August 27, 2009
Back on January 5, I wrote a piece entitled: “Clean-Up Time On Wall Street” in which I pondered whether our new President-elect and his administration would really “crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis”. I quoted from a December 15 article by Stephen Labaton of The New York Times, examining the failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitated such breakdowns. Some of the highlights from the Times piece included these points:
. . . H. David Kotz, the commission’s new inspector general, has documented several major botched investigations. He has told lawmakers of one case in which the commission’s enforcement chief improperly tipped off a private lawyer about an insider-trading inquiry.
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There are other difficulties plaguing the agency. A recent report to Congress by Mr. Kotz is a catalog of major and minor problems, including an investigation into accusations that several S.E.C. employees have engaged in illegal insider trading and falsified financial disclosure forms.
I then questioned the wisdom of Barack Obama’s appointment of Mary Schapiro as the new Chair of the Securities and Exchange Commission, quoting from an article by Randall Smith and Kara Scannell of The Wall Street Journal concerning Schapiro’s track record as chair of the Financial Industry Regulatory Authority (FINRA):
Robert Banks, a director of the Public Investors Arbitration Bar Association, an industry group for plaintiff lawyers . . . said that under Ms. Schapiro, “Finra has not put much of a dent in fraud,” and the entire system needs an overhaul. “The government needs to treat regulation seriously, and for the past eight years we have not had real securities regulation in this country,” Mr. Banks said.
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In 2001 she appointed Mark Madoff, son of disgraced financier Bernard Madoff, to the board of the National Adjudicatory Council, the national committee that reviews initial decisions rendered in Finra disciplinary and membership proceedings.
I also quoted from a two-part op-ed piece for the January 3 New York Times, written by Michael Lewis, author of Liar’s Poker, and David Einhorn. Here’s what they had to say about the SEC:
Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)
Keeping all of this in mind, let’s have a look at the current lawsuit brought by the SEC against Bank of America, pending before Judge Jed S. Rakoff of The United States District Court for the Southern District of New York. The matter was succinctly described by Louise Story of The New York Times:
The case centers on $3.6 billion bonuses that were paid out by Merrill Lynch late last year, just before that firm was merged with Bank of America. Neither company disclosed the bonuses to shareholders, and the S.E.C. has charged that the companies’ proxy statement about the merger were misleading in their description of the bonuses.
To make a long story short, Bank of America agreed to settle the case for a mere $33 million, despite its insistence that it properly disclosed to its shareholders, the bonuses it authorized for Merrill Lynch & Co employees. The mis-handling of this case by the SEC was best described by Rolfe Winkler of Reuters. The moral outrage over this entire matter was best expressed by Karl Denninger of The Market Ticker. Denninger’s bottom line was this:
It is time for the damn gloves to come off. Our economy cannot recover until the scam street games are stopped, the fraudsters are removed from the executive suites (and if necessary from Washington) and the underlying frauds – particularly including the games played with the so-called “value” of assets on the balance sheets of various firms are all flushed out.
On a similarly disappointing note, there is the not-so-small matter of: “Where did all the TARP money go?” You may have read about Elizabeth Warren and you may have seen her on television, discussing her role as chair of the Congressional Oversight Panel, tasked with scrutinizing the TARP bank bailouts. Neil Barofsky was appointed Special Investigator General of TARP (SIGTARP). Why did all of this become necessary? Let’s take another look back to last January. At that time, a number of Democratic Senators, including: Russ Feingold (Wisconsin), Jeanne Shaheen (New Hampshire), Evan Bayh (Indiana) and Maria Cantwell (Washington) voted to oppose the immediate distribution of the second $350 billion in TARP funds. The vote actually concerned a “resolution of disapproval” to block distribution of the TARP money, so that those voting in favor of the resolution were actually voting against releasing the funds. Barack Obama had threatened to veto this resolution if it passed. The resolution was defeated with 52 votes (contrasted with 42 votes in favor of it). At that time, Obama was engaged in a game of “trust me”, assuring those in doubt that the second $350 billion would not be squandered in the same undocumented manner as the first $350 billion. As Jeremy Pelofsky reported for Reuters on January 15:
To win approval, Obama and his team made extensive promises to Democrats and Republicans that the funds would be used to better address the deepening mortgage foreclosure crisis and that tighter accounting standards would be enforced.
“My pledge is to change the way this plan is implemented and keep faith with the American taxpayer by placing strict conditions on CEO pay and providing more loans to small businesses,” Obama said in a statement, adding there would be more transparency and “more sensible regulations.”
Although it was a nice-sounding pledge, the new President never lived up to it. Worse yet, we now have to rely on Congress, to insist on getting to the bottom of where all the money went. Although Elizabeth Warren was able to pressure “Turbo” Tim Geithner into providing some measure of disclosure, there are still lots of questions that remain unanswered. I’m sure many people, including Turbo Tim, are uncomfortable with the fact that Neil Barofsky is doing “too good” of a job as SIGTARP. This is probably why Congress has now thrown a “human monkey wrench” into the works, with its addition of former SEC commissioner Paul Atkins to the Congressional Oversight Panel. Expressing his disgust over this development, David Reilly wrote a piece for Bloomberg News, entitled: “Wall Street Fox Beds Down in Taxpayer Henhouse”. He discussed the cynical appointment of Atkins with this explanation:
Atkins was named last week to be one of two Republicans on the five-member TARP panel headed by Harvard Law School professor Elizabeth Warren. He replaces former Senator John Sununu, who stepped down in July.
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And while a power-broker within the commission, Atkins was also seen as the sharp tip of the deregulatory spear during George W. Bush’s presidency.
Atkins didn’t waver from his hands-off position, even as the credit crunch intensified. Speaking less than two months before the collapse of Lehman Brothers Holdings Inc., Atkins in one of his last speeches at the SEC warned against calls for a “new regulatory order.”
He added, “We must not immediately jump to the conclusion that failures of firms in the marketplace or the unavailability of credit in the marketplace is caused by market failure, or indeed regulatory failure.”
When I spoke with him yesterday, Atkins hadn’t changed his tune. “If the takeaway by some people is that deregulation is the thing that led to problems in the marketplace, that’s completely wrong,” he said. “The problems happened in the most heavily regulated areas of the financial-services industry.”
Regulated by whom?
A Helluva Read
August 31, 2009
We are constantly being bombarded with predictions and opinions about where the economy is headed. Since last fall’s financial crisis, people have seen their home values reduced to shocking levels; they’ve seen their investments take a nosedive and they’ve watched our government attempt to respond to crises on several fronts. There have been numerous programs including TARP, TALF, PPIP and quantitative easing, that some of us have tried to understand and that others find too overwhelming to approach. When one attempts to gain an appreciation of what caused this crisis, it quickly becomes apparent that there are a number of different theories being espoused, depending upon which pundit is doing the talking. One of my favorite explanations of what caused the financial crisis came from William K. Black, Associate Professor of Economics and Law at the University of Missouri – Kansas City School of Law. In his lecture: The Great American Bank Robbery (which can be seen here) Black explains that we have a culture of corruption at the highest levels of our government, which, combined with ineptitude, allowed some of the sleaziest people on Wall Street to nearly destroy our entire financial system.
William Black recently participated in a conference with a group of experts associated with the Economists for Peace and Security and the Initiative for Rethinking the Economy. The panel included authorities from all over the world and met in Paris on June 15 – 16. A report on the meeting was prepared by Professor James K. Galbraith and was published by The Levy Economics Institute of Bard College. The paper, entitled Financial and Monetary Issues as the Crisis Unfolds, is available here. At 16 pages, the document goes into great detail about what has been going wrong and how to address it, in terms that are understandable to the layperson. Here’s how the report was summarized in the Preface:
As to the question of where we are now, at the current stage of the economic crisis, Professor Galbraith recalled one panel member’s analogy to the eye of a hurricane:
There is plenty to quote from in this document, especially in light of the fact that it provides a good deal of sound, constructive criticism of our government’s response to the crisis. Additionally, the panel offered solutions you’re not likely to hear from politicians, most of whom are in the habit of repeating talking points, written by lobbyists.
Focusing on the situation here in the United States, the report gave us some refreshing criticism, especially in the current climate where commentators are stumbling over each other to congratulate Ben Bernanke on his nomination to a second term as Federal Reserve chairman:
Lest I go on, quoting the whole damned thing, I’ll simply urge you to take a look at it. At the conclusion of the paper was the unpleasant point that some of the damage from this crisis has been irreversible. There was an admonition that before undertaking reconstruction of the damage, some careful planning should be done, inclusive of the necessary safeguards to make it possible to move forward.
Whether or not anyone in Washington will pay serious attention to these findings is another issue altogether. Our system of legalized graft in the form of lobbying and campaign contributions, guarantees an uphill battle for anyone attempting to change the status quo.