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The Outrage Continues

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February 1, 2010

The news reports of the past few days have brought us enough fuel to keep us outraged for the next decade.  Let’s just hope that some of this lasts long enough for the November elections.  I will touch on just three of the latest stories that should get the pitchfork-wielding mobs off their asses and into the streets.  Nevertheless, we have to be realistic about these things.  With the Super Bowl coming up, it’s going to be tough to pry those butts off the couches.

The first effrontery should not come as too much of a surprise.  The Times of London has reported that Goldman Sachs CEO, Lloyd Blankfein (a/k/a Lloyd Bankfiend) is expecting to receive a $100 million bonus this year:

Bankers in Davos for the World Economic Forum (WEF) told The Times yesterday they understood that Lloyd Blankfein and other top Goldman bankers outside Britain were set to receive some of the bank’s biggest-ever payouts.  “This is Lloyd thumbing his nose at Obama,” said a banker at one of Goldman’s rivals.

Blankfein is also thumbing his nose at the American taxpayers.  Despite widespread media insistence that Goldman Sachs “paid back the government” there is a bit of unfinished business arising from something called Maiden Lane III — for which Goldman should owe us billions.

That matter brings us to our second item:  the recently-released Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky).  The report is 224 pages long, so I’ll refer you to the handy summary prepared by Michael Shedlock (“Mish”).  Mish’s headline drove home the point that there are currently 77 ongoing investigations of fraud, money laundering and insider trading as a result of the TARP bank bailout program.  Here are a few more of his points, used as introductions to numerous quoted passages from the SIGTARP report:

The Report Blasts Geithner and the NY Fed.  I seriously doubt Geithner survives this but the sad thing is Geithner will not end up in prison where he belongs.

*   *   *

Please consider a prime conflict of interest example in regards to PPIP, the Public-Private-Investment-Plan, specifically designed to allow banks to dump their worst assets onto the public (taxpayers) shielding banks from the risk.

*   *   *

Note the refutation of the preposterous claims that taxpayers will be made whole.

*   *   *

TARP Tutorial:  How Taxpayers Lose Money When Banks Fail

My favorite comment from Mish appears near the conclusion of his summary:

Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.

My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so.  This was done to bail out the banks at any and all cost to the taxpayers.

Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense?  Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.

Mish’s last remark (and his link to an earlier posting) brings us to the third disgrace to be covered in this piece:  The AIG bailout cover-up.  On January 29, David Reilly wrote an article for Bloomberg News (and Business Week) concerning last Wednesday’s hearing before the House Committee on Oversight and Government Reform.  After quoting from Reilly’s article, Mish made this observation:

Most know I am not a big believer in conspiracies.  I regularly dismiss them.  However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.

David Reilly began the Bloomberg/Business Week piece this way:

The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter.  After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner.  David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:

By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking.  This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs.  It’s as though the New York Fed was a black-ops outfit for the nation’s central bank.

*   *   *

The New York Fed is one of 12 Federal Reserve Banks that operate under the supervision of the Federal Reserve’s board of governors, chaired by Ben Bernanke.  Member-bank presidents are appointed by nine-member boards, who themselves are appointed largely by other bankers.

As Representative Marcy Kaptur told Geithner at the hearing:  “A lot of people think that the president of the New York Fed works for the U.S. government.  But in fact you work for the private banks that elected you.”

The “cover-up” aspect to this caper involved intervention by the New York Fed that included editing AIG’s communications to investors and pressuring the Securities and Exchange Commission to keep secret the details of the bailouts of AIG’s counterparties (Maiden Lane III).  The Fed’s opposition to disclosure of such documentation to Congress was the subject of a New York Times opinion piece in December.  The recent SIGTARP report emphasized the disingenuous nature of the Fed’s explanation for keeping this information hidden:

SIGTARP’s audit also noted that the now familiar argument from Government officials about the dire consequences of basic transparency, as advocated by the Federal Reserve in connection with Maiden Lane III, once again simply does not withstand scrutiny.  Federal Reserve officials initially refused to disclose the identities of the counterparties or the details of the payments, warning that disclosure of the names would undermine AIG’s stability, the privacy and business interests of the counterparties, and the stability of the markets.  After public and Congressional pressure, AIG disclosed the identities of its counterparties, including its eight largest:  Societe Generale, Goldman Sachs Group Inc., Merrill Lynch, Deutsche Bank AG, UBS, Calyon Corporate and Investment Banking (a subsidiary of Credit Agricole S.A.), Barclays PLC, and Bank of America.

Notwithstanding the Federal Reserve’s warnings, the sky did not fall; there is no indication that AIG’s disclosure undermined the stability of AIG or the market or damaged legitimate interests of the counterparties.

The SIGTARP investigation has revealed some activity that most people would never have imagined possible given the enormous amounts of money involved in these bailouts and the degree of oversight (that should have been) in place.  The bigger question becomes:  Will any criminal charges be brought against those officials who breached the public trust by facilitating this monumental theft of taxpayer dollars?



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Watching For Storm Clouds

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October 26, 2009

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

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

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

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

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

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

*   *   *

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

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

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

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

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

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

*   *   *

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

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

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

*   *   *

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

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



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