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Federal Reserve Bailout Records Provoke Limited Outrage

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

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

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

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

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

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

*   *   *

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

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

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

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

Ivry and Griffin provided this reaction from Bernie Sanders:

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

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

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

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

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

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

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

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

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

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

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

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

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

Thanks for the explanation, Mr. Dudley.


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Obama Fatigue

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Since President Obama first assumed office, it hasn’t been too difficult to find harsh criticism of the new administration.  One need only tune in to the Fox News, where an awkward Presidential sneeze could be interpreted as a “secret message” to Bill Ayers or George Soros.  Nevertheless, with the passing of time, voices from across the political spectrum have joined a chorus of frustration with the Obama agenda.

On February 26, 2009 – only one month into the Obama Presidency – I voiced my suspicion about the new administration’s unwillingness to address the problem of systemic risk, inherent in allowing a privileged few banks to enjoy their “too big to fail” status:

Will Turbo Tim’s “stress tests” simply turn out to be a stamp of approval, helping insolvent banks avoid any responsible degree of reorganization, allowing them to continue their “welfare queen” existence, thus requiring continuous infusions of cash at the expense of the taxpayers?  Will the Obama administration’s “failure of nerve” –  by avoiding bank nationalization — send us into a ten-year, “Japan-style” recession?  It’s beginning to look that way.

By September of 2009, I became convinced that Mr. Obama was suffering from a degree of hubris, which could seal his fate as a single-term President:

Back on July 15, 2008 and throughout the Presidential campaign, Barack Obama promised the voters that if he were elected, there would be “no more trickle-down economics”.  Nevertheless, his administration’s continuing bailouts of the banking sector have become the worst examples of trickle-down economics in American history – not just because of their massive size and scope, but because they will probably fail to achieve their intended result.

Although the TARP bank bailout program was initiated during the final months of the Bush Presidency, the Obama administration’s stewardship of that program recently drew sharp criticism from Neil Barofsky, the retiring Special Inspector General for TARP (SIGTARP).  Beyond that, in his March 29 op-ed piece for The New York Times, Mr. Barofsky criticized the Obama administration’s failure to make good on its promises of “financial reform”:

Finally, the country was assured that regulatory reform would address the threat to our financial system posed by large banks that have become effectively guaranteed by the government no matter how reckless their behavior.  This promise also appears likely to go unfulfilled.  The biggest banks are 20 percent larger than they were before the crisis and control a larger part of our economy than ever.  They reasonably assume that the government will rescue them again, if necessary.

*   *   *

Worse, Treasury apparently has chosen to ignore rather than support real efforts at reform, such as those advocated by Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, to simplify or shrink the most complex financial institutions.

*   *   *

In the final analysis, it has been Treasury’s broken promises that have turned TARP – which was instrumental in saving the financial system at a relatively modest cost to taxpayers – into a program commonly viewed as little more than a giveaway to Wall Street executives.

It wasn’t meant to be that.  Indeed, Treasury’s mismanagement of TARP and its disregard for TARP’s Main Street goals – whether born of incompetence, timidity in the face of a crisis or a mindset too closely aligned with the banks it was supposed to rein in – may have so damaged the credibility of the government as a whole that future policy makers may be politically unable to take the necessary steps to save the system the next time a crisis arises.  This avoidable political reality might just be TARP’s most lasting, and unfortunate, legacy.

Another unlikely critic of President Obama is the retired law school professor who blogs using the pseudonym, “George Washington”.  A recent posting at Washington’s Blog draws from a number of sources to ponder the question of whether President Obama (despite his Nobel Peace Prize) has become more brutal than President Bush.  The essay concludes with a review of Obama’s overall performance in The White House:

Whether or not Obama is worse than Bush, he’s just as bad.

While we had Bush’s “heck of a job” response to Katrina, we had Obama’s equally inept response and false assurances in connection with the Gulf oil spill, and Obama’s false assurances in connection with the Japanese nuclear crisis.

And Bush and Obama’s response to the financial crisis are virtually identical:  bail out the giant banks, let Wall Street do whatever it wants, and forget the little guy.

The American voters asked for change.  Instead, we got a different branch of the exact same Wall Street/military-industrial complex/Big Energy (BP, GE)/Big Pharma party.

Another commentator who has become increasingly critical of President Obama is Robert Reich, Secretary of Labor in the Clinton Administration.  Mr. Obama’s failure to push back against the corporatist politicians, who serve as “reverse Robin Hoods” enriching CEOs at the expense of American workers, resulted in this rebuke from Professor Reich:

President Obama and Democratic leaders should be standing up for the wages and benefits of ordinary Americans, standing up for unions, and decrying the lie that wage and benefit concessions are necessary to create jobs.  The President should be traveling to the Midwest – taking aim at Republican governors in the heartland who are hell bent on destroying the purchasing power of American workers.  But he’s doing nothing of the sort.

As attention begins to focus on the question of who will be the Republican nominee for the 2012 Presidential election campaign, Obama Fatigue is causing many people to appraise the President’s chances of defeat.  The excitement of bringing the promised “change” of 2008 has morphed into cynicism.  Many of the voters who elected Obama in 2008 might be too disgusted to bother with voting in 2012.  As a result, the idea of a Democratic or Independent challenger to Obama is receiving more consideration.  Rolling Stone’s Matt Taibbi recently provided this response to a letter inquiring about the possibility that Elizabeth Warren could make a run for the White House in 2012:

A few months ago I heard a vague rumor from someone who theoretically would know that such a thing was being contemplated, but I don’t know anything beyond that.  I wish she would run.  I’m not sure if it would ultimately be a good thing or a bad thing for Barack Obama – she could fatally wound his general-election chances by exposing his ties to Wall Street – but I think she’s exactly what this country needs. She’s totally literate on the finance issues and is completely on the side of human beings, as opposed to banks and oil companies and the like.  One thing I will say:  if she did run, she would have a lot more support from the press than she probably imagines, as there are a lot of reporters out there who are reaching the terminal-disappointment level with Obama ready to hop on the bandwagon of someone like Warren.

If Elizabeth Warren ultimately decides to make a run for The White House, Mr. Obama should do the right thing:  Stop selling the sky to people and step aside.


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No Justice For The Wicked

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Although the drumbeat continues, I remain skeptical as to whether any of the criminals responsible for causing the financial crisis will ever be brought to justice.  In the weeks before President Obama’s Inauguration, the foremost question on my mind was whether the new administration would take the necessary steps to change the culture of corruption on Wall Street:

As we approach the eve of the Obama Administration’s first day, across America the new President’s supporters have visions of “change we can believe in” dancing in their heads.  For some, this change means the long overdue realization of health care reform.  For those active in the Democratic campaigns of 2006, “change” means an end to the Iraq war.  Many Americans are hoping that the new administration will crack down on the unregulated activities on Wall Street that helped bring about the current economic crisis.

On December 15, Stephen Labaton wrote an article for the New York Times, examining the recent failures of the Securities and Exchange Commission as well as the environment at the SEC that facilitates such breakdowns.

At that time, I also focused on the point made in a commentary by Michael Lewis and David Einhorn, which appeared in the January 3 New York Times:

It’s not hard to see why the S.E.C. behaves as it does.  If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

I concluded that piece with a rhetorical question:

Let’s hope our new President, the Congress and others pay serious attention to what Lewis and Einhorn have said.  Cleaning up Wall Street is going to be a dirty job.  Will those responsible for accomplishing this task be up to doing it?

By March 23, 2009, it had become obvious that our new President was more concerned about the “welfare” (pun intended) of the Wall Street banks than the well-being of the American economy.  I began my posting of that date with this statement:

We the people, who voted for Barack Obama, are about to get ripped off by our favorite Hope dealer.

On August 27 of that year, I wrote another piece expressing my disappointment with how things had (not) progressed.  My October 1, 2009 posting focused on the fact that H. David Kotz, Inspector General of the Securities and Exchange Commission, issued two reports, recommending 58 changes to improve the way the agency investigates and enforces violations of securities laws, as a result of the SEC’s failure to investigate the Bernie Madoff Ponzi scheme.  The reports exposed a shocking degree of ineptitude at the SEC.

After the release of the report by bankruptcy examiner Anton Valukas, pinpointing the causes of the collapse of Lehman Brothers, I lamented the fact that the mainstream media hadn’t shown much concern about the matter, despite the terrible fraud exposed in the report.  Nevertheless, by the next day, I was able to highlight some great commentaries on the Valukas Report and I felt optimistic enough to conclude the piece with this thought:

We can only hope that a continued investigation into the Lehman scandal will result in a very bright light directed on those privileged plutocrats who consider themselves above the law.

If only  . . .

By the eve of the mid-term elections, I had an answer to the question I had posed on January 5, 2009 as to whether our new President and Congress would be up to the task of cleaning up Wall Street:

One common theme voiced by many critics of the Obama administration has been its lack of interest in prosecuting those responsible for causing the financial crisis.  Don’t hold your breath waiting for Attorney General Eric Hold-harmless to initiate any criminal proceedings against such noteworthy individuals as Countrywide’s Angelo Mozilo or Dick Fuld of Lehman Brothers.  On October 23, Frank Rich of The New York Times mentioned both of those individuals while lamenting the administration’s failure to prosecute the “financial crimes that devastated the nation”:

The Obama administration seems not to have a prosecutorial gene.   It’s shy about calling a fraud a fraud when it occurs in high finance.
*   *   *
Since Obama has neither aggressively pursued the crash’s con men nor compellingly explained how they gamed the system, he sometimes looks as if he’s fronting for the industry even if he’s not.

The special treatment afforded to the perpetrators of the frauds that helped create the financial crisis wasn’t the only gift to Wall Street from the Democratically-controlled White House, Senate and Congress.  The financial “reform” bill was so badly compromised (by the Administration and Senate Democrats, themselves) as it worked its way through the legislative process, that it is now commonly regarded as nothing more than a hoax.

By the close of 2010, I noted that an expanding number of commentators shared my outrage over the likelihood that we would never see any prosecutions result from the crimes that brought about the financial crisis:

A recent article written by former New York Mayor Ed Koch began with the grim observation that no criminal charges have been brought against any of the malefactors responsible for causing the financial crisis:

Looking back on 2010 and the Great Recession, I continue to be enraged by the lack of accountability for those who wrecked our economy and brought the U.S. to its knees.  The shocking truth is that those who did the damage are still in charge.  Many who ran Wall Street before and during the debacle are either still there making millions, if not billions, of dollars, or are in charge of our country’s economic policies which led to the debacle.

Most recently, Matt Taibbi has written another great article for Rolling Stone entitled, “Why Isn’t Wall Street in Jail?”.  It’s nice to know that the drumbeat for justice continues.  Taibbi’s essay provided a great history of the crisis, with a particular emphasis on how whistleblowers were ignored, just as Harry Markopolos was ignored when (in May of 2000) he tried to alert the SEC to the fact that Bernie Madoff’s hedge fund was a multi-billion-dollar Ponzi scheme.  Here is a great passage from Matt Taibbi’s essay:

In the past few years, the administration has allocated massive amounts of federal resources to catching wrongdoers — of a certain type.  Last year, the government deported 393,000 people, at a cost of $5 billion.  Since 2007, felony immigration prosecutions along the Mexican border have surged 77 percent; nonfelony prosecutions by 259 percent.  In Ohio last month, a single mother was caught lying about where she lived to put her kids into a better school district; the judge in the case tried to sentence her to 10 days in jail for fraud, declaring that letting her go free would “demean the seriousness” of the offenses.

So there you have it.  Illegal immigrants:  393,000.  Lying moms:  one.  Bankers:  zero.  The math makes sense only because the politics are so obvious.  You want to win elections, you bang on the jailable class. You build prisons and fill them with people for selling dime bags and stealing CD players.  But for stealing a billion dollars?  For fraud that puts a million people into foreclosure?  Pass.  It’s not a crime.  Prison is too harsh.  Get them to say they’re sorry, and move on.  Oh, wait — let’s not even make them say they’re sorry.  That’s too mean; let’s just give them a piece of paper with a government stamp on it, officially clearing them of the need to apologize, and make them pay a fine instead.  But don’t make them pay it out of their own pockets, and don’t ask them to give back the money they stole. In fact, let them profit from their collective crimes, to the tune of a record $135 billion in pay and benefits last year.  What’s next?  Taxpayer-funded massages for every Wall Street executive guilty of fraud?

Wouldn’t it be nice if public opinion meant more to the Obama administration than campaign contributions from Wall Street banksters?




Where Obama Went Wrong

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September 27, 2010

One could write an 800-page book on this subject.  During the past week, we’ve been bombarded with explanations from across the political spectrum, concerning how President Obama has gone from wildly-popular cult hero to radioactive force on the 2010 campaign trail.  For many Democrats facing re-election bids in November, the presence of Obama at one of their campaign rallies could be reminiscent of the appearance of William Macy’s character from the movie, The Cooler.  Wikipedia’s discussion of the film provided this definition:

In gambling parlance, a “cooler” is an unlucky individual whose presence at the tables results in a streak of bad luck for the other players.

Barack Obama was elected on a wave of emotion, under the banners of  “Hope” and “Change”.  These days, the emotion consensus has turned against Obama as voters feel more hopeless as a result of Obama’s failure to change anything.  His ardent supporters feel as though they have been duped.  Instead of having been tricked into voting for a “secret Muslim”, they feel they have elected a “secret Republican”.  At the Salon.com website, Glenn Greenwald has documented no less than fifteen examples of Obama’s continuation of the policies of George W. Bush, in breach of his own campaign promises.

One key area of well-deserved outrage against President Obama’s performance concerns the economy.  The disappointment about this issue was widely articulated in December of 2009, as I pointed out here.  At that time, Matt Taibbi had written an essay for Rolling Stone entitled, “Obama’s Big Sellout”, which inspired such commentators as Edward Harrison of Credit Writedowns to write this and this.  Beyond the justified criticism, polling by Pew Research has revealed that 46% of Democrats and 50% of Republicans incorrectly believe that the TARP bank bailout was signed into law by Barack Obama rather than George W. Bush.  President Obama invited this confusion with his nomination of “Turbo” Tim Geithner to the position of Treasury Secretary.  As President of the Federal Reserve of New York, Geithner oversaw the $13 billion gift Goldman Sachs received by way of Maiden Lane III.

The emotional battleground of the 2010 elections provided some fun for conservative pundit, Peggy Noonan this week as a result of the highly-publicized moment at the CNBC town hall meeting on September 20.  Velma Hart’s question to the President was emblematic of the plight experienced by many 2008 Obama supporters.  Noonan’s article, “The Enraged vs. The Exhausted” characterized the 2010 elections as a battle between those two emotional factions.  The “Velma Moment” exposed Obama’s political vulnerability as an aloof leader, lacking the ability to emotionally connect with his supporters:

The president looked relieved when she stood.  Perhaps he thought she might lob a sympathetic question that would allow him to hit a reply out of the park.  Instead, and in the nicest possible way, Velma Hart lobbed a hand grenade.

“I’m a mother. I’m a wife.  I’m an American veteran, and I’m one of your middle-class Americans.  And quite frankly I’m exhausted.  I’m exhausted of defending you, defending your administration, defending the mantle of change that I voted for, and deeply disappointed with where we are.”  She said, “The financial recession has taken an enormous toll on my family.”  She said, “My husband and I have joked for years that we thought we were well beyond the hot-dogs-and-beans era of our lives.  But, quite frankly, it is starting to knock on our door and ring true that that might be where we are headed.”

What a testimony.  And this is the president’s base.  He got that look public figures adopt when they know they just took one right in the chops on national TV and cannot show their dismay.  He could have responded with an engagement and conviction equal to the moment.  But this was our president  — calm, detached, even-keeled to the point of insensate.  He offered a recital of his administration’s achievements: tuition assistance, health care.  It seemed so off point.  Like his first two years.

Kirsten Powers of The Daily Beast provided the best analysis of how the “Velma Moment” illustrated Obama’s lack of empathy.  Where Bill Clinton is The Sorcerer, Barack Obama is The Apprentice:

Does Barack Obama suffer from an “empathy deficit?” Ironically, it was Obama who used the phrase in a 2008 speech when he diagnosed the United States as suffering from the disorder.  In a plea for unity, candidate Obama said lack of empathy was “the essential deficit that exists in this country.”  He defined it as “an inability to recognize ourselves in one another; to understand that we are our brother’s keeper; we are our sister’s keeper; that, in the words of Dr. King, we are all tied together in a single garment of destiny.”

*   *   *

And at a 2008 rally in Westerville, Ohio, Obama said, “One of the values that I think men in particular have to pass on is the value of empathy.  Not sympathy, empathy.  And what that means is standing in somebody else’s shoes, being able to look through their eyes.  You know, sometimes we get so caught up in ‘us’ that it’s hard to see that there are other people and that your behavior has an impact on them.”

Yes, President Obama, sometimes that does happen.  Take a look in the mirror.  Nothing brought this problem into relief like the two Obama supporters who confronted the president at a recent town hall meeting expressing total despair over their economic situation and hopelessness about the future.  Rather than expressing empathy, Obama seemed annoyed and proceeded with one of his unhelpful lectures.

*   *   *

One former Emoter-in-Chief, Bill Clinton, told Politico last week, “[Obama’s] being criticized for being too disengaged, for not caring.  So he needs to turn into it.  I may be one of the few people that think it’s not bad that that lady said she was getting tired of defending him.  He needs to hear it.  You need to hear. Embrace people’s anger, including their disappointment at you.  And just ask ‘em to not let the anger cloud their judgment.  Let it concentrate their judgment.  And then make your case.”

Then the kicker:  “[Obama has] got to realize that, in the end, it’s not about him. It’s about the American people, and they’re hurting.”

The American people are hurting because their President sold them out immediately after he was elected.  When faced with the choice of bailing out the zombie banks or putting those banks through temporary receivership (the “Swedish approach” – wherein the bank shareholders and bondholders would take financial “haircuts”) Obama chose to bail out the banks at taxpayer expense.  So here we are  . . .  in a Japanese-style “lost decade”.  In case you don’t remember the debate from early 2009 – peruse this February 10, 2009 posting from the Calculated Risk website.  After reading that, try not to cry after looking at this recent piece by Barry Ritholtz of The Big Picture entitled, “We Should Have Gone Swedish  . . .” :

The result of the Swedish method?  They spent 4% of GDP ($18.3 billion in today’s dollars), to rescue their banks.  That is far less than the $trillions we have spent — somewhere between 15-20% of GDP.

Final cost to the Swedes?  Less than 2% of G.D.P.  (Some officials believe it was closer to zero, depending on how certain rates of return are calculated).

In the US, the final tally is years away from being calculated — and its likely to be many times what Sweden paid in GDP % terms.

It has become apparent that the story of  “Where Obama Went Wrong” began during the first month of his Presidency.  Whoever undertakes the task of writing that book will be busy for a long time.




Voters Got Fooled Again

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September 13, 2010

With mid-term elections approaching, the articles are turning up all over the place.  Newsweek’s Howard Fineman calls them pre-mortems:  advance analyses of why the Democrats will lose power in November.  Some of us saw the handwriting on the wall quite a while ago.  Before President Obama had completed his first year in office, it was becoming clear that his campaign theme of “hope” and “change” was just a ruse to con the electorate.   On September 21, 2009, I wrote a piece entitled, “The Broken Promise”, based on this theme:

Back on July 15, 2008 and throughout the Presidential campaign, Barack Obama promised the voters that if he were elected, there would be “no more trickle-down economics”.  Nevertheless, his administration’s continuing bailouts of the banking sector have become the worst examples of trickle-down economics in American history — not just because of their massive size and scope, but because they will probably fail to achieve their intended result.  Although the Treasury Department is starting to “come clean” to Congressional Oversight chair Elizabeth Warren, we can’t even be sure about the amount of money infused into the financial sector by one means or another because of the lack of transparency and accountability at the Federal Reserve.

In November of 2009, Matt Taibbi wrote an article for Rolling Stone entitled,“Obama’s Big Sellout”.  Taibbi’s essay inspired Edward Harrison of Credit Writedowns to write his own critique of Obama’s first eleven months in office.  Beyond that, Mr. Harrison’s assessment of the fate of proposed financial reform legislation turned out to be prescient.  Remember – Ed Harrison wrote this on December 11, 2009:

As you probably know, I have been quite disappointed with this Administration’s leadership on financial reform.  While I think they ‘get it,’ it is plain they lack either the courage or conviction to put forward a set of ideas that gets at the heart of what caused this crisis.

It was clear to many by this time last year that the President may not have been serious about reform when he picked Tim Geithner and Larry Summers as the leaders of his economic team.  As smart and qualified as these two are, they are rightfully seen as allied with Wall Street and the anti-regulatory movement.

At a minimum, the picks of Geithner and Summers were a signal to Wall Street that the Obama Administration would be friendly to their interests.  It is sort of like Ronald Reagan going to Philadelphia, Mississippi as a first stop in the 1980 election campaign to let southerners know that he was friendly to their interests.

I reserved judgment because one has to judge based on actions.  But last November I did ask Is Obama really “Change we can believe in?” because his Administration was being stacked with Washington insiders and agents of the status quo.

Since that time it is obvious that two things have occurred as a result of this ‘Washington insider’ bias.  First, there has been no real reform.  Insiders are likely to defend the status quo for the simple reason that they and those with whom they associate are the ones who represent the status quo in the first place.  What happens when a company is nationalized or declared bankrupt is instructive; here, new management must be installed to prevent the old management from covering up past mistakes or perpetuating errors that led to the firm’s demise.  The same is true in government.

That no ‘real’ reform was coming was obvious, even by June when I wrote a brief note on the fake reform agenda.  It is even more obvious with the passage of time and the lack of any substantive reform in health care.

Second, Obama’s stacking his administration with insiders has been very detrimental to his party.  I imagine he did this as a way to overcome any worries about his own inexperience and to break with what was seen as a major factor in Bill Clinton’s initial failings.  While I am an independent, I still have enough political antennae to know that taking established politicians out of incumbent positions (Joe Biden, Janet Napolitano, Hillary Clinton, Rahm Emanuel, Kathleen Sebelius or Tim Kaine) jeopardizes their seat.  So, the strategy of stacking his administration has not only created a status quo bias, but it has also weakened his party.

Mr. Harrison’s point about those incumbencies is now being echoed by many commentators – most frequently to point out that Janet Napolitano was replaced as Governor of Arizona by Jan Brewer.  Brewer is expected to win in November despite her inability to debate or form a coherent sentence before a live audience.

Bob Herbert of The New York Times recently wrote a great piece, in which he blasted the Democrats for failing to “respond adequately to their constituents’ most dire needs”:

The Democrats are in deep, deep trouble because they have not effectively addressed the overwhelming concern of working men and women:  an economy that is too weak to provide the jobs they need to support themselves and their families.  And that failure is rooted in the Democrats’ continued fascination with the self-serving conservative belief that the way to help ordinary people is to shower money on the rich and wait for the blessings to trickle down to the great unwashed below.

It was a bogus concept when George H.W. Bush denounced it as “voodoo economics” in 1980, and it remains bogus today, no matter how hard the Democrats try to dress it up in a donkey costume.

I was surprised to see that Howard Fineman focused his campaign pre-mortem on President Obama himself, rather than critiquing the Democratic Party as a whole.  At a time when mainstream media pundits are frequently criticized for going soft on those in power in order to retain “access”, it was refreshing to see Fineman point out some of Obama’s leadership flaws:

The president is an agreeable guy, but aloof, and not one who likes to come face to face with the enemy. Sure, GOP leaders were laying traps for him from the start.  And it was foolish to assume Mitch McConnell or John Boehner would play ball.  But Obama doesn’t really know Republicans, and he doesn’t seem to want to take their measure.  (Nor has he seemed all that curious about what makes Democratic insiders tick.)  It’s the task of the presidency to cajole people, including your enemies, into doing what they don’t want to do if it is good for the country.  Did Obama think he could eschew the rituals of politics — that all he had to do was invoke His Hopeness to bring people aboard?

Well, people aren’t on board and that’s the problem.  The voters were taken for chumps and they were fooled by some good campaign propaganda.  Nevertheless, as President George W. Bush once said:

Fool me once – shame on – shame on you.  Fool me – You can’t get fooled again!

At this point, it does not appear as though the voters who supported President Obama and company in 2008 are willing to let themselves get fooled again.  At least the Republicans admit that their primary mission is to make life easier for rich people at everyone else’s expense.  The fact that the voters hate being lied to – more than anything else – may be the one lesson the Democrats learn from this election cycle.




Geithner Watch

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August 19, 2010

It’s that time once again.  The Treasury Department has launched another “charm offensive” – and not a moment too soon.  “Turbo” Tim Geithner got some really bad publicity at the Daily Beast website by way of a piece by Philip Shenon.  The story concerned the fact that a man named Daniel Zelikow — while in between revolving door spins at JP Morgan Chase — let Geithner live rent-free in Zelikow’s $3.5 million Washington townhouse, during Geithner’s first eight months as Treasury Secretary.  Zelikow (who had previously worked for JP Morgan Chase from 1999 until 2007) was working at the Inter-American Development Bank at the time.  The Daily Beast described the situation this way:

At that time, Geithner was overseeing the bailout of several huge Wall Street banks, including JPMorgan, which received $25 billion in federal rescue funds from the TARP program.

Zelikow, a friend of Geithner’s since they were classmates at Dartmouth College in the early 1980s, begins work this month running JPMorgan’s new 12-member International Public Sector Group, which will develop foreign governments as clients.

*   *   *

Stephen Gillers, a law professor at New York University who is a specialist in government ethics and author of a leading textbook on legal ethics, described Geithner’s original decision to move in with Zelikow last year as “just awful” —  given the conflict-of-interest problems it seemed to create.

He tells The Daily Beast that Geithner now needs to avoid even the appearance of assisting JPMorgan in any way that suggested a “thank-you note” to Zelikow in exchange for last year’s free rent.

“He needs to be purer than Caesar’s wife — purer than Caesar’s whole family,” Gillers said of the Treasury secretary.

The Daily Beast story came right on the heels of Matt Taibbi’s superlative article in Rolling Stone, exposing the skullduggery involved in removing all the teeth from the financial “reform” bill.  Taibbi did not speak kindly of Geithner:

If Obama’s team had had their way, last month’s debate over the Volcker rule would never have happened.  When the original version of the finance-­reform bill passed the House last fall  – heavily influenced by treasury secretary and noted pencil-necked Wall Street stooge Timothy Geithner – it contained no attempt to ban banks with federally insured deposits from engaging in prop trading.

Just when it became clear that Geithner needed to make some new friends in the blogosphere, another conclave with financial bloggers took place on Monday, August 16.  The first such event took place last November.  I reviewed several accounts of the November meeting in a piece entitled “Avoiding The Kool -Aid”.  Since that time, Treasury has decided to conduct such meetings 4 – 6 times per year.  The conferences follow an “open discussion” format, led by individual senior Treasury officials (including Turbo Tim himself) with three presenters, each leading a 45-minute session.  A small number of financial bloggers are invited to attend.  Some of the bloggers who were unable to attend last November’s session were sorry they missed it.  The August 16 meeting was the first one I’d heard about since the November event.  The following bloggers attended the August 16 session:  Phil Davis of Phil’s Stock World, Yves Smith of Naked Capitalism, John Lounsbury for Ed Harrison’s Credit Writedowns, Michael Konczal of Rortybomb, Steve Waldman of Interfluidity, as well as Tyler Cowen and Alex Tabarrok of Marginal Revolution.  As of this writing, Alex Tabarrok and John Lounsbury were the only attendees to have written about the event.  You can expect to see something soon from Yves Smith of Naked Capitalism.

At this juncture, the effort appears to have worked to Geithner’s advantage, since he made a favorable impression on Alex Tabarrok, just as he had done last November with Tabarrok’s partner at Marginal Revolution, Tyler Cowen:

As Tyler said after an earlier visit, Geithner is smart and deep.  Geithner took questions on any topic.  Bear in mind that taking questions from people like Mike Konczal, Tyler, or Interfluidity is not like taking questions from the press.  Geithner quickly identified the heart of every question and responded in a way that showed a command of both theory and fact.  We went way over scheduled time.  He seemed to be having fun.

It will be interesting to see whether the upcoming accounts of the meeting continue to provide Geithner with the image makeover he so desperately needs.


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Getting Rolled By Wall Street

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August 5, 2010

For the past few years, investors have been flocking to exchange-traded funds (ETFs) as an alternative to mutual funds, which often penalize investors for bailing out less than 90 days after buying in.  The ETFs are traded on exchanges in the same manner as individual stocks.  Investors can buy however many shares of an ETF as they desire, rather than being faced with a minimum investment as required by many mutual funds.  Other investors see ETFs as a less-risky alternative than buying individual stocks, since some funds consist of an assortment of stocks from a given sector.

The most recent essay by one of my favorite commentators, Paul Farrell of MarketWatch, is focused on the ETFs that are based on commodities, rather than stocks.  As it turns out, the commodity ETFs have turned out to be yet another one of Wall Street’s weapons of mass financial destruction.  Paul Farrell brings the reader’s attention to a number of articles written on this subject – all of which bear a theme similar to the title of Mr. Farrell’s piece:  “Commodity ETFs: Toxic, deadly, evil”.

Mr. Farrell discussed a recent article from Bloomberg BusinessWeek, exposing the hazards inherent in commodity ETFs.  That article began by discussing the experience of a man who invested $10,000 in an ETF called the U.S. Oil Fund (ticker symbol: USO), designed to track the price of light, sweet crude oil.  The investor’s experience became a familiar theme for many who had bought into commodity ETFs:

What happened next didn’t make sense.  Wolf watched oil go up as predicted, yet USO kept going down.  In February 2009, for example, crude rose 7.4 percent while USO fell by 7.4 percent.  What was going on?

What was going on was something called “contango”.  The BusinessWeek article explained it this way:

Contango is a word traders use to describe a specific market condition, when contracts for future delivery of a commodity are more expensive than near-term contracts for the same stuff.  It is common in commodity markets, though as Wolf and other investors learned, it can spell doom for commodity ETFs. When the futures contracts that commodity funds own are about to expire, fund managers have to sell them and buy new ones; otherwise they would have to take delivery of billions of dollars’ worth of raw materials.  When they buy the more expensive contracts — more expensive thanks to contango — they lose money for their investors.  Contango eats a fund’s seed corn, chewing away its value.

*   *   *

Contango isn’t the only reason commodity ETFs make lousy buy-and-hold investments.  Professional futures traders exploit the ETFs’ monthly rolls to make easy profits at the little guy’s expense.  Unlike ETF managers, the professionals don’t trade at set times.  They can buy the next month ahead of the big programmed rolls to drive up the price, or sell before the ETF, pushing down the price investors get paid for expiring futures.  The strategy is called “pre-rolling.”

“I make a living off the dumb money,” says Emil van Essen, founder of an eponymous commodity trading company in Chicago.  Van Essen developed software that predicts and profits from pre-rolling.  “These index funds get eaten alive by people like me,” he says.

A look at 10 well-known funds based on commodity futures found that, since inception, all 10 have trailed the performance of their underlying raw materials, according to Bloomberg data.

*   *   *

Just as they did with subprime mortgage-backed securities, Wall Street banks are transferring wealth from their clients to their trading desks.  “You walk into a casino, you expect to lose money,” says Greg Forero, former director of commodities trading at UBS (UBS).  “It’s the same with these products.  You’re playing a game with a very high rake, a very high house advantage, and you’re not the house.”

Another problem caused by commodity ETFs is the havoc they create by raising prices of consumer goods – not because of a supply and demand effect – but purely by financial speculation:

Wheat prices jumped 52 percent in early 2008, setting records before plunging again, and sugar more than doubled last year even as the economy slowed, forcing Reinwald’s Bakery in Huntington, N.Y., to fire five of its 32 employees.  “You try and budget to make money, but that’s becoming impossible to predict,” says owner Richard Reinwald, chairman of the Retail Bakers of America.

Paul Farrell also brought our attention to an article entitled “ETFs Gone Wild” to highlight the hazards these products create for the entire financial system:

In Bloomberg Markets’ “ETFs Gone Wild,” investors are warned that many ETFs are “stuffed with exotic derivatives,” at risk of becoming “the next financial time bomb.”  In short, thanks to ETFs, Wall Street is already creating a dangerous new kind of global weapon of mass destruction — a bomb primed to detonate like the 2000 dot-coms, the 2008 subprimes — and detonation is dead ahead.

Mr. Farrell’s essay included a discussion of a Rolling Stone article by McKenzie Funk, describing the exploits of Phil Heilberg, a former AIG commodity trader.  The Rolling Stone piece demonstrated how commodity ETFs are just the latest weapon used to advance “Chaos Capitalism”:

And yet, as Funk puts it:  “Heilberg’s bet on chaos is beginning to play out on the streets.”  The toxic trail of commodity ETFs is already proving to be deadly, starving thousands worldwide, while the new Capitalists of Chaos only see incredible profit opportunities, as they make huge bets that they’ll get even richer in the next round of catastrophes, disasters, poverty, starvation and wars.

Bottom line: Commodity ETF/WMDs are mutating into a toxic pandemic fueled (and protected by) the insatiable greed of banks, traders and politicians whose brains are incapable of giving up their profit machine, won’t until it implodes and self-destructs.  The Wall Street Banksters have no sense of morals, no ethics, no soul, no goal in life other than getting very rich, very fast.  They care nothing of democracy, civilization or the planet.

Don’t count on the faux financial “reform” bill to remedy any of the problems created by commodity ETFs.  As the BusinessWeek article pointed out, the Commodity Futures Trading Commission is going to have its hands full:

How much the new law will help remains to be seen, says Jill E. Sommers, one of the agency’s five commissioners, because Congress still needs to appropriate funds and write guidelines for implementation and enforcement.

Let’s not overlook the fact that those “guidelines” are going to be written by industry lobbyists.  The more things change — the more they remain the same.



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ObamaWatch

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June 14, 2010

Last week, I highlighted some criticism of Barack Obama’s presidency, which came from such unlikely sources as Maureen Dowd and Frank Rich of The New York Times, as well as Tony Norman of the Pittsburgh Post-Gazette.  The man whom I described as the “Disappointer-in-Chief” during his third month in office, has continued to draw harsh criticism from unlikely sources.  At this point, the subject pondered by many commentators concerns whether any of this dissatisfaction will stick long enough to have an impact on the mid-term elections and beyond.

If the President read Tim Dickenson’s recent essay for Rolling Stone, “The Spill, The Scandal and the President”, it must have been painful.  Mr. Dickenson didn’t pull any punches while explaining Mr. Obama’s role in the Deepwater Horizon disaster:

Like the attacks by Al Qaeda, the disaster in the Gulf was preceded by ample warnings – yet the administration had ignored them.  Instead of cracking down on MMS, as he had vowed to do even before taking office, Obama left in place many of the top officials who oversaw the agency’s culture of corruption.  He permitted it to rubber-stamp dangerous drilling operations by BP – a firm with the worst safety record of any oil company – with virtually no environmental safeguards, using industry-friendly regulations drafted during the Bush years.  He calibrated his response to the Gulf spill based on flawed and misleading estimates from BP – and then deployed his top aides to lowball the flow rate at a laughable 5,000 barrels a day, long after the best science made clear this catastrophe would eclipse the Exxon Valdez.

At the Naked Capitalism website, Yves Smith summed up a good number of the Obama Administration’s shortcomings in the first paragraph of her June 11 piece about the BP mess:

As readers may know, I’ve been consistently disappointed by the Obama Administration:  its faux progressive packaging versus its corporatist posture, its half-hearted, halting reforms which are noisily trumpeted as the real thing, its deep seated belief that public antipathy to its initiatives means it needs to work harder on selling its message, when it really needs a new strategy.

But the escalating disaster of the Gulf oil spill, and the unique constellation it presents, namely, a big, rich, isolated, foreign perp, which is largely if not solely responsible for the mess, in close proximity to contested mid-term elections, might actually rouse Obama to do something uncharacteristic, namely get tough.

This is by no means a likely outcome, but we are seeing some novel behaviors.  First is that Obama finally may have succeeded in getting someone important afraid of him.  This is a critically important lesson; Machiavelli told his prince it was much more important to be feared than loved.  Mere anger is often negotiation posturing or a manifestation of CEO Derangement Syndrome; fear is much harder to fake.  And BP is finally starting to get rattled.

In case you are wondering whether the President is still popular in Hollywood, The Hill recently turned to a couple of southern California bloggers to provide some insight as to whether Mr. Obama has begun to lose his sparkle in Tinsel Town.  John Nolte of Andrew Breitbart’s Big Hollywood blog expressed the belief that the President’s supporters in Hollywood have been keeping the faith:

If anything, Hollywood is worried about and for Obama.  Worried about the upcoming mid-terms, his re-election chances, his sliding poll numbers, and his gilded ship sailing off course and landing in Carter-ita-ville instead of Mt. Rushmore.

From the more left-leaning perspective, Deborah White of The Liberal OC blog gave us the impression that the President’s Hollywood supporters are becoming increasingly disappointed, although not yet disgruntled:

As of now, President Obama has not lost the support of most Hollywood liberals.  But Democrats in Hollywood are also no longer lavishing praise on Obama as they did in hopeful droves before his triumphant election.

Hollywood liberals no longer view Barack Obama as someone they blindly “want to follow… somewhere, anywhere” as pal George Clooney famously told Charlie Rose in early 2008.

Meanwhile, Maureen Dowd has continued with her unrestrained criticism of the President.  Her June 11 column must have irritated more than a few people on Pennsylvania Avenue:

The press traveling with Obama on the campaign never had a lovey-dovey relationship with him.  He treated us with aloof correctness, and occasional spurts of irritation.  Like many Democrats, he thinks the press is supposed to be on his side.

The patrician George Bush senior was always gracious with reporters while conveying the sense that what we do for a living was rude.

The former constitutional lawyer now in the White House understands that the press has a role in the democracy.  But he is an elitist, too, as well as thin-skinned and controlling.  So he ends up regarding scribes as intrusive, conveying a distaste for what he sees as the fundamental unseriousness of a press driven by blog-around-the-clock deadlines.

During the Presidential election campaign, Mr. Obama was often described as a “Rorschach test” — people saw in him whatever they imagined.  Now that the President has been able to disappoint his supporters, the criticism is gradually becoming increasingly harsh.  As frustration over the BP crisis, unemployment and the economy continues to build — the criticism voiced by those who voted for him is likely to become more caustic.




Your Sleazy Government At Work

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May 31, 2010

Although the cartoon above appeared in my local paper, it came to my attention only because Barry Ritholtz posted it on his website, The Big Picture.  Congratulations to Jim Morin of The Miami Herald for creating one of those pictures that’s worth well over a thousand words.

Forget about all that oil floating in the Gulf of Mexico.  President Obama, Harry Reid and “Countrywide Chris” Dodd are too busy indulging in an orgy of self-congratulation over the Senate’s passage of a so-called “financial reform” bill (S. 3217) to be bothered with “the fishermen’s buzzkill”.  Meanwhile, many commentators are expressing their disappointment and disgust at the fact that the banking lobby has succeeded in making sure that the taxpayers will continue to pick up the tab when the banks go broke trading unregulated derivatives.

Matt Taibbi has written a fantastic essay for Rolling Stone, documenting the creepy battle over financial reform in the Senate.  The folks at Rolling Stone are sure getting their money’s worth out of Taibbi, after his landmark smackdown of Goldman Sachs and his revealing article exposing the way banks such as JP Morgan Chase fleeced Jefferson County, Alabama.  In his latest “must read” essay, Taibbi provides his readers with an understandable discussion of what is wrong with derivatives trading and Wall Street’s efforts to preserve the status quo:

Imagine a world where there’s no New York Stock Exchange, no NASDAQ or Nikkei:  no open exchanges at all, and all stocks traded in the dark.  Nobody has a clue how much a share of  IBM costs or how many of them are being traded.  In that world, the giant broker-dealer who trades thousands of IBM shares a day, and who knows which of its big clients are selling what and when, will have a hell of a lot more information than the day-trader schmuck sitting at home in his underwear, guessing at the prices of stocks via the Internet.

That world exists.  It’s called the over-the-counter derivatives market. Five of the country’s biggest banks, the Goldmans and JP Morgans and Morgan Stanleys, account for more than 90 percent of the market, where swaps of all shapes and sizes are traded more or less completely in the dark.  If you want to know how Greece finds itself bankrupted by swaps, or some town in Alabama overpaid by $93 million for deals to fund a sewer system, this is the explanation:  Nobody outside a handful of big swap dealers really has a clue about how much any of this shit costs, which means they can rip off their customers at will.

This insane outgrowth of  jungle capitalism has spun completely out of control since 2000, when Congress deregulated the derivatives market.  That market is now roughly 100 times bigger than the federal budget and 20 times larger than both the stock market and the GDP.  Unregulated derivative deals sank AIG, Lehman Brothers and Greece, and helped blow up the global economy in 2008.  Reining in derivatives is the key battle in the War for Finance Reform.  Without regulation of this critical market, Wall Street could explode another mushroom cloud of nuclear leverage and risk over the planet at any time.

At The New York Times, Gretchen Morgenson de-mystified how both the Senate’s “financial reform” bill and the bill passed by the House require standardized derivatives to be traded on an exchange or a “swap execution facility”.  Although these proposals create the illusion of reform – it’s important to keep in mind that old maxim about gambling:  “The house always wins.”  In this case, the ability to “front-run” the chumps gives the house the power to keep winning:

But the devil is always in the details — hence, two 1,500-page bills — and problems arise in how the proposals define what constitutes a swap execution facility, and who can own one.

Big banks want to create and own the venues where swaps are traded, because such control has many benefits.  First, it gives the dealers extremely valuable pretrade information from customers wishing to buy or sell these instruments.  Second, depending on how these facilities are designed, they may let dealers limit information about pricing when transactions take place — and if an array of prices is not readily available, customers can’t comparison-shop and the banks get to keep prices much higher than they might be on an exchange.

*   *   *

Finally, lawmakers who are charged with consolidating the two bills are talking about eliminating language that would bar derivatives facilities from receiving taxpayer bailouts if they get into trouble.  That means a federal rescue of an imperiled derivatives trading facility could occur.  (Again, think A.I.G.)

Surely, we beleaguered taxpayers do not need to backstop any more institutions than we do now.  According to Jeffrey M. Lacker, president of the Federal Reserve Bank of Richmond, Va., only 18 percent of the nation’s financial sector was covered by implied federal guarantees in 1999.  By the end of 2008, his bank’s research shows, the federal safety net covered 59 percent of the financial sector.

In a speech last week, Mr. Lacker said that he feared we were going to perpetuate the cycle of financial crises followed by taxpayer bailouts, in spite of Congressional reform efforts.

“Arguably, we will not break the cycle of regulation, bypass, crisis and rescue,”  Mr. Lacker said, “until we are willing to clarify the limits to government support, and incur the short-term costs of confirming those limits, in the interest of building a stronger and durable foundation for our financial system.  Measured against this gauge, my early assessment is that progress thus far has been negligible.”

Negligible progress, 3,000 pages notwithstanding.

When one considers what this legislation was intended to address, the dangers posed by failing to extinguish those systemic threats to the economy and what the Senate bill is being claimed to remedy  —  it’s actually just a huge, sleazy disgrace.  Matt Taibbi’s concluding words on the subject underscore the fact that not only do we still need real financial reform, we also need campaign finance reform:

Whatever the final outcome, the War for Finance Reform serves as a sweeping demonstration of how power in the Senate can be easily concentrated in the hands of just a few people.  Senators in the majority party – Brown, Kaufman, Merkley, even a committee chairman like Lincoln – took a back seat to Reid and Dodd, who tinkered with amendments on all four fronts of  the war just enough to keep many of them from having real teeth.  “They’re working to come up with a bill that Wall Street can live with, which by definition makes it a bad bill,” one Democratic aid eexplained in the final, frantic days of negotiation.

On the plus side, the bill will rein in some forms of predatory lending, and contains a historic decision to audit the Fed.  But the larger, more important stuff – breaking up banks that grow Too Big to Fail, requiring financial giants to pay upfront for their own bailouts, forcing the derivatives market into the light of day – probably won’t happen in any meaningful way.  The Senate is designed to function as a kind of ongoing negotiation between public sentiment and large financial interests, an endless tug of war in which senators maneuver to strike a delicate mathematical balance between votes and access to campaign cash.  The problem is that sometimes, when things get really broken, the very concept of a middle ground between real people and corrupt special interests becomes a grotesque fallacy.  In times like this, we need our politicians not to bridge a gap but to choose sides and fight.  In this historic battle over finance reform, when we had a once-in-a-generation chance to halt the worst abuses on Wall Street, many senators made the right choice.  In the end, however, the ones who mattered most picked wrong – and a war that once looked winnable will continue to drag on for years, creating more havoc and destroying more lives before it is over.

The sleazy antics by the Democrats who undermined financial reform (while pretending to advance it) will not be forgotten by the voters.  The real question is whether any independent candidates can step up to oppose the tools of Wall Street, relying on the nickels and dimes from “the little people” to wage a battle against the kleptocracy.






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Damage Control

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December 17, 2009

Matt Taibbi hit another grand slam with his recent Rolling Stone article: “Obama’s Big Sellout”.  It was another classic work in his unique style.  The ugly truth it drove home was that Barack Obama used a “bait and switch” tactic in his Presidential campaign:  promising to reform Wall Street — until the day after he got elected — at which time he immediately jumped into bed with the culprits of the financial crisis.  The reaction of the Obama apologists to the Rolling Stone piece involved the usual tactic of attacking the messenger (in this case:  Taibbi himself).  It didn’t work.  The best way to see how this played out should begin with a reading of  Taibbi’s retort to a critique appearing in The American Prospect — a feeble attempt to demonstrate that Taibbi got his facts wrong.  A neutral judge, Felix Salmon of Reuters, then stepped in and ruled in favor of Taibbi.  The online responses to Felix Salmon’s essay are a great read.  At the Open Left website, David Sirota upbraided Taibbi’s critics, who spanned the political spectrum — many of whom expressed condescension at the “naïve” decision of an outside-the-beltway reporter to expose the breach of a campaign promise:

It’s certainly true that a lot of politicians’ words mean nothing – but if reporters start treating that as a non-newsworthy assumption in their coverage, then the whole journalistic system becomes a joke – a miasma of personality profiles and puff pieces that assumes that the only thing that must be valued in politics is personal intangibles like “charisma” and “charm” and “toughness” and all those other incessant cliches. And what a joke that makes of our democracy.  In a republic where we only get to vote our politicians in or out every few years, all we have to go on are their promises.  If we now must assume their promises aren’t true, and attack people for being “naïve” for daring to try to hold them to their promises, then we’ve made a joke of our whole political system.

Matt Taibbi’s article immediately forced the White House into a damage control mode.  Another softball interview was immediately set up with Steve Croft of 60 Minutes, wherein Obama attempted to redeem his false image as an adversary of the Wall Street investment banks.  The President took advantage of that opportunity to present himself as an antagonist of those he described as “fat cats”.  On the following day, Obama held a meeting in the White House cabinet room with some banking representatives who found the event important enough to attend.  Immediately afterward, Charlie Gasparino revealed the backstory behind Obama’s meeting with the bankers.  After informing us that the administration provided the bankers with Obama’s “talking points” in advance of the meeting, Gasparino disclosed this:

.  .  . people with first-hand knowledge of the sitdown said, it was a heavily scripted affair — with none of the fireworks Obama displays in public.

*   *   *

Said one CEO who attended:  “I expected to be taken to the woodshed, but the tone was quite the opposite.”

Said another senior exec with knowledge of the meeting: “The whole thing was so telegraphed that not much was accomplished, other than giving Obama a PR stunt.   . . .  He might have sounded mean on ‘60 Minutes,’ but during the meeting he was a hell of a lot nicer.”

Many commentators were quick to point out that by the time Obama started talking tough about “fat cats”, he had already given them all they wanted by allowing them to pay back their TARP loans on an expedited basis.  As Henry Blodget explained for The Business Insider:

And in case you missed what is really going on here, the banks that repaid TARP are now getting all the benefits of government help with none of the drawbacks.  They just ditched the bad stuff — namely, pay caps — and kept the good stuff (implicit bond guarantees, subsidized super-low interest rates, no obligation to do anything for anyone).  Obama can jawbone all he wants about “fat cats,” but that’s all he can do.

At The Washington Post, Steven Pearlstein bemoaned the fact that the TARP beneficiaries had been “let off their leash”.  Pearlstein expressed concern that this move created the potential for more problems in the future:

By rushing to cash in their chips, however, the administration not only gave up political leverage and additional profit, but took the risk that one or more of the banks may find that it can’t make it on its own.  While the financial system has rebounded faster than anyone could have imagined, potential threats still loom — a further collapse of commercial real estate, for example, or a string of sovereign debt defaults.  And bank profits, while having rebounded, remain significantly dependent on the availability of cheap funding from the Federal Reserve and other central banks that cannot be expected to last indefinitely.

The administration’s damage control effort turned out to be worthless.  With his centerpiece healthcare reform effort floundering in the Senate, Obama the President is appearing to be significantly less effective than Obama the candidate.  The President’s critics have been quick to pounce.  George Will noted that Obama has “seen his job approval vary inversely with his ubiquity”.  The New York Post’s Michael Goodwin alleged that Obama “doesn’t look like he cares that big chunks of the country, left, right and center, are giving up on him.”  However, the best analysis of the confidence crisis afflicting the Obama Presidency came from Dan Gerstein of Forbes.com.  Gerstein observed that the new Preisdent’s leadership style was to blame — something Gerstein described as “the Reverse Roosevelt:  Talk boldly and carry a toothpick.”  While debunking the administration’s claim that it had lost the leverage it had over Wall Street with the TARP paybacks, Gerstein argued that such an excuse “doesn’t pass the laugh test” because the banking industry is the most regulated industry in the country.  The task Obama faces is to cultivate a leadership style that will be useful in confronting the challenges he undertook when he assumed office:

For those center dwellers, the issue is not that Obama is too liberal or too pragmatic (the chief complaints of the noisemakers on the left and right), but that he is not effective enough.  They question whether he has what it takes to get results:  to find the right balance on health care, to admit and fix the inadequacies of the stimulus, to begin taming the deficit without impeding growth.  It is a crisis of confidence that at its heart is, as Brookings scholar and former Clinton adviser Bill Galston points out, a crisis of competence.

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But regardless of the reasons, Obama signed up for these missions, and his ability to succeed in them will largely hinge on whether he can grow as a leader.  Can he overcome his inhibitions, whatever their cause, and learn from the legacies of our most effective presidents about how to wield the full power of his office?  He clearly knows how to don the velvet glove (often with substantial impact) — will he come to understand when to unleash the iron fist?

Obama’s pattern so far is far from encouraging.  But I would not give up hope for growth.

It appears as though we are back to the themes of “hope” and “change”.  This time we’re hoping that Obama will change.



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