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Congressional Sleaze In The Spotlight

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Last February, I wrote a piece entitled, “License To Steal”, concerning a certain legal loophole which allows members of Congress to trade stocks using “insider information”:

On January 26, 2009, Congressman Brian Baird introduced H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act).  The bill was intended to resolve the situation concerning one of the more sleazy “perks” of serving in Congress.  As it presently stands, the law prohibiting “insider trading” (e.g. 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.  In that scenario, Ms. Stewart’s sale of the ImClone stock would have been entirely legal.  That’s because the laws which apply to you and I do not apply to those in Congress.  Needless to say, within six months of its introduction, H.R.682 was referred to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties where it died of neglect.  Since that time, there have been no further efforts to propose similar legislation.

At a time when the public is finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions, more attention is being focused on how the “real money” is made in Congress.  A new book by Peter Schweizer – Throw Them All Out – deals with this very subject.  The book’s subtitle is reminiscent of the point I tried to make in my February posting:  “How politicians and their friends get rich off insider stock tips, land deals and cronyism that would send the rest of us to prison”.

Peter J. Boyer wrote an article for Newsweek, explaining how Peter Schweizer came about writing this book.  Schweizer is the William J. Casey research fellow at the Hoover Institution and as Boyer pointed out, Schweizer is considered by liberal critics as a “right wing hit man”.  It’s nice to see someone from the right provide us with an important treatise on crony capitalism.  The book exposes insider trading by both Democrats and Republicans – hell-bent on profiteering from the laws they enact.  Boyer’s essay provided us with some examples of the sleazy trades made by Congress-cretins, as described in Throw Them All Out.  Here are a few examples:

Indeed, Schweizer reports that, during the debate over Obama’s health-care reform package, John Boehner, then the House minority leader, was investing “tens of thousands of dollars” in health-insurance-company stocks, which made sizable gains when the proposed public option in the reform deal was killed.

*   *   *

One of the more dramatic episodes in the book recounts the trading activity of Republican Rep. Spencer Bachus, of Alabama, who, as the ranking member of the House Financial Services Committee, was privy to sensitive high-level meetings during the 2008 financial crisis and proceeded to make a series of profitable stock-option trades.

Bachus was known in the House as a guy who liked to play the market, and in fact he was pretty good at it; one year, he reported a capital gain in excess of $150,000 from his trading activities. More striking is that Bachus boldly carried forth his trading in the teeth of the impending financial collapse, the nightmarish dimensions of which he had learned about first-hand in confidential briefings from Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke.  On Sept. 19, 2008, after attending two such briefings, Bachus bought options in an index fund (ProShares UltraShort QQQ) that effectively amounted to a bet that the market would fall.  That is indeed what happened, and, on Sept. 23, Bachus sold his “short” options, purchased for $7,846, for more than $13,000—nearly doubling his investment in four days.

Around the time Congress and the Bush administration worked out a TARP bailout, Bachus made another options buy and again nearly doubled his money.

*   *   *

After the first briefing from Bernanke and Paulson, brokers for Democratic Congressman Jim Moran, of Virginia, and his wife sold their shares in 90 companies, dodging the losses that others who stayed in the market would soon face. Republican Rep. Shelley Capito, of West Virginia, sold between $100,000 and $250,000 of Citigroup stock the day after the first meeting, recording capital gains on Citigroup transactions in that rocky period.

Peter Schweizer’s analysis of the bipartisan culture of corruption on Capitol Hill reinforces one of my favorite criticisms of American government:  Our Sham Two-Party System.  The Republi-Cratic Corporatist Party owes its allegiance to no population, no principle, no cause – other than pocketing as much money as possible.  Just as there have been some recent “pushback” efforts by outraged citizens, Schweizer is now advocating a “Throw Them All Out” campaign.  This could have a potentially significant impact on Congress, because the term of office in the House of Representatives lasts for only two years.  Consider Schweizer’s thought at the close of the Newsweek piece:

“I was troubled,” he says, “by the fact that the political elite gets to play by a different set of rules than the rest of us.  In the process of researching this book, I came to the conclusion that political party and political philosophy matter a lot less than we think.  Washington is a company town, and politics is a business. People wonder why we don’t get more change in Washington, and the reason is that the permanent political class is very comfortable.  Business is good.”

I concluded my February 28 posting with this point:

“Inside information” empowers the party in possession of that knowledge with something known as “information asymmetry”, allowing that person to take advantage of (or steal from) the less-informed person on the other side of the trade.  Because membership in Congress includes a license to steal, can we ever expect those same individuals to surrender those licenses?  Well, if they were honest  .   .   .

A successful “Throw Them All Out” campaign would obviate the necessity of attempting to convince this Congress to pass the “Stop Trading on Congressional Knowledge Act” (STOCK Act).  If the next Congress knows that its political survival is depending on its passage of the STOCK Act, we might see it become law.


 

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Widespread Disappointment With Financial Reform

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Exactly one year ago, I wrote a piece entitled, “Financial Reform Bill Exposed As Hoax” wherein I expressed my outrage that the financial reform effort had become a charade.  The final product resulting from all of the grandstanding and backroom deals – the Dodd–Frank bill – had become nothing more than a hoax on the American public.  My essay included the reactions of five commentators, who were similarly dismayed.  I concluded the posting with this remark:

The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective.  Once this 2,000-page farce is signed into law, watch for the reactions.  It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.

During the year since that posting, I felt a bit less misanthropic each time someone spoke out, wrote an article or made a presentation demonstrating that our government’s “financial reform” effort was nothing more than political theater.  Last July, Rich Miller of Bloomberg News reported that according to a Bloomberg National Poll, almost eighty percent of those surveyed expressed “just a little or no confidence” that the financial reform bill would make their financial assets more secure.  Forty-seven percent believed that the bill would do more to protect the financial industry than consumers.  The American public is not as dumb as most people claim!

This past week brought us three great perspectives on the worthlessness of our government’s financial reform facade.  I was surprised that the most impressive presentation came from a Fed-head!   Thomas M. Hoenig, President and CEO of the Kansas City Federal Reserve Bank, gave a speech at New York University’s Stern School of Business, concerning the future of “systemically important financial institutions” or “SIFIs” and the Dodd-Frank Act.  (Bill Black prefers to call them “systemically dangerous institutions” or “SDIs”.)   After a great discussion of the threat these entities pose to our financial system and the moral hazard resulting from the taxpayer-financed “safety net”, which allows creditors of the SIFIs to avoid accountability for risks taken, Tom Hoenig focused on Dodd-Frank:

Following this financial crisis, Congress and the administration turned to the work of repair and reform.  Once again, the American public got the standard remedies – more and increasingly complex regulation and supervision.  The Dodd-Frank reforms have all been introduced before, but financial markets skirted them.  Supervisory authority existed, but it was used lightly because of political pressure and the misperceptions that free markets, with generous public support, could self-regulate.

Dodd-Frank adds new layers of these same tools, but it fails to employ one remedy used in the past to assure a more stable financial system – simplification of our financial structure through Glass-Steagall-type boundaries.  To this end, there are two principles that should guide our efforts to restore such boundaries.  First, institutions that have access to the safety net should be restricted to certain core activities that the safety net was intended to protect – making loans and taking deposits – and related activities consistent with the presence of the safety net.

Second, the shadow banking system should be reformed in its use of money market funds and short-term repurchase agreements – the repo market.  This step will better assure that the safety net is not ultimately called upon to bail them out in crisis.

Another engaging perspective on financial reform efforts came from Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, which conducted televised hearings concerning the causes of the financial crisis and issued its final report in January.  On June 27, Angelides wrote an article for The Washington Post wherein he discussed what caused the financial crisis, the current efforts to “revise the historical narrative” of what led to the economic catastrophe, as well as the efforts to undermine, subvert and repeal the meager reforms Dodd-Frank authorized.  Angelides didn’t pull any punches when he upbraided Congressional Republicans for conduct which the Democrats have been too timid (or complicit) to criticize:

If you are Rep. Paul Ryan, you ignore the fact that our federal budget deficit has ballooned more than $10 trillion annually since the financial collapse.  You disregard the reality that two-thirds of the deficit increase is directly attributable to the economic downturn and bipartisan fiscal measures adopted to bolster the economy.  Instead of focusing on the real cause of the deficit, you conflate today’s budgetary disaster with the long-term challenges of Medicare so you can shred the social safety net.

*   *   *

If you are most congressional Republicans, you turn a blind eye to the sad history of widespread lending abuses that savaged communities across the country and pledge to block the appointment of anyone to head the new Consumer Financial Protection Bureau unless its authority is weakened.  You ignore the evidence of pervasive excess that wrecked our financial markets and attempt to cut funding for the regulators charged with curbing it.  Across the board, you refuse to acknowledge what went wrong and then try to stop efforts to make it right.

David Sirota wrote a great essay for Salon entitled, “America’s unique hatred of finance reform”.  Sirota illustrated how bipartisan efforts to undermine financial reform are turning America into – what The Daily Show with Jon Stewart called – “Sweden’s Mexico”:

On one hand, Europe’s politics of finance seem to be gradually moving in the direction of Sweden — that is, in the direction of growth and stability.  As the Washington Post reports, that Scandinavian country — the very kind American Tea Party types write off with “socialist” epithets — has the kind of economy the U.S. can now “only dream of:  growing rapidly, creating jobs and gaining a competitive edge (as) the banks are lending, the housing market booming (and) the budget is balanced.”  It has accomplished this in part by seriously regulating its banking sector after it collapsed in the 1990s.

*   *   *

After passing an embarrassingly weak financial “reform” bill that primarily cemented the status quo, the U.S. government is now delaying even the most minimal new rules that were included in the legislation.  At the same time, Senate Republicans are touting their plans to defund any new financial regulatory agencies; the chairman of the House Financial Services Committee has declared that “Washington and the regulators are there to serve the banks” — not the other way around; and the Obama administration is now trying to force potential economic partners to accept financial deregulation as a consequence of bilateral trade deals.

Meanwhile, the presidential campaign already looks like a contest between two factions of the same financial elite — a dynamic that threatens to make the 2012 extravaganza a contest to see which party can more aggressively suck up to the banks.

Any qualified, Independent political candidate, who is willing to step up for the American middle class and set out a plan of action to fight the financial industry as well as its lobbyists, would be well-positioned for a 2012 election victory.


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Libertarian Accuses Socialist Of Selling Out

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Quite a bit has been written about the Federal Reserve’s December 1 release of documents revealing the details of its bailouts to those business entities benefiting from the Fed’s eleven emergency lending programs initiated as a result of the 2008 financial crisis.  When you consider the fact that those documents concern over 21,000 transactions, all the attention should come as no surprise.

The two individuals who seem to have benefited the most from this event are Congressman Ron Paul and Senator Bernie Sanders.  The two became unlikely allies in their battle to include an “Audit the Fed” provision in the financial reform bill.  Ron Paul, the Libertarian Republican from Texas (considered the “Godfather of the Tea Party movement”) authored the book, End The Fed.  Congressman Paul sponsored the original “Audit the Fed” proposal in the House of Representatives – H.R. 1207.  Bernie Sanders, who describes himself as a democratic socialist, sponsored the watered-down “Audit the Fed” bill — S. 3217 — which replaced Congressman Paul’s version in what finally became known as the Restoring Financial Stability Act of 2010.

A recent article in The Wall Street Journal by Maya Jackson Randall recalled the backstory of how the Sanders proposal was incorporated into the financial reform bill:

Under pressure from the Obama administration, Mr. Sanders, who has described himself as a democratic socialist, made last-minute changes to his proposal; it doesn’t require audits of monetary policy, and it doesn’t require disclosure of the names of banks that use the discount window.

An unhappy Paul, a long-time Fed critic, said Mr. Sanders had “sold out.”

Who would have ever thought that a Libertarian Republican would, one day, accuse a democratic socialist of “selling out” on a bill to regulate the financial industry?

With the Republicans’ becoming the majority party in the House, the numerous committee chairmanships will now pass from the Democrats to the GOP for the 112th Congress.  Although quite a bit of concern has been expressed by liberal pundits that the banking lobby will now have unfettered control over Congress, many banking industry lobbyists are sweating over the fact that Ron Paul will be the likely Chairman of the House Financial Services Committee.  That fear and the efforts by ranking Republicans to assuage that dread were discussed in a recent article by Phil Mattingly and Robert Schmidt for Bloomberg BusinessWeek:

Five GOP leadership aides, speaking anonymously because a decision isn’t final, say incoming House Speaker John Boehner has discussed ways to prevent Paul from becoming chairman or to keep him on a tight leash if he does.  If Boehner, who will help determine who gets to chair subcommittees as early as Dec. 8, rejects Paul, he may have to contend with thousands of grassroots supporters and dozens of younger lawmakers who see Paul as a hero.  Boehner, through a spokesman, declined to comment.  “A lot of the older members probably think Ron is a little bit out of step,” says Representative Bill Posey, a Florida Republican and unabashed Paul fan.  “The depth of his knowledge on monetary policy, his understanding of it all, is second to none.”

Nevertheless, Ron Paul accused a socialist of  “selling out” by capitulating to the pressure exerted by the banking lobby through its puppet – the Obama administration.  His use of such a reproach demonstrates that Congressman Paul cannot be trusted to make certain that the House Financial Services Committee serves as a tool of the banking lobby.  Beyond that, the extreme, partisan elements of the Republican Party cannot depend on Congressman Paul to “follow the script” written to portray Obama as the socialist.

As the Bloomberg BusinessWeek article pointed out, any efforts to deprive Congressman Paul of this chairmanship will guarantee some serious blowback from the Tea Party ranks as well as the other supporters of Ron Paul.  John Boehner is in a serious double-bind here.  If he allows Paul to assume the chairmanship, Boehner’s anticipated efforts to keep Paul “on a tight leash” should provide some good entertainment.


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Moment Of Truth

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May 24, 2010

Now that the Senate has passed its own version of a financial reform bill (S. 3217), the legislation must be reconciled with the House version before the bill can be signed into law by the President.  At this point, there is one big problem:  the President doesn’t like the bill because it actually has more teeth than an inbred, moonshine-drinking, meth head.  One especially objectionable provision in the eyes of the Administration and its kindred of the kleptocracy, Ben Bernanke, concerns the restrictions on derivatives trading introduced by Senator Blanche Lincoln.

Eric Lichtblau and Edward Wyatt of The New York Times wrote an article describing the current game plan of financial industry lobbyists to remove those few teeth from the financial reform bill to make sure that what the President signs is all gums:

The biggest flash point for many Wall Street firms is the tough restrictions on the trading of derivatives imposed in the Senate bill approved Thursday night.  Derivatives are securities whose value is based on the price of other assets like corn, soybeans or company stock.

The financial industry was confident that a provision that would force banks to spin off their derivatives businesses would be stripped out, but in the final rush to pass the bill, that did not happen.

The opposition comes not just from the financial industry.  The chairman of the Federal Reserve and other senior banking regulators opposed the provision, and top Obama administration officials have said they would continue to push for it to be removed.

And Wall Street lobbyists are mounting an 11th-hour effort to remove it when House and Senate conferees begin meeting, perhaps this week, to reconcile their two bills.  Lobbyists say they are already considering the possible makeup of the conference panel to focus on office visits and potential fund-raising.

The article discussed an analysis provided to The New York Times by Citizens for Responsibility and Ethics in Washington, a nonpartisan group:

The group’s analysis found that the 14 freshmen who serve on the House Financial Services Committee raised 56 percent more in campaign contributions than other freshmen.  And most freshmen on the panel, the analysis found, are now in competitive re-election fights.

“It’s definitely not accidental,” said Melanie Sloan, the director of the ethics group. “It appears that Congressional leaders are deliberately placing vulnerable freshmen on the Financial Services Committee to increase their ability to raise money.”

Take Representative John Adler, Democrat of New Jersey.  Mr. Adler is a freshman in Congress with no real national profile, yet he has managed to raise more than $2 million for his re-election, more than any other freshman, the analysis found.

That is due in large part, political analysts say, to his spot on the Financial Services Committee.

An opinion piece from the May 24 Wall Street Journal provided an equally-sobering outlook on this legislation:

The unifying theme of the Senate bill that passed last week and the House bill of last year is to hand even more discretion and authority to the same regulators who failed to foresee and in many cases created the last crisis.  The Democrats who wrote the bill are selling it as new discipline for Wall Street, but Wall Street knows better.  The biggest banks support the bill, and the parts they don’t like they will lobby furiously to change or water down.

Big Finance will more than hold its own with Big Government, as it always does, while politicians will have more power to exact even more campaign tribute.  The losers are the overall economy, as financial costs rise, and taxpayers when the next bailout arrives.

At The Huffington Post, Mary Bottari discussed the backstory on Blanche Lincoln’s derivatives reform proposal and the opposition it faces from both lobbyists and the administration:

The Obama Administration Wants to Kill the Best Provisions

Lincoln’s proposal has come under fire from all fronts.  Big bank lobbyists went ballistic of course and they will admit that getting her language pulled from the bill is still their top priority.  Behind the scenes, it is also the top priority of the administration and the Federal Reserve.  Believe it or not the administration is fighting to preserve its ability to bailout any financial institutions that gets in trouble, not just commercial banks.  Yep that is right.  Instead of clamping down Wall Street gambling, the administration wants to keep reckless institutions on the teat of the Federal Reserve.

The battle lines are drawn.  The biggest threat to the Lincoln language now is the Obama administration and the Federal Reserve.  There will no doubt be a move to strip out the strong Lincoln language in conference committee where the House and Senate versions of the bank reform bill now go to be aligned.

Meanwhile, President Obama continues to pose as the champion of the taxpayers, asserting his bragging rights for the Senate’s passage of the bill.  Jim Kuhnhenn of MSNBC made note of Obama’s remark, which exhibited the Executive Spin:

The financial industry, Obama said, had tried to stop the new regulations “with hordes of lobbyists and millions of dollars in ads.”

In fact, the lobbyists have just begun to fight and Obama is right in their corner, along with Ben Bernanke.



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Lacking Reform

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January 4, 2010

David Reilly of Bloomberg News did us all a favor by reading through the entire, 1,270-page financial reform bill that was recently passed by the House of Representatives.  The Wall Street Reform and Consumer Protection Act (HR 4173) was described by Reilly this way:

The baby of Financial Services Committee Chairman Barney Frank, the House bill is meant to address everything from too-big-to-fail banks to asleep-at-the-switch credit-ratings companies to the protection of consumers from greedy lenders.

After reading the bill, David Reilly wrote a commentary piece for Bloomberg entitled:  “Bankers Get $4 Trillion Gift from Barney Frank”.  Reilly seemed surprised that banks opposed this legislation, emphasizing that “they should cheer for its passage by the full Congress in the New Year” because of the bill’s huge giveaways to the banking industry and Wall Street.  Here are some of Reilly’s observations on what this bill provides:

—  For all its heft, the bill doesn’t once mention the words “too-big-to-fail,” the main issue confronting the financial system.  Admitting you have a problem, as any 12-stepper knows, is the crucial first step toward recovery.

— Instead, it supports the biggest banks.  It authorizes Federal Reserve banks to provide as much as $4 trillion in emergency funding the next time Wall Street crashes.  So much for “no-more-bailouts” talk.  That is more than twice what the Fed pumped into markets this time around.  The size of the fund makes the bribes in the Senate’s health-care bill look minuscule.

— Oh, hold on, the Federal Reserve and Treasury Secretary can’t authorize these funds unless “there is at least a 99 percent likelihood that all funds and interest will be paid back.”   Too bad the same models used to foresee the housing meltdown probably will be used to predict this likelihood as well.

More Bailouts

— The bill also allows the government, in a crisis, to back financial firms’ debts.  Bondholders can sleep easy  — there are more bailouts to come.

— The legislation does create a council of regulators to spot risks to the financial system and big financial firms. Unfortunately this group is made up of folks who missed the problems that led to the current crisis.

— Don’t worry, this time regulators will have better tools.  Six months after being created, the council will report to Congress on “whether setting up an electronic database” would be a help. Maybe they’ll even get to use that Internet thingy.

— This group, among its many powers, can restrict the ability of a financial firm to trade for its own account.  Perhaps this section should be entitled, “Yes, Goldman Sachs Group Inc., we’re looking at you.”

My favorite passage from Reilly’s essay concerned the proposal for a Consumer Financial Protection Agency:

— The bill isn’t all bad, though.  It creates a new Consumer Financial Protection Agency, the brainchild of Elizabeth Warren, currently head of a panel overseeing TARP.  And the first director gets the cool job of designing a seal for the new agency.  My suggestion:  Warren riding a fiery chariot while hurling lightning bolts at Federal Reserve Chairman Ben Bernanke.

The cover story for the December 30 edition of Business Week explained how this bill became so badly compromised.  Alison Vekshin and Dawn Kopecki wrote the piece, explaining how the New Democrat Coalition, which “has 68 fiscally conservative, pro-business members who fill 15 of the party’s 42 seats on the House Financial Services Committee” reshaped this bill.  The New Democrats fought off proposed changes to derivatives trading and included an amendment to the Consumer Financial Protection Agency legislation giving federal regulators more discretion to override state consumer protection laws than what was initially proposed.  Beyond that, “non-financial” companies such as real estate agencies and automobile dealerships will not be subject to the authority of the new agency.  The proposed requirement for banks to offer “plain-vanilla” credit-card and mortgage contracts was also abandoned.

One of my pet peeves involves Democrats’ claiming to be “centrists” or “moderates” simply because they enjoy taking money from lobbyists.  Too many people are left with the impression that a centrist is someone who lacks a moral compass.  The Business Week story provided some insight about how the New Democrat Coalition gets … uh … “moderated”:

Since the start of the 2008 election cycle, the financial industry has donated $24.9 million to members of the New Democrats, some 14% of the total funds the lawmakers have collected, according to the Center for Responsive Politics.  Representative Melissa Bean of Illinois, who has led the Coalition’s efforts on regulatory reform, was the top beneficiary, with donations of $1.4 million.

As the financial reform bill is being considered by the Senate, the U.S. Chamber of Commerce has stepped up its battle against the creation of a Consumer Financial Protection Agency.  The Business Week article concluded with one lawmaker’s perspective:

“My greatest fear for the last year has been an economic collapse,” says Representative Brad Miller (D-N.C), who sits on Frank’s House Financial Services Committee.  “My second greatest fear was that the economy would stabilize and the financial industry would have the clout to defeat the fundamental reforms that our nation desperately needs.  My greatest fear seems less likely … but my second greatest fear seems more likely every day.”

The dysfunction that preserves this unhealthy status quo was best summed up by Chris Whalen of Institutional Risk Analytics:

The big banks pay the big money in Washington, the members of Congress pass new laws to enable the theft from the public purse, and the servile Fed prints money to keep the game going for another day.

As long as Congress is going through the motions of passing “reform” legislation, they should do us all a favor and take on the subject of lobbying reform.  Of course, the chances of that ever happening are slim to none.



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The Federal Reserve Is On The Ropes

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November 23, 2009

Last February, Republican Congressman Ron Paul introduced HR 1207, the Federal Reserve Transparency Act of 2009, by which the Government Accountability Office would be granted authority to audit the Federal Reserve and present a report to Congress by the end of 2010.  On May 21, Congressman Alan Grayson, a Democrat from Florida, wrote to his Democratic colleagues in the House, asking them to co-sponsor the bill. The bill eventually gained over 300 co-sponsors.  By October 30, Congressman Mel Watt, a Democrat from North Carolina, basically “gutted” the bill according to Congressman Paul, in an interview with Bob Ivry of Bloomberg News.  Watt subsequently proposed a competing measure, which was aided by the circulation of a letter by eight academics, who were described as a “political cross-section of prominent economists”.  Ryan Grim of The Huffington Post disclosed on November 18 that the purportedly diverse, independent economists were actually paid stooges of the Federal Reserve:

But far from a broad cross-section, the “prominent economists” lobbying on behalf of the Watt bill are in fact deeply involved with the Federal Reserve.  Seven of the eight are either currently on the Fed’s payroll or have been in the past.

After HR 1207 had been undermined by Watt, an amendment calling for an audit of the Federal Reserve was added as amendment 69B to HR3996, the Financial Stability Improvement Act of 2009.  The House Finance Committee voted to approve that amendment on November 19.  This event was not only a big win for Congressmen Paul and Grayson — it also gave The Huffington Post’s Ryan Grim the opportunity for a “victory lap”:

In an unprecedented defeat for the Federal Reserve, an amendment to audit the multi-trillion dollar institution was approved by the House Finance Committee with an overwhelming and bipartisan 43-26 vote on Thursday afternoon despite harried last-minute lobbying from top Fed officials and the surprise opposition of Chairman Barney Frank (D-Mass.), who had previously been a supporter.

*   *   *

“Today was Waterloo for Fed secrecy,” a victorious Grayson said afterwards.

Scott Lanman of Bloomberg News pointed out that this battle was just one of many legislative onslaughts against the Fed:

The Fed’s powers and rate-setting independence are under threat on several fronts in Congress.  Separately yesterday, the Senate Banking Committee began debate on legislation that would strip the Fed of bank-supervision powers and give lawmakers greater say in naming the officials who vote on monetary policy.

*   *   *

Paul and other lawmakers have accused the Fed of lax oversight of banks and failing to avert the financial crisis.

Federal Reserve Chairman Ben Bernanke is feeling even more heat because the Senate Banking Committee will begin hearings concerning Bernanke’s reappointment as Fed Chair.  The hearings will begin on December 3, the same day as President Obama’s jobs summit.  Senate Banking Committee chair, Chris Dodd, revealed to videoblogger Mike Stark that Bernanke’s reappointment is “not necessarily” a foregone conclusion.

Let’s face it:  the public has finally caught on to the fact that the mission of the Fed is to protect the banking industry and if that is to be accomplished at the public’s expense — then so be it.  Back at The Huffington Post, Tom Raum explained how this heightened awareness of the Fed’s activities has resulted in some Congressional pushback:

Many lawmakers question whether the Fed’s money machine has mainly benefited financial markets and not the broader economy.  Lawmakers are also peeved that the central bank acted without congressional involvement when it brokered the 2008 sale of failed investment bank Bear Stearns and engineered the rescue of insurer American International Group.

Tom Raum echoed concern about the how the current increase in “anti-Fed” sentiment might affect the Bernanke confirmation hearings:

Should Bernanke be worried?

“Not only should be worried, he’s clearly ratcheted up his game in terms of his communications with Congress,” said Norman Ornstein, a senior fellow at the American Enterprise Institute.

Ornstein said the Fed bashing this time is different from before, with “a broader base of support.  And it’s coming from people who in the past would not have hit the Fed.  There’s a lot of populist anger out there — on the left, in the center and on the right.  And politicians are responsive to that.”

Populist anger with the Fed will certainly change the way history will regard former Fed chairman, Alan Greenspan.  Fred Sheehan’s new book:  Panderer to Power:  The True Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, could not have been released at a better time.  At his blog, Sheehan responded to five questions about Greenspan, providing us with a taste of what to expect in the new book.  Here is one of the interesting points, demonstrating how Greenspan helped create our current crisis:

The American economy’s recovery from the early 1990s was financial.  This was a first.  The recovery was a product of banks borrowing, leveraging and lending to hedge funds.  The banks were also creating and selling complicated and very profitable derivative products.  Greenspan needed the banks to grow until they became too-big-to-fail.  It was evident the “real” economy — businesses that make tires and sell shoes — no longer drove the economy.  Thus, finance was given every advantage to expand, no matter how badly it performed.  Financial firms that should have died were revived with large injections of money pumped by the Federal Reserve into the banking system.

It’s great to see Congress step up to the task of exposing the antics of the Federal Reserve.  Let’s just hope these efforts meet with continued success.



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Preparing For The Worst

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November 19, 2009

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

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

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

*   *   *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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Call Him The Dimon Dog

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November 16, 2009

It seems as though once an individual rises to a significant level of influence and authority, that person becomes “too big for straight talk”.  We’ve seen it happen with politicians, prominent business people and others caught-up in the “leadership” racket.  Influential people are well aware of the unforeseen consequences resulting from a candid, direct response to a simple question.  Mindful of those hazards, a rhetorical technique employing equivocation, qualification and obfuscation is cultivated in order to avoid responsibility for what could eventually become exposed as a brain fart.

Since last year’s financial crisis began, we have heard plenty of debate over the concept of “too big to fail” —  the idea that a bank is so large and interconnected with other important financial institutions that its failure could pose a threat to the entire financial system.  Recent efforts at financial reform have targeted the “too big to fail” (TBTF) concept, with differing approaches toward downsizing or breaking up those institutions with “systemic risk” potential.  Treasury Secretary “Turbo” Tim Geithner was the first to use doublespeak as a weapon against those attempting to eliminate TBTF status.  When he testified before the House Financial Services Committee on September 23 to explain his planned financial reform agenda, Geithner attempted to create the illusion that his plan would resolve the “too big to fail” problem:

First, we cannot allow firms to reap the benefits of explicit or implicit government subsidies without very strong government oversight.  We must substantially reduce the moral hazard created by the perception that these subsidies exist; address their corrosive effects on market discipline; and minimize their encouragement of risk-taking.

So, in other words … the government subsidies to those institutions will continue, but only if the recipients get “very strong government oversight”.  In his next sentence, Geithner expressed his belief that the moral hazard was created “by the perception that these subsidies exist” rather than the FACT that they exist.  At a subsequent House Financial Services Committee hearing on October 29, Geithner again tried to trick his audience into believing that the administration’s latest reform plan was opposed to TBTF status.  As Jim Kuhnhenn and Anne Flaherty reported for The Huffington Post, representatives from both sides of the isle saw right through Geithner’s smokescreen:

Others argue that by singling out financial firms important to the economy, the government could inevitably set itself up to bail them out, and that even dismantling rather than rescuing them would take taxpayer money.

“Apparently, the ‘too big to fail’ model is too hard to kill,” quipped Republican Rep. Ed Royce of California.

Rep. Brad Sherman, D-Calif., called the bill “TARP on steroids,” referring to the government’s $700 billion Wall Street rescue fund.

On Friday the 13th, Jamie Dimon, the CEO of JP Morgan Chase, stole the spotlight in this debate with an opinion piece published by The Washington Post.  Dimon pretended to be opposed to the TBTF concept and quoted from his fellow double-talker, Turbo Tim.  Dimon then made this assertion:  “The term ‘too big to fail’ must be excised from our vocabulary.”  He followed with the qualification that ending TBTF “does not mean that we must somehow cap the size of financial-services firms.”  Dimon proceeded to argue against the creation of “artificial limits” on the size of financial institutions.  In other words:  Dimon would like to see Congress enact a law that could never be applied because it would contain no metric for its own applicability.

Criticism of Dimon’s Washington Post piece was immediate and widespread, especially considering the fact that his own JP Morgan is a TBTF All Star.  David Weidner explained it for MarketWatch this way:

In other words, Dimon favors a regulatory system for unwinding failing institutions — he believes no bank should be too big to fail — but doesn’t seem to like the global effort, endorsed by the G-20, to encourage smaller, less-connected institutions.  He wants to let big institutions be big.

The best criticism of Dimon’s article came from my blogging buddy, Adrienne Gonzalez, a/k/a  Jr Deputy Accountant.  She pointed out that the report for the first quarter of 2009 by the Office of the Currency Comptroller revealed that JP Morgan Chase holds 81 trillion dollars’ worth of derivatives contracts, putting it in first place on the OCC list of what she called “derivatives offenders”.  After quoting the passage in Dimon’s piece concerning the procedure for winding-down “a large financial institution”, Adrienne made this point:

Interesting and a great read but useless in practical application.  Does Dimon really believe this?  With $81 TRILLION in notional derivatives exposure, I don’t see how an FDIC for investment banks could possibly unwind such a tangled mess in an orderly fashion.  He’s joking, right?

For an interesting portrayal of The Dimon Dog, you might want to take a look at an article by Paul Barrett, entitled “I, Banker”.   It was actually a book review Barrett wrote for The New York Times concerning a biography of Dimon by Duff McDonald, entitled The Last Man Standing.  I haven’t read the book and after reading Barrett’s review, I have no intention of doing so — since Barrett made the book appear to be the work of a fawning sycophant in awe of Dimon.  In criticizing the book, Paul Barrett gave us some of his own useful insights about Dimon:

The Dimon of  “Last Man Standing” emerges as a brilliant but flawed winner, one whose long and psychologically tangled apprenticeship to another legendary money man, Sanford Weill, helped lay the groundwork for the crisis of 2008.  In recent days, Dimon’s conduct suggests he is someone who puts the interests of his company ahead of those of society at large, which will be surprising only to those who naively look to modern Wall Street for statesmanship.

*   *   *

JPMorgan under Dimon’s leadership allowed home buyers to borrow without having to prove their income.  The bank did business with sleazy mortgage brokers who would lend to anyone with a heartbeat.  These habits ended only in 2008, when it was too late.  McDonald lauds Dimon for cleverly unloading huge volumes of the toxic subprime mortgages JPMorgan originated.  But that’s like praising a corporate polluter for trucking his poisonous sludge into the next state.  It doesn’t solve the problem; it merely moves it elsewhere.

Paul Barrett’s book review gave us a useful perspective on The Dimon Dog’s support of the administration’s financial reform agenda:

McDonald notes that the C.E.O. publicly endorses certain financial regulatory changes proposed by the Obama administration.  But critics point out that lobbyists employed by “Dimon and his team are actually stonewalling derivatives reform in order to protect the outsize margins the business generates” for JPMorgan.  The derivatives in question include “credit default swaps,” transactions akin to insurance policies that lenders can buy to buffer against loans that go bad.  In the wrong hands, credit derivatives become a form of gambling that can lead to ruin.  They need to be checked, and Dimon’s self-interested resistance isn’t helping matters.

Dimon may be the best of his breed, but when it comes to public-spirited leaders, today’s Wall Street isn’t a promising recruiting ground.

Well said!



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Simon Johnson In The Spotlight

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October 12, 2009

An ever-increasing number of people are paying close attention to a gentleman named Simon Johnson.  Mr. Johnson, a former chief economist at the International Monetary Fund, now works at MIT as Professor of Entrepreneurship at the Sloan School of Management.  His Baseline Scenario website is focused on the financial and economic crises.  At the Washington Post website, he runs a blog with James Kwak called The Hearing.  Last spring, Johnson turned more than a few heads with his article from the May 2009 issue of The Atlantic, “The Quiet Coup”, in which he explained that what happened in America during last year’s financial crisis and what is currently happening with our economic predicament is “shockingly reminiscent” of events experienced during financial crises in emerging market nations (i.e. banana republics and proto-capitalist regimes).

On October 9, Joe Nocera of The New York Times began his column by asking Professor Johnson what he thought the Wall Street banks owed America after receiving trillions of dollars in bailouts.  Johnson’s response turned to Wednesday’s upcoming fight before the House Financial Services Committee concerning the financial reforms proposed by the Obama administration:

“They can’t pay what they owe!” he began angrily.  Then he paused, collected his thoughts and started over:  “Tim Geithner saved them on terms extremely favorable to the banks.  They should support all of his proposed reforms.”

Mr. Johnson continued, “What gets me is that the banks have continued to oppose consumer protection.  How can they be opposed to consumer protection as defined by a man who is the most favorable Treasury Secretary they have had in a generation?  If he has decided that this is what they need, what moral right do they have to oppose it?  It is unconscionable.”

This week’s battle over financial reform has been brewing for quite a while.  Back on May 31, Gretchen Morgenson and Dan Van Natta wrote a piece for The New York Times entitled, “In Crisis, Banks Dig In for Fight Against Rules”:

Hotly contested legislative wars are traditional fare in Washington, of course, and bills are often shaped by the push and pull of lobbyists — representing a cornucopia of special interests — working with politicians and government agencies.

What makes this fight different, say Wall Street critics and legislative leaders, is that financiers are aggressively seeking to fend off regulation of the very products and practices that directly contributed to the worst economic crisis since the Great Depression.  In contrast, after the savings-and-loan debacle of the 1980s, the clout of the financial lobby diminished significantly.

In case you might be looking for a handy scorecard to see which members of Congress are being “lobbied” by the financial industry and to what extent those palms are being greased, The Wall Street Journal was kind enough to provide us with an interactive chart.  Just slide the cursor next to the name of any member of the House Financial Services Committee and you will be able to see how much generosity that member received just during the first quarter of 2009 from an entity to be affected by this legislation.  The bars next to the committee members’ names are color-coded, with different colors used to identify specific sources, whose names are displayed as you pass over that section of the bar.  This thing is a wonderful invention.  I call it “The Graft Graph”.

On October 9, Simon Johnson appeared with Representative Marcy Kaptur (D – Ohio) on the PBS program, Bill Moyers Journal.  At one point during the interview, Professor Johnson expressed grave doubts about our government’s ability to implement financial reform:

And yet, the opportunity for real reform has already passed. And there is not going to be — not only is there not going to be change, but I’ll go further.  I’ll say it’s going to be worse, what comes out of this, in terms of the financial system, its power, and what it can get away with.

*  *   *

BILL MOYERS:  Why have we not had the reform that we all knew was being — was needed and being demanded a year ago?

SIMON JOHNSON:  I think the opportunity — the short term opportunity was missed.  There was an opportunity that the Obama Administration had.  President Obama campaigned on a message of change.  I voted for him.  I supported him.  And I believed in this message.  And I thought that the time for change, for the financial sector, was absolutely upon us.  This was abundantly apparent by the inauguration in January of this year.

SIMON JOHNSON:  And Rahm Emanuel, the President’s Chief of Staff has a saying.  He’s widely known for saying, ‘Never let a good crisis go to waste’.  Well, the crisis is over, Bill.  The crisis in the financial sector, not for people who own homes, but the crisis for the big banks is substantially over.  And it was completely wasted.  The Administration refused to break the power of the big banks, when they had the opportunity, earlier this year.  And the regulatory reforms they are now pursuing will turn out to be, in my opinion, and I do follow this day to day, you know.  These reforms will turn out to be essentially meaningless.

Sound familiar?  If you change the topic to healthcare reform, you end up with the same bottom line:  “These reforms will turn out to be essentially meaningless.”  The inevitable watering down of both legislative efforts can be blamed on weak, compromised leadership.  It’s one thing to make grand promises on the campaign trail — yet quite another to look a lobbyist in the eye and say:  “Thanks, but no thanks.”  Toward the end of the televised interview, Bill Moyers had this exchange with Representative Kaptur:

BILL MOYERS:   How do we get Congress back?  How do we get Congress to do what it’s supposed to do?  Oversight.  Real reform.  Challenge the powers that be.

MARCY KAPTUR:  We have to take the money out.  We have to get rid of the constant fundraising that happens inside the Congress.  Before political parties used to raise money; now individual members are raising money through the DCCC and the RCCC.  It is absolutely corrupt.

As we all know, our system of legalized graft goes beyond the halls of Congress.  During his Presidential campaign, Barack Obama received nearly $995,000 in contributions from the people at Goldman Sachs.  The gang at 85 Broad Street is obviously getting its money’s worth.



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Kill The Whales

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October 8, 2009

Those whales are back in the news again — this time due to calls for their slaughter.  In case you’re wondering what kind of person would advocate the killing of whales, I would like to identify two people who recently spoke out in favor of such action.  The first of these individuals is one of my favorite columnists at The New York Times, Gretchen Morgenson, winner of the Pulitzer Prize in 2002 for her “trenchant and incisive” coverage of Wall Street.  The second is the chair of the Federal Deposit Insurance Corporation, Sheila Bair.  Two women want to have whales killed?  Yes.  However, the “whales” in question are those infamous financial institutions considered “too big to fail”.  On October 3, Gretchen Morgenson wrote a piece for The New York Times, entitled:  “The Cost of Saving These Whales” in which she defined “to big to fail” institutions as “banks that are so big and interconnected that their very existence threatens the world”.   She discussed the problems caused by the continued existence of those whales with this explanation:

During the credit bust, our leaders embraced the too-big-to-fail policy, reluctantly bailing out large institutions to save the system from collapse, they said.  Yet even as the crisis has abated, these policy makers have shown little interest in cutting financial monsters down to size.  This is especially disturbing given that some institutions have grown even larger as a result of the mess.

It is perverse, of course, to reward big banks’ mistakes with bailouts financed by beleaguered taxpayers.  But the too-big-to-fail doctrine benefits the banks in other ways as well:  the implication that an institution will not be allowed to fall gives it significant cost advantages over smaller, perhaps more responsible competitors.

On October 4, Sheila Bair of the FDIC gave a speech before the International Institute of Finance at their annual meeting in Istanbul, Turkey.  At the outset, she pointed out that “the first task” in creating “a more resilient, transparent, and better-regulated financial system” would be to scrap the “too big to fail” doctrine.  She went on to explain how to go about killing those whales:

To do this we need a resolution regime that provides for the orderly wind-down of banking and other financial enterprises without imposing costs on the taxpayers.

The solution must involve a practical and effective mechanism for the orderly resolution of these institutions similar to that used for FDIC-insured banks.

This new regime would not permit taxpayer funds to be used to prop up a firm or its management.  Instead, senior management would be replaced, and losses would be borne by the stockholders and creditors.

On September 23, 2009 Treasury Secretary “Turbo” Tim Geithner testified before the House Financial Services Committee to explain his planned financial reform agenda.  Here’s what Turbo Tim had to say about the plan for dealing with the “too big to fail” problem:

First, we cannot allow firms to reap the benefits of explicit or implicit government subsidies without very strong government oversight.  We must substantially reduce the moral hazard created by the perception that these subsidies exist; address their corrosive effects on market discipline; and minimize their encouragement of risk-taking.

So, in other words … the government subsidies to these institutions will continue, but only if the recipients get “very strong government oversight”.  In his next sentence Geithner expressed his belief that the moral hazard was created “by the perception that these subsidies exist” rather than the FACT that they exist.  Geithner’s scheme of continued corporate welfare for the biggest financial institutions is consistent with what we learned about him from Jo Becker and Gretchen Morgenson in their New York Times article back on April 26.  That essay gave us some great insight about Turbo Tim’s blindness to moral hazard:

Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation’s economic stewards for a brainstorming session.  What emergency powers might the government want at its disposal to confront the crisis? he asked.

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.  Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes.

And more often than not, Mr. Geithner has been a leading architect of those bailouts, the activist at the head of the pack.  He was the federal regulator most willing to “push the envelope,” said H. Rodgin Cohen, a prominent Wall Street lawyer who spoke frequently with Mr. Geithner.

Geithner’s objective of putting the prosperity of the banks ahead of any concern for the taxpayers was again demonstrated in this AFP report from October 6:

On proposed changes to the financial system, Geithner said it was “legitimate” for banks to be influential and admitted that reform could “pose risks to financial innovation.”

Nevertheless, he stressed that “the most important issue is that if stability (of financial institutions) is not guaranteed, it will become harder to raise capital.”

On October 6, Newsweek published an interview conducted by Nancy Cook with William Black, a former federal regulator during the Savings & Loan crisis and a professor of economics and law at the University of Missouri – Kansas City.  The interview included a discussion of the government’s response to the financial crisis.  One remark made by Mr. Black reinforced my opinion about Turbo Tim:

“Some of the things Bernanke did were very bad, but he is in sharp contrast to Geithner who has been wrong about everything in his career.  When Geithner was once answering a question in response to Ron Paul, he said, ‘I’ve never been a regulator.’  He was then the President of the New York Federal Reserve, and he purports that he was never a regulator?  That is a demonstration of what is wrong with the Federal Reserve banks if the head of the unit doesn’t think he’s a regulator.  He’s a disaster.”

It should come as no surprise that Richard Carnell, a Professor at Fordham Law School and former Assistant Treasury Secretary for President Clinton, would have this to say about Geithner’s financial reform agenda, when asked for his comments by Kim Thai of Fortune:

The plan includes useful reforms.  But it’s also naive, timid, misguided, politically inept, and intellectually dishonest.

It places naive faith in regulation.  Yet regulation failed disastrously over the past decade.  Bank regulators had ample powers to keep banks safe but did too little, too late.  They let banks use $12-13 in borrowed money for every $1 in shareholders’ money.  The administration’s response?  Give regulators more powers.

[The plan] preserves a preposterous tangle of overlapping regulators.  And it didn’t arrive until June, seven months after the election.  By then the crisis had faded and special interest politics had come roaring back.

It entrenches bailouts for large financial institutions.  Voters know that’s rotten policy.  It makes firms like General Electric divest their banks.  That serves no purpose.  It’s like trying to ward off the Mexican Mafia by fortifying the Canadian border.  Small wonder voters remain skeptical.

It appears as though Turbo Tim is not up to the job of killing those whales.  Perhaps the President should find someone who is.



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