December 17, 2009
Matt Taibbi hit another grand slam with his recent Rolling Stone article: “Obama’s Big Sellout”. It was another classic work in his unique style. The ugly truth it drove home was that Barack Obama used a “bait and switch” tactic in his Presidential campaign: promising to reform Wall Street — until the day after he got elected — at which time he immediately jumped into bed with the culprits of the financial crisis. The reaction of the Obama apologists to the Rolling Stone piece involved the usual tactic of attacking the messenger (in this case: Taibbi himself). It didn’t work. The best way to see how this played out should begin with a reading of Taibbi’s retort to a critique appearing in The American Prospect — a feeble attempt to demonstrate that Taibbi got his facts wrong. A neutral judge, Felix Salmon of Reuters, then stepped in and ruled in favor of Taibbi. The online responses to Felix Salmon’s essay are a great read. At the Open Left website, David Sirota upbraided Taibbi’s critics, who spanned the political spectrum — many of whom expressed condescension at the “naïve” decision of an outside-the-beltway reporter to expose the breach of a campaign promise:
It’s certainly true that a lot of politicians’ words mean nothing – but if reporters start treating that as a non-newsworthy assumption in their coverage, then the whole journalistic system becomes a joke – a miasma of personality profiles and puff pieces that assumes that the only thing that must be valued in politics is personal intangibles like “charisma” and “charm” and “toughness” and all those other incessant cliches. And what a joke that makes of our democracy. In a republic where we only get to vote our politicians in or out every few years, all we have to go on are their promises. If we now must assume their promises aren’t true, and attack people for being “naïve” for daring to try to hold them to their promises, then we’ve made a joke of our whole political system.
Matt Taibbi’s article immediately forced the White House into a damage control mode. Another softball interview was immediately set up with Steve Croft of 60 Minutes, wherein Obama attempted to redeem his false image as an adversary of the Wall Street investment banks. The President took advantage of that opportunity to present himself as an antagonist of those he described as “fat cats”. On the following day, Obama held a meeting in the White House cabinet room with some banking representatives who found the event important enough to attend. Immediately afterward, Charlie Gasparino revealed the backstory behind Obama’s meeting with the bankers. After informing us that the administration provided the bankers with Obama’s “talking points” in advance of the meeting, Gasparino disclosed this:
. . . people with first-hand knowledge of the sitdown said, it was a heavily scripted affair — with none of the fireworks Obama displays in public.
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Said one CEO who attended: “I expected to be taken to the woodshed, but the tone was quite the opposite.”
Said another senior exec with knowledge of the meeting: “The whole thing was so telegraphed that not much was accomplished, other than giving Obama a PR stunt. . . . He might have sounded mean on ‘60 Minutes,’ but during the meeting he was a hell of a lot nicer.”
Many commentators were quick to point out that by the time Obama started talking tough about “fat cats”, he had already given them all they wanted by allowing them to pay back their TARP loans on an expedited basis. As Henry Blodget explained for The Business Insider:
And in case you missed what is really going on here, the banks that repaid TARP are now getting all the benefits of government help with none of the drawbacks. They just ditched the bad stuff — namely, pay caps — and kept the good stuff (implicit bond guarantees, subsidized super-low interest rates, no obligation to do anything for anyone). Obama can jawbone all he wants about “fat cats,” but that’s all he can do.
At The Washington Post, Steven Pearlstein bemoaned the fact that the TARP beneficiaries had been “let off their leash”. Pearlstein expressed concern that this move created the potential for more problems in the future:
By rushing to cash in their chips, however, the administration not only gave up political leverage and additional profit, but took the risk that one or more of the banks may find that it can’t make it on its own. While the financial system has rebounded faster than anyone could have imagined, potential threats still loom — a further collapse of commercial real estate, for example, or a string of sovereign debt defaults. And bank profits, while having rebounded, remain significantly dependent on the availability of cheap funding from the Federal Reserve and other central banks that cannot be expected to last indefinitely.
The administration’s damage control effort turned out to be worthless. With his centerpiece healthcare reform effort floundering in the Senate, Obama the President is appearing to be significantly less effective than Obama the candidate. The President’s critics have been quick to pounce. George Will noted that Obama has “seen his job approval vary inversely with his ubiquity”. The New York Post’s Michael Goodwin alleged that Obama “doesn’t look like he cares that big chunks of the country, left, right and center, are giving up on him.” However, the best analysis of the confidence crisis afflicting the Obama Presidency came from Dan Gerstein of Forbes.com. Gerstein observed that the new Preisdent’s leadership style was to blame — something Gerstein described as “the Reverse Roosevelt: Talk boldly and carry a toothpick.” While debunking the administration’s claim that it had lost the leverage it had over Wall Street with the TARP paybacks, Gerstein argued that such an excuse “doesn’t pass the laugh test” because the banking industry is the most regulated industry in the country. The task Obama faces is to cultivate a leadership style that will be useful in confronting the challenges he undertook when he assumed office:
For those center dwellers, the issue is not that Obama is too liberal or too pragmatic (the chief complaints of the noisemakers on the left and right), but that he is not effective enough. They question whether he has what it takes to get results: to find the right balance on health care, to admit and fix the inadequacies of the stimulus, to begin taming the deficit without impeding growth. It is a crisis of confidence that at its heart is, as Brookings scholar and former Clinton adviser Bill Galston points out, a crisis of competence.
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But regardless of the reasons, Obama signed up for these missions, and his ability to succeed in them will largely hinge on whether he can grow as a leader. Can he overcome his inhibitions, whatever their cause, and learn from the legacies of our most effective presidents about how to wield the full power of his office? He clearly knows how to don the velvet glove (often with substantial impact) — will he come to understand when to unleash the iron fist?
Obama’s pattern so far is far from encouraging. But I would not give up hope for growth.
It appears as though we are back to the themes of “hope” and “change”. This time we’re hoping that Obama will change.
Too Cute By Half
April 29, 2010
On April 15, I discussed the disappointing performance of the Financial Crisis Inquiry Commission (FCIC). The vapid FCIC hearings have featured softball questions with no follow-up to the self-serving answers provided by the CEOs of those too-big–to-fail financial institutions.
In stark contrast to the FCIC hearings, Tuesday brought us the bipartisan assault on Goldman Sachs by the Senate Permanent Subcommittee on Investigations. Goldman’s most memorable representatives from that event were the four men described by Steven Pearlstein of The Washington Post as “The Fab Four”, apparently because the group’s most notorious member, Fabrice “Fabulous Fab” Tourre, has become the central focus of the SEC’s fraud suit against Goldman. Tourre’s fellow panel members were Daniel Sparks (former partner in charge of the mortgage department), Joshua Birnbaum (former managing director of Structured Products Group trading) and Michael Swenson (current managing director of Structured Products Group trading). The panel members were obviously over-prepared by their attorneys. Their obvious efforts at obfuscation turned the hearing into a public relations disaster for Goldman, destined to become a Saturday Night Live sketch. Although these guys were proud of their evasiveness, most commentators considered them too cute by half. The viewing public could not have been favorably impressed. Both The Washington Post’s Steven Pearlstein as well as Tunku Varadarajan of The Daily Beast provided negative critiques of the group’s testimony. On the other hand, it was a pleasure to see the Senators on the Subcommittee doing their job so well, cross-examining the hell out of those guys and not letting them get away with their rehearsed non-answers.
A frequently-repeated theme from all the Goldman witnesses who testified on Tuesday (including CEO Lloyd Bankfiend and CFO David Viniar) was that Goldman had been acting only as a “market maker” and therefore had no duty to inform its customers that Goldman had short positions on its own products, such as the Abacus-2007AC1 CDO. This assertion is completely disingenuous. When Goldman creates a product and sells it to its own customers, its role is not limited to that of “market-maker”. The “market-maker defense” was apparently created last summer, when Goldman was defending its “high-frequency trading” (HFT) activities on stock exchanges. In those situations, Goldman would be paid a small “rebate” (approximately one-half cent per trade) by the exchanges themselves to buy and sell stocks. The purpose of paying Goldman to make such trades (often selling a stock for the same price they paid for it) was to provide liquidity for the markets. As a result, retail (Ma and Pa) investors would not have to worry about getting stuck in a “roach motel” – not being able to get out once they got in – after buying a stock. That type of market-making bears no resemblance to the situations which were the focus of Tuesday’s hearing.
Coincidentally, Goldman’s involvement in high-frequency trading resulted in allegations that the firm was “front-running” its own customers. It was claimed that when a Goldman customer would send out a limit order, Goldman’s proprietary trading desk would buy the stock first, then resell it to the client at the high limit of the order. (Of course, Goldman denied front-running its clients.) The Zero Hedge website focused on the language of the disclaimer Goldman posted on its “GS360” portal. Zero Hedge found some language in the GS360 disclaimer which could arguably have been exploited to support an argument that the customer consented to Goldman’s front-running of the customer’s orders.
At Tuesday’s hearing, the Goldman witnesses were repeatedly questioned as to what, if any, duty the firm owed its clients who bought synthetic CDOs, such as Abacus. Alistair Barr of MarketWatch contended that the contradictory answers provided by the witnesses on that issue exposed internal disagreement at Goldman as to what duty the firm owed its customers. Kurt Brouwer of MarketWatch looked at the problem this way :
A more useful approach could involve looking at the language of the brokerage agreements in effect between Goldman and its clients. How did those contracts define Goldman’s duty to its own customers who purchased the synthetic CDOs that Goldman itself created? The answer to that question could reveal that Goldman Sachs might have more lawsuits to fear than the one brought by the SEC.