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The Legacy Of Mark Pittman

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December 3, 2009

Just a week before the Senate banking committee was to begin confirmation hearings on President Obama’s nomination of Ben Bernanke to a second term as chairman of the Federal Reserve, one of the most important watchdogs of the Fed died at the age of 52.  Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.  The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling last August by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions to compete for business.  The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis.  The Federal Reserve is pursuing an appeal of that decision.

Since September of 2008, we have been overexposed to the specious claims by politicians, regulators and other federal officials, that the financial crisis was “unforeseeable”.  The veracity of such statements is undercut by the fact that on June 29 of 2007, Mark Pittman provided us with this ominous warning from his desk at Bloomberg News:

The subprime meltdown is sending shock waves through the capital markets in part because mortgage bonds are the world’s biggest debt market, according to the Securities Industry Financial Markets Association.

Pittman’s groundbreaking work on the havoc created by the subprime mortgage-backed securities market resulted in his receiving the Gerald Loeb Award in 2008, which he shared with his fellow Bloomberg reporters, Bob Ivry and Kathleen Howley, for a five-part series entitled “Wall Street’s Faustian Bargain”.

On November 30, Bob Ivry wrote what many have described as the “definitive obituary” for Mark Pittman.  Ivry disclosed that although the actual cause of death was not yet known, Pittman had suffered from “heart-related illnesses”.  In addition to providing us with his colleague’s impressive biography, Ivry shared the reactions to Pittman’s death, expressed by several prominent individuals:

“He was one of the great financial journalists of our time,” said Joseph Stiglitz, a professor at Columbia University in New York and the winner of the 2001 Nobel Prize for economics. “His death is shocking.”

*   *   *

“Who sues the Fed?  One reporter on the planet,” said Emma Moody, a Wall Street Journal editor who worked with Pittman at Bloomberg News.  “The more complex the issue, the more he wanted to dig into it.  Years ago, he forced us to learn what a credit- default swap was.  He dragged us kicking and screaming.”

*   *   *

“He’s been on this crisis since before the crisis,” said Gretchen Morgenson, the Pulitzer Prize-winning financial columnist for the NewYork Times.  “He was the best at burrowing into the most complex securities Wall Street could come up with and explaining the implications of them to readers of all levels of sophistication.  His investigative work during the crisis set the standard for other reporters everywhere.  He was a giant.”

Congressman Brad Miller of North Carolina wrote an informative remembrance of Pittman for The Huffington Post.  This statement is one of the highlights from that piece:

The financial crisis is a result of a failure of every institution of our democracy.  Regulators failed.  Congress failed.  And the financial press failed abysmally.  Mark was an exception.  Mark’s irreverence allowed him to see the crisis coming when other financial reporters accepted uncritically what the industry said.  Mark’s irreverence was what made him a great reporter.

Mark Pittman was featured in the recent film American Casino, a documentary which analyzed the subprime mortgage catastrophe and the resulting financial crisis.  In September of 2008, when the crisis had most people in the world scratching their heads in confusion, Pittman provided a roadmap to the initial bailouts, shortly after they were distributed.

The interview with Mark Pittman, conducted by Ryan Chittum for the Columbia Journalism Review in February of 2009, gave Pittman the opportunity to share his experiences during the onset of the financial crisis.  The interview is especially informative as to what we can expect to find out about this mess in the future, as the investigations begin to unfold.  Passages like these reveal the magnitude of the loss resulting from Pittman’s death:

TA:  Does there need to be regulation just to simplify things to where it makes sense to more people?

MP:  If it was all transparent the complexity wouldn’t matter.  If the CDO market had had publicly available prospectuses with the contents of the CDO disclosed, we wouldn’t have this issue, because Bloomberg probably would have made fun of anybody who bought anything like this.  But there was this enormous shadow banking system going on.  We did a series about that, too.  A lot of times people don’t see what we do.

*   *   *

The thing that people don’t realize is that the Fed is now the “bad bank.”  That’s just something that people don’t understand.  They’ve taken collateral, and they refuse to tell us how they valued it  …

We have numerous banks — dozens, maybe hundreds that are insolvent.  And they become more insolvent every day because more people quit paying their mortgage loans, and more guys move out of the shopping center, and more people quit paying their credit cards.  But nobody wants to have the adult conversation.  We need to be honest about what the problem is here, how big it is, and how we’re going forward to clean it up, and who’s going to pay for it.

*   *   *

Hopefully, we will be able to inform the people enough to know how badly we’re getting screwed (laughs).  We need to know how to prevent it from happening again, and we need to know who did it.  There’s renewed energy on this front because we’ve staffed up the people who cover banks, the securities firms.  We have a lot more people going at real estate and a bunch of different areas that this involves.  That was a conscious move from meetings we started having in 2007.  We hired people and we moved people from one area to another area.

Pittman’s final statement during the interview underscores the fact that one of the greatest fighters for an informed public has been lost:

This is a big deal and it’s going to be going on — I swear to God I’m going to retire on this story, because it’s just going to keep happening.

Tragically, Mark Pittman was forced to “retire” on terms that were not satisfactory to any of us.  We can only hope that others will be inspired by his work and follow his lead.



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The “Bad Bank” Debate

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January 29, 2009

The $700 billion Troubled Assets Relief Program (TARP) doesn’t seem to have accomplished much in the way of relieving banks from the ownership of “troubled assets”.  In fact, nobody seems to know exactly what was done with the first $350 billion in TARP funds, and those who do know are not talking.  Meanwhile, the nation’s banks have continued to flounder.  As David Cho reported in The Washington Post on Wednesday, January 28:

The health of many banks is getting worse, not better, as the downturn makes it difficult for all kinds of consumers and businesses to pay back money they borrowed from these financial firms.  Conservative estimates put bank losses yet to be declared at $1 trillion.

The continuing need for banks to unload their toxic assets has brought attention to the idea of creating a “bad bank” to buy mortgage-backed securities and other toxic assets, thus freeing-up banks to get back into the lending business.  Bloomberg News and other sources reported on Wednesday that FDIC chair, Sheila Bair, is pushing for her agency to run such a “bad bank”.  Our new Treasury Secretary, Tim Geithner, has also discussed the idea of such a bank (often referred to as an “aggregator bank”) as reported on Wednesday by Reuters:

Geithner said last week the administration was reviewing the option of setting up a bad bank, but that it is “enormously complicated to get right.”

The idea of creating such a bank has drawn quite a bit of criticism.  Back on January 18, Paul Krugman (recipient of the Nobel Prize in Economics) characterized this approach, without first “nationalizing” the banks on a temporary basis, as “Wall Street Voodoo”:

A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s:  it seized the defunct banks, cleaning out the shareholders.  Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.

The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches.  Instead, they’re reportedly gravitating toward a compromise approach:  moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.

Krugman scrutinized Sheila Bair’s earlier explanation that the aggregator bank would buy the toxic assets at “fair value”, by questioning how we define what “fair value” really means.  He concluded that this entire endeavor (as it is currently being discussed) is a bad idea for all concerned:

Unfortunately, the price of this retreat into superstition may be high.  I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job.

Krugman is not alone in his skepticism concerning this plan.  As Annelena Lobb and Rob Curran  reported in Wednesday’s Wall Street Journal, this idea is facing some criticism from those in the financial planning business:

“I don’t see how this increases liquidity,” says Paul Sutherland, chief investment officer at FIM Group in Traverse City, Mich.  “This idea that we should burn million-dollar bills from taxpayers to take bad assets isn’t the best path.”

Billionaire financier Geroge Soros told CNBC that he disagrees with the “bad bank” strategy, explaining that the proposal “will help relieve the situation, but it will not be sufficient to turn it around”.  He then took advantage of the opportunity to criticize the execution of the first stage of the TARP bailout:

As to Paulson’s handling of the first half of the $700 billion Wall Street bailout fund known as TARP, Soros said the money was used “capriciously and haphazardly.”  He said half of it has now been wasted, and the rest will need to be used to plug holes.

Former Secretary of Labor, Robert Reich, anticipates that a “big chunk” of the remaining TARP funds will be used to create this aggregator bank.  Accordingly, he has suggested application of the type of standards that were absent during the first TARP phase:

Until the taxpayer-financed Bad Bank has recouped the costs of these purchases through selling the toxic assets in the open market, private-sector banks that benefit from this form of taxpayer relief must (1) refrain from issuing dividends, purchasing other companies, or paying off creditors; (2) compensate their executives, traders, or directors no more than 10 percent of what they received in 2007; (3) be reimbursed by their executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008 — compensation which was, after all, based on false premises and fraudulent assertions, and on balance sheets that hid the true extent of these banks’ risks and liabilities; and (4) commit at least 90 percent of their remaining capital to new bank loans.

However, Reich’s precondition:  “Until the taxpayer-financed Bad Bank has recouped the costs of these purchases through selling the toxic assets in the open market” is exactly what makes his approach unworkable.  The cost of purchasing the toxic assets from banks will never be recouped by selling them in the open market.  This point was emphasized by none other than “Doctor Doom” himself (Dr. Nouriel Roubini) during an interview with CNBC at the World Economic Forum in Davos, Switzerland.  Dr. Roubini pointed out:

At which price do you buy the assets?  If you buy them at a high price, you are having a huge fiscal cost.  If you buy them at the right market price, the banks are insolvent and you have to take them over.  So I think it’s a bad idea.  It’s another form of moral hazard and putting on the taxpayers, the cost of the bailout of the financial system.

What is Dr. Roubini’s solution?  Face up to the reality that the banks are insolvent and “do what Sweden did”:  take over the banks, clean them up by selling off the bad assets and sell them back to the private sector.

Nevertheless, you can’t always count on the federal government to do the right thing.  In this case, I doubt that they will.  As David Cho pointed out at the end of his Washington Post article:

The bailout program “is a public relations nightmare,” one government official said.  He added that Obama officials are sure to face criticism for whatever course they take.