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The Outrage Continues

February 1st, 2010 Posted in Uncategorized

Feb, 01 2010

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February 1, 2010

The news reports of the past few days have brought us enough fuel to keep us outraged for the next decade. Let’s just hope that some of this lasts long enough for the November elections. I will touch on just three of the latest stories that should get the pitchfork-wielding mobs off their asses and into the streets. Nevertheless, we have to be realistic about these things. With the Super Bowl coming up, it’s going to be tough to pry those butts off the couches.

The first effrontery should not come as too much of a surprise. The Times of London has reported that Goldman Sachs CEO, Lloyd Blankfein (a/k/a Lloyd Bankfiend) is expecting to receive a $100 million bonus this year:

Bankers in Davos for the World Economic Forum (WEF) told The Times yesterday they understood that Lloyd Blankfein and other top Goldman bankers outside Britain were set to receive some of the bank’s biggest-ever payouts. “This is Lloyd thumbing his nose at Obama,” said a banker at one of Goldman’s rivals.

Blankfein is also thumbing his nose at the American taxpayers. Despite widespread media insistence that Goldman Sachs “paid back the government” there is a bit of unfinished business arising from something called Maiden Lane III — for which Goldman should owe us billions.

That matter brings us to our second item: the recently-released Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky). The report is 224 pages long, so I’ll refer you to the handy summary prepared by Michael Shedlock (“Mish”). Mish’s headline drove home the point that there are currently 77 ongoing investigations of fraud, money laundering and insider trading as a result of the TARP bank bailout program. Here are a few more of his points, used as introductions to numerous quoted passages from the SIGTARP report:

The Report Blasts Geithner and the NY Fed. I seriously doubt Geithner survives this but the sad thing is Geithner will not end up in prison where he belongs.

*   *   *

Please consider a prime conflict of interest example in regards to PPIP, the Public-Private-Investment-Plan, specifically designed to allow banks to dump their worst assets onto the public (taxpayers) shielding banks from the risk.

*   *   *

Note the refutation of the preposterous claims that taxpayers will be made whole.

*   *   *

TARP Tutorial: How Taxpayers Lose Money When Banks Fail

My favorite comment from Mish appears near the conclusion of his summary:

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so. This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense? Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

Mish’s last remark (and his link to an earlier posting) brings us to the third disgrace to be covered in this piece: The AIG bailout cover-up. On January 29, David Reilly wrote an article for Bloomberg News (and Business Week) concerning last Wednesday’s hearing before the House Committee on Oversight and Government Reform. After quoting from Reilly’s article, Mish made this observation:

Most know I am not a big believer in conspiracies. I regularly dismiss them. However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.

David Reilly began the Bloomberg/Business Week piece this way:

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner. David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank.

* * *

The New York Fed is one of 12 Federal Reserve Banks that operate under the supervision of the Federal Reserve’s board of governors, chaired by Ben Bernanke. Member-bank presidents are appointed by nine-member boards, who themselves are appointed largely by other bankers.

As Representative Marcy Kaptur told Geithner at the hearing: “A lot of people think that the president of the New York Fed works for the U.S. government. But in fact you work for the private banks that elected you.”

The “cover-up” aspect to this caper involved intervention by the New York Fed that included editing AIG’s communications to investors and pressuring the Securities and Exchange Commission to keep secret the details of the bailouts of AIG’s counterparties (Maiden Lane III). The Fed’s opposition to disclosure of such documentation to Congress was the subject of a New York Times opinion piece in December. The recent SIGTARP report emphasized the disingenuous nature of the Fed’s explanation for keeping this information hidden:

SIGTARP’s audit also noted that the now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve in connection with Maiden Lane III, once again simply does not withstand scrutiny. Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG’s stability, the privacy and business interests of the counterparties, and the stability of the markets. After public and Congressional pressure, AIG disclosed the identities of its counterparties, including its eight largest: Societe Generale, Goldman Sachs Group Inc., Merrill Lynch, Deutsche Bank AG, UBS, Calyon Corporate and Investment Banking (a subsidiary of Credit Agricole S.A.), Barclays PLC, and Bank of America.

Notwithstanding the Federal Reserve’s warnings, the sky did not fall; there is no indication that AIG’s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties.

The SIGTARP investigation has revealed some activity that most people would never have imagined possible given the enormous amounts of money involved in these bailouts and the degree of oversight (that should have been) in place. The bigger question becomes: Will any criminal charges be brought against those officials who breached the public trust by facilitating this monumental theft of taxpayer dollars?

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The Dishonesty Behind The Bernanke Vote

January 28th, 2010 Posted in Uncategorized

Jan, 28 2010

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January 28. 2010

While reading a recent Huffington Post piece by Jason Linkins, wherein he criticized President Obama’s proposed spending freeze, I was struck by Linkins’ emphasis on the notion that this proposal signaled a return to “institutionalized infantilism”:

One of the most significant things that Obama promised to do during the campaign was to simply level with the American people — deal with them in straightforward fashion, tell the hard truths, make the tough choices, and go about explaining his decisions as if he were talking to adults.

Linkins referred to a recent essay about the freeze, written by Ryan Avent of The Economist, which underscored the greater, underlying problem motivating politicians such as Obama to believe they can “slip one by” the gullible public:

This is yet another move toward the infantilisation of the electorate; whatever the gamesmanship behind the proposal, Mr. Obama has apparently concluded that the electorate can’t be expected to handle anything like a real description of the tough decisions which must be made.

Matt Taibbi made a similar observation about our President, while pondering whether the announced reliance on the wisdom of Paul Volcker meant an end to Tim Geithner’s days as Treasury Secretary:

Obama, as is his nature I think, tried to take the fork in the road all year, making nice to his base while actually delivering to his money people, not realizing the two were perpetually in conflict. His failure to make a clear choice, or rather to make the right choice, is what has doomed him everywhere politically.

It will be interesting to see what comes next, whether this is just for show or not.

We are now witnessing another example of this “infantilisation of the electorate” as it takes place with the dishonest maneuvering to get Ben Bernanke’s nomination to a second term past a filibuster. Here’s how this scam was exposed by Josh Rosner at The Big Picture website:

Sources have suggested that Senator Barbara Boxer (D-CA) intends to vote “yes” on Chairman Bernanke’s cloture vote and “no” on the floor. The cloture vote requires 60 “yes” votes to approve and really is THE vote to confirm. The floor vote only requires a simple majority to pass and therefore is a less important vote requiring fewer “yes” votes.

Get it? These Senators believe they can go back to their constituents with a straight face and tell the chumps that they voted against Bernanke’s confirmation when, in fact, they facilitated his confirmation by voting for cloture to give Bernanke a boost over the potentially insurmountable, 60-vote hurdle. This sleight-of-hand comes along at the precise moment when we are learning about Bernanke’s true role in the AIG bailout. As Ryan Grim reported for The Huffington Post:

A Republican senator said Tuesday that documents showing Federal Reserve Board Chairman Ben Bernake covered up the fact that his staff recommended he not bailout AIG are being kept from the public. And a House Republican charged that a whistleblower had alerted Congress to specific documents provide “troubling details” of Bernanke’s role in the AIG bailout.

Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that’s the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke’s motives were.

Yves Smith of Naked Capitalism disclosed that Congressman Darrell Issa, who has been investigating the AIG bailout in his role as ranking Republican on the House Oversight and Government Reform Committee, “believes there is evidence that says Bernanke overruled his staff and authorized the rescue”. Ms. Smith explained how Issa is pushing ahead to investigate:

Rep. Darrell Issa of the House Oversight Committee has asked to Committee Chairman Towns to subpoena more documents from the Fed regarding its decision-making process in the AIG bailout.

* * *

In addition, Issa has noted that the Fed had failed to comply in full with previous subpoenas, and has not released any documents relative to AIG prior to September 2008 or after May 2009, even though they fall within the scope of previous subpoenas.

Congressman Issa’s letter can be viewed in its entirety here.

You may recall that the fight against the Fed for release of the AIG bailout documents became the subject of an opinion piece in the December 19 edition of The New York Times, written by Eliot Spitzer, Frank Partnoy and William Black.

There are plenty of reasons to oppose confirmation of Ben Bernanke to a second term as Fed chair. Senator Jim Bunning did a fantastic job articulating many of those points during the confirmation hearing on December 3. Beyond that, economist Randall Wray gave us “3 Reasons to Fear Bernanke’s Reappointment” at the Roosevelt Institute’s New Deal 2.0 website. Dr. Wray concluded his essay with this statement:

To be clear, I would prefer to replace Bernanke with someone who actually understands monetary policy and who advocates regulation and supervision of financial institutions.

The really pressing issue at this point is whether the withheld AIG bailout documents, which are the subject of Congressman Issa’s latest inquiry, might actually reveal some malefaction on the part of Bernanke himself. A revelation of that magnitude would certainly kill the confirmation effort. If Bernanke is confirmed prior to the release of documents indicating malfeasance on his part, I’ll be wishing I had a dollar for every time a Senator would say: “I just voted for cloture –but I voted against confirmation.”

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Lev Is The Drug

January 14th, 2010 Posted in Uncategorized

Jan, 14 2010

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January 14, 2010

The first day of hearings conducted by the Financial Crisis Inquiry Commission (FCIC) was as entertaining as I expected. The stars of the show: Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, “The Dimon Dog” of JP Morgan Chase and Brian Moynihan from Bank of America presented themselves as likeable guys. However, in the case of Blankfein, whenever he wasn’t talking he would sit there with that squinting, perplexed look on his face that seemed to mime the question: “WTF?” A large segment of the viewing public has already been primed to view these gentlemen as “The Four Horsemen of The Financial Apocalypse”. Nevertheless, there were four more Horsemen absent from the “stage” on Wednesday: Messrs. Greenspan, Bernanke, Paulson and Geithner. Beyond that, Brian Moynihan didn’t really belong there, since he was not such a significant “player” as the other panel members, in events of 2008. In fact, history may yet view his predecessor, Ken Lewis, as more of a victim in this drama, due to the fact that he was apparently coerced by Hank Paulson and Ben Bernanke into buying Merrill Lynch with instructions to remain silent about Merrill’s shabby financial status. I would have preferred to see Vikram Pandit of Citigroup in that seat.

As I watched the show, I tried to imagine what actors would be cast to play which characters on the panel in a movie about the financial crisis. Mike Myers would be the obvious choice to portray Lloyd Blankfein. Myers could simply don his Dr. Evil regalia and it would be an easy gig. The Dimon Dog should be played by George Clooney because he came off as a “regular guy”, lacking the highly-polished, slick presentation one might expect from someone in that position. Brian Moynihan could be portrayed by Robin Williams, in one of his rare, serious roles. John Mack should be portrayed by Nicholas Cage, if only because Cage needs the money.

Although many reports have described their demeanor as “contrite”, the four members of the first panel gave largely self-serving presentations, characterizing their firms in the most favorable light. Blankfein emphasized that Goldman Sachs still believes in marking its assets to market. As expected, his theme of “if we knew then what we knew now . . .” got heavier rotation than a Donna Summer record at a party for Richard Simmons. John Mack, who was more candid and perhaps the most contrite panel member, made a point of mentioning that some assets cannot be “marked to market” because there really is no market for them. Excuse me . . . but isn’t that the definition of the term, “worthless”?

Throughout the session, the panel discussed the myriad causes that contributed to the onset of the financial crisis. Despite that, nobody seemed interested in implicating the Federal Reserve’s monetary policy as a factor. “Don’t bite the hand that feeds you” was the order of the day. All four panelists described the primary cause of the crisis as excessive leverage. They acted as a chorus, singing “Lev Is The Drug”. Lloyd Blankfein repeatedly expressed pride in the fact that Goldman Sachs has always been leveraged to “only” a 23-to-1 ratio. The Dimon Dog’s theme was something like: “We did everything right . . . except that we were overleveraged”. Dimon went on to make the specious claim that overleveraging by consumers was a contributing element in causing the crisis. Although many commentators whom I respect have made the same point, I just don’t buy it. Why blame people who were led to believe that their homes would continue to print money for them until they died? Dimon himself admitted at the hearing that no consideration was ever given to the possibility that home values would slump. Worse yet, for a producer or purveyor of the so-called “financial weapons of mass-destruction” to implicate overleveraged consumers as sharing a role in precipitating this mess is simply absurd.

The second panel from Wednesday’s hearing was equally, if not more entertaining. Michael Mayo of Calyon Securities seemed awfully proud of himself. After all, he did a great job on his opening statement and he knew it. Later on, he refocused his pride with an homage to his brother, who is currently serving in Iraq. Nevertheless, the star witness from the second panel was Kyle Bass of Hayman Advisors, who gave the most impressive performance of the day. Bass made a point of emphasizing (in so many words) that Lloyd Blankfein’s 23-to-1 leverage ratio was nearly 100 percent higher than what prudence should allow. If you choose to watch the testimony of just one witness from Wednesday’s hearing, make sure it’s Kyle Bass.

I didn’t bother to watch the third panel for much longer than a few minutes. The first two acts were tough to follow. Shortly into the opening statement by Mark Zandy of Moody’s, I decided that I had seen enough for the day. Besides, Thursday’s show would hold the promise of some excitement with the testimony of Sheila Bair of the FDIC. I wondered whether someone might ask her: “Any hints as to what banks are going to fail tomorrow?” On the other hand, I had been expecting the testimony of Attorney General Eric Hold-harmless to help cure me of the insomnia caused by too much Cuban coffee.

The Commissioners themselves have done great work with all of the witnesses. Phil Angelides has a great style, combining a pleasant affect with incisive questioning and good witness control. Doug Holtz-Eakin and Brooksley Born have been batting 1000. Heather Murren is more than a little easy on the eyes, bringing another element of “star quality” to the show.

Who knows? This commission could really end up making a difference in effectuating financial reform. They’re certainly headed in that direction.

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More Fun Hearings

January 11th, 2010 Posted in Uncategorized

Jan, 11 2010

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January 11, 2010

In my last posting, I discussed the need for a 9/11-type of commission to investigate and provide an accounting of the Federal Reserve’s role in causing the financial crisis. A more broad-based inquiry into the causes of the financial crisis is being conducted by the Financial Crisis Inquiry Commission, led by former California State Treasurer, Phil Angelides. The Financial Crisis Inquiry Commission (FCIC) was created by section 5 of the Fraud Enforcement and Recovery Act (or FERA) which was signed into law on May 20, 2009. The ten-member Commission has been modeled after the Pecora Commission of the early 1930s, which investigated the causes of the Great Depression, and ultimately provided a basis for reforms of Wall Street and the banking industry. Like the Pecora Commission, the FCIC has subpoena power.

On Wednesday, January 13, the FCIC will hold its first public hearing which will include testimony from some interesting witnesses. The witnesses will appear in panels, with three panels being heard on Wednesday and two more panels appearing on Thursday. The witness list and schedule appear at The Huffington Post website. Wednesday’s first panel is comprised of the following financial institution CEOs: Lloyd Blankfein of Goldman Sachs (who unknowingly appeared as Dr. Evil on several humorous, internet-based Christmas cards), Jamie Dimon (a/k/a “The Dimon Dog”) of JP Morgan Chase, John Mack of Morgan Stanley and Brian Moynihan of Bank of America. Curiously, Vikram Pandit of Citigroup was not invited.

Frank Rich of The New York Times spoke highly of FCIC chairman Phil Angelides in his most recent column. Nevertheless, as Mr. Rich pointed out, given the fact that the banking lobby has so much influence over both political parties, there is a serious question as to whether the FCIC will have as much impact on banking reform as did the Pecora Commission:

Though bad history shows every sign of repeating itself on Wall Street, it will take a near-miracle for Angelides to repeat Pecora’s triumph. Our zoo of financial skullduggery is far more complex, with many more moving pieces, than that of the 1920s. The new inquiry does have subpoena power, but its entire budget, a mere $8 million, doesn’t even match the lobbying expenditures for just three banks (Citi, Morgan Stanley, Bank of America) in the first nine months of 2009. The firms under scrutiny can pay for as many lawyers as they need to stall between now and Dec. 15, deadline day for the commission’s report.

More daunting still is the inquiry’s duty to reach into high places in the public sector as well as the private. The mystery of exactly what happened as TARP fell into place in the fateful fall of 2008 thickens by the day — especially the behind-closed-door machinations surrounding the government rescue of A.I.G. and its counterparties.

A similar degree of skepticism was apparent in a recent article by Binyamin Appelbaum of The Washington Post. Mr. Appelbaum also made note of the fact that the relatively small, $8 million budget — for an investigation that has until December 15 to prepare its report — will likely be much less than the amount spent by the banks under investigation. Appelbaum pointed out that FCIC vice chairman, William Thomas, a retired Republican congressman from California, felt that the commission would benefit from its instructions to focus on understanding the crisis rather than providing policy recommendations. Nevertheless, both Angelides and Thomas expressed concern about the December 15 deadline:

The tight timetable also makes it impossible to produce a comprehensive account of the crisis, both men said. Instead, the commission will focus its work on particular topics, perhaps producing a series of case studies, Angelides said.

* * *

Both Angelides and Thomas acknowledged that the commission is off to a slow start, having waited more than a year since the peak of the crisis to hold its first hearing. Thomas said that a lot of work already was happening behind the scenes and that the hearing next week could be compared to a rocket lifting off after a lengthy construction process.

Even as books and speeches about the crisis pile up, Thomas expressed confidence that the committee’s work could still make a difference.

“There are a lot of people who still haven’t learned the lessons,” he said.

One of those people who still has not learned his lesson is Treasury Secretary “Turbo” Tim Geithner, who is currently facing a chorus of calls for his resignation or firing. Economist Randall Wray, in a piece entitled, “Fire Geithner Now!” shared my sentiment that Turbo Tim is not the only one who needs to go:

There is a growing consensus that it is time for President Obama to fire Treasury Secretary Timothy Geithner. While he is at it, he needs to clean house by firing Larry Summers, by banning Robert Rubin from Washington, and by appointing a replacement for Chairman Bernanke. It is time for a fresh start.

Geithner is facing renewed scrutiny due to his questionable actions while at the NYFed. As reported on Bloomberg and in the NYT, secret emails show that the NYFed under Geithner’s command prohibited AIG from reporting that it was passing government bail-out funds directly to counterparties, including Goldman Sachs.

Beyond that, Professor Wray emphasized that Obama’s new economic team should be able to recognize the following four principles (which I have abbreviated):

1. Banks do not face a liquidity crisis, rather they are massively insolvent. Reported profits are due entirely to trading activities – which amount to nothing more than a game of Old Maid, with institutions selling bad assets to each other at inflated prices on a quid-pro-quo basis. As such, they need to be shut down and resolved. …

2. Saving financial institutions does not save the economy. …

3. As such, all of the bail-outs and guarantees provided to financial institutions (over $20 trillion) need to be unwound. Not because we cannot “afford” them but because they are dangerous. Unfortunately, Congress has come to see all of these trillions of dollars committed to Wall Street as a barrier to spending more on Main street. …

4. Finally, we need an economic team that understands government finance. The current team is hopelessly confused, led and misguided by Robert Rubin. …

At The Business Insider website, Henry Blodget gave a four-minute, video presentation, citing five reasons why Geithner should resign. The text version of this discussion appears at The Huffington Post. Nevertheless, at The Business Insider’s Clusterstock blog, John Carney expressed his belief that Geithner would not quit or be forced to leave office until after the mid-term elections in November:

We would like to see Geithner go now.

* * *

But there’s little chance this will happen. The Obama administration cannot afford to show weakness. If it caved to Congressional critics of Geithner, lawmakers would be further emboldened to chip away at the president’s authority. Senate Republicans would likely turn the confirmation hearing of Geithner’s replacement into a brawl — one that would not reflect well on the White House or Democrat Congressional leadership.

There’s also little political upside to getting rid of Geithner now. It will not save Congressional Democrats any seats in the mid-term election. Obama’s popularity ratings won’t rise. None of the administration’s priorities will be furthered by firing Geithner.

All of this changes following the midterm elections, when Democrats will likely lose seats in Congress. At that point, the administration will be looking for a fall guy. Geithner will make an attractive fall guy.

Although there may not be much hope that the hard work of the Financial Crisis Inquiry Commission will result in any significant financial reform legislation, at least we can look forward to the resignations of Turbo Tim and Larry Summers before the commission’s report is due on December 15.

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A 9-11 Commission For The Federal Reserve

January 7th, 2010 Posted in Uncategorized

Jan, 07 2010

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January 7, 2010

After the terrorist attacks of September 11, 2001, Congress passed Public Law 107-306, establishing The National Commission on Terrorist Attacks Upon the United States (also known as the 9-11 Commission). The Commission was chartered to create a full and complete account of the circumstances surrounding the September 11, 2001 terrorist attacks, including preparedness for and the immediate response to the attacks. The Commission was also mandated to provide recommendations designed to guard against future attacks. The Commission eventually published a report with those recommendations. The failure to implement and adhere to those recommendations is now being discussed as a crucial factor in the nearly-successful attempt by The Undiebomber to crash a jetliner headed to Detroit on Christmas Day.

On January 3, 2010, Federal Reserve Chairman Ben Bernanke gave a speech at the Annual Meeting of the American Economic Association in Atlanta, entitled: “Monetary Policy and the Housing Bubble”. The speech was a transparent attempt to absolve the Federal Reserve from culpability for causing the financial crisis, due to its policy of maintaining low interest rates during Bernanke’s tenure as Fed chair as well as during the regime of his predecessor, Alan Greenspan. Bernanke chose instead, to focus on a lack of regulation of the mortgage industry as being the primary reason for the crisis.

Critical reaction to Bernanke’s speech was swift and widespread. Scott Lanman of Bloomberg News discussed the reaction of an economist who was unimpressed:

“It sounds a little bit like a mea culpa,” said Randall Wray, an economics professor at the University of Missouri in Kansas City, who was in Atlanta and didn’t attend Bernanke’s speech. “The Fed played a role by promoting the most dangerous financial innovations used by institutions to fuel the housing bubble.”

Nomi Prins attended the speech and had this to say about it for The Daily Beast:

But having watched his entire 10-slide presentation (think: Economics 101 with a political twist), I had a different reaction: fear.

My concern is straightforward: Bernanke doesn’t seem to have learned the lessons of the very recent past. The flip side of Bernanke’s conclusion — we need stronger regulation to avoid future crises — is that the Fed’s monetary, or interest-rate, policy was just fine. That the crisis that brewed for most of the decade was merely a mistake of refereeing, versus the systemic issue of mega-bank holding companies engaged in reckless practices, many under the Fed’s jurisdiction.

* * *

Meanwhile, justifying past monetary policy rather than acknowledging the real-world link between Wall Street practices and general economic troubles suggests that Bernanke will power the Fed down the path of the same old mistakes. Focusing on lending problems is important, but leaving goliath, complex banks to their worst practices (albeit with some regulatory tweaks) is to miss the world as it is.

As the Senate takes on the task of further neutering the badly compromised financial reform bill passed by the House (HR 4173) — supposedly drafted to prevent another financial crisis — the need for a better remedy is becoming obvious. Instead of authorizing nearly $4 trillion for the next round of bailouts which will be necessitated as a result of the continued risky speculation by those “too big to fail” financial institutions, Congress should take a different approach. What we really need is another 9/11-type of commission, to clarify the causes of the financial catastrophe of September 2008 (which manifested itself as a credit crisis) and to make recommendations for preventing another such event.

David Leonhardt of The New York Times explained that Greenspan and Bernanke failed to realize that they were inflating a housing bubble because they had become “trapped in an echo chamber of conventional wisdom” that home prices would never drop. Leonhardt expressed concern that allowing the Fed chair to remain in such an echo chamber for the next bubble could result in another crisis:

What’s missing from the debate over financial re-regulation is a serious discussion of how to reduce the odds that the Fed — however much authority it has — will listen to the echo chamber when the next bubble comes along. A simple first step would be for Mr. Bernanke to discuss the Fed’s recent failures, in detail. If he doesn’t volunteer such an accounting, Congress could request one.

In the future, a review process like this could become a standard response to a financial crisis. Andrew Lo, an M.I.T. economist, has proposed a financial version of the National Transportation Safety Board — an independent body to issue a fact-finding report after a crash or a bust. If such a board had existed after the savings and loan crisis, notes Paul Romer, the Stanford economist and expert on economic growth, it might have done some good.

Barry Ritholtz, author of Bailout Nation, argued that Bernanke’s failure to understand what really caused the credit crisis is just another reason for a proper investigation addressing the genesis of that event:

Unfortunately, it appears to me that the Fed Chief is defending his institution and the judgment of his immediate predecessor, rather than making an honest appraisal of what went wrong.

As I have argued in this space for nearly 2 years, one cannot fix what’s broken until there is a full understanding of what went wrong and how. In the case of systemic failure, a proper diagnosis requires a full understanding of more than what a healthy system should look like. It also requires recognition of all of the causative factors — what is significant, what is incidental, the elements that enabled other factors, the “but fors” that the crisis could not have occurred without.

Ritholtz contended that an honest assessment of the events leading up to the credit crisis would likely reveal a sequence resembling the following time line:

1. Ultra low interest rates led to a scramble for yield by fund managers;

2. Not coincidentally, there was a massive push into subprime lending by unregulated NONBANKS who existed solely to sell these mortgages to securitizers;

3. Since they were writing mortgages for resale (and held them only briefly) these non-bank lenders collapsed their lending standards; this allowed them to write many more mortgages;

4. These poorly underwritten loans — essentially junk paper — was sold to Wall Street for securitization in huge numbers.

5. Massive ratings fraud of these securities by Fitch, Moody’s and S&P led to a rating of this junk as Triple AAA.

6. That investment grade rating of junk paper allowed those scrambling bond managers (see #1) to purchase higher yield paper that they would not otherwise have been able to.

7. Increased leverage of investment houses allowed a huge securitization manufacturing process; Some iBanks also purchased this paper in enormous numbers;

8. More leverage took place in the shadow derivatives market. That allowed firms like AIG to write $3 trillion in derivative exposure, much of it in mortgage and credit related areas.

9. Compensation packages in the financial sector were asymmetrical, where employees had huge upside but shareholders (and eventually taxpayers) had huge downside. This (logically) led to increasingly aggressive and risky activity.

10. Once home prices began to fall, all of the above fell apart.

As long as the Federal Reserve chairman keeps his head buried in the sand, in a state of denial or delusion about the true cause of the financial crisis, while Congress continues to facilitate a system of socialized risk for privatized gain, we face the dreadful possibility that history will repeat itself.

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This Fight Is Far From Over

December 24th, 2009 Posted in Uncategorized

Dec, 24 2009

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December 24, 2009

On November 26, I mentioned how apologists for controversial Wall Street giant, Goldman Sachs, were attempting to characterize Goldman’s critics as “conspiracy theorists” in the apparent hope that the use of such a term would discourage continued scrutiny of that firm’s role in causing the financial crisis. The name-calling tactic didn’t work. Since that time, my favorite reporter for The New York Times — Pulitzer Prize winner, Gretchen Morgenson — has continued to dig down into a dirty, sickening story about how Goldman Sachs (as well as some other firms) through their deliberate bets against their own financial products, known as Collateralized Debt Obligations (or CDOs) caused the financial crisis and ruined the lives of most Americans. Ms. Morgenson had previously discussed the opinion of derivatives expert, Janet Tavakoli, who argued that Goldman Sachs “should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books”. Although the Goldman apologists have been quick to point out that the firm repaid the bailout money it received under TARP, the $13 billion received by Goldman Sachs as an AIG counterparty by way of Maiden Lane III, has not been repaid.

On December 23, The New York Times published the latest report written by Gretchen Morgenson and Louise Story revealing how Goldman and other firms created those Collateralized Debt Obligations, sold them to their own customers and then used a new Wall Street index, called the ABX (a way to invest in the direction of mortgage securities) to bet that those same CDOs would fail. Here’s a passage from the beginning of that superb Morgenson/Story article:

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.

Wait a minute! Let’s pause for a moment and reflect on that. “Turbo” Tim Geithner has retained a “special counselor” whose responsibilities included oversight of Tricadia’s parent company. Tricadia has the dubious honor of having helped cause the financial crisis by creating CDOs and then betting against them. What’s wrong with this picture? Our President apparently sees nothing wrong with it. At this point, that’s not too surprising.

Anyway . . . Let’s get back to the Times article:

How these disastrously performing securities were devised is now the subject of scrutiny by investigators in Congress, at the Securities and Exchange Commission and at the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, according to people briefed on the investigations. Those involved with the inquiries declined to comment.

While the investigations are in the early phases, authorities appear to be looking at whether securities laws or rules of fair dealing were violated by firms that created and sold these mortgage-linked debt instruments and then bet against the clients who purchased them, people briefed on the matter say.

We can only hope that the investigations by Congress, the SEC and FINRA might result in some type of sanctions. At this juncture, that sort of accountability just seems like a wild fantasy.

Janet Tavakoli did a follow-up piece of her own for The Huffington Post on December 22. She is now more critical of the November 17 report prepared by the Special Inspector General of Tarp (SIGTARP) and she continues to demand that Goldman should pay back the billions it received as an AIG counterparty:

The TARP Inspector General’s November 17 report missed the most damaging facts. Intentionally or otherwise, it was evasive action or just plain whitewash. The report failed to clarify Goldman’s role in AIG’s near collapse, and that of all the settlement deals, the U.S.taxpayers’ was by far the worst.

* * *

Goldman paid mega bonuses in past years subsidized by selling hot air. Now it proposes to again pay billions in bonuses based on earnings made possible by taxpayer dollars.

Now that the crisis is over, we should ask Goldman Sachs — and all of AIG’s other trading partners involved in these trades — to buy back these mortgage assets at full price. Alternatively, we can impose a special tax. Instead of calling it a windfall profits tax, we might label it a “hot air” profits tax.

It was refreshing to read the opinion of someone who felt that Janet Tavakoli was holding back on her criticism of Goldman Sachs in the above-quoted piece. Thomas Adams is a banking law attorney at Paykin, Kreig and Adams, LLP as well a former managing director of Ambac Financial Group, a bond insurer that is managing to crawl its way out from under the rubble of the CDO catastrophe. Mr. Adams obviously has no warm spot in his heart for Goldman Sachs. I continue to take delight in the visual image of a Goldman apologist, blue-faced with smoke coming out of his ears while reading the essay Mr. Adams wrote for Naked Capitalism:

. . . Ms. Tavakoli stops short of telling the whole story. While she is very knowledgeable of this market, perhaps she is unaware of the full extent of the wrongdoings Goldman committed by getting themselves paid on the AIG bailout. The Federal Reserve and the Treasury aided and abetted Goldman Sachs in committing financial and ethical crimes at an astounding level.

* * *

But Ms. Tavakoli fails to note that the collapse of the CDO bonds and the collapse of AIG were a deliberate strategy by Goldman. To realize on their bet against the housing market, Goldman needed the CDO bonds to collapse in value, which would cause AIG to be downgraded and lead to AIG posting collateral and Goldman getting paid for their bet. I am confident that Goldman Sachs did not reveal to AIG that they were betting on the housing market collapse.

* * *

Goldman goes quite a few steps further into despicable territory with their other actions and the body count from Goldman’s actions is so enormous that it crosses over into criminal territory, morally and legally, by getting taxpayer money for their predation.

Goldman made a huge bet that the housing market would collapse. They profited, on paper, from the tremendous pain suffered by homeowners, investors and taxpayers across the country, they helped make it worse. Their bet only succeeded because they were able to force the government into bailing out AIG.

In addition, the Federal Reserve and the Treasury, by helping Goldman Sachs to profit from homeowner and investor losses, conceal their misrepresentations to shareholders, destroy insurers by stuffing them with toxic bonds that they marketed as AAA, and escape from the consequences of making a risky bet, committed a grave injustice and, very likely, financial crimes. Since the bailout, they have actively concealed their actions and mislead the public. Goldman, the Fed and the Treasury should be investigated for fraud, securities law violations and misappropriation of taxpayer funds. Based on what I have laid out here, I am confident that they will find ample evidence.

The backlash against the repugnant activities of Goldman Sachs has come a long way from Matt Taibbi’s metaphor describing Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.” With three investigations underway, the widely-despised icon of Wall Street greed might have more to worry about than its public image.

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Turning Up The Heat

December 21st, 2009 Posted in Uncategorized

Dec, 21 2009

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December 21, 2009

By now you should be aware of the fact that for his 56th birthday, Federal Reserve chairman Ben Bernanke was named Time magazine’s “Person of the Year”. Were the folks at Time so arrogant as to believe that this honor would insure the confirmation of Bernanke to a second term as chairman of the Federal Reserve? More than a few commentators expressed the view that Time’s “Person of the Year” award might actually jeopardize Bernanke’s chance at confirmation. For example, take a look at what Mike Shedlock (a/k/a Mish) had to say:

That Bernanke is on the cover of Time Magazine means one thing “Bernanke’s Time Is Limited” He is on his way out. And that is good news.

* * *

The quicker this blows up, the quicker we can recover. And knowing what we know about Time Magazine, Central Banking will blow up sooner rather than later. Moreover, Bernanke will not be part of the solution, and that is a good thing.

I thank Time Magazine for the information and their kiss of death warning. However, I must also remind readers that Stalin made the cover twice, so immediate results just might be expecting too much.

When Bernanke was grilled by the Senate Banking Committee during the confirmation hearing on December 3, Senator Jim Bunning of Kentucky gave him a magnificent pummeling, most notable for the assertion: “You are the definition of a moral hazard!” My only criticism of Bunning’s diatribe was that he should have said: “You are the personification of a moral hazard” or “You are the epitome of a moral hazard” — otherwise, it was perfect. If that weren’t enough, Senator Bunning demanded that Bernanke answer seventy written questions submitted by Bunning himself. Those of you who have ever been a party to a lawsuit might recall having to provide signed answers to written interrogatories. Most jurisdictions place a limit on the number of such interrogatories to the extent of approximately 35. Senator Bunning propounded twice that many to Bernanke and the nominee answered all of them. Don Luskin of Smart Money analyzed one of these answers in a way that underscored the necessity of removing Bernanke from the Fed chairmanship.

On December 18, Victoria McGrane reported for Politico that the Bernanke nomination “could be in more trouble than previously thought”. Although the Senate Banking Committee voted to confirm the nomination, ultimately the entire Seante must vote on the matter. The fact that six Republicans and one Democrat from the Banking Committee voted against the nomination was portrayed as an ominous signal, casting doubt on the likelihood of confirmation. Ms. McGrane discussed the reaction to the confirmation hearings expressed by Brian Gardner, a bank analyst for Keefe, Bruyette and Woods:

Two aspects of the two-hour debate that preceded the committee vote struck Gardner as worrisome for Bernanke: the unenthusiastic — even apologetic — tone from some of the senators who voted yes and a dispute over the Fed’s refusal to release documents about the bailout of insurance giant American International Group to senators on the committee.

The article explained that the AIG bailout documents were available for review by “some banking committee staffers” although the documents have been withheld by the Fed from individual senators and the public, based on the Fed’s claim that the documents are “protected”.

This is apparently an assertion by the Fed that there is some sort of privilege protecting the AIG bailout documents from disclosure. Nevertheless, if the fight over these records ever gets before a court, it is likely that production of the documents would be compelled, since any claim of privilege was waived once the Fed allowed the “banking committee staffers” to review the items.

The Politico report noted the significance of this matter:

That spat could have legs, Gardner said, and if it resonates with a public already fuming at the Fed, it could sway the votes of yes-leaning senators.

The battle over the AIG bailout documents was also the subject of an opinion piece in the December 19 edition of The New York Times, written by Eliot Spitzer, Frank Partnoy and William Black. Here’s some of what they had to say:

No doubt, some of the e-mail messages contain privileged conversations among lawyers. Others probably include private information that is irrelevant to A.I.G.’s role in the crisis. But the vast majority of these documents could be made public without legal concern. So why haven’t the Treasury and the Federal Reserve already made sure the public could see this information? Do they want to protect A.I.G., or do they worry about shining too much sunlight on their own performance leading up to and during the crisis?

What will these e-mails reveal about the actions of Ben Bernanke and “Turbo” Tim Geithner during the AIG bailout phase of the financial crisis? Were laws violated or do they simply exhibit some poor decision-making and cronyism?

Most of us are now getting ready for the coldest month of the year – but for Ben Bernanke, the heat is being turned up — full blast.

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Compare And Contrast

November 26th, 2009 Posted in Uncategorized

Nov, 26 2009

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November 26, 2009

We have seen and heard so much discussion during the past week concerning the dismal performance of Treasury Secretary “Turbo” Tim Geithner while testifying before the Joint Economic Committee — I won’t repeat it. At this point, there appears to be a consensus that Turbo Tim has to go. The scary part comes when pundits start tossing around names for a possible replacement. One would expect that President Obama might be wise enough to avoid the appointment of another “Wall Street insider” as Treasury Secretary. Rumors are circulating that The Dimon Dog (Jamie Dimon, CEO of JP Morgan Chase) is being considered for the post. This buzz gained more traction when bank analyst, Dick Bove, recently voiced support for Dimon as Treasury Secretary. The handful of Geithner supporters deny that Turbo Tim ever was a “Wall Street insider”. This assertion is contradicted by the fact that Geithner was the President of the New York Federal Reserve at the time of the financial crisis, when he served as architect of the more-than-generous bailouts of those “too big to fail” financial institutions — at taxpayer expense.

These days, the most vilified beneficiary of government largesse resulting from the financial crisis is the widely-despised investment bank, Goldman Sachs — often referred to as the “giant vampire squid” — thanks to Matt Taibbi’s metaphor, describing Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

For whatever reason, a number of commentators have chosen to help defend Goldman Sachs against what they consider to be unfair criticism. A recent example came to us from James Stewart of The New Yorker. Stewart had previously written a 25-page essay for that magazine, entitled “Eight Days” — a dramatic chronology of the financial crisis as it unfolded during September of 2008. Last week, Stewart seized upon the release of the recent SIGTARP report to defend Goldman with a blog posting which characterized the report as supportive of the argument that Goldman owes the taxpayers nothing as a result of the government bailouts resulting from that near-meltdown. (In case you don’t know, a former Assistant U.S. District Attorney from New York named Neil Barofsky was nominated by President Bush as the Special Investigator General of the TARP program. The acronym for that job title is SIGTARP.) In his blog posting, James Stewart began by characterizing Goldman’s detractors as “conspiracy theorists”. That was a pretty weak start. Stewart went on to imply that the SIGTARP report refutes the claims by critics that, despite Goldman’s repayment of the TARP bailout, it did not repay the government the billions it received as a counterparty to AIG’s collateralized debt obligations. Stewart referred to language in the SIGTARP report to support the spin that because “Goldman was fully hedged on its exposure both to a failure by A.I.G. and to the deterioration of value in its collateralized debt obligations” and that “(i)t repaid its TARP loans with interest, bought back the government’s warrants at a nice profit to the Treasury” Goldman therefore owes the government nothing — other than “a special debt of gratitude”. One important passage from page 22 of the SIGTARP report that Stewart conveniently ignored, concerned the money received by Goldman Sachs as an AIG counterparty by way of Maiden Lane III, at which point those credit default obligations (of questionable value) were purchased at an excessive price by the government. Here’s that passage from the SIGTARP report:

When FRBNY authorized the creation of Maiden Lane III in November 2008, it lent approximately $24.6 billion to the newly formed limited liability company, and AIG provided Maiden Lane III approximately $5 billion in equity. These funds were used to purchase CDOs from AIG counterparties worth an estimated fair value of $29.6 billion at the time of the purchases, which were done in three stages on November 25, 2008, December 18, 2008, and December 22, 2008. AIGFP’s counterparties were paid $27.1 billion, and AIGFP was paid $2.5 billion per an agreement between AIGFP and FRBNY. The $2.5 billion represented the amount of collateral that AIGFP had previously paid to the counterparties that was in excess of the actual decline in the fair value as of October 31, 2008.

FRBNY’s loan to Maiden Lane III is secured by the CDOs as the underlying assets. After the loan has been repaid in full plus interest, and, to the extent that there are sufficient remaining cash proceeds, AIG will be entitled to repayment of the $5 billion that the company contributed in equity, plus accrued interest. After repayment in full of the loan and the equity contribution (each including accrued interest), any remaining proceeds will be split 67 percent to FRBNY and 33 percent to AIG.

On November 21, one of my favorite reporters for The New York Times, Pulitzer Prize winner Gretchen Morgenson, wrote an informative piece concerning the recent SIGTARP Report. Compare and contrast Ms. Morgenson’s discussion of the report’s disclosures, with the spin provided by James Stewart. Here is some of what Ms. Morgenson had to say:

The Fed, under Mr. Geithner’s direction, caved in to A.I.G.’s counterparties, giving them 100 cents on the dollar for positions that would have been worth far less if A.I.G. had defaulted. Goldman Sachs, Merrill Lynch, Societe Generale and other banks were in the group that got full value for their contracts when many others were accepting fire-sale prices.

On the question of whether this payout was what the report describes as a “backdoor bailout” of A.I.G.’s counterparties, Mr. Barofsky concluded: “The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.” The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.

*   *   *

Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by Goldman Sachs, A.I.G.’s largest trading partner and recipient of $12.9 billion in taxpayer money in the bailout, that it had faced no material risk in an A.I.G. default — that, in effect, had A.I.G. cratered, Goldman wouldn’t have suffered damage.

*   *   *

Rather than forcing the banks to accept a steep discount, or “haircut,” the Fed gave the banks $27 billion in taxpayer cash and allowed them to keep an additional $35 billion in collateral already posted by A.I.G. That amounted to about $62 billion for the contracts, which the report describes as “far above their market value at the time.”

* *   *

As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky’s reminds us how the taxpayer bailout of A.I.G. benefited Goldman.

* *   *

The inspector noted in his report that Goldman made several arguments for why it believed it was not materially at risk in an A.I.G. default, but he is skeptical of the firm’s reasoning.

So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm.

*   *   *

Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.

“A.I.G., a sophisticated investor, foolishly took this risk,” she said. “But the U.S. taxpayer never agreed to be the victim of investments that should undergo a rigorous audit.”

After reading James Stewart’s November 19 blog posting and Gretchen Morgenson’s November 21 article from The New York Times, ask yourself this: Are Gretchen Morgenson and Janet Tavakoli “conspiracy theorists” . . . or is James Stewart just a tool?

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Preparing For The Worst

November 19th, 2009 Posted in Uncategorized

Nov, 19 2009

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November 19, 2009

In the November 18 edition of The Telegraph, Ambrose Evans-Pritchard revealed that the French investment bank, Societe Generale “has advised its clients to be ready for a possible ‘global economic collapse’ over the next two years, mapping a strategy of defensive investments to avoid wealth destruction”. That gloomy outlook was the theme of a report entitled: “Worst-case Debt Scenario” in which the bank warned that a new set of problems had been created by government rescue programs, which simply transferred private debt liabilities onto already “sagging sovereign shoulders”:

“As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse,” said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast.

Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.

* * *

The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. “High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt,” it said.

Inflating debt away might be seen by some governments as a lesser of evils.

If so, gold would go “up, and up, and up” as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s.

To make matters worse, America still has an unemployment problem that just won’t abate. A recent essay by Charles Hugh Smith for The Business Insider took a view beyond the “happy talk” propaganda to the actual unpleasant statistics. Mr. Smith also called our attention to what can be seen by anyone willing to face reality, while walking around in any urban area or airport:

The divergence between the reality easily observed in the real world and the heavily touted hype that “the recession is over because GDP rose 3.5%” is growing. It’s obvious that another 7 million jobs which are currently hanging by threads will be slashed in the next year or two.

By this point, most Americans are painfully aware of the massive bailouts afforded to those financial institutions considered “too big to fail”. The thought of transferring private debt liabilities onto already “sagging sovereign shoulders” immediately reminds people of TARP and the as-yet-undisclosed assistance provided by the Federal Reserve to some of those same, TARP-enabled institutions.

As Kevin Drawbaugh reported for Reuters, the European Union has already taken action to break up those institutions whose failure could create a risk to the entire financial system:

EU regulators are set to turn the spotlight on 28 European banks bailed out by governments for possible mandated divestitures, officials said on Wednesday.

The EU executive has already approved restructuring plans for British lender Lloyds Banking (LLOY.L), Dutch financial group ING Groep NV (ING.AS) and Belgian group KBC (KBC.BR).

Giving break-up power to regulators would be “a good thing,” said Paul Miller, a policy analyst at investment firm FBR Capital Markets, on Wednesday.

Big banks in general are bad for the economy because they do not allocate credit well, especially to small businesses, he said. “Eventually the big banks get broken up in one way or another,” Miller said at the Reuters Global Finance Summit.

Meanwhile in the United States, the House Financial Services Committee approved a measure that would grant federal regulators the authority to break up financial institutions that would threaten the entire system if they were to fail. Needless to say, this proposal does have its opponents, as the Reuters article pointed out:

In both the House and the Senate, “financial lobbyists will continue to try to water down this new and intrusive federal regulatory power,” said Joseph Engelhard, policy analyst at investment firm Capital Alpha Partners.

If a new break-up power does survive the legislative process, Engelhard said, it is unlikely a “council of numerous financial regulators would be able to agree on such a radical step as breaking up a large bank, except in the most unusual circumstances, and that the Treasury Secretary … would have the ability to veto any imprudent use of such power.”

When I first read this, I immediately realized that Treasury Secretary “Turbo” Tim Geithner would consider any use of such power as imprudent and he would likely veto any attempt to break up a large bank. Nevertheless, my concerns about the “Geithner factor” began to fade after I read some other encouraging news stories. In The Huffington Post, Sam Stein disclosed that Oregon Congressman Peter DeFazio (a Democrat) had called for the firing of White House economic advisor Larry Summers and Treasury Secretary “Timmy Geithner” during an interview with MSNBC’s Ed Schultz. Mr. Stein provided the following recap of that discussion:

“We think it is time, maybe, that we turn our focus to Main Street — we reclaim some of the unspent [TARP] funds, we reclaim some of the funds that are being paid back, which will not be paid back in full, and we use it to put people back to work. Rebuilding America’s infrastructure is a tried and true way to put people back to work,” said DeFazio.

“Unfortunately, the President has an adviser from Wall Street, Larry Summers, and a Treasury Secretary from Wall Street, Timmy Geithner, who don’t like that idea,” he added. “They want to keep the TARP money either to continue to bail out Wall Street … or to pay down the deficit. That’s absurd.”

Asked specifically whether Geithner should stay in his job, DeFazio replied: “No.”

“Especially if you look back at the AIG scandal,” he added, “and Goldman and others who got their bets paid off in full … with taxpayer money through AIG. We channeled the money through them. Geithner would not answer my question when I said, ‘Were those naked credit default swaps by Goldman or were they a counter-party?’ He would not answer that question.”

DeFazio said that among he and others in the Congressional Progressive Caucus, there was a growing consensus that Geithner needed to be removed. He added that some lawmakers were “considering questions regarding him and other economic advisers” — though a petition calling for the Treasury Secretary’s removal had not been drafted, he said.

Another glimmer of hope for the possible removal of Turbo Tim came from Jeff Madrick at The Daily Beast. Madrick’s piece provided us with a brief history of Geithner’s unusually fast rise to power (he was 42 when he was appointed president of the New York Federal Reserve) along with a reference to the fantastic discourse about Geithner by Jo Becker and Gretchen Morgenson, which appeared in The New York Times last April. Mr. Madrick demonstrated that what we have learned about Geithner since April, has affirmed those early doubts:

Recall that few thought Geithner was seasoned enough to be Treasury secretary when Obama picked him. Rubin wasn’t ready to be Treasury secretary when Clinton was elected and he had run Goldman Sachs. Was Geithner’s main attraction that he could easily be controlled by Summers and the White House political advisers? It’s a good bet. A better strategy, some argued, would have been to name Paul Volcker, the former Fed chairman, for a year’s worth of service and give Geithner as his deputy time to grow. But Volcker would have been far harder to control by the White House.

But now the president needs a Treasury Secretary who is respected enough to stand up to Wall Street, restabilize the world’s trade flows and currencies, and persuade Congress to join a battle to get the economic recovery on a strong path. He also needs someone with enough economic understanding to be a counterweight to the White House advisers, led by Summers, who have consistently been behind the curve, except for the $800 billion stimulus. And now that is looking like it was too little. The best guess is that Geithner is not telling the president anything that the president does not know or doesn’t hear from someone down the hall.

The problem for Geithner and his boss, is that the stakes if anything are higher than ever.

As the rest of the world prepares for worsening economic conditions, the United States should do the same. Keeping Tim Geithner in charge of the Treasury makes less sense than it did last April.

AIG, Ambrose Evans-Pritchard, American capitalism, American International Group, bank bailout, bank stocks, banking crisis, banking lobby, Barack Obama, blog, Capital Alpha Partners, centrist, Charles Hugh Smith, Commentary, comprehensive bank bailout plan, conflict of interest, Congress, conservative, credit default swaps, crony capitalism, Daniel Fermon, Democrat, Democratic Party, Democrats, derivatives crisis, economic crisis, economic meltdown, economics, economists, Ed Schultz, equities markets, European Union, FBR Capital Markets, Federal Reserve, financial crisis, financial institutions as too big to fail, financial meltdown, financial reform, Geithner factor, Goldman Sachs, government guarantees, Gretchen Morgenson, House Financial Services Committee, huge financial institutions, investment banks, Jeff Madrick, Jo Becker, John Burke, John T Burke Jr, Joseph Engelhard, Kevin Drawbaugh, Larry Summers, liberal, lobbyists, moral hazard, MSNBC, New York Federal Reserve, News, Obama Administration, Obama Presidency, Opinion, Oregon Congressman Peter DeFazio, Paul Miller, Paul Volcker, Political, Politics, Preparing For The Worst, President of the United States, proprietary trading, regulatory capture, Republican, Republican Party, Reuters, Sam Stein, SEC scandals, securities, socialized loss and privatized gain, Societe Generale, stock markets, systemic risk, systemic risk regulator, TARP, TARP bailout, taxpayer subsidies to investment banks, taxpayers, the banks, The Business Insider, the center lane, The Daily Beast, the economy, The Huffington Post, The New York Times, the Telegraph, The White House, thecenterlane, Timmy Geithner, too big to fail, toxic assets, transparency, Treasury Department, Treasury Secretary Tim Geithner, troubled assets, Troubled Assets Relief Program, Turbo Tim Geithner, unemployment, United States Senate, United States Treasury, Wall Street, wealth transfer, Worst-case Debt Scenario

Bait And Switch

October 19th, 2009 Posted in Uncategorized

Oct, 19 2009

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October 19, 2009

On Friday, October 16, Aaron Task interviewed Elizabeth Warren for his online TV show, Tech Ticker. In case you don’t remember, Ms. Warren is the Harvard law professor, appointed to chair the Congressional Oversight Panel which has attempted to trace the money thrown into the infamous slush fund known as TARP — the Troubled Assets Relief Program. Mr. Task questioned Professor Warren as to whether, after all this time, we can expect a full accounting as to where the TARP money went. Professor Warren responded: “No. I think there is no chance that we will get a full accounting of it.” She explained the reason for this is because former Treasury Secretary Hank Paulson never asked for an explanation “on the front end” (when the TARP bailout program began) concerning what the recipients planned to do with this money, nor was any documentation of expenditures requested. As an aside, the folks at The New York Times were kind enough to put together this TARP scorecard, for keeping track of which institutions pay back the money they received. Of course, these amounts do not include all the loans, “backstopping” and other largesse provided to Wall Street by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Treasury. For that information, we can look to this Bailout Tally Report, prepared by Nomi Prins for her book: It Takes a Pillage: Behind the Bailouts, Bonuses,and Backroom Deals from Washington to Wall Street.

During the interview with Aaron Task, Elizabeth Warren expressed particular concern over the fact that former Treasury Secretary Paulson failed to put any restrictions on the use of the TARP bailout funds prior to their dispersal, despite the explanation to the taxpayers that this money would be used to remove the “toxic assets” from the banks’ balance sheets. Worse yet, as she explained: “The toxic assets are still there, by and large” because the TARP money was used by the Wall Street banks to “make bets”. The bait-and-switch tactic used by Secretary Paulson was exposed by Professor Warren when she criticized how the banks used that money:

My biggest complaint would be: That was not how Secretary Paulsen described what was going to happen with American taxpayer dollars. . . . He said we are going to put money into the banks to increase lending — specifically to increase small business lending because that is the engine of our economy . . . I have a real problem when we describe to taxpayers their money will be taken and used one way and in fact it’s used another way.

Professor Warren also noted that nothing had been done to contain “systemic risk” after the financial crisis because those institutions requiring bailouts as they were considered “too big to fail” have grown even larger. This subject was addressed by Rolfe Winkler of Reuters, who questioned whether these institutions, such as Goldman Sachs, are really indispensable:

Many of us didn’t like it — we thought banks like Goldman should have been recapitalized the right way, by wiping out shareholders and forcing subordinated creditors to eat their share of losses. But that ship has sailed. We socialized the risk while privatizing the profit because we were told we had no other choice: The government had to guarantee the biggest banks’ liabilities because they were too unstable to survive bankruptcy or FDIC receivership.

If that’s true, why haven’t we seen any substantial reforms to reduce systemic risk? Congress is kicking around new resolution authority to help resolve failed systemically-important banks. But the goal should be reducing systemic risk to begin with. Yet serious reform of the derivatives market — something that would reduce its size significantly — is nowhere on the radar.

Indeed, Goldman’s trading results suggest that market is coming back with a vengeance. It’s playing in very risky markets with a capital structure that remains vulnerable yet is guaranteed by taxpayers.

* * *

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit.

Elizabeth Warren’s reaction to the issue of what has been done with those profits — the huge, record-breaking bonuses paid to the people at Goldman Sachs and JP Morgan, was to describe the situation as so inappropriate as to leave her “speechless”. Fortunately this sentiment is shared by a number of people who are already taking action in the absence of any responsible government activity. The Gawker website has announced its initiation of what it calls the “Goldman Project” as a way of pushing back against this atrocity:

But what makes it eye-stabbingly, brain-searingly blood-boiling is the fact that Goldman’s employees are personally reaping the benefits of these subsidies to the tune of an average of $700,000 per staffer. Being unjustifiably wealthy in boom times is not enough — when market forces of their own creation brought their company low, they turned to the taxpayers both to rescue the firm and prop up their obscenely acquisitive lifestyles.

* * *

. . . we’re launching the Goldman Project, an ongoing attempt to track and publicize the multi-million second homes, $50,000 cars, $500 bottles of wine, and ostentatious living that we are subsidizing. And we need your help: Are you Facebook friends with a Goldmanite who just posted photos of his lavish bachelor party? Post them to our fancy new tag page, #GoldmanProject, or e-mail them to us. Are you a realtor who just sold a $4 million duplex a Goldman banker? Is your ex-boyfriend Goldman banker planning a year-end trip to Cabo to blow his bonus wad? Shoot us an e-mail. Likewise, if you catch any references to Goldman employees living large in the media, post them to #GoldmanProject to keep a running clipfile.

The folks at Gawker aren’t the only ones taking action. When the American Bankers Association holds its annual meeting in Chicago on October 25-26, it will be confronted with a (hopefully) large protest led by a coalition of labor, community and consumer groups, called the “Showdown in Chicago”. Visit their website and do whatever you can to help make this event a success. The arrogant influence peddlers in Washington need to get the message: Clean things up or get thrown out.

Aaron Task, AIG, American Bankers Association, American capitalism, American International Group, Bailout Tally Report, Bait And Switch, bank bailout, bank stocks, banking crisis, banking lobby, Barack Obama, Ben Bernanke, blog, centrist, Citigroup, Commentary, comprehensive bank bailout plan, conflict of interest, Congress, Congressional Oversight Panel, conservative, credit default swaps, crony capitalism, Democrat, Democratic Party, Democrats, economic crisis, economics, economists, Elizabeth Warren, equities markets, FDIC, Federal Deposit Insurance Corporation, Federal Reserve, Federal Reserve Chairman Ben Bernanke, financial crisis, financial institutions as too big to fail, financial reform, Gawker, Goldman Sachs, government guarantees, Government Sachs, Hank Paulson, Harvard Law School, Henry Paulson, influence peddlers, insolvent banks, investment banks, It Takes a Pillage -- Behind the Bailouts Bonuses and Backroom Deals from Washington to Wall Street, John Burke, John T Burke Jr, JP Morgan, liberal, lobbyists, moral hazard, New York Stock Exchange, News, Nomi Prins, Obama Administration, Obama Presidency, opacity, Opinion, Political, Politics, President of the United States, regulatory capture, Republican, Republican Party, Reuters, revolving door, Rolfe Winkler, SEC, SEC scandals, securities, Securities and Exchange Act, Securities and Exchange Commission, self-dealing insiders, Showdown in Chicago, socialized loss and privatized gain, stock markets, systemic risk, systemic risk regulator, TARP, TARP bailout, TARP scorecard, taxpayer subsidies to investment banks, taxpayers, Tech Ticker, the banks, the center lane, the economy, the Goldman Project, The New York Times, The White House, thecenterlane, too big to fail, transparency, Treasury Department, Treasury Secretary Tim Geithner, Troubled Assets Relief Program, Turbo Tim Geithner, United States Senate, United States Treasury, Wall Street, Wall Street lobbyists, Wall Street meltdown, wealth transfer, welfare for the rich

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