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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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An Early Favorite For 2010

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February 11, 2010

It appears as though the runner-up for TheCenterLane.com’s 2009 Jackass of the Year Award is well on his way to winning the title for 2010.  After reading an op-ed piece by Ross Douthat of The New York Times, I decided that as of December 31, 2009, it was too early to determine whether our new President was worthy of such a title.

Since Wednesday morning, we have been bombarded with reactions to a story from Bloomberg News, concerning an interview Obama had with Bloomberg BusinessWeek in the Oval Office.  In case you haven’t seen it, here is the controversial passage from the beginning of that article:

President Barack Obama said he doesn’t “begrudge” the $17 million bonus awarded to JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon or the $9 million issued to Goldman Sachs Group Inc. CEO Lloyd Blankfein, noting that some athletes take home more pay.

The president, speaking in an interview, said in response to a question that while $17 million is “an extraordinary amount of money” for Main Street, “there are some baseball players who are making more than that and don’t get to the World Series either, so I’m shocked by that as well.”

“I know both those guys; they are very savvy businessmen,” Obama said in the interview yesterday in the Oval Office with Bloomberg BusinessWeek, which will appear on newsstands Friday.  “I, like most of the American people, don’t begrudge people success or wealth.  That is part of the free-market system.”

Many commentators have expounded upon what this tells us about our President.  I’d like to quote the reactions from a couple of my favorite bloggers.  Here’s what Yves Smith had to say at Naked Capitalism:

There are only two, not mutually exclusive, conclusions one can reach from reading this tripe:  that Obama is a lackey of the financiers, and putting the best spin he can on their looting, or he is a fool.

The salient fact is that, their protests to the contrary, the wealth of those at the apex of the money machine was not the result of the operation of  “free markets” or any neutral system.  The banking industry for the better part of two decades has fought hard to create a playing field skewed in their favor, with it permissible to sell complex products with hidden bad features to customers often incapable of understanding them.  By contrast, one of the factors that needs to be in place for markets to produce desirable outcomes is for buyers and sellers to have the same information about the product and the objectives of the seller.

Similarly, the concentrated capital flows, often too-low interest rates, and asymmetrical Federal Reserve actions (cutting rates fast when markets look rocky, being very slow to raise rates and telegraphing that intent well in advance) that are the most visible manifestations of two decades of bank-favoring policies, are the equivalent of massive subsidies.

And that’s before we get to the elephant in the room, the massive subsidies to the banksters that took place during the crisis and continue today.

We have just been through the greatest looting of the public purse in history, and Obama tries to pass it off as meritocracy in action.

Obama is beyond redemption.

At his Credit Writedowns website, Edward Harrison made this observation:

The problem is not that we have free markets in America, but rather that we have bailouts and crony capitalism.  So Americans actually do begrudge people this kind of monetary reward.  It has been obvious to me that the bailouts are a large part of why Obama’s poll numbers have been sinking.  It’s not just the economy here — so unless the President can demonstrate he understands this, he is unlikely to win back a very large number of voters who see this issue as central to their loss of confidence in Obama.

Is it just me or does this sound like Obama just doesn’t get it?

Victoria McGrane of Politico gave us a little background on Obama’s longstanding relationship with The Dimon Dog:

Dimon is seen as one of the Wall Street executives who enjoys the closest relationship with the president, along with Robert Wolf, head of the American division of Swiss bank UBS.  A longtime Democratic donor, Dimon first met Obama in Chicago, where Dimon lived and worked from the late 1990s until 2007.

And both Dimon and Blankfein have met with the president several times.  In their most recent meeting, Obama invited Dimon to Washington for lunch right before the State of the Union, according to a source familiar with the meeting.

Some commentators have expressed the view that Obama is making a transparent attempt to curry favor with the banking lobby in time to get those contributions flowing to Democratic candidates in the mid-term elections.  Nevertheless, for Obama, this latest example of trying to please both sides of a debate will prove to be yet another “lose/lose” situation.  As Victoria McGrane pointed out:

But relations between most Democrats and Wall Street donors aren’t as warm this cycle as the financial industry chafes against the harsh rhetoric and policy prescriptions lawmakers have aimed at them.

As for those members of the electorate who usually vote Democratic, you can rest assured that a large percentage will see this as yet another act of betrayal.  They saw it happen with the healthcare reform debacle and they’re watching it happen again in the Senate, as the badly-compromised financial reform bill passed by the House (HR 4173) is being completely defanged.  A bad showing by the Democrats on November 2, 2010 will surely be blamed on Obama.

As of February 11, we already have a “favorite” in contention for the 2010 Jackass of the Year Award.  It’s time for the competition to step forward!



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A 9-11 Commission For The Federal Reserve

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January 7, 2010

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

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

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

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

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

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

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

*   *   *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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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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