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Geithner Gets Bashed in New Book

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Much has been written about “Turbo” Tim Geithner since he first became Treasury Secretary on January 26, 2009.  In his book, Too Big to Fail, Andrew Ross Sorkin wrote adoringly about Geithner’s athletic expertise.  On the other hand, typing “Turbo Tim Geithner” into the space on the upper-right corner of this page and clicking on the little magnifying glass will lead you to no less than 61 essays wherein I saw fit to criticize the Treasury Secretary.  I first coined the “Turbo” nickname on February 9, 2009 and on February 16 of that year I began linking “Turbo” to an explanatory article, for those who did not understand the reference.

Geithner has never lacked defenders.  The March 10, 2010 issue of The New Yorker ran an article by John Cassidy entitled, “No Credit”.  The title was meant to imply that Getithner’s efforts to save America’s financial system were working, although he was not getting any credit for this achievement.  From the very outset, the New Yorker piece was obviously an attempt to reconstruct Geithner’s controversial public image – because he had been widely criticized as a tool of Wall Street.

Edward Harrison of Credit Writedowns dismissed the New Yorker article as “an out and out puff piece” that Geithner himself could have written:

Don’t be fooled; this is a clear plant to help bolster public opinion for a bailout and transfer of wealth, which was both unnecessary and politically damaging.

Another article on Geithner, appearing in the April 2010 issue of The Atlantic, was described by Edward Harrison as “fairly even-handed” although worthy of extensive criticism.  Nevertheless, after reading the following passage from the first page of the essay, I found it difficult to avoid using the terms “fawning and sycophantic” to describe it:

In the course of many interviews about Geithner, two qualities came up again and again.  The first was his extraordinary quickness of mind and talent for elucidating whatever issue was the preoccupying concern of the moment.  Second was his athleticism.  Unprompted by me, friends and colleagues extolled his skill and grace at windsurfing, tennis, basketball, running, snowboarding, and softball (specifying his prowess at shortstop and in center field, as well as at the plate).  He inspires an adolescent awe in male colleagues.

Gawd!  Yeech!

In November of 2008, President George W. Bush appointed Neil M. Barofsky to the newly-established position, Special Inspector General for the Troubled Asset Relief Program (SIGTARP).  Barofsky was responsible for preventing fraud, waste and abuse involving TARP operations and funds.  From his first days on that job, Neil Barofsky found Timothy Geithner to be his main opponent.  On March 31 of 2009, the Senate Finance Committee held a hearing on the oversight of TARP.  The hearing included testimony by Neil Barofsky, who explained how the Treasury Department had been interfering with his efforts to ascertain what was being done with TARP funds which had been distributed to the banks.  Matthew Jaffe of ABC News described Barofsky’s frustration in attempting to get past the Treasury Department’s roadblocks.

On the eve of his retirement from the position of Special Inspector General for TARP (SIGTARP), Neil Barofsky wrote an op-ed piece for the March 30, 2011 edition of The New York Times entitled, “Where the Bailout Went Wrong”.  Barofsky devoted a good portion of the essay to a discussion of the Obama administration’s failure to make good on its promises of “financial reform”, with a particular focus on the Treasury Department:

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

In the final analysis, it has been Treasury’s broken promises that have turned TARP — which was instrumental in saving the financial system at a relatively modest cost to taxpayers — into a program commonly viewed as little more than a giveaway to Wall Street executives.

It wasn’t meant to be that.  Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals — whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in — may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.  This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

It should come as no surprise that in Neil Barofsky’s new book, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, the author pulls no punches in his criticism of Timothy Geithner.  Barofsky has been feeding us some morsels of what to expect from the book by way of some recent articles in Bloomberg News.  Here is some of what Barofsky wrote for Bloomberg on July 22:

More important, the financial markets continue to bet that the government will once again come to the big banks’ rescue.  Creditors still give the largest banks more favorable terms than their smaller counterparts — a direct subsidy to those that are already deemed too big to fail, and an incentive for others to try to join the club.  Similarly, the major banks are given better credit ratings based on the assumption that they will be bailed out.

*   *   *

The missteps by Treasury have produced a valuable byproduct: the widespread anger that may contain the only hope for meaningful reform. Americans should lose faith in their government.  They should deplore the captured politicians and regulators who distributed tax dollars to the banks without insisting that they be accountable.  The American people should be revolted by a financial system that rewards failure and protects those who drove it to the point of collapse and will undoubtedly do so again.

Only with this appropriate and justified rage can we hope for the type of reform that will one day break our system free from the corrupting grasp of the megabanks.

In his review of Barofsky’s new book, Darrell Delamaide of MarketWatch discussed the smackdown Geithner received from Barofsky:

Barofsky may have an axe to grind, but he grinds it well, portraying Geithner as a dissembling bureaucrat in thrall to the banks and reminding us all that President Barack Obama’s selection of Geithner as his top economic official may have been one of his biggest mistakes, and a major reason the White House incumbent has to fight so hard for re-election.

From his willingness to bail out the banks with virtually no accountability, to his failure to make holders of credit default swaps on AIG take a haircut, to his inability to mount any effective program for mortgage relief, Geithner systematically favored Wall Street over Main Street and created much of the public’s malaise in the aftermath of the crisis.

*    *    *

Barofsky, a former prosecutor, relates that he rooted for Geithner to get the Treasury appointment and was initially willing to give him the benefit of the doubt when it emerged that he had misreported his taxes while he worked at the International Monetary Fund.

But as more details on those unpaid taxes came out and Geithner’s explanations seemed increasingly disingenuous, Barofsky had his first doubts about the secretary-designate.

Barofsky, of course, was not alone in his skepticism, and Geithner’s credibility was damaged from the very beginning by the disclosures about his unpaid taxes.

*   *   *

Barofsky concludes his scathing condemnation of Geithner’s “bank-centric policies” by finding some silver lining in the cloud – that the very scale of the government’s failure will make people angry enough to demand reform.

Once Geithner steps down from his position at the end of the year, we may find that his legacy is defined by Neil Barofsky’s book, rather than any claimed rescue of the financial system.


 

Tempus Fugit

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If a Democrat wants to challenge Barack Obama for the Democratic Party’s Presidential nomination, time is quickly running out.  It takes a while to put a campaign together.  Aside from rounding-up enough money to challenge an incumbent – who is expected to have a $1 billion war chest – there are other logistic challenges.  For starters, a campaign team must be assembled, along with a network across the states.  Messaging strategy and a campaign theme must be established.  It’s a huge deal.  Nevertheless, if the Democrats believe that they can just sit back and watch Obama swagger his way to re-election – they’re going to be in for a big disappointment.

As I pointed out in my last posting, Obama’s problems have expanded beyond weak polling numbers.  The Solyndra scandal can be expected to receive at least as much television coverage as the Casey Anthony “Tot Mom” trial.  Ron Suskind’s new book about the President’s handling of the economy, Confidence Men, has provided us with an abundance of insights on Obama’s leadership failings.  Those observations will reverberate throughout the 2012 campaign until Election Day.

Obama’s mishandling of the economic crisis is useful only as evidence of the President’s ineptitude in the domestic policy arena.  Has Obama done any better with his foray into foreign policy?  Steve Clemons provided us with the answer to that question by way of an article which appeared in The Atlantic.  The essay is also available at his own blog, The Washington Note.  Mr. Clemons provided a great analysis of Obama’s influence on the Israel – Palestine peace process:

Obama continues to parrot the line that peace can only be achieved between the “two parties”, that only they can really bring this global ulcer to a close, when they decide to negotiate.  The fact is that the status quo of frozen negotiations is benefiting the dominant, settlement-expanding Israel — and the US, in promising to veto at the UN Security Council Palestine’s bid for official state recognition, is playing guarantor to one side, undermining the aspirations of others on the other side of the equation.  What if the US had said to Kosovo — no statehood, no recognition from the US until you resolve all of your ongoing issues with Russia?

*   *   *

Obama is assuring the further emasculation and perhaps final demise of Palestine’s moderates.  Obama is also treating the Israelis and Palestinians as if they are on equal footing, equally able to concede to each other’s demands.  What Obama doesn’t get is that a substantial portion of Israel’s population loves not having a deal and never wants one.  They are OK with a peace process to nowhere — but that is not acceptable for the less-endowed, less-powerful Palestinian side.  Hamas is in the rejectionist corner as well, seeing its fortunes rise as earnest efforts at peace go nowhere.

The world watched Barack Obama lose a battle in the last two years with Israel Prime Minister Benjamin Netanyahu over Israeli settlement expansion in contested and occupied territories.  This is like the Soviet Union having lost a war of wills at the height of its power with Cuba.

The client state trumped the President of the United States — telegraphing to many around the world that President Obama ultimately didn’t have the courage of his convictions and wasn’t able to deploy power and statecraft to achieve the outlines of what he called for in his lofty rhetoric.  Obama’s UN General Assembly speech has done nothing to reverse the impression that Netanyahu is the alpha dog in the relationship with President Obama — and this is truly tragic and geostrategically consequential.

Well, at least Obama is consistent  .  .  .  equally inept and spineless on foreign policy issues as he is when challenged with domestic policy matters.

Will any Democrat step up to prevent the Republican Party from taking over the White House (any more than it already has with Obama in there)?  The President’s apologists can no longer dismiss criticism of this administration by characterizing it as propaganda from Fox News.  Matt Taibbi’s recent remark about Obama exemplifies how an increasing number of Americans – from across the political spectrum – feel about our current President:

I just don’t believe this guy anymore, and it’s become almost painful to listen to him.

Wake up, Democrats!  Time is of the essence.


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The Lehman Fallout

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March 16, 2010

Everyone is speculating about what will happen next.  The shock waves resulting from the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, have left the blogosphere’s commentators with plenty to discuss.  Unfortunately, the mainstream media isn’t giving this story very much traction.  On March 15, the Columbia Journalism Review published an essay by Ryan Chittum, decrying the lack of mainstream media attention given to the Lehman scandal.  Here is some of what he said:

Look, I know that Lehman collapsed a year and a half ago, but this is a major story — one that finally gets awfully close to putting the crimes in the crisis.  I’ll go ahead and say it:  If you’ve wanted to know about the Valukas report and its implications, you’ve been better served by reading Zero Hedge and Naked Capitalism than you have The Wall Street Journal or New York Times.  This on the biggest financial news story of the week — and one of the biggest of the year.  These papers have hundreds of journalists at their disposal.  The blogs have one non-professional writer and a handful of sometime non-pro-journalist contributors.

I’m hardly the only one who has noticed this.  James Kwak of Baseline Scenario wrote this earlier today:

Overall, I’m surprised by how little interest the report has gotten in the media, given its depth and the surprising nature of some of its findings.

At the Zero Hedge website, Tyler Durden reacted to the Columbia Journalism Review piece this way:

Only a few days have passed since its release, and already the Mainstream Media has forgotten all about the Lehman Examiner Report, with barely an occasional mention.  As the CJR points out, this unquestionably massive story of corruption and vice, is being covered up by powered interests controlling all the major news outlets, because just like in the Galleon case, the stench goes not only to the top, (in this case the NewYork Fed and the SEC), but very likely to various corporations that have vested interests in the conglomerates controlling America’s key media organizations.

One probable reason why the Lehman story is being buried is because its timing dovetails so well with the unveiling of Senator “Countrywide Chris” Dodd’s financial reform plan.  The fact that Dodd’s plan includes the inane idea of expanding the powers of the Federal Reserve was not to be ignored by John Carney of The Business Insider website:

Why do we think these are such bad ideas?  At the most basic level, it’s hard to see how the expansion of the scope of the Federal Reserve’s authority to cover any large financial institution makes sense.  The Federal Reserve was not able to prevent disaster at the firms it was already charged with overseeing.  What reason is there to think it will do a better job at regulating a wider universe of firms?

More concretely, the Federal Reserve had regulators in place inside of Lehman Brothers following the collapse of Bear Stearns.  These in-house regulators did not realize that Lehman’s management was rebuking market demands for reduced risk and covering up its rebuke with accounting sleight-of-hand.  When Lehman actually came looking for a bailout, officials were reportedly surprised at how bad things were at the firm.  A similar situation unfolded at Merrill Lynch.  The regulators proved inadequate to the task.

Just think:  It was only one week ago when we were reading those fawning, sycophantic stories in The New Yorker and The Atlantic about what a great guy “Turbo” Tim Geithner is.  This week brought us a great essay by Professor Randall Wray, which raised the question of whether Geithner helped Lehman hide its accounting tricks.  Beyond that, Professor Wray emphasized how this scandal underscores the need for Federal Reserve transparency, which has been so ardently resisted by Ben Bernanke.  (Remember the lawsuit by the late Mark Pittman of Bloomberg News?)  Among the great points made by Professor Wray were these:

Not only did the NY Fed fail to blow the whistle on flagrant accounting tricks, it also helped to hide Lehman’s illiquid assets on the Fed’s balance sheet to make its position look better.  Note that the NY Fed had increased its supervision to the point that it was going over Lehman’s books daily; further, it continued to take trash off the books of Lehman right up to the bitter end, helping to perpetuate the fraud that was designed to maintain the pretense that Lehman was not massively insolvent. (see here)

Geithner told Congress that he has never been a regulator. (see here)  That is a quite honest assessment of his job performance, although it is completely inaccurate as a description of his duties as President of the NY Fed.

*   *   *

More generally, this revelation drives home three related points.  First, the scandal is on-going and it is huge. President Obama must hold Geithner accountable.  He must determine what did Geithner know, and when did he know it.  All internal documents and emails related to the AIG bailout and the attempt to keep Lehman afloat need to be released.  Further, Obama must ask what has Geithner done to favor his clients on Wall Street?  It now looks like even the Fed BOG, not just the NY Fed, is involved in the cover-up.  It is in the interest of the Obama administration to come clean.  It is hard to believe that it does not already have sufficient cause to fire Geithner.  In terms of dollar costs to the government, this is surely the biggest scandal in US history.  In terms of sheer sleaze does it rank with Watergate?  I suppose that depends on whether you believe that political hit lists and spying that had no real impact on the outcome of an election is as bad as a wholesale handing-over of government and the economy to Wall Street.

It remains to be seen whether anyone in the mainstream media will be hitting this story so hard.  One possible reason for the lack of significant coverage may exist in this disturbing point at the conclusion of Wray’s piece:

Of greater importance is the recognition that all of the big banks are probably insolvent.  Another financial crisis is nearly certain to hit in coming months — probably before summer.  The belief that together Geithner and Bernanke have resolved the crisis and that they have put the economy on a path to recovery will be exposed as wishful thinking.

Oh, boy!  Not good!  Not good at all!  We’d better change the subject to March Madness, American Idol or Rielle Hunter!  Anything but this!



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Inviting Blowback

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March 11, 2010

Is it just a coincidence that “Turbo” Tim Geithner was the subject of back-to-back feature stories in The New Yorker and The Atlantic ?  A number of commentators don’t think so.

The March 10 issue of The New Yorker ran an article by John Cassidy entitled, “No Credit”.  The title is meant to imply that Getithner’s efforts to save America’s financial system are working but he’s not getting any credit for this achievement.  From the very outset, this piece was obviously an attempt to reconstruct Geithner’s controversial public image – because he has been widely criticized as a tool of Wall Street.

The article by Jo Becker and Gretchen Morgenson in the April 26, 2009 issue of The New York Times helped clarify the record on Geithner’s loyalty to the big banks at the public’s expense, during his tenure as president of the Federal Reserve of New York.  That piece began with a brainstorming session convened by Treasury Secretary Hank Paulson in June of 2008, at which point Paulson asked for suggestions as to what emergency powers the government should have at its disposal to confront the burgeoning financial crisis:

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer.  He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward.  Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription.

The recent article in The New Yorker defends Geithner’s bank bailouts, with a bit of historical revisionism that conveniently avoids a small matter referred to as Maiden Lane III:

During the past ten months, U.S. banks have raised more than a hundred and forty billion dollars from investors and increased the reserves they hold to cover unforeseen losses.  While many small banks are still in peril, their larger brethren, such as Bank of America, Wells Fargo, and Goldman Sachs, are more strongly capitalized than many of their international competitors, and they have repaid virtually all the money they received from taxpayers.  Looking ahead, the Treasury Department estimates the ultimate cost of the financial-rescue package at just a hundred and seventeen billion dollars — and much of that related to propping up General Motors and Chrysler.

Edward Harrison of Credit Writedowns dismissed the NewYorker article as “an out and out puff piece” that Geithner himself could have written:

Don’t be fooled; this is a clear plant to help bolster public opinion for a bailout and transfer of wealth, which was both unnecessary and politically damaging.

The article on Geithner, appearing in the April issue of The Atlantic, was described by Mr. Harrison as “fairly even-handed” although worthy of extensive criticism.  Nevertheless, after reading the following passage from the first page of the essay, I found it difficult to avoid using the terms “fawning and sycophantic” to describe it:

In the course of many interviews about Geithner, two qualities came up again and again.  The first was his extraordinary quickness of mind and talent for elucidating whatever issue was the preoccupying concern of the moment.  Second was his athleticism.  Unprompted by me, friends and colleagues extolled his skill and grace at windsurfing, tennis, basketball, running, snowboarding, and softball (specifying his prowess at shortstop and in center field, as well as at the plate).  He inspires an adolescent awe in male colleagues.

Gawd!  Yeech!

The reaction to the New Yorker and Atlantic articles, articulated by Yves Smith of Naked Capitalism, is an absolutely fantastic “must read” piece.  Ms. Smith goes beyond the subject of Geithner.  Her essay is a tour de force, describing how President Obama sold out the American public in the service of his patrons on Wall Street.  The final two paragraphs portray the administration’s antics with a long-overdue measure of pugilism:

But the Obama administration miscalculated badly.  First, it bought the financiers’ false promise that massive subsidies to them would kick start the economy.  But economists are now estimating that it is likely to take five years to return to pre-crisis levels of unemployment.  Obama took his eye off the ball.  A Democratic President’s most important responsibility is job creation.  It is simply unacceptable to most Americans for Wall Street to be reaping record profits and bonuses while the rest of the country is suffering.  Second, it assumed finance was too complicated to hold the attention of most citizens, and so the (non) initiatives under way now would attract comparatively little scrutiny.  But as public ire remains high, the press coverage has become almost schizophrenic.  Obvious public relations plants, like Ben Bernanke’s designation as Time Magazine’s Man of the Year (precisely when his confirmation is running into unexpected opposition) and stories in the New York Times that incorrectly reported some Goldman executive bonus cosmetics as meaningful concessions have co-existed with reports on the abject failure of Geithner’s mortgage modification program.  While mainstream press coverage is still largely flattering, the desperation of the recent PR moves versus the continued public ire and recognition of where the Administration’s priorities truly lie means the fissures are becoming a gaping chasm.

So with Obama’s popularity falling sharply, it should be no surprise that the Administration is resorting to more concerted propaganda efforts.  It may have no choice.  Having ceded so much ground to the financiers, it has lost control of the battlefield.  The banking lobbyists have perfected their tactics for blocking reform over the last two decades.  Team Obama naively cast its lot with an industry that is vastly more skilled in the dark art of the manufacture of consent than it is.

Congratulations to Yves Smith for writing a fantastic critique of the Obama administration’s combination of nonfeasance and misfeasance in responding to both the financial and economic crises.



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The Battle Over Bernanke

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January 25, 2010

Ben Bernanke’s four-year term as chairman of the Federal Reserve ends on January 31.  There is presently no vote scheduled to confirm President Obama’s nomination of Bernanke to that post because four Senators (Bernie Sanders, D-Vt.; Jim Bunning, R-Ky.; Jim DeMint, R-S.C. and David Vitter, R-La.) have placed holds on Bernanke’s nomination.  In order for the Senate to proceed to a vote on the nomination, 60 votes will be required.  At this point, there is a serious question as to whether the pro-Bernanke faction can produce those 60 votes.  A number of commentators have described last week’s win by Scott Brown as a “chill factor” for those Senators considering whether to vote for confirmation.  Ryan Grim of The Huffington Post put it this way:

Opposition to the reconfirmation of Federal Reserve Chairman Ben Bernanke is growing in the Senate in the wake of a Republican Scott Brown’s victory, fueled by populist rage, in the Massachusetts Senate race.

James Pethokoukis of Reuters explained the situation in these terms:

Liberals in Congress want him gone.  Then again, they want pretty much the whole Obama economic team gone.  But Geithner and Summers aren’t up for a Senate vote.  Bernanke is.  And if Dems start bailing, don’t expect Republicans to save him.  No politician in America gains anything by voting for Bernanke.  A “no” vote is a free vote.  Wall Street still loves him, though.  Geithner, too.

At The Hill, Tony Romm reported:

Bernanke has taken heat as Wall Street’s profits have soared while unemployment has become stuck in double digits, and the wave of economic populism soaring through Washington in the wake of a stunning Democratic loss in the Massachusetts Senate races comes at a bad time for his confirmation.

If Bernanke is not confirmed, he will continue to sit on the Federal Reserve Board of Governors because each Fed Governor is appointed to a 14-year term.  Donald Kohn, the vice chairman, would serve as the interim chairman until Bernanke’s successor is nominated and confirmed.

The forces pushing for Bernanke’s confirmation have now resorted to scare tactics, warning that dire consequences will result from a failure to re-confirm Bernanke.  Senator “Countrywide Chris” Dodd warned that if Bernanke is not confirmed, the economy will go into a “tailspin”.  An Associated Press report, written by Jennine Aversa and carried by The Washington Post, warned that a failure to confirm Bernanke could raise the risk of a double-dip recession.  At The Atlantic, Megan McArdle exploited widespread concern over already-depleted retirement savings:

Spiking his nomination may have grim effects on 401(k)s throughout the land.

Not to be outdone, Judge Richard Posner issued this warning from his perch at The Atlantic:

If he is not confirmed, the independence of the Fed will take a terrible hit, because the next nominee will have to make outright promises to Congress of bank bashing, and of keeping interest rates way down regardless of inflation risk, in order to be confirmed.

I guess that these people forgot to mention that if Bernanke is not confirmed:

A plague of locusts shall be visited upon us,

The earth will be struck by a Texas-sized asteroid,

An incurable venereal disease will be spread via toilet seats,

The Internet will vanish, and   . . .

Osama bin Laden will become the next Justice of the United States Supreme Court.

At the Think Progress website, Matthew Yglesias pondered the issue:

What happens if Ben Bernanke isn’t reconfirmed?  Well, some folks seem to think it will send markets into a tailspin.  But it’s worth emphasizing that in literal terms almost nothing will happen.

Beyond that, as Sudeep Reddy and Damian Paletta explained in The Wall Street Journal:

The Federal Open Market Committee — which consists of the presidentially appointed Fed governors in Washington and the presidents of the regional Fed banks — meets Jan. 26-27 and traditionally elects a chairman and vice chairman at its first meeting of the year.  The committee, which makes monetary policy decisions, is set to elect Mr. Bernanke as its chairman at that meeting, a move that doesn’t require approval of the White House or the Senate.

Min Zeng of The Wall Street Journal filled us in as to what else we can expect from the FOMC this week:

Next week, the two-day FOMC meeting will end Wednesday afternoon with a statement on an interest-rate decision and policymakers’ latest outlook on the economy and inflation.

The FOMC is widely expected by market participants to keep its main policy rate — the fed-funds target rate — at ultra-low levels near zero as recent data haven’t demonstrated a persistent and strong economic recovery, with a jobless rate still hovering around the highest level in more than two decades.

Fed policymakers are also likely to stick to their plan to end the $1.25 trillion mortgage-backed securities purchases program at the end of March.  The central bank should also reiterate its plan to let some emergency lending programs expire Feb. 1.

The Fed could soon hike the rate it charges on emergency loans, known as the discount rate, but that would largely be symbolic now that banks have been borrowing less and less from it as financial markets stabilized.

Meanwhile, the battle against the Bernanke confirmation continues.  Mike Shedlock (a/k/a Mish) has urged his readers to contact the “undecided” Senators and voice opposition to Bernanke.  Mish has also provided the names and contact information for those Senators, as well as the names of those Senators who are currently on record as either supporting or opposing Bernanke.

I’d like to see Bernanke lose, regardless of the consequences.  The rationale for this opinion was superbly articulated by Senator Jim Bunning during the confirmation hearing on December 3.  If you’re not familiar with it — give it a read.  Here is Senator Bunning’s conclusion to those remarks, delivered directly to Bernanke:

From monetary policy to regulation, consumer protection, transparency, and independence, your time as Fed Chairman has been a failure.  You stated time and again during the housing bubble that there was no bubble.  After the bubble burst, you repeatedly claimed the fallout would be small.  And you clearly did not spot the systemic risks that you claim the Fed was supposed to be looking out for.  Where I come from we punish failure, not reward it.  That is certainly the way it was when I played baseball, and the way it is all across America.  Judging by the current Treasury Secretary, some may think Washington does reward failure, but that should not be the case.  I will do everything I can to stop your nomination and drag out the process as long as possible.  We must put an end to your and the Fed’s failures, and there is no better time than now.

Amen.



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Simon Johnson In The Spotlight

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October 12, 2009

An ever-increasing number of people are paying close attention to a gentleman named Simon Johnson.  Mr. Johnson, a former chief economist at the International Monetary Fund, now works at MIT as Professor of Entrepreneurship at the Sloan School of Management.  His Baseline Scenario website is focused on the financial and economic crises.  At the Washington Post website, he runs a blog with James Kwak called The Hearing.  Last spring, Johnson turned more than a few heads with his article from the May 2009 issue of The Atlantic, “The Quiet Coup”, in which he explained that what happened in America during last year’s financial crisis and what is currently happening with our economic predicament is “shockingly reminiscent” of events experienced during financial crises in emerging market nations (i.e. banana republics and proto-capitalist regimes).

On October 9, Joe Nocera of The New York Times began his column by asking Professor Johnson what he thought the Wall Street banks owed America after receiving trillions of dollars in bailouts.  Johnson’s response turned to Wednesday’s upcoming fight before the House Financial Services Committee concerning the financial reforms proposed by the Obama administration:

“They can’t pay what they owe!” he began angrily.  Then he paused, collected his thoughts and started over:  “Tim Geithner saved them on terms extremely favorable to the banks.  They should support all of his proposed reforms.”

Mr. Johnson continued, “What gets me is that the banks have continued to oppose consumer protection.  How can they be opposed to consumer protection as defined by a man who is the most favorable Treasury Secretary they have had in a generation?  If he has decided that this is what they need, what moral right do they have to oppose it?  It is unconscionable.”

This week’s battle over financial reform has been brewing for quite a while.  Back on May 31, Gretchen Morgenson and Dan Van Natta wrote a piece for The New York Times entitled, “In Crisis, Banks Dig In for Fight Against Rules”:

Hotly contested legislative wars are traditional fare in Washington, of course, and bills are often shaped by the push and pull of lobbyists — representing a cornucopia of special interests — working with politicians and government agencies.

What makes this fight different, say Wall Street critics and legislative leaders, is that financiers are aggressively seeking to fend off regulation of the very products and practices that directly contributed to the worst economic crisis since the Great Depression.  In contrast, after the savings-and-loan debacle of the 1980s, the clout of the financial lobby diminished significantly.

In case you might be looking for a handy scorecard to see which members of Congress are being “lobbied” by the financial industry and to what extent those palms are being greased, The Wall Street Journal was kind enough to provide us with an interactive chart.  Just slide the cursor next to the name of any member of the House Financial Services Committee and you will be able to see how much generosity that member received just during the first quarter of 2009 from an entity to be affected by this legislation.  The bars next to the committee members’ names are color-coded, with different colors used to identify specific sources, whose names are displayed as you pass over that section of the bar.  This thing is a wonderful invention.  I call it “The Graft Graph”.

On October 9, Simon Johnson appeared with Representative Marcy Kaptur (D – Ohio) on the PBS program, Bill Moyers Journal.  At one point during the interview, Professor Johnson expressed grave doubts about our government’s ability to implement financial reform:

And yet, the opportunity for real reform has already passed. And there is not going to be — not only is there not going to be change, but I’ll go further.  I’ll say it’s going to be worse, what comes out of this, in terms of the financial system, its power, and what it can get away with.

*  *   *

BILL MOYERS:  Why have we not had the reform that we all knew was being — was needed and being demanded a year ago?

SIMON JOHNSON:  I think the opportunity — the short term opportunity was missed.  There was an opportunity that the Obama Administration had.  President Obama campaigned on a message of change.  I voted for him.  I supported him.  And I believed in this message.  And I thought that the time for change, for the financial sector, was absolutely upon us.  This was abundantly apparent by the inauguration in January of this year.

SIMON JOHNSON:  And Rahm Emanuel, the President’s Chief of Staff has a saying.  He’s widely known for saying, ‘Never let a good crisis go to waste’.  Well, the crisis is over, Bill.  The crisis in the financial sector, not for people who own homes, but the crisis for the big banks is substantially over.  And it was completely wasted.  The Administration refused to break the power of the big banks, when they had the opportunity, earlier this year.  And the regulatory reforms they are now pursuing will turn out to be, in my opinion, and I do follow this day to day, you know.  These reforms will turn out to be essentially meaningless.

Sound familiar?  If you change the topic to healthcare reform, you end up with the same bottom line:  “These reforms will turn out to be essentially meaningless.”  The inevitable watering down of both legislative efforts can be blamed on weak, compromised leadership.  It’s one thing to make grand promises on the campaign trail — yet quite another to look a lobbyist in the eye and say:  “Thanks, but no thanks.”  Toward the end of the televised interview, Bill Moyers had this exchange with Representative Kaptur:

BILL MOYERS:   How do we get Congress back?  How do we get Congress to do what it’s supposed to do?  Oversight.  Real reform.  Challenge the powers that be.

MARCY KAPTUR:  We have to take the money out.  We have to get rid of the constant fundraising that happens inside the Congress.  Before political parties used to raise money; now individual members are raising money through the DCCC and the RCCC.  It is absolutely corrupt.

As we all know, our system of legalized graft goes beyond the halls of Congress.  During his Presidential campaign, Barack Obama received nearly $995,000 in contributions from the people at Goldman Sachs.  The gang at 85 Broad Street is obviously getting its money’s worth.



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The Longest Year

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September 14, 2009

As I write this, President Obama is preparing another fine-sounding, yet empty speech.  His subject this time is financial reform.  You may recall last week’s lofty address to the joint session of Congress, promoting his latest, somewhat-less-nebulous approach to healthcare reform.  He assured the audience that the so-called “public option” (wherein a government-created entity competes with private sector healthcare insurers) would be an integral part of the plan.  Within a week, two pieces of political toast from the Democratic Party (Nancy Pelosi and Harry Reid) set about undermining that aspect of the healthcare reform agenda.  This is just one reason why, on November 2, 2010, the people who elected Democrats in 2006 and 2008 will be taking a “voters’ holiday”, paving the way for Republican majorities in the Senate and House.  The moral lapse involving the public option was documented by David Sirota for Danny Schechter’s NewsDissector blog:

House Speaker Nancy Pelosi for the first time yesterday suggested she may be backing off her support of the public option – the government-run health plan that the private insurance industry is desperately trying to kill.  According to CNN, Pelosi and Senate Majority Leader Harry Reid “said they would support any provision that increases competition and accessibility for health insurance – whether or not it is the public option favored by most Democrats.”

This announcement came just hours before Steve Elmendorf, a registered UnitedHealth lobbyist and the head of UnitedHealth’s lobbying firm Elmendorf Strategies, blasted this email invitation throughout Washington, D.C. I just happened to get my hands on a copy of the invitation from a source – check it out:

From: Steve Elmendorf [mailto:steve@elmendorfstrategies.com]
Sent: Friday, September 11, 2009 8:31 AM
Subject: event with Speaker Pelosi at my home
You are cordially invited to a reception with

Speaker of the House
Nancy Pelosi

Thursday, September 24, 2009
6:30pm ~ 8:00pm

At the home of
Steve Elmendorf
2301 Connecticut Avenue, NW
Apt. 7B
Washington, D.C.

$5,000 PAC
$2,400 Individual

Again, Elmendorf is a registered lobbyist for UnitedHealth, and his firm’s website brags about its work for UnitedHealth on its website.

The sequencing here is important: Pelosi makes her announcement and then just hours later, the fundraising invitation goes out. Coincidental?  I’m guessing no – these things rarely ever are.

I wrote a book a few years ago called Hostile Takeover whose premise was that corruption and legalized bribery has become so widespread that nobody in Washington even tries to hide it. This is about as good an example of that truism as I’ve ever seen.

Whatever President Obama proposes to accomplish in terms of financial reform will surely be met with a similar fate.  Worse yet, his appointment of “Turbo” Tim Geithner as Treasury Secretary and his nomination of Ben Bernanke to a second term as Federal Reserve chairman are the best signals of the President’s true intention:  Preservation of the status quo, regardless of the cost to the taxpayers.

On this first anniversary of the demise of Lehman Brothers and the acknowledgment of the financial crisis, many commentators have noted the keen observations by Simon Johnson, a former chief economist at the International Monetary Fund, published in the May, 2009 issue of The Atlantic.  The theme of Johnson’s article, “The Quiet Coup” was that the current economic and financial crisis in the United States is “shockingly reminiscent” of those experienced in emerging markets (i.e. banana republics and proto-capitalist regimes).  The devil behind all the details in setting these systems upright after a financial crisis is the age-old concept of moral hazard or more simply:  sleaze.  In making the comparison of the United States to the emerging market countries he encountered at the IMF, Mr. Johnson began this way:

But there’s a deeper and more disturbing similarity:  elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse.  More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.  The government seems helpless, or unwilling, to act against them.

Here are a few more passages from “The Quiet Coup” that our political leaders would be well-advised to consider:

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason:  it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change.  As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.”  But there’s the rub:  the economy can’t recover until the banks are healthy and willing to lend.

*   *   *

The second problem the U.S. faces—the power of the oligarchy— is just as important as the immediate crisis of lending.  And the advice from the IMF on this front would again be simple:  break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business.  Where this proves impractical—since we’ll want to sell the banks quickly— they could be sold whole, but with the requirement of being broken up within a short time.  Banks that remain in private hands should also be subject to size limitations.

Mr. Johnson pointed out the need to overhaul our current antitrust laws – not because any single institution controls so much market share as to influence prices – but because the failure of any one “to big to fail” bank could collapse the entire financial system.

One of my favorite reporters at The New York Times, Gretchen Morgenson, observed the anniversary of the Lehman Brothers failure with an essay that focused, in large part, on a recent paper by Edward Kane, a finance professor at Boston College, who created the expression: “zombie bank” in 1987.   This month, the Networks Financial Institute at Indiana State University published a policy brief by Dr. Kane on the subject of financial regulation.  In her article:  “But Who Is Watching Regulators?”, Ms. Morgenson summed up Professor Kane’s paper in the following way:

This ugly financial episode we’ve all had to live through makes clear, Mr. Kane says, that taxpayers must protect themselves against two things:  the corrupting influence of bureaucratic self-interest among regulators and the political clout wielded by the large institutions they are supposed to police. Finally, he argues, taxpayers must demand that the government publicize the costs of efforts taken to save the financial system from itself.

Although you may have seen widely-publicized news reports about an “overwhelming number” of academicians opposing the current efforts to require transparency from the Federal Reserve, Professor Kane provides a strong argument in favor of Fed transparency as well as scrutiny of the Treasury and the other government entities enmeshed the complex system of bailouts created within the past year.

At thirty-eight pages, his paper is quite a deep read.  Nevertheless, it’s packed with great criticism of the Federal Reserve and the Treasury.  We need more of this and when someone of Professor Kane’s stature provides it, there had better be people in high places taking it very seriously.  The following are just a few of the many astute observations made by Dr. Kane:

Agency elitism would be evidenced by the extent to which its leaders use crises to establish interpretations and precedents that cover up its mistakes, inflate its powers, expand its discretion, and extend its jurisdiction. According to this standard, Fed efforts to use the crisis as a platform for self-congratulation and for securing enlarged systemic-risk authority sidetracks rather than promotes effective reform.

*   *   *

A financial institution’s incentive to disobey, circumvent or lobby against a particular rule increases with the opportunity cost of compliance. This means that, to sort out the welfare consequences of any regulatory program, we must assess not only the costs and benefits of compliance, but include the costs and benefits of circumvention as well.

*   *   *

Realistically, every government-managed program of disaster relief is a strongly lobbied and nontransparent tax-transfer scheme for redistributing wealth and shifting risk away from the disaster’s immediate victims.  A financial crisis externalizes – in margin and other collateral calls, in depositor runs, and in bank and borrower pleas for government assistance – a political and economic struggle over when and how losses accumulated in corporate balance sheets and in the portfolios of insolvent financial institutions are to be unwound and reallocated across society.  At the same time, insolvent firms and government rescuers share a common interest in mischaracterizing the size and nature of the redistribution so as to minimize taxpayer unrest.

In principle, lenders and investors that voluntarily assume real and financial risks should reap the gains and bear the losses their risk exposures generate.  However, in crises, losers pressure government officials to rescue them and to induce other parties to share their pain.

The advocates of crony capitalism and their tools (our politicians and regulatory bureaucrats) need to know that we are on to them.  If the current administration is willing to facilitate more of the same, then it’s time for some new candidates to step forward.




Ron Paul Struts His Stuff

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August 17, 2009

Republican Congressman Ron Paul of Texas has become quite a popular guy, lately.  Back on February 26, he sponsored his own bill, the Federal Reserve Transparency Act, (HR 1207) which would give the Government Accountability Office authority to audit the Federal Reserve and its member components, requiring a report to Congress by the end of 2010.  On July 29, a Rasmussen poll revealed that 75 percent of those surveyed were in favor of auditing the Federal Reserve, with only 9 percent opposed to such a measure.  Lew Rockwell’s website recently featured an article by Anthony Gregory, discussing the Rasmussen poll results and the popularity of Ron Paul’s proposed legislation:

While much of the hostility toward Obama’s domestic policy might be seen in partisan terms, distrust of the Fed completely transcends typical ideological or partisan lines.  While all Congressional Republicans support Ron Paul’s bill to audit the Fed, so do more than a hundred Democrats, demonstrating the impact of the wide public outrage over the Washington-Wall Street shenanigans since the financial downturn.

The Federal Reserve, a centerpiece in the bipartisan establishment, an essential component in both war finance and economic management, is now the least trusted government agency.  More than two thirds of Americans do not believe the Fed is doing a good job.  Two years ago, virtually no one even talked about the Fed; it was an obscure institution assumed to be necessary, wise and uninteresting.  Anyone who brought it up was accused of being outside the sphere of respectable opinion.  Now its champions are on the defensive, and they are desperately scrambling to restore public awe for the central bank behind the curtain.

But the opposition to Obama’s economic policies, both on the right and on the anti-corporate left who view his ties to the banking industry with suspicion, along with a growing disappointment on the left as it concerns civil liberties and war, may eventually constrain Obama.

The mistrust of the Fed, discussed by Mr. Gregory, was based on a Gallup Poll, also conducted during July, which revealed that the Federal Reserve is now “the least trusted” of all government-related entities.

Despite protests from the academic world and an unsupportive editorial from The Washington Post, support for Ron Paul’s bill continues to gain momentum.  Howard Rich, Chairman of Americans for Limited Government, wrote a favorable commentary on this proposal, pointing out that he initially thought it was a rather strange idea.  He eventually looked at the situation with this rationale:

From its founding in 1913, the Fed has existed as an island of almost total independence — setting interest rates, managing inflation and regulating banks according to the will of its Chairman and seven-member Board of Directors.

It cannot be audited. Its ledger is not disclosed. Its meetings are private. Its decisions are not up for debate.

Of course, this ongoing shroud of secrecy ignores the fact that the Fed — as it exists today — is a completely different animal than it was even two years ago.

No longer merely a “regulatory” agency, the Fed has used the current economic crisis as an excuse to dramatically expand its role.  With zero transparency, accountability and effectiveness, it has printed and loaned trillions of dollars since mid-2007 in a costly and unsuccessful effort to mitigate fallout from the sub-prime mortgage crisis.

The question of where those trillions of dollars went is exactly what is on the minds of most people demanding more accountability from the Fed.  Was any favoritism involved in determining what banks received how much money?  Dean Baker wrote an opinion piece for The Guardian, arguing against the re-appointment of Ben Bernanke for another term as the Fed chairman.  The subject of favoritism in the Fed’s response to last fall’s financial meltdown was apparently a matter of concern to Mr. Baker:

By this measure, Bernanke’s performance is very poor.  He has refused to provide the public, or even the relevant congressional committees, with information on the trillions of dollars in loans that were made through the Fed’s special lending facilities.  While anyone can go to the Treasury’s website and see how much each bank received through Tarp and under what terms, Bernanke refuses to share any information on the loans that banks and other institutions received from the Fed.

Where we do have information, it is not encouraging.  At the peak of the financial crisis in October, Goldman Sachs converted itself from an investment bank into a bank holding company, in part so that it could tap an FDIC loan guarantee programme.  Remarkably, Bernanke allowed Goldman to continue to act as an investment bank, taking highly speculative positions even after it had borrowed $28bn with the FDIC’s guarantee.

The idea that the Federal Reserve could loan trillions of dollars to unidentified beneficiaries on secret terms has resulted in outrage from across the political spectrum.  In his rebuttal to The Washington Post‘s editorial criticizing Ron Paul’s Fed transparency initiative, Independent (and self-avowed socialist) Senator Bernie Sanders of Vermont had this to say:

This legislation wouldn’t undermine the Fed’s independence, and it wouldn’t put Congress in charge of monetary policy.  An audit is simply an examination of records or financial accounts to check their accuracy.

We must not equate “independence” with secrecy.  No matter how intelligent or well-intentioned the Fed chairman and his staff may be, it isn’t appropriate to give a handful of people the power to lend an unlimited supply of money to anyone it wants without sufficient oversight.

Absolute power corrupts absolutely.  The American people have a right to know what is being done with their hard-earned taxpayer dollars.  This money does not belong to the Fed; it belongs to the American people.

The tremendous upsurge in support for the Federal Reserve Transparency Act was obviously what motivated Ron Paul to write an essay on the matter for Sunday’s edition of The Philadelphia Inquirer.  With such a strong wind at his back, he confidently trashed the arguments of his opponents and began the piece with this assertion:

The Federal Reserve’s unprecedented intervention into the U.S. economy has inflamed more Americans than almost any other issue in recent memory.

Congressman Paul then proceeded to pound away at the criticism of his bill, reminding me of a boxer, who sees blood flowing down into his opponent’s eyes:

The most conservative estimates place the potential cost of the Federal Reserve’s bailouts and guarantees at about $9 trillion. That is equivalent to more than 60 percent of the U.S.economy, all undertaken by one organization, and almost all of those transactions are exempt from congressional oversight and public scrutiny.

The Fed and its apologists are using bogeymen to deflect criticism.  If the Fed were audited, they argue, monetary policy would be compromised as Congress tries to direct the Fed’s actions, and the Fed’s record of economic stability and low inflation would come to an end.  Nothing could be further from the truth.

*   *   *

The Fed’s mismanagement created the Great Depression, the stagflation of the 1970s, and now our current economic crisis. Over the nearly100 years of the Fed’s existence, the dollar has lost nearly 95 percent of its purchasing power.  A “mild” rate of inflation of 2 percent per year means that a baby born today will see the dollar’s purchasing power erode by a further 75 percent over his lifetime.  If this boondoggle is the Fed’s definition of stability and sound management of the dollar, I would hate to see what instability looks like.

Yet that is exactly what we face today and in the near future with a federal government and a Federal Reserve working hand in hand to bail out favored Wall Street firms with sums of money that have quickly reached absurd proportions.

*   *   *

The fact that a single entity, the Federal Reserve, has dominated monetary policy for so long has been detrimental to the economy.  As long as we try to keep up the fictions that the Federal Reserve works to benefit the American people, that attempting to fix interest rates will not distort the economy, and that the Fed can end a recession by injecting liquidity, we will never free ourselves from the boom and bust of the business cycle.

A necessary first step to restoring economic stability in this country is to audit the Fed, to find out the multitude of sectors in which it has involved itself, and, once the audit has been completed, to analyze the results and determine how the Fed should be reined in.

When one sees a former Republican Presidential primary contender enjoy this type of momentum, the inevitable question is whether Ron Paul might make another run for the White House.  Justin Miller had this on his mind last month when he discussed this subject for The Atlantic:

Paul is just as plausible a candidate to run for the Republican nomination as are Mitt Romney, Sarah Palin, or Mike Huckabee who were tested in polls this month.  Like them, Paul’s run for the White House (twice) before and has said he isn’t opposed to doing it again, albeit he said it’s “unlikely.”  What’s more likely, based on the circumstantial evidence, is that the Republican voters would receive Paul better than they did last year.  Feature him in polls from now on and we can test this hypothesis.

As President Obama continues to alienate the liberal base of the Democratic Party, Ron Paul might be just the person the Republicans would want to nominate in 2012.  He’ll be 77 years old at that point — just in time for a single term.

More Bad Press For Goldman Sachs

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July 16, 2009

They can’t seem to get away from it, no matter how hard they try.  Goldman Sachs is finding itself confronted with bad publicity on a daily basis.

It all started with Matt Taibbi’s article in Rolling Stone.  As I pointed out on June 25, I liked the article as well as Matt’s other work.  His blog can be found here.  His article on Goldman Sachs employed a good deal of hyperbolic rhetoric which I enjoyed  —  especially the metaphor of Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.  Nevertheless, many commentators took issue with the article, especially focusing on the subtitle’s claim that “Goldman Sachs has engineered every major market manipulation since the Great Depression”.  I took that remark as hyperbole, since it would obviously require over 120 megabytes of space to document “every major market manipulation since the Great Depression” — so I wasn’t disappointed about being unable to read all that.  Some of Taibbi’s critics include Megan McArdle from The Atlantic and Joe Weisenthal at Clusterstock.

On the other hand, Taibbi did get a show of support from Eliot “Socks” Spitzer during a July 14 interview on Bloomberg TV.  Mr. Spitzer made some important points about Goldman’s conduct that we are now hearing from a number of other sources.  Spitzer began by emphasizing that because of the bank bailouts “Goldman’s capital was driven to virtually nothing — because we as taxpayers gave them access to capital — they made a bloody fortune” (another vampire squid reference).  Spitzer voiced the concern that Goldman is simply going back to proprietary trading and taking advantage of spreads, following its old business model.  He argued that, a result of the bailouts:

. . . their job should be, from a macroeconomic perspective, to raise capital and put it into sectors that create jobs.  If they’re not getting that done, then why are we supporting them the way we have been?

This sentiment seems to be coming from all directions, in light of the fact that on July 14, Goldman reported second-quarter profits of 3.44 billion dollars — while on the following day, another TARP recipient, CIT Group disclosed that it would likely file for bankruptcy on July 17.  On July 16, The Wall Street Journal ran an editorial entitled:  “A Tale of Two Bailouts” comparing Goldman’s fate with that of CIT.  The article pointed out that since Goldman’s risk is subsidized by the taxpayers, the company might be more appropriately re-branded as “Goldie Mac”:

We like profits as much as the next capitalist.  But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business.  Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail.  But that is all but impossible now and for the foreseeable future.  Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.

If there is a lesson in this week’s tale of two banks, it’s that it won’t be enough to give the Federal Reserve a mandate to “monitor” systemic risk.  Last fall’s bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share.  Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer’s dime.

Robert Reich voiced similar concern over the fact that “Goldman’s high-risk business model hasn’t changed one bit from what it was before the implosion of Wall Street.”  He went on to explain:

Value-at-risk — a statistical measure of how much the firm’s trading operations could lose in a day — rose to an average of  $245 million in the second quarter from $240 million in the first quarter. In the second quarter of 2008, VaR averaged $184 million.

Meanwhile, Goldman is still depending on $28 billion in outstanding debt issued cheaply with the backing of the Federal Deposit Insurance Corporation.  Which means you and I are still indirectly funding Goldman’s high-risk operations.

*   *   *

So the fact that Goldman has reverted to its old ways in the market suggests it has every reason to believe it can revert to its old ways in politics, should its market strategies backfire once again — leaving the rest of us once again to pick up the pieces.

At The Huffington Post, Mike Lux reminded Goldman that despite its repayment of $10 billion in TARP funds, we haven’t overlooked the fact that Goldman has not repaid the $13 billion it received for being a counterparty to AIG’s bad paper or the “unrevealed billions” it received from the Federal Reserve.  This raises a serious question as to whether Goldman should be allowed to pay record bonuses to its employees, as planned.  Didn’t we go through this once beforePaul Abrams is mindful of this, having issued a wake-up call to “Turbo” Tim Geithner and Congress.

As long as we keep reading the news, each passing day provides us with yet another reminder to feel outrage over the hubris of the people at Goldman Sachs.

Where The Money Is

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June 1, 2009

For the past few months we have been hearing TV “experts” tell us that “it’s almost over” when discussing the Great Recession.  Beyond that, many of the TV news-readers insist that the “bear market” is over and that we are now in a “bull market”.  In his new column for The Atlantic (named after his book A Failure of Capitalism) Judge Richard A. Posner is using the term “depression” rather than “recession” to describe the current state of the economy.  In other words, he’s being a little more blunt about the situation than most commentators would care to be.  Meanwhile, the “happy talk” people, who want everyone to throw what is left of their life savings back into the stock market, are saying that the recession is over.  If you look beyond the “good news” coming from the TV and pay attention to who the “financial experts” quoted in those stories are … you will find that they are salaried employees of such companies as Barclay’s Capital and Charles Schwab  … in other words:  the brokerages and asset managers who want your money.   A more sober report on the subject, prepared by the National Association for Business Economics (NABE) revealed that 74 percent of the economists it surveyed were of the opinion that the recession would end in the third quarter of this year.  Nineteen percent of the economists surveyed by the NABE predicted that the recession would end during the fourth quarter of 2009 and the remaining 7 percent opined that the recession would end during the first quarter of 2010.

Some investors, who would rather not wait for our recession to end before jumping back into the stock market, are rapidly flocking to what are called “emerging markets”.  To get a better understanding of what emerging markets are all about, read Chuan Li’s (mercifully short) paper on the subject for the University of Iowa Center for International Finance and Development.  The rising popularity of investing in emerging markets was evident in Fareed Zakaria’s article from the June 8 issue of Newsweek:

It is becoming increasingly clear that the story of the global economy is a tale of two worlds.  In one, there is only gloom and doom, and in the other there is light and hope.  In the traditional bastions of wealth and power — America, Europe and Japan — it is difficult to find much good news.  But there is a new world out there — China, India, Indonesia, Brazil — in which economic growth continues to power ahead, in which governments are not buried under a mountain of debt and in which citizens remain remarkably optimistic about their future.  This divergence, between the once rich and the once poor, might mark a turn in history.

*    *    *

Compare the two worlds.  On the one side is the West (plus Japan), with banks that are overleveraged and thus dysfunctional, governments groaning under debt, and consumers who are rebuilding their broken balance sheets. America is having trouble selling its IOUs at attractive prices (the last three Treasury auctions have gone badly); its largest state, California, is veering toward total fiscal collapse; and its budget deficit is going to surpass 13 percent of GDP —  a level last seen during World War II.  With all these burdens, even if there is a recovery, the United States might not return to fast-paced growth for a while.  And it’s probably more dynamic than Europe or Japan.

Meanwhile, emerging-market banks are largely healthy and profitable.  (Every Indian bank, government-owned and private, posted profits in the last quarter of 2008!)  The governments are in good fiscal shape.  China’s strengths are well known — $2 trillion in reserves, a budget deficit that is less than 3 percent of GDP — but consider Brazil, which is now posting a current account surplus.

On May 31, The Economic Times reported similarly good news for emerging markets:

Growth potential and a long-term outlook for emerging markets remain structurally intact despite cyclically declining exports and capital outflows, a research report released on Sunday said.

According to Credit Suisse Research’s latest edition of Global Investor, looking forward to an eventual recovery from the current crisis, growth led by domestic factors in emerging markets is set to succeed debt-fuelled US private consumption as the most important driver of global economic growth over coming years.

The Seeking Alpha website featured an article by David Hunkar, following a similar theme:

Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets.

On May 29, The Wall Street Journal‘s Smart Money magazine ran a piece by Elizabeth O’Brien, featuring investment bargains in “re-emerging” markets:

As the U.S. struggles to reverse the economic slide, some emerging markets are ahead of the game.  The International Monetary Fund projects that while the world’s advanced economies will contract this year, emerging economies will expand by as much as 2.5 percent, and some countries will grow a lot faster.  Even better news:  Some pros are finding they don’t have to pay a lot to own profitable “foreign” stocks.  The valuations on foreign stocks have become “very, very attractive,” says Uri Landesman, chief equity strategist for asset manager ING Investment Management Americas.

As for The Wall Street Journal itself, the paper ran a June 1 article entitled: “New Driver for Stocks”, explaining that China and other emerging markets are responsible the rebound in the demand for oil:

International stock markets have long taken their cues from the U.S., but as it became clear that emerging-market economies would hold up best and rebound first from the downturn, the U.S. has in some ways moved over to the passenger seat.

Jim Lowell of MarketWatch wrote a June 1 commentary discussing some emerging market exchange-traded funds (ETFs), wherein he made note of his concern about the “socio-politico volatility” in some emerging market regions:

Daring to drink the water of the above funds could prove to be little more than a way to tap into Montezuma’s revenge.  But history tells us that investors who discount the rewards are as prone to disappointment as those who dismiss the risks.

On May 29, ETF Guide discussed some of the exchange-traded funds focused on emerging markets:

Don’t look now, but emerging markets have re-discovered their mojo.  After declining more than 50 percent last year and leading global stocks into a freefall, emerging markets stocks now find themselves with a 35 percent year-to-date gain on average.

A website focused solely on this area of investments is Emerging Index.

So if you have become too risk-averse to allow yourself to get hosed when this “bear market rally” ends, you may want to consider the advantages and disadvantages of investing in emerging markets.  Nevertheless, “emerging market” investments might seem problematic as a way of dodging whatever bullets come by, when American stock market indices sink.  The fact that the ETFs discussed in the above articles are traded on American exchanges raises a question in my mind as to whether they could be vulnerable to broad-market declines as they happen in this country.  That situation could be compounded by the fact that many of the underlying stocks for such funds are, themselves, traded on American exchanges, even though the stocks are for foreign corporations.  By way of disclosure, as of the time of writing this entry, I have no such investments myself, although by the time you read this  . . .   I just might.

Update: I subsequently “stuck my foot in the water” by investing in the iShares MSCI Brazil Index ETF (ticker symbol: EWZ).  Any guesses as to how long I stick with it?

June 3 Update: Today the S&P 500 dropped 1.37 percent and EWZ dropped 5.37 percent — similar to the losses posted by many American companies.   Suffice it to say:  I am not a happy camper!  I plan on unloading it.

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