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Kill The Whales

October 8th, 2009 Posted in Uncategorized

Oct, 08 2009

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October 8, 2009

Those whales are back in the news again — this time due to calls for their slaughter. In case you’re wondering what kind of person would advocate the killing of whales, I would like to identify two people who recently spoke out in favor of such action. The first of these individuals is one of my favorite columnists at The New York Times, Gretchen Morgenson, winner of the Pulitzer Prize in 2002 for her “trenchant and incisive” coverage of Wall Street. The second is the chair of the Federal Deposit Insurance Corporation, Sheila Bair. Two women want to have whales killed? Yes. However, the “whales” in question are those infamous financial institutions considered “too big to fail”. On October 3, Gretchen Morgenson wrote a piece for The New York Times, entitled: “The Cost of Saving These Whales” in which she defined “to big to fail” institutions as “banks that are so big and interconnected that their very existence threatens the world”. She discussed the problems caused by the continued existence of those whales with this explanation:

During the credit bust, our leaders embraced the too-big-to-fail policy, reluctantly bailing out large institutions to save the system from collapse, they said. Yet even as the crisis has abated, these policy makers have shown little interest in cutting financial monsters down to size. This is especially disturbing given that some institutions have grown even larger as a result of the mess.

It is perverse, of course, to reward big banks’ mistakes with bailouts financed by beleaguered taxpayers. But the too-big-to-fail doctrine benefits the banks in other ways as well: the implication that an institution will not be allowed to fall gives it significant cost advantages over smaller, perhaps more responsible competitors.

On October 4, Sheila Bair of the FDIC gave a speech before the International Institute of Finance at their annual meeting in Istanbul, Turkey. At the outset, she pointed out that “the first task” in creating “a more resilient, transparent, and better-regulated financial system” would be to scrap the “too big to fail” doctrine. She went on to explain how to go about killing those whales:

To do this we need a resolution regime that provides for the orderly wind-down of banking and other financial enterprises without imposing costs on the taxpayers.

The solution must involve a practical and effective mechanism for the orderly resolution of these institutions similar to that used for FDIC-insured banks.

This new regime would not permit taxpayer funds to be used to prop up a firm or its management. Instead, senior management would be replaced, and losses would be borne by the stockholders and creditors.

On September 23, 2009 Treasury Secretary “Turbo” Tim Geithner testified before the House Financial Services Committee to explain his planned financial reform agenda. Here’s what Turbo Tim had to say about the plan for dealing with the “too big to fail” problem:

First, we cannot allow firms to reap the benefits of explicit or implicit government subsidies without very strong government oversight. We must substantially reduce the moral hazard created by the perception that these subsidies exist; address their corrosive effects on market discipline; and minimize their encouragement of risk-taking.

So, in other words … the government subsidies to these institutions will continue, but only if the recipients get “very strong government oversight”. In his next sentence Geithner expressed his belief that the moral hazard was created “by the perception that these subsidies exist” rather than the FACT that they exist. Geithner’s scheme of continued corporate welfare for the biggest financial institutions is consistent with what we learned about him from Jo Becker and Gretchen Morgenson in their New York Times article back on April 26. That essay gave us some great insight about Turbo Tim’s blindness to moral hazard:

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.

And more often than not, Mr. Geithner has been a leading architect of those bailouts, the activist at the head of the pack. He was the federal regulator most willing to “push the envelope,” said H. Rodgin Cohen, a prominent Wall Street lawyer who spoke frequently with Mr. Geithner.

Geithner’s objective of putting the prosperity of the banks ahead of any concern for the taxpayers was again demonstrated in this AFP report from October 6:

On proposed changes to the financial system, Geithner said it was “legitimate” for banks to be influential and admitted that reform could “pose risks to financial innovation.”

Nevertheless, he stressed that “the most important issue is that if stability (of financial institutions) is not guaranteed, it will become harder to raise capital.”

On October 6, Newsweek published an interview conducted by Nancy Cook with William Black, a former federal regulator during the Savings & Loan crisis and a professor of economics and law at the University of Missouri – Kansas City. The interview included a discussion of the government’s response to the financial crisis. One remark made by Mr. Black reinforced my opinion about Turbo Tim:

“Some of the things Bernanke did were very bad, but he is in sharp contrast to Geithner who has been wrong about everything in his career. When Geithner was once answering a question in response to Ron Paul, he said, ‘I’ve never been a regulator.’ He was then the President of the New York Federal Reserve, and he purports that he was never a regulator? That is a demonstration of what is wrong with the Federal Reserve banks if the head of the unit doesn’t think he’s a regulator. He’s a disaster.”

It should come as no surprise that Richard Carnell, a Professor at Fordham Law School and former Assistant Treasury Secretary for President Clinton, would have this to say about Geithner’s financial reform agenda, when asked for his comments by Kim Thai of Fortune:

The plan includes useful reforms. But it’s also naive, timid, misguided, politically inept, and intellectually dishonest.

It places naive faith in regulation. Yet regulation failed disastrously over the past decade. Bank regulators had ample powers to keep banks safe but did too little, too late. They let banks use $12-13 in borrowed money for every $1 in shareholders’ money. The administration’s response? Give regulators more powers.

[The plan] preserves a preposterous tangle of overlapping regulators. And it didn’t arrive until June, seven months after the election. By then the crisis had faded and special interest politics had come roaring back.

It entrenches bailouts for large financial institutions. Voters know that’s rotten policy. It makes firms like General Electric divest their banks. That serves no purpose. It’s like trying to ward off the Mexican Mafia by fortifying the Canadian border. Small wonder voters remain skeptical.

It appears as though Turbo Tim is not up to the job of killing those whales. Perhaps the President should find someone who is.

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The Next Big Fight

October 1st, 2009 Posted in Uncategorized

Oct, 01 2009

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October 1, 2009

On Tuesday September 29, 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. On September 10, Mr. Kotz testified before the Senate Banking Committee. You can find the prepared testimony here. (I suggest starting at page 8.) Having read that testimony, I wasn’t too shocked at what Mr. Kotz had to say in Tuesday’s reports. Nevertheless, as Zachery Kouwe explained in The New York Times, the level of bureaucratic incompetence at the SEC was underestimated:

Many on Wall Street and in Washington were surprised that some of Mr. Kotz’s proposals, like recording interviews with witnesses and creating a database for tips and complaints, were not already part of the S.E.C.’s standard practice.

The extent of dysfunction at the SEC has been well-documented. Back on January 5, I wrote a piece entitled: “Clean-Up Time On Wall Street”, expressing my hope that the incoming Obama administration might initiate some serious financial reforms. I quoted from Steven Labaton’s New York Times report concerning other SEC scandals investigated by Mr. Kotz last year. My posting also included a quote from a Times piece by Michael Lewis (author of Liar’s Poker) and David Einhorn, which is particularly relevant to the recent disclosures by Inspector General Kotz:

Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.

This sentiment was echoed on Tuesday by Barry Ritholtz at The Big Picture website:

The agency is supposed to be an investor’s advocate, the chief law enforcement agency for the markets. But that has hardly been how they have been managed, funded and operated in recent years.

Essentially the largest prosecutor’s office in the country, the SEC has been undercut at every turn: Their staffing was far too small to handle their jurisdiction — Wall Street and public Corporations. Their budgets have been sliced, and they were unable to keep up with the explosion in corporate criminality. Many key positions were left unfilled, and morale was severely damaged. A series of disastrous SEC chairs were appointed — to be “kinder and gentler.” Not only did they fail to maintain SEC funding (via fines), but they allowed the worst corporate offenders to go unpunished.

Gee, go figure that under those circumstances, they sucked at their jobs.

* * *

The bottom line of the SEC is this: If we are serious about corporate fraud, about violations of the SEC laws, about a level playing field, then we fund the agency adequately, hire enough lawyers to prosecute the crimes, and prevent Congress critters from interfering with the SEC doing its job.

To be blunt: So far, there is no evidence we are sincere about making the SEC a serious watchdog with teeth.

Congress sure hasn’t been. Staffing levels have been ignored, budgeting has been cut over the years. And it’s the sort of administrative issue that does not lend itself to bumper sticker aphorisms or tea party slogans.

Financial expert Janet Tavakoli explained in a presentation to the International Monetary Fund last week, that regulatory failures in the United States helped create an even larger Ponzi scam than the Madoff ruse — the massive racket involving the trading of residential mortgage-backed securities:

Wall Street disguised these toxic “investments” with new value-destroying securitizations and derivatives.

Meanwhile, collapsing mortgage lenders paid high dividends to shareholders (old investors) and interest on credit lines to Wall Street (old investors) with money raised from new investors in doomed securities. New money allowed Wall Street to temporarily hide losses and pay enormous bonuses. This is a classic Ponzi scheme.

* * *

Had regulators done their jobs, they would have shut down Wall Street’s financial meth labs, and the Ponzi scheme would have quickly choked to death from lack of monetary oxygen.

After the Savings and Loan crisis of the late 1980’s, there were more than 1,000 felony indictments of senior officers. Recent fraud is much more widespread and costly. The consequences are much greater. Congress needs to fund investigations. Regulators need to get tough on crime.

As Simon Johnson and James Kwak explained in The Washington Post, the upcoming battle over financial reform will be hard-fought by the banking industry and its lobbyists:

The next couple of months will be crucial in determining the shape of the financial system for decades to come. And so far, the signs are not encouraging.

* * *

Even back in April, the industry was able to kill Obama’s request for legislation allowing bankruptcy judges to modify mortgages. Five months of profits later, the big banks are only stronger. Is Obama up for this fight?

Our new President must know by now, that sinking a three-point shot is much easier than the juggling act he has undertaken with health care reform, the wars in Iraq and Afghanistan as well as his recent quest to help Chicago win the bid for the 2016 Olympics. If Mr. Obama can’t beat the health insurance lobby with both the Senate and Congress under Democratic control — how will the voters feel if he drops another ball in the fight for financial reform? Thanks to Harry Truman, the American public knows where “the buck stops”. The previously-quoted Washington Post commentary looked even further back in history to explain this burden of leadership:

During the reign of Louis XIV, when the common people complained of some oppressive government policy, they would say, “If only the king knew . . . .” Occasionally people will make similar statements about Barack Obama, blaming the policies they don’t like on his lieutenants.

But Barack Obama, like Louis XIV before him, knows exactly what is going on. Now is the time for him to show what his priorities are and how hard he is willing to fight for them. Elections have consequences, people used to say. This election brought in a popular Democratic president with reasonably large majorities in both houses of Congress. The financial crisis exposed the worst side of the financial services industry to the bright light of day. If we cannot get meaningful financial regulatory reform this year, we can’t blame it all on the banking lobby.

Let the games begin!

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Spread The Word

September 29th, 2009 Posted in Uncategorized

Sep, 29 2009

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September 29, 2009

I’ve seen quite a few articles and broadcasts from “mainstream” news sources during the past few weeks that have actually made me feel encouraged about the public’s response to the financial crisis and our current economic predicament. Six months ago, the dirty picture of what caused last year’s near-meltdown and what has continued to prevent the necessary reforms, was something one could find only by reading a relatively small number of blogs. Michael Panzner wrote a book entitled Financial Armageddon in 2006, predicting what many “experts” later described as unforeseeable. Mr. Panzner now has a blog called Financial Armageddon (as well as another: When Giants Fall). At his Financial Armageddon website, Mr. Panzner has helped ease the pain of the economic catastrophe with a little humor by educating his readers on some novel measurements of our recession level — such as the increased use of hair dye and “The Hot Waitress Index”. (He ran another great posting about the increasing number of disastrous experiences for people who tried to save money by cutting their own hair.) Meanwhile, Matt Taibbi has continued to serve as a gadfly against crony capitalism. Zero Hedge keeps us regularly apprised of the suspicious activities in the equities and futures markets, which are of no apparent concern to regulatory officials. Some bloggers, including Jr Deputy Accountant, have criticized the manic money-printing and other inappropriate activities at the Federal Reserve — which resists all efforts at oversight and transparency. One no longer experiences the stigma of “conspiracy theorist” by accepting the view that our financial and economic problems were caused primarily by regulatory failure.

On September 23, Dan Gerstein wrote a piece for Forbes, about the impressive, 25-page article concerning last year’s financial crisis, written by James Stewart for The New Yorker, entitled: “Eight Days”. At the outset, Mr. Gerstein noted how the New Yorker article provided the reader with some shocking insight on someone we all thought we knew pretty well:

But the biggest eye-opener was that the most incisive and damning questions raised by any of our leaders during this existential crisis came from none other than the era’s top free-market cheerleader in Washington, George W. Bush.

* * *

Paulson and Bernanke alerted Bush that AIG was about to fail, warned of the massive ripple effect AIG going bust would have on the global economy, and explained why the Fed could not intervene with an insurance company to stop this systemic threat. In response, Bush asked “How have we come to the point where we can’t let an institution fail without affecting the whole economy?”

The question raised by President Bush is still tragically apt, since nothing has been accomplished in the past year to break up or downsize those institutions considered “too big to fail”. Mr. Gerstein’s experience from reading the New Yorker article helped reinforce the understanding that our current situation is not only the result of regulatory failure, but it’s also a by-product of something called “regulatory capture” — wherein the regulators are beholden to those whom they are supposed to regulate:

Once disaster was averted and the system stabilized, Paulson, Geithner and Bernanke had no excuse for not laying down the law to Wall Street — figuratively and literally — in the ensuing weeks. By that I mean restructuring the deals we struck with the banks to get far better returns for taxpayers and rewriting the rules governing the financial system to prevent them from ever thinking they could gamble risk-free with our money again.

* * *

There’s no apparent sense of apartness or independence between regulator and regulated. To the contrary, there’s a power imbalance in the wrong direction, with the regulators dependent on and even at the mercy of the regulated. What does it say about the integrity and even the sanity of this system when the doctors have to ask the inmates how to restructure their treatments?

I was particularly impressed by Dan Gerstein’s closing remarks in the Forbes piece. It was encouraging to see another commentary in a mainstream media source, consistent with the ranting I did here, here and here. Mr. Gerstein expressed dismay at the lack of attention given to the unpleasant truth that we live in a plutocracy which won’t be changed until the people demand it:

That’s why I was so disappointed to find Stewart’s epic article buried in the elite pages of the New Yorker. It should have been serialized on the front pages of every newspaper in the country last week, so every American would be reminded in full detail of just how warped and rigged our financial system has been — and why it still is. Maybe then it might sink in that getting mad won’t get us even in the power struggle with the financial elites for control of our economy, and that change won’t happen until taxpayers demand it. You want public accountability for Wall Street? Let’s start with an accountable public.

Each time an article such as Dan Gerstein’s “Too Close For Comfort” gets widespread exposure, we move one step closer to the point where we have an informed, accountable public. It’s unfortunate that his commentary was buried in the elite pages of Forbes. That’s why I have it here. Spread the word.

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Ron Paul Struts His Stuff

August 17th, 2009 Posted in Uncategorized

Aug, 17 2009

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August 17, 2009

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* * *

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

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

* * *

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

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

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

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

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

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Fed Up With The Fed

July 20th, 2009 Posted in Uncategorized

Jul, 20 2009

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July 20, 2009

Last week’s news that Goldman Sachs reported $3.44 billion in earnings for the second quarter of 2009 provoked widespread outrage that was rather hard to avoid. Even Jon Stewart saw fit to provide his viewers with an informative audio-visual presentation concerning the role of Goldman Sachs in our society. Allan Sloan pointed out that in addition to the $10 billion Goldman received from the TARP program, (which it repaid) Goldman also received another $12.9 billion as a counterparty to AIG’s bad paper (which it hasn’t repaid). Beyond that, there was the matter of “the Federal Reserve Board moving with lightning speed last fall to allow Goldman to become a bank holding company”. Sloan lamented that despite this government largesse, Goldman is still fighting with the Treasury Department over how much it should pay taxpayers to buy back the stock purchase warrants it gave the government as part of the TARP deal. The Federal Reserve did more than put Goldman on the fast track for status as a bank holding company (which it denied to Lehman Brothers, resulting in that company’s bankruptcy). As Lisa Lerer reported for Politico, Senator Bernie Sanders questioned whether Goldman received even more assistance from the Federal Reserve. Because the Fed is not subject to transparency, we don’t know the answer to that question.

A commentator writing for the Seeking Alpha website under the pseudonym: Cynicus Economicus, expressed the opinion that people need to look more at the government and the Federal Reserve as being “at the root of the appearance of the bumper profits and bonuses at Goldman Sachs.” He went on to explain:

All of this, hidden in opacity, has led to a point at which insolvent banks are now able to make a ‘profit’. Exactly why has this massive bleeding of resources into insolvent banks been allowed to take place? Where exactly is the salvation of the real economy, the pot of gold at the end of the rainbow of the financial system? Like the pot of gold and the rainbow, if we just go a bit further…..we might just find the pot of gold.

In this terrible mess, the point that is forgotten is what a financial system is actually really for. It only exists to allocate accumulated capital and provision of insurances; the financial system should be a support to the real economy, by efficiently allocating capital. It is entirely unclear how pouring trillions of dollars into insolvent institutions, capital which will eventually be taken out of the ‘real’ economy, might facilitate this. The ‘real’ economy is now expensively supporting the financial system, rather than the financial system supporting the real economy.

The opacity of the Federal Reserve has become a focus of populist indignation since the financial crisis hit the meltdown stage last fall. As I discussed on May 25, Republican Congressman Ron Paul of Texas introduced the Federal Reserve Transparency Act (HR 1207) which would give the Government Accountability Office the authority to audit the Federal Reserve as well as its member components, and require a report to Congress by the end of 2010. Meanwhile, President Obama has suggested expanding the Fed’s powers to make it the nation’s “systemic risk regulator” overseeing banks such as Goldman Sachs, deemed “too big to fail”. The suggestion of expanding the Fed’s authority in this way has only added to the cry for more oversight. On July 17, Willem Buiter wrote a piece for the Financial Times entitled: “What to do with the Fed”. He began with this observation:

The desire for stronger Congressional oversight of the Fed is no longer confined to a few libertarian fruitcakes, conspiracy theorists and old lefties. It is a mainstream view that the Fed has failed to foresee and prevent the crisis, that it has managed it ineffectively since it started, and that it has allowed itself to be used as a quasi-fiscal instrument of the US Treasury, by-passing Congressional control.

Since the introduction of HR 1207, a public debate has ensued over this bill. This dispute was ratcheted up a notch when a number of economics professors signed a petition, urging Congress and the White House “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” An interesting analysis of this controversy appears at LewRockwell.com, in an article by economist Robert Higgs. Here’s how Higgs concluded his argument:

All in all, the economists’ petition reflects the astonishing political naivite and historical myopia that now characterize the top echelon of the mainstream economics profession. Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy — its monetary order — cannot produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work — indeed, cannot work — any better in the monetary order than it works in the economy as a whole.

It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided actions, but abolished root and branch before it inflicts further centrally planned disaster on the world’s people.

Close down the Federal Reserve? It’s not a new idea. Back on September 29, when the Emergency Economic Stabilization Act of 2008 was just a baby, Avery Goodman posted a piece at the Seeking Alpha website arguing for closure of the Fed. The article made a number of good points, although this was my favorite:

The Fed balance sheet shows that it injected a total of about $262 billion, probably into the stock market, over the last two weeks, pumping up prices on Wall Street. The practical effect will be to allow people in-the-know to sell their equities at inflated prices to people-who-believe-and-trust, but don’t know. Sending so much liquidity into the U.S.economy will stoke the fires of hyperinflation, regardless of what they do with interest rates. In a capitalist society, the stock market should not be subject to such manipulation, by the government or anyone else. It should rise and fall on its own merits. If it is meant to fall, let it do so, and fast. It is better to get the economic downturn over with, using shock therapy, than to continue to bleed the American people slowly to death through a billion tiny pinpricks.

So the battle over the Fed continues. In the mean time, as The Washington Post reports, Fed Chairman Ben Bernanke takes his show on the road, making four appearances over the next six days. Tuesday and Wednesday will bring his semiannual testimony on monetary policy before House and Senate committees. Perhaps he will be accompanied by Goldman Sachs CEO, Lloyd Bankfiend, who could show everyone the nice “green shoots” growing in his IRA at taxpayer expense.

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More Bad Press For Goldman Sachs

July 16th, 2009 Posted in Uncategorized

Jul, 16 2009

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July 16, 2009

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

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

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

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

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

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

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

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

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

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

* * *

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

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

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

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Painting The Tape

July 2nd, 2009 Posted in Uncategorized

Jul, 02 2009

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July 2, 2009

Would you be willing to wager your life savings on pro-wrestling matches? That is basically what you are doing when you invest in the stock market these days. The game is being rigged. If you are just a “retail investor” or “little guy”, you run the risk of having your investment in this “bear market rally” significantly diminish in the blink of an eye. Regular readers of this blog (all four of them) know that this is one of my favorite subjects. In my posting on May 21, I recalled feeling a little paranoid last December when I wrote this:

Do you care to hazard a guess as to what the next Wall Street scandal might be? I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets. I’ve discussed it with some knowledgeable investors. I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets. I have a hunch that their plan is to run up stock prices at the end of the day before those numbers have a chance to settle back down to the level where the market would normally have them. The inflated “closing price” for the day is then perceived as the market value of the stock. This plan would be an effort to con investors into believing that the market has pulled out of its slump. Eventually the victims would find themselves hosed once again at the next “market correction”. I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.

After my last posting about this subject on May 21, I have continued to read quite a number of opinions by authoritative sources, echoing my belief that the stock market is being manipulated. Tyler Durden at Zero Hedge has been quite diligent about exposing incidents of “tape painting”. Some examples appear here and here. In case you don’t know what is meant by “painting the tape”, here is a definition:

An illegal action by a group of market manipulators buying and/or selling a security among themselves to create artificial trading activity, which, when reported on the ticker tape, lures in unsuspecting investors as they perceive an unusual volume.

After causing a movement in the security, the manipulators hope to sell at a profit.

As one might expect, this activity is more easily accomplished on days when trading volume is low. On June 11, Craig Brown had this to say about the subject on the Seeking Alpha website:

I have read some posts about some suspicions on perhaps some entities painting the tape. Volume has been light so it is something that could happen. We will see if these conspiracy theories play out.

Regular readers of Zero Hedge (it’s on my blogroll, at the right) had the opportunity to see some televised interviews during the past few days, when professionals have complained about “tape painting” in the equities markets. On Monday, June 29, we saw on (of all places) CNBC, a discussion with Larry Levin, a futures trader on the Chicago Mercantile Exchange. I would consider CNBC the last place to criticize “pumping” of stock prices, since their commentary often seems designed to do just that. Nevertheless, watch and listen to what Larry Levin had to say at 2:22 into this video clip. He explains that “this market continues to be propped up by government intervention and manipulation” and he unequivocally accuses the Obama administration of acting to “prop this market up on a daily basis”. Again, on Wednesday, July 1, visitors to the Zero Hedge website had the opportunity to see this June 30 clip from Bloomberg TV, wherein Joe Saluzzi of Themis Trading noted that “you’ve got government forecasts that are intentionally misleading us, constantly”. He went on to emphasize that the trading volume we see every day is “fictitious — it’s not real”. He explained the potential hazards to retail investors caused by trading programs that “artificially inflate the prices” of stocks, although a “news event” could cause that program trading to abruptly reverse, erasing a valuable portion of the retail investors’ assets.

On June 24, Bret Rosenthal posted an article on the HedgeCo.net website, entitled: “Coping With Government-Sponsored Market Manipulation”. Here’s some of what he had to say:

We must not allow the government manipulations to cloud our judgement and sucker us into investments that have no hope of success over time. Example: the government-sponsored rally in the financials over the last 3+ months was clearly created to help the banking sector raise capital. Again, if you wish to argue this point I suggest you go down to the water’s edge and scream at the tide. Massive amounts of capital were raised through the secondary markets for financial companies in the last 30 days. This is a simple fact. Now that this manipulation is complete and private capital has been sucked in where will the equity markets go?

The best advice for the retail investor, attempting to navigate through the current “bear market rally” was provided by Graham Summers, Senior Market Strategist at OmniSans Investment Research, in this July 1 posting at the Seeking Alpha website:

This rally has sucker punched the shorts countless times now, particularly when it comes to late-day market manipulation. In a nutshell, every time stocks begin showing signs of breaking down, someone steps in, usually during the final 30 minutes of trading, to push the market back into positive territory. So while economic fundamentals indicate we’ve come much too far too fast, it’s hard to make money trading based on this information.

* * *

To rephrase the above thoughts, stocks are currently trading where they should be a full year from now assuming that the economy turns around this fall. This hardly makes a strong case for greater gains or more upward momentum. But it’s hard to go short with the historic rig that is currently taking place in the market.

So my advice to anyone right now is to stay put. This week is a wash anyhow due to it being short and due to performance gaming: portfolio managers and institutional investors pushing stocks higher so they can close out the quarter with gains on their positions. Indeed, yesterday’s market volume on the NYSE was the lowest we’ve seen since January 5, 2009.

So don’t open any new positions for now. This week will be exceedingly choppy. And with volume drying up to a trickle, there is potential for some violent swings as the big boys play around with their end of the quarter shenanigans. You don’t want to be on the wrong side of one of those swings.

Meanwhile, I’ve been watching my investment in the SRS exchange-traded fund (which inversely tracks the IYR real estate index, at twice the magnitude) unwind during the past few days, erasing the nice profit I made just after getting into it. Will I bail? Nawww! I’m waiting for that “news event” to turn things around.

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Matt Taibbi Deserves An Award

June 25th, 2009 Posted in Uncategorized

Jun, 25 2009

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June 25, 2009

Like many people, I found out about Matt Taibbi as a result of his frequent appearances on HBO’s Real Time with Bill Maher. Last spring, Matt appeared on Real Time to discuss his research into the global economic crisis and the resulting scheme of numerous bailouts engineered in response to each sub-crisis of this economic catastrophe. My March 26 piece: “Understanding The Creepy Bailouts“, quoted from Matt’s fantastic article for Rolling Stone magazine, entitled: “The Big Takeover”. (At that time, the “Big Takeover” link led to the complete article. Rolling Stone now provides only abbreviated versions of its published articles on line.) One important theme of Matt’s commentary was evident in this passage:

The mistake most people make in looking at the financial crisis is thinking of it in terms of money, a habit that might lead you to look at the unfolding mess as a huge bonus-killing downer for the Wall Street class. But if you look at it in purely Machiavellian terms, what you see is a colossal power grab that threatens to turn the federal government into a kind of giant Enron — a huge, impenetrable black box filled with self-dealing insiders whose scheme is the securing of individual profits at the expense of an ocean of unwitting involuntary shareholders, previously known as taxpayers.

Matt has a unique way of discussing the extremely complicated, technical issues involved in the financial crisis, by breaking them down into understandable, plain-language points. Unfortunately, most mainstream journalists lack either the understanding or the courage (or both) to discuss our financial predicament in such a frank, informative manner. Take for example: Fareed Zakaria’s discussion of the economic catastrophe as it appeared in Newsweek under the title “The Capitalist Manifesto”. Nobody could to a better job of ripping that thing to shreds than Matt Taibbi himself. With his June 24 blog entry, he did just that:

Zakaria works hard to tell the crisis story minus these outrageous details. Then he goes on to argue that, basically, nothing should be done. We mostly just need a “gut check”; we, all of us, need to rediscover that little voice in all of us that says, “if it doesn’t feel right, we shouldn’t be doing it.” I mean, that is actually what he wrote. No one needs to go to jail, we don’t need to worry about who’s to blame, we just need, you know, do a better job using our trusty moral compasses to navigate the seas of life. It’s classic Zakaria in the sense that he attacks ugly political phenomena with tired cliches and hack pablum until you’re almost too bored to keep your eyes open, then in the end reduces it all to a dumbed-down t-shirt that carries us forward to another cycle of political inaction: Laissez-faire capitalism doesn’t rip off people, people rip off people!

Matt’s previous blog entry on June 18, focused on one of my favorite subjects: the hideous monster we have come to know as Goldman Sachs. I had written a piece about that entity on May 21, discussing how Paul Farrell of MarketWatch and John Crudele of the New York Post had been voicing the same suspicions I had been harboring about Goldman. After reading Matt Taibbi’s June 18 article, I enthusiastically sent the link to my friends. This stuff was just too good! Matt was laying it on the line in a way few others had the courage or the skill to do. I doubt whether many in the mainstream media will follow his lead. Here is one of the highlights from that piece:

Any way you slice it, Goldman was responsible for putting tens of billions of toxic mortgages on the market, resulting in mass foreclosures, mass depletion of retirement funds, and a monstrously over-leveraged financial system that we will now all be bailing out for the next half-century or so. All of this so that Goldman could make a few billion bucks acting as the middleman in all of these deadly transactions.

If that weren’t enough, Matt pointed out that the upcoming issue of Rolling Stone would feature another of his reports — this one focused exclusively on Goldman Sachs. That issue (#1082-83, with the Jonas Brothers on the cover) is now on the newsstands. Matt’s article: “The Wall Street Bubble Machine” is best explained in the subtitle:

From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression — And they’re about to do it again.

In case you are wondering how they’re going to do it again . . . Matt reports that it will be by way of the “Cap and Trade” program. Goldman has already positioned itself to serve as one of our government’s premier carbon credit pimps. Matt offered this explanation:

Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy-futures market?

“Oh, it’ll dwarf it,” says a former staffer on the House energy committee.

Matt’s “bottom line” paragraph at the conclusion of the essay underscores what I believe are America’s biggest problems: “lobbying” and “campaign contributions” (our tradition of legalized graft). Our government is not just one of laws . . . it is one of loopholes, exemptions and waivers. Those things cost money. The people who have the money to “invest” in such machinations, usually find themselves rewarded handsomely . . . at the expense of the taxpayers. Here’s how Matt wrapped it up:

But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal, excusing them from homework until the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but we should at least know where it’s all going.

Amen.

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A Consensus On Conspiracy

May 21st, 2009 Posted in Uncategorized

May, 21 2009

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May 21, 2009

I guess I can throw away my tinfoil hat. I’m not so paranoid, after all.

Back on December 18, after discussing the bank bailout boondoggle, I made this observation about what had been taking place in the equities markets during that time:

Do you care to hazard a guess as to what the next Wall Street scandal might be? I have a pet theory concerning the almost-daily spate of “late-day rallies” in the equities markets. I’ve discussed it with some knowledgeable investors. I suspect that some of the bailout money squandered by Treasury Secretary Paulson has found its way into the hands of some miscreants who are using this money to manipulate the stock markets. I have a hunch that their plan is to run up stock prices at the end of the day, before those numbers have a chance to settle back down to the level where the market would normally have them. The inflated “closing price” for the day is then perceived as the market value of the stock. This plan would be an effort to con investors into believing that the market has pulled out of its slump. Eventually the victims would find themselves hosed once again at the next “market correction”. I don’t believe that SEC Chairman Christopher Cox would likely uncover such a scam, given his track record.

Some people agreed with me, although others considered such a “conspiracy” too far-flung to be workable.

Thanks to Tyler Durden at Zero Hedge, my earlier suspicions of market manipulation were confirmed. On Tuesday, May 19, Mr. Durden posted a video clip from an interview with (among others) Dan Schaeffer, president of Schaeffer Asset Management, previously broadcast on the Fox Business Channel on May 14. While discussing the latest “bear market rally”, Dan Schaeffer made this observation:

“Something strange happened during the last 7 or 8 weeks. Doreen, you probably can concur on this — there was a power underneath the market that kept holding it up and trading the futures. I watch the futures every day and every tick, and a tremendous amount of volume came in at several points during the last few weeks, when the market was just about ready to break and shot right up again. Usually toward the end of the day — it happened a week ago Friday, at 7 minutes to 4 o’clock, almost 100,000 S&P futures contracts were traded, and then in the last 5 minutes, up to 4 o’clock, another 100,000 contracts were traded, and lifted the Dow from being down 18 to up over 44 or 50 points in 7 minutes. That is 10 to 20 billion dollars to be able to move the market in such a way. Who has that kind of money to move this market?

“On top of that, the market has rallied up during the stress test uncertainty and moved the bank stocks up, and the bank stocks issues secondary — they issue stock — they raised capital into this rally. It was a perfect text book setup of controlling the markets — now that the stock has been issued …”

Mr. Schaeffer was then interrupted by panel member, Richard Suttmeier of ValuEngine.com.

My fellow foilhats likely had no trouble recognizing this market manipulation as the handiwork of the Plunge Protection Team (also known as the PPT). Many commentators have considered the PPT as nothing more than a myth, with some believing that this “myth” stems from the actual existence of something called The President’s Working Group on Financial Markets. For a good read on the history of the PPT, I recommend the article by Ambrose Evans-Pritchard of the Telegraph. Bear in mind that Evans-Pritchard’s article was written in October of 2006, two years before the global economic meltdown:

Hank Paulson, the market-wise Treasury Secretary who built a $700m fortune at Goldman Sachs, is re-activating the ‘plunge protection team’ (PPT), a shadowy body with powers to support stock index, currency, and credit futures in a crash.

Otherwise known as the working group on financial markets, it was created by Ronald Reagan to prevent a repeat of the Wall Street meltdown in October 1987.

Mr Paulson says the group had been allowed to languish over the boom years. Henceforth, it will have a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis.

* * *

The PPT was once the stuff of dark legends, its existence long denied. But ex-White House strategist George Stephanopoulos admits openly that it was used to support the markets in the Russia/LTCM crisis under Bill Clinton, and almost certainly again after the 9/11 terrorist attacks.

“They have an informal agreement among major banks to come in and start to buy stock if there appears to be a problem,” he said.

“In 1998, there was the Long Term Capital crisis, a global currency crisis. At the guidance of the Fed, all of the banks got together and propped up the currency markets. And they have plans in place to consider that if the stock markets start to fall,” he said.

The only question is whether it uses taxpayer money to bail out investors directly, or merely co-ordinates action by Wall Street banks as in 1929. The level of moral hazard is subtly different.

John Crudele of the New York Post frequently discusses the PPT, although he is presently of the opinion that it either no longer exists or has gone underground. He has recently considered the possibility that the PPT may have “outsourced” its mission to Goldman Sachs:

Let’s remember something.

First, Goldman Sachs accepted $10 billion in government money under the Troubled Asset Relief Program (TARP), so it is gambling with taxpayer money.

But the bigger thing to remember is this: The firm may be living up to its nickname – Government Sachs – and might be doing the government’s bidding.

The stock market rally these past seven weeks has certainly made it easier for the Obama administration to do its job. That, plus a little fancy accounting during the first quarter, has calmed peoples’ nerves quite a bit.

Rallies on Wall Street, of course, are good things – unless it turns out that some people know the government is rigging the stock market and you don’t.

That brings me to something called The President’s Working Group on Financial Markets, which is commonly referred to as the Plunge Protection Team.

As I wrote in last Thursday’s column, the Team has disappeared.

Try finding The President’s Working Group at the US Treasury and you won’t.

The guys and girls that Treasury Secretary Hank Paulson relied on so heavily last year when he was forcing Bank of America to buy Merrill Lynch and when he was waterboarding other firms into coming to Wall Street’s rescue has gone underground.

Anybody who has read this column for long enough knows what I think, that the President’s Working Group Plunge Protectors have, in the past, tinkered with the financial markets.

We’ll let interrogators in some future Congressional investigation decide whether or not they did so legally.

But right now, I smell a whiff of Goldman in this market. Breath in deeply, it’s intoxicating – and troubling.

Could Goldman Sachs be involved in a conspiracy to manipulate the stock markets? Paul Farrell of MarketWatch has been writing about the “Goldman Conspiracy” for over a month. You can read about it here and here. In his May 4 article, he set out the plot line for a suggested, thirteen-episode television series called: The Goldman Conspiracy. I am particularly looking forward to the fourth episode in the proposed series:

Episode 4. ‘Goldman Conspiracy’ is manipulating stock market

“Something smells fishy in the market. And the aroma seems to be coming from Goldman Sachs,” says John Crudele in the New York Post. Stocks prices soaring. “So, who’s moving the market?” Not the little guy. “Professional traders, with Goldman Sachs leading the way.” NYSE numbers show “Goldman did twice the number of so-called big program trades during the week of April 13,” over a billion shares, creating “a historic rally despite the fact that the economy continues to be in serious trouble.” Then he tells us why: Because the “Goldman Conspiracy” is using TARP and Fed money, churning the markets. They are “gambling with taxpayer money.”

It’s nice to know that other commentators share my suspicions … and better yet: Some day I could be watching a television series, based on what I once considered my own, sensational conjecture.

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The Betrayal

March 23rd, 2009 Posted in Uncategorized

Mar, 23 2009

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March 23, 2009

We the people, who voted for Barack Obama, are about to get ripped off by our favorite Hope dealer. Throughout the recent controversy arising from the huge bonuses paid to AIG executives, President Obama has done quite a bit of hand wringing over the fact that the government is rewarding “the very same people who got us into this mess”. Treasury Secretary, “Turbo” Tim Geithner is now rolling out the administration’s so-called Financial Stability Plan, wherein once again, “the very same people who got us into this mess” will be rewarded with our tax dollars. Over a trillion dollars of taxpayer money will be used to either buy back or insure an arbitrarily-assigned value for the infamous mortgage-backed securities. The purpose of this exercise will be to prevent the bankers themselves from losing money. The country’s top economists, including two Nobel Prize winners (Paul Krugman and Joseph Stiglitz) have advocated a different solution: placing those banks that are about to fail into “temporary receivership”. However, this process would result in a significant reduction of the stock prices for those banks, in addition to replacement of the management of those institutions. The big-shot bankers won’t put up with this.

In Sunday’s New York Times, Frank Rich referenced a reader’s observation that this is President Obama’s “Katrina Moment”. How the new President responds to this crisis will likely shape “the trajectory of his term”. I prefer to call it Obama’s “Yellow Cake Moment”, since he and his administration are bent on selling a lie (the likelihood that the Financial Stability Plan can succeed) to the public in order to further assist the bad bankers. It is similar to when George W. Bush convinced many in Congress and the public, that Saddam Hussein was attempting to purchase yellow cake uranium to make atomic bombs (with Bush’s ultimate goal being widespread support for the invasion of Iraq).

It should be no coincidence that the Financial Stability Plan is rewarding the bad bankers, since it was prepared by some of “the very same people who got us into this mess”. I am specifically referring to Larry Summers and Turbo Tim himself. Frank Rich covered this point quite well in Sunday’s article. As a result, Obama’s attempt to chastise “the very same people who got us into this mess” is quite specious, in light of the fact that some of those people have shaped his latest bank bailout.

Back during the campaign, Candidate Obama caught quite a bit of flack for talking about “putting lipstick on a pig”. Nevertheless, his continued promotion of the various incarnations of what is essentially the same ill-conceived plan floated by former Treasury Secretary Henry Paulson, demonstrates that Obama himself is now putting lipstick on a pig. As Paul Krugman pointed out:

Why was I so quick to condemn the Geithner plan? Because it’s not new; it’s just another version of an idea that keeps coming up and keeps being refuted. It’s basically a thinly disguised version of the same plan Henry Paulson announced way back in September.

* * *

But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls “a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don’t think I can finish this on a Times blog]”

Nevertheless, “public outcry” is exactly what is warranted in response to this soon-to-be fiasco. Most economists favor the “temporary receivership” approach, rather than the continued bailouts of insolvent banks. The Administration’s Financial Stability Plan is just another way to reward “the very same people who got us into this mess”. This plan is expected to cost at least one trillion dollars. As a result, the government is about to bilk the taxpayers out of an amount in excess of 20 Bernie Madoff Ponzi schemes.

MSNBC’s Rachel Maddow has recently vilified Senator Evan Bayh’s caucus of moderate Democrats, whom she calls “Conservadems” because they have been offering some resistance to a few of Obama’s proposals. These Senators are actually smart people who can detect the distinctive odor of snake oil. They know better than to tie their political futures to a bank bailout plan that can destroy their own credibility with the voting public. They know that public support of Obama’s broader agenda is hinged on how he deals with the banking problem. As Ben Smith and Manu Raju reported for Politico:

But many lawmakers made clear Tuesday their view that voters’ willingness to trust Obama on some subjects will be determined by their view of how well he handles the economic crisis.

* * *

“Unless we can instill some trust back with the American people that these people who brought on this problem, who risked our 401K funds and hard-working people’s money, aren’t going to be able to profit from their folly, I think we are at risk of losing their trust,” said Sen. Amy Klobuchar (D-Minn.).

Meanwhile, there’s an ill wind a-blowin’ and it’s coming from 1600 Pennsylvania Avenue. The efforts by many pundits to blame the flawed financial policy on Geithner are misplaced. If President Obama weren’t on board with this plan, it would have never made it outside of the Oval Office. The problem is with Obama himself, rather than Geithner. Unfortunately, the decision our President has made will likely turn a two-year recession into a ten-year recession. To him, the corresponding benefit of helping out the bankers must apparently be worth it.

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