Two years ago, I was inspired to write a piece entitled, “Justice Denied” after seeing hedge fund manager, David Einhorn interviewed by Charlie Rose. I also discussed an essay Jesse Eisenger wrote for the DealBook blog at The New York Times entitled, “The Feds Stage a Sideshow While the Big Tent Sits Empty”. The piece reinforced my suspicion that the “insider trading” investigation which received so much publicity in December of 2010 was simply a diversionary tactic to direct public attention away from the crimes which caused the financial crisis.
Since that time, a good deal of commentary has been written, lamenting the fact that no criminal charges have been brought against the miscreants who caused the financial crisis. Unfortunately, Attorney General Eric Hold-Harmless has taken no action against those responsible, while the time for bringing those charges within the applicable Statutes of Limitations was allowed to tick away.
With the expiration of the relevant Statutes of Limitations, the next question becomes: Does the failure to prosecute those cases rise to the level of obstruction of justice? Although President Obama has repeatedly insisted that “no crimes were committed” which could have caused the financial crisis, we are now learning that such was not the case.
Jesse Eisenger recently wrote another piece for the Deal Book blog at the New York Times entitled, “Financial Crisis Lawsuit Suggests Bad Behavior at Morgan Stanley” which appeared on January 23. In that essay, Eisenger discussed how the discovery process in civil lawsuits against the Wall Street Banks involved in the creation of the collateralized debt obligations (CDOs) based on subprime mortgages, revealed that those CDOs were known to be toxic at the time they were marketed.
The Naked Capitalism website has provided and excellent roadmap to the skulduggery involving the role CDOs played in causing the financial crisis.
Matt Taibbi has written another magnum opus on the financial crisis, this time focusing on sleazy conduct which took place after the meltdown. In his article for Rolling Stone entitled, “Secrets and Lies of the Bailout”, we were reminded how the bank bailouts not only unjustly enriched the culprits who caused the problem – but they also provided the opportunity for those too-big-to-fail institutions to become even bigger while facilitating the cover-up of how the original mess occurred:
The public has been lied to so shamelessly and so often in the course of the past four years that the failure to tell the truth to the general populace has become a kind of baked-in, official feature of the financial rescue. Money wasn’t the only thing the government gave Wall Street – it also conferred the right to hide the truth from the rest of us. And it was all done in the name of helping regular people and creating jobs. “It is,” says former bailout Inspector General Neil Barofsky, “the ultimate bait-and-switch.”
Despite so many efforts to hide the truth from “the little people”, the truth is slowly leaking out as a result of the dogged investigation by journalists and bloggers. As discovery proceeds in the civil lawsuits against the megabanks, revealing the extent of criminal activity which brought about the most catastrophic economic disaster since the Great Depression, people will begin to ask: “How did they get away with this?” Perhaps the best way to answer that question would be to bring criminal charges against those who allowed the perpetrators to get away with it.
For the past few years, a central mission of this blog has been to focus on Washington’s unending efforts to protect, pamper and bail out the Wall Street megabanks at taxpayer expense. From Maiden Lane III to TARP and through countless “backdoor bailouts”, the Federal Reserve and the Treasury Department have been pumping money into businesses which should have gone bankrupt in 2008. Worse yet, President Obama and Attorney General Eric Hold-harmless have expressed no interest in bringing charges against those miscreants responsible for causing the financial crisis. The Federal Reserve’s latest update to its Survey of Consumer Finances for 2010 revealed that during the period of 2007-2010, the median family net worth declined by a whopping thirty-eight percent. Despite the massive extent of wealth destruction caused by the financial crisis, our government is doing nothing about it.
I have always been a fan of economist John Hussman of the Hussman Funds, whose Weekly Market Comment essays are frequently referenced on this website. Professor Hussman’s most recent piece, “The Heart of the Matter” serves as a manifesto of how the financial crisis was caused, why nothing was done about it and why it is happening again both in the United States and in Europe. Beyond that, Professor Hussman offers some suggestions for remedying this unaddressed and unresolved set of circumstances. It is difficult to single out a passage to quote because every word of Hussman’s latest Market Comment is precious. Be sure to read it. What I present here are some hints as to the significance of this important essay:
The ongoing debate about the economy continues along largely partisan lines, with conservatives arguing that taxes just aren’t low enough, and the economy should be freed of regulations, while liberals argue that the economy needs larger government programs and grand stimulus initiatives.
Lost in this debate is any recognition of the problem that lies at the heart of the matter: a warped financial system, both in the U.S. and globally, that directs scarce capital to speculative and unproductive uses, and refuses to restructure debt once that debt has gone bad.
Specifically, over the past 15 years, the global financial system – encouraged by misguided policy and short-sighted monetary interventions – has lost its function of directing scarce capital toward projects that enhance the world’s standard of living. Instead, the financial system has been transformed into a self-serving, grotesque casino that misallocates scarce savings, begs for and encourages speculative bubbles, refuses to restructure bad debt, and demands that the most reckless stewards of capital should be rewarded through bailouts that transfer bad debt from private balance sheets to the public balance sheet.
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By our analysis, the U.S. economy is presently entering a recession. Not next year; not later this year; but now. We expect this to become increasingly evident in the coming months, but through a constant process of denial in which every deterioration is dismissed as transitory, and every positive outlier is celebrated as a resumption of growth. To a large extent, this downturn is a “boomerang” from the credit crisis we experienced several years ago. The chain of events is as follows:
Financial deregulation and monetary negligence -> Housing bubble -> Credit crisis marked by failure to restructure bad debt -> Global recession -> Government deficits in U.S. and globally -> Conflict between single currency and disparate fiscal policies in Europe -> Austerity -> European recession and credit strains -> Global recession.
In effect, we’re going into another recession because we never effectively addressed the problems that produced the first one, leaving us unusually vulnerable to aftershocks. Our economic malaise is the result of a whole chain of bad decisions that have distorted the financial markets in ways that make recurring crisis inevitable.
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Every major bank is funded partially by depositors, but those deposits typically represent only about 60% of the funding. The rest is debt to the bank’s own bondholders, and equity of its stockholders. When a country like Spain goes in to save a failing bank like Bankia – and does so by buying stock in the bank – the government is putting its citizens in a “first loss” position that protects the bondholders at public expense. This has been called “nationalization” because Spain now owns most of the stock, but the rescue has no element of restructuring at all. All of the bank’s liabilities – even to its own bondholders – are protected at public expense. So in order to defend bank bondholders, Spain is increasing the public debt burden of its own citizens. This approach is madness, because Spain’s citizens will ultimately suffer the consequences by eventual budget austerity or risk of government debt default.
The way to restructure a bank is to take it into receivership, write down the bad assets, wipe out the stockholders and much of the subordinated debt, and then recapitalize the remaining entity by selling it back into the private market. Depositors don’t lose a dime. While the U.S. appropriately restructured General Motors – wiping out stock, renegotiating contracts, and subjecting bondholders to haircuts – the banking system was largely untouched.
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If it seems as if the global economy has learned nothing, it is because evidently the global economy has learned nothing. The right thing to do, again, is to take receivership of insolvent banks and wipe out the stock and subordinated debt, using the borrowed funds to protect depositors in the event that the losses run deep enough to eat through the intervening layers of liabilities (which is doubtful), and otherwise using the borrowed funds to stimulate the economy after the restructuring occurs. We’re going to keep having crises until global leaders recognize that short of creating hyperinflation (which also subordinates the public, in this case by destroying the value of currency), there is no substitute for debt restructuring.
For some insight as to why the American megabanks were never taken into temporary receivership, it is useful to look back to February of 2010 when Michael Shedlock (a/k/a“Mish”) provided us with a handy summary of the 224-page Quarterly Report from SIGTARP (the Special Investigator General for TARP — Neil Barofsky). My favorite comment from Mish appeared near the conclusion of his summary:
Clearly TARP was a complete failure, that is assuming the goals of TARP were as stated.
My belief is the benefits of TARP and the entire alphabet soup of lending facilities was not as stated by Bernanke and Geithner, but rather to shift as much responsibility as quickly as possible on to the backs of taxpayers while trumping up nonsensical benefits of doing so. This was done to bail out the banks at any and all cost to the taxpayers.
Was this a huge conspiracy by the Fed and Treasury to benefit the banks at taxpayer expense? Of course it was, and the conspiracy is unraveling as documented in this report and as documented in AIG Coverup Conspiracy Unravels.
On January 29 2010, David Reilly wrote an article for Bloomberg BusinessWeek concerning the previous week’s hearing before the House Committee on Oversight and Government Reform. After quoting from Reilly’s article, Mish made this observation:
Most know I am not a big believer in conspiracies. I regularly dismiss them. However, this one was clear from the beginning and like all massive conspiracies, it is now in the light of day.
The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.
Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.
That “secretive group” is The Federal Reserve of New York, whose president at the time of the AIG bailout was “Turbo” Tim Geithner. David Reilly’s disgust at the hearing’s revelations became apparent from the tone of his article:
By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.
At least in the Eurozone there is fear that the taxpayers will never submit to enhanced economic austerity measures, which would force the citizenry into an impoverished existence so that their increased tax burden could pay off the debts incurred by irresponsible bankers. In the United States there is no such concern. The public is much more compliant. Whether that will change is anyone’s guess.
Comments Off on Instead Of Solving a Problem – Form a Committee
It’s become a stale joke about the Obama administration. Every time a demand is made for the White House to take decisive action on an important issue . . . the President’s solution is always the same: Form a committee to study the matter.
In my last posting, I discussed the January 20 article written by Scot Paltrow forReuters, which revealed that Attorney General Eric Hold-harmless and Lanny Breuer, head of the Justice Department’s criminal division, had been partners in the Washington law firm, Covington & Burling. As Scot Paltrow pointed out, during the years while Holder and Breuer were partners at Covington, the firm’s clients included the four largest U.S. banks – Bank of America, Citigroup, JP Morgan Chase and Wells Fargo & Co.
Less than a week after publication of Paltrow’s report, which raised “conflict of interest” questions concerning Holder’s reluctance to prosecute banks or mortgage servicers for fraudulent foreclosure practices, President Obama delivered his State of the Union address. With Paltrow’s revelations still fresh in my mind, I was particularly surprised to hear President Obama make the following statement:
And tonight, I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis. This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.
If it weren’t bad enough that critics had already been complaining about the Attorney General’s failure to prosecute mortgage fraud cases, Obama has most recently appointed Holder to supervise “investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis”. It’s hard to avoid the assumption that those “investigations” will lead to nowhere. By Wednesday, I found that I was not alone in my cynicism concerning what is now called the Office of Mortgage Origination and Securitization Abuses.
Wednesday morning brought an essay by Yves Smith of Naked Capitalism, in which she expressed dread about the possibility that New York Attorney General Eric Schneiderman may have been seduced by Team Obama to join the effort exerting pressure on each Attorney General from every state to consent to a settlement of any and all claims against the banksters arising from their fraudulent foreclosure practices. Each state is being asked to release the banks from criminal and civil liability in return for a share of the $25 billion settlement package. Ms. Smith compared that initiative with Obama’s most recent announcement about the Office of Mortgage Origination and Securitization Abuses:
So get this: this is a committee that will “investigate.” . . . Neil Barofsky, former prosecutor and head of SIGTARP, doesn’t buy the logic of this committee either:
Neil Barofsky @neilbarofsky
If task force created either b/c DOJ hasn’t done an investigation, or b/c 3-yr investigation a failure, how does Holder keep his job?
A lot of soi-disant liberal groups have fallen in line with Obama messaging, which was the plan (I already have the predictable congratulatory Move On e-mail in my inbox). Let’s get real. The wee problem is that this committee looks like yet another bit of theater for the Administration to pretend, yet again, that it is Doing Something, while scoring a twofer by getting Schneiderman, who has been a pretty effective opponent, hobbled.
If you wanted a real investigation, you get a real independent investigator, with a real budget and staffing, and turn him loose. We had the FCIC which had a lot of hearings and produced a readable book that said everyone was responsible for the mortgage crisis, which was tantamount to saying no one was responsible. We even had an eleven-regulator Foreclosure Task Force that looked at 2800 loan files (and a mere 100 foreclosures) and found nothing very much wrong.
Neil Barofsky’s question deserves repetition: Why does Attorney General Eric Hold-harmless still have his job if – after three years – the Justice Department has taken no action against those responsible for originating and securitizing the risky mortgages which led to the housing crisis?
David Dayen of Firedoglake weighed-in with his own skeptical take on Obama’s purported crakdown on mortgage origination and securitization abuses:
First of all, this becomes part of a three year-old Financial Fraud Task Force which has done approximately nothing on Wall Street accountability outside of a few insider trading arrests. So that’s the context of this investigative panel, part of the same entity that has spun its wheels. Second, the panel would only look at origination, where there have been plenty of lawsuits and where the main offenders are all out of business, and securitization, which may aid investors (that includes pension funds, of course) but not necessarily homeowners. . . .
Given the fact that this is an election year, President Obama knows that mere lip service toward a populist cause will not be enough to win back those disgruntled former supporters, who have now learned – the hard way – that talk is cheap. Obama is now going the extra mile – he’s forming a committee! Trouble is – those disgruntled former supporters have already learned that committee formation is simply the disingenuous “follow-through” on a false campaign promise. Nice try, Mr. President!
The Occupy Wall Street protest has exposed the politicians – who have always claimed to be populists – for what they really are: tools of the plutocracy. Conspicuously absent from the Wall Street occupation have been nearly all Democrats – despite their party’s efforts to portray itself as the champion of Main Street in its battle against the tyranny of the megabanks. As has always been the case, the Democrats won’t really do anything that could disrupt the flow of bribes campaign contributions they receive from our nation’s financial elites.
The “no show” Democrats reminded me of an article which appeared at Truthdig, written by Chris Hedges, author of the book, Death of the Liberal Class. In his Truthdig essay, Chris Hedges emphasized how the liberal class “abandoned the human values that should have remained at the core of its activism”:
The liberal class, despite becoming an object of widespread public scorn, prefers the choreographed charade. It will decry the wars in Iraq and Afghanistan or call for universal health care, but continue to defend and support a Democratic Party that has no intention of disrupting the corporate machine. As long as the charade is played, the liberal class can hold itself up as the conscience of the nation without having to act. It can maintain its privileged economic status. It can continue to live in an imaginary world where democratic reform and responsible government exist. It can pretend it has a voice and influence in the corridors of power. But the uselessness and irrelevancy of the liberal class are not lost on the tens of millions of Americans who suffer the indignities of the corporate state. And this is why liberals are rightly despised by the working class and the poor.
If it had not been obvious before the 2010 elections, it should be obvious now. Back in July of 2010, I was busy harping about how the Obama administration had sabotaged the financial “reform” bill:
As I pointed out on July 12, Mike Konczal of the Roosevelt Institute documented the extent to which Obama’s Treasury Department undermined the financial reform bill at every step. On the following day, Rich Miller of Bloomberg Newsexamined the results of a Bloomberg National Poll, which measured the public’s reaction to the financial reform bill. Almost eighty percent of those who responded were of the opinion that the new bill would do little or nothing to prevent or mitigate another financial crisis. Beyond that, 47 percent shared the view that the bill would do more to protect the financial industry than consumers.
Both healthcare and financial “reform” legislation turned out to be “bait and switch” scams used by the Obama administration against its own supporters. After that double-double-cross, the liberal blogosphere was being told to “pay no attention to that man behind the curtain”.
In an earlier posting, I discussed the sordid efforts of the Democratic-controlled Senate to sabotage the financial reform bill:
The sleazy antics by the Democrats who undermined financial reform (while pretending to advance it) will not be forgotten by the voters. The real question is whether any independent candidates can step up to oppose the tools of Wall Street, relying on the nickels and dimes from “the little people” to wage a battle against the kleptocracy.
Since the Occupy Wall Street demonstration has gained momentum, a number of commentators have analyzed the complicity of hypocritical Democrats in ceding more unregulated power to the very culprits responsible for causing the financial crisis. The most important of these essays was an article written by Matt Stoller for Politico. Stoller began the piece by debunking the myth that the cancer known as “financial deregulation” was introduced to the American system by the Reagan administration:
Like President Bill Clinton before him, Obama and his team believe in deregulation and are continuing a “let them eat cake”-style social contract that solidified during Ronald Reagan’s presidency. As this contract has fallen apart, so has the strong coalition behind Obama’s presidency.
We haven’t seen a challenge to the bank-friendly Democratic orthodoxy for 40 years. The progenitor of this modern Democratic Party was Jimmy Carter. Though Reagan and Clinton helped finish the job, it was Carter who began wholesale deregulation of the banking industry – as Jeff Madrick details in his new book, “The Age of Greed.”
In signing the landmark Depository Institutions Deregulation and Monetary Control Act of 1980, which lifted usury caps, Carter said, “Our banks and savings institutions are hampered by a wide range of outdated, unfair and unworkable regulations.”
Stoller provided some hope for disillusioned former supporters of the Democratic Party by focusing on three Democratic state attorneys general, who have been investigating possible fraud in the securitization of trillions of dollars of mortgages. Matt Stoller referred to these officials – Eric Schneiderman of New York, Catherine Cortez Masto of Nevada and Beau Biden of Delaware – as the “Justice Democrats”. As Stoller observed, a number of other officials have been influenced by the noble efforts of these Justice Democrats:
There are other politicians following this path. Jefferson Smith, an Oregon state representative now running for mayor of Portland, successfully fought legislation to make foreclosures easier in that state. Register of Deeds Jeff Thigpen in North Carolina took on banking interests by fighting foreclosure fraud. Maryland Rep. Elijah Cummings has been dogged in his investigations of mortgage servicers.
It should not be surprising that these officials have been getting quite a bit of pushback from their fellow Democrats – including Delaware Governor Jack Markell as well as a number of high-ranking officials from the Justice Department, led by Attorney General Eric Hold-harmless.
When the Occupy Wall Street protest began on September 17, what little coverage it received from the mainstream media was based on the “giggle factor”. With the passing of time, it becomes increasingly obvious that the news media and our venal political leaders are seriously underestimating the ability of the “little people” to fight back against the kleptocracy.
It was during Barack Obama’s third month in the White House, when I realized he had become the “Disappointer-In-Chief”. Since that time, the disappointment felt by many of us has progressed into a bad case of the creeps.
Gretchen Morgenson of The New York Times has been widely praised for her recent report, exposing the Obama administration’s vilification of New York State Attorney General Eric Schneiderman for his refusal to play along with Team Obama’s efforts to insulate the fraud-closure banks from the criminal prosecution they deserve. The administration is attempting to pressure each Attorney General from every state to consent to a settlement of any and all claims against the banksters arising from their fraudulent foreclosure practices. Each state is being asked to release the banks from criminal and civil liability in return for a share of the $20 billion settlement package. The $20 billion is to be used for loan modifications. Leading the charge on behalf of the administration are Shaun Donovan, the Secretary of Housing and Urban Development, as well as a number of high-ranking officials from the Justice Department, led by Attorney General Eric Hold-harmless. Here are some highlights from Ms. Morgenson’s article:
Mr. Schneiderman and top prosecutors in some other states have objected to the proposed settlement with major banks, saying it would restrict their ability to investigate and prosecute wrongdoing in a variety of areas, including the bundling of loans in mortgage securities.
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Mr. Schneiderman has also come under criticism for objecting to a settlement proposed by Bank of New York Mellon and Bank of America that would cover 530 mortgage-backed securities containing Countrywide Financial loans that investors say were mischaracterized when they were sold.
The deal would require Bank of America to pay $8.5 billion to investors holding the securities; the unpaid principal amount of the mortgages remaining in the pools totals $174 billion.
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This month, Mr. Schneiderman sued to block that deal, which had been negotiated by Bank of New York Mellon as trustee for the holders of the securities.
The passage from Gretchen Morgenson’s report which drew the most attention concerned a statement made to Schneiderman by Kathryn Wylde. Ms. Wylde is a “Class C” Director of the Federal Reserve Bank of New York. The role of a Class C Director is to represent the interests of the public on the New York Fed board. Barry Ritholtz provided this reaction to Ms. Wylde’s encounter with Mr. Schneiderman:
If the Times report is accurate, and the quote below represents Ms. Wylde’s comments, than that position is a laughable mockery, and Ms. Wylde should resign effective immediately.
The quote in question, which was reported to have occurred at Governor Hugh Carey’s funeral (!?!) was as follows:
“It is of concern to the industry that instead of trying to facilitate resolving these issues, you seem to be throwing a wrench into it. Wall Street is our Main Street — love ’em or hate ’em. They are important and we have to make sure we are doing everything we can to support them unless they are doing something indefensible.”
I do not know if Ms. Wylde understands what her proper role should be, but clearly she is somewhat confused. She appears to be far more interested in representing the banks than the public.
Robert Scheer of Truthdig provided us with some background on Obama’s HUD Secretary, Shaun Donovan, one of the administration’s arm-twisters in the settlement effort :
Donovan has good reason not to want an exploration of the origins of the housing meltdown: He has been a big-time player in the housing racket for decades. Back in the Clinton administration, when government-supported housing became a fig leaf for bundling suspect mortgages into what turned out to be toxic securities, Donovan was a deputy assistant secretary at HUD and acting Federal Housing Administration commissioner. He was up to his eyeballs in this business when the Clinton administration pushed through legislation banning any regulation of the market in derivatives based on home mortgages.
Armed with his insider connections, Donovan then went to work for the Prudential conglomerate (no surprise there), working deals with the same government housing agencies that he had helped run. As The New York Times reported in 2008 after President Barack Obama picked him to be secretary of HUD, “Mr. Donovan was a managing director at Prudential Mortgage Capital Co., in charge of its portfolio of investments in affordable housing loans, including Fannie Mae and the Federal Housing Administration debt.”
Obama has been frequently criticized for stacking his administration with people who regularly shuttle between corporations and the captured agencies responsible for regulating those same businesses. Risk management guru, Christopher Whalen lamented the consequences of Obama’s cozy relationship with the Wall Street banks – most tragically, those resulting from Obama’s unwillingness to adopt the “Swedish solution” of putting the insolvent zombie banks through temporary receivership:
The path of least resistance politically has been to temporize and talk. But by following the advice of Rubin and Summers, and avoiding tough decisions about banks and solvency, President Obama has only made the crisis more serious and steadily eroded public confidence. In political terms, Obama is morphing into Herbert Hoover, as I wrote in one of my first posts for Reuters.com, “In a new period of instability, Obama becomes Hoover.”
Whereas two or three years ago, a public-private approach to restructuring insolvent banks could have turned around the economic picture in relatively short order, today the cost to clean up the mess facing Merkel, Obama and other leaders of western European nations is far higher and the degree of unease among the public is growing. You may thank Larry Summers, Robert Rubin and the other members of the “do nothing” chorus around President Obama for this unfortunate outcome.
We are now past the point of blaming Obama’s advisors for the President’s recurrent betrayal of the public interest while advancing the goals of his corporate financiers. Yves Smith of Naked Capitalism has voiced increasingly harsh appraisals of Obama’s performance. By August 22, it became clear to Ms. Smith that the administration’s efforts to shield the fraud-closure banks from liability exposed a scandalous degree of venality:
It is high time to describe the Obama Administration by its proper name: corrupt.
Admittedly, corruption among our elites generally and in Washington in particular has become so widespread and blatant as to fall into the “dog bites man” category. But the nauseating gap between the Administration’s propaganda and the many and varied ways it sells out average Americans on behalf of its favored backers, in this case the too big to fail banks, has become so noisome that it has become impossible to ignore the fetid smell.
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Team Obama bears all the hallmarks of being so close to banks and big corporations that it has lost all contact with and understanding of mainstream America.
The latest example is its heavy-handed campaign to convert New York state attorney general Eric Schneiderman to a card carrying member of the “be nice to our lords and masters the banksters” club. Schneiderman was the first to take issue with the sham of the so-called 50 state attorney general mortgage settlement. As far as the Administration is concerned, its goal is to give banks a talking point and prove to them that Team Obama is protecting their backs in a way that the chump public hopefully won’t notice.
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Yet rather than address real, serious problems, senior administration officials are instead devoting time and effort to orchestrating a faux grass roots campaign to con a state AG into thinking his supporters are deserting him because he has dared challenge the supremacy of the banks.
I would include Eric Schneiderman in a group with Elizabeth Warren and Maria Cantwell as worthy challengers to Barack Obama in the 2012 Presidential Election. I wish one of them would step forward.
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.
Although the drumbeat continues, I remain skeptical as to whether any of the criminals responsible for causing the financial crisis will ever be brought to justice. In the weeks before President Obama’s Inauguration, the foremost question on my mind was whether the new administration would take the necessary steps to change the culture of corruption on Wall Street:
As we approach the eve of the Obama Administration’s first day, across America the new President’s supporters have visions of “change we can believe in” dancing in their heads. For some, this change means the long overdue realization of health care reform. For those active in the Democratic campaigns of 2006, “change” means an end to the Iraq war. Many Americans are hoping that the new administration will crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis.
On December 15, Stephen Labaton wrote an article for the New York Times, examining the recent failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitates such breakdowns.
At that time, I also focused on the point made in a commentary by Michael Lewis and David Einhorn, which appeared in the January 3 New York Times:
It’s not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.
I concluded that piece with a rhetorical question:
Let’s hope our new President, the Congress and others pay serious attention to what Lewis and Einhorn have said. Cleaning up Wall Street is going to be a dirty job. Will those responsible for accomplishing this task be up to doing it?
By March 23, 2009, it had become obvious that our new President was more concerned about the “welfare” (pun intended) of the Wall Street banks than the well-being of the American economy. I began my posting of that date with this statement:
We the people, who voted for Barack Obama, are about to get ripped off by our favorite Hope dealer.
On August 27 of that year, I wrote another piece expressing my disappointment with how things had (not) progressed. My October 1, 2009 posting focused on the fact that H. David Kotz, Inspector General of the Securities and Exchange Commission, issued two reports, recommending 58 changes to improve the way the agency investigates and enforces violations of securities laws, as a result of the SEC’s failure to investigate the Bernie Madoff Ponzi scheme. The reports exposed a shocking degree of ineptitude at the SEC.
After the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, I lamented the fact that the mainstream media hadn’t shown much concern about the matter, despite the terrible fraud exposed in the report. Nevertheless, by the next day, I was able to highlight some great commentaries on the Valukas Report and I felt optimistic enough to conclude the piece with this thought:
We can only hope that a continued investigation into the Lehman scandal will result in a very bright light directed on those privileged plutocrats who consider themselves above the law.
If only . . .
By the eve of the mid-term elections, I had an answer to the question I had posed on January 5, 2009 as to whether our new President and Congress would be up to the task of cleaning up Wall Street:
One common theme voiced by many critics of the Obama administration has been its lack of interest in prosecuting those responsible for causing the financial crisis. Don’t hold your breath waiting for Attorney General Eric Hold-harmless to initiate any criminal proceedings against such noteworthy individuals as Countrywide’s Angelo Mozilo or Dick Fuld of Lehman Brothers. On October 23, Frank Rich of The New York Times mentioned both of those individuals while lamenting the administration’s failure to prosecute the “financial crimes that devastated the nation”:
The Obama administration seems not to have a prosecutorial gene. It’s shy about calling a fraud a fraud when it occurs in high finance.
* * *
Since Obama has neither aggressively pursued the crash’s con men nor compellingly explained how they gamed the system, he sometimes looks as if he’s fronting for the industry even if he’s not.
The special treatment afforded to the perpetrators of the frauds that helped create the financial crisis wasn’t the only gift to Wall Street from the Democratically-controlled White House, Senate and Congress. The financial “reform” bill was so badly compromised (by the Administration and Senate Democrats, themselves) as it worked its way through the legislative process, that it is now commonly regarded as nothing more than a hoax.
By the close of 2010, I noted that an expanding number of commentators shared my outrage over the likelihood that we would never see any prosecutions result from the crimes that brought about the financial crisis:
A recent article written by former New York Mayor Ed Koch began with the grim observation that no criminal charges have been brought against any of the malefactors responsible for causing the financial crisis:
Looking back on 2010 and the Great Recession, I continue to be enraged by the lack of accountability for those who wrecked our economy and brought the U.S. to its knees. The shocking truth is that those who did the damage are still in charge. Many who ran Wall Street before and during the debacle are either still there making millions, if not billions, of dollars, or are in charge of our country’s economic policies which led to the debacle.
Most recently, Matt Taibbi has written another great article for Rolling Stone entitled, “Why Isn’t Wall Street in Jail?”. It’s nice to know that the drumbeat for justice continues. Taibbi’s essay provided a great history of the crisis, with a particular emphasis on how whistleblowers were ignored, just as Harry Markopolos was ignored when (in May of 2000) he tried to alert the SEC to the fact that Bernie Madoff’s hedge fund was a multi-billion-dollar Ponzi scheme. Here is a great passage from Matt Taibbi’s essay:
In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type. Last year, the government deported 393,000 people, at a cost of $5 billion. Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent. In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would “demean the seriousness” of the offenses.
So there you have it. Illegal immigrants: 393,000. Lying moms: one. Bankers: zero. The math makes sense only because the politics are so obvious. You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players. But for stealing a billion dollars? For fraud that puts a million people into foreclosure? Pass. It’s not a crime. Prison is too harsh. Get them to say they’re sorry, and move on. Oh, wait — let’s not even make them say they’re sorry. That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead. But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year. What’s next? Taxpayer-funded massages for every Wall Street executive guilty of fraud?
Wouldn’t it be nice if public opinion meant more to the Obama administration than campaign contributions from Wall Street banksters?
Comments Off on Bad Report Card Haunts Democrats At Mid-Terms
It doesn’t take much time or effort to find out how or why the Democrats have alienated so many independent voters (and so much of their own base) during the 2010 election cycle. You don’t need to look to the Fox News or Andrew Breitbart for an explanation. Reading through the opinion pages of The New York Times should provide you with a good understanding of what the Democrats have been doing wrong.
One common theme voiced by many critics of the Obama administration has been its lack of interest in prosecuting those responsible for causing the financial crisis. Don’t hold your breath waiting for Attorney General Eric Hold-harmless to initiate any criminal proceedings against such noteworthy individuals as Countrywide’s Angelo Mozilo or Dick Fuld of Lehman Brothers. On October 23, Frank Rich of The New York Times mentioned both of those individuals while lamenting the administration’s failure to prosecute the “financial crimes that devastated the nation”:
The Obama administration seems not to have a prosecutorial gene. It’s shy about calling a fraud a fraud when it occurs in high finance.
* * *
Since Obama has neither aggressively pursued the crash’s con men nor compellingly explained how they gamed the system, he sometimes looks as if he’s fronting for the industry even if he’s not.
The special treatment afforded to the perpetrators of the frauds that helped create the financial crisis wasn’t the only gift to Wall Street from the Democratically-controlled White House, Senate and Congress. The financial “reform” bill was so badly compromised (by the Administration and Senate Democrats, themselves) as it worked its way through the legislative process, that it is now commonly regarded as nothing more than a hoax. Frank Rich finds it ironic that the voters are about to return power to “those who greased the skids” to facilitate the financial catastrophe:
We can blame much of this turn of events on the deep pockets of oil billionaires like the Koch brothers and on the Supreme Court’s Citizens United decision, which freed corporations to try to buy any election they choose. But the Obama White House is hardly innocent. Its failure to hold the bust’s malefactors accountable has helped turn what should have been a clear-cut choice on Nov. 2 into a blurry contest between the party of big corporations and the party of business as usual.
David Weidner of MarketWatchrecently discussed the idea of appointing a special prosecutor to bring the Wall Street culprits to justice. After acknowledging the often-used pushback argument made by those opposed to such a prosecutorial effort — that those cases are impossibly difficult to advance through the legal system — Weidner made this observation:
These cases may be difficult, but they’re not impossible. And given the creation of a lawless marketplace where one economy-destroying decision can be made on top of another for short-term personal gains, something has to be done.
But nothing’s happening. Maybe it’s because of the money Wall Street lavishes on Congress. Perhaps it’s the close ties between the industry and the administration. It could be, as Nouriel Roubini said in the new documentary “Inside Job,” investigators are “afraid” of what they will find.
A special prosecutor, in a bid to make a name for himself or herself, might be immune to such pressure. It’s our best hope for outing the scoundrels and creating an industry where greed finally takes a backseat to the law.
Back at The New York Times, Charles Blow brought our attention to the recent rant by Attorney General Eric Hold-harmless, who – despite his uselessness in the aftermath of the financial Ponzi-crisis – stands at the ready to prosecute marijuana smokers in the event that Proposition 19 becomes law in The Golden State. One would think that the Obama administration might prefer that a large bloc of voters should remain stoned for as long as possible, so as to prevent those citizens from realizing what a lousy job their President is doing for them. Worse yet, Charles Blow explained how the Democrats have been advancing the Clinton-era Byrne Formula Grant Program, as a vehicle for financing a war on pot smokers, over the objections of former President George W. Bush and conservative groups, who emphasized that the program “has proved to be an ineffective and inefficient use of resources.” Nevertheless, the Democrats were able to direct two billion dollars from the financial stimulus program to the so-called Byrne Grants. Remember: that’s two billion dollars from the American Recovery and Reinvestment Act of 2009 – which was supposed to put people back to work and save the economy – misappropriated to the effort of putting pot smokers in jail. I guess that the Obama Justice Department has to look like it’s doing something.
Another issue that has not escaped the public’s radar – despite the efforts of the Obama administration – is the never-ending catastrophe in the Gulf of Corexit, caused by the Deepwater Horizon oil rig blowout. Washington’s Blog recently featured an important posting, with links to several articles about this environmental disaster, which the administration wants you to forget about (at least until after the election). The BP-sponsored, mainstream media seem more than happy with the claim of “mission accomplished” voiced by Coast Guard Rear Admiral Paul Zukunft (the man in charge of the federal response) and his top science adviser, Steve Lehmann. A review of any one of the articles linked at the Washington’s Blog posting will scare the hell out of you — just in time for Halloween (and Election Day). Nevertheless the people who will get the worst haunting of Halloween 2010 will be the Democrats. Unfortunately for us, most of them deserve it.
The first day of hearings conducted by the Financial Crisis Inquiry Commission (FCIC) was as entertaining as I expected. The stars of the show: Lloyd Blankfein of Goldman Sachs, John Mack of Morgan Stanley, “The Dimon Dog” of JP Morgan Chase and Brian Moynihan from Bank of America presented themselves as likeable guys. However, in the case of Blankfein, whenever he wasn’t talking he would sit there with that squinting, perplexed look on his face that seemed to mime the question: “WTF?” A large segment of the viewing public has already been primed to view these gentlemen as “The Four Horsemen of The Financial Apocalypse”. Nevertheless, there were four more Horsemen absent from the “stage” on Wednesday: Messrs. Greenspan, Bernanke, Paulson and Geithner. Beyond that, Brian Moynihan didn’t really belong there, since he was not such a significant “player” as the other panel members, in events of 2008. In fact, history may yet view his predecessor, Ken Lewis, as more of a victim in this drama, due to the fact that he was apparently coerced by Hank Paulson and Ben Bernanke into buying Merrill Lynch with instructions to remain silent about Merrill’s shabby financial status. I would have preferred to see Vikram Pandit of Citigroup in that seat.
As I watched the show, I tried to imagine what actors would be cast to play which characters on the panel in a movie about the financial crisis. Mike Myers would be the obvious choice to portray Lloyd Blankfein. Myers could simply don his Dr. Evil regalia and it would be an easy gig. The Dimon Dog should be played by George Clooney because he came off as a “regular guy”, lacking the highly-polished, slick presentation one might expect from someone in that position. Brian Moynihan could be portrayed by Robin Williams, in one of his rare, serious roles. John Mack should be portrayed by Nicholas Cage, if only because Cage needs the money.
Although many reports have described their demeanor as “contrite”, the four members of the first panel gave largely self-serving presentations, characterizing their firms in the most favorable light. Blankfein emphasized that Goldman Sachs still believes in marking its assets to market. As expected, his theme of “if we knew then what we knew now . . .” got heavier rotation than a Donna Summer record at a party for Richard Simmons. John Mack, who was more candid and perhaps the most contrite panel member, made a point of mentioning that some assets cannot be “marked to market” because there really is no market for them. Excuse me . . . but isn’t that the definition of the term, “worthless”?
Throughout the session, the panel discussed the myriad causes that contributed to the onset of the financial crisis. Despite that, nobody seemed interested in implicating the Federal Reserve’s monetary policy as a factor. “Don’t bite the hand that feeds you” was the order of the day. All four panelists described the primary cause of the crisis as excessive leverage. They acted as a chorus, singing “Lev Is The Drug”. Lloyd Blankfein repeatedly expressed pride in the fact that Goldman Sachs has always been leveraged to “only” a 23-to-1 ratio. The Dimon Dog’s theme was something like: “We did everything right . . . except that we were overleveraged”. Dimon went on to make the specious claim that overleveraging by consumers was a contributing element in causing the crisis. Although many commentators whom I respect have made the same point, I just don’t buy it. Why blame people who were led to believe that their homes would continue to print money for them until they died? Dimon himself admitted at the hearing that no consideration was ever given to the possibility that home values would slump. Worse yet, for a producer or purveyor of the so-called “financial weapons of mass-destruction” to implicate overleveraged consumers as sharing a role in precipitating this mess is simply absurd.
The second panel from Wednesday’s hearing was equally, if not more entertaining. Michael Mayo of Calyon Securities seemed awfully proud of himself. After all, he did a great job on his opening statement and he knew it. Later on, he refocused his pride with an homage to his brother, who is currently serving in Iraq. Nevertheless, the star witness from the second panel was Kyle Bass of Hayman Advisors, who gave the most impressive performance of the day. Bass made a point of emphasizing (in so many words) that Lloyd Blankfein’s 23-to-1 leverage ratio was nearly 100 percent higher than what prudence should allow. If you choose to watch the testimony of just one witness from Wednesday’s hearing, make sure it’s Kyle Bass.
I didn’t bother to watch the third panel for much longer than a few minutes. The first two acts were tough to follow. Shortly into the opening statement by Mark Zandy of Moody’s, I decided that I had seen enough for the day. Besides, Thursday’s show would hold the promise of some excitement with the testimony of Sheila Bair of the FDIC. I wondered whether someone might ask her: “Any hints as to what banks are going to fail tomorrow?” On the other hand, I had been expecting the testimony of Attorney General Eric Hold-harmless to help cure me of the insomnia caused by too much Cuban coffee.
The Commissioners themselves have done great work with all of the witnesses. Phil Angelides has a great style, combining a pleasant affect with incisive questioning and good witness control. Doug Holtz-Eakin and Brooksley Born have been batting 1000. Heather Murren is more than a little easy on the eyes, bringing another element of “star quality” to the show.
Who knows? This commission could really end up making a difference in effectuating financial reform. They’re certainly headed in that direction.
TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.
