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Congress Could Be Quite Different After 2012 Elections

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They come up for re-election every two years.  Each of the 435 members of the House of Representatives is in a constant “campaign mode” because the term of office is so short.  Lee White of the American Historical Association summed-up the impact of the 2010 elections this way:

On Tuesday, November 2, 2010, U.S. voters dramatically changed the landscape in Washington.  Republicans gained control of the House and, although the Democrats retained control of the Senate their margin in that body has been reduced to 53-47.

*   *   *

Clearly the most dramatic change will be in the House with new Republican committee and subcommittee chairs taking over.

Voter discontent was revealed by the fact that just before the 2010 elections, the Congressional approval rating was at 17 percent.  More recently, according to a Gallup poll, taken during April 7-11 of 2011, Congressional job approval is now back down to 17 percent, after a bump up to 23 percent in February.  Of particular interest were the conclusions drawn by the pollsters at Gallup concerning the implications of the latest polling results:

Congress’ approval rating in Gallup’s April 7-11 survey is just four points above its all-time low.  The probability of a significant improvement in congressional approval in the months ahead is not high. Congress is now engaged in a highly contentious battle over the federal budget, with a controversial vote on the federal debt ceiling forthcoming in the next several months.  The Republican-controlled House often appears to be battling with itself, as conservative newly elected House members hold out for substantial cuts in government spending.  Additionally, Americans’ economic confidence is as low as it has been since last summer, and satisfaction with the way things are going in the U.S. is at 19%.

At this point, it appears as though we could be looking at an even larger crop of freshmen in the 2013 Congress than we saw in January, 2011.  (According to polling guru, Nate Silver, the fate of the 33 Senate incumbents is still an open question.)

One poster child for voter ire could be Republican Congressman Spencer Bachus of Alabama.  You might recall that at approximately this time last year, Matt Taibbi wrote another one of his great exposés for Rolling Stone entitled, “Looting Main Street”.  In his exceptional style, Taibbi explained how JPMorgan Chase bribed the local crooked politicians into replacing Jefferson County’s bonds, issued to finance an expensive sewer project, with variable interest rate swaps (also known as synthetic rate swaps).  Then came the financial crisis.  As a result, the rate Jefferson County had to pay on the bonds went up while the rates paid by banks to the county went down.  It didn’t take long for the bond rating companies to downgrade those sewer bonds to “junk” status.

JPMorgan Chase unsuccessfully attempted to dismiss a lawsuit arising from this snafu.  Law 360 reported on April 15 that the Alabama Supreme Court recently affirmed the denial of JPMorgan’s attempt to dismiss the case, which was based on these facts:

Jefferson County accuses JPMorgan of paying bribes to county officials in exchange for an appointment as lead underwriter for what turned out to be a highly risky refinancing of the county’s sewer debt, which caused Jefferson County billions of dollars in losses.  According to the complaint, JPMorgan, JPMorgan Chase and underwriting firm Blount Parrish & Co. handed out bribes, kickbacks and payoffs to swindle the county out of millions in inflated fees.

JPMorgan claimed that only the Governor of Alabama had authority to bring such a suit.  I wonder why former Alabama Governor Bob Riley didn’t bother to join Jefferson County as a party plaintiff, making the issue moot and saving Jefferson County some legal fees, before the case found its way to the state Supreme Court?

Joe Nocera of The New York Times recently put the spotlight on another character from Alabama politics:

Has Spencer Bachus, as the local congressman, decried this debacle?  Of course – what local congressman wouldn’t?  In a letter last year to Mary Schapiro, the chairwoman of the S.E.C., he said that the county’s financing schemes “magnified the inherent risks of the municipal finance market.”

*   *   *

Bachus is not just your garden variety local congressman, though.  As chairman of the Financial Services Committee, he is uniquely positioned to help make sure that similar disasters never happen again – not just in Jefferson County but anywhere.  After all, the new Dodd-Frank financial reform law will, at long last, regulate derivatives.  And the implementation of that law is being overseen by Bachus and his committee.

Among its many provisions related to derivatives – all designed to lessen their systemic risk – is a series of rules that would make it close to impossible for the likes of JPMorgan to pawn risky derivatives off on municipalities.  Dodd-Frank requires sellers of derivatives to take a near-fiduciary interest in the well-being of a municipality.

You would think Bachus would want these regulations in place as quickly as possible, given the pain his constituents are suffering.  Yet, last week, along with a handful of other House Republican bigwigs, he introduced legislation that would do just the opposite:  It would delay derivative regulation until January 2013.

As Joe Nocera suggested, this might be more than simply a delaying tactic, to keep derivatives trading unregulated for another two years.  Bachus could be counting on Republican takeovers of the Senate and the White House after the 2012 election cycle.  At that point, Bachus and his fellow Tools of Wall Street could finally drive a stake through the heart of the nearly-stillborn baby known as “financial reform”.

On the other hand, the people vested with the authority to cast those votes that keep Spencer Bachus in office, could realize that he is betraying them in favor of the Wall Street banksters.  The “public memory” may be short but – fortunately – the term of office for a Congressman is equally brief.


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Bad Timing By The Dimon Dog At Davos

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Last week’s World Economic Forum in Davos, Switzerland turned out to be a bad time for The Dimon Dog to stage a “righteous indignation” fit.  One would expect an investment banker to have a better sense of timing than what was demonstrated by the CEO of JPMorgan Chase.  Vito Racanelli provided this report for Barron’s:

The Davos panel, called “The Next Shock, Are We Better Prepared?” proceeded at a typically low emotional decibel level until Dimon was asked about what he thought of Americans who had directed their anger against the banks for the bailout.

Dimon visibly turned more animated, replying that “it’s not fair to lump all banks together.”  The TARP program was forced on some banks, and not all of them needed it, he said.  A number of banks helped stabilize things, noting that his bank bought the failed Bear Stearns.  The idea that all banks would have failed without government intervention isn’t right, he said defensively

Dimon clearly felt aggrieved by the question and the negative banker headlines, and went on for a while.

“I don’t lump all media together… .  There’s good and there’s bad.  There’s irresponsible and ignorant and there’s really smart media.  Well, not all bankers are the same.  I just think this constant refrain [of] ‘bankers, bankers, bankers,’ – it’s just a really unproductive and unfair way of treating people…  People should just stop doing that.”

The immediate response expressed by a number of commentators was to focus on Dimon’s efforts to obstruct financial reform.  Although Dimon had frequently paid lip service to the idea that no single institution should pose a risk to the entire financial system in the event of its own collapse, he did all he could to make sure that the Dodd-Frank “financial reform” bill did nothing to overturn the “too big to fail” doctrine.  Beyond that, the post-crisis elimination of the Financial Accounting Standards Board requirement that a bank’s assets should be “marked to market” values, was the only crutch that kept JPMorgan Chase from falling into the same scrap heap of insolvent banks as the other Federal Reserve welfare queens.

Simon Johnson (former chief economist at the International Monetary Fund) obviously had some fun writing a retort – published in the Economix blog at The New York Times to The Dimon Dog’s diatribe.  Johnson began by addressing the threat voiced by Dimon and Diamond (Robert E. Diamond of Barclay’s Bank):

The newly standard line from big global banks has two components  .  .  .

First, if you regulate us, we’ll move to other countries.  And second, the public policy priority should not be banks but rather the spending cuts needed to get budget deficits under control in the United States, Britain and other industrialized countries.

This rhetoric is misleading at best.  At worst it represents a blatant attempt to shake down the public purse.

*   *   *

As we discussed at length during the Senate hearing, it is therefore not possible to discuss bringing the budget deficit under control in the foreseeable future without measuring and confronting the risks still posed by our financial system.

Neil Barofsky, the special inspector general for the Troubled Assets Relief Program, put it well in his latest quarterly report, which appeared last week: perhaps TARP’s most significant legacy is “the moral hazard and potentially disastrous consequences associated with the continued existence of financial institutions that are ‘too big to fail.’ ”

*   *   *

In this context, the idea that megabanks would move to other countries is simply ludicrous.  These behemoths need a public balance sheet to back them up, or they will not be able to borrow anywhere near their current amounts.

Whatever you think of places like Grand Cayman, the Bahamas or San Marino as offshore financial centers, there is no way that a JPMorgan Chase or a Barclays could consider moving there.  Poorly run casinos with completely messed-up incentives, these megabanks need a deep-pocketed and somewhat dumb sovereign to back them.

After Dimon’s temper tantrum, a pile-on by commentators immediately ensued.  Elinor Comlay and Matthew Goldstein of Reuters wrote an extensive report, documenting Dimon’s lobbying record and debunking a good number of public relations myths concerning Dimon’s stewardship of JPMorgan Chase:

Still, with hindsight it’s clear that Dimon’s approach to risk didn’t help him entirely avoid the financial crisis.  Even as the first rumblings of the crisis were sounding in the distance, he aggressively sought to boost Chase’s share of the U.S. mortgage business.

At the end of 2007, after JPMorgan had taken a $1.3 billion write-down on leveraged loans, Dimon told analysts the bank was planning to add as much as $20 billion in mortgages from riskier borrowers.  “We think we’d get very good spreads and … it will be a drop in the bucket for our capital ratios.”

By mid-2008, JPMorgan Chase had $95.1 billion exposure to home equity loans, almost $15 billion in subprime mortgages and a $76 billion credit card book.  Banks were not required to mark those loans at market prices, but if the loans were accounted for that way, losses could have been as painful for JPMorgan as credit derivatives were for AIG, according to former investment bank executives.

What was particularly bad about The Dimon Dog’s timing of his Davos diatribe concerned the fact that since December 2, 2010 a $6.4 billion lawsuit has been pending against JPMorgan Chase, brought by Irving H. Picard, the bankruptcy trustee responsible for recovering the losses sustained by Bernie Madoff’s Ponzi scam victims.  Did Dimon believe that the complaint would remain under seal forever?  On February 3, the complaint was unsealed by agreement of the parties, with the additional stipulation that the identities of several bank employees would remain confidential.  The New York Times provided us with some hints about how these employees were expected to testify:

On June 15, 2007, an evidently high-level risk management officer for Chase’s investment bank sent a lunchtime e-mail to colleagues to report that another bank executive “just told me that there is a well-known cloud over the head of Madoff and that his returns are speculated to be part of a Ponzi scheme.”

Even before that, a top private banking executive had been consistently steering clients away from investments linked to Mr. Madoff because his “Oz-like signals” were “too difficult to ignore.”  And the first Chase risk analyst to look at a Madoff feeder fund, in February 2006, reported to his superiors that its returns did not make sense because it did far better than the securities that were supposedly in its portfolio.

At The Daily Beast, Allan Dodds Frank began his report on the suit with questions that had to be fresh on everyone’s mind in the wake of the scrutiny The Dimon Dog had invited at Davos:

How much did JPMorgan CEO and Chairman Jamie Dimon know about his bank’s valued customer Bernie Madoff, and when did he know it?

These two crucial questions have been lingering below the surface for more than two years, even as the JPMorgan Chase leader cemented his reputation as the nation’s most important, most upright, and most highly regarded banker.

Not everyone at Davos was so impressed with The Dimon Dog.  Count me among those who were especially inspired by the upbraiding Dimon received from French President Nicolas Sarkozy:

“Don’t be accusatory of us,” Sarkozy snapped at Dimon at the World Economic Forum in Davos, Switzerland.

“The world has paid with tens of millions of unemployed, who were in no way to blame and who paid for everything.”

*   *   *
“We saw that for the last 10 years, major institutions in which we thought we could trust had done things which had nothing to do with simple common sense,” the Frenchman said.  “That’s what happened.”

Sarkozy also took direct aim at the bloated bonuses many bankers got despite the damage they did.

“When things don’t work, you can never find anyone responsible,” Sarkozy said.  “Those who got bumper bonuses for seven years should have made losses in 2008 when things collapsed.”

Why don’t we have a President like that?


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Financial Reform Bill Exposed As Hoax

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June 28, 2010

You don’t have to look too far to find damning criticism of the so-called financial “reform” bill.  Once the Kaufman-Brown amendment was subverted (thanks to the Obama administration), the efforts to solve the problem of financial institutions’ growth to a state of being “too big to fail” (TBTF) became a lost cause.  Dylan Ratigan, who had been fuming for a while about the financial reform charade, had this to say about the product that emerged from reconciliation on Friday morning:

It means that the same people who brought you these horrible changes — rising wealth discrepancy, massive unemployment and a crumbling infrastructure – have now further institutionalized the policies that will keep the causes of these problems firmly in place.

The best trashing of this bill came from Tyler Durden at Zero Hedge:

Congrats, middle class, once again you get raped by Wall Street, which is off to the races to yet again rapidly blow itself up courtesy of 30x leverage, unlimited discount window usage, trillions in excess reserves, quadrillions in unregulated derivatives, a TBTF framework that has been untouched and will need a rescue in under a year, non-existent accounting rules, a culture of unmitigated greed, and all of Congress and Senate on its payroll.  And, sorry, you can’t even vote some of the idiots that passed this garbage out:  after all there is a retiring lame duck in charge of it all.  We can only hope his annual Wall Street (i.e. taxpayer funded) annuity will satisfy his conscience for destroying any hope America could have of a credible financial system.

*   *   *

In other words, the greatest theatrical production of the past few months is now over, it has achieved nothing, it will prevent nothing, and ultimately the financial markets will blow up yet again, but not before the Teleprompter in Chief pummels the idiot public with address after address how he singlehandedly was bribed, pardon, achieved a historic event of being the only president to completely crumble under Wall Street’s pressure on every item that was supposed to reign in the greatest risktaking generation (with Other People’s Money) in history.

Robert Lenzner of Forbes focused his criticism of the bill on the fact that nothing was done to limit the absurd leverage used by the banks to borrow against their capital.  After all, at the January 13 hearing of the Financial Crisis Inquiry Commission, Lloyd Bankfiend of Goldman Sachs and JP Morgan’s Dimon Dog admitted that excessive leverage was a key problem in causing the financial crisis.  As I discussed in “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”.

At Forbes, Robert Lenzner discussed the ugly truth about how the limits on leverage were excised from this bill:

The capitulation on this matter of leverage is extraordinary evidence of Wall Street’s power to influence Congress through its lobbying dollars.  It is another example of the public servants serving the agents of finance capitalism.  After pumping in gobs of sovereign credit to replace the credit that had been wiped out and replace the supply of credit to the economic system, a weak reform bill will just be an invitation to drum up the leverage that caused the crisis in the first place.

Another victory for the lobbyists came in their sabotage of the prohibition on proprietary trading (when banks trade with their own money, for their own benefit).  The bill provides that federal financial regulators shall study the measure, then issue rules implementing it, based on the results of that study.  The rules might ultimately ban proprietary trading or they may allow for what Jim Jubak of MSN calls the “de minimus” (trading with minimal amounts) exemption to the ban.  Jubak considers the use of the de minimus exemption to the so-called ban as the likely outcome.  Many commentators failed to realize how the lobbyists worked their magic here, reporting that the prop trading ban (referred to as the “Volcker rule”) survived reconciliation intact.  Jim Jubak exposed the strategy employed by the lobbyists:

But lobbying Congress is only part of the game.  Congress writes the laws, but it leaves it up to regulators to write the rules.  In a mid-June review of the text of the financial-reform legislation, the Chamber of Commerce counted 399 rule-makings and 47 studies required by lawmakers.

Each one of these, like the proposed de minimus exemption of the Volcker rule, would be settled by regulators operating by and large out of the public eye and with minimal public input.  But the financial-industry lobbyists who once worked at the Federal Reserve, the Treasury, the Securities and Exchange Commission, the Commodities Futures Trading Commission or the Federal Deposit Insurance Corp. know how to put in a word with those writing the rules.  Need help understanding a complex issue?  A regulator has the name of a former colleague now working as a lobbyist in an e-mail address book.  Want to share an industry point of view with a rule-maker?  Odds are a lobbyist knows whom to call to get a few minutes of face time.

At the Naked Capitalism website, Yves Smith served up some more negative reactions to the bill, along with her own cutting commentary:

I want the word “reform” back.  Between health care “reform” and financial services “reform,” Obama, his operatives, and media cheerleaders are trying to depict both initiatives as being far more salutary and far-reaching than they are.  This abuse of language is yet another case of the Obama Administration using branding to cover up substantive shortcomings.  In the short run it might fool quite a few people, just as BP’s efforts to position itself as an environmentally responsible company did.

*   *   *

So what does the bill accomplish?  It inconveniences banks around the margin while failing to reduce the odds of a recurrence of a major financial crisis.

The only two measures I see as genuine accomplishments, the Audit the Fed provisions, and the creation of a consumer financial product bureau, do not address systemic risks.  And the consumer protection authority was substantially watered down.  Recall a crucial provision, that banks be required to offer plain vanilla variants of products, was axed early on.

So there you have it.  The bill that is supposed to save us from another financial crisis does nothing to accomplish that objective.  Once this 2,000-page farce is signed into law, watch for the reactions.  It will be interesting to sort out the clear-thinkers from the Kool-Aid drinkers.





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Failed Financial Reform And Failed Justice

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April 26, 2010

As the long-awaited financial reform legislation finally seems to be headed toward enactment, the groans of disappointment are loud and clear.  My favorite reporter at The New York Times, Gretchen Morgenson, did a fine job of exposing the shortcomings destined for inclusion in this lame bill:

Unfortunately, the leading proposals would do little to cure the epidemic unleashed on American taxpayers by the lords of finance and their bailout partners.  The central problem is that neither the Senate nor House bills would chop down big banks to a more manageable and less threatening size.  The bills also don’t eliminate the prospect of future bailouts of interconnected and powerful companies.

Too big to fail is alive and well, alas.  Indeed, several aspects of the legislative proposals sanction and codify the special status conferred on institutions that are seen as systemically important.  Instead of reducing the number of behemoth firms assigned this special status, the bills would encourage smaller companies to grow large and dangerous so that they, too, could have a seat at the bailout buffet.

*   *   *

It is disappointing that none of the current proposals call for breaking up institutions that are now too big or on their way there.  Such is the view of Richard W. Fisher, president of the Federal Reserve Bank of Dallas.

“The social costs associated with these big financial institutions are much greater than any benefits they may provide,” Mr. Fisher said in an interview last week.  “We need to find some international convention to limit their size.”

*   *   *

Edward Kane, a finance professor at Boston College and an authority on financial institutions and regulators, said that it was not surprising that substantive changes for both groups are not on the table.  After all, powerful banks want to maintain their ability to privatize gains and socialize losses.

“To understand why defects in in solvency detection and resolution persist, analysts must acknowledge that large financial institutions invest in building and exercising political clout,” Mr.Kane writes in an article, titled “Defining and Controlling Systemic Risk,” that he is scheduled to present next month at a Federal Reserve conference.

But regulators, eager to avoid being blamed for missteps in oversight, also have an interest in the status quo, Mr. Kane argues.  “As in a long-running poker game in which one player (here, the taxpayer) is a perennial and relatively clueless loser,” he writes, “other players see little reason to disturb the equilibrium.”

At Forbes, Robert Lenzner focused on the human failings responsible for the bad behavior of the big banks with his emphasis on the notion that “a fish stinks from the head”:

No well-intentioned reform bill that will pass Congress can prevent the mind-blowing stupidity, hubris and denial utilized by the big fish of Wall Street from stinking from the head.

*   *   *

Transparency won’t help if the Obama plan does not absolutely require all derivatives to be registered at the Securities and Exchange Commission.  It’s an invitation for abuse as five major market making banks like JPMorgan Chase account for 95% of all derivatives transactions and a very large share of their profits.  We haven’t seen evidence that they police themselves satisfactorily.

Derivatives expert Janet Tavakoli recently expressed her disgust over the disingenuousness of the current version of this legislation:

Our proposed “financial reform” bill is a sham, and the health of our society and our economy is at stake.

Ms. Tavakoli referred to the recent Huffington Post article by Dan Froomkin, which highlighted the criticism of the financial reform legislation provided by Professor William Black (the former prosecutor from the Savings and Loan crisis, whose execution was called for by Charles Keating).  Froomkin embraced the logic of economist James Galbraith, who emphasized that rather than relying on the expertise of economists to shape financial reform, we should be looking to the assistance of criminologists.  William Black reinforced this idea:

Criminologists, Black said, are trained to identify the environments that produce epidemics of fraud — and in the case of the financial crisis, the culprit is obvious.

“We’re looking at incentive structures,” he told HuffPost.  “Not people suddenly becoming evil.  Not people suddenly becoming crazy.  But people reacting to perverse incentive structures.”

CEOs can’t send out a memo telling their front-line professionals to commit fraud, “but you can send the same message with your compensations system, and you can do it without going to jail,” Black said.

Criminologists ask “fundamentally different types of question” than the ones being asked.

Back at The New York Times, Frank Rich provided us with a rare example of mainstream media outrage over the lack of interest in prosecuting the fraudsters responsible for the financial disaster that put eight million people out of work:

That no one at Lehman Brothers has yet been held liable for its Enronesque bookkeeping deceit is appalling.  That we still haven’t seen the e-mail and documents that would illuminate A.I.G.’s machinations with Goldman and the rest of its counterparties amounts to a cover-up.  That investigative journalists have consistently been way ahead of the authorities, the S.E.C. included, in uncovering Wall Street’s foul play is a scandal.  If this culture remains in place, the whole crisis will have gone to waste.

Unfortunately, the likelihood that any significant financial reform will be enacted as a result of the financial crisis is about the same as the likelihood that we will see anyone doing a “perp walk” for the fraudulent behavior that caused the meltdown.  Don’t expect serious reform and don’t expect justice.



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