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Building A Consensus For Survival

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March 29, 2010

In my last posting, I focused on the fantastic discourse in favor of financial reform presented by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, in a speech before the U.S. Chamber of Commerce.  In addition to Hoenig’s speech, last week brought us a number of excellent arguments for the cause that is so bitterly opposed by Wall Street lobbyists.  On the same day that Thomas Hoenig delivered his great speech to the U.S. Chamber of Commerce, Deputy Treasury Secretary Neal Wolin also addressed that institution to argue in favor of financial reform.  I enjoyed the fact that he rubbed this in their faces:

That is why it is so puzzling that, despite the urgent and undeniable need for reform, the Chamber of Commerce has launched a $3 million advertising campaign against it.  That campaign is not designed to improve the House and Senate bills.  It is designed to defeat them.  It is designed to delay reform until the memory of the crisis fades and the political will for change dies out.

The Chamber’s campaign comes on top of the $1.4 million per day already being spent on lobbying and campaign contributions by big banks and Wall Street financial firms.  There are four financial lobbyists for every member of Congress.

Wolin’s presentation was yet another signal from the Treasury Department that inspired economist Simon Johnson to begin feeling optimistic about the possibility that some meaningful degree of financial reform might actually take place:

Against all the odds, a glimmer of hope for real financial reform begins to shine through.  It’s not that anything definite has happened — in fact most of the recent Senate details are not encouraging – but rather that the broader political calculus has shifted in the right direction.

Instead of seeing the big banks as inviolable, top people in Obama administration are beginning to see the advantage of taking them on — at least on the issue of consumer protection.  Even Tim Geithner derided the banks recently as,

“those who told us all they were the masters of noble             financial innovation and sophisticated risk management.”

Yep.  That was our old pal and former New York Fed President, “Turbo” Tim Geithner, making the case for financial reform before the American Enterprise Institute.  (You remember them — the outfit that fired David Frum for speaking out against Fox News and the rest of the “conservative entertainment industry”.)  Treasury Secretary Geithner made his pitch for reform by reminding his conservative audience that longstanding advocates of the “efficient market hypothesis” had come on board in favor of financial reform:

Now, the recognition that markets failed and that the necessary solution involves reform; that it requires rules enforced by government is not a partisan or political judgment.  It is a conclusion reached by liberals and by conservative skeptics of regulation.

Judge Richard Posner, a leader in the conservative Chicago School of economics, wrote last year, that “we need a more active and intelligent government to keep our model of a capitalist economy from running off the rails.”

And consider Alan Greenspan, a skeptic of the benefits of regulation, who recently said, “inhibiting irrational behavior when it can be identified, through regulation,   . . .   could be stabilizing.”

No wonder Simon Johnson is feeling so upbeat!  The administration is actually making a serious attempt at doing what needs to be done to get this accomplished.

Meanwhile, The New York Times had run a superb article by David Leonhardt just as Geithner was about to address the AEI.  Leonhardt’s essay, “Heading Off the Next Financial Crisis” is a thorough analysis, providing historical background and covering every angle on what needs to be done to clean up the mess that got us where we are today — and to prevent it from happening again.  Here are some snippets from the first page that had me hooked right away:

It was a maddening story line:  the government helped the banks get rich by looking the other way during good times and saved them from collapse during bad times.  Just as an oil company can profit from pollution, Wall Street profited from weak regulation, at the expense of society.

*   *   *

In a way, this issue is more about human nature than about politics.  By definition, the next period of financial excess will appear to have recent history on its side.

*   *   *

One way to deal with regulator fallibility is to implement clear, sweeping rules that limit people’s ability to persuade themselves that the next bubble is different — upfront capital requirements, for example, that banks cannot alter.  Thus far, the White House, the Fed and Congress have mostly steered clear of such rules.

Congratulations to David Leonhardt for putting that great piece together.  As more commentators continue to advance such astute, sensible appeals to plug the leaks in our sinking financial system, there is a greater likelihood that our lawmakers will realize that the economic risk of doing nothing far exceeds the amounts of money in those envelopes from the lobbyists.



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The Best Argument For Financial Reform

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March 26, 2010

Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, spoke out in favor of financial reform on Wednesday in a speech before the U.S. Chamber of Commerce.  The shocking aspect of Hoenig’s speech is that it comes from the mouth of a member of the Federal Reserve’s Open Market Committee (FOMC) which sets economic policy.  Beyond that, Hoenig brutally criticized what has been done so far to tilt the playing field in favor of the megabanks, at the expense of smaller banks.  Here are some choice bits from what should be mandatory reading for everyone in Congress:

As a nation, we have violated the central tenants of any successful system.  We have seen the formation of a powerful group of financial firms.  We have inadvertently granted them implied guarantees and favors, and we have suffered the consequences.  We must correct these violations.  We must reinvigorate fair competition within our system in a culture of business ethics that operates under the rule of law.  When we do this, we will not eliminate the small businesses’ need for capital, but we will make access to capital once again earned, as it should be.

*   *   *

The fact is that Main Street will not prosper without a healthy financial system.  We will not have a healthy financial system now or in the future without making fundamental changes that reverse the wrong-headed incentives, change behavior and reinforce the structure of our financial system.  These changes must be made so that the largest firms no longer have the incentive to take too much risk and gain a competitive funding advantage over smaller ones.  Credit must be allocated efficiently and equitably based on prospective economic value.  Without these changes, this crisis will be remembered only in textbooks and then we will go through it all again.

Hoenig’s speech comes at a time when the Senate is considering a watered-down version of financial reform that has been widely criticized.  Economist Simon Johnson pointed out how any approach based on U.S. authority alone to “resolve” or break up systemically dangerous banks would be doomed because “there is no cross-border agreement on resolution process and procedure — and no prospect of the same in sight”.

Blogger Mike Konczal expressed his disappointment with what has become of the Financial Reform Bill as it has been dragged through the legislative process:

It’s funny, I know what a good financial reform bill becoming a bad financial reform bill looks like through this process.  I’ve seen bribes and more bribes and last-minute giveaway changes.

The notion that bribery has been an obstacle to financial reform became a central theme of Karl Denninger’s enthusiastic reaction to Hoenig’s speech:

All in all it’s nice to see Thomas Hoenig wake up.  Now let’s see if we can get CONgress to stop opening the bribe envelopes, er, ignore the campaign contributions for a sufficient period of time to actually fix this mess, forcing those “big banks” to get that leverage ratio down to where it belongs, along with marking their assets to the market.

Thomas Hoenig provided exactly the type of leadership needed and at exactly the right time to give a boost to serious financial reform.  We can only hope that there will be enough responsible, ethical people in the Senate to incorporate Hoenig’s suggestions into the Financial Reform Bill.  If only  . . .



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Dumping On Alan Greenspan

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March 22, 2010

On Friday, March 19, former Federal Reserve chair, Alan Greenspan appeared before the Brookings Institution to present his 48-page paper entitled, “The Crisis”.  The obvious subject of the paper concerned the causes of the 2008 financial crisis.  With this document, Greenspan attempted to add his own spin to history, for the sake of restoring his tattered public image.  The man once known as “The Maestro” had fallen into the orchestra pit and was struggling to preserve his prestige.  After the release of his paper on Friday, there has been no shortage of criticism, despite Greenspan’s “enlightened” change of attitude concerning bank regulation.  Greenspan’s refusal to admit the Federal Reserve’s monetary policy had anything to do with causing the crisis has placed him directly in the crosshairs of more than a few critics.

Sewell Chan of The New York Times provided this summary of Greenspan’s paper:

Mr. Greenspan, who has long argued that the market is often a more effective regulator than the government, has now adopted a more expansive view of the proper role of the state.

He argues that regulators should enforce collateral and capital requirements, limit or ban certain kinds of concentrated bank lending, and even compel financial companies to develop “living wills” that specify how they are to be liquidated in an orderly way.

*   *   *

. . . Mr. Greenspan warned that “megabanks” formed through mergers created the potential for “unusually large systemic risks” should they fail.

Mr. Greenspan added:  “Regrettably, we did little to address the problem.”

That is as close as Greenspan came to admitting that the Federal Reserve had a role in helping to cause the financial crisis.  Nevertheless, these magic words from page 39 of “The Crisis” are what got everybody jumping:

To my knowledge, that lowering of the federal funds rate nearly a decade ago was not considered a key factor in the housing bubble.

The best retort to this denial of reality came from Barry Ritholtz, author of Bailout Nation.  His essay entitled, “Explaining the Impact of Ultra-Low Rates to Greenspan” is a must read.  Here’s how Ritholtz concluded the piece:

The lack of regulatory enforcement was a huge factor in allowing the credit bubble to inflate, and set the stage for the entire credit crisis.  But it was intricately interwoven with the ultra low rates Alan Greenspan set as Fed Chair.

So while he is correct in pointing out that his own failures as a bank regulator are in part to blame, he needs to also recognize that his failures in setting monetary policy was also a major factor.

In other words, his incompetence as a regulator made his incompetence as a central banker even worse.

Paul La Monica wrote an interesting post for CNN Money’s The Buzz blog entitled, “Greenspan and Bernanke still don’t get it”.  He was similarly unimpressed with Greenspan’s denial that Fed monetary policy helped cause the crisis:

This argument is getting tiresome.  Keeping rates so low helped inflate the bubble.

*   *   *

“The Fed wasn’t the sole culprit.  But if not for an artificially steep yield curve, we probably would not have had a global financial crisis,” said John Norris, managing director of wealth management with Oakworth Capital Bank in Birmingham, Ala.

“Greenspan and Bernanke are missing the point.  It all stems from monetary policy,” Norris added.  “If you give bankers an inducement to lend more than they ordinarily would they are going to do so.”

From across the pond, Stephen Foley wrote a great article for The Independent entitled, “For the wrong answers, turn to Greenspan”.  He began the piece this way:

The former US Federal Reserve chairman, the wizened wiseman of laissez-faire economics, shocked us all — and probably himself — when he told a congressional panel in 2008 that he had found “a flaw in the model I perceived is the critical functioning structure that defines how the world works, so to speak”.  He meant that he had realised banks cannot be trusted to manage their own risks, and that markets do not smoothly self-correct.

But instead of taking that revelation and helping to point the way to a new, post-crisis financial world, he has shuddered to an intellectual halt.  It is the same intellectual stop sign that Wall Street’s bankers are at.  The failure to move forward is regrettable, dangerous and more than a little self-serving.

These reactions to Greenspan’s paper are surely just the beginning of an overwhelming backlash.  The Economist has already weighed in and before too long, we might even see a movie documenting the Fed’s responsibility for helping to cause The Great Recession.



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Inviting Blowback

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March 11, 2010

Is it just a coincidence that “Turbo” Tim Geithner was the subject of back-to-back feature stories in The New Yorker and The Atlantic ?  A number of commentators don’t think so.

The March 10 issue of The New Yorker ran an article by John Cassidy entitled, “No Credit”.  The title is meant to imply that Getithner’s efforts to save America’s financial system are working but he’s not getting any credit for this achievement.  From the very outset, this piece was obviously an attempt to reconstruct Geithner’s controversial public image – because he has been widely criticized as a tool of Wall Street.

The article by Jo Becker and Gretchen Morgenson in the April 26, 2009 issue of The New York Times helped clarify the record on Geithner’s loyalty to the big banks at the public’s expense, during his tenure as president of the Federal Reserve of New York.  That piece began with a brainstorming session convened by Treasury Secretary Hank Paulson in June of 2008, at which point Paulson asked for suggestions as to what emergency powers the government should have at its disposal to confront the burgeoning financial crisis:

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer.  He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward.  Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription.

The recent article in The New Yorker defends Geithner’s bank bailouts, with a bit of historical revisionism that conveniently avoids a small matter referred to as Maiden Lane III:

During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses.  While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers.  Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars — and much of that related to propping up General Motors and Chrysler.

Edward Harrison of Credit Writedowns dismissed the NewYorker article as “an out and out puff piece” that Geithner himself could have written:

Don’t be fooled; this is a clear plant to help bolster public opinion for a bailout and transfer of wealth, which was both unnecessary and politically damaging.

The article on Geithner, appearing in the April issue of The Atlantic, was described by Mr. Harrison as “fairly even-handed” although worthy of extensive criticism.  Nevertheless, after reading the following passage from the first page of the essay, I found it difficult to avoid using the terms “fawning and sycophantic” to describe it:

In the course of many interviews about Geithner, two qualities came up again and again.  The first was his extraordinary quickness of mind and talent for elucidating whatever issue was the preoccupying concern of the moment.  Second was his athleticism.  Unprompted by me, friends and colleagues extolled his skill and grace at windsurfing, tennis, basketball, running, snowboarding, and softball (specifying his prowess at shortstop and in center field, as well as at the plate).  He inspires an adolescent awe in male colleagues.

Gawd!  Yeech!

The reaction to the New Yorker and Atlantic articles, articulated by Yves Smith of Naked Capitalism, is an absolutely fantastic “must read” piece.  Ms. Smith goes beyond the subject of Geithner.  Her essay is a tour de force, describing how President Obama sold out the American public in the service of his patrons on Wall Street.  The final two paragraphs portray the administration’s antics with a long-overdue measure of pugilism:

But the Obama administration miscalculated badly.  First, it bought the financiers’ false promise that massive subsidies to them would kick start the economy.  But economists are now estimating that it is likely to take five years to return to pre-crisis levels of unemployment.  Obama took his eye off the ball.  A Democratic President’s most important responsibility is job creation.  It is simply unacceptable to most Americans for Wall Street to be reaping record profits and bonuses while the rest of the country is suffering.  Second, it assumed finance was too complicated to hold the attention of most citizens, and so the (non) initiatives under way now would attract comparatively little scrutiny.  But as public ire remains high, the press coverage has become almost schizophrenic.  Obvious public relations plants, like Ben Bernanke’s designation as Time Magazine’s Man of the Year (precisely when his confirmation is running into unexpected opposition) and stories in the New York Times that incorrectly reported some Goldman executive bonus cosmetics as meaningful concessions have co-existed with reports on the abject failure of Geithner’s mortgage modification program.  While mainstream press coverage is still largely flattering, the desperation of the recent PR moves versus the continued public ire and recognition of where the Administration’s priorities truly lie means the fissures are becoming a gaping chasm.

So with Obama’s popularity falling sharply, it should be no surprise that the Administration is resorting to more concerted propaganda efforts.  It may have no choice.  Having ceded so much ground to the financiers, it has lost control of the battlefield.  The banking lobbyists have perfected their tactics for blocking reform over the last two decades.  Team Obama naively cast its lot with an industry that is vastly more skilled in the dark art of the manufacture of consent than it is.

Congratulations to Yves Smith for writing a fantastic critique of the Obama administration’s combination of nonfeasance and misfeasance in responding to both the financial and economic crises.



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Elizabeth Warren To The Rescue

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March 4, 2010

We reached the point where serious financial reform began to look like a lost cause.  Nothing has been done to address the problems that caused the financial crisis.  Economists have been warning that we could be facing another financial crisis, requiring another round of bank bailouts.  The watered-down financial reform bill passed by the House of Representatives, HR 4173, is about to become completely defanged by the Senate.

The most hotly-contested aspect of the proposed financial reform bill — the establishment of an independent, stand-alone, Consumer Financial Protection Agency — is now in the hands of “Countrywide Chris” Dodd, who is being forced into retirement because the people of Connecticut are fed up with him.  As a result, this is his last chance to get some more “perks” from his position as Senate Banking Committee chairman.  Back on January 18, Elizabeth Warren (Chair of the Congressional Oversight Panel and the person likely to be appointed to head the CFPA) explained to Reuters that banking lobbyists might succeed in “gutting” the proposed agency:

“The CFPA is the best indicator of whether Congress will reform Wall Street or whether it will continue to give Wall Street whatever it wants,” she told Reuters in an interview.

*   *   *

Consumer protection is relatively simple and could easily be fixed, she said.  The statutes, for the most part, already exist, but enforcement is in the hands of the wrong people, such as the Federal Reserve, which does not consider it central to its main task of maintaining economic stability, she said.

The latest effort to sabotage the proposed CFPA involves placing it under the control of the Federal Reserve.  As Craig Torres and Yalman Onaran explained for Bloomberg News:

Putting it inside the Fed, instead of creating a standalone bureau, was a compromise proposed by Senator Bob Corker, a Tennessee Republican, and Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.

*   *   *

Banking lobbyists say the Fed’s knowledge of the banking system makes it well-suited to coordinate rules on credit cards and other consumer financial products.

*   *   *

The financial-services industry has lobbied lawmakers to defeat the plan for a consumer agency.  JP Morgan Chase & Co. Chief Executive Officer Jamie Dimon called the agency “just a whole new bureaucracy” on a December conference call with analysts.

Barry Ritholtz, author of Bailout Nation, recently discussed the importance of having an independent CFPA:

Currently, there are several proposals floating around to change the basic concept of a consumer protection agency.  For the most part, these proposals are meaningless, watered down foolishness, bordering on idiotic.  Let the Fed do it? They were already charged with doing this, and under Greenspan, committed Nonfeasance — they failed to do their duty.

The Fed is the wrong agency for this.

In an interview with Ryan Grim of The Huffington Post, Congressman Barney Frank expressed a noteworthy reaction to the idea:

“It’s like making me the chief judge of the Miss America contest,” Frank said.

On Tuesday, March 2, Elizabeth Warren spent the day on the phone with reform advocates, members of Congress and administration officials, as she explained in an interview with Shahien Nasiripour of The Huffington Post.  The key point she stressed in that interview was the message:  “Pass a strong bill or nothing at all.”  It sounds as though she is afraid that the financial reform bill could suffer the same fate as the healthcare reform bill.  That notion was reinforced by the following comments:

My first choice is a strong consumer agency  . . .  My second choice is no agency at all and plenty of blood and teeth left on the floor.

*   *   *

“The lobbyists would like nothing better than for the story to be the [proposed] agency has died and everyone has given up,” Warren said.  “The lobbyists’ closest friends in the Senate would like nothing better than passing an agency that has a good name but no real impact so they have something good to say to the voters — and something even better to say to the lobbyists.”

Congratulations, Professor Warren!  At last, someone with some cajones is taking charge of this fight!

On Wednesday, March 3, the Associated Press reported that the Obama administration was getting involved in the financial reform negotiations, with Treasury Secretary Geithner leading the charge for an independent Consumer Financial Protection agency.  I suspect that President Obama must have seen the “Ex-Presidents” sketch from the FunnyOrDie.com website, featuring the actors from Saturday Night Live portraying former Presidents (and ghosts of ex-Presidents) in a joint effort toward motivating Obama to make sure the CFPA becomes a reality.  When Dan Aykroyd and Chevy Chase reunited, joining Dana Carvey, Will Ferrell and Darryl Hammond in promoting this cause, Obama could not have turned them down.



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More Super Powers For Turbo Tim

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February 18, 2010

I shouldn’t have been shocked when I read about this.  It’s just that it makes no sense at all and it’s actually scary — for a number of reasons.  On Wednesday, February 17, Sewell Chan broke the story for The New York Times:

The Senate and the Obama administration are nearing agreement on forming a council of regulators, led by the Treasury secretary, to identify systemic risk to the nation’s financial system, officials said Wednesday.

They’re going to put “Turbo” Tim Geithner in charge of the council that regulates systemic risk in the banking system?  Let the pushback begin!  The first published reaction to this news (that I saw) came from Tom Lindmark at the iStockAnalyst.com website:

Only the Congress of the United States is capable of this sort of monumental stupidity.  It appears as if the responsibility for running a newly formed council of bank regulators is going to be delegated to the Treasury Secretary.

Lindmark’s beef was not based on any personal opinion about the appointment of Tim Geithner himself to such a role.  Mr. Lindmark’s opinion simply reflects his disgust at the idea of putting a political appointee at the head of such a committee:

The job of overseeing our financial system is going to be given to an individual whose primary job is implementing the political agenda of his boss — the President of the US.

Regulation of the banks and whatever else gets thrown into the mix is now going to be driven by politicians who have little or no interest in a safe and sound banking system.  As we know too well, their primary interest is the perpetuation and enhancement of their own power with no regard for the consequences.

So there you have reason number one:  Nothing personal — just bad policy.

I can’t wait to hear the responses from some of my favorite gurus from the world of finance.  How about John Hussman — president of the investment advisory firm that manages the Hussman Funds?  One day before the story broke concerning our new systemic risk regulator, this statement appeared in the Weekly Market Comment by Dr. Hussman:

If one is alert, it is evident that the Federal Reserve and the U.S. Treasury have disposed of the need for Congressional approval, and have engineered a de facto bailout of Fannie Mae and Freddie Mac, at public expense.

What better qualification could one have for sitting at the helm of the systemic risk council?  Choose one of the guys who bypassed Congressional authority to bail out Fannie Mae and Freddie Mac with the taxpayers’ money!  If Geithner is actually appointed to chair this council, you can expect an interesting response from Dr. Hussman.

Jeremy Grantham should have plenty to rant about concerning this nomination.  As chairman of GMO, Mr. Grantham is responsible for managing over $107 billion of his clients’ hard-inherited money.  Consider what he said about Geithner’s performance as president of the New York Fed during the months leading up to the financial crisis:

Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks.

Mr. Grantham should hardly be pleased to hear about our Treasury Secretary’s new role, regulating systemic risk.

The coming days should provide some entertaining diatribes along the lines of:  “You’ve got to be kidding!” in response to this news.  I’m looking forward to it!



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Beyond The Banks

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February 4, 2010

I recently saw the movie Food, Inc. and was struck by the idea that there are some fundamental problems that span just about every situation where government corruption and ineptitude have facilitated an industry’s efforts to crush the interests of consumers.  At approximately 36 minutes into the film, Michael Pollan explained how government efforts to prevent abuses in the food industry are undermined by the fact that the government always relies on the “quick fix” or “band-aid” approach, rather than a strategy addressed at solving a systemic problem.  In other words:  government prefers to treat the symptoms rather than the disease.

As I thought about Michael Pollan’s remark, I was immediately reminded of our financial crisis.  In that case, the solution was to bail out the “too big to fail” financial institutions.  As legislative proposals are introduced to address the systemic problems and prevent a recurrence of what happened in the fall of 2008, the lobbyists have stepped in to sabotage those efforts.

There were two other factors discussed in Food Inc. as presenting roadblocks to effective consumer-protective legislation:  the revolving door between the industry and Washington, as well as “regulatory capture” — a situation where government regulators are beholden to those whom they regulate.

We have seen the impact of these two factors in the financial area and they have been well-documented.  The “revolving door” was the subject of two recent essays by John Carney at The Business Insider website.  Carney discussed “The Banking Blob” as a secret club of Senate staffers and Wall Street lobbyists:

Staffers on the powerful Senate banking committee are part of what is known as “The Banking Blob,” a person familiar with the matter told us.  The Banking Blob is made up of current banking committee staffers and former staffers who are now bankers or lobbyists.  They frequently socialize together, often organizing happy hours and parties.

“They move in a pack.  They socialize together,” the person says.  “Hell.  They even inter-marry.”

The Blob is made up of both Republican and Democratic staffers.  Outsiders tend to think the Blob members view themselves as “cooler” than other Capitol Hill staff members.  Often a job on the banking committee leads to a well-paying job for a Wall Street firm or a position at a K-Street lobbyist law firm.

Carney had previously discussed the problem of Senate banking committee staffers who see their job as simply a stepping stone to a lucrative banking job:

The allure of banking is hardly a mystery.  The money is better.  Far better than the government wages paid to Capitol Hill staffers.  After years of toiling in government service, many staffers dream of a better life in one of the leafy neighborhoods that are so posh you cannot get there on DC’s Metro.     . . .

“Everyone talks about people going from Goldman to government.  But the problem is the other way.  Too many staffers go from Capitol Hill to banking.  And even more aspire to make that move.  It corrupts the process,” the staffer told us.

The third problem  — “regulatory capture” — is best epitomized in the person of “Turbo” Tim Geithner.  Joshua Rosner recently dissected Turbo Tim’s often-repeated claim that he has always worked in “public service”.  Rosner demonstrated that the only sector that has been “serviced” by Geithner was the banking industry:

Secretary Geithner can keep repeating his assertion he has worked in public service his whole life.  Never mind that this calls into question his tangible market experience, this claim begs the question:  How does he define working in the public service?

Geithner’s last job, as the President of the New York Fed highlights that question.

*   *   *

The New York Fed is not government-owned.  Most people fail to recognize this fact.  Simply, the Federal Reserve Board (responsible for monetary policy, with a dual mandate of full employment and price stability) is an independent part of the federal government, while the New York Fed is a shareholder-owned or private corporation.  In other words, where the Federal Reserve Board is www.frb.gov, the District Bank is www.newyorkfed.org. Historically, the New York Fed has been among the most profitable shareholder-owned corporations in the world.  Yet it keeps the details of its shareholders’ ownership information private.  What we do know is that its owners include precisely those institutions it is tasked to regulate and supervise and those it has obviously failed to adequately supervise.  Unlike the other District Banks of the Federal Reserve system, which have overseen their banks quite well, the New York Fed’s concentration of the largest banks, coupled with its unique role of managing the market operations of the entire Fed system, has built a culture where it sees itself as a market participant and peer to those firms it regulates.

The President of the NY Fed is chosen by, paid by and reports to the private shareholders of that private institution.  Only three of the nine Directors of the Board of the New York Fed are chosen by the Federal Reserve Board and, until this year, the NY Fed’s Chair — chosen by the Federal Reserve Board in Washington — was a former Chairman of Goldman Sachs who still sits on Goldman’s Board.

*   *   *

In truth, Geithner’s ineffectiveness in his role as NY Fed President and his current political posturing — without any policy substance to directly address too-big-to-fail or the Fed’s flawed powers to bailout firms — seems to have resulted from design rather than accident.

*   *   *

If being a public servant is funneling unreasonable amounts of taxpayer capital, without market discipline, to the largest and most poorly managed banks, then Geithner’s selection as Secretary of Treasury makes sense.

One important lesson to be learned from our government’s inability to do its job regulating the financial sector, is that this failure is primarily caused by three problems:

  • An unwillingness to address a systemic problem by choosing, instead, to focus on “quick fixes”;
  • A revolving door between government and industry;
  • Regulatory capture.

Legislators, consumer advocates and commentators should focus on these three problem areas when addressing any situation where our government proves itself ineffective in preventing abuses by a particular industry.



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The Outrage Continues

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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

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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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The Battle Over Bernanke

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January 25, 2010

Ben Bernanke’s four-year term as chairman of the Federal Reserve ends on January 31.  There is presently no vote scheduled to confirm President Obama’s nomination of Bernanke to that post because four Senators (Bernie Sanders, D-Vt.; Jim Bunning, R-Ky.; Jim DeMint, R-S.C. and David Vitter, R-La.) have placed holds on Bernanke’s nomination.  In order for the Senate to proceed to a vote on the nomination, 60 votes will be required.  At this point, there is a serious question as to whether the pro-Bernanke faction can produce those 60 votes.  A number of commentators have described last week’s win by Scott Brown as a “chill factor” for those Senators considering whether to vote for confirmation.  Ryan Grim of The Huffington Post put it this way:

Opposition to the reconfirmation of Federal Reserve Chairman Ben Bernanke is growing in the Senate in the wake of a Republican Scott Brown’s victory, fueled by populist rage, in the Massachusetts Senate race.

James Pethokoukis of Reuters explained the situation in these terms:

Liberals in Congress want him gone.  Then again, they want pretty much the whole Obama economic team gone.  But Geithner and Summers aren’t up for a Senate vote.  Bernanke is.  And if Dems start bailing, don’t expect Republicans to save him.  No politician in America gains anything by voting for Bernanke.  A “no” vote is a free vote.  Wall Street still loves him, though.  Geithner, too.

At The Hill, Tony Romm reported:

Bernanke has taken heat as Wall Street’s profits have soared while unemployment has become stuck in double digits, and the wave of economic populism soaring through Washington in the wake of a stunning Democratic loss in the Massachusetts Senate races comes at a bad time for his confirmation.

If Bernanke is not confirmed, he will continue to sit on the Federal Reserve Board of Governors because each Fed Governor is appointed to a 14-year term.  Donald Kohn, the vice chairman, would serve as the interim chairman until Bernanke’s successor is nominated and confirmed.

The forces pushing for Bernanke’s confirmation have now resorted to scare tactics, warning that dire consequences will result from a failure to re-confirm Bernanke.  Senator “Countrywide Chris” Dodd warned that if Bernanke is not confirmed, the economy will go into a “tailspin”.  An Associated Press report, written by Jennine Aversa and carried by The Washington Post, warned that a failure to confirm Bernanke could raise the risk of a double-dip recession.  At The Atlantic, Megan McArdle exploited widespread concern over already-depleted retirement savings:

Spiking his nomination may have grim effects on 401(k)s throughout the land.

Not to be outdone, Judge Richard Posner issued this warning from his perch at The Atlantic:

If he is not confirmed, the independence of the Fed will take a terrible hit, because the next nominee will have to make outright promises to Congress of bank bashing, and of keeping interest rates way down regardless of inflation risk, in order to be confirmed.

I guess that these people forgot to mention that if Bernanke is not confirmed:

A plague of locusts shall be visited upon us,

The earth will be struck by a Texas-sized asteroid,

An incurable venereal disease will be spread via toilet seats,

The Internet will vanish, and   . . .

Osama bin Laden will become the next Justice of the United States Supreme Court.

At the Think Progress website, Matthew Yglesias pondered the issue:

What happens if Ben Bernanke isn’t reconfirmed?  Well, some folks seem to think it will send markets into a tailspin.  But it’s worth emphasizing that in literal terms almost nothing will happen.

Beyond that, as Sudeep Reddy and Damian Paletta explained in The Wall Street Journal:

The Federal Open Market Committee — which consists of the presidentially appointed Fed governors in Washington and the presidents of the regional Fed banks — meets Jan. 26-27 and traditionally elects a chairman and vice chairman at its first meeting of the year.  The committee, which makes monetary policy decisions, is set to elect Mr. Bernanke as its chairman at that meeting, a move that doesn’t require approval of the White House or the Senate.

Min Zeng of The Wall Street Journal filled us in as to what else we can expect from the FOMC this week:

Next week, the two-day FOMC meeting will end Wednesday afternoon with a statement on an interest-rate decision and policymakers’ latest outlook on the economy and inflation.

The FOMC is widely expected by market participants to keep its main policy rate — the fed-funds target rate — at ultra-low levels near zero as recent data haven’t demonstrated a persistent and strong economic recovery, with a jobless rate still hovering around the highest level in more than two decades.

Fed policymakers are also likely to stick to their plan to end the $1.25 trillion mortgage-backed securities purchases program at the end of March.  The central bank should also reiterate its plan to let some emergency lending programs expire Feb. 1.

The Fed could soon hike the rate it charges on emergency loans, known as the discount rate, but that would largely be symbolic now that banks have been borrowing less and less from it as financial markets stabilized.

Meanwhile, the battle against the Bernanke confirmation continues.  Mike Shedlock (a/k/a Mish) has urged his readers to contact the “undecided” Senators and voice opposition to Bernanke.  Mish has also provided the names and contact information for those Senators, as well as the names of those Senators who are currently on record as either supporting or opposing Bernanke.

I’d like to see Bernanke lose, regardless of the consequences.  The rationale for this opinion was superbly articulated by Senator Jim Bunning during the confirmation hearing on December 3.  If you’re not familiar with it — give it a read.  Here is Senator Bunning’s conclusion to those remarks, delivered directly to Bernanke:

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure.  You stated time and again during the housing bubble that there was no bubble.  After the bubble burst, you repeatedly claimed the fallout would be small.  And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for.  Where I come from we punish failure, not reward it.  That is certainly the way it was when I played baseball, and the way it is all across America.  Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case.  I will do everything I can to stop your nomination and drag out the process as long as possible.  We must put an end to your and the Fed’s failures, and there is no better time than now.

Amen.



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