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A Look Ahead

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December 7, 2009

As 2010 approaches, expect the usual bombardment of prognostications from the stars of the info-tainment industry, concerning everything from celebrity divorces to the nuclear ambitions of Iran.   Meanwhile, those of us preferring quality news reporting must increasingly rely on internet-based venues to seek out the views of more trustworthy sources on the many serious subjects confronting the world.  On October 29, I discussed the most recent GMO Quarterly Newsletter from financial wizard Jeremy Grantham and his expectation that the stock market will undergo a

“correction” or drop of approximately 20 percent next year.   Grantham’s paper inspired others to ponder the future of the troubled American economy and the overheated stock market.  Mark Hulbert, editor of The Hulbert Financial Digest, wrote a piece for the December 5 edition of The New York Times, picking up on Jeremy Grantham’s stock performance expectations.  Hulbert noted Grantham’s continuing emphasis on “high-quality, blue chip” stocks as the most likely to perform well in the coming year.  Grantham’s rationale is based on the fact that the recent stock market rally was excessively biased in favor of junk stocks, rather than the higher-quality “blue chips”, such as Wal-Mart.  Hulbert noted how Wal-mart shares gained only 14 percent since March 9, while the shares of the debt-laden electronics services firm, Sanmina-SCI, have risen more than 600 percent during that same period.  Hulbert pointed out that the conclusion to be reached from this information should be pretty obvious:

As an unintended consequence, Mr. Grantham said, high-quality stocks today are about as cheap as they have ever been relative to shares of firms with weaker finances.

It’s almost a certain bet that high-quality blue chips will outperform lower-quality stocks over the longer term,” he said.

My favorite reaction to Jeremy Grantham’s newsletter came from Paul Farrell of MarketWatch, who emphasized Grantham’s broader view for the economy as a whole, rather than taking a limited focus on stock performance.  Farrell targeted President Obama’s “predictably irrational” economic policies by presenting us with a handy outline of Grantham’s criticism of those policies.  Farrell prefaced his outline with this statement:

So please listen closely to his 14-point analysis of the rampant irrationality at the highest level of American government today, because what he is also predicting is another catastrophic meltdown dead ahead.

At the first point in the outline, Farrell made this observation:

If Grantham ever was a fan, he’s clearly disillusioned with the president.   His 14 points expose the extremely irrational behavior of Obama breaking promises by turning Washington over to Wall Street, a blunder that will trigger the Great Depression 2.

Farrell’s discussion included a reference to the latest article by Matt Taibbi for Rolling Stone, entitled “Obama’s Big Sellout”.  The Rolling Stone website described Taibbi’s latest essay in these terms:

In “Obama’s Big Sellout”, Matt Taibbi argues that President Obama has packed his economic team with Wall Street insiders intent on turning the bailout into an all-out giveaway.  Rather than keeping his progressive campaign advisers on board, Taibbi says Obama gave key economic positions in the White House to the very people who caused the economic crisis in the first place.  Taibbi also points to the ties Obama’s appointees have to one main in particular:  Bob Rubin, the former Goldman Sachs co-chairman who served as Treasury secretary under Bill Clinton.

Since the article is not available online yet, you will have to purchase the latest issue of Rolling Stone or wait patiently for the release of their next issue, at which time “Obama’s Big Sellout” should be online.  In the mean time, they have provided this brief video of Matt Taibbi’s discussion of the piece.

The new year will also bring us a new book by Danny Schecter, entitled The Crime of Our Time.  Mr. Schecter recently discussed this book in a live interview with Max Keiser.  (The interview begins at 16:55 into the video.)  In discussing the book, Schecter explained how “the financial industry essentially de-regulated its own marketplace.  They got rid of the laws that required disclosure and accountability …” and created a “shadow banking system”.  Shechter’s previous book, Plunder, has now become a film that will be released soon.  In Plunder, he described how the subprime mortgage crisis nearly destroyed the American economy.  The interview by Max Keiser contains a short clip from the upcoming film.  Danny also directed the movie based on (and named after) his 2006 book, In Debt We Trust, wherein he predicted the bursting of the credit bubble.

It was right at this point last year when Danny’s father died.  The event is easy for me to remember because my own father died one week later.  At that time, I was comforted by reading Danny’s eloquent piece about his father’s death.  Danny was kind enough to respond to the e-mail I had sent him since, as an old fan from his days at WBCN radio in Boston, during the early 1970s, my friends and I tried our best to provide Danny with any leads we came across.  These days, it’s good to see that Danny Schechter “The News Dissector” is still at it with the same vigor he demonstrated more than thirty-five years ago.  I look forward to his new book and the new film.



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Watching For Storm Clouds

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October 26, 2009

As the economy continues to flounder along, one need not look very far to find enthusiastic cheerleaders embracing any seemingly positive information to reinforce the belief that this catastrophic chapter in history is about to reach an end.  Meanwhile, others are watching out for signs of more trouble.  The recent celebrations over the return of the Dow Jones Industrial Average to the 10,000 level gave some sensible commentators the opportunity to point out that this may simply be evidence that we are experiencing an “asset bubble” which could burst at any moment.

October 21 brought the latest Quarterly Report from SIGTARP, the Special Investigator General for TARP, who is a gentleman named Neil Barofsky.  Since the report is 256 pages long, it made more sense for Mr. Barofsky to submit to a few television interviews and simply explain to us, the latest results of his investigatory work.  In a discussion with CNN’s Wolf Blitzer on that date, Mr. Barofsky voiced his concern about the potential consequences that could arise because those bailed-out banks, considered “too big to fail” have continued to grow, due to government-approved mergers:

“These banks that were too big to fail are now bigger,” Barofsky said.  “Government has sponsored and supported several mergers that made them larger and that guarantee, that implicit guarantee of moral hazard, the idea that the government is not going to let these banks fail, which was implicit a year ago, is now explicit, we’ve said it.  So if anything, not only have there not been any meaningful regulatory reform to make it less likely, in a lot of ways, the government has made such problems more likely.

“Potentially we could be in more danger now than we were a year ago,” he added.

In comparing where the economy is now, as opposed to this time last year, we haven’t seen much in the way of increased lending by the oversized banks.  In fact, we’ve only seen more hubris and bullying on their part.  Julian Delasantellis expressed it this way in his October 22 essay for the Asia Times:

Now, a year later, things have turned out exactly as expected – except that the roles are reversed.  The rulemakers have not disciplined the corrupted; it’s more accurate to say that the corrupted have abased the rulemakers.  If the intention was that the big investment banks would settle down into a sort of quiet, reserved suburban lifestyle, the reality has been that they’ve acted more like former gangsters placed into the US government’s witness protection program, taking over the numbers racket on the Saturday pee-wee soccer fields.

*   *   *

Obviously, there can’t be any inflation, or any real long-term earnings growth for consumer and business-oriented banks for that matter, as long as the economic crisis continues to destroy capital faster than Obama can ask Bernanke to print it.

These issues are of little concern to operations such as Goldman and Morgan, with their trading strategies and profit profiles essentially divorced from the real economy.  But down here on planetary level, as the little league baseball fields don’t get maintained because the businesses who funded the work go out of business after having their loans called, after elderly people with chest pains have to wait longer for one of the few ambulances on station after rescue service cutbacks, life is changing, changing for the long term, and it sure isn’t pretty.

“Proprietary trading” by banks such as Goldman Sachs and JP Morgan Chase, forms an important part of their business model.  This practice involves trading by those banks, on their own accounts, rather than the accounts of customers.  The possibility of earning lavish bonus payments helps to incentivize risk taking by the traders working on the “prop desks” of those institutions.  Gillian Tett wrote a report for the Financial Times on October 22, wherein she discussed an e-mail she received from a recently-retired banker, who stays in touch with his former colleagues — all of whom remain actively trading the markets.  Ms. Tett observed that this man was “feeling deeply shocked” when he shared his observations with her:

“Forget about the events of the past 12 months … the punters are back punting as aggressively as ever,” he wrote.  “Highly leveraged short-term trades are back in vogue as players … jostle to load up on everything from Reits [real estate investment trusts] and commercial property, commodities, emerging markets and regular stocks and bonds.

“Oh, I am sure the banks’ public relations people will talk about the subdued atmosphere in banking, but don’t you believe it,” he continued bitterly, noting that when money is virtually free — or, at least, at 0.5 per cent — traders feel stupid if they don’t leverage up.

“Any sense of control is being chucked out of the window.  After the dotcom boom and bust it took a good few years for the market to get its collective mojo back [but] this time it has taken just a few months,” he added.  He finished with a despairing question:  “Was October 2008 just a dress rehearsal for the crash when this latest bubble bursts?”

*   *   *

Yet, if you talk at length to traders — or senior bankers — it seems that few truly believe that fundamentals alone explain this pattern.  Instead, the real trigger is the amount of money that central bankers have poured into the system that is frantically seeking a home, because most banks simply do not want to use that cash to make loans.  Hence, the fact that the prices of almost all risk assets are rallying — even as non-risky assets such as Treasuries bounce too.

Now, some western policymakers like to argue — or hope –that this striking rally could be beneficial, in a way, even if it is not initially based on fundamentals.  After all, the argument goes, if markets rebound sharply, that should boost animal spirits in a way that could eventually seep through to the “real” economy.

On this interpretation, the current rally could turn out to be akin to the firelighter that one uses to start a blaze in a pile of damp wood.

*   *   *

So I, like my e-mail correspondent, am growing uneasy.  Perhaps, the optimistic “firelighter-igniting-the-damp-wood” scenario will yet come to play; but we will probably not really know whether the optimists are correct for at least another six months.

Gillian Tett’s “give it six months” approach seems much more sober and rational than what we hear from many of the exuberant commentators appearing on television.  Beyond that, she reminds us that our current situation involves a more important issue than the question of whether our economy can experience sustained growth:  The continued use of leveraged risk-taking by TARP beneficiaries invites the possibility of a return to last year’s crisis-level conditions.  As long as those banks know that the taxpayers will be back to bail them out again, there is every reason to assume that we are all headed for more trouble.



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Offering Solutions

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October 22, 2009

Many of us are familiar with the old maxim asserting that “if you’re not part of the solution, you’re part of the problem.”  During the past year we’ve been exposed to plenty of hand-wringing by info-tainers from various mainstream media outlets decrying the financial crisis and our current economic predicament.  Very few of these people ever seem to offer any significant insight on such interesting topics as:  what really caused the meltdown, how to prevent it from happening again, whether any laws were broken that caused this catastrophe, whether any prosecutions might be warranted or how to solve our nation’s continuing economic ills, which seem to be immune to all the attempted cures.  The painful thorn in the side of Goldman Sachs, Matt Taibbi, recently raised an important question, reminding people to again scrutinize the vapid media coverage of this pressing crisis:

It’s literally amazing to me that our press corps hasn’t yet managed to draw a distinction between good news on Wall Street for companies like Goldman, and good news in reality.

*   *   *

In fact the dichotomy between the economic health of ordinary people and the traditional “market indicators” is not merely a non-story, it is a sort of taboo — unmentionable in major news coverage.

That quote inspired Yves Smith of Naked Capitalism to write a superb essay about how “access journalism” has created a controlled press.  What follows is just a small nugget of the great analysis in that piece:

So what do we have?  A media that predominantly bases its stories on what it is fed because it has to.  Ever-leaner staffing, compressed news cycles, and access journalism all conspire to drive reporters to focus on the “must cover” news, which is to a large degree influenced by the parties that initiate the story.  And that means they are increasingly in an echo chamber, spending so much time with the influential sources they feel they must cover that they start to be swayed by them.

*   *   *

The message, quite overly, is: if you are pissed, you are in a minority.  The country has moved on.  Things are getting better, get with the program. Now I saw the polar opposite today.  There is a group of varying sizes, depending on the topic, that e-mails among itself, mainly professional investors, analysts, economists (I’m usually on the periphery but sometimes chime in).  I never saw such an angry, active, and large thread about the Goldman BS fest today.  Now if people who have not suffered much, and are presumably benefitting from the market recovery are furious, it isn’t hard to imagine that what looks like complacency in the heartlands may simply be contained rage looking for an outlet.

Fortunately, one television news reporter has broken the silence concerning the impact on America’s middle class, caused by Wall Street’s massive Ponzi scam and our government’s response – which he calls “corporate communism”.  I’m talking about MSNBC’s Dylan Ratigan.  On Wednesday’s edition of his program, Morning Meeting, he decried the fact that the taxpayers have been forced to subsidize the “parlor game” played by Goldman Sachs and other firms involved in proprietary trading on our coin.  Mr. Ratigan then proceeded to offer a number of solutions available to ordinary people, who would like to fight back against those pampered institutions considered “too big to fail”.  Some of these measures involve:  moving accounts from one of those enshrined banks to a local bank or credit union; paying with cash whenever possible and contacting your lawmakers to insist upon financial reform.

My favorite lawmaker in the battle for financial reform is Congressman Alan Grayson, whose district happens to include Disney World.  His fantastic interrogation of Federal Reserve general counsel, Scott Alvarez, about whether the Fed tries to manipulate the stock markets, was a great event.  Grayson has now co-sponsored a “Financial Autopsy” amendment to the proposed Consumer Financial Protection Agency bill.  This amendment is intended to accomplish the following:

– Requires the CFPA conduct a “Financial Autopsy” of each state’s bankruptcies and foreclosures (a scientific sampling), and identify financial products that systematically led to a large number of bankruptcies and foreclosures.
– Requires the CFPA report to Congress annually on the top financial products (the companies and individuals that originated the products) that caused consumer bankruptcies and foreclosures.
– Requires the CFPA take corrective action to eliminate or restrict those deceptive products to prevent future bankruptcies and corrections

– The bottom line is to highlight destructive products based on if they are making people “broke”.

From his website, The Market Ticker, Karl Denninger offered his own contributions to this amendment:

This sort of “feel good” legislative amendment will of course be resisted, but it simply isn’t enough.  The basic principle of equity (better said as “fairness under the law”) puts forward the premise that one cannot cheat and be allowed to keep the fruits of one’s outrageous behavior.

So while I like the direction of this amendment, I would put forward the premise that the entirety of the gains “earned” from such toxic products, when found, are clawed back and distributed to the consumers so harmed, and that to the extent this does not fully compensate for that harm such a finding should give rise to a private, civil cause of action for the consumers who are bankrupted or foreclosed.

It’s nice to know that bloggers are no longer the only voices insisting on financial reform.  Ed Wallace of Business Week recently warned against the consequences of unchecked speculation on oil futures:

Is today’s stock market divorced from economic reality?  Probably.  It is a certainty that oil is.  We know that because those in the market are still putting out the same tired and incorrect logic that they used successfully last year to push oil to $147 a barrel while demand was plummeting.

Because oil is not carrying a market price that fairly reflects economic conditions and demand inventories, overpriced energy is siphoning off funds that could be used for corporate expansion, increased consumerism and, in time, the recreation of jobs in America.

Did you think that the “Enron Loophole” was closed by the enactment of the 2008 Farm Bill?  It wasn’t.  The Farm Bill simply gave more authority to the Commodity Futures Trading Commission to regulate futures contracts that had been exempted by the loophole.  In case you’re wondering about the person placed in charge of the Commodity Futures Trading Commission by President Obama  —  his name is Gary Gensler and he used to work for  …  You guessed it:  Goldman Sachs.



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Pay More Attention To That Man Behind The Curtain

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October 15, 2009

Reading the news these days can cause so much aggravation, I’m surprised more people haven’t pulled out all of their hair.  Regardless of one’s political perspective, there is an inevitable degree of outrage experienced from revelations concerning the role of government malfeasnace in causing and reacting to the financial crisis.  We have come to rely on satire to soothe our anger.  (For a good laugh, be sure to read this.)  Fortunately, an increasing number of commentators are not only exposing the systemic problems that created this catastrophe – they’re actually suggesting some good solutions.

Robert Scheer, editor of Truthdig, recently considered the idea that the debate over healthcare reform might just be a distraction from the more urgent need for financial reform:

The health care issue should never even have been brought up at a time when the economy is reeling and we are running such immense deficits to shore up the banks.  Instead of fixing the economy by saving Americans’ homes and jobs, we are preoccupied with pie-in-the-sky rhetoric on a hot issue that should have been addressed in calmer times.  It came up now because, despite all the hoary partisan posturing, it is a safer subject than the more pressing issue of what to do with Citigroup, AIG and General Motors, which the taxpayers happen to own but do not control.  While Treasury Secretary Timothy Geithner plots in secret with the top bankers who got us into this mess, we are focused on the perennial circus of so-called health care reform.

There is an odd disconnect between the furious public debate over health care reform, with its emphasis on the cost of an increased government role, and the nonexistent discussion about the far more expensive and largely secretive government program to bail out Wall Street.  Why the agitation over the government spending $83 billion a year on health care when at least 20 times that amount has been thrown at the creators of the ongoing financial crisis without any serious public accountability?  On Wednesday, the Wall Street Journal reported that employees of the financial industry that we taxpayers saved are slated to be paid a record $140 billion this year.

Remember, taxpayers:  That $140 billion is your money.  The bailed-out institutions may claim to have repaid their TARP obligations, but they also received trillions in loans from the Federal Reserve — and Ben Bernanke refuses to disclose which institutions received how much.

William Greider wrote a superb essay for the October 26 issue of The Nation, emphasizing the importance of the work undertaken by the Financial Crisis Inquiry Commission, led by Phil Angelides, as well as the investigation being done by the House Committee on Oversight and Government Reform:

Even if Congress manages to act this fall, the debate will not end.  Obama’s plan does not begin to get at the rot in the financial system.  Wall Street’s most notorious practices continue to flourish, and if unemployment rates keep rising through 2010, the public will not set aside its anger.  The Angelides investigators could put the story back on the front page.

*  *  *

Beyond Ponzi schemes and deceitful mortgage lending, a far larger crime may lurk at the center of the crisis — wholesale securities fraud.  “Risk models” reassured unwitting investors who bought millions of bundled mortgage securities and derivatives like credit-default swaps.  But as Christopher Whalen of Institutional Risk Analytics has testified, many of the models lacked real-life markets where they could be tested and verified.  “Clearly, we have now many examples where a model or the pretense of a model was used as a vehicle for creating risk and hiding it,” Whalen said.  “More important, however, is the role of financial models for creating opportunities for deliberate acts of securities fraud.”  That’s what investigators can examine.  What did the Wall Street firms know about the reliability of these models when they sold the securities?  And what did they tell the buyers?

*  *  *

Surely the political system itself is a root cause of the financial crisis.  The swollen influence of financial interests pushed Congress and presidents to repeal regulation and look the other way as reckless excesses developed.  Efforts to restore a more reliable representative democracy can start with Congress.  The power of money could be curbed by new rules prohibiting members of key committees from accepting contributions from the sectors they oversee.  Regulatory agencies, likewise, need internal designs to protect them from capture by the industries they regulate.

The Federal Reserve, having failed in its obligations so profoundly, should be reconstituted as an accountable federal agency, shorn of the excessive secrecy and insider privileges accorded to bankers.  The Constitution gives Congress, not the executive branch, the responsibility for managing money and credit.  Congress must reassert this responsibility and learn how to provide adequate oversight and policy critique.

Reforming the financial system, in other words, can be the prelude to reviving representative democracy.

At The Huffington Post, Robert Borosage warned that the financial industry is waging a huge lobbying battle to derail any attempts at financial reform.  Beyond that, the banking lobbyists will re-write any legislation to make it more favorable to their own objectives:

The banking lobby is nothing if not shameless.  They hope to use the reforms to WEAKEN current law.  They are pushing to make the federal standard the ceiling on reform, stripping the power of states to have higher standards.  Basically, they are hoping to find a way to shut down the independent investigations of state attorneys general like New York’s Eliot Spitzer and Andrew Cuomo or Illinois’ Lisa Madigan.

*  *  *

Historically, the banks, as Senator Dick Durbin decried in disgust, “own the place.”  And they’ve succeeded thus far in frustrating reform, even while pocketing literally hundreds of billions in support from taxpayers.

*  *  *

But this time it could be different.  Backroom deals are no longer safe.  Americans have been fleeced of trillions in the value of their homes and their savings because of Wall Street’s reckless excesses.  Then as taxpayers, they were extorted to ante up literally trillions more to forestall economic collapse by bailing out the banking sector.  Insult was added to that injury when the Federal Reserve refused to tell the Congress who got the money and on what terms.

Legislators would be well advised to understand the cozy old ways of doing business are no longer acceptable.  Americans are livid and paying attention.  Legislators who rely on Wall Street to finance their campaigns and then lead the effort to block or dilute reforms will discover that their constituents know what they have been up to.  Organizations like my own Campaign for America’s Future, the Sunlight Foundation, Americans for Financial Reform, Huffington Post bloggers will make certain the word gets out.  Legislators may discover that Wall Street’s money is a burden, not a blessing.

The most encouraging article I have seen came from Dan Gerstein of Forbes.  His perspective matched my sentiments exactly.  Looking through President Obama’s empty rhetoric, Mr. Gerstein helped provide direction and encouragement to those of us who are losing hope that our dysfunctional government could do anything close to addressing our nation’s financial ills:

The Changer-in-Chief long ago gave up on the idea of dismantling and remaking the crazy-quilt regulatory system that Wall Street (along with its Washington enablers) rigged for its own enrichment at everyone else’s expense.

*  *  *

Instead, Team Obama opted to move around the deck chairs within the existing bureaucracy, daftly hoping this conformist approach would be enough to prevent another titanic meltdown.

*  *  *

In the end, though, the key to success will be countering Wall Street’s influence and putting the politicians’ feet to the ire.  Members of Congress need to know there will be consequences for sticking with the status quo.      . . .  Make clear to every incumbent: Endorse our plan and we’ll give you money and public support; back the banks, and we will run ads against you telling voters you are for corrupt capitalism.

As I have said before, this is all about power.  Right now, Wall Street has the political playing field to itself; it has the money, the access it buys and the fear it implies.  And the public is on the outside, looking incredulous that this rigged system is still in place more than a year after it was exposed.  But if the frustrated middle can organize and mobilize a focused, non-partisan revolt of the revolted — as opposed to the inchoate and polarizing tea party movement — that whole dynamic will quickly change.  And so too, I’m confident, will the voting habits of our elected officials.

Fortunately, individuals like Dan Gerstein are motivating people to stand up and let our elected officials know that they work for the people and not the lobbyists.  Larry Klayman, founder of Judicial Watch, has just written a new book:  Whores: Why And How I Came To Fight The Establishment.  The timing of the book’s release could not have been better.



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The Next Big Fight

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October 1, 2009

On Tuesday September 29, H. David Kotz, Inspector General of the Securities and Exchange Commission, issued two reports, recommending 58 changes to improve the way the agency investigates and enforces violations of securities laws, as a result of the SEC’s failure to investigate the Bernie Madoff Ponzi scheme.  The reports exposed a shocking degree of ineptitude at the SEC.  On September 10, Mr. Kotz testified before the Senate Banking Committee.  You can find the prepared testimony here.  (I suggest starting at page 8.)  Having read that testimony, I wasn’t too shocked at what Mr. Kotz had to say in Tuesday’s reports.  Nevertheless, as Zachery Kouwe explained in The New York Times, the level of bureaucratic incompetence at the SEC was underestimated:

Many on Wall Street and in Washington were surprised that some of Mr. Kotz’s proposals, like recording interviews with witnesses and creating a database for tips and complaints, were not already part of the S.E.C.’s standard practice.

The extent of dysfunction at the SEC has been well-documented.  Back on January 5, I wrote a piece entitled:  “Clean-Up Time On Wall Street”, expressing my hope that the incoming Obama administration might initiate some serious financial reforms.  I quoted from Steven Labaton’s New York Times report concerning other SEC scandals investigated by Mr. Kotz last year.  My posting also included a quote from a Times piece by Michael Lewis (author of Liar’s Poker) and David Einhorn, which is particularly relevant to the recent disclosures by Inspector General Kotz:

Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.

This sentiment was echoed on Tuesday by Barry Ritholtz at The Big Picture website:

The agency is supposed to be an investor’s advocate, the chief law enforcement agency for the markets.  But that has hardly been how they have been managed, funded and operated in recent years.

Essentially the largest prosecutor’s office in the country, the SEC has been undercut at every turn:  Their staffing was far too small to handle their jurisdiction — Wall Street and public Corporations.  Their budgets have been sliced, and they were unable to keep up with the explosion in corporate criminality.  Many key positions were left unfilled, and morale was severely damaged.  A series of disastrous SEC chairs were appointed — to be “kinder and gentler.”  Not only did they fail to maintain SEC funding (via fines), but they allowed the worst corporate offenders to go unpunished.

Gee, go figure that under those circumstances, they sucked at their jobs.

*   *   *

The bottom line of the SEC is this:  If we are serious about corporate fraud, about violations of the SEC laws, about a level playing field, then we fund the agency adequately, hire enough lawyers to prosecute the crimes, and prevent Congress critters from interfering with the SEC doing its job.

To be blunt:  So far, there is no evidence we are sincere about making the SEC a serious watchdog with teeth.

Congress sure hasn’t been.  Staffing levels have been ignored, budgeting has been cut over the years.  And it’s the sort of administrative issue that does not lend itself to bumper sticker aphorisms or tea party slogans.

Financial expert Janet Tavakoli explained in a presentation to the International Monetary Fund last week, that regulatory failures in the United States helped create an even larger Ponzi scam than the Madoff ruse — the massive racket involving the trading of residential mortgage-backed securities:

Wall Street disguised these toxic “investments” with new value-destroying securitizations and derivatives.

Meanwhile, collapsing mortgage lenders paid high dividends to shareholders (old investors) and interest on credit lines to Wall Street (old investors) with money raised from new investors in doomed securities.  New money allowed Wall Street to temporarily hide losses and pay enormous bonuses.  This is a classic Ponzi scheme.

*   *   *

Had regulators done their jobs, they would have shut down Wall Street’s financial meth labs, and the Ponzi scheme would have quickly choked to death from lack of monetary oxygen.

After the Savings and Loan crisis of the late 1980’s, there were more than 1,000 felony indictments of senior officers.  Recent fraud is much more widespread and costly.  The consequences are much greater.  Congress needs to fund investigations.  Regulators need to get tough on crime.

As Simon Johnson and James Kwak explained in The Washington Post, the upcoming battle over financial reform will be hard-fought by the banking industry and its lobbyists:

The next couple of months will be crucial in determining the shape of the financial system for decades to come.  And so far, the signs are not encouraging.

*   *   *

Even back in April, the industry was able to kill Obama’s request for legislation allowing bankruptcy judges to modify mortgages.  Five months of profits later, the big banks are only stronger.  Is Obama up for this fight?

Our new President must know by now, that sinking a three-point shot is much easier than the juggling act he has undertaken with health care reform, the wars in Iraq and Afghanistan as well as his recent quest to help Chicago win the bid for the 2016 Olympics.  If Mr. Obama can’t beat the health insurance lobby with both the Senate and Congress under Democratic control — how will the voters feel if he drops another ball in the fight for financial reform?   Thanks to Harry Truman, the American public knows where “the buck stops”.  The previously-quoted Washington Post commentary looked even further back in history to explain this burden of leadership:

During the reign of Louis XIV, when the common people complained of some oppressive government policy, they would say, “If only the king knew . . . .”  Occasionally people will make similar statements about Barack Obama, blaming the policies they don’t like on his lieutenants.

But Barack Obama, like Louis XIV before him, knows exactly what is going on.  Now is the time for him to show what his priorities are and how hard he is willing to fight for them. Elections have consequences, people used to say.  This election brought in a popular Democratic president with reasonably large majorities in both houses of Congress.  The financial crisis exposed the worst side of the financial services industry to the bright light of day.  If we cannot get meaningful financial regulatory reform this year, we can’t blame it all on the banking lobby.

Let the games begin!



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Spread The Word

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September 29, 2009

I’ve seen quite a few articles and broadcasts from “mainstream” news sources during the past few weeks that have actually made me feel encouraged about the public’s response to the financial crisis and our current economic predicament.  Six months ago, the dirty picture of what caused last year’s near-meltdown and what has continued to prevent the necessary reforms, was something one could find only by reading a relatively small number of blogs.  Michael Panzner wrote a book entitled Financial Armageddon in 2006, predicting what many “experts” later described as unforeseeable.  Mr. Panzner now has a blog called Financial Armageddon (as well as another: When Giants Fall).  At his Financial Armageddon website, Mr. Panzner has helped ease the pain of the economic catastrophe with a little humor by educating his readers on some novel measurements of our recession level — such as the increased use of hair dye and “The Hot Waitress Index”.   (He ran another great posting about the increasing number of disastrous experiences for people who tried to save money by cutting their own hair.)   Meanwhile, Matt Taibbi has continued to serve as a gadfly against crony capitalism.   Zero Hedge keeps us regularly apprised of the suspicious activities in the equities and futures markets, which are of no apparent concern to regulatory officials.   Some bloggers, including Jr Deputy Accountant, have criticized the manic money-printing and other inappropriate activities at the Federal Reserve — which resists all efforts at oversight and transparency.  One no longer experiences the stigma of “conspiracy theorist” by accepting the view that our financial and economic problems were caused primarily by regulatory failure.

On September 23, Dan Gerstein wrote a piece for Forbes, about the impressive, 25-page article concerning last year’s financial crisis, written by James Stewart for The New Yorker, entitled:   “Eight Days”.  At the outset, Mr. Gerstein noted how the New Yorker article provided the reader with some shocking insight on someone we all thought we knew pretty well:

But the biggest eye-opener was that the most incisive and damning questions raised by any of our leaders during this existential crisis came from none other than the era’s top free-market cheerleader in Washington, George W. Bush.

*   *   *

Paulson and Bernanke alerted Bush that AIG was about to fail, warned of the massive ripple effect AIG going bust would have on the global economy, and explained why the Fed could not intervene with an insurance company to stop this systemic threat.  In response, Bush asked  “How have we come to the point where we can’t let an institution fail without affecting the whole economy?”

The question raised by President Bush is still tragically apt, since nothing has been accomplished in the past year to break up or downsize those institutions considered “too big to fail”.  Mr. Gerstein’s experience from reading the New Yorker article helped reinforce the understanding that our current situation is not only the result of regulatory failure, but it’s also a by-product of something called “regulatory capture” —  wherein the regulators are beholden to those whom they are supposed to regulate:

Once disaster was averted and the system stabilized, Paulson, Geithner and Bernanke had no excuse for not laying down the law to Wall Street — figuratively and literally — in the ensuing weeks.  By that I mean restructuring the deals we struck with the banks to get far better returns for taxpayers and rewriting the rules governing the financial system to prevent them from ever thinking they could gamble risk-free with our money again.

*   *   *

There’s no apparent sense of apartness or independence between regulator and regulated.  To the contrary, there’s a power imbalance in the wrong direction, with the regulators dependent on and even at the mercy of the regulated.  What does it say about the integrity and even the sanity of this system when the doctors have to ask the inmates how to restructure their treatments?

I was particularly impressed by Dan Gerstein’s closing remarks in the Forbes piece.  It was encouraging to see another commentary in a mainstream media source, consistent with the ranting I did here, here and here.  Mr. Gerstein expressed dismay at the lack of attention given to the unpleasant truth that we live in a plutocracy which won’t be changed until the people demand it:

That’s why I was so disappointed to find Stewart’s epic article buried in the elite pages of the New Yorker.  It should have been serialized on the front pages of every newspaper in the country last week, so every American would be reminded in full detail of just how warped and rigged our financial system has been — and why it still is.  Maybe then it might sink in that getting mad won’t get us even in the power struggle with the financial elites for control of our economy, and that change won’t happen until taxpayers demand it.  You want public accountability for Wall Street?  Let’s start with an accountable public.

Each time an article such as Dan Gerstein’s “Too Close For Comfort” gets widespread exposure, we move one step closer to the point where we have an informed, accountable public.  It’s unfortunate that his commentary was buried in the elite pages of Forbes.  That’s why I have it here.  Spread the word.



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Turning Over A Rock

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September 24, 2009

Last year’s financial crisis and our current economic crisis have exposed some pretty ugly things to an unsuspecting public.  As news reporters dig and as witnesses are called to testify, these investigations are turning over a very large rock, revealing all the colonies of maggots and fungus infestations, just below ground level, out of our usual view.  The voters are learning more about the sleaziness that takes place on Wall Street and in the halls of Congress.  Hopefully, they will become motivated to demand some changes.

A recent report by American Public Media’s Steve Henn revealed how the law prohibiting “insider trading” (i.e. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress.  Remember how Martha Stewart went to prison?  Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties.  Mr. Henn’s report discussed the investment transactions made by some Senators after having been informed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, that our financial system was on the verge of a meltdown.  After quoting GOP House Minority Leader John Boehner’s public acknowledgement last September that:

We clearly have an unprecedented crisis in our financial system.   .   .   .

On behalf of the American people our job is to put our partisan differences aside and to work together to help solve this crisis.

Mr. Henn proceeded to explain how swift Senatorial action resulted in a bipartisan exercise of greed:

The next day, according to personal financial disclosures, Boehner cashed out of a fund designed to profit from inflation.  Since he sold, it’s lost more than half its value.

Sen. Dick Durbin, an Illinois Democrat, who was also at that meeting sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.

Durbin said like millions of others he was worried about his retirement. Boehner says his stock broker acted alone without even talking to him.  Both lawmakers say they didn’t benefit from any special tips.

But over time members of Congress do much better than the rest of us when playing the stock market.

*   *   *

The value of information that flows from the inner workings of Washington isn’t lost on Wall Street professionals.

Michael Bagley is a former congressional staffer who now runs the OSINT Group. Bagley sells access and research. His clients are hedge funds, and he makes it his business to mine Congress and the rest of Washington for tips.

MICHAEL Bagley: The power center of finance has moved from Wall Street to Washington.

His firm is just one recent entry into Washington’s newest growth industry.

CRAIG HOLMAN: It’s called political intelligence.

Craig Holman is at Public Citizen, a consumer watchdog.  Holman believes lobbyists shouldn’t be allowed to sell tips to hedge funds and members of Congress shouldn’t trade on non-public information.  But right now it’s legal.

HOLMAN: It’s absolutely incredible, but the Securities and Exchange Act does not apply to members of Congress, congressional staff or even lobbyists.

That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information.  But it doesn’t apply to political intelligence.  That makes this business lucrative.  Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.

BAGLEY: So information is a commodity in Washington.

Inside information on dozens of issues, from bank capitol requirements to new student loan rules, can move markets.  Consumer advocate Craig Holman is backing a bill called the STOCK Act.  Introduced in the House, it would force political-intelligence firms to disclose their clients and it would ban lawmakers, staffers, and lobbyists from profiting on non-public knowledge.

Mr. Henn’s report went on to raise concern over the fact that there is nothing to stop members of Congress from acting on such information to the detriment of their constituents in favor of their own portfolios.

In his prepared testimony before the House Financial Services Committee this morning, former Federal Reserve Chair Paul Volcker made this observation:

I understand, and share, concern that the financial crisis has revealed weaknesses in our regulatory and supervisory agencies as well as in the activities of private financial institutions.  There has been criticism of the Federal Reserve itself, and even proposals to remove responsibilities other than monetary policy, strictly defined, from the Fed.

Mr. Volcker discussed a number of suggestions for regulatory changes to prevent a repeat of last year’s crisis.  He criticized Treasury Secretary “Turbo” Tim Geithner’s approach toward what amounts to simply baby-sitting for those financial institutions considered “too big to fail”.   Here is some of Mr. Volcker’s discussion on that point:

However well justified in terms of dealing with the extreme threats to the financial system in the midst of crisis, the emergency actions of the Federal Reserve, the Treasury, and ultimately the Congress to protect the viability of particular institutions – their bond holders and to some extent even their stockholders – have inevitably left an indelible mark on attitudes and behavior patterns of market participants.

  • Will not the pattern of protection for the largest banks and their holding companies tend to encourage greater risk-taking, including active participation in volatile capital markets, especially when compensation practices so greatly reward short-term success?
  • Are community or regional banks to be deemed “too small to save”, raising questions of competitive viability?

*   *   *

What all this amounts to is an unintended and unanticipated extension of the official “safety net”, an arrangement designed decades ago to protect the stability of the commercial banking system.  The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted.  Ultimately, the possibility of further crises – even greater crises – will increase.

This concern is often discussed as the “moral hazard” issue.  William Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City published an excellent paper concerning this issue on September 10.  He made some great suggestions as to how to deal with these “Systemically Dangerous Institutions”:

Historically, “too big to fail” was a misnomer – large, insolvent banks and S&Ls were placed in receivership and their “risk capital” (shareholders and subordinated debtholders) received nothing.  That treatment is fair, minimizes the costs to the taxpayers, and minimizes “moral hazard.”  “Too big to fail” meant only that they were not placed in liquidating receiverships (akin to a Chapter 7 “liquidating” bankruptcy).  In this crisis, however, regulators have twisted the term into immunity.  Massive insolvent banks are not placed in receivership, their senior managers are left in place, and the taxpayers secretly subsidize their risk capital.  This policy is indefensible.  It is also unlawful.  It violates the Prompt Corrective Action law.  If it is continued it will cause future crises and recurrent scandals.

*   *   *

Under the current regulatory system banks that are too big to fail pose a clear and present danger to the economy.  They are not national assets.  A bank that is too big to fail is too big to operate safely and too big to regulate.  It poses a systemic risk. These banks are not “systemically important”, they are “systemically dangerous.”  They are ticking time bombs – except that many of them have already exploded.

Mr. Black then listed twenty areas of reform where these institutions would face additional regulatory compliance and restrictions on their activities, including a ban on “all new speculative investments”.     Paul Volcker took that issue a step further with his criticism of “proprietary trading” by these institutions, which often can result in conflicts of interest with customers, since these banks are trading on their own accounts while in a position to act on the confidential investing strategies of their clients.

Paul Volcker made a point of emphasizing the need to clarify the overlapping jurisdictions of the Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC).  On September 18, David Corn wrote a piece about the CFTC, describing it as:

…  a somewhat obscure federal agency, but an important one. Its mission is to protect consumers and investors by preventing misconduct in futures trading that could distort the prices of agricultural and energy commodities.  In 2000, the CFTC wanted to regulate credit default swaps — complicated and privately traded financial instruments that helped grease the way to the subprime meltdown — but Republican Sen. Phil Gramm, then the chair of the Senate Banking Committee, Fed chair Alan Greenspan and Clinton administration officials (including Lawrence Summers, now President Obama’s top economic adviser) blocked that effort.  Had the CFTC been allowed to police swaps, the housing finance crisis that begot the economic crash of last year might not have been as bad.  So the CFTC is a critical agency.  And under Obama’s proposal for more robust financial regulation — which he talked about during a Wall Street visit on Monday — the CFTC would have greater responsibility to make sure no one was gaming the financial system.  Consequently, the composition of the CFTC is more significant than ever.

Mr. Corn expressed his concern over the fact that the Obama administration had nominated Scott O’Malia, a Republican Senate aide, to be a commissioner on the CTFC:

For the past seven years, he’s been a GOP staffer in the Senate.  But before that he was a lobbyist for Mirant, an Atlanta-based electricity company. According to House and Senate records, while at Mirant O’Malia was registered to lobby for greater deregulation at a time when his company was exploiting the then-ongoing deregulation of the energy market to bilk consumers.  Remember the Enron-driven electricity crisis in California of 2001, when Enron and other companies were manipulating the state’s deregulated electricity markets, causing prices to go sky-high, creating rolling black-outs and triggering a statewide emergency?  Mirant was one of those other companies.  According to state investigators, Mirant deliberately held back power to force prices up.

After the crisis, Mirant was investigated by various federal and local agencies and became the target of a number of lawsuits.  It ultimately agreed to pay California about half a billion dollars to settle claims it had screwed the state’s residents.  It also was fined $12.5 million — by the CFTC! — for attempting to manipulate natural gas prices.

Mr. O’Malia had previously been nominated for this position by President George W. Bush.  Nevertheless, Washington Senator Maria Cantwell helped block the nomination.  As a result, David Corn was understandably shocked when O’Malia was re-nominated for this same position by the Obama administration:

Yet Obama has brought it back.  Why would a president who craves change in Washington and who wants the CFTC to be a tougher watchdog do that?

The answer to that question is another question:  Does President Obama really want the CFTC to be a tougher watchdog or just another “lap dog” like the SEC?

After all the promises of the needed regulatory “clean-up” to prevent another financial crisis, can we really trust our current leadership to accomplish anything toward that goal?



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