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Revenge Of The Blondes

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My vintage iPhone sputtered, stammered and finally stalled out as I tried to access an article about derivatives trading after clicking on the link.  The process got as far as the appearance of the URL, which indicated that the source was The New York Times.  I assumed that the piece had been written by Gretchen Morgenson and that I could read it once I sat down at my regular computer.  Within moments, I was at The Big Picture website, where I found another link to the same article.  This time it worked and I found that the piece had been written by Louise Story.  “Wrong blonde”, I thought to myself.  It was at that point when I realized how much the world had changed from the days when “dumb blonde” jokes had been so popular.  In fact, a vast amount of the skullduggery that caused and resulted from the financial crisis has been exposed and explained by women with blonde hair.  After a handful of unscrupulous Wall Street bankers brought the world’s financial system to the brink of collapse, an even smaller number of blonde, female sleuths set about unwinding this complex web of deceit for “the Average Joe” to understand.  Here are a few of them:

Yves Smith

All right  .  .  .   It’s an old picture from her days at Goldman Sachs.  Cue-up Duran Duran.  (It’s almost as old as the photo of Ben Bernanke in my fake Chandon ad, based on their  “Life needs bubbles” theme.)  On most days, the first blog I access is Naked Capitalism.  Its publisher and most frequent contributor is Yves Smith (a/k/a Susan Webber).  At the Seeking Alpha website, a review of her recent book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, began this way:

ECONNED is the most deeply researched and empirically validated account of the financial meltdown of 2008-2009 and how its unaddressed causes predict similar crises to come.  As a long-time Wall Street veteran, Yves Smith, through her influential blog “Naked Capitalism” lucidly explains to her over 2500,000 unique visitors each month exactly what games market players use and how their “innovations” evolved over the years to take the rest of us to the cleaners.  Smith is that unusual combination of scholar, expert, participant and teacher, who writes with a clarifying sense of moral outrage and disgust at the decline of ethics on Wall Street and financial markets.

Smith’s daily list of Links at Naked Capitalism, covers a broad range of newsworthy subjects both within and beyond the financial realm.  I usually find myself reading all of the articles linked on that page.

Gretchen Morgenson

Gretchen Morgenson is my favorite reporter for The New York Times.  She has proven herself to be Treasury Secretary Turbo Tim Geithner’s worst nightmare.  Ms. Morgenson has caused Geithner so much agony, I would not be surprised to hear that he named his recent kidney stone after her.  With Jo Becker, Ms. Morgenson wrote the most revealing essay on Geithner back in April of 2009.  Once you’ve read it, you will have a better understanding of why Geithner gave away so many billions to the banksters as president of the New York Fed by way of Maiden Lane III.  Morgenson subsequently wrote her own article on Maiden Lane III here.

Ms. Morgenson has many detractors.  Most prominent among them was the late Tanta (a/k/a Doris Dungey) of the Calculated Risk blog, who wrote the recurring “Morgenson Watch” for that site.  Yves Smith of Naked Capitalism (see above) accurately summed up the bulk of the criticism directed against Gretchen Morgenson:

Gretchen Morgenson is often a target of heated criticism on the blogosphere, which I have argued more than once is overdone.  While her articles on executive compensation and securities litigation are consistently well reported, she has an appetite for the wilder side of finance, and often looks a bit out of her depth.  Typically, she simply runs afoul of finance pedants, who jump on misapplication of industry jargon or minor errors when those (admittedly disconcerting) errors fail to derail the thrust of the argument.

A noted example of this was Morgenson’s article of March 6 2010, in which she explained that Greece was hiding its financial obligations with “credit default swaps” rather than currency swaps.  The bloggers who vigilantly watch for her to make such a mistake wouldn’t let go of that one for quite a while.  Nevertheless, I like her work.  Nobody is perfect.

Louise Story

As I mentioned at the outset of this piece, Louise Story wrote the recent article for The New York Times, concerning anticompetitive practices in the credit derivatives clearing, trading and information services industries.  Discussing that subject in a manner that can make it understandable to the “average reader” (someone with a high school education) is no easy task.  Beyond that, Ms. Story was able to explain the frustrations of regulators, who had hoped that some degree of transparency could be introduced to the derivatives market as a result of the recently enacted, “Dodd-Frank” financial reform bill.  It’s an important article, which has drawn a good deal of well-deserved attention.

Last year, Ms. Story co-authored a New York Times article with Gretchen Morgenson, concerning collateralized debt obligations (CDOs) entitled, “Banks Bundled Bad Debt, Bet Against It and Won”.  As I pointed out at the time:  Pay close attention to the explanation of how Tim Geithner retained a “special counselor” whose previous responsibilities included oversight of the parent company of an investment firm named Tricadia, Inc.  Tricadia has the dubious honor of having helped cause the financial crisis by creating CDOs and then betting against them.

These three women, as well as a number of their non-blonde counterparts (including:  Nomi Prins, Janet Tavakoli and Naomi Klein) have exposed a vast amount of the odious activities that caused the financial crisis.  They have helped inform and educate the public on what the “good old boys” network of bankers, regulators and lobbyists have been doing to this country.  The paradigm shift that took us beyond the sexist stereotype of the  “dumb blonde” has brought our society to the point where women – often blonde ones – have intervened to alert the rest of us to the hazards caused by what Paul Farrell of MarketWatch described as “Wall Street’s macho ego trip”.

If you should come across someone who still tells “dumb blonde” jokes – ask that person if he (or she) has read ECONned.


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Fedbashing Is On The Rise

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It seems as though everyone is bashing the Federal Reserve these days.  In my last posting, I criticized the Fed’s most recent decision to create $600 billion out of thin air in order to purchase even more treasury securities and mortgage-backed securities by way of the recently-announced, second round of quantitative easing (referred to as QE2).  Since that time, I’ve seen an onslaught of outrage directed against the Fed from across the political spectrum.  Bethany McLean of Slate made a similar observation on November 9.  As the subtitle to her piece suggested, people who criticized the Fed were usually considered “oddballs”.  Ms. McLean observed that the recent Quarterly Letter by Jeremy Grantham (which I discussed here) is just another example of anti-Fed sentiment from a highly-respected authority.  Ms. McLean stratified the degrees of anti-Fed-ism this way:

If Dante had nine circles of hell, then the Fed has three circles of doubters.  The first circle is critical of the Fed’s current policies. The second circle thinks that the Fed has been a menace for a long time.  The third circle wants to seriously curtail or even get rid of the Fed.

From the conservative end of the political spectrum, the Republican-oriented Investor’s Business Daily provided an editorial on November 9 entitled, “Fighting The Fed”.  More famously, in prepared remarks to be delivered during a trade association meeting in Phoenix, Sarah Palin ordered Federal Reserve chairman Ben Bernanke to “cease and desist” his plan to proceed with QE2.  As a result of the criticism of her statement by Sudeep Reddy of The Wall Street Journal’s Real Time Economics blog, it may be a while before we hear Ms. Palin chirping about this subject again.

The disparagement directed against the Fed from the political right has been receiving widespread publicity.  I was particularly impressed by the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009.  Here is the most-frequently quoted portion of Bunning’s diatribe:

.   .   .   you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail.  Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out. In short, you are the definition of moral hazard.

Michael Grunwald, author of Time magazine’s “Person of the Year 2009” cover story on Ben Bernanke, saw fit to write a sycophantic “puff piece” in support of Bernanke’s re-confirmation as Fed chairman.  In that essay, Grunwald attempted to marginalize Bernanke’s critics with this statement:

The mostly right-leaning (deficit) hawks rail about Helicopter Ben, Zimbabwe Ben and the Villain of the Year,   . . .

The “Helicopter Ben” piece was written by Larry Kudlow.  The “Zimbabwe Ben” and “Villain of the Year” essays were both written by Adrienne Gonzalez of the Jr. Deputy Accountant website, who saw her fanbase grow exponentially as a result of Grunwald’s remark.  The most amusing aspect of Grunwald’s essay in support of Bernanke’s confirmation was the argument that the chairman could be trusted to restrain his moneyprinting when confronted with demands for more monetary stimulus:

Still, doves want to know why he isn’t providing even more gas. Part of the answer is that he doesn’t seem to think that pouring more cash into the banking system would generate many jobs, because liquidity is not the current problem.  Banks already have reserves; they just aren’t using them to make loans and spur economic activity.  Bernanke thinks injecting even more money would be like pushing on a string.
*   *   *

To Bernanke, the benefits of additional monetary stimulus would be modest at best, while the costs could be disastrous. Reasonable economists can and do disagree.

Compare and contrast that Bernanke with the Bernanke who explained his rationale for more monetary stimulus in the November 4, 2010 edition of The Washington Post:

The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed.

*   *   *

But the Federal Reserve has a particular obligation to help promote increased employment and sustain price stability. Steps taken this week should help us fulfill that obligation.

Bernanke should have said:  “Pushing on a string should help us fulfill that obligation.”

Meanwhile, the Fed is getting thoroughly bashed from the political left, as well.  The AlterNet website ran the text of this roundtable discussion from the team at Democracy Now (Michael Hudson, Amy Goodman and Juan Gonzalez – with a cameo appearance by Joseph Stiglitz) focused on the question of whether QE2 will launch an “economic war on the rest of the world”.  I enjoyed this opening remark by Michael Hudson:

The head of the Fed is known as “Helicopter Ben” because he talks about dropping money into the economy.  But if you see helicopters, they’re probably not your friends.  Don’t go out and wait for them to drop the money, because the money is all going electronically into the banks.

At the progressive-leaning TruthDig website, author Nomi Prins discussed the latest achievement by that unholy alliance of Wall Street and the Federal Reserve:

The Republicans may have stormed the House, but it was Wall Street and the Fed that won the election.

*   *   *

That $600 billion figure was about twice what the proverbial “analysts” on Wall Street had predicted.  This means that, adding to the current stash, the Fed will have shifted onto its books about $1 trillion of the debt that the Treasury Department has manufactured.  That’s in addition to $1.25 trillion more in various assets backed by mortgages that the Fed is keeping in its till (not including AIG and other backing) from the 2008 crisis days.  This ongoing bailout of the financial system received not a mention in pre- or postelection talk.

*   *   *

No winning Republican mentioned repealing the financial reform bill, since it doesn’t really actually reform finance, bring back Glass-Steagall, make the big banks smaller or keep them from creating complex assets for big fees.  Score one for Wall Street.  No winning Democrat thought out loud that maybe since the Republican tea partyers were so anti-bailouts they should suggest a strategy that dials back ongoing support for the banking sector as it continues to foreclose on homes, deny consumer and small business lending restructuring despite their federal windfall, and rake in trading profits.  The Democrats couldn’t suggest that, because they were complicit.  Score two for Wall Street.

In other words, nothing will change.  And that, more than the disillusionment of his supporters who had thought he would actually stand by his campaign rhetoric, is why Obama will lose the White House in 2012.

The only thing I found objectionable in Ms. Prins’ essay was her reference to “the pro-bank center”.  Since when is the political center “pro-bank”?  Don’t blame us!

As taxpayer hostility against the Fed continues to build, expect to see this book climb up the bestseller lists:  The Creature from Jekyll Island.   It’s considered the “Fedbashers’ bible”.


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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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Bait And Switch

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October 19, 2009

On Friday, October 16, Aaron Task interviewed Elizabeth Warren for his online TV show, Tech Ticker.  In case you don’t remember, Ms. Warren is the Harvard law professor, appointed to chair the Congressional Oversight Panel which has attempted to trace the money thrown into the infamous slush fund known as TARP — the Troubled Assets Relief Program.  Mr. Task questioned Professor Warren as to whether, after all this time, we can expect a full accounting as to where the TARP money went.  Professor Warren responded:  “No.  I think there is no chance that we will get a full accounting of it.”  She explained the reason for this is because former Treasury Secretary Hank Paulson never asked for an explanation “on the front end” (when the TARP bailout program began) concerning what the recipients planned to do with this money, nor was any documentation of expenditures requested.  As an aside, the folks at The New York Times were kind enough to put together this TARP scorecard, for keeping track of which institutions pay back the money they received.  Of course, these amounts do not include all the loans, “backstopping” and other largesse provided to Wall Street by the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC) and the Treasury.  For that information, we can look to this Bailout Tally Report, prepared by Nomi Prins for her book:  It Takes a Pillage: Behind the Bailouts, Bonuses,and Backroom Deals from Washington to Wall Street.

During the interview with Aaron Task, Elizabeth Warren expressed particular concern over the fact that former Treasury Secretary Paulson failed to put any restrictions on the use of the TARP bailout funds prior to their dispersal, despite the explanation to the taxpayers that this money would be used to remove the “toxic assets” from the banks’ balance sheets.  Worse yet, as she explained:  “The toxic assets are still there, by and large” because the TARP money was used by the Wall Street banks to “make bets”.  The bait-and-switch tactic used by Secretary Paulson was exposed by Professor Warren when she criticized how the banks used that money:

My biggest complaint would be:  That was not how Secretary Paulsen described what was going to happen with American taxpayer dollars.   . . . He said we are going to put money into the banks to increase lending —  specifically to increase small business lending because that is the engine of our economy . . .  I have a real problem when we describe to taxpayers their money will be taken and used one way and in fact it’s used another way.

Professor Warren also noted that nothing had been done to contain “systemic risk” after the financial crisis because those institutions requiring bailouts as they were considered “too big to fail” have grown even larger.  This subject was addressed by Rolfe Winkler of Reuters, who questioned whether these institutions, such as Goldman Sachs, are really indispensable:

Many of us didn’t like it — we thought banks like Goldman should have been recapitalized the right way, by wiping out shareholders and forcing subordinated creditors to eat their share of losses.  But that ship has sailed.  We socialized the risk while privatizing the profit because we were told we had no other choice:  The government had to guarantee the biggest banks’ liabilities because they were too unstable to survive bankruptcy or FDIC receivership.

If that’s true, why haven’t we seen any substantial reforms to reduce systemic risk?  Congress is kicking around new resolution authority to help resolve failed systemically-important banks.  But the goal should be reducing systemic risk to begin with.  Yet serious reform of the derivatives market — something that would reduce its size significantly — is nowhere on the radar.

Indeed, Goldman’s trading results suggest that market is coming back with a vengeance.  It’s playing in very risky markets with a capital structure that remains vulnerable yet is guaranteed by taxpayers.

*   *   *

Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street.  That may be.  But Main Street still owns much of the risk while Wall Street gets all of the profit.

Elizabeth Warren’s reaction to the issue of what has been done with those profits — the huge, record-breaking bonuses paid to the people at Goldman Sachs and JP Morgan, was to describe the situation as so inappropriate as to leave her “speechless”.  Fortunately this sentiment is shared by a number of people who are already taking action in the absence of any responsible government activity.  The Gawker website has announced its initiation of what it calls the “Goldman Project” as a way of pushing back against this atrocity:

But what makes it eye-stabbingly, brain-searingly blood-boiling is the fact that Goldman’s employees are personally reaping the benefits of these subsidies to the tune of an average of $700,000 per staffer.  Being unjustifiably wealthy in boom times is not enough — when market forces of their own creation brought their company low, they turned to the taxpayers both to rescue the firm and prop up their obscenely acquisitive lifestyles.

*   *   *

.  .  .  we’re launching the Goldman Project, an ongoing attempt to track and publicize the multi-million second homes, $50,000 cars, $500 bottles of wine, and ostentatious living that we are subsidizing.  And we need your help: Are you Facebook friends with a Goldmanite who just posted photos of his lavish bachelor party?  Post them to our fancy new tag page, #GoldmanProject, or e-mail them to us.  Are you a realtor who just sold a $4 million duplex a Goldman banker?  Is your ex-boyfriend Goldman banker planning a year-end trip to Cabo to blow his bonus wad?  Shoot us an e-mail.  Likewise, if you catch any references to Goldman employees living large in the media, post them to #GoldmanProject to keep a running clipfile.

The folks at Gawker aren’t the only ones taking action.  When the American Bankers Association holds its annual meeting in Chicago on October 25-26, it will be confronted with a (hopefully) large protest led by a coalition of labor, community and consumer groups, called the “Showdown in Chicago”.  Visit their website and do whatever you can to help make this event a success.  The arrogant influence peddlers in Washington need to get the message:  Clean things up or get thrown out.



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