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Getting It Reich

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April 8, 2010

Robert Reich, former Secretary of Labor under President Clinton, has been hitting more than a few home runs lately.   At a time when too many commentators remain in lock-step with their favorite political party, Reich pulls no punches when pointing out the flaws in the Obama administration’s agenda.  I particularly enjoyed his reaction to the performance of Larry Summers on ABC television’s This Week on April 4:

I’m in the “green room” at ABC News, waiting to join a roundtable panel discussion on ABC’s weekly Sunday news program, This Week.

*   *   *

Larry Summers was interviewed just before Greenspan. He said the economy is expanding, that the Administration is doing everything it can to bring jobs back, and that the regulatory reform bills moving on the Hill will prevent another financial crisis.

What?

*   *   *

If any three people are most responsible for the failure of financial regulation, they are Greenspan, Larry Summers, and my former colleague, Bob Rubin.

*   *   *

I dislike singling out individuals for blame or praise in a political system as complex as that of the United States but I worry the nation is not on the right economic road, and that these individuals — one of whom advises the President directly and the others who continue to exert substantial influence among policy makers — still don’t get it.

The direction financial reform is taking is not encouraging.  Both the bill that emerged from the House and the one emerging from the Senate are filled with loopholes that continue to allow reckless trading of derivatives.  Neither bill adequately prevents banks from becoming insolvent because of their reckless trades.  Neither limits the size of banks or busts up the big ones.  Neither resurrects the Glass-Steagall Act. Neither adequately regulates hedge funds.

More fundamentally, neither bill begins to rectify the basic distortion in the national economy whose rewards and incentives are grotesquely tipped toward Wall Street and financial entrepreneurialism, and away from Main Street and real entrepreneurialism.

Is it because our elected officials just don’t understand what needs to be done to prevent another repeat of the financial crisis – or is the unwillingness to take preventative action the result of pressure from lobbyists?  I think they’re just playing dumb while they line their pockets with all of that legalized graft. Meanwhile, Professor Reich continued to function as the only adult in the room, with this follow-up piece:

Needless to say, the danger of an even bigger cost in coming years continues to grow because we still don’t have a new law to prevent what happened from happening again.  In fact, now that they know for sure they’ll be bailed out, Wall Street banks – and those who lend to them or invest in them – have every incentive to take even bigger risks.  In effect, taxpayers are implicitly subsidizing them to do so.

*   *   *

But the only way to make sure no bank it too big to fail is to make sure no bank is too big.  If Congress and the White House fail to do this, you have every reason to believe it’s because Wall Street has paid them not to.

Reich’s recent criticism of the Federal Reserve was another sorely-needed antidote to Ben Bernanke’s recent rise to media-designated sainthood.  In an essay quoting Republican Senator Jim DeMint of South Carolina, Reich transcended the polarized political climate to focus on the fact that the mysterious Fed enjoys inappropriate authority:

The Fed has finally came clean.  It now admits it bailed out Bear Stearns – taking on tens of billions of dollars of the bank’s bad loans – in order to smooth Bear Stearns’ takeover by JP Morgan Chase.  The secret Fed bailout came months before Congress authorized the government to spend up to $700 billion of taxpayer dollars bailing out the banks, even months before Lehman Brothers collapsed.  The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout.

The losses from those deals still total tens of billions, and taxpayers are ultimately on the hook.  But the public never knew.  There was no congressional oversight.  It was all done behind closed doors. And the New York Fed – then run by Tim Geithner – was very much in the center of the action.

*   *   *

The Fed has a big problem.  It acts in secret.  That makes it an odd duck in a democracy.  As long as it’s merely setting interest rates, its secrecy and political independence can be justified. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk — choosing winners and losers in the capitalist system — its legitimacy is questionable.

You probably thought that Ron Paul was the only one who spoke that way about the Federal Reserve.  Fortunately, when people such as Robert Reich speak out concerning the huge economic and financial dysfunction afflicting America, there is a greater likelihood that those with the authority to implement the necessary reforms will do the right thing.  We can only hope.



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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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Three New Books For March

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February 24, 2010

The month of March brings us three new books about the financial crisis.  The authors are not out to make apologies for anyone.  To the contrary, they point directly at the villains and expose the systemic flaws that were exploited by those who still may yet destroy the world economy.  All three of these books are available at the Amazon widget on the sidebar at the left side of this page.

Regular fans of the Naked Capitalism blog have been following the progress of Yves Smith on her new book, ECONned:  How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.  It will be released on March 2.  Here is some information about the book from the product description at the Amazon website:

ECONned is the first book to examine the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.

Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown.  Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.

In eConned (sic), author Yves Smith reveals:

–why the measures taken by the Obama Administration are mere palliatives and are unlikely to pave the way for a solid recovery

–how economists have come to play a profoundly anti-democratic role in policy

–how financial models and concepts that were discredited more than thirty years ago are still widely used by banks, regulators, and investors

–how management and employees of major financial firms looted them, enriching themselves and leaving the mess to taxpayers

–how financial regulation enabled predatory behavior by Wall Street towards investors

–how economics has no theory of financial systems, yet economists fearlessly prescribe how to manage them

Michael Lewis is the author of the wildly-popular book, Liar’s Poker, based on his experience as a bond trader for Solomon Brothers in the mid-80s.  His new book, The BigShort: Inside the Doomsday Machine, will be released on March 15.  Here is some of what Amazon’s product description says about it:

A brilliant account — character-rich and darkly humorous — of how the U.S. economy was driven over the cliff.

*   *   *

Michael Lewis’s splendid cast of characters includes villains, a few heroes, and a lot of people who look very, very foolish:  high government officials, including the watchdogs; heads of major investment banks (some overlap here with previous category); perhaps even the face in your mirror.  In this trenchant, raucous, irresistible narrative, Lewis writes of the goats and of the few who saw what the emperor was wearing, and gives them, most memorably, what they deserve.  He proves yet again that he is the finest and funniest chronicler of our times.

Our third author, Simon Johnson, recently co-authored an article for CenterPiece with Peter Boone entitled, “The Doomsday Cycle” which explains how “we have let a ‘doomsday cycle’ infiltrate our economic system”.  The essay contains a number of proposals for correcting this problem.  Here is one of them:

We believe that the best route to creating a safer system is to have very large and robust capital requirements, which are legislated and difficult to circumvent or revise.  If we triple core capital at major banks to15-25% of assets, and err on the side of requiring too much capital for derivatives and other complicated financial structures, we will create a much safer system with less scope for “gaming” the rules.

Simon Johnson is a professor of Entrepreneurship at MIT’s Sloan School of Management.  From 2007-2008, he was chief economist at the International Monetary Fund.  With James Kwak, he is the co-publisher of The Baseline Scenario website.  Johnson and Kwak have written a new book entitled, 13 Bankers:  The Wall Street Takeover and the Next Financial Meltdown.  Although this book won’t be released until March 30, the Amazon website has already quoted from reviews by the following people:  Bill Bradley, Robert Reich, Arianna Huffington, Bill Moyers, Alan Grayson, Brad Miller, Elizabeth Warren and others.  Professor Warren must be a Democrat, based on the affiliation of nearly everyone else who reviewed the book.

Here is some of what can be found in Amazon’s product description:

.  .  .  a wide-ranging, meticulous, and bracing account of recent U.S. financial history within the context of previous showdowns between American democracy and Big Finance: from Thomas Jefferson to Andrew Jackson, from Theodore Roosevelt to Franklin Delano Roosevelt.  They convincingly show why our future is imperiled by the ideology of finance (finance is good, unregulated finance is better, unfettered finance run amok is best) and by Wall Street’s political control of government policy pertaining to it.

As these authors make the talk show circuit to promote their books during the coming weeks, the American public will hearing repeated pleas to demand that our elected officials take action to stop the mercenary financial behemoths from destroying the world.  Perhaps the message will finally hit home.

If you are interested in any of these three books, they’re available on the right side of this page.



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More Super Powers For Turbo Tim

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February 18, 2010

I shouldn’t have been shocked when I read about this.  It’s just that it makes no sense at all and it’s actually scary — for a number of reasons.  On Wednesday, February 17, Sewell Chan broke the story for The New York Times:

The Senate and the Obama administration are nearing agreement on forming a council of regulators, led by the Treasury secretary, to identify systemic risk to the nation’s financial system, officials said Wednesday.

They’re going to put “Turbo” Tim Geithner in charge of the council that regulates systemic risk in the banking system?  Let the pushback begin!  The first published reaction to this news (that I saw) came from Tom Lindmark at the iStockAnalyst.com website:

Only the Congress of the United States is capable of this sort of monumental stupidity.  It appears as if the responsibility for running a newly formed council of bank regulators is going to be delegated to the Treasury Secretary.

Lindmark’s beef was not based on any personal opinion about the appointment of Tim Geithner himself to such a role.  Mr. Lindmark’s opinion simply reflects his disgust at the idea of putting a political appointee at the head of such a committee:

The job of overseeing our financial system is going to be given to an individual whose primary job is implementing the political agenda of his boss — the President of the US.

Regulation of the banks and whatever else gets thrown into the mix is now going to be driven by politicians who have little or no interest in a safe and sound banking system.  As we know too well, their primary interest is the perpetuation and enhancement of their own power with no regard for the consequences.

So there you have reason number one:  Nothing personal — just bad policy.

I can’t wait to hear the responses from some of my favorite gurus from the world of finance.  How about John Hussman — president of the investment advisory firm that manages the Hussman Funds?  One day before the story broke concerning our new systemic risk regulator, this statement appeared in the Weekly Market Comment by Dr. Hussman:

If one is alert, it is evident that the Federal Reserve and the U.S. Treasury have disposed of the need for Congressional approval, and have engineered a de facto bailout of Fannie Mae and Freddie Mac, at public expense.

What better qualification could one have for sitting at the helm of the systemic risk council?  Choose one of the guys who bypassed Congressional authority to bail out Fannie Mae and Freddie Mac with the taxpayers’ money!  If Geithner is actually appointed to chair this council, you can expect an interesting response from Dr. Hussman.

Jeremy Grantham should have plenty to rant about concerning this nomination.  As chairman of GMO, Mr. Grantham is responsible for managing over $107 billion of his clients’ hard-inherited money.  Consider what he said about Geithner’s performance as president of the New York Fed during the months leading up to the financial crisis:

Timothy Geithner, in turn, sat in the very engine room of the USS Disaster and helped steer her onto the rocks.

Mr. Grantham should hardly be pleased to hear about our Treasury Secretary’s new role, regulating systemic risk.

The coming days should provide some entertaining diatribes along the lines of:  “You’ve got to be kidding!” in response to this news.  I’m looking forward to it!



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Senator Cantwell Stands Tough

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February 8, 2010

Back in June of 2008, when it became obvious that Hillary Clinton would not win the nomination as the Democratic Party’s Presidential candidate, Clinton’s despondent female supporters lamented that they would never see a woman elected President within their own lifetimes.  At that point, I wrote a piece entitled, “Women To Watch”, reminding readers that “there are a number of women presently in the Senate, who got there without having been married to a former President (whose surname could be relied upon for recognition purposes).”  One of those women, whom I discussed in that essay, was Senator Maria Cantwell of Washington.  Since that time, Senator Cantwell has proven herself as a defender of her constituents and an opponent of Wall Street.  Her bold criticism of the Obama administration’s handling of the economic crisis as well as her vocal opposition to the influence of lobbyists, motivated me to write a second piece about Senator Cantwell in November of 2009.  More recently, she voted against the confirmation of Ben Bernanke’s nomination to a second term as Federal Reserve chair and on February 2, Reuters reported that she was taking a stand against loopholes in proposed financial reform legislation.

On February 7, Les Blumenthal of the McLatchy Newspapers saw fit to highlight Senator Cantwell’s efforts at backing-up with real action, her tough stand against Wall Street:

To hear Sen. Maria Cantwell talk, another economic bubble is building as Wall Street banks — backed by taxpayer bailouts — continue to play the high-risk derivatives markets rather than extend credit to struggling businesses on Main Street.

Cantwell says that Congress and the Obama administration are just watching it happen.

*   *   *

“We are trying to keep the focus on what needs to be done to get credit flowing and avoid another bubble,” Cantwell said in an interview.  “Do I wish the White House team was more attuned to these issues?  Yes.”

*   *   *

White House officials have, at least twice, backed off commitments they made to her that they’d push for tougher regulations, Cantwell said.

“Their economic team is not living up to what they said they would,” Cantwell said.

Her criticism of the financial regulatory reform bill passed by the House — as being “riddled with loopholes” — was reminiscent of the widespread reaction to the disappointing failure of the Democrats to pass any significant healthcare reform legislation:

If the bills emerging from committees aren’t tough enough, Cantwell vowed a floor fight.  She said she had support from half a dozen senators, including Democrats Dianne Feinstein of California, Tom Harkin of Iowa, and Carl Levin of Michigan.

“People are going to have to ask themselves what’s better — a weak bill or no bill?” she said.

At a time when her peers are busy selling out to lobbyists, Senator Cantwell is continuing to reinforce her image as a reformer.  Her February 4 exchange with “Turbo” Tim Geithner, during his appearance before the Senate Finance Committee, was an example of the type of challenge that other Democrats are afraid to publicly vocalize when addressing members of the administration.  Cantwell emphasized that the President has the authority to act on his own (by issuing an Executive Order) to make $30 billion available to community banks, rather than waiting for Congress to pass legislation for such a rescue.  Her home state’s Lake Stevens Journal discussed that moment:

“If we don’t implement change right now, we are going to lose more jobs,” Cantwell told Geithner.  “Do not wait for legislation.  Come to terms with the community banks on reasonable terms that they can agree to — and I think that that we will be well on our way to getting Americans back to work.”

Maria Cantwell continues to exhibit a (sadly) unique toughness in standing up to those forces bent on preserving the destructive status quo.  As disgruntled supporters of Hillary Clinton wonder whether her intention to step down as Secretary of State in 2012 could signal another opportunity to elect America’s first female President —  they would be well-advised to consider Senator Cantwell as their best hope for reaching that historic milestone.



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Taking The Suckers For Granted

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January 21. 2010

In the aftermath of Coakley Dokeley’s failed quest to replace Teddy Kennedy as Senator of Massachusetts, the airwaves and the blogosphere have been filled with an assortment of explanations for how and why the Bay State elected a Republican senator for the first time in 38 years.  I saw the reason as a simple formula:  One candidate made 66 campaign appearances while the other made 19.  The rationale behind the candidate’s lack of effort was simple:  she took the voters for granted.  This was the wrong moment to be taking the voters for chumps.  At a time when Democrats were vested with a “supermajority” in the Senate, an overwhelming majority in the House and with control over the Executive branch, they overtly sold out the interests of their constituents in favor of payoffs from lobbyists.  Obama’s centerpiece legislative effort, the healthcare bill, turned out to be another “crap sandwich” of loopholes, exceptions, escape clauses and an effective date after the Mayan-prophesized end of the world.  Obama’s giveaway to Big Pharma was outdone by Congressional giveaways to the healthcare lobby.

The Democrats’ efforts to bring about financial reform are now widely viewed as just another opportunity to rake in money and favors from lobbyists, leaving the suckers who voted for them to suffer worse than before.  Coakley Dokeley made the same mistake that Obama and most politicians of all stripes are making right now:  They’re taking the suckers for granted.  That narrative seems to be another important reason why the Massachusetts senatorial election has become such a big deal.  There is a lesson to be learned by the politicians, who are likely to ignore it.

Paul Farrell recently wrote an open letter to President Obama for MarketWatch, entitled:  “10 reasons Obama is now failing 95 million investors”.  In his discussion of reason number five, “Failing to pick a cast of characters that could have changed history”, Farrell made this point:

Last year many voted for you fearing McCain might pick Phil Gramm as Treasury secretary.  Unfortunately, Mr. President, your picks not only revived Reaganomics under the guise of Keynesian economics, you sidelined a real change-agent, Paul Volcker, and picked Paulson-clones like Geithner and Summers.  But worst of all, you’re reappointing Bernanke, a Greenspan clone, as Fed chairman, an economist who, as Taleb put it, “doesn’t even know he doesn’t understand how things work.”  And with that pick, you proved you also don’t understand how things work.

Another former Obama supporter, Mort Zuckerman, editor-in-chief of U.S. News and World Report and publisher of the New York Daily News, wrote a piece for The Daily Beast, examining Obama’s leadership shortcomings:

In the campaign, he said he would change politics as usual.  He did change them.  It’s now worse than it was.  I’ve now seen the kind of buying off of politicians that I’ve never seen before.  It’s politically corrupt and it’s starting at the top.  It’s revolting.

*   *   *

I hope there are changes.  I think he’s already laid in huge problems for the country.  The fiscal program was a disaster.  You have to get the money as quickly as possible into the economy.  They didn’t do that.  By end of the first year, only one-third of the money was spent.  Why is that?

He should have jammed a stimulus plan into Congress and said, “This is it.  No changes.  Don’t give me that bullshit.  We have a national emergency.”  Instead they turned it over to Harry Reid and Nancy Pelosi who can run circles around him.

As for the Democrats’ pre-sabotaged excuse for “financial reform”, the fate of the 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.  Elizabeth Warren, 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.

Setting up the CFPA is largely a matter of stripping the Fed and other agencies of their consumer protection duties and relocating them into a new agency.

With all the coverage and expressed anticipation that the Massachusetts election will serve as a “wake-up call” to Obama and Congressional Democrats, not all of us are so convinced.  Edward Harrison of Credit Writedowns put it this way:

But, I don’t think the President gets it.  He is holed up in the echo chamber called the White House.  If the catastrophic loss in Massachusetts’ Senate race and the likely defeat of his health care reform bill doesn’t wake Obama up to the realities that he is not in Roosevelt’s position but in Hoover’s, he will end as a failed one-term President.

I agree.  I also believe that the hubris will continue.  Why would any of these politicians change their behavior?  The “little people” never did matter.  They exist solely to be played as fools.  They are powerless against the plutocracy.  Right?



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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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The Pushback Against Bernanke

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November 30, 2009

This week brings us the confirmation hearings on President Obama’s nomination of Ben Bernanke to a second four-year term as chairman of the Federal Reserve.  The recent progress in Congressional efforts to audit the Federal Reserve will certainly spice up the confirmation hearings.  If that weren’t enough, Bernanke saw fit to write a commentary piece for Sunday’s edition of The Washington Post, expressing his opposition to any attempts to limit the Fed’s power and subject it to an audit.  Here is some of what he had to say in that column:

These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States.  The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

Well, he should have known what would be coming next  . . .  the avalanche of criticism pointing out how the Fed played a major role in causing the crisis.  As you will see below, that response was swift.  Worse yet, Bernanke’s theme of “we learned our lesson” will surely inspire harsh interrogation at the confirmation hearings:

The Federal Reserve, like other regulators around the world, did not do all that it could have to constrain excessive risk-taking in the financial sector in the period leading up to the crisis.  We have extensively reviewed our performance and moved aggressively to fix the problems.

Dean Baker did not waste any time before ripping into Bernanke’s essay.  Baker’s Beat the Press blog at The American Prospect website regularly upbraids Bernanke for his responsibility in causing the economic crisis.  Baker’s retort to the Washington Post piece was published at the Talking Points Memo website.  The final paragraph of Baker’s essay reflected his outrage that the Post would publish Bernanke’s rant without an opposing response:

The arrogance of this column is almost beyond belief.  This man is incredibly lucky to still have his job at time when millions of other workers have lost theirs as a direct result of his incompetence.  A serious news outlet would not have printed such a ridiculously self-serving piece without at least securing an opposing opinion.  Of course, Bernanke’s piece appeared in the Washington Post.

Dean Baker’s primary criticism of Bernanke is based on the Fed chair’s failure to control the 8-trillion-dollar housing bubble before it burst, nearly destroying the entire economy:

We had further losses in demand associated with the bursting of a bubble in non-residential real estate.  In total, the loss in bubble-driven demand was well over $1 trillion a year.  All of it an entirely predictable outcome of the collapse of a housing bubble.

The simple reality is that there is nothing in the Fed’s bag of tricks that will allow it to easily replace over $1 trillion in annual demand.  In short, the bubble guaranteed the economic disaster that we are now experiencing, end of story.

At the Naked Capitalism website, Yves Smith dealt a hefty load of thorough criticism on the Bernanke article.  She began with the verdict against Bernanke and built an impressive argument supporting her opinion:

What is interesting is how much the tables have turned.  The Obama effort to make the Fed into the uber bank regulator has become a rout, with decent odds that the Fed will have its powers reduced, and an increasing possibility that Bernanke might not be reconfirmed (which is frankly the right outcome, no CEO who presided over a similar disaster would still be in charge).

Smith did not restrict her criticism to the Fed’s failure to control the housing bubble.  Here are some of her points:

For instance, the Fed was the architect of the “let a thousand flowers bloom” policy towards derivatives, and made inadequate (one might say no) effort to understand new financial technology.  Bernanke himself rationalized burgeoning consumer debt, claiming that consumer balance sheets were in good shape.  Hun?  This is Japan circa 1989 thinking.

*   *   *

Yes, I am told the Fed is now making all the banks disclose their derivatives positions to them, but the Fed lacks the analytical capacity to do much with this information (and I am further told the Fed staff understands that too).  So that does not fit my notion of “tougher oversight.”  And the rest is just empty promises.

In response to Bernanke’s claim that Congressional efforts to rein-in the authority of the Fed are “very much out of step with the global consensus on the appropriate role of central banks,” Ms. Smith pounced:

Notice how Bernanke invokes a “global consensus,” which is wonderfully vague and ignores the fact that the pre-crisis “global consensus” of minimally regulated markets and financial institutions, is precisely what caused the crisis.  Moreover, even if the Fed’s mandate in theory was appropriate, its governance structure is not.  The Bank of England and the ECB are not peculiar largely private institutions, accountable to almost no one, as the Fed now is.  The Fed’s insistence on secrecy regarding many of its emergency operations is unwarranted and deeply troubling.  And “the Fed played a major role in arresting the crisis” ignores the fact that the Fed played a major role in creating it, namely, via negative real interest rates for a protracted period.  And he is declaring the Fed’s policies to be successful when the jury is still out.

Brenanke’s claim that the idiotic bank stress tests “marked a turning point in public confidence in the banking system” invited a well-deserved attack.  Here’s how Yves Smith handled it:

The worst is the folks at the Fed clearly believe the bogus stress tests were a meaningful exercise.  That alone should disqualify them from getting a bigger role in bank supervision.  And if you read their pronouncements, they plan to continue to use them, and have the process run by …  monetary economists!  Pray tell, what do they know about bank operations?  Help me!  And some of the help the Fed has enlisted in the stress test exercise includes the consulting firm McKinsey, which has the biggest banking practice in the consulting industry.  Think McKinsey is going to devise anything that might be rough on its biggest meal tickets?

Remember that these negative reactions to the Bernanke article are just what appeared on Sunday.  By the time the confirmation hearings begin on December 3, you can be sure that Bernanke’s own words from the Post column will be used against him.  We may find that his decision to write this piece was a crucial turning point leading to a decision against his confirmation.



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Compare And Contrast

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November 26, 2009

We have seen and heard so much discussion during the past week concerning the dismal performance of Treasury Secretary “Turbo” Tim Geithner while testifying before the Joint Economic Committee — I won’t repeat it.  At this point, there appears to be a consensus that Turbo Tim has to go.  The scary part comes when pundits start tossing around names for a possible replacement.  One would expect that President Obama might be wise enough to avoid the appointment of another “Wall Street insider” as Treasury Secretary.  Rumors are circulating that The Dimon Dog (Jamie Dimon, CEO of JP Morgan Chase) is being considered for the post.  This buzz gained more traction when bank analyst, Dick Bove, recently voiced support for Dimon as Treasury Secretary.  The handful of Geithner supporters deny that Turbo Tim ever was a “Wall Street insider”.  This assertion is contradicted by the fact that Geithner was the President of the New York Federal Reserve at the time of the financial crisis, when he served as architect of the more-than-generous bailouts of those “too big to fail” financial institutions — at taxpayer expense.

These days, the most vilified beneficiary of government largesse resulting from the financial crisis is the widely-despised investment bank, Goldman Sachs — often referred to as the “giant vampire squid” — thanks to Matt Taibbi’s metaphor, describing Goldman as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

For whatever reason, a number of commentators have chosen to help defend Goldman Sachs against what they consider to be unfair criticism.  A recent example came to us from James Stewart of The New Yorker.  Stewart had previously written a 25-page essay for that magazine, entitled “Eight Days” — a dramatic chronology of the financial crisis as it unfolded during September of 2008.  Last week, Stewart seized upon the release of the recent SIGTARP report to defend Goldman with a blog posting which characterized the report as supportive of the argument that Goldman owes the taxpayers nothing as a result of the government bailouts resulting from that near-meltdown.  (In case you don’t know, a former Assistant U.S. District Attorney from New York named Neil Barofsky was nominated by President Bush as the Special Investigator General of the TARP program.  The acronym for that job title is SIGTARP.)   In his blog posting, James Stewart began by characterizing Goldman’s detractors as “conspiracy theorists”.  That was a pretty weak start.  Stewart went on to imply that the SIGTARP report refutes the claims by critics that, despite Goldman’s repayment of the TARP bailout, it did not repay the government the billions it received as a counterparty to AIG’s collateralized debt obligations.  Stewart referred to language in the SIGTARP report to support the spin that because “Goldman was fully hedged on its exposure both to a failure by A.I.G. and to the deterioration of value in its collateralized debt obligations” and that “(i)t repaid its TARP loans with interest, bought back the government’s warrants at a nice profit to the Treasury” Goldman therefore owes the government nothing — other than “a special debt of gratitude”.  One important passage from page 22 of the SIGTARP report that Stewart conveniently ignored, concerned the money received by Goldman Sachs as an AIG counterparty by way of Maiden Lane III, at which point those credit default obligations (of questionable value) were purchased at an excessive price by the government.  Here’s that passage from the SIGTARP report:

When FRBNY authorized the creation of Maiden Lane III in November 2008, it lent approximately $24.6 billion to the newly formed limited liability company, and AIG provided Maiden Lane III approximately $5 billion in equity.  These funds were used to purchase CDOs from AIG counterparties worth an estimated fair value of $29.6 billion at the time of the purchases, which were done in three stages on November 25, 2008, December 18, 2008, and December 22, 2008.  AIGFP’s counterparties were paid $27.1 billion, and AIGFP was paid $2.5 billion per an agreement between AIGFP and FRBNY.  The $2.5 billion represented the amount of collateral that AIGFP had previously paid to the counterparties that was in excess of the actual decline in the fair value as of October 31, 2008.

FRBNY’s loan to Maiden Lane III is secured by the CDOs as the underlying assets.  After the loan has been repaid in full plus interest, and, to the extent that there are sufficient remaining cash proceeds, AIG will be entitled to repayment of the $5 billion that the company contributed in equity, plus accrued interest.  After repayment in full of the loan and the equity contribution (each including accrued interest), any remaining proceeds will be split 67 percent to FRBNY and 33 percent to AIG.

On November 21, one of my favorite reporters for The New York Times, Pulitzer Prize winner Gretchen Morgenson, wrote an informative piece concerning the recent SIGTARP Report.  Compare and contrast Ms. Morgenson’s discussion of the report’s disclosures, with the spin provided by James Stewart.  Here is some of what Ms. Morgenson had to say:

The Fed, under Mr. Geithner’s direction, caved in to A.I.G.’s counterparties, giving them 100 cents on the dollar for positions that would have been worth far less if A.I.G. had defaulted.  Goldman Sachs, Merrill Lynch, Societe Generale and other banks were in the group that got full value for their contracts when many others were accepting fire-sale prices.

On the question of whether this payout was what the report describes as a “backdoor bailout” of A.I.G.’s counterparties, Mr. Barofsky concluded:  “The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties.”  The report noted that this was money the banks might not otherwise have received had A.I.G. gone belly-up.

*   *   *

Finally, Mr. Barofsky pokes holes in arguments made repeatedly over the past 14 months by Goldman Sachs, A.I.G.’s largest trading partner and recipient of $12.9 billion in taxpayer money in the bailout, that it had faced no material risk in an A.I.G. default — that, in effect, had A.I.G. cratered, Goldman wouldn’t have suffered damage.

*   *   *

Rather than forcing the banks to accept a steep discount, or “haircut,” the Fed gave the banks $27 billion in taxpayer cash and allowed them to keep an additional $35 billion in collateral already posted by A.I.G.  That amounted to about $62 billion for the contracts, which the report describes as “far above their market value at the time.”

*   *   *

As Goldman prepares to pay out nearly $17 billion in bonuses to its employees in one of its most profitable years ever, it is important that an authoritative, independent voice like Mr. Barofsky’s reminds us how the taxpayer bailout of A.I.G. benefited Goldman.

*   *   *

The inspector noted in his report that Goldman made several arguments for why it believed it was not materially at risk in an A.I.G. default, but he is skeptical of the firm’s reasoning.

So is Janet Tavakoli, an expert in derivatives at Tavakoli Structured Finance, a consulting firm.

*   *   *

Ms. Tavakoli argues that Goldman should refund the money it received in the bailout and take back the toxic C.D.O.’s now residing on the Fed’s books — and to do so before it begins showering bonuses on its taxpayer-protected employees.

“A.I.G., a sophisticated investor, foolishly took this risk,” she said.  “But the U.S. taxpayer never agreed to be the victim of investments that should undergo a rigorous audit.”

After reading James Stewart’s November 19 blog posting and Gretchen Morgenson’s November 21 article from The New York Times, ask yourself this:  Are Gretchen Morgenson and Janet Tavakoli “conspiracy theorists”      . . .  or is James Stewart just a tool?



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