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No Justice For The Wicked

February 17th, 2011 Posted in Uncategorized
Feb, 17 2011
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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?




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Senator Kaufman Will Be Missed

November 18th, 2010 Posted in Uncategorized
Nov, 18 2010
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Ted Kaufman filled Joe Biden’s seat representing the state of Delaware in the United States Senate on January 15, 2009, when Biden resigned to serve as Vice-President.  Kaufman’s 22-month term as Senator concluded on November 15, when Chris Coons was sworn in after defeating Christine O’Donnell in the 2010 election.

Senator Kaufman served as Chairman of the Congressional Oversight Panel – the entity created to monitor TARP on behalf of Congress.  The panel’s November Oversight Report was released at the COP website with an embedded, five-minute video of Senator Kaufman’s introduction to the Report.  At the DelawareOnline website, Nicole Gaudiano began her article about Kaufman’s term by pointing out that C-SPAN ranked Kaufman as the 10th-highest among Senators for the number of days (126) when he spoke on the Senate floor during the current Congressional session.  Senator Kaufman was a high-profile advocate of financial reform, who devoted a good deal of effort toward investigating the causes of the 2008 financial crisis.

On November 9, Senator Kaufman was interviewed by NPR’s Robert Siegel, who immediately focused on the fact that aside from the Securities and Exchange Commission’s civil suit against Goldman Sachs and the small fine levied against Goldman by FINRA, we have yet to see any criminal prosecutions arising from the fraud and other violations of federal law which caused the financial crisis.  Kaufman responded by asserting his belief that those prosecutions will eventually proceed, although “it takes a while” to investigate and prepare these very complex cases:

When you commit fraud on Wall Street or endanger it, you have good attorneys around you to kind of clean up after you.  So they clean up as they go.  And then when you actually go to trial, these are very, very, very complex cases.  But I still think we will have some good cases.  And I also think that if isn’t a deterrent, they will continue to do that.  And I think we have the people in place now at the Securities Exchange Commission and the Justice Department to hold them accountable.

We can only hope so   .  .  .

Back on March 17, I discussed a number of reactions to the recently-released Valukas Report on the demise of Lehman Brothers, which exposed the complete lack of oversight by the Federal Reserve Bank of New York — the entity with investigators in place inside of Lehman Brothers after the collapse of Bear Stearns.  The FRBNY had the perfect vantage point to conduct effective oversight of Lehman.  Not only did the FRBNY fail to do so — it actually helped Lehman maintain a false image of being financially solvent.  It is important to keep in mind that Lehman CEO Richard Fuld was a class B director of the FRBNY during this period.  Senator Kaufman’s reaction to the Valukas Report resulted in his widely-quoted March 15 speech from the Senate floor, in which he emphasized that the government needs to return the rule of law to Wall Street:

We all understood that to restore the public’s faith in our financial markets and the rule of law, we must identify, prosecute, and send to prison the participants in those markets who broke the law.  Their fraudulent conduct has severely damaged our economy, caused devastating and sustained harm to countless hard-working Americans, and contributed to the widespread view that Wall Street does not play by the same rules as Main Street.

*   *   *

Many have said we should not seek to “punish” anyone, as all of Wall Street was in a delirium of profit-making and almost no one foresaw the sub-prime crisis caused by the dramatic decline in housing values.  But this is not about retribution.  This is about addressing the continuum of behavior that took place — some of it fraudulent and illegal — and in the process addressing what Wall Street and the legal and regulatory system underlying its behavior have become.

As part of that effort, we must ensure that the legal system tackles financial crimes with the same gravity as other crimes.

The nagging suspicion that those nefarious activities at Lehman Brothers could be taking place “at other banks as well” became a key point in Senator Kaufman’s speech:

Mr. President, I’m concerned that the revelations about Lehman Brothers are just the tip of the iceberg.  We have no reason to believe that the conduct detailed last week is somehow isolated or unique.  Indeed, this sort of behavior is hardly novel.  Enron engaged in similar deceit with some of its assets.  And while we don’t have the benefit of an examiner’s report for other firms with a business model like Lehman’s, law enforcement authorities should be well on their way in conducting investigations of whether others used similar “accounting gimmicks” to hide dangerous risk from investors and the public.

Within a few months after that speech by Senator Kaufman, a weak financial reform bill was enacted to appease (or more importantly:  deceive) the outraged taxpayers.  Despite that legislative sham, polling results documented the increased public skepticism about the government’s ability or willingness to do right by the American public.

On October 20, Sam Gustin interviewed economist Joseph Stiglitz for the DailyFinance website.  Their discussion focused on the recent legislative attempt to address the causes of the financial crisis.  Professor Stiglitz emphasized the legal system’s inability to control that type of  sleazy behavior:

The corporations have the right to give campaign contributions.  So basically we have a system in which the corporate executives, the CEOs, are trying to make sure the legal system works not for the companies, not for the shareholders, not for the bondholders – but for themselves.

So it’s like theft, if you want to think about it that way.  These corporations are basically now working now for the CEOs and the executives and not for any of the other stakeholders in the corporation, let alone for our broader society.

You look at who won with the excessive risk-taking and shortsighted behavior of the banks.  It wasn’t the shareholder or the bondholders.  It certainly wasn’t American taxpayers.  It wasn’t American workers.  It wasn’t American homeowners.  It was the CEOs, the executives.

*   *   *

Economists focus on the whole notion of incentives.  People have an incentive sometimes to behave badly, because they can make more money if they can cheat.  If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

And that’s why, for instance, in our antitrust law, we often don’t catch people when they behave badly, but when we do we say there are treble damages. You pay three times the amount of the damage that you do.  That’s a strong deterrent.

For now, there are no such deterrents for those CEOs who nearly collapsed the American economy and destroyed 15 million jobs.  Robert Scheer recently provided us with an update about what life is now like for Sandy Weill, the former CEO of Citigroup.  Scheer’s essay – entitled “The Man Who Shattered Our Economy” revealed that Weill just purchased a vineyard estate in Sonoma, California for a record $31 million.  That number should serve as a guidepost when considering the proposition expressed by Professor Stiglitz:

If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.

What are the chances of that happening?


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Bogus Editorial Gets Exposed

August 16th, 2010 Posted in Uncategorized
Aug, 16 2010
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August 16, 2010

One of my favorite commentators, Bill Fleckenstein, wrote an interesting piece calling attention to the fact that the Patent Office is underfunded to the tune of about $1 billion.  The good news is that fixing this problem might create as many as 2.5 million new jobs over the next three years.  Fleck based his article on a New York Times essay by Paul Michel (former Chief Judge of the United States Court of Appeals for the District of Columbia Circuit) and Henry Nothhaft, co-author of the upcoming book, Great Again.

Bill Fleckenstein began his discussion by noting another letdown by our Disappointer-In-Chief:

As the financial crisis was unfolding in late 2008 and early 2009, I actually thought for a while that the incoming Obama administration might try to do something intelligent regarding incentivizing jobs.  That was 100% incorrect.  The only incentives it has created are ones not to hire more employees, which has only made a bad situation worse.

Unfortunately, Fleck decided to support his perspective with an editorial from the August 9 Wall Street Journal entitled, “Why I’m Not Hiring” by Michael Fleischer.  Fleischer whined about how President Obama has made things difficult for his “little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings.”  Fleischer concluded the piece with this lament:

And even if the economic outlook were more encouraging, increasing revenues is always uncertain and expensive.  As much as I might want to hire new salespeople, engineers and marketing staff in an effort to grow, I would be increasing my company’s vulnerability to government decisions to raise taxes, to policies that make health insurance more expensive, and to the difficulties of this economic environment.

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up.  From where I sit, the government’s message is unmistakable:  Creating a new job carries a punishing price.

Bill Fleckenstein was not the only commentator who was apparently “taken in” by this editorial.  It has been getting re-blogged all over the Web.

What most people don’t realize is that the author of the Wall Street Journal editorial, Michael Fleischer, is the brother of Ari Fleischer, the former press secretary to President George W. Bush.

Kevin Drum wrote a piece for Mother Jones, which began with his criticism of the Journal for not admitting that the aforementioned editorial was written by Ari Fleischer’s brother.  Beyond that, Mr. Drum provided us with a little more information about Michael Fleischer’s background:

Michael, thanks to his White House connections, was one of the squadron of free market evangelizers who parachuted into Baghdad to privatize Iraqi industry after the war.  We all know how well that went, which is probably what qualifies him to write op-eds about creeping Obama-ism for the Wall Street Journal.

Drum then quoted this reader’s comment, posted at the Outside The Beltway blog, concerning the Fleischer editorial:

The fact is that if Mr. Fleisher’s company has to buy an extra box of paper clips it will cause them to go belly up.  He’s in not position to hire anyone regardless of tax policy.

The reason Mr. Fleischer’s company isn’t hiring has nothing to do with taxes or the policies of any administration.  It’s because his business has been in decline for a decade.  As the CEO, that decline is his fault.  All his complaining about taxes and benefits is just a smokescreen for his own incompetence.

The world changed around them a decade ago and they failed to adapt.  In 2000, their annual sales were 66 million dollars with cash on hand of 12 million.  By 2003, sales were down to 55 million and cash was down to 6 million.  That was before the financial crisis and under the allegedly pro business policies of the previous administration.  In 2009, sales were down to 44 million and cash was down to 2 million.     They managed to lose 17 million dollars that year and got a carry back refund of some 5 million dollars.  Mr. Fleischer should spend less time complaining about taxes and more time thinking about how he can correct 10 years of mismanagement.

Don’t take my word for it, read the balance sheets yourself.

http://www.bogen.com/aboutus/financials/#historical

Another blogger had some fun digging into the truth about Fleischer’s Bogen Communications and hanging out the dirty laundry on the Internet:

Here’s the thing, though.  If you actually look into Bogen, you find out that there are far better reasons for why Fleischer isn’t hiring.  Like the stock price absolutely cratering last year.  Or the settlement that they reached with a contractor who alleged “multiple causes of action for breach of contract and various torts”; a settlement that came after the contractor had already been awarded a cool $12.5 mil in “compensatory and punitive damages.”

It’s always funny when a political hatchet job gets exposed.  It’s even funnier when the perpetrators are too dumb to realize that —  in  what Marshall McLuhan used to call “the electronic information environment” (back in the 1960s)  — it’s pretty easy to dig up the truth.

Anyone trying to ascertain the truth about why companies aren’t hiring would be better served to peruse websites such as MarketWatch or Bloomberg, rather than the Wall Street Journal’s editorial page.  Bill Fleckenstein should have known better.



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Getting Rolled By Wall Street

August 5th, 2010 Posted in Uncategorized
Aug, 05 2010
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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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Rare Glimpses Of Honesty And Sanity

July 1st, 2010 Posted in Uncategorized
Jul, 01 2010
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July 1, 2010

Too many of the commentaries we see these days are either motivated by or calculated to promote hysteria.  When someone expresses a rational point of view or an honest look at the skullduggery going on in Washington, it’s as refreshing as a cold beer on a hot, summer day.

With so much panic over sovereign debt and budget deficits afflicting the consensual mood,  it’s always great to read a piece by someone willing to analyze the situation from a perspective based on facts instead of fear.  Brett Arends wrote a great piece for MarketWatch, dissecting the debt panic and looking at the data to be considered by those implementing public policy on this issue.  His essay focused on “the three biggest lies about the economy”:  that unemployment is below ten percent, that the markets are panicking about the deficit and that the United States is sliding into socialism.  Here is some of what he had to say:

Most people have no idea what’s really going on in the economy.   They’re living on spin, myths and downright lies.  And if we don’t know the facts, how can we make intelligent decisions?

High unemployment exerts a huge deflationary force on the economy.  Beyond that, the income taxes those unemployed citizens used to pay are no longer helping to pick up the tab for our bloated budget.   Mr. Arends emphasized the importance of looking at the real unemployment rate – what is referred to as U6 – which includes those people deliberately disregarded when counting the “unemployed”:

For example it counts discouraged job seekers, and those forced to work part-time because they can’t get a full-time job.

That rate right now is 16.6%, just below its recent high and twice the level it was a few years ago.

*   *   *

Consider, for example, the situation among men of prime working age.  An analysis of data at the U.S. Labor Department shows that there are 79 million men in America between the ages of 25 and 65.  And nearly 18 million of them, or 22%, are out of work completely.  (The rate in the 1950s was less than 10%.)  And that doesn’t even count those who are working part-time because they can’t get full-time work.  Add those to the mix and about one in four men of prime working age lacks a full-time job.

In exploding the myth about claimed market panic concerning the debt, Arends dug back into his arsenal of common sense, explaining what would happen if the markets were panicked:

. . .  the interest rate on government bonds would be skyrocketing.  That’s what happens with risky debt:  Lenders demand higher and higher interest payments to compensate them for the dangers.

But the rates on U.S. bonds have been plummeting recently.  The yield on the 30-year Treasury bond is down to just 4%.  By historic standards that’s chickenfeed.  Panicked?  The bond markets are practically snoring.

The specious claims about domestic socialism don’t really deserve a response, but here is how Arends dealt with that narrative:

Meanwhile, federal spending, about 25% of the economy this year, is expected to fall to about 23% by 2013.  In 1983, under Ronald Reagan, it hit 23.5%.  In the early 1990s it was around 22%.  Some socialism.

Another prevalent false narrative being circulated lately (particularly by President Obama and his administration) concerns the hoax known as the “financial reform” bill.  Wisconsin Senator Russ Feingold gave us a rare, disgusted insider’s look at how Wall Street was able to get what it wanted from its lackeys on Capitol Hill:

Since the Senate bill passed, I have had a number of conversations with key members of the administration, Senate leadership and the conference committee that drafted the final bill.  Unfortunately, not once has anyone suggested in those conversations the possibility of strengthening the bill to address my concerns and win my support.  People want my vote, but they want it for a bill that, while including some positive provisions, has Wall Street’s fingerprints all over it.

In fact, reports indicate that the administration and conference leaders have gone to significant lengths to avoid making the bill stronger.

Lest we forget that the financial crisis of 2008 was caused by the antics of cretins such as “Countrywide Chris” Dodd, Senator Feingold’s essay mentioned that sleazy chapter in Senate history to put this latest disgrace in the proper perspective:

Many of the critical actors who shaped this bill were present at the creation of the financial crisis.  They supported the enactment of Gramm-Leach-Bliley, deregulating derivatives, even the massive Interstate Banking bill that helped grease the “too big to fail” skids.  It shouldn’t be a surprise to anyone that the final version of the bill looks the way it does, or that I won’t fall in line with their version of  “reform.”

As I discussed in “Your Sleazy Government at Work”, the voters will not forget about the Democrats (including President Obama) who undermined financial reform legislation, while pretending to advance it.  The Democratic Party has until early 2012 to face up to the fact that their organization would be better off supporting a Presidential candidate with the integrity of Russ Feingold or Maria Cantwell if they expect to maintain control over the Executive branch of our government.





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Financial Reform Bill Exposed As Hoax

June 28th, 2010 Posted in Uncategorized
Jun, 28 2010
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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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Ignoring The Root Cause

June 17th, 2010 Posted in Uncategorized
Jun, 17 2010
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June 17, 2010

The predominant criticism of the so-called “financial reform” bill is its failure to address the problems caused by the existence of financial institutions considered “too big to fail”.  In an essay entitled, “Creating the Next Crisis” economist Simon Johnson discussed the consequences of this legislative let-down:

On the critical dimension of excessive bank size and what it implies for systemic risk, there was a concerted effort by Senators Ted Kaufman and Sherrod Brown to impose a size cap on the largest banks – very much in accordance with the spirit of the original “Volcker Rule” proposed in January 2010 by Obama himself.  In an almost unbelievable volte face, for reasons that remain somewhat mysterious, Obama’s administration itself shot down this approach.  “If enacted, Brown-Kaufman would have broken up the six biggest banks in America,” a senior Treasury official said.  “If we’d been for it, it probably would have happened.  But we weren’t, so it didn’t.”

*   *   *

The US financial sector received an unconditional bailout – and is not now facing any kind of meaningful re-regulation.  We are setting ourselves up, without question, for another boom based on excessive and reckless risk-taking at the heart of the world’s financial system.  This can end only one way:  badly.

One would assume that an important lesson learned from the 2008 financial crisis was the idea that a corporation shouldn’t be permitted to blackmail the country with threats that its own financial collapse would have such a dire impact on society-at-large that the corporation should be bailed out by the taxpayers.  The resulting problem is called “moral hazard” because such businesses are encouraged to act irresponsibly by virtue of the certainty that they will be bailed out if their activities prove self-destructive.

Gonzalo Lira wrote a piece for the Naked Capitalism blog, explaining how the moral hazard resulting from the “too big to fail” doctrine is facilitating a state of corporate anarchy:

In a nutshell, in this era of corporate anarchy, corporations do not have to abide by any rules — none at all.  Legal, moral, ethical, even financial rules are irrelevant.  They have all been rescinded in the pursuit of profit — literally nothing else matters.

As a result, corporations currently exist in a state of almost pure anarchy — but an anarchy directly related to their size:  The larger the corporation, the greater its absolute freedom to do and act as it pleases.  That’s why so many medium-sized corporations are hell-bent on growth over profits:  The biggest of them all, like BP and Goldman Sachs, live in a positively Hobbesian State of Nature, free to do as they please, with nary a consequence.

Good-old British Petroleum – the latest beneficiary of the “too big to fail doctrine”  — can rely on its size to avoid any sanctions it considers unacceptable because too many “small people” might lose their jobs if BP can’t stay fat and happy.  Gonzalo Lira’s analysis went a step further:

Worst of all, BP realizes that, if it finally cannot get a handle on the oil spill disaster, they can simply fob it off on the U.S. Government — in other words, the people of the United States will wind up cleaning BP’s mess.  BP knows that no one will hold it accountable — BP knows that it will get away with it.

*   *   *

This era of corporate anarchy is reaching a crisis point — we can all sense it.  Yet the leadership in the United States and Europe is making no effort to solve the root problem.  Perhaps they don’t see the problem.  Perhaps they are beholden to corporate masters.  Whatever the case, in his speech, President Obama made ridiculous references to “clean energy” while ignoring the cause of the BP oil spill disaster, the cause of the financial crisis, the cause of the spiralling health-care costs — the corporate anarchy that underlines them all.

This era of corporate anarchy is wrecking the world — literally, if you’ve been tuning in to images of the oil billowing out a mile down in the Gulf of Mexico.

Mr. Lira discussed how a leadership void has been helping corporate anarchy overtake democratic capitalism:

Obama is a corporatist — he’s one of Them.  So there’ll be more bullshit talk about “clean energy” and “energy independence”, while the root cause — corporate anarchy — is left undisturbed.

The failure of President Obama to take advantage of the opportunity to address this “root cause” in his Oval Office address concerning the Deepwater Horizon disaster, inspired Robert Reich to make this comment:

Whether it’s Wall Street or health insurers or oil companies, we are approaching a turning point.  The top executives of powerful corporations are pursuing profits in ways that menace the nation.  We have not seen the likes not since the late nineteenth century when the “robber barons” of finance, oil, and the giant trusts ran roughshod over America.  Now, as then, they are using their wealth and influence to buy off legislators and intimidate the regions that depend on them for jobs.  Now, as then, they are threatening the safety and security of our people.

One of my favorite commentators, Paul Farrell of MarketWatch, recently warned us about the consequences of allowing corporate anarchy to destroy democratic capitalism:

The rise of uncontrolled corporate greed killed the “Invisible Hand,” the “soul” of capitalism that Adam Smith saw in 1776 as a divine force serving “the common good.”  Today the system has no moral compass.  Wall Street’s insatiable greed has destroyed capitalism from within, turning America’s economy into a soulless zombie.

The “Invisible Hand” Adam Smith saw as essential to capitalism in “The Theory of Moral Sentiments” died in endless battles fought by 261,000 lobbyists each wanting a bigger piece of the $1.7 trillion federal budget pie plus favorable laws protecting, vesting and increasing the power and wealth of their special interest clients.  Future historians will call this ideological battle replacing democracy the new “American Capitalists Anarchy.”

*   *   *

As a New York Times reviewer put it:  Nations like “China and Russia are using what he calls ‘state capitalism’ to advance the interests of their companies at the expense of their American rivals.”  Global pandemic?

Unfortunately while America wastes trillions to bail out inefficient too-stupid-to-fail banks, our competition is bankrolling healthy state-controlled corporations to destroy us  . . .

If we ever reach the point when the watered-down “financial reform” bill finally becomes law, the taxpayers should insist that their government move on to address the “root cause” of corporate anarchy by taking up campaign finance reform.  That should be one hell of a fight!



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The Poisonous Bailout

June 10th, 2010 Posted in Uncategorized
Jun, 10 2010
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June 10, 2010

The adults in the room have spoken.  The Congressional Oversight Panel – headed by Harvard Law School professor Elizabeth Warren – created to oversee the TARP program, has just issued a report disclosing the ugly truth about the bailout of AIG:

The government’s actions in rescuing AIG continue to have a poisonous effect on the marketplace.

Note the present tense in that statement.  Not only did the bailout have a poisonous effect on the marketplace at the time –it continues to have a poisonous effect on the marketplace.  The 300-page report includes the reason why the AIG bailout continues to have this poisonous effect:

The AIG rescue demonstrated that Treasury and the Federal Reserve would commit taxpayers to pay any price and bear any burden to prevent the collapse of America‘s largest financial institutions and to assure repayment to the creditors doing business with them.

And that, dear readers, is precisely what the concept of “moral hazard” is all about.  It is the reason why we should not continue to allow financial institutions to be “too big to fail”.  Bad behavior by financial institutions is encouraged by the Federal Reserve and Treasury with assurance that any losses incurred as a result of that risky activity will be borne by the taxpayers rather than the reckless institutions.  You might remember the pummeling Senator Jim Bunning gave Ben Bernanke during the Federal Reserve Chairman’s appearance before the Senate Banking Committee for Bernanke’s confirmation hearing on December 3, 2009:

.  .  .   you have decided that just about every large bank, investment bank, insurance company, and even some industrial companies are too big to fail.  Rather than making management, shareholders, and debt holders feel the consequences of their risk-taking, you bailed them out.  In short, you are the definition of moral hazard.

With particular emphasis on the AIG bailout, this is what Senator Bunning said to Bernanke:

Even if all that were not true, the A.I.G. bailout alone is reason enough to send you back to Princeton.  First you told us A.I.G. and its creditors had to be bailed out because they posed a systemic risk, largely because of the credit default swaps portfolio.  Those credit default swaps, by the way, are over the counter derivatives that the Fed did not want regulated.  Well, according to the TARP Inspector General, it turns out the Fed was not concerned about the financial condition of the credit default swaps partners when you decided to pay them off at par.  In fact, the Inspector General makes it clear that no serious efforts were made to get the partners to take haircuts, and one bank’s offer to take a haircut was declined.  I can only think of two possible reasons you would not make then-New York Fed President Geithner try to save the taxpayers some money by seriously negotiating or at least take up U.B.S. on their offer of a haircut.  Sadly, those two reasons are incompetence or a desire to secretly funnel more money to a few select firms, most notably Goldman Sachs, Merrill Lynch, and a handful of large European banks.

Hugh Son of Bloomberg BusinessWeek explained how the Congressional Oversight Panel’s latest report does not have a particularly optimistic view of AIG’s ability to repay the bailout:

The bailout includes a $60 billion Fed credit line, an investment of as much as $69.8 billion from the Treasury Department and up to $52.5 billion to buy mortgage-linked assets owned or backed by the insurer through swaps or securities lending.

AIG owes about $26.6 billion on the credit line and $49 billion to the Treasury.  The company returned to profit in the first quarter, posting net income of $1.45 billion.

‘Strong, Vibrant Company’

“I’m confident you’ll get your money, plus a profit,” AIG Chief Executive Officer Robert Benmosche told the panel in Washington on May 26.  “We are a strong, vibrant company.”

The panel said in the report that the government’s prospects for recovering funds depends partly on the ability of AIG to find buyers for its units and on investors’ willingness to purchase shares if the Treasury Department sells its holdings.  AIG turned over a stake of almost 80 percent as part of the bailout and the Treasury holds additional preferred shares from subsequent investments.

“While the potential for the Treasury to realize a positive return on its significant assistance to AIG has improved over the past 12 months, it still appears more likely than not that some loss is inevitable,” the panel said.

Simmi Aujla of the Politico reported on Elizabeth Warren’s contention that Treasury and Federal Reserve officials should have attempted to save AIG without using taxpayer money:

“The negotiations would have been difficult and they might have failed,” she said Wednesday in a conference call with reporters.  “But the benefits of crafting a private or even a joint public-private solution were so superior to the cost of a complete government bailout that they should have been pursued as vigorously as humanly possible.”

The Treasury and Federal Reserve are now in “damage control” mode, issuing statements that basically reiterate Bernanke’s “panic” excuse referenced in the above-quoted remarks by Jim Bunning.

The release of this report is well-timed, considering the fact that the toothless, so-called “financial reform” bill is now going through the reconciliation stage.  Now that Blanche Lincoln is officially the Democratic candidate to retain her Senate seat representing Arkansas – will the derivatives reform provisions disappear from the bill?  In light of the information contained in the Congressional Oversight Panel’s report, a responsible – honest – government would not only crack down on derivatives trading but would also ban the trading of “naked” swaps.  In other words:  No betting on defaults if you don’t have a potential loss you are hedging – or as Phil Angelides explained it:  No buying fire insurance on your neighbor’s house.  Of course, we will probably never see such regulation enacted – until after he next financial crisis.



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Delaying A Tough Decision

June 3rd, 2010 Posted in Uncategorized
Jun, 03 2010
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June 3, 2010

A recent article by David Lightman for the McClatchy Newspapers bemoaned the fact that the Senate took off for a ten-day break without voting on the “Jobs Bill” passed by the House of Representatives (H.R.4213).   Mr. Lightman’s piece expressed particular concern about the fact that a summer jobs program for approximately 330,000 “at-risk youths” has been hanging in the balance between deficit distress and economic recovery efforts.  Of particular concern is the fact that time is of the essence for keeping the youth jobs program alive for this summer:

The longer the wait, the less the program can reduce joblessness among the nation’s most vulnerable population.  Unemployment among 16- to 19-year-olds was 25.4 percent in April.

“Summer’s only so long, and it is a summer youth program,” said Mark Mattke, the work force strategy and planning director at the Spokane Area Workforce Development Council.  More than 5,700 people in Washington state got summer jobs through government programs last year.

Financial expert, Janet Tavakoli, recently wrote an essay for The Huffington Post, discussing the cause-and-effect relationship between hard economic times and the crime rate.  With municipal budget cutbacks reducing the ranks of our nation’s law enforcement personnel, a failure to extend unemployment benefits, as provided by the Jobs Bill, could be a dangerous experiment.  Ms. Tavakoli discussed how the current recession has precipitated an increase in Chicago’s street crime:

Last summer gang violence ruled the night at Leland and Sheridan, a neighborhood in the process of gentrifying.

In the upscale Lincoln Park area, just a little further south of this unrest, men alone at night were accosted by groups of three to six men and severely beaten, robbed, and hospitalized.  Seven muggings occurred in a five-day period from July 30 to August 4, 2009.

This kind of activity was unusual for these areas of Chicago until last summer.

Current Escalating Violent Crime and Chicago’s Prime Lakefront Areas

Shootings are way up in Chicago, and ordinary citizens — along with shorthanded police — are angry.  Chicago has a gun ban, yet on Wednesday, May 19, Thomas Wortham IV, a Chicago police officer and Iraq War veteran, was shot when four gang members attempted to steal the new motorcycle the officer had brought to show his father, a retired police officer.  Shots were fired, and his father saw the skirmish, ran for his gun, and managed to get off a few rounds.  Two gang members were shot while two sped away dragging his fallen son’s body some distance in the process.

Nine people were shot on Sunday night (May 24), and Chicago is currently in the grips of a massive crime wave that has overwhelmed our under funded police force.

Gangland violence and shootings now occur up and down Chicago’s lakefront.

*   *   *

This escalation and geographical spread of violence is new, and I believe it is related to our Great Recession and budget issues.  I don’t believe that Chicago is alone in its budget problems.  If new patterns in Recession-related-violence have not yet affected other major cities in the U.S. the way they have affected Chicago, they may affect them soon.  It is also likely that crime is being underreported as crime-fighting budgets are cut.

Given the current momentum for deficit hawkishness, the Senate’s break before the vote on this bill could be advantageous.  After all, the bill barely passed in the House.  Our Senators need to carefully consider the consequences of the failure to pass this bill.  David Leonhardt of The New York Times presented a reasoned argument to his readers from the Senate on June 1, recommending passage of the Jobs Bill:

It would still add about $54 billion to the deficit over the next decade. On the other hand, it could also do some good.  Among other things, it would cut taxes for businesses, expand summer jobs programs and temporarily extend jobless benefits for some of today’s 15 million unemployed workers.

*   *   *

Including the jobs bill, the deficit is projected to grow to about $1.3 trillion next year (and that’s assuming the White House can persuade Congress to make some proposed spending cuts and repeal the Bush tax cuts for the affluent).  To be at a level that economists consider sustainable, the deficit needs to be closer to $400 billion.  Only then would normal economic growth be able to pay it off.

So Congress would need to find almost $900 billion in savings.  By voting down the jobs bill, it would save more than $50 billion by 2015 and get 7 percent of the way to the goal.  That’s not nothing.  In a nutshell, it’s the case against the bill.

*   *   *

Of course, even if the bill is not very expensive, it is worth passing only if it will make a difference.  And economists say it will.

Last year’s big stimulus program certainly did.  The Congressional Budget Office estimates that 1.4 million to 3.4 million people now working would be unemployed were it not for the stimulus.  Private economists have made similar estimates.

There are two arguments for more stimulus today.  The first is that, however hopeful the economic signs, the risk of a double-dip recession remains. Financial crises often bring bumpy recoveries.  The recent troubles in Europe surely won’t help.

The second argument is that the economy has a terribly long way to go before it can be considered healthy.  Here is a sobering way to think about the situation:  If the next four years were to bring job growth as fast as the job growth during the best four years of the 1990s boom — which isn’t likely — the unemployment rate would still be higher in 2014 than when the recession began in late 2007.

Voters may not like deficits, but they really do not like unemployment.

Looking at the problem this way makes the jobs bill seem like less of a tough call.  Luckily, the country’s two big economic problems — the budget deficit and the job market — are not on the same timeline.  The unemployment rate is near a 27-year high right now.  Deficit reduction can wait a bit, given that lenders continue to show confidence in Washington’s ability to repay the debt.

Remember that by way of Maiden Lane III, “Turbo” Tim Geithner, as president of the New York Fed, gave away $30 billion of taxpayer money to the counterparties of AIG – even though most of them didn’t need it.  A “clawback” of that money from those banks (including Goldman Sachs – a $19 billion recipient) could pay for more than half the cost of the Jobs Bill.   If the $30 billion wasted on Maiden Lane III can be so easily forgotten – why not spend $54 billion to avoid a “double-dip” recession and a hellish increase in street crime?



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Your Sleazy Government At Work

May 31st, 2010 Posted in Uncategorized
May, 31 2010
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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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