May 28th, 2012 Posted in Uncategorized
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On May 22, the Congressional Budget Office released its report on how the United States can avoid going off the "fiscal cliff" on January 1, 2013. The report is entitled, "Economic Effects of Reducing the Fiscal Restraint That Is Scheduled to Occur in 2013". Forget about the Mayan calendar and December 21, 2012. The real disaster is scheduled for eleven days later. The CBO provided a brief summary of the 10-page report – what you might call the Cliff Notes version. Here are some highlights:
In fact, under current law, increases in taxes and, to a lesser extent, reductions in spending will reduce the federal budget deficit dramatically between 2012 and 2013 – a development that some observers have referred to as a "fiscal cliff" – and will dampen economic growth in the short term.
Under those fiscal conditions, which will occur under current law, growth in real (inflation-adjusted) GDP in calendar year 2013 will be just 0.5 percent, CBO expects – with the economy projected to contract at an annual rate of 1.3 percent in the first half of the year and expand at an annual rate of 2.3 percent in the second half. Given the pattern of past recessions as identified by the National Bureau of Economic Research, such a contraction in output in the first half of 2013 would probably be judged to be a recession.
As the complete version of the report explained, the consequences of abruptly-imposed, draconian austerity measures while the economy is in a state of anemic growth in the wake of the 2008 financial crisis, could have a devastating impact because incomes will drop, shrinking the tax base and available revenue – the life blood of the United States government:
The weakening of the economy that will result from that fiscal restraint will lower taxable incomes and, therefore, revenues, and it will increase spending in some categories – for unemployment insurance, for instance.
An interesting analysis of the CBO report was provided by Robert Oak of the Economic Populist website. He began with a description of the cliff itself:
What the CBO is referring to is the fiscal cliff. Remember when the budget crisis happened, resulting in the United States losing it's AAA credit rating? Then, Congress and this administration just punted, didn't compromise, or better yet, base recommendations on actual economic theory, and allowed automatic spending cuts of $1.2 trillion across the board, to take place instead. These budget cuts will be dramatic and happen in 2012 and 2013.
Spending cuts, especially sudden ones, actually weaken economic growth. This is why austerity has caused a disaster in Europe. Draconian cuts have pushed their economies into not just recessions, but depressions.
The conclusion reached by Robert Oak was particularly insightful:
This report should infuriate Republicans, who earlier wanted to silence the CBO because they were telling the GOP their policies would hurt the economy in so many words. But maybe not. Unfortunately the CBO is not breaking down tax cuts, when there is ample evidence tax cuts for rich individuals do nothing for economic growth. Bottom line though, the CBO is right on in their forecast, draconian government spending cuts will cause an anemic economy to contract.
Although the CBO did offer a good solution for avoiding a drive off the fiscal cliff, it remains difficult to imagine how our dysfunctional government could ever implement these measures:
Or, if policymakers wanted to minimize the short-run costs of narrowing the deficit very quickly while also minimizing the longer-run costs of allowing large deficits to persist, they could enact a combination of policies: changes in taxes and spending that would widen the deficit in 2013 relative to what would occur under current law but that would reduce deficits later in the decade relative to what would occur if current policies were extended for a prolonged period.
The foregoing passage was obviously part of what Robert Oak had in mind when he mentioned that the CBO report would "infuriate Republicans". Any plans to "widen the deficit" would be subject to the same righteous indignation as an abortion festival or a national holiday for gay weddings. Nevertheless, Mitt Romney accidentally acknowledged the validity of the logic underlying the CBO's concern. Bill Black had some fun with Romney's admission by writing a fantastic essay on the subject:
Romney has periodic breakdowns when asked questions about the economy because he sometimes forgets the need to lie. He forgets that he is supposed to treat austerity as the epitome of economic wisdom. When he responds quickly to questions about austerity he slips into default mode and speaks the truth – adopting austerity during the recovery from a Great Recession would (as in Europe) throw the nation back into recession or depression. The latest example is his May 23, 2012 interview with Mark Halperin in Time magazine.
"Halperin: Why not in the first year, if you're elected — why not in 2013, go all the way and propose the kind of budget with spending restraints, that you'd like to see after four years in office? Why not do it more quickly?
Romney: Well because, if you take a trillion dollars for instance, out of the first year of the federal budget, that would shrink GDP over 5%. That is by definition throwing us into recession or depression. So I'm not going to do that, of course."
Romney explains that austerity, during the recovery from a Great Recession, would cause catastrophic damage to our nation. The problem, of course, is that the Republican congressional leadership is committed to imposing austerity on the nation and Speaker Boehner has just threatened that Republicans will block the renewal of the debt ceiling in order to extort Democrats to agree to austerity – severe cuts to social programs. Romney knows this could "throw us into recession or depression" and says he would never follow such a policy.
Later in the interview, Romney claims that federal budgetary deficits are "immoral." But he has just explained that using austerity for the purported purpose of ending a deficit would cause a recession or depression. A recession or depression would make the deficit far larger. That means that Romney should be denouncing austerity as "immoral" (as well as suicidal) because it will not simply increase the deficit (which he claims to find "immoral" because of its impact on children) but also dramatically increase unemployment, poverty, child poverty and hunger, and harm their education by causing more teachers to lose their jobs and more school programs to be cut.
Mitt Romney is beginning to sound as though he has his own inner Biden, who spontaneously speaks out in an unrestrained manner, sending party officials into "damage control" mode.
This could turn out to be an interesting Presidential campaign, after all.
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Why Bad Publicity Never Hurts Goldman Sachs
March 8th, 2012 Posted in Uncategorized
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My last posting focused on the widely-publicized research conducted by Stéphane Côté, PhD, Associate Professor of Organizational Behavior at the University of Toronto's Rotman School of Management, who worked with a team of four psychologists from the University of California at Berkeley to conduct seven studies on a rather timely subject. Their article, "Higher social class predicts increased unethical behavior" was published in the February 27 issue of the Proceedings of the National Academy of Sciences (PNAS). The following excerpt from the abstract of their paper provides the general theme of what their efforts revealed:
. . . investigation revealed upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.
I began my discussion of that paper by looking back at a Washington Post opinion piece entitled, "Angry about inequality? Don't blame the rich". The essay was written last January by James Q. Wilson (who passed away on March 2). On March 4, William K. Black took a deeper look at the legacy of James Q. Wilson, which provided a better understanding of why Wilson would champion the "Don't blame the rich" rationale. As Bill Black pointed out, Wilson was a political scientist, known best for his theory called "broken windows" – a metaphor based on a vacant building with a few broken windows, which quickly has all of its windows broken because petty criminals feel emboldened to damage a building so neglected by its owners. Bill Black emphasized that Wilson was exclusively preoccupied with minor, "blue collar" crimes. Black noted that in a book entitled, Thinking About Crime, Wilson expressed tolerance for "some forms of civic corruption" while presenting an argument that criminology "should focus overwhelmingly on low-status blue collar criminals". Bill Black went on to explain how Wilson's blindness to the relevance of the "broken windows" concept, as it related to "white collar" crime, resulted in a missed opportunity to attenuate the criminogenic milieu which led to the 2008 financial crisis:
Wilson emphasized that it was the willingness of society to tolerate relatively minor blue collar crimes that led to social disintegration and epidemics of severe blue collar crimes, but he engaged in the same willingness to tolerate and excuse less severe white collar crimes. He predicted in his work on "broken windows" that tolerating widespread smaller crimes would lead to epidemic levels of larger crimes because it undermined community and social restraints. The epidemics of elite white collar crime that have driven our recurrent, intensifying financial crises have proven this point. Similarly, corruption that is excused and tolerated by elites is unlikely to remain at the level of "a few deals." Corruption is likely to spread in incidence and severity precisely because it undermines community and the rule of law and it is likely to grow more pervasive and harmful the more we "tolera[te]" it.
Taking Wilson's "broken windows" reasoning seriously in the elite white collar crime context would require us to take a series of prophylactic measures to restore integrity and strengthen peer pressures against misconduct. Indeed, we have implicitly tested the applicability of "broken windows" reasoning in that context by adopting policies that acted directly contrary to Wilson's reasoning. We have adopted executive and professional compensation systems that are exceptionally criminogenic.
Fiduciary duties are critical means of preventing broken windows from occurring and making it likely that any broken windows in corporate governance will soon be remedied, yet we have steadily weakened fiduciary duties. For example, Delaware now allows the elimination of the fiduciary duty of care as long as the shareholders approve. Court decisions have increasingly weakened the fiduciary duties of loyalty and care. The Chamber of Commerce's most recent priorities have been to weaken Sarbanes-Oxley and the Foreign Corrupt Practices Act. We have made it exceptionally difficult for shareholders who are victims of securities fraud to bring civil suits against the officers and entities that led or aided and abetted the securities fraud.
In the elite white collar crime context we have been following the opposite strategy of that recommended under "broken windows" theory. We have been breaking windows. We have excused those who break the windows. Indeed, we have praised them and their misconduct. The problem with allowing broken windows is far greater in the elite white collar crime context than the blue collar crime context.
To find a "poster child" example for the type of errant fiduciary behavior which owes its existence to Wilson's misapplication of the "broken windows" doctrine, one need look no further than Matt Taibbi's favorite "vampire squid": Goldman Sachs. One would think that after Taibbi's groundbreaking, 2009 tour de force about Goldman's involvement in the events which led to the financial crisis . . . and after the April 2010 Senate Permanent Subcommittee on Investigations hearing, wherein Goldman's "Fab Four" testified about selling their customers the Abacus CDO and that "shitty" Timberwolf deal, the firm would at least try to keep a lower profile these days. Naaaaw!
Goldman Sachs has now found itself in the crosshairs of a man, formerly accused of carrying water for the firm – Andrew Ross Sorkin. Sorkin's March 5 DealBook article for The New York Times upbraided Goldman for its flagrant conflict of interest in a deal where the firm served as an adviser to an oil (and natural gas) pipeline company, El Paso, which was being sold to Houston-based Kinder Morgan for $21.1 billion. Goldman owned a 19.1 percent stake in Kinder Morgan at the time. Andrew Ross Sorkin quoted from the script which Goldman CEO, Lloyd Blankfein read to El Paso's CEO, Douglas Foshee, wherein Blankfein confirmed that Foshee was aware of Goldman's investment in Kinder Morgan. It was refreshing to see a bit of righteous indignation in Sorkin's discussion of the dirty details behind this transaction:
When the deal was announced, buried at the end of the news release was a list of Wall Street banks that had advised on the deal, including Goldman Sachs. Goldman received a $20 million fee for playing matchmaker for El Paso. The fee, of course, was not disclosed, nor was the Kinder Morgan stake owned by Goldman Sachs's private equity arm, worth some $4 billion. Nor did the release disclose that the Goldman banker who advised El Paso to accept Kinder Morgan's bid owned $340,000 worth of Kinder Morgan stock.
Now, however, a court ruling in a shareholder lawsuit has laid bare the truth: Goldman was on every conceivable side of the deal. As a result, El Paso may have unwittingly sold itself far too cheaply. Mr. Blankfein may have said he was "very sensitive to the appearance of conflict," but the judge's order ruling "reluctantly" against a motion to block the merger made it clear that Goldman's conflicts went far beyond mere appearances.
Here's just one example: In an effort to help mitigate its clear conflict, Goldman Sachs recommended that El Paso hire an additional adviser so that El Paso would be able to say that it had received completely impartial advice. Goldman did not say it would step down, and lose its fee, it simply suggested that El Paso hire one more bank – in this case, Morgan Stanley.
After explaining that Goldman included a provision in the deal that Morgan Stanley would get paid only if El Paso agreed to the sale to Kinder Morgan, Sorkin expressed this reaction:
Goldman's brazenness in this deal is nothing short of breathtaking.
Goldman's conflict of interest in the El Paso deal was also the subject of an article by Matthew Philips of Bloomberg BusinessWeek. Mr. Philips reminded us of whom we have to thank for "helping Greece dupe regulators by disguising billions of dollars' worth of sovereign debt":
New details have also emerged about Goldman's role in helping Greece hide its debt so it could qualify for membership in the European Union. In a Bloomberg News story out this week, Greek officials talk about how they didn't truly understand the complex swaps contracts they were buying from Goldman bankers from 2001 to 2005, and that each time Goldman restructured the deal, things got worse for Greece.
The story reads like a cautionary tale of a homeowner who keeps returning to the same contractor to repair the damage done by the previous fix-it job. At one point, Goldman prohibited Greece's debt manager, Christoforos Sardelis, from seeking outside price quotes on the complicated derivatives Goldman was selling to Greece.
Yet Goldman's sullied reputation doesn't appear to be negatively impacting its business. In fact, Goldman is outpacing its Wall Street competition recently in key areas of business. In 2011, Goldman was the top adviser for both global M&A and equity IPOs. A Bloomberg survey of traders, investors, and analysts last May showed that while 54 percent of respondents had an unfavorable opinion of Goldman, 78 percent believed that allegations it duped clients and misled Congress would have no material effect on its business.
In other words: Goldman Sachs keeps breaking windows and nobody cares. Thanks for nothing, James Q. Wilson!
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Be Sure To Catch These Items
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As we reach the end of 2011, I keep stumbling across loads of important blog postings which deserve more attention. These pieces aren't really concerned with the usual, "year in review"- type of subject matter. They are simply great items which could get overlooked by people who are too busy during this time of year to set aside the time to browse around for interesting reads. Accordingly, I'd like to bring a few of these to your attention.
The entire European economy is on its way to hell, thanks to an idiotic, widespread belief that economic austerity measures will serve as a panacea for the sovereign debt crisis. The increasing obviousness of the harm caused by austerity has motivated its proponents to crank-up the "John Maynard Keynes was wrong" propaganda machine. You don't have to look very far to find examples of that stuff. On any given day, the Real Clear Politics (or Real Clear Markets) website is likely to be listing at least one link to such a piece. Those commentators are simply trying to take advantage of the fact that President Obama botched the 2009 economic stimulus effort. Many of us realized – a long time ago – that Obama's stimulus measures would prove to be inadequate. In July of 2009, I wrote a piece entitled, "The Second Stimulus", wherein I pointed out that another stimulus program would be necessary because the American Recovery and Reinvestment Act of 2009 was not going to accomplish its intended objective. Beyond that, it was already becoming apparent that the stimulus program would eventually be used to support the claim that Keynesian economics doesn't work. Economist Stephanie Kelton anticipated that tactic in a piece she published at the New Economic Perspectives website:
Some of us saw this coming. For example, Jamie Galbraith and Robert Reich warned, on a panel I organized in January 2009, that the stimulus package needed to be at least $1.3 trillion in order to create the conditions for a sustainable recovery. Anything shy of that, they worried, would fail to sufficiently improve the economy, making Keynesian economics the subject of ridicule and scorn.
Despite the current "ridicule and scorn" campaign against Keynesian economics, a fantastic, unbiased analysis of the subject has been provided by Henry Blodget of The Business Insider. Blodget's commentary was written in easy-to-read, layman's terms and I can't say enough good things about it. Here's an example:
The reason austerity doesn't work to quickly fix the problem is that, when the economy is already struggling, and you cut government spending, you also further damage the economy. And when you further damage the economy, you further reduce tax revenue, which has already been clobbered by the stumbling economy. And when you further reduce tax revenue, you increase the deficit and create the need for more austerity. And that even further clobbers the economy and tax revenue. And so on.
Another "must read" blog posting was provided by Mike Shedlock (a/k/a Mish). Mish directed our attention to a rather extensive list of "Things to Say Goodbye To", which was written last year by Clark McClelland and appeared on Jeff Rense's website. (Clark McClelland is a retired NASA aerospace engineer who has an interesting background. I encourage you to explore McClelland's website.) Mish pared McClelland's list down to nine items and included one of his own – loss of free speech:
A bill in Congress with an innocuous title – Stop Online Piracy Act (SOPA) – threatens to do much more.
This bill's real intent is not to stop piracy, but rather to hand over control of the internet to corporations.
At his Financial Armageddon blog, Michael Panzner took a similar approach toward slimming down a list of bullet points which reveal the disastrous state of our economy: "50 Economic Numbers From 2011 That Are Almost Too Crazy To Believe," from the Economic Collapse blog. Panzner's list was narrowed down to ten items – plenty enough to undermine those "sunshine and rainbows" prognostications about what we can expect during 2012.
The final item on my list of "must read" essays is a rebuttal to that often-repeated big lie that "no laws were broken" by the banksters who caused the financial crisis. Bill Black is an Associate Professor of Economics and Law at the University of Missouri-Kansas City in the Department of Economics and the School of Law. Black directed litigation for the Federal Home Loan Bank Board (FHLBB) from 1984 to 1986 and served as deputy director of the Federal Savings and Loan Insurance Corporation (FSLIC) in 1987. Black's refutation of the "no laws were broken by the financial crisis banksters" meme led up to a clever homage to Dante's Divine Comedy describing the "ten circles of hell" based on "the scale of ethical depravity by the frauds that drove the ongoing crisis". Here is Black's retort to the big lie:
Sixty Minutes' December 11, 2011 interview of President Obama included a claim by Obama that, unfortunately, did not lead the interviewer to ask the obvious, essential follow-up questions.
I can tell you, just from 40,000 feet, that some of the most damaging behavior on Wall Street, in some cases, some of the least ethical behavior on Wall Street, wasn't illegal.
I offer the following scale of unethical banker behavior related to fraudulent mortgages and mortgage paper (principally collateralized debt obligations (CDOs)) that is illegal and deserved punishment. I write to prompt the rigorous analytical discussion that is essential to expose and end Obama and Bush's "Presidential Amnesty for Contributors" (PAC) doctrine. The financial industry is the leading campaign contributor to both parties and those contributions come overwhelmingly from the wealthiest officers – the one-tenth of one percent that thrives by being parasites on the 99 percent.
I have explained at length in my blogs and articles why:
• Only fraudulent home lenders made liar's loans
• Liar's loans were endemically fraudulent
• Lenders and their agents put the lies in liar's loans
• Appraisal fraud was endemic and led by lenders and their agents
• Liar's loans could only be sold through fraudulent reps and warranties
• CDOs "backed" by liar's loans were inherently fraudulent
• CDOs backed by liar's loans could only be sold through fraudulent reps and warranties
• Liar's loans hyper-inflated the bubble
• Liar's loans became roughly one-third of mortgage originations by 2006
Each of these frauds is a conventional fraud that could be prosecuted under existing laws.
It's nice to see someone finally take a stand against the "Presidential Amnesty for Contributors" (PAC) doctrine. Every time Obama attempts to invoke that doctrine – he should be called on it. The Apologist-In-Chief needs to learn that the voters are not as stupid as he thinks they are.
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Dubious Reassurances
October 20th, 2011 Posted in Uncategorized
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There appears to be an increasing number of commentaries presented in the mainstream media lately, assuring us that "everything is just fine" or – beyond that – "things are getting better" because the Great Recession is "over". Anyone who feels inclined to believe those comforting commentaries should take a look at the Financial Armageddon blog and peruse some truly grim reports about how bad things really are.
On a daily basis, we are being told not to worry about Europe's sovereign debt crisis because of the heroic efforts to keep it under control. On the other hand, I was more impressed by the newest Weekly Market Comment by economist John Hussman of the Hussman Funds. Be sure to read the entire essay. Here are some of Dr. Hussman's key points:
From my perspective, Wall Street's "relief" about the economy, and its willingness to set aside recession concerns, is a mistake born of confusion between leading indicators and lagging ones. Leading evidence is not only clear, but on a statistical basis is essentially certain that the U.S. economy, and indeed, the global economy, faces an oncoming recession. As Lakshman Achuthan notes on the basis of ECRI's own (and historically reliable) set of indicators, "We've entered a vicious cycle, and it's too late: a recession can't be averted." Likewise, lagging evidence is largely clear that the economy was not yet in a recession as of, say, August or September. The error that investors are inviting here is to treat lagging indicators as if they are leading ones.
The simple fact is that the measures that we use to identify recession risk tend to operate with a lead of a few months. Those few months are often critical, in the sense that the markets can often suffer deep and abrupt losses before coincident and lagging evidence demonstrates actual economic weakness. As a result, there is sometimes a "denial" phase between the point where the leading evidence locks onto a recession track, and the point where the coincident evidence confirms it. We saw exactly that sort of pattern prior to the last recession. While the recession evidence was in by November 2007 (see Expecting A Recession ), the economy enjoyed two additional months of payroll job growth, and new claims for unemployment trended higher in a choppy and indecisive way until well into 2008. Even after Bear Stearns failed in March 2008, the market briefly staged a rally that put it within about 10% of its bull market high.
At present, the S&P 500 is again just 10% below the high it set before the recent market downturn began. In my view, the likelihood is very thin that the economy will avoid a recession, that Greece will avoid default, or that Europe will deal seamlessly with the financial strains of a banking system that is more than twice as leveraged as the U.S. banking system was before the 2008-2009 crisis.
A few weeks ago, I noted that Greece was likely to be promised a small amount of relief funding, essentially to buy Europe more time to prepare its banking system for a Greek default, and observed "While it's possible that the equity markets will mount a relief rally in the event of new funding to Greece, it will be important to recognize that handing out a bit more relief would be preparatory to a default, and that would probably be reflected in a failure of Greek yields to retreat significantly on that news."
As of Friday, the yield on 1-year Greek debt has soared to 169%. Greece will default. Europe is buying time to reduce the fallout.
As of this writing, the yield on 1-year Greek debt is now 189.82%. How could it be possible to pay almost 200% interest on a one-year loan?
Despite all of the "good news" about America's zombie megabanks, which were bailed out during the financial crisis (and for a while afterward) Yves Smith of Naked Capitalism has been keeping an ongoing "Bank of America Deathwatch". The story has gone from grim to downright creepy:
If you have any doubt that Bank of America is in trouble, this development should settle it. I'm late to this important story broken this morning by Bob Ivry of Bloomberg, but both Bill Black (who I interviewed just now) and I see this as a desperate (or at the very best, remarkably inept) move by Bank of America's management.
The short form via Bloomberg:
Bank of America Corp. (BAC), hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation…
Bank of America's holding company — the parent of both the retail bank and the Merrill Lynch securities unit — held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
This move reflects either criminal incompetence or abject corruption by the Fed. Even though I've expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It's well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.
But it's even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.
It is the aggregate outrage caused by the rampant malefaction throughout American finance, which has motivated the protesters involved in the Occupy Wall Street movement. Those demonstrators have found it difficult to articulate their demands because any comprehensive list of grievances they could assemble would be unwieldy. Most important among their complaints is the notion that the failure to enforce prohibitions against financial wrongdoing will prevent restoration of a healthy economy. The best example of this is the fact that our government continues to allow financial institutions to remain "too big to fail" – since their potential failure would be remedied by a taxpayer-funded bailout.
Hedge fund manager Barry Ritholtz articulated those objections quite well, in a recent piece supporting the State Attorneys General who are resisting the efforts by the Justice Department to coerce settlement of the States' "fraudclosure" cases against Bank of America and others – on very generous terms:
The Rule of Law is yet another bedrock foundation of this nation. It seems to get ignored when the criminals involved received billions in bipartisan bailout monies.
The line of bullshit being used on State AGs is that we risk an economic crisis if we prosecute these folks.
The people who claim that fail to realize that the opposite is true – the protest at Occupy Wall Street, the negative sentiment, the general economic angst – traces itself to the belief that there is no justice, that senior bankers have gotten away with economic murder, and that we have a two-tiered criminal system, one for the rich and one for the poor.
Today's NYT notes the gloom that has descended over consumers, and they suggest it may be home prices. I think they are wrong – in my experience, the sort of generalized rage and frustration comes about when people realize the institutions they have trusted have betrayed them. Humans deal with financial losses in a very specific way – and it's not fury. This is about a fundamental breakdown of the role of government, courts, and leadership in the nation. And it all traces back to the bailouts of reckless bankers, and the refusal to hold them in any way accountable.
There will not be a fundamental economic recovery until that is recognized.
In the mean time, the quality of life for the American middle class continues to deteriorate. We need to do more than simply hope that the misery will "trickle" upward.
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Widespread Disappointment With Financial Reform
June 30th, 2011 Posted in Uncategorized
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Exactly one year ago, I wrote a piece entitled, "Financial Reform Bill Exposed As Hoax" wherein I expressed my outrage that the financial reform effort had become a charade. The final product resulting from all of the grandstanding and backroom deals – the Dodd–Frank bill – had become nothing more than a hoax on the American public. My essay included the reactions of five commentators, who were similarly dismayed. I concluded the posting with this remark:
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.
During the year since that posting, I felt a bit less misanthropic each time someone spoke out, wrote an article or made a presentation demonstrating that our government's "financial reform" effort was nothing more than political theater. Last July, Rich Miller of Bloomberg News reported that according to a Bloomberg National Poll, almost eighty percent of those surveyed expressed "just a little or no confidence" that the financial reform bill would make their financial assets more secure. Forty-seven percent believed that the bill would do more to protect the financial industry than consumers. The American public is not as dumb as most people claim!
This past week brought us three great perspectives on the worthlessness of our government's financial reform facade. I was surprised that the most impressive presentation came from a Fed-head! Thomas M. Hoenig, President and CEO of the Kansas City Federal Reserve Bank, gave a speech at New York University's Stern School of Business, concerning the future of "systemically important financial institutions" or "SIFIs" and the Dodd-Frank Act. (Bill Black prefers to call them "systemically dangerous institutions" or "SDIs".) After a great discussion of the threat these entities pose to our financial system and the moral hazard resulting from the taxpayer-financed "safety net", which allows creditors of the SIFIs to avoid accountability for risks taken, Tom Hoenig focused on Dodd-Frank:
Following this financial crisis, Congress and the administration turned to the work of repair and reform. Once again, the American public got the standard remedies – more and increasingly complex regulation and supervision. The Dodd-Frank reforms have all been introduced before, but financial markets skirted them. Supervisory authority existed, but it was used lightly because of political pressure and the misperceptions that free markets, with generous public support, could self-regulate.
Dodd-Frank adds new layers of these same tools, but it fails to employ one remedy used in the past to assure a more stable financial system – simplification of our financial structure through Glass-Steagall-type boundaries. To this end, there are two principles that should guide our efforts to restore such boundaries. First, institutions that have access to the safety net should be restricted to certain core activities that the safety net was intended to protect – making loans and taking deposits – and related activities consistent with the presence of the safety net.
Second, the shadow banking system should be reformed in its use of money market funds and short-term repurchase agreements – the repo market. This step will better assure that the safety net is not ultimately called upon to bail them out in crisis.
Another engaging perspective on financial reform efforts came from Phil Angelides, who served as chairman of the Financial Crisis Inquiry Commission, which conducted televised hearings concerning the causes of the financial crisis and issued its final report in January. On June 27, Angelides wrote an article for The Washington Post wherein he discussed what caused the financial crisis, the current efforts to "revise the historical narrative" of what led to the economic catastrophe, as well as the efforts to undermine, subvert and repeal the meager reforms Dodd-Frank authorized. Angelides didn't pull any punches when he upbraided Congressional Republicans for conduct which the Democrats have been too timid (or complicit) to criticize:
If you are Rep. Paul Ryan, you ignore the fact that our federal budget deficit has ballooned more than $10 trillion annually since the financial collapse. You disregard the reality that two-thirds of the deficit increase is directly attributable to the economic downturn and bipartisan fiscal measures adopted to bolster the economy. Instead of focusing on the real cause of the deficit, you conflate today's budgetary disaster with the long-term challenges of Medicare so you can shred the social safety net.
If you are most congressional Republicans, you turn a blind eye to the sad history of widespread lending abuses that savaged communities across the country and pledge to block the appointment of anyone to head the new Consumer Financial Protection Bureau unless its authority is weakened. You ignore the evidence of pervasive excess that wrecked our financial markets and attempt to cut funding for the regulators charged with curbing it. Across the board, you refuse to acknowledge what went wrong and then try to stop efforts to make it right.
David Sirota wrote a great essay for Salon entitled, "America's unique hatred of finance reform". Sirota illustrated how bipartisan efforts to undermine financial reform are turning America into – what The Daily Show with Jon Stewart called – "Sweden's Mexico":
On one hand, Europe's politics of finance seem to be gradually moving in the direction of Sweden — that is, in the direction of growth and stability. As the Washington Post reports, that Scandinavian country — the very kind American Tea Party types write off with "socialist" epithets — has the kind of economy the U.S. can now "only dream of: growing rapidly, creating jobs and gaining a competitive edge (as) the banks are lending, the housing market booming (and) the budget is balanced." It has accomplished this in part by seriously regulating its banking sector after it collapsed in the 1990s.
After passing an embarrassingly weak financial "reform" bill that primarily cemented the status quo, the U.S. government is now delaying even the most minimal new rules that were included in the legislation. At the same time, Senate Republicans are touting their plans to defund any new financial regulatory agencies; the chairman of the House Financial Services Committee has declared that "Washington and the regulators are there to serve the banks" — not the other way around; and the Obama administration is now trying to force potential economic partners to accept financial deregulation as a consequence of bilateral trade deals.
Meanwhile, the presidential campaign already looks like a contest between two factions of the same financial elite — a dynamic that threatens to make the 2012 extravaganza a contest to see which party can more aggressively suck up to the banks.
Any qualified, Independent political candidate, who is willing to step up for the American middle class and set out a plan of action to fight the financial industry as well as its lobbyists, would be well-positioned for a 2012 election victory.
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Democrats Share The Blame
January 24th, 2011 Posted in Uncategorized
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January 21 brought us Episode 199 of HBO's Real Time with Bill Maher. At the end of the program, Bill went through his popular "New Rules" segment. On this occasion, he wound it up with a rant about how the Republicans were exclusively at fault for the financial crisis. Aside from the fact that this claim was historically inaccurate, it was not at all fair to David Stockman (a guest on that night's show) who had to sit through Maher's diatribe without an opportunity to point out the errors. (On the other hand, I was fine with watching Stephen Moore twist in the wind as Maher went through that tirade.)
That incident underscored the obvious need for Bill Maher to invite William Black as a guest on the show in order to clarify this issue. Prior to that episode, Black had written an essay, which appeared on The Big Picture website. Although the theme of that piece was to debunk the "mantra of the Republican Party" that "regulation is a job killer", Black emphasized that Democrats had a role in "deregulation, desupervision, and de facto decriminalization (the three 'des')" which created the "criminogenic environment" precipitating the financial crisis:
The Great Recession was triggered by the collapse of the real estate bubble epidemic of mortgage fraud by lenders that hyper-inflated that bubble. That epidemic could not have happened without the appointment of anti-regulators to key leadership positions. The epidemic of mortgage fraud was centered on loans that the lending industry (behind closed doors) referred to as "liar's" loans — so any regulatory leader who was not an anti-regulatory ideologue would (as we did in the early 1990s during the first wave of liar's loans in California) have ordered banks not to make these pervasively fraudulent loans.
From roughly 1999 to the present, three administrations have displayed hostility to vigorous regulation and have appointed regulatory leaders largely on the basis of their opposition to vigorous regulation. When these administrations occasionally blundered and appointed, or inherited, regulatory leaders that believed in regulating, the administration attacked the regulators. In the financial regulatory sphere, recent examples include Arthur Levitt and William Donaldson (SEC), Brooksley Born (CFTC), and Sheila Bair (FDIC).
Similarly, the bankers used Congress to extort the Financial Accounting Standards Board (FASB) into trashing the accounting rules so that the banks no longer had to recognize their losses. The twin purposes of that bit of successful thuggery were to evade the mandate of the Prompt Corrective Action (PCA) law and to allow banks to pretend that they were solvent and profitable so that they could continue to pay enormous bonuses to their senior officials based on the fictional "income" and "net worth" produced by the scam accounting. (Not recognizing one's losses increases dollar-for-dollar reported, but fictional, net worth and gross income.)
When members of Congress (mostly Democrats) sought to intimidate us into not taking enforcement actions against the fraudulent S&Ls we blew the whistle.
President Obama's January 18 opinion piece for The Wall Street Journal prompted a retort from Bill Black. The President announced that he had signed an executive order requiring "a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive". Obama's focus on "regulations that stifle job creation" seemed to exemplify what Black had just discussed one day earlier. Accordingly, Bill Black wrote an essay for The Huffington Post on January 19, which began this way:
I get President Obama's "regulatory review" plan, I really do. His game plan is a straight steal from President Clinton's strategy after the Republican's 1994 congressional triumph. Clinton's strategy was to steal the Republican Party's play book. I know that Clinton's strategy was considered brilliant politics (particularly by the Clintonites), but the Republican financial playbook produces recurrent, intensifying fraud epidemics and financial crises. Rubin and Summers were Clinton's offensive coordinators. They planned and implemented the Republican game plan on finance. Rubin and Summers were good choices for this role because they were, and remain, reflexively anti-regulatory. They led the deregulation and attack on supervision that began to create the criminogenic environment that produced the financial crisis.
Bill Clinton's role in facilitating the financial crisis would have surely become an issue in the 2008 Presidential election campaign, had Hillary Clinton been the Democratic nominee. Instead, the Democrats got behind a "Trojan horse" candidate, disguised in the trappings of "Change" who, once elected, re-installed the very people who implemented the crucial deregulatory changes which caused the financial crisis. Bill Black provided this explanation:
The zeal, crude threats, and arrogance they displayed in leading the attacks on SEC Chair Levitt and CFTC Chair Born's efforts to adopt regulations that would have reduced the risks of fraud and financial crises were exceptional. Just one problem — they were wrong and Levitt and Born were right. Rubin and Summers weren't slightly wrong; they put us on the path to the Great Recession. Obama knows that Clinton's brilliant political strategy, stealing the Republican play book, was a disaster for the nation, but he has picked politics over substance.
Obama's proposal and the accompanying OMB releases do not mention the word or the concept of fraud. Despite an "epidemic" of fraud led by the bank CEOs (which caused the greatest crisis of his life), Obama cannot bring itself to use the "f" word. The administration wants the banks' senior officers to fund its reelection campaign. I've never raised political contributions, but I'm certain that pointing out that a large number of senior bank officers were frauds would make fundraising from them awkward.
Black targeted Obama's lame gesture toward acknowledgement of some need for regulation, encapsulated in the statement that "(w)here necessary, we won't shy away from addressing obvious gaps …":
Huh? The vital task is to find the non-obvious gaps. Why, two years into his presidency, has the administration failed to address "obvious gaps"? The administration does not need Republican approval to fill obvious gaps in regulation. Even when Obama finds "obvious gaps" in regulatory protection he does not promise to act. He will act only "where necessary." We know that Summers, Rubin, and Geithner rarely believe that financial regulation is "necessary." Even if Obama decides it is "necessary" to act he only promises to "address" "obvious gaps" — not "end" or "fill" them.
At the conclusion of his Huffington Post essay, Black provided his own list of "obvious gaps" described as the "Dirty Dozen" — ". . . obvious gaps in financial regulation which have persisted and grown during this, Obama's first two years in office."
Bill Black is just one of many commentators to annotate the complicity of Democrats in causing the financial crisis. Beyond that, Black has illustrated how President Obama has preserved – and possibly enhanced — the "criminogenic" milieu which could bring about another financial crisis.
The first step toward implementing "bipartisan solutions" to our nation's ills should involve acknowledging the extent to which the fault for those problems is bipartisan.
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November 1st, 2010 Posted in Uncategorized
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As we approach Election Day, many commentators are confirming an observation used as the theme of my posting from September 6:
The steps taken by the Obama administration during its first few months have released massive, long-lasting fallout, destroying the re-election hopes of Democrats in the Senate and House.
Too many people whom the President thought he could count among his supporters have become his biggest critics. One might expect that after eight years of outrage over the antics of the Bush administration, Maureen Dowd would be thrilled about the work done by the Obama White House. Nevertheless, her most recent discussion of Obama's performance was less than flattering:
In 2008, the message was him. The promise was him. And that's why 2010 is a referendum on him.
With his coalition and governing majority shattering around him, President Obama will have to summon political skills — starting Wednesday — that he has not yet shown he has.
With the exception of Obama, most Americans seemed to agree that the "right" thing to do until the economy recovered was to focus on jobs instead of getting the Congress mired for months in making over health insurance and energy policy. And the "right" thing to do was to come down harder on the big banks for spending on bonuses instead of lending to small businesses that don't get bailouts.
Contrary to the President's expectations, the voting public has not overlooked the administration's refusal to heed the advice of Bill Black, Robert Reich, and the roster of economists that included Adam Posen and Matthew Richardson advocating the use of the so-called "Swedish solution" of putting the zombie banks through temporary receivership. To the dismay of everyone in the world (outside of Obama's inner circle) the new President chose to follow the advice of Larry Summers and put the welfare (as in corporate welfare) of those insolvent, too-big-to-fail banks ahead of the nation's economic health. When President Obama appeared on The Daily Show with Jon Stewart on October 27, Stewart began the discussion by asking Obama to explain the rationale underlying his appointment of Larry Summers (a retread from the Clinton administration) as director of the National Economic Council. President Obama fell back on his two-year-old claim that to follow any course other than that recommended by Summers, would have resulted in the failure of at least 100 banks. Obama's claim that the cost of the financial crisis was less than 1% of GDP did not slip past Yves Smith of the Naked Capitalism website. Ms. Smith (who voted for Obama in 2008) didn't pull any punches in refuting that claim:
I'm so offended by the latest Obama canard, that the financial crisis of 2007-2008 cost less than 1% of GDP, that I barely know where to begin. Not only does this Administration lie on a routine basis, it doesn't even bother to tell credible lies. And this one came directly from the top, not via minions. It's not that this misrepresentation is earth-shaking, but that it epitomizes why the Obama Administration is well on its way to being an abject failure.
The reason Obama makes such baldfacedly phony statements is twofold: first, his pattern of seeing PR as the preferred solution to all problems, and second, his resulting slavish devotion to smoke and mirrors over sound policy.
But Team Obama is no doubt rationalizing this chicanery: if they can keep from recognizing losses until the recovery takes place, then the ultimate damage will be lower. But Japan's post bubble record shows that doesn't work. You simply don't get a recovery with a diseased financial system. You need to purge the bad assets, only then will meaningful growth resume.
Financial risk management guru, Chris Whalen, recently expressed his anguish over the administration's unwillingness to restructure the zombie banks:
The reluctance comes partly from what truths restructuring will reveal. As a result, these same large zombie banks and the U.S. economy will continue to shrink under the weight of bad debt, public and private. Remember that the Dodd-Frank legislation was not so much about financial reform as protecting the housing GSEs.
Because President Barack Obama and the leaders of both political parties are unwilling to address the housing crisis and the wasting effects on the largest banks, there will be no growth and no net job creation in the U.S. for the next several years. And because the Obama White House is content to ignore the crisis facing millions of American homeowners, who are deep underwater and will eventually default on their loans, the efforts by the Fed to reflate the U.S. economy and particularly consumer spending will be futile.
The idea that Obama sees "PR as the preferred solution to all problems" surfaced again in a great piece by Peter Baker of The New York Times, which included this observation:
Rather than entertaining the possibility that the program they have pursued is genuinely and even legitimately unpopular, the White House and its allies have concluded that their political troubles amount to mainly a message and image problem.
Baker's article focused on the most recent gripe made by Obama at another one of his highbrow fundraisers. Remember the blowback from the President's recent diatribe at a fundraiser hosted by the appropriately-named Rich Richman? Well, something similar happened again. The setting this time was a $15,200-per-ticket affair for doctors at the home of a wealthy hospital executive in Boston. While addressing this audience, the President explained that the reason why the voters have not embraced the Democrats during this election cycle is because the voters are having trouble thinking clearly, as they are "scared". Not surprisingly, this re-ignited the controversy focused on Obama's elitism.
The Tea Party spokespeople aren't the only ones who are accusing President Obama of elitism. The Progressive-oriented TruthDig website, recently published an interesting essay by Chris Hedges, author of Death of the Liberal Class. Hedges points out that elitism is exactly the problem afflicting not only Obama, but the entire group, referred to as "the liberal class". Consider his argument:
The liberal class, which once made piecemeal and incremental reform possible, functioned traditionally as a safety valve. During the Great Depression, with the collapse of capitalism, it made possible the New Deal. During the turmoil of the 1960s, it provided legitimate channels within the system to express the discontent of African-Americans and the anti-war movement. But the liberal class, in our age of neo-feudalism, is now powerless. It offers nothing but empty rhetoric. It refuses to concede that power has been wrested so efficiently from the hands of citizens by corporations that the Constitution and its guarantees of personal liberty are irrelevant. It does not act to mitigate the suffering of tens of millions of Americans who now make up a growing and desperate permanent underclass. And the disparity between the rhetoric of liberal values and the rapacious system of inverted totalitarianism the liberal class serves makes liberal elites, including Barack Obama, a legitimate source of public ridicule. The liberal class, whether in universities, the press or the Democratic Party, insists on clinging to its privileges and comforts even if this forces it to serve as an apologist for the expanding cruelty and exploitation carried out by the corporate state.
As long as the liberal class had even limited influence, whether through the press or the legislative process, liberals were tolerated and even respected. But once the liberal class lost all influence it became a class of parasites. The liberal class, like the déclassé French aristocracy, has no real function within the power elite. And the rising right-wing populists, correctly, ask why liberals should be tolerated when their rhetoric bears no relation to reality and their presence has no influence on power.
As Maureen Dowd pointed out, Wednesday is going to be a big day. If President Obama thought he had his hands full going into this election . . . wait until the aftermath.
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Those First Steps Have Destroyed Mid-term Democrat Campaigns
September 6th, 2010 Posted in Uncategorized
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The steps taken by the Obama administration during its first few months have released massive, long-lasting fallout, destroying the re-election hopes of Democrats in the Senate and House. Let's take a look back at Obama's missteps during that crucial period.
During the first two weeks of February, 2009 — while the debate was raging as to what should be done about the financial stimulus proposal — the new administration was also faced with making a decision on what should be done about the "zombie" Wall Street banks. Treasury Secretary Geithner had just rolled out his now-defunct "financial stability plan" in a disastrous press conference. Most level-headed people, including Joe Nocera of The New York Times, had been arguing in favor of putting those insolvent banks through temporary receivership – or temporary nationalization – until they could be restored to healthy, functional status. Nevertheless, at this critical time, Obama, Geithner and Fed chair Ben Bernanke had decided to circle their wagons around the Wall Street banks. Here's how I discussed the situation on February 16, 2009:
Geithner's resistance to nationalization of insolvent banks represents a stark departure from the recommendations of many economists. While attending the World Economic Forum in Davos, Switzerland last month, Dr. Nouriel Roubini explained (during an interview on CNBC) that the cost of purchasing the toxic assets from banks will never be recouped by selling them in the open market:
At which price do you buy the assets? If you buy them at a high price, you are having a huge fiscal cost. If you buy them at the right market price, the banks are insolvent and you have to take them over. So I think it's a bad idea. It's another form of moral hazard and putting on the taxpayers, the cost of the bailout of the financial system.
Dr. Roubini's solution is to face up to the reality that the banks are insolvent and "do what Sweden did": take over the banks, clean them up by selling off the bad assets and sell them back to the private sector. On February 15, Dr. Roubini repeated this theme in a Washington Post article he co-wrote with fellow New York University economics professor, Matthew Richardson.
Even after Geithner's disastrous press conference, President Obama voiced a negative reaction to the Swedish approach during an interview with Terry Moran of ABC News.
Nearly a month later, on March 12, 2009 — I discussed how the administration was still pushing back against common sense on this subject, while attempting to move forward with its grandiose, "big bang" agenda. The administration's unwillingness to force those zombie banks to face the consequences of their recklessness was still being discussed — yet another month later by Bill Black and Robert Reich. Three months into his Presidency, Obama had established himself as a guardian of the Wall Street status quo.
Even before the stimulus bill was signed into law, the administration had been warned, by way of an article in Bloomberg News, that a survey of fifty economists revealed that the proposed $787 billion stimulus package would be inadequate. Before Obama took office, Nobel laureate, Joseph Stiglitz, pointed out for Bloomberg Television back on January 8, 2009, that the President-elect's proposed stimulus would be inadequate to heal the ailing economy:
"It will boost it," Stiglitz said. "The real question is — is it large enough and is it designed to address all the problems. The answer is almost surely it is not enough, particularly as he's had to compromise with the Republicans."
On January 19, 2009, financier George Soros contended that even an $850 billion stimulus would not be enough:
"The economies of the world are falling off a cliff. This is a situation that is comparable to the1930s. And once you recognize it, you have to recognize the size of the problem is much bigger," he said.
On February 26, 2009, Economics Professor James Galbarith pointed out in an interview that the stimulus plan was inadequate. Two months earlier, Paul Krugman had pointed out on Face the Nation, that the proposed stimulus package of $775 billion would fall short.
More recently, on September 5, 2010, a CNN poll revealed that only 40 percent of those surveyed voiced approval of the way President Obama has handled the economy. Meanwhile, economist Richard Duncan is making the case for another stimulus package "to back forward-looking technologies that will help the U.S. compete and to shift away from the nation's dependency on industries vulnerable to being outsourced to low-wage centers abroad". Chris Oliver of MarketWatch provided us with this glimpse into Duncan's thinking:
The U.S. is already on track to run up trillion-dollar-plus annual deficits through the next decade, according to estimates by the Congressional Budget Office.
"If the government doesn't spend this money, we are going to collapse into a depression," Duncan says. "They are probably going to spend it. . . . It would be much wiser to realize the opportunities that exist to spend the money in a concerted way to advance the goals of our civilization."
Making the case for more stimulus, Paul Krugman took a look back at the debate concerning Obama's first stimulus package, to address the inevitable objections against any further stimulus plans:
Those who said the stimulus was too big predicted sharply rising (interest) rates. When rates rose in early 2009, The Wall Street Journal published an editorial titled "The Bond Vigilantes: The disciplinarians of U.S. policy makers return." The editorial declared that it was all about fear of deficits, and concluded, "When in doubt, bet on the markets."
But those who said the stimulus was too small argued that temporary deficits weren't a problem as long as the economy remained depressed; we were awash in savings with nowhere to go. Interest rates, we said, would fluctuate with optimism or pessimism about future growth, not with government borrowing.
When in doubt, bet on the markets. The 10-year bond rate was over 3.7 percent when The Journal published that editorial; it's under 2.7 percent now.
What about inflation? Amid the inflation hysteria of early 2009, the inadequate-stimulus critics pointed out that inflation always falls during sustained periods of high unemployment, and that this time should be no different. Sure enough, key measures of inflation have fallen from more than 2 percent before the economic crisis to 1 percent or less now, and Japanese-style deflation is looking like a real possibility.
Meanwhile, the timing of recent economic growth strongly supports the notion that stimulus does, indeed, boost the economy: growth accelerated last year, as the stimulus reached its predicted peak impact, but has fallen off — just as some of us feared — as the stimulus has faded.
I believe that Professor Krugman would agree with my contention that if President Obama had done the stimulus right the first time – not only would any further such proposals be unnecessary – but we would likely be enjoying a healthy economy with significant job growth. Nevertheless, the important thing to remember is that President Obama didn't do the stimulus adequately in early 2009. As a result, his fellow Democrats will be paying the price in November.
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Failed Financial Reform And Failed Justice
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As the long-awaited financial reform legislation finally seems to be headed toward enactment, the groans of disappointment are loud and clear. My favorite reporter at The New York Times, Gretchen Morgenson, did a fine job of exposing the shortcomings destined for inclusion in this lame bill:
Unfortunately, the leading proposals would do little to cure the epidemic unleashed on American taxpayers by the lords of finance and their bailout partners. The central problem is that neither the Senate nor House bills would chop down big banks to a more manageable and less threatening size. The bills also don't eliminate the prospect of future bailouts of interconnected and powerful companies.
Too big to fail is alive and well, alas. Indeed, several aspects of the legislative proposals sanction and codify the special status conferred on institutions that are seen as systemically important. Instead of reducing the number of behemoth firms assigned this special status, the bills would encourage smaller companies to grow large and dangerous so that they, too, could have a seat at the bailout buffet.
It is disappointing that none of the current proposals call for breaking up institutions that are now too big or on their way there. Such is the view of Richard W. Fisher, president of the Federal Reserve Bank of Dallas.
"The social costs associated with these big financial institutions are much greater than any benefits they may provide," Mr. Fisher said in an interview last week. "We need to find some international convention to limit their size."
Edward Kane, a finance professor at Boston College and an authority on financial institutions and regulators, said that it was not surprising that substantive changes for both groups are not on the table. After all, powerful banks want to maintain their ability to privatize gains and socialize losses.
"To understand why defects in in solvency detection and resolution persist, analysts must acknowledge that large financial institutions invest in building and exercising political clout," Mr.Kane writes in an article, titled "Defining and Controlling Systemic Risk," that he is scheduled to present next month at a Federal Reserve conference.
But regulators, eager to avoid being blamed for missteps in oversight, also have an interest in the status quo, Mr. Kane argues. "As in a long-running poker game in which one player (here, the taxpayer) is a perennial and relatively clueless loser," he writes, "other players see little reason to disturb the equilibrium."
At Forbes, Robert Lenzner focused on the human failings responsible for the bad behavior of the big banks with his emphasis on the notion that "a fish stinks from the head":
No well-intentioned reform bill that will pass Congress can prevent the mind-blowing stupidity, hubris and denial utilized by the big fish of Wall Street from stinking from the head.
Transparency won't help if the Obama plan does not absolutely require all derivatives to be registered at the Securities and Exchange Commission. It's an invitation for abuse as five major market making banks like JPMorgan Chase account for 95% of all derivatives transactions and a very large share of their profits. We haven't seen evidence that they police themselves satisfactorily.
Derivatives expert Janet Tavakoli recently expressed her disgust over the disingenuousness of the current version of this legislation:
Our proposed "financial reform" bill is a sham, and the health of our society and our economy is at stake.
Ms. Tavakoli referred to the recent Huffington Post article by Dan Froomkin, which highlighted the criticism of the financial reform legislation provided by Professor William Black (the former prosecutor from the Savings and Loan crisis, whose execution was called for by Charles Keating). Froomkin embraced the logic of economist James Galbraith, who emphasized that rather than relying on the expertise of economists to shape financial reform, we should be looking to the assistance of criminologists. William Black reinforced this idea:
Criminologists, Black said, are trained to identify the environments that produce epidemics of fraud — and in the case of the financial crisis, the culprit is obvious.
"We're looking at incentive structures," he told HuffPost. "Not people suddenly becoming evil. Not people suddenly becoming crazy. But people reacting to perverse incentive structures."
CEOs can't send out a memo telling their front-line professionals to commit fraud, "but you can send the same message with your compensations system, and you can do it without going to jail," Black said.
Criminologists ask "fundamentally different types of question" than the ones being asked.
Back at The New York Times, Frank Rich provided us with a rare example of mainstream media outrage over the lack of interest in prosecuting the fraudsters responsible for the financial disaster that put eight million people out of work:
That no one at Lehman Brothers has yet been held liable for its Enronesque bookkeeping deceit is appalling. That we still haven't seen the e-mail and documents that would illuminate A.I.G.'s machinations with Goldman and the rest of its counterparties amounts to a cover-up. That investigative journalists have consistently been way ahead of the authorities, the S.E.C. included, in uncovering Wall Street's foul play is a scandal. If this culture remains in place, the whole crisis will have gone to waste.
Unfortunately, the likelihood that any significant financial reform will be enacted as a result of the financial crisis is about the same as the likelihood that we will see anyone doing a "perp walk" for the fraudulent behavior that caused the meltdown. Don't expect serious reform and don't expect justice.
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The Goldman Fallout
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In the aftermath of the disclosure concerning the Securities and Exchange Commission's fraud suit against Goldman Sachs, we have heard more than a little reverberation of Matt Taibbi's "vampire squid" metaphor, along with plenty of concern about which other firms might find themselves in the SEC's crosshairs.
As Jonathan Weil explained for Bloomberg News :
As Wall Street bombshells go, the lawsuit that the Securities and Exchange Commission filed against Goldman Sachs Group Inc. is about as big as it gets.
At The Economist, there was a detectable scent of schadenfreude in the discussion, which reminded readers that despite Lloyd Blankfein's boast of having repaid Goldman's share of the TARP bailout, not everyone has overlooked Maiden Lane III:
IS THE most powerful and controversial firm on Wall Street about to get the comeuppance that so many think it deserves?
The charges could hardly come at a worse time for Goldman. The firm has been under fire on a number of fronts, including over the handsome payout it secured from the New York Fed as a derivatives counterparty of American International Group, an insurer that almost failed in 2008. In a string of negative articles over the past year, Goldman has been accused of everything from double-dealing for its own advantage to planting its own people in the Treasury and other agencies to ensure that its interests were looked after.
At this point, those who criticized Matt Taibbi for his tour de force against Goldman (such as Megan McArdle) must be experiencing a bit of remorse. Meanwhile, those of us who wrote items appearing at GoldmanSachs666.com are exercising our bragging rights.
The complaint filed against Goldman by the SEC finally put to rest the tired old lie that nobody saw the financial crisis coming. The e-mails from Goldman VP, Fabrice Tourre, made it perfectly clear that in addition to being aware of the imminent collapse, some Wall Street insiders were actually counting on it. Jonathan Weil's Bloomberg article provided us with the translated missives from Mr. Tourre:
"More and more leverage in the system. The whole building is about to collapse anytime now," Fabrice Tourre, the Goldman Sachs vice president who was sued for his role in putting together the deal, wrote on Jan. 23, 2007.
"Only potential survivor, the fabulous Fab … standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities!!!"
A few weeks later, Tourre, now 31, e-mailed a top Goldman trader: "the cdo biz is dead we don't have a lot of time left." Goldman closed the Abacus offering in April 2007.
Michael Shedlock (a/k/a Mish) has quoted a number of sources reporting that Goldman may soon find itself defending similar suits in Germany and the UK.
Not surprisingly, there is mounting concern over the possibility that other investment firms could find themselves defending similar actions by the SEC. As Anusha Shrivastava reported for The Wall Street Journal, the action in the credit markets on Friday revealed widespread apprehension that other firms could face similar exposure:
Credit markets were shaken Friday by the news as investors tried to figure out whether other firms or other structured finance products will be affected.
Investors are concerned that the SEC's action may create a domino effect affecting other firms and other structured finance products. There's also the worry that this regulatory move may rattle the recovery and bring uncertainty back to the market.
"Credit markets are seeing a sizeable impact from the Goldman news," said Bill Larkin, a portfolio manager at Cabot Money Management, in Salem, Mass. "The question is, has the S.E.C. discovered what may have been a common practice across the industry? Is this the tip of the iceberg?"
The SEC's move marks "an escalation in the battle to expose conflicts of interest on Wall Street," said Chris Whalen of Institutional Risk Analytics in a note to clients. "Once upon a time, Wall Street firms protected clients and observed suitability … This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another."
The timing of this suit could not have been better – with the Senate about to consider what (if anything) it will do with financial reform legislation. Bill Black expects that this scandal will provide the necessary boost to get financial reform enacted into law. I hope he's right.
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