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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.


 

Geithner Redeems Himself – For Now

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I’ve never been a fan of Treasury Secretary Tim Geithner.  Nevertheless, I have to give the guy credit for delivering a great speech at the Economic Club of Chicago on April 4.  The event took place in a building which was formerly home to an off-track betting parlor, with an “upscale” section called The Derby Club (where Gene Siskel spent lots of time and money)  – in an era before discretionary income became an obsolete concept.

At a time when the U.S. Chamber of Commerce is suffering from “buyer’s remorse” after bankrolling the election of ideologues opposed to infrastructure spending, Geithner spoke out in favor of common sense.  We have come a long, painful way from the days when the Chamber of Commerce aligned itself against the interests of the “little people”.  As Keith Laing reported for The Hill, the Chamber no longer considers “stimulus” to be such a dirty word.  Laing discussed the joint efforts by the Chamber of Commerce and AFL-CIO executive Edward Wytkind to advance the transportation bill through a Congressional roadblock:

“We’re going to be pounding away during the recess to get House members to know they’ve got to check their party at the door,” Wytkind said of Republicans in the House who opposed accepting the Senate’s transportation bill.

Other transportation supporters were similarly pessimistic.  U.S. Chamber of Commerce executive director of transportation and infrastructure Janet Kavinoky said the 90-day extension could lead to a longer agreement, but only if lawmakers get right back to work after the two-week recess.

“No length of time is going to be good for construction or business, but at least 90 days provides a length of time Congress could get a long-term bill done,” Kavinoky said.  “But the House in particular is going to have their nose to the grindstone, or whatever metaphor you want to use, to get a bill off the House floor and into a conference.”

The timing could not have been better for someone in a position of national leadership to deliver a warning that premature austerity policies (implemented before economic recovery gains traction) can have the same destructive consequences as we are witnessing in Europe.  To his credit, Tim Geithner stepped up to the plate and hit a home run.  Here are his most important remarks, delivered in Chicago on Wednesday:

Much of the political debate and the critiques of business lobbyists misread the underlying dynamics of the economy today.  Many have claimed that the basic foundations of American business are in crisis, critically undermined by taxes and regulation.

And yet, business profits are higher than before the crisis and have recovered much more quickly than overall growth and employment.  Business investment in equipment and software is up by 33 percent over the past 2 ½ years.  Exports have grown 24 percent in real terms over the same period.  And manufacturing is coming back, with factory payrolls up by more than 400,000 since the start of 2010.

The business environment in the United States is in numerous ways better than that of many of our major competitors, as measured by international comparisons of regulatory burden, the tax burden on workers, the quality of legal protections of property rights, the ease of starting a business, the availability of capital, and the broader flexibility of the economy.

The challenges facing the American economy today are not primarily about the vibrancy or efficiency of the business community.  They are about the barriers to economic opportunity and economic security for many Americans and the political constraints that now stand in the way of better economic outcomes.

These challenges can only be addressed by government action to help speed the recovery and repair the remaining damage from the crisis and reforms and investments to lay the foundation for stronger future growth.

This means taking action to support growth in the short-term – such as helping Americans refinance their mortgages and investing in infrastructure projects – so that we don’t jeopardize the gains our economy has made over the last three years.

And it means making the investments and reforms necessary for a stronger economy in the future. Investments in things like education, to help Americans compete in the global economy.  Investments in innovation, so that our economy can offer the best jobs possible.  Investments in infrastructure, to reduce costs and increase productivity.  Policies to expand exports. And reforms to improve incentives for investing in the United States – including reform of our business tax system.

A growth strategy for the American economy requires more than promises to cut taxes and spending.

We have to be willing to do things, not just cut things.

To expand exports, we have to support programs like the Export-Import Bank, which provides financing at no cost to the government for American businesses trying to compete in foreign markets.

To make us more competitive, we have to be willing to make larger long-term investments in infrastructure, not just limp forward with temporary extensions.

Any credible growth agenda has to recognize that there are parts of the economy, like the financial system, that need reform and regulation.  Businesses need to be able to rely on a more stable source of capital, with a financial system that allocates resources to their most productive uses, not misallocating them to an unsustainable real estate boom.

Cutting government investments in education and infrastructure and basic science is not a growth strategy.  Cutting deeply into the safety net for low-income Americans is not financially necessary and cannot plausibly help strengthen economic growth. Repealing Wall Street Reform will not make the economy grow faster – it would just make us more vulnerable to another crisis.

This strategy is a recipe to make us a declining power – a less exceptional nation.  It is a dark and pessimistic vision of America.

Is this simply another example of the Obama administration’s habit of  “doing the talk” without “doing the walk”?  Time will tell.


 

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Running Out of Pixie Dust

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On September 18 of 2008, I pointed out that exactly one year earlier, Jon Markman of MSN.com noted that the Federal Reserve had been using “duct tape and pixie dust” to hold the economy together.  In fact, there were plenty of people who knew that our Titanic financial system was headed for an iceberg at full speed – long before September of 2008.  In October of 2006, Ambrose Evans-Pritchard of the Telegraph wrote an article describing how Treasury Secretary Hank Paulson had re-activated the Plunge Protection Team (PPT):

Mr Paulson has asked the team to examine “systemic risk posed by hedge funds and derivatives, and the government’s ability to respond to a financial crisis”.

“We need to be vigilant and make sure we are thinking through all of the various risks and that we are being very careful here. Do we have enough liquidity in the system?” he said, fretting about the secrecy of the world’s 8,000 unregulated hedge funds with $1.3 trillion at their disposal.

Among the massive programs implemented in response to the financial crisis was the Federal Reserve’s quantitative easing program, which began in November of 2008.  A second quantitative easing program (QE 2) was initiated in November of 2010.  The next program was “operation twist”.  Last week, Jon Hilsenrath of the Wall Street Journal discussed the Fed’s plan for another bit of magic, described by economist James Hamilton as “sterilized quantitative easing”.  All of these efforts by the Fed have served no other purpose than to inflate stock prices.  This process was first exposed in an August, 2009 report by Precision Capital Management entitled, A Grand Unified Theory of Market ManipulationMore recently, on March 9, Charles Biderman of TrimTabs posted this (video) rant about the ongoing efforts by the Federal Reserve to manipulate the stock market.

At this point, many economists are beginning to pose the question of whether the Federal Reserve has finally run out of “pixie dust”.  On February 23, I mentioned the outlook presented by economist Nouriel Roubini (a/k/a Dr. Doom) who provided a sobering counterpoint to the recent stock market enthusiasm in a piece he wrote for the Project Syndicate website entitled, “The Uptick’s Downside”.  I included a discussion of economist John Hussman’s stock market prognosis.  Dr. Hussman admitted that there might still be an opportunity to make some gains, although the risks weigh heavily toward a more cautious strategy:

The bottom line is that near-term market direction is largely a throw of the dice, though with dice that are modestly biased to the downside.  Indeed, the present overvalued, overbought, overbullish syndrome tends to be associated with a tendency for the market to repeatedly establish slight new highs, with shallow pullbacks giving way to further marginal new highs over a period of weeks.  This instance has been no different.  As we extend the outlook horizon beyond several weeks, however, the risks we observe become far more pointed.  The most severe risk we measure is not the projected return over any particular window such as 4 weeks or 6 months, but is instead the likelihood of a particularly deep drawdown at some point within the coming 18-month period.

In December of 2010, Dr. Hussman wrote a piece, providing “An Updated Who’s Who of Awful Times to Invest ”, in which he provided us with five warning signs:

The following set of conditions is one way to capture the basic “overvalued, overbought, overbullish, rising-yields” syndrome:

1) S&P 500 more than 8% above its 52 week (exponential) average
2) S&P 500 more than 50% above its 4-year low
3) Shiller P/E greater than 18
4) 10-year Treasury yield higher than 6 months earlier
5) Advisory bullishness > 47%, with bearishness < 27%

On March 10, Randall Forsyth wrote an article for Barron’s, in which he basically concurred with Dr. Hussman’s stock market prognosis.  In his most recent Weekly Market Comment, Dr. Hussman expressed a bit of umbrage about Randall Forsyth’s remark that Hussman “missed out” on the stock market rally which began in March of 2009:

As of last week, the market continued to reflect a set of conditions that have characterized a wicked subset of historical instances, comprising a Who’s Who of Awful Times to Invest .  Barron’s ran a piece over the weekend that reviewed our case.  It’s interesting to me that among the predictable objections (mostly related to our flat post-2009 performance, but overlooking the 2000-2009 record), none addressed the simple fact that the prior instances of this condition have invariably turned out terribly.  It seems to me that before entirely disregarding evidence that is as rare as it is ominous, you have to ask yourself one question.  Do I feel lucky?

*   *   *

Investors Intelligence notes that corporate insiders are now selling shares at levels associated with “near panic action.”  Since corporate insiders typically receive stock as part of their compensation, it is normal for insiders to sell about 2 shares on the open market for every share they purchase outright.  Recently, however, insider sales have been running at a pace of more than 8-to-1.

*   *   *

While investors and the economic consensus has largely abandoned any concern about a fresh economic downturn, we remain uncomfortable with the divergence between reliable leading measures – which are still actually deteriorating – and more upbeat coincident/lagging measures on which public optimism appears to be based.

Nevertheless, Randall Forsyth’s article was actually supportive of Hussman’s opinion that, given the current economic conditions, discretion should mandate a more risk-averse investment strategy.  The concluding statement from the Barron’s piece exemplified such support:

With the Standard & Poor’s 500 up 24% from the October lows, it may be a good time to take some chips off the table.

Beyond that, Mr. Forsyth explained how the outlook expressed by Walter J. Zimmermann concurred with John Hussman’s expectations for a stock market swoon:

Walter J. Zimmermann Jr., who heads technical analysis for United-ICAP, a technical advisory firm, puts it more succinctly:  “A perfect financial storm is looming.”

*   *   *

THERE ARE AMPLE FUNDAMENTALS to knock the market down, including the well-advertised surge in gasoline prices, which Zimmermann calculates absorbed the discretionary spending power for half of America.  And the escalating tensions over Iran’s nuclear program “is the gift that keeps on giving…if you like fear-inflated energy prices,” he wrote in the client letter.

At the same time, “the euro-zone response to their deflationary debt trap continues to be further loans to the hopelessly indebted, in return for crushing austerity programs.

So, evidently, not content with another mere recession, euro-zone leaders are inadvertently shooting for another depression.  They may well succeed.”

The euro zone is (or was, he stresses) the world’s largest economy, and a buyer of 22% of U.S. exports, which puts the domestic economy at risk, he adds.

Given the fact that the Federal Reserve has already expended the “heavy artillery” in its arsenal, it seems unlikely that the remaining bit of pixie dust in Ben Bernanke’s pocket – “sterilized quantitative easing” – will be of any use in the Fed’s never-ending efforts to inflate stock prices.


 

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More Favorable Reviews For Huntsman

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In my last posting, I focused on how Jon Huntsman has been the only Presidential candidate to present responsible ideas for regulating the financial industry (Obama included).  Since that time, I have read a number of similarly favorable reactions from respected authorities and commentators who reviewed Huntsman’s proposals .

Simon Johnson is the former Chief Economist for the International Monetary Fund (IMF) from 2007-2008.  He is currently the Ronald A. Kurtz Professor of Entrepreneurship at the MIT Sloan School of Management.  At his Baseline Scenario blog, Professor Johnson posted the following comments in reaction to Jon Huntsman’s policy page on financial reform and Huntsman’s October 19 opinion piece for The Wall Street Journal:

More bailouts and the reinforcement of moral hazard – protecting bankers and other creditors against the downside of their mistakes – is the last thing that the world’s financial system needs.   Yet this is also the main idea of the Obama administration.  Treasury Secretary Tim Geithner told the Fiscal Times this week that European leaders “are going to have to move more quickly to put in place a strong firewall to help protect countries that are undertaking reforms,” meaning more bailouts.  And this week we learned more about the underhand and undemocratic ways in which the Federal Reserve saved big banks last time around.  (You should read Ron Suskind’s book, Confidence Men: Wall Street, Washington, and the Education of a President, to understand Mr. Geithner’s philosophy of unconditional bailouts; remember that he was president of the New York Fed before become treasury secretary.)

Is there really no alternative to pouring good money after bad?

In a policy statement released this week, Governor Jon Huntsman articulates a coherent alternative approach to the financial sector, which begins with a diagnosis of our current problem:  Too Big To Fail banks,

“To protect taxpayers from future bailouts and stabilize America’s economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices”

Mr. Geithner feared the collapse of big banks in 2008-09 – but his policies have made them bigger.  This makes no sense.  Every opportunity should be taken to make the megabanks smaller and there are plenty of tools available, including hard size caps and a punitive tax on excessive size and leverage (with any proceeds from this tax being used to reduce the tax burden on the nonfinancial sector, which will otherwise be crushed by the big banks’ continued dangerous behavior).

The goal is simple, as Mr. Huntsman said in his recent Wall Street Journal opinion piece: make the banks small enough and simple enough to fail, “Hedge funds and private equity funds go out of business all the time when they make big mistakes, to the notice of few, because they are not too big to fail.  There is no reason why banks cannot live with the same reality.”

The quoted passage from Huntsman’s Wall Street Journal essay went on to say this:

These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s.  There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose.

The major banks’ too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop.

Far be it from President Obama to make such an observation.

Huntsman’s policy page on financial reform included a discussion of repealing the Dodd-Frank law:

More specifically, real reform means repealing the 2010 Dodd-Frank law, which perpetuates too-big-to-fail and imposes costly and mostly useless regulations on innocent smaller banks without addressing the root causes of the crisis or anticipating future crises.  But the overregulation cannot be addressed without ending the bailout subsidies, so that is where reform must begin.

Beyond that, Huntsman’s Wall Street Journal piece gave us a chance to watch the candidate step in shit:

Once too-big-to-fail is fixed, we could then more easily repeal the law’s unguided regulatory missiles, such as the Consumer Financial Protection Bureau.  American banks provide advice and access to capital to the entrepreneurs and small business owners who have always been our economic center of gravity.  We need a banking sector that is able to serve that critical role again.

American banks also do a lot to screw their “personal banking” customers (the “little people”) and sleazy “payday loan”-type operations earn windfall profits exploiting those workers whose incomes aren’t enough for them to make it from paycheck-to-paycheck.  The American economy is 70 percent consumer-driven.  American consumers have always been “our economic center of gravity” and the CFPB was designed to protect them.  Huntsman would do well to jettison his anti-CFPB agenda if he wants to become President.

Mike Konczal of the Roosevelt Institute, exhibited a similarly “hot and cold” reaction to Huntsman’s proposals for financial reform.  What follows is a passage from a recent posting at his Rortybomb blog, entitled “Huntsman Wants to Repeal Dodd-Frank so he can Pass Title VII of Dodd-Frank”:

So we need to get serious about derivatives regulation by bringing transparency to the over-the-counter derivatives market, with serious collateral requirements.  This was turned into law as the Wall Street Transparency and Accountability Act of 2010, or Title VII of Dodd-Frank.

So we need to eliminate Dodd-Frank in order to pass Dodd-Frank’s resolution authority and derivative regulations – two of the biggest parts of the bill – but call it something else.

You can argue that Dodd-Frank’s derivative rules have too many loopholes with too much of the market exempted from the process and too much power staying with the largest banks.  But those are arguments that Dodd-Frank doesn’t go far enough, where Huntsman’s critique of Dodd-Frank is that it goes way too far.

Huntsman should be required to explain the issues here – is he against Dodd-Frank before being for it?  Is his Too Big To Fail policy and derivatives policy the same as Dodd-Frank, and if not how do they differ?  It isn’t clear from the materials he has provided so far how the policies would be different, and if it is a problem with the regulations in practice how he would get stronger ones through Congress.

I do applaud this from Huntsman:

RESTORING RULE OF LAW

President Huntsman’s administration will direct the Department of Justice to take the lead in investigating and brokering an agreement to resolve the widespread legal abuses such as the robo-signing scandal that unfolded in the aftermath of the housing bubble.  This is a basic question of rule of law; in this country no one is above the law. There are also serious issues involving potential violations of the securities laws, particularly with regard to fair and accurate disclosure of the underlying loan contracts and property titles in mortgage-backed securities that were sold.  If investors’ rights were abused, this needs to be addressed fully.  We need a comprehensive settlement that puts all these issues behind us, but any such settlement must include full redress of all legal violations.

*   *   *

And I will note that the dog-whistles hidden inside the proposal are towards strong reforms (things like derivatives reform “will also allow end-users to negotiate better terms with Wall Street and in turn lower trading costs” – implicitly arguing that the dealer banks have too much market power and it is the role of the government to create a fair playing field).  Someone knows what they are doing.  His part on bringing down the GSEs doesn’t mention the hobbyhorse of the Right that the CRA and the GSEs caused the crisis, which is refreshing to see.

If Republican voters are smart, they will vote for Jon Huntsman in their state primary elections.  As I said last time:  If Jon Huntsman wins the Republican nomination, there will be a serious possibility that the Democrats could lose control of the White House.


 

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Elizabeth Warren Should Run Against Obama

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Now that President Obama has thrown Elizabeth Warren under the bus by nominating Richard Cordray to head the Consumer Financial Protection Bureau (CFPB), she is free to challenge Obama in the 2012 election.  It’s not a very likely scenario, although it’s one I’d love to see:  Warren as the populist, Independent candidate – challenging Obama, the Wall Street tool – who is already losing to a phantom, unspecified Republican.

A good number of people were disappointed when Obama failed to nominate Warren to chair the CFPB, which was her brainchild.  It was bad enough that Treasury Secretary “Turbo” Tim Geithner didn’t like her – but once the President realized he was getting some serious pushback about Warren from Senate Republicans – that was all it took.  Some Warren supporters have become enamored with the idea that she could challenge Scott Brown for his seat representing Massachusetts in the Senate.  However, many astute commentators consider that as a really stupid idea.  Here is the reaction from Yves Smith of Naked Capitalism:

We argued yesterday that the Senate was not a good vehicle for advancing Elizabeth Warren’s aims of helping middle class families, since she would have no more, and arguably less power than she has now, and would be expected to defend Democrat/Obama policies, many of which are affirmatively destructive to middle class interests (just less so than what the Republicans would put in place).

A poll conducted in late June by Scott Brown and the Republican National Committee raises an even more basic question:  whether she even has a shot at winning.

*   *   *

The poll shows a 25 point gap, which is a massive hurdle, and also indicates that Brown is seen by many voters as not being a Republican stalwart (as in he is perceived to vote for the state’s, not the party’s, interest).  A 25 point gap is a near insurmountable hurdle and shows that Warren’s reputation does not carry as far as the Democratic party hackocracy would like her fans to believe.  But there’s no reason not to get this pesky woman to take up what is likely to be a poisoned chalice.  If she wins, she’s unlikely to get on any important committees, given the Democratic party pay to play system, and will be boxed in by the practical requirements of having to make nice to the party and support Obama positions a meaningful portion of the time. And if she runs and loses, it would be taken as proof that her middle class agenda really doesn’t resonate with voters, which will give the corporocrats free rein (if you can’t sell a liberal agenda in a borderline Communist state like Massachusetts, it won’t play in Peoria either).

Obviously, a 2012 challenge to the Obama Presidency by Warren would be an uphill battle.  Nevertheless, it’s turning out to be an uphill battle for the incumbent, as well.  David Weidner of MarketWatch recently discussed how Obama’s failure to adequately address the economic crisis has placed the President under the same pressure faced by many Americans today:

He’s about to lose his job.

*   *   *

Blame as much of the problem on his predecessor as you like, the fact is Obama hasn’t come up with a solution.  In fact, he’s made things worse by filling his top economic posts with banking-friendly interests, status-quo advisers and milquetoast regulators.

And if there’s one reason Obama loses in 2012, it’ll be because he failed to surround himself with people willing to take drastic action to get the economy moving again.

In effect, Obama’s team has rewarded the banking industry under the guise of “saving the economy” while abandoning citizens and consumers desperate for jobs, credit and spending power.

There was the New York Fed banker cozy with Wall Street: Timothy Geithner.

There was the former Clinton administration official who was the architect of policies that led to the financial crisis: Larry Summers.

There was a career bureaucrat named to lead the Securities and Exchange Commission:  Mary Schapiro.

To see just how unremarkable this group is, consider that the most progressive regulator in the Obama administration, Federal Deposit Insurance Corp. Chairman Sheila Bair, was a Republican appointed by Bush.

*   *   *

The lack of action by Obama’s administration of mediocrities is the reason the recovery sputters.  In essence, the turnaround depends too much on a private sector that, having escaped failure, is too content to sit out what’s supposed to be a recovery.

*   *   *

What began as a two-step approach:  1) saving the banks, and then 2) saving homeowners, was cut short after the first step.

Instead of extracting more lending commitments from the banks, forcing more haircuts on investors and more demands on business, Obama has let his team of mediocrities allow the debate to be turned on government.  The government caused the financial crisis.  The government ruined the housing market.

It wasn’t true at the start, but it’s becoming true now.

Despite his status as the incumbent and his $1 billion campaign war chest, President Obama could find himself voted out of office in 2012.  When you consider the fact that the Republican Party candidates who are currently generating the most excitement are women (Bachmann and the undeclared Palin) just imagine how many voters might gravitate to a populist female candidate with substantially more brains than Obama.

The disillusionment factor afflicting Obama is not something which can be easily overlooked.  The man I have referred to as the “Disappointer-In-Chief” since his third month in office has lost more than the enthusiasm of his “base” supporters – he has lost the false “progressive” image he had been able to portray.  Matt Stoller of the Roosevelt Institute explained how the real Obama had always been visible to those willing to look beyond the campaign slogans:

Many people are “disappointed” with Obama.  But, while it is certainly true that Obama has broken many many promises, he projected his goals in his book The Audacity of Hope.  In Audacity, he discussed how in 2002 he was going to give politics one more shot with a Senate campaign, and if that didn’t work, he was going into corporate law and getting wealthy like the rest of his peer group.  He wrote about how passionate activists were too simple-minded, that the system basically worked, and that compromise was a virtue in and of itself in a world of uncertainty. His book was a book about a fundamentally conservative political creature obsessed with process, not someone grounded in the problems of ordinary people.  He told us what his leadership style is, what his agenda was, and he’s executing it now.

I expressed skepticism towards Obama from 2005, onward.  Paul Krugman, Debra Cooper, and Tom Ferguson among others pegged Obama correctly from day one.  Obama broadcast who he was, through his conservative policy focus (which is how Krugman pegged him), his bank backers (which is how Ferguson pegged him), his political support of Lieberman (which is how I pegged him), and his cavalier treatment of women’s issues (which is how Debra Cooper pegged him).  He is doing so again, with his choice to effectively remove Elizabeth Warren from the administration.

I just wish Elizabeth Warren would fight back and challenge Obama for The White House.  If only   .   .   .


 

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Discipline Problem

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At the conclusion of a single, five-year term as Chair of the Federal Deposit Insurance Corporation (FDIC) Sheila Bair is calling it quits.  One can hardly blame her.  It must have been one hell of an experience:  Warning about the hazards of the subprime mortgage market, being ignored and watching the consequences unfold . . .  followed by a painful, weekly ritual, which gave birth to a website called Bank Fail Friday.

Bair’s tenure at the helm of the FDIC has been – and will continue to be – the subject of some great reading.  On her final day at the FDIC (July 8) The Washington Post published an opinion piece by Ms. Bair in which she warned that short-term, goal-directed thinking could bring about another financial crisis.  She also had something to brag about.  Despite the efforts of Attorney General Eric Hold-harmless and the Obama administration to ignore the malefaction which brought about the financial crisis and allowed the Wall Street villains to profiteer from that catastrophe, Bair’s FDIC actually stepped up to the plate:

This past week, the FDIC adopted a rule that allows the agency to claw back two years’ worth of compensation from senior executives and managers responsible for the collapse of a systemic, non-bank financial firm.

To date, the FDIC has authorized suits against 248 directors and officers of failed banks for shirking their fiduciary duties, seeking at least $6.8 billion in damages.  The rationales the executives come up with to try to escape accountability for their actions never cease to amaze me.  They blame the failure of their institutions on market forces, on “dead-beat borrowers,” on regulators, on space aliens.  They will reach for any excuse to avoid responsibility.

Mortgage brokers and the issuers of mortgage-based securities were typically paid based on volume, and they responded to these incentives by making millions of risky loans, then moving on to new jobs long before defaults and foreclosures reached record levels.

The difference between Sheila Bair’s approach to the financial/economic crisis and that of the Obama Administration (whose point man has been Treasury Secretary “Turbo” Tim Geithner) was analyzed in a great article by Joe Nocera of The New York Times entitled, “Sheila Bair’s Bank Shot”.  The piece was based on Nocera’s “exit interview” with the departing FDIC Chair.  Throughout that essay, Nocera underscored Bair’s emphasis on “market discipline” – which he contrasted with Geithner’s fanatic embrace of the exact opposite:  “moral hazard” (which Geithner first exhibited at the onset of the crisis while serving as President of the Federal Reserve of New York).  Nocera made this point early in the piece:

On financial matters, she seemed to have better political instincts than Obama’s Treasury Department, which of course is now headed by Geithner.  She favored “market discipline” – meaning shareholders and debt holders would take losses ahead of depositors and taxpayers – over bailouts, which she abhorred.  She didn’t spend a lot of time fretting over bank profitability; if banks had to become less profitable, postcrisis, in order to reduce the threat they posed to the system, so be it.  (“Our job is to protect bank customers, not banks,” she told me.)

Bair’s discussion of those early, panic-filled days during September 2008 is consistent with reports we have read about Geithner elsewhere.  This passage from Nocera’s article is one such example:

For instance, during the peak of the crisis, with credit markets largely frozen, banks found themselves unable to roll over their short-term debt.  This made it virtually impossible for them to function.  Geithner wanted the F.D.I.C. to guarantee literally all debt issued by the big bank-holding companies – an eye-popping request.

Bair said no.  Besides the risk it would have entailed, it would have also meant a windfall for bondholders, because much of the existing debt was trading at a steep discount.  “It was unnecessary,” she said.  Instead, Bair and Paulson worked out a deal in which the F.D.I.C. guaranteed only new debt issued by the bank-holding companies.  It was still a huge risk for the F.D.I.C. to take; Paulson says today that it was one of the most important, if underrated, actions taken by the federal government during the crisis.  “It was an extraordinary thing for us to do,” Bair acknowledged.

Back in April of 2009, the newly-appointed Treasury Secretary met with similar criticism in this great article by Jo Becker and Gretchen Morgenson at The New York Times:

Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson, Jr. convened the nation’s economic stewards for a brainstorming session.  What emergency powers might the government want at its disposal to confront the crisis? he asked.

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.  Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes.

Geithner’s utter contempt for market discipline again became a subject of the Nocera-Bair interview when the conversation turned to the infamous Maiden Lane III bailouts.

“I’ve always wondered why none of A.I.G.’s counterparties didn’t have to take any haircuts.  There’s no reason in the world why those swap counterparties couldn’t have taken a 10 percent haircut.  There could have at least been a little pain for them.”  (All of A.I.G.’s counterparties received 100 cents on the dollar after the government pumped billions into A.I.G.  There was a huge outcry when it was revealed that Goldman Sachs received more than $12 billion as a counterparty to A.I.G. swaps.)

Bair continued:  “They didn’t even engage in conversation about that.  You know, Wall Street barely missed a beat with their bonuses.”

“Isn’t that ridiculous?” she said.

This article by Gretchen Morgenson provides more detail about Geithner’s determination that AIG’s counterparties receive 100 cents on the dollar.  For Goldman Sachs – it amounted to $12.9 billion which was never repaid to the taxpayers.  They can brag all they want about paying back TARP – but Maiden Lane III was a gift.

I was surprised that Sheila Bair – as a Republican – would exhibit the same sort of “true believer-ism” about Barack Obama as voiced by many Democrats who blamed Rahm Emanuel for the early disappointments of the Obama administration.  Near the end of Nocera’s interview, Bair appeared taken-in by Obama’s “plausible deniability” defense:

“I think the president’s heart is in the right place,” Bair told me.  “I absolutely do.  But the dichotomy between who he selected to run his economic team and what he personally would like them to be doing – I think those are two very different things.”  What particularly galls her is that Treasury under both Paulson and Geithner has been willing to take all sorts of criticism to help the banks.  But it has been utterly unwilling to take any political heat to help homeowners.

The second key issue for Bair has been dealing with the too-big-to-fail banks. Her distaste for the idea that the systemically important banks can never be allowed to fail is visceral.  “I don’t think regulators can adequately regulate these big banks,” she told me.  “We need market discipline.  And if we don’t have that, they’re going to get us in trouble again.”

If Sheila Bair’s concern is valid, the Obama administration’s track record for market discipline has us on a certain trajectory for another financial crisis.



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Federal Reserve Bailout Records Provoke Limited Outrage

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On December 3, 2009 I wrote a piece entitled, “The Legacy of Mark Pittman”.  Mark Pittman was the reporter at Bloomberg News whose work was responsible for the lawsuit, brought under the Freedom of Information Act, against the Federal Reserve, seeking disclosure of the identities of those financial firms benefiting from the Fed’s eleven emergency lending programs.

The suit, Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, (U.S. District Court, Southern District of New York) resulted in a ruling in August of 2009 by Judge Loretta Preska, who rejected the Fed’s defense that disclosure would adversely affect the ability of those institutions (which sought loans at the Fed’s discount window) to compete for business.  The suit also sought disclosure of the amounts loaned to those institutions as well as the assets put up as collateral under the Fed’s eleven lending programs, created in response to the financial crisis.  The Federal Reserve appealed Judge Preska’s decision, taking the matter before the United States Court of Appeals for the Second Circuit.  The Fed’s appeal was based on Exemption 4 of the Freedom of Information Act, which exempts trade secrets and confidential business information from mandatory disclosure.  The Second Circuit affirmed Judge Preska’s decision on the basis that the records sought were neither trade secrets nor confidential business information because Bloomberg requested only records generated by the Fed concerning loans that were actually made, rather than applications or confidential information provided by persons, firms or other organizations in attempt to obtain loans.  Although the Fed did not attempt to appeal the Second Circuit’s decision to the United States Supreme Court, a petition was filed with the Supreme Court by Clearing House Association LLC, a coalition of banks that received bailout funds.  The petition was denied by the Supreme Court on March 21.

Bob Ivry of Bloomberg News had this to say about the documents produced by the Fed as a result of the suit:

The 29,000 pages of documents, which the Fed released in pdf format on a CD-ROM, revealed that foreign banks accounted for at least 70 percent of the Fed’s lending at its October, 2008 peak of $110.7 billion.  Arab Banking Corp., a lender part- owned by the Central Bank of Libya, used a New York branch to get 73 loans from the window in the 18 months after Lehman Brothers Holdings Inc. collapsed.

As government officials and news reporters continue to review the documents, a restrained degree of outrage is developing.  Ron Paul is the Chairman of the House Financial Services Subcommittee on Domestic Monetary Policy.  He is also a longtime adversary of the Federal Reserve, and author of the book, End The Fed.  A recent report by Peter Barnes of FoxBusiness.com said this about Congressman Paul:

.   .   .   he plans to hold hearings in May on disclosures that the Fed made billions — perhaps trillions — in secret emergency loans to almost every major bank in the U.S. and overseas during the financial crisis.

*   *   *

“I am, even with all my cynicism, still shocked at the amount this is and of course shocked, but not completely surprised, [that] much [of] this money went to help foreign banks,” said Rep. Ron Paul (R-TX),   .   .   .  “I don’t have [any] plan [for] legislation …  It will take awhile to dissect that out, to find out exactly who benefitted and why.”

In light of the fact that Congressman Paul is considering another run for the Presidency, we can expect some exciting hearings starring Ben Bernanke.

Senator Bernie Sanders of Vermont became an unlikely ally of Ron Paul in their battle to include an “Audit the Fed” provision in the financial reform bill.  Senator Sanders was among the many Americans who were stunned to learn that Arab Banking Corporation used a New York branch to get 73 loans from the Fed during the 18 months after the collapse of Lehman Brothers.  The infuriating factoid in this scenario is apparent in the following passage from the Bloomberg report by Bob Ivry and Donal Griffin:

The bank, then 29 percent-owned by the Libyan state, had aggregate borrowings in that period of $35 billion — while the largest single loan amount outstanding was $1.2 billion in July 2009, according to Fed data released yesterday.  In October 2008, when lending to financial institutions by the central bank’s so- called discount window peaked at $111 billion, Arab Banking took repeated loans totaling more than $2 billion.

Ivry and Griffin provided this reaction from Bernie Sanders:

“It is incomprehensible to me that while creditworthy small businesses in Vermont and throughout the country could not receive affordable loans, the Federal Reserve was providing tens of billions of dollars in credit to a bank that is substantially owned by the Central Bank of Libya,” Senator Bernard Sanders of Vermont, an independent who caucuses with Democrats, wrote in a letter to Fed and U.S. officials.

The best critique of the Fed’s bailout antics came from Rolling Stone’s Matt Taibbi.  He began his report this way:

After the financial crash of 2008, it grew to monstrous dimensions, as the government attempted to unfreeze the credit markets by handing out trillions to banks and hedge funds.  And thanks to a whole galaxy of obscure, acronym-laden bailout programs, it eventually rivaled the “official” budget in size – a huge roaring river of cash flowing out of the Federal Reserve to destinations neither chosen by the president nor reviewed by Congress, but instead handed out by fiat by unelected Fed officials using a seemingly nonsensical and apparently unknowable methodology.

As Matt Taibbi began discussing what the documents produced by the Fed revealed, he shared this reaction from a staffer, tasked to review the records for Senator Sanders:

“Our jaws are literally dropping as we’re reading this,” says Warren Gunnels, an aide to Sen. Bernie Sanders of Vermont.  “Every one of these transactions is outrageous.”

In case you are wondering just how “outrageous” these transactions were, Mr. Taibbi provided an outrageously entertaining chronicle of a venture named “Waterfall TALF Opportunity”, whose principal investors were Christy Mack and Susan Karches.  Susan Karches is the widow of Peter Karches, former president of Morgan Stanley’s investment banking operations.  Christy Mack is the wife of John Mack, the chairman of Morgan Stanley.  Matt Taibbi described Christy Mack as “thin, blond and rich – a sort of still-awake Sunny von Bulow with hobbies”.  Here is how he described Waterfall TALF:

The technical name of the program that Mack and Karches took advantage of is TALF, short for Term Asset-Backed Securities Loan Facility.  But the federal aid they received actually falls under a broader category of bailout initiatives, designed and perfected by Federal Reserve chief Ben Bernanke and Treasury Secretary Timothy Geithner, called “giving already stinking rich people gobs of money for no fucking reason at all.”  If you want to learn how the shadow budget works, follow along.  This is what welfare for the rich looks like.

The venture would have been more aptly-named, “TALF Exploitation Windfall Opportunity”.  Think about it:  the Mack-Karches entity was contrived for the specific purpose of cashing-in on a bailout program, which was ostensibly created for the purpose of preventing a consumer credit freeze.

I was anticipating that the documents withheld by the Federal Reserve were being suppressed because – if the public ever saw them – they would provoke an uncontrollable degree of public outrage.  So far, the amount of attention these revelations have received from the mainstream media has been surprisingly minimal.  When one compares the massive amounts squandered by the Fed on Crony Corporate Welfare Queens such as Christy Mack and Susan Karches ($220 million loaned at a fraction of a percentage point) along with the multibillion-dollar giveaways (e.g. $13 billion to Goldman Sachs by way of Maiden Lane III) the fighting over items in the 2012 budget seems trivial.

The Fed’s defense of its lending to foreign banks was explained on the New York Fed’s spiffy new Liberty Street blog:

Discount window lending to U.S. branches of foreign banks and dollar funding by branches to parent banks helped to mitigate the economic impact of the crisis in the United States and abroad by containing financial market disruptions, supporting loan availability for companies, and maintaining foreign investment flows into U.S. companies and assets.

Without the backstop liquidity provided by the discount window, foreign banks that faced large and fluctuating demand for dollar funding would have further driven up the level and volatility of money market interest rates, including the critical federal funds rate, the Eurodollar rate, and Libor (the London interbank offered rate).  Higher rates and volatility would have increased distress for U.S. financial firms and U.S. businesses that depend on money market funding.  These pressures would have been reflected in higher interest rates and reduced bank lending, bank credit lines, and commercial paper in the United States.  Moreover, further volatility in dollar funding markets could have disrupted the Federal Reserve’s ability to implement monetary policy, which requires stabilizing the federal funds rate at the policy target set by the Federal Open Market Committee.

In other words:  Failure by the Fed to provide loans to foreign banks would have made quantitative easing impossible.  There would have been no POMO auctions.  As a result, there would have been no supply of freshly printed-up money to be used by the proprietary trading desks of the primary dealers to ramp-up the stock market for those “late-day rallies”.  This process was described as the “POMO effect” in a 2009 paper by Precision Capital Management entitled, “A Grand Unified Theory of Market Manipulation”.

Thanks for the explanation, Mr. Dudley.


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Grasping Reality With The Opinions Of Others

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In the course of attempting to explain or criticize complex economic and financial issues, it usually becomes necessary to quote from the experts – often at length – to provide an understandable commentary.  Nevertheless, it was with great pleasure that I read about a dust-up involving Megan McArdle’s use of a published interview conducted by Bruce Bigelow of Xconomy, without attribution.  The incident was recently discussed by Brad DeLong.  (If you are a regular reader of Professor DeLong’s blog, you might recognize the title of this posting as a variant on the name of his website.)  Before I move on, it will be necessary to expand this moment of schadenfreude, due to the ironic timing of the controversy.  On March 7, Time published a list of “The 25 Best Financial Blogs”, with McArdle’s blog as number 15.  Aside from the fact that many worthy bloggers were overlooked by Time (including Mish and Simon Johnson) the list drew plenty of criticism for its inclusion of McArdle’s blog.  Here are just some of the comments to that effect, which appeared on the Naked Capitalism website:

duffolonious says:

Megan McArdle?  Seriously?  I’ve seen so many people rip her to shreds that I’ve completely ignored her.

Is she another example of nepotism?  Like Bill Kristol.

Procopius says:

Basically yes, although not quite as blatant.  Her old man was an inspector of contracting in New York City.  He got surprisingly rich.  From that he went to starting his own contracting business.  He got surprisingly rich.  Then he went back to New York City in an even higher level supervisory job.  He got surprisingly rich.  So Megan went to good schools and had her daddy’s network of influential “friends” to help her with her “job search” when she graduated.  Of course, she’s no dummy, and did a professional job of networking with all the “right” people she met at school, too.

For my part, in order to discuss the proposed settlement resulting from the investigation of the five largest banks and mortgage servicers conducted by state attorneys general and federal officials (including the Justice Department, the Treasury and the newly-formed Consumer Financial Protection Bureau) I will rely on the commentary from some of my favorite financial bloggers.  The investigating officials submitted this 27-page proposal as the starting point for what is expected to be a weeks-long negotiation process, possibly resulting in some loan modifications as well as remedies for those who faced foreclosures expedited by the use of “robo-signers” and other questionable practices.

Yves Smith of Naked Capitalism criticized the settlement proposal as “Bailout as Reward for Institutionalized Fraud”:

The argument defenders of the deal make are twofold:  this really is a good deal (hello?) and it’s as far as the Obama Administration is willing to push the banks, so we have to put a lot of lipstick on this pig and resign ourselves to political necessities.  And the reason the Obama camp is trying to declare victory and go home is that it is afraid that any serious effort to deal with the mortgage mess will reveal the insolvency of the banks.

Team Obama had put on a full court press since March 2009 to present the banks as fundamentally sound, and to the extent they needed more dough, the stress tests and resulting capital raising took care of any remaining problems.  Timothy Geithner was even doing victory laps last month in Europe.  To reverse course now and expose the fact that writedowns on second mortgages held by the four biggest banks and plus the true cost of legal liabilities from the mortgage crisis (putbacks, servicer fraud, chain of title issues) would blow a big hole in the banks’ balance sheets and fatally undermine whatever credibility the officialdom still has.

But the fallacy of their thinking is that addressing and cleaning up this rot would lead to a financial crisis, therefore anything other than cosmetics and making life inconvenient for the banks around the margin is to be avoided at all costs.  But these losses exist already.  The fallacy lies in the authorities’ delusion that they are avoiding creating losses, when we are in fact talking about who should bear costs that already exist.

The perspective taken by Edward Harrison of Credit Writedowns focused on the extent to which we can find the fingerprints of Treasury Secretary Tim Geithner on the settlement proposal.  Ed Harrison emphasized the significance of Geithner’s final remarks from an interview conducted last year by Daniel Gross for Slate:

The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

From there, Ed Harrison illustrated how Geithner’s roadmap has been based on the willingness to follow that logic:

More than ever, Tim Geithner runs the show for economic policy. He is the last man standing of the Old Obama team.  Volcker, Summers, Orszag, and Romer are all gone.  So Geithner’s vision of bailouts and settlements is the one that carries the most weight.

What is Geithner saying with his policies?

  • The financial system was on the verge of collapse.  We all know that now – about US banks and European ones too.  Fed Chair Ben Bernanke has said so as has Bank of England head Mervyn King.  The WikiLeaks cables affirmed systemic insolvency as the real issue most demonstrably.
  • When presented with a choice of Japan or Sweden as the model for crisis resolution, the US felt the Japan banking crisis response was the best historical precedent.  It is still unclear whether this was a political or an economic decision.
  • The most difficult political aspect of the banking crisis response was socialising bank lossesAll banking crisis bailouts involve some form of loss socialisation and this is a policy which citizens find abhorrent.  That’s what Geithner meant most directly about ‘deeply unpopular, deeply hard to understand’.
  • Using pro-inflationary monetary policy and fiscal stimulus, the U.S. can put this crisis in the rear view mirror.  Low interest rates and a steep yield curve combined with bailouts, stress tests, dividend reductions and private capital will allow time to heal all wounds.  That is the Geithner view.
  • Once the system is healthy again, it should expand.  The reason you need to bail the banks out is that they have expansion opportunities abroad.  As emerging markets develop more sophisticated financial markets, the Treasury secretary believes American banks are well positioned to profit.  American finance can’t profit if you break up the banks.

I would argue that Tim Geithner believes we are almost at that final stage where the banks are now healthy enough to get bigger and take share in emerging markets.  His view is that a more robust regulatory environment will keep things in check and prevent another financial crisis.

I hope this helps to explain why the Obama Administration is keen to get this $20 billion mortgage settlement done.  The prevailing view in the Administration is that the U.S. is in a fragile but sustainable recovery.  With emerging markets leading the economic recovery and U.S. banks on sounder footing, now is the time to resume the expansion of U.S. financial services.  I should also add that given the balance sheet recession in the U.S., the only way banks can expand is via an expansion abroad.

I strongly disagree with this vision of America’s future economic development.  But this is the road we are on.

Will those of us who refuse to believe in Tinkerbelle face the blame for the next financial crisis?


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License To Steal

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People are finally beginning to understand how our elected officials are benefiting from a system of “legalized graft” in the form of campaign contributions.  Voters have seen so many politicians breach their campaign promises while providing new meaning to the expression “follow the money”, that there now seems to be a resigned acceptance that political payoffs are an uncomfortable fact of life.  Worse yet, most people aren’t aware of another loophole in the law allowing Congress-cretins to make real money.

On January 26, 2009, Congressman Brian Baird introduced H.R.682, the “Stop Trading on Congressional Knowledge Act” (STOCK Act).  The bill was intended to resolve the situation concerning one of the more sleazy “perks” of serving in Congress.  As it presently stands, the law prohibiting “insider trading” (e.g. acting on confidential corporate information when making a transaction involving that company’s publicly-traded stock) does not apply to members of Congress.  Remember how Martha Stewart went to prison?  Well, if she had been representing Connecticut in Congress, she might have been able to interpose the defense that she was inspired to sell her ImClone stock based on information she acquired in the exercise of her official duties.  In that scenario, Ms. Stewart’s sale of the ImClone stock would have been entirely legal.  That’s because the laws which apply to you and I do not apply to those in Congress.  Needless to say, within six months of its introduction, H.R.682 was referred to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties where it died of neglect.  Since that time, there have been no further efforts to propose similar legislation.

Here is a summary of the most important provisions of the “Stop Trading on Congressional Knowledge Act”:

Amends the Securities Exchange Act of 1934 and the Commodities Exchange Act to direct both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to prohibit purchase or sale of either securities or commodities for future delivery by a person in possession of material nonpublic information regarding pending or prospective legislative action if the information was obtained:  (1) knowingly from a Member or employee of Congress; (2) by reason of being a Member or employee of Congress; and (3) other federal employees.

Amends the Code of Official Conduct of the Rules of the House of Representatives to prohibit designated House personnel from disclosing material nonpublic information relating to any pending or prospective legislative action relating to either securities of a publicly-traded company or a commodity if such personnel has reason to believe that the information will be used to buy or sell the securities or commodity based on such information.

Back in September of 2009, a report by American Public Media’s Steve Henn discussed the investment transactions made by some Senators in September of 2008, after having been informed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke, that our financial system was on the verge of a meltdown.  After quoting then GOP House Minority Leader John Boehner’s public acknowledgement that:

We clearly have an unprecedented crisis in our financial system.    .   .   .

On behalf of the American people our job is to put our partisan differences aside and to work together to help solve this crisis.

Mr. Henn proceeded to explain how swift Senatorial action resulted in a bipartisan exercise of greed:

The next day, according to personal financial disclosures, Boehner cashed out of a fund designed to profit from inflation.  Since he sold, it’s lost more than half its value.

Sen. Dick Durbin, an Illinois Democrat, who was also at that meeting sold more than $40,000 in mutual funds and reinvested it all with Warren Buffett.

Durbin said like millions of others he was worried about his retirement.  Boehner says his stock broker acted alone without even talking to him.  Both lawmakers say they didn’t benefit from any special tips.

But over time members of Congress do much better than the rest of us when playing the stock market.

*   *   *

The value of information that flows from the inner workings of Washington isn’t lost on Wall Street professionals.

Michael Bagley is a former congressional staffer who now runs the OSINT Group.  Bagley sells access and research. His clients are hedge funds, and he makes it his business to mine Congress and the rest of Washington for tips.

MICHAEL Bagley: The power center of finance has moved from Wall Street to Washington.

His firm is just one recent entry into Washington’s newest growth industry.

CRAIG HOLMAN: It’s called political intelligence.

Craig Holman is at Public Citizen, a consumer watchdog.  Holman believes lobbyists shouldn’t be allowed to sell tips to hedge funds and members of Congress shouldn’t trade on non-public information.  But right now it’s legal.

HOLMAN: It’s absolutely incredible, but the Securities and Exchange Act does not apply to members of Congress, congressional staff or even lobbyists.

That law bans corporate insiders, from executives to their bankers and lawyers, from trading on inside information.  But it doesn’t apply to political intelligence.  That makes this business lucrative.  Bagley says firms can charge hedge funds $25,000 a month just to follow a hot issue.

BAGLEY: So information is a commodity in Washington.

Inside information on dozens of issues, from bank capitol requirements to new student loan rules, can move markets.  Consumer advocate Craig Holman is backing a bill called the STOCK Act.  Introduced in the House, it would force political-intelligence firms to disclose their clients and it would ban lawmakers, staffers, and lobbyists from profiting on non-public knowledge.

Mr. Henn’s report went on to raise concern over the fact that there is nothing to stop members of Congress from acting on such information to the detriment of their constituents in favor of their own portfolios.

Take a look at the list below from opensecrets.org concerning the wealthiest members of Congress.  In light of the fact that these knaves are able to trade on “inside information” you now have the answer to the following question from the opensecrets website:

Congressional members’ personal wealth keeps expanding year after year, typically at rates well beyond inflation and any tax increases.  The same cannot be said for most Americans.  Are your representatives getting rich in Congress and, if so, how?

Here is the Top Ten List of the Richest Members of Congress from opensecrets.org:

NAME               MINIMUM NET WORTH    AVERAGE   MAXIMUM NET WORTH

Darrell Issa (R-Calif) $156,050,022      $303,575,011    $451,100,000

Jane Harman (D-Calif)  $151,480,522    $293,454,761   $435,429,001

John Kerry (D-Mass)    $182,755,534     $238,812,296   $294,869,059

Mark Warner (D-Va)     $65,692,210       $174,385,102   $283,077,995

Jared Polis (D-Colo)     $36,694,140        $160,909,068   $285,123,996

Herb Kohl (D-Wis)        $89,358,027           $160,302,011   $231,245,995

Vernon Buchanan (R-Fla)$-69,434,661    $148,373,160  $366,180,982

Michael McCaul (R-Texas) $73,685,086  $137,611,043  $201,537,000

Jay Rockefeller (D-WVa)  $61,446,018      $98,832,010   $136,218,002

Dianne Feinstein (D-Calif) $46,055,250    $77,082,134   $108,109,018

Jay Rockefeller’s position on the list is easy to understand, given the fact that he is the great-grandson of John D. Rockefeller.  How the first eight people on the list were able to become more wealthy than Jay Rockefeller should be matter of interest to the voting public.  In the case of  #10 — California Senator Dianne Feinstein  — we have an interesting situation.  As chair of the Senate Military Construction Appropriations subcommittee, she helped her husband, Iraq war profiteer Richard C. Blum, benefit from decisions she made as chair of that subcommittee.  In an article for bohemian.com, Peter Byrne discussed how Senator Feinstein was routinely informed about specific federal projects coming before her in which one of her husband’s businesses had a stake.  As Byrne’s article explained, the inside information Feinstein received was intended to help the senator avoid conflicts of interest, although it had the effect of exacerbating such conflicts.

“Inside information” empowers the party in possession of that knowledge with something known as “information asymmetry”, allowing that person to take advantage of (or steal from) the less-informed person on the other side of the trade.  Because membership in Congress includes a license to steal, can we ever expect those same individuals to surrender those licenses?  Well, if they were honest .   .   .


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Revenge Of The Blondes

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

Yves Smith

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

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

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

Gretchen Morgenson

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

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

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

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

Louise Story

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

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

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

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


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