to wait until a split among the circuits develops.

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Another decision-not-to-decide: the Chrysler bankruptcy. Yesterday the Justices dismissed an appeal brought by Indiana pension funds who objected to the ham-handed way in which the Obama administration pushed the old Chrysler through bankruptcy at their expense. The 2d Circuit in June had approved of the shotgun sale of most of Chrysler's assets to Fiat, but Justice Ginsberg stayed the sale soon thereafter. Now the Justices have sent the case back to the 2d Circuit with an order that the circuit dismiss the challenge to that sale as moot.

The state treasurer in Indiana says that he is happy with the high court's decision not to decide on mootness grounds. The manner in which it is done effectively erases the Second Court's decision as a precedent, and this means there is no precedent upholding the kind of emergency proceeding employed here. Its critics survive to fight another day.

OTC derivatives bill

On Friday, Rep. Barney Frank (D-MA), the chairman of the Financial Services Committee of the House of Representatives, released a "discussion draft" of legislation to regulate over-the-counter derivatives.

This draft takes a point of view distinct in an important respect from that of the administration. The White House/Treasury proposals have focused on standardizing OTC derivatives so that they could be processed through clearing houses, in the expectation that such clearing would lower the risk of such instruments to the broader financial system.

Look at this from the point of view not of hedge funds or speculators, but of companies who really use derivatives to hedge their operational positions. Airline companies, for example, are in the market for derivative products in regard to oil prices. Why? because sharp increases in oil prices proves very costly to their operations, so they look for a way to make such a sharp increase work for them through the derivative, getting them back in one pocket what that development takes away from them via the other.

Yet airlines might have a tougher time doing this under the Obama proposal than they'd like, because the centralized clearinghouses could require they put up cash or liquid assets as collateral. That would burn a hole in their balance sheets.

The discussion draft says that the requirement for OTC swaps to be cleared centrally would not apply if "one of the counterparties to the swap is not a swap dealer or other major swaps participant." Learn more here.

See the discussion draft itself here.