Full Version: Imperial Banker
8/27 Have the immoral actions of central bankers precipitated the decline of the West? – Daily Bell
http://www.thedailybell.com/500/Have-the-i...f-the-West.html
Orwellian Madness "Bernanke Saved The World"
The MarketWatch Headline Bernanke: We Saved The World is the height of Orwellian madness.
Please consider the "full story" We saved the world from disaster, Fed's Bernanke says.
In a speech at the Kansas City Fed's annual retreat in Jackson Hole, Wyo., Bernanke summarized a hellish year and explained modestly how he and his central bank colleagues saved the world from a bigger disaster.
"The world has been through the most severe financial crisis since the Great Depression," he said. "As severe as the economic impact has been, however, the outcome could have been decidedly worse."
If the Fed, other central banks and other government leaders hadn't acted in a coordinated and aggressive way in September and October of 2008, "the resulting global downturn could have been extraordinarily deep and protracted," Bernanke said.
The policy response "averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers."
Reflections on a Year of Crisis
To be fair to Bernanke, he never directly claimed to have "Saved The World". That is a trumped-up headline by MarketWatch.
Here is the key snip from his Jackson Hole speech Reflections on a Year of Crisis.
Since we last met here, the world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.
As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary. Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted.
Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years. I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress toward both those objectives.
Serious Risk vs. Saved the World
There is a difference between "Serious Risk" and "Saving the World". However, that is as far as I will go in defending Bernanke. It is important to understand that we are in this crisis because of the policies of Central Bankers in general and the Greenspan and Bernanke Fed in particular.
Both Greenspan and Bernanke have fostered an environment that threw money at every problem. The worldwide credit boom and housing bubbles were a direct result of Central Bank policies. Thus, giving credit to Bernanke is like giving credit to a doctor for amputating a cancerous limb after mistakenly cutting off three perfectly healthy limbs.
The difference between the Greenspan's alleged "success" and Bernanke's struggle to save the world is Greenspan had a wind of consumers' willingness to go deeper in debt blowing at his back. Bernanke has the wind of boomers fearing retirement in the midst of falling home prices and impaired bank balance sheets blowing stiffly in his face.
That difference is immense. For further discussion of the problems facing Bernanke and how little power the Fed really has when consumer attitudes have changed, please see Belief In Wizards Runs Deep.
Bernanke's Self-Promotion Self-Vindication Campaign
Bernanke's Jackson Hole speech is part of his campaign for re-appointment to the Fed. Previously, Bernanke had a cream-puff interview with 60 minutes as well as three fluff installments on "The NewsHour with Jim Lehrer" as discussed in Bernanke Goes On Self-Promotional Media Blitz.
Bernanke's media blitz is as galling as it is unprecedented. No Fed chairman in history has openly or brazenly campaigned for reappointment.
The most galling thing is that nowhere along the way did Bernanke ever mention his role, the Fed's role, or central banker's role in general for creating this crisis.
Did The Fed Really Save The World?
Even Bernanke admits that "We cannot know for sure what the economic effects of these events would have been ..." thus we still cannot be sure if his policy actions were correct. Indeed some highly respected individuals suggest they were the wrong thing to do.
Elizabeth Warren On The Policy Response
Visit msnbc.com for Breaking News, World News, and News about the Economy
Please listen to that sobering interview, in entirety. It is about 9 minutes long. Elizabeth Warren rips PPIP (the public-private investment plan) to shreds, and questions the policy responses that have still left toxic assets on the balance sheets of banks.
Warren: ".... In addition to what we've got with the toxic assets, we've got a real problem coming on commercial mortgages.... looking ahead to 2010, 2011, 2012 we are potentially looking at 50-60% default rates. This is a very significant problem concentrated with intermediate and smaller banks"
My favorite exchange starts just after the 7 minute mark.
MSNBC: In hindsight was Paulson right? If Congress did not write that $700 billion check would banks have collapsed?
Warren: I have to say I think there would have been some real pain. There are some businesses today that are alive that would have been wiped out. However, I am just not convinced at all that we would have gone into a death spiral"
MSNBC: With the facts he knew at the time, was it the right call?
Warren: (struggling to be polite) "You know, let me say it this way. The question about whether or not the world as we know it has ended, depends on what you think the world is as we know it. If you think the world as we know it, are a handful of huge financial institutions, the dinosaurs that roamed the earth, then you're right. They are not going to exist without huge infusions of government money. On the other hand if what you really believe is that our economy and our world is 115 million American households you start to see it very differently. And you say, you know if the dinosaurs are gone there are still a lot of stuff to be done.
High Praise For Elizabeth Warren
I have high praise for Warren. It takes a lot of courage to say what she did on the record. Moreover, I am certain she is correct about what she hints the real world is: American households and a large consortium of small to mid-sized banks as opposed to a few dinosaurs that ought to be extinct.
Bernanke Saved The Dinosaurs
Bernanke did not "save the world". All Bernanke did was prolong the lives of a few ailing dinosaurs at great expense to US taxpayers.
Elizabeth Warren, not Bernanke should have given a speech at Jackson Hole.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
The MarketWatch Headline Bernanke: We Saved The World is the height of Orwellian madness.
Please consider the "full story" We saved the world from disaster, Fed's Bernanke says.
In a speech at the Kansas City Fed's annual retreat in Jackson Hole, Wyo., Bernanke summarized a hellish year and explained modestly how he and his central bank colleagues saved the world from a bigger disaster.
"The world has been through the most severe financial crisis since the Great Depression," he said. "As severe as the economic impact has been, however, the outcome could have been decidedly worse."
If the Fed, other central banks and other government leaders hadn't acted in a coordinated and aggressive way in September and October of 2008, "the resulting global downturn could have been extraordinarily deep and protracted," Bernanke said.
The policy response "averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers."
Reflections on a Year of Crisis
To be fair to Bernanke, he never directly claimed to have "Saved The World". That is a trumped-up headline by MarketWatch.
Here is the key snip from his Jackson Hole speech Reflections on a Year of Crisis.
Since we last met here, the world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.
As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary. Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted.
Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years. I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress toward both those objectives.
Serious Risk vs. Saved the World
There is a difference between "Serious Risk" and "Saving the World". However, that is as far as I will go in defending Bernanke. It is important to understand that we are in this crisis because of the policies of Central Bankers in general and the Greenspan and Bernanke Fed in particular.
Both Greenspan and Bernanke have fostered an environment that threw money at every problem. The worldwide credit boom and housing bubbles were a direct result of Central Bank policies. Thus, giving credit to Bernanke is like giving credit to a doctor for amputating a cancerous limb after mistakenly cutting off three perfectly healthy limbs.
The difference between the Greenspan's alleged "success" and Bernanke's struggle to save the world is Greenspan had a wind of consumers' willingness to go deeper in debt blowing at his back. Bernanke has the wind of boomers fearing retirement in the midst of falling home prices and impaired bank balance sheets blowing stiffly in his face.
That difference is immense. For further discussion of the problems facing Bernanke and how little power the Fed really has when consumer attitudes have changed, please see Belief In Wizards Runs Deep.
Bernanke's Self-Promotion Self-Vindication Campaign
Bernanke's Jackson Hole speech is part of his campaign for re-appointment to the Fed. Previously, Bernanke had a cream-puff interview with 60 minutes as well as three fluff installments on "The NewsHour with Jim Lehrer" as discussed in Bernanke Goes On Self-Promotional Media Blitz.
Bernanke's media blitz is as galling as it is unprecedented. No Fed chairman in history has openly or brazenly campaigned for reappointment.
The most galling thing is that nowhere along the way did Bernanke ever mention his role, the Fed's role, or central banker's role in general for creating this crisis.
Did The Fed Really Save The World?
Even Bernanke admits that "We cannot know for sure what the economic effects of these events would have been ..." thus we still cannot be sure if his policy actions were correct. Indeed some highly respected individuals suggest they were the wrong thing to do.
Elizabeth Warren On The Policy Response
Visit msnbc.com for Breaking News, World News, and News about the Economy
Please listen to that sobering interview, in entirety. It is about 9 minutes long. Elizabeth Warren rips PPIP (the public-private investment plan) to shreds, and questions the policy responses that have still left toxic assets on the balance sheets of banks.
Warren: ".... In addition to what we've got with the toxic assets, we've got a real problem coming on commercial mortgages.... looking ahead to 2010, 2011, 2012 we are potentially looking at 50-60% default rates. This is a very significant problem concentrated with intermediate and smaller banks"
My favorite exchange starts just after the 7 minute mark.
MSNBC: In hindsight was Paulson right? If Congress did not write that $700 billion check would banks have collapsed?
Warren: I have to say I think there would have been some real pain. There are some businesses today that are alive that would have been wiped out. However, I am just not convinced at all that we would have gone into a death spiral"
MSNBC: With the facts he knew at the time, was it the right call?
Warren: (struggling to be polite) "You know, let me say it this way. The question about whether or not the world as we know it has ended, depends on what you think the world is as we know it. If you think the world as we know it, are a handful of huge financial institutions, the dinosaurs that roamed the earth, then you're right. They are not going to exist without huge infusions of government money. On the other hand if what you really believe is that our economy and our world is 115 million American households you start to see it very differently. And you say, you know if the dinosaurs are gone there are still a lot of stuff to be done.
High Praise For Elizabeth Warren
I have high praise for Warren. It takes a lot of courage to say what she did on the record. Moreover, I am certain she is correct about what she hints the real world is: American households and a large consortium of small to mid-sized banks as opposed to a few dinosaurs that ought to be extinct.
Bernanke Saved The Dinosaurs
Bernanke did not "save the world". All Bernanke did was prolong the lives of a few ailing dinosaurs at great expense to US taxpayers.
Elizabeth Warren, not Bernanke should have given a speech at Jackson Hole.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
On account of Fed sponsorship, Banks 'Too Big to Fail' Have Grown Even Bigger.
When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.
Today, the biggest of those banks are even bigger.
J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.
"It is at the top of the list of things that need to be fixed," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. "It fed the crisis, and it has gotten worse because of the crisis."
Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.
Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow, Federal Reserve documents show.
"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."
"The oligopoly has tightened," he added.
Last October, when the Fed was arranging the merger between Wells Fargo and Wachovia, it identified six other metropolitan regions in which the combined company would either exceed the Justice Department's antitrust guidelines or hold more than a third of an area's deposits. But the central bank thought local competition in each of those places was sufficient to allow the merger to go through, documents show.
Camden Fine, president of the Independent Community Bankers of America, said those comments reveal the government's preferential treatment of big banks. He doubted whether the Fed would approve the merger of community banks if the combined company ended up controlling more a third of the market.
"To favor one class of financial institutions over another class skews the market. You don't have a free market; you have a government-favored market," he said. "We will never have free markets again if you have the government picking winners and losers."
At times Shelia Bair seems to have a clue, other times not. Judging from her comment on too big to fail: "It fed the crisis, and it has gotten worse because of the crisis", she once again shows signs of intelligent thought.
There's lots more to see in the article including a link to charts showing Residential Mortgage and Bank Deposit Market Share.
For more on how too big to fail is creating winners and loses, please see Tale of Two Economies.
http://globaleconomicanalysis.blogspot.com...-economies.html
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
When the credit crisis struck last year, federal regulators pumped tens of billions of dollars into the nation's leading financial institutions because the banks were so big that officials feared their failure would ruin the entire financial system.
Today, the biggest of those banks are even bigger.
J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.
"It is at the top of the list of things that need to be fixed," said Sheila C. Bair, chairman of the Federal Deposit Insurance Corp. "It fed the crisis, and it has gotten worse because of the crisis."
Fresh data from the FDIC show that big banks have the ability to borrow more cheaply than their peers because creditors assume these large companies are not at risk of failing. That imbalance could eventually squeeze out smaller competitors. Already, consumers are seeing fewer choices and higher prices for financial services, some senior government officials warn.
Officials waived long-standing regulations to make the deals work. J.P. Morgan Chase, Bank of America and Wells Fargo were each allowed to hold more than 10 percent of the nation's deposits despite a rule barring such a practice. In several metropolitan regions, these banks were permitted to take market share beyond what the Department of Justice's antitrust guidelines typically allow, Federal Reserve documents show.
"There's been a significant consolidation among the big banks, and it's kind of hollowing out the banking system," said Mark Zandi, chief economist of Moody's Economy.com. "You'll be left with very large institutions and small ones that fill in the cracks. But it'll be difficult for the mid-tier institutions to thrive."
"The oligopoly has tightened," he added.
Last October, when the Fed was arranging the merger between Wells Fargo and Wachovia, it identified six other metropolitan regions in which the combined company would either exceed the Justice Department's antitrust guidelines or hold more than a third of an area's deposits. But the central bank thought local competition in each of those places was sufficient to allow the merger to go through, documents show.
Camden Fine, president of the Independent Community Bankers of America, said those comments reveal the government's preferential treatment of big banks. He doubted whether the Fed would approve the merger of community banks if the combined company ended up controlling more a third of the market.
"To favor one class of financial institutions over another class skews the market. You don't have a free market; you have a government-favored market," he said. "We will never have free markets again if you have the government picking winners and losers."
At times Shelia Bair seems to have a clue, other times not. Judging from her comment on too big to fail: "It fed the crisis, and it has gotten worse because of the crisis", she once again shows signs of intelligent thought.
There's lots more to see in the article including a link to charts showing Residential Mortgage and Bank Deposit Market Share.
For more on how too big to fail is creating winners and loses, please see Tale of Two Economies.
http://globaleconomicanalysis.blogspot.com...-economies.html
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Tale of Two Economies
How well corporations have fared in the recovery depends largely on two factors.
1) How much cash on hand they had and how conservative they were heading into the recession
2) How much Uncle Sam (taxpayers) bailed them out
The Wall Street Journal has the story in Halting Recovery Divides America in Two.
The U.S. recovery is a tale of two economies.
At one extreme of Corporate America is a cadre of companies and banks, mostly big, united by an enviable access to credit. At the other end are firms, chiefly small, with slumping sales that can't borrow or are facing stiff terms to do so.
On Main Street, there are consumers with rock-solid jobs -- but also legions of debt-strapped individuals struggling to keep their noses above water.
This split helps explain the patchiness of the recovery that appears to be taking hold after the worst recession in a half-century.
The split between companies that can borrow and those that can't shows the extent to which any recovery depends on reviving the nation's ailing banks and squeamish credit markets. Until that happens, the vigor of the economy will remain in doubt.
"If you're not making money, you need to borrow money," says John Graham, a finance professor at Duke University's Fuqua School of Business. But "you need to be creditworthy in order to borrow, and if you're not making money, you're creditworthiness isn't very strong."
Mr. Graham, who oversees a quarterly survey of CFOs, says more companies are doing better than they were a few months ago. Still, he estimates, one in four is in "dire straights due to lack of profits combined with not being able to borrow."
Companies big enough to bypass banks and go directly to capital markets are finding a warmer reception. That's because the markets are showing more willingness to make risky loans: In January, only eight of the 56 companies that sold bonds were rated below-investment-grade, or "junk," according to Dealogic. In August, by contrast, 24 of the 60 deals had junk ratings.
Since the start of the year, companies have been increasingly turning to the bond markets to raise money. Through August thus far, companies have issued $395.4 billion in bonds over 512 deals, according to Dealogic, a healthy increase from the second half of last year when the markets went months with fewer offerings and less than a handful of junk bond deals.
In the business of finance itself, a divide between early winners and others appears to be opening up as well. Many of the nation's biggest financial institutions, benefiting from federal-government backing, have been able to raise equity and debt from private investors. Some large money-management companies such as BlackRock Inc. are profiting by helping the Treasury with the clean-up from the burst bubble.
Some of the nation's largest banks could, in fact, emerge from the crisis stronger than they entered it. While they have suffered huge losses on complex financial products, and are still facing mounting loan defaults, they were stabilized with tens of billions of dollars of taxpayer money. In the second quarter, the seven largest commercial banks earned more than $14 billion, even as thousands of smaller banks were in the red.
Big lenders are currently enjoying an advantage in their "cost of funds" -- the raw material of a bank, which is in the business of borrowing cheaply and lending at a higher rate. The handful of banks with more than $10 billion in assets were paying 1.18% to borrow money in the second quarter, the FDIC said in data issued Thursday. By contrast, banks with $100 million and $1 billion in assets were paying 1.97%, a big difference in a business where tenths of a percentage point translates into millions of dollars in profits.
As of June 30 the three largest banks -- Bank of America, Wells Fargo, and J.P.Morgan -- collectively had $2.3 trillion in domestic deposits, or 31% of the industry total, according to the Federal Deposit Insurance Corp. Two years earlier, the top three had only 20% of the industry total.
There is much more in the article including some winners and losers. Panera Bread, having no debt is a winner. Panera franchisees have a tougher go.
And the biggest of big banks, Bank of America, Wells Fargo, and J.P.Morgan appear to be doing well thanks to bailouts and low costs of funds. Because those banks are regarded as "well capitalized" they pay a smaller insurance rate to the FDIC. "Regarded" is the key word. They can continue to be regarded as "well capitalized" but commercial real estate loans, credit card defaults, and pay option ARMs problems are the 800 pound gorillas in the room.
When it comes to deposits, the big got bigger. Too big to fail is now "Too Bigger To Fail".
However, as long as the corporate bond market holds together, equities will fetch a bid. How much longer that can last is anyone's guess. I suspect not much longer. The pool of greater fools is not unlimited.
In the meantime ponder the key sentence in the article by Mr. Graham, who oversees a quarterly survey of CFOs "one in four [businesses] is in dire straits due to lack of profits combined with not being able to borrow."
That is in addition to: Greater Than One in Four FDIC Insured Institutions are Unprofitable; Bank Problem List at 15 Year High.
The best all this world record stimulus could do is create a bifurcated economy leaving one in four businesses and banks on the brink of disaster. Meanwhile there is no recovery in jobs, and no relief for cash strapped consumers.
In due time this "recovery" is going to start flying apart.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
How well corporations have fared in the recovery depends largely on two factors.
1) How much cash on hand they had and how conservative they were heading into the recession
2) How much Uncle Sam (taxpayers) bailed them out
The Wall Street Journal has the story in Halting Recovery Divides America in Two.
The U.S. recovery is a tale of two economies.
At one extreme of Corporate America is a cadre of companies and banks, mostly big, united by an enviable access to credit. At the other end are firms, chiefly small, with slumping sales that can't borrow or are facing stiff terms to do so.
On Main Street, there are consumers with rock-solid jobs -- but also legions of debt-strapped individuals struggling to keep their noses above water.
This split helps explain the patchiness of the recovery that appears to be taking hold after the worst recession in a half-century.
The split between companies that can borrow and those that can't shows the extent to which any recovery depends on reviving the nation's ailing banks and squeamish credit markets. Until that happens, the vigor of the economy will remain in doubt.
"If you're not making money, you need to borrow money," says John Graham, a finance professor at Duke University's Fuqua School of Business. But "you need to be creditworthy in order to borrow, and if you're not making money, you're creditworthiness isn't very strong."
Mr. Graham, who oversees a quarterly survey of CFOs, says more companies are doing better than they were a few months ago. Still, he estimates, one in four is in "dire straights due to lack of profits combined with not being able to borrow."
Companies big enough to bypass banks and go directly to capital markets are finding a warmer reception. That's because the markets are showing more willingness to make risky loans: In January, only eight of the 56 companies that sold bonds were rated below-investment-grade, or "junk," according to Dealogic. In August, by contrast, 24 of the 60 deals had junk ratings.
Since the start of the year, companies have been increasingly turning to the bond markets to raise money. Through August thus far, companies have issued $395.4 billion in bonds over 512 deals, according to Dealogic, a healthy increase from the second half of last year when the markets went months with fewer offerings and less than a handful of junk bond deals.
In the business of finance itself, a divide between early winners and others appears to be opening up as well. Many of the nation's biggest financial institutions, benefiting from federal-government backing, have been able to raise equity and debt from private investors. Some large money-management companies such as BlackRock Inc. are profiting by helping the Treasury with the clean-up from the burst bubble.
Some of the nation's largest banks could, in fact, emerge from the crisis stronger than they entered it. While they have suffered huge losses on complex financial products, and are still facing mounting loan defaults, they were stabilized with tens of billions of dollars of taxpayer money. In the second quarter, the seven largest commercial banks earned more than $14 billion, even as thousands of smaller banks were in the red.
Big lenders are currently enjoying an advantage in their "cost of funds" -- the raw material of a bank, which is in the business of borrowing cheaply and lending at a higher rate. The handful of banks with more than $10 billion in assets were paying 1.18% to borrow money in the second quarter, the FDIC said in data issued Thursday. By contrast, banks with $100 million and $1 billion in assets were paying 1.97%, a big difference in a business where tenths of a percentage point translates into millions of dollars in profits.
As of June 30 the three largest banks -- Bank of America, Wells Fargo, and J.P.Morgan -- collectively had $2.3 trillion in domestic deposits, or 31% of the industry total, according to the Federal Deposit Insurance Corp. Two years earlier, the top three had only 20% of the industry total.
There is much more in the article including some winners and losers. Panera Bread, having no debt is a winner. Panera franchisees have a tougher go.
And the biggest of big banks, Bank of America, Wells Fargo, and J.P.Morgan appear to be doing well thanks to bailouts and low costs of funds. Because those banks are regarded as "well capitalized" they pay a smaller insurance rate to the FDIC. "Regarded" is the key word. They can continue to be regarded as "well capitalized" but commercial real estate loans, credit card defaults, and pay option ARMs problems are the 800 pound gorillas in the room.
When it comes to deposits, the big got bigger. Too big to fail is now "Too Bigger To Fail".
However, as long as the corporate bond market holds together, equities will fetch a bid. How much longer that can last is anyone's guess. I suspect not much longer. The pool of greater fools is not unlimited.
In the meantime ponder the key sentence in the article by Mr. Graham, who oversees a quarterly survey of CFOs "one in four [businesses] is in dire straits due to lack of profits combined with not being able to borrow."
That is in addition to: Greater Than One in Four FDIC Insured Institutions are Unprofitable; Bank Problem List at 15 Year High.
The best all this world record stimulus could do is create a bifurcated economy leaving one in four businesses and banks on the brink of disaster. Meanwhile there is no recovery in jobs, and no relief for cash strapped consumers.
In due time this "recovery" is going to start flying apart.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Central bankers stuck in a hole
Central bankers at their annual Jackson Hole, Wyoming, retreat celebrated their "success" in rescuing financial institutions and in paving the way for global economic recovery. By ignoring any responsibility for causing the continuing financial disaster, they merely clear the path for an even more severe crisis. - Hossein Askari and Noureddine Krichene
http://www.atimes.com/atimes/Global_Economy/KI01Dj05.html
Bailout Propaganda Begins
from Taibblog by Matt Taibbi
Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.
via As Biggest Banks Repay Bailout Money, the U.S. Sees a Profit – NYTimes.com.
It was inevitable that the same people who pushed through the multi-trillion-dollar bailout of Wall Street would come out later on and tell us what a great idea theirs turned out to be, in retrospect and under the light of evidentiary examination. And we’re getting that now, with a pair of reports, the above one in the New York Times and another in the Financial Times, telling us the bailout is working because the government has made some money on TARP. They came to this conclusion by quoting Fed officials, who apparently calculated how much interest the Fed earned on TARP investments above what it would have earned on T-bills. The amount so far, according to these worthy gentlemen: $14 billion.
This is sort of like calculating the returns on a mutual fund by only counting the stocks in the fund that have gone up. Forgetting for a moment that TARP is only slightly relevant in the entire bailout scheme — more on that in a moment — the TARP calculations are a joke, apparently leaving out huge future losses from AIG and Citigroup and others in the red. Since only a small portion of the debt has been put down by the best borrowers, and since the borrowers in the worst shape haven’t retired their obligations yet, it’s crazy to make any conclusions about TARP, pure sophistry. Moreover, a think tank set up to analyze TARP, Ethisphere, calculated in June that TARP was still $148 billion down overall, a debt of over $1200 per American. To start talking about what a success TARP is now is beyond meaningless.
The other reason for that is that it’s only a tiny sliver of the whole bailout picture. The real burden carried by the government and the Fed comes from the various anonymous bailout facilities — the TALF, the PPIP, the Maiden Lanes, and so on. The losses from the Fed’s purchase of distressed/crap Bear Stearns assets (Maiden Lane I) and AIG assets (MaidenLanes II and III) alone were as recently as late July calculated in the $8.6 billion range, and even that number is very conservative. Then there’s the trillion or so dollars that the Fed used on buying up mortgage-backed securities and Treasuries; we don’t know what their market value is now. And there are untold trillions more the Fed has loaned out in the last 18 months and which we are not likely to find out much about, unless the recent court ruling green-lighting Bloomberg’s FOIA request for those records actually goes through.
In light of all this, the Fed’s decision to brag publicly about a few loans that are actually performing is sort of scary — it speaks to a level of intellectual desperation and magical-thinking unusual even for a banker in the subprime/MBS era. Don’t be surprised if you hear more of this sort of thing in the coming years.
Taxpayers Make 23% On Goldman TARP Repayment
http://trueslant.com/justingardner/2009/07...tarp-repayment/
Administration Looks for an Out on Bailout Rules
http://trueslant.com/jamiemalanowski/2009/...-bailout-rules/
When Banks Don't Compete or Tell Anyone What They're Doing, They Win. We Lose.
http://trueslant.com/paulsmalera/2009/05/1...ey-win-we-lose/
We've been robbed: AIG fat cats pay themselves $165 million in bonuses with our money
http://trueslant.com/laurieessig/2009/03/1...with-our-money/
Do we really want to abrogate contract law?
http://trueslant.com/claudiadeutsch/2009/0...e-contract-law/
from Taibblog by Matt Taibbi
Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.
via As Biggest Banks Repay Bailout Money, the U.S. Sees a Profit – NYTimes.com.
It was inevitable that the same people who pushed through the multi-trillion-dollar bailout of Wall Street would come out later on and tell us what a great idea theirs turned out to be, in retrospect and under the light of evidentiary examination. And we’re getting that now, with a pair of reports, the above one in the New York Times and another in the Financial Times, telling us the bailout is working because the government has made some money on TARP. They came to this conclusion by quoting Fed officials, who apparently calculated how much interest the Fed earned on TARP investments above what it would have earned on T-bills. The amount so far, according to these worthy gentlemen: $14 billion.
This is sort of like calculating the returns on a mutual fund by only counting the stocks in the fund that have gone up. Forgetting for a moment that TARP is only slightly relevant in the entire bailout scheme — more on that in a moment — the TARP calculations are a joke, apparently leaving out huge future losses from AIG and Citigroup and others in the red. Since only a small portion of the debt has been put down by the best borrowers, and since the borrowers in the worst shape haven’t retired their obligations yet, it’s crazy to make any conclusions about TARP, pure sophistry. Moreover, a think tank set up to analyze TARP, Ethisphere, calculated in June that TARP was still $148 billion down overall, a debt of over $1200 per American. To start talking about what a success TARP is now is beyond meaningless.
The other reason for that is that it’s only a tiny sliver of the whole bailout picture. The real burden carried by the government and the Fed comes from the various anonymous bailout facilities — the TALF, the PPIP, the Maiden Lanes, and so on. The losses from the Fed’s purchase of distressed/crap Bear Stearns assets (Maiden Lane I) and AIG assets (MaidenLanes II and III) alone were as recently as late July calculated in the $8.6 billion range, and even that number is very conservative. Then there’s the trillion or so dollars that the Fed used on buying up mortgage-backed securities and Treasuries; we don’t know what their market value is now. And there are untold trillions more the Fed has loaned out in the last 18 months and which we are not likely to find out much about, unless the recent court ruling green-lighting Bloomberg’s FOIA request for those records actually goes through.
In light of all this, the Fed’s decision to brag publicly about a few loans that are actually performing is sort of scary — it speaks to a level of intellectual desperation and magical-thinking unusual even for a banker in the subprime/MBS era. Don’t be surprised if you hear more of this sort of thing in the coming years.
Taxpayers Make 23% On Goldman TARP Repayment
http://trueslant.com/justingardner/2009/07...tarp-repayment/
Administration Looks for an Out on Bailout Rules
http://trueslant.com/jamiemalanowski/2009/...-bailout-rules/
When Banks Don't Compete or Tell Anyone What They're Doing, They Win. We Lose.
http://trueslant.com/paulsmalera/2009/05/1...ey-win-we-lose/
We've been robbed: AIG fat cats pay themselves $165 million in bonuses with our money
http://trueslant.com/laurieessig/2009/03/1...with-our-money/
Do we really want to abrogate contract law?
http://trueslant.com/claudiadeutsch/2009/0...e-contract-law/
Jim Sinclair’s Commentary
The FDIC is broke in terms of present capital and even just the 416 troubled banks.
The FDIC will approach the US Treasury within ten weeks for additional funding.
The FDIC must, as their funds are falling towards zero.
The FDIC will be restocked with funds by the US Treasury.
The FDIC then becomes another form of QE.
The Chinese are publicly opposed to a continued QE dollar program.
This adds more fuel to the fire that this coming winter will be extremely difficult for the US dollar.
The Coming Deposit Insurance Bailout
Another lesson that federal guarantees aren’t free.
Americans are about to re-learn that bank deposit insurance isn’t free, even as Washington is doing its best to delay the coming bailout. The banking system and the federal fisc would both be better off in the long run if the political class owned up to the reality.
We’re referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.
The FDIC has since had to buttress the fund with a $5.6 billion special levy on top of the regular fees that banks already pay for the federal guarantee. This has further drained bank capital, even as regulators say the banking system desperately needs more capital. Everyone now assumes the FDIC will hit banks with yet another special insurance fee in anticipation of even more bank losses. The feds would rather execute this bizarre dodge of weakening the same banks they claim must get stronger rather than admit that they’ll have to tap the taxpayers who are the ultimate deposit insurers.
It isn’t as if regulators don’t understand the problem. Earlier this year they quietly asked Congress to provide up to $500 billion in Treasury loans to repay depositors. The FDIC can draw up to $100 billion merely by asking, while the rest requires Treasury approval. The request was made on the political QT because, amid the uproar over TARP and bonuses, no one in Congress or the Obama Administration wanted to admit they’d need another bailout.
But this subterfuge can’t last. Eighty-four banks have already failed this year, and many more are headed in that direction. The FDIC said it had 416 banks on its problem list at the end of June, up from 305 only three months earlier. The total assets of banks on the problem list was nearly $300 billion, and more of these assets are turning bad faster than banks can put aside reserves to account for them. The commercial real-estate debacle is still playing out at thousands of banks, even as the overall economy bottoms out and begins to recover.
More…
http://online.wsj.com/article/SB1000142405...24866:b27452892
The FDIC is broke in terms of present capital and even just the 416 troubled banks.
The FDIC will approach the US Treasury within ten weeks for additional funding.
The FDIC must, as their funds are falling towards zero.
The FDIC will be restocked with funds by the US Treasury.
The FDIC then becomes another form of QE.
The Chinese are publicly opposed to a continued QE dollar program.
This adds more fuel to the fire that this coming winter will be extremely difficult for the US dollar.
The Coming Deposit Insurance Bailout
Another lesson that federal guarantees aren’t free.
Americans are about to re-learn that bank deposit insurance isn’t free, even as Washington is doing its best to delay the coming bailout. The banking system and the federal fisc would both be better off in the long run if the political class owned up to the reality.
We’re referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.
The FDIC has since had to buttress the fund with a $5.6 billion special levy on top of the regular fees that banks already pay for the federal guarantee. This has further drained bank capital, even as regulators say the banking system desperately needs more capital. Everyone now assumes the FDIC will hit banks with yet another special insurance fee in anticipation of even more bank losses. The feds would rather execute this bizarre dodge of weakening the same banks they claim must get stronger rather than admit that they’ll have to tap the taxpayers who are the ultimate deposit insurers.
It isn’t as if regulators don’t understand the problem. Earlier this year they quietly asked Congress to provide up to $500 billion in Treasury loans to repay depositors. The FDIC can draw up to $100 billion merely by asking, while the rest requires Treasury approval. The request was made on the political QT because, amid the uproar over TARP and bonuses, no one in Congress or the Obama Administration wanted to admit they’d need another bailout.
But this subterfuge can’t last. Eighty-four banks have already failed this year, and many more are headed in that direction. The FDIC said it had 416 banks on its problem list at the end of June, up from 305 only three months earlier. The total assets of banks on the problem list was nearly $300 billion, and more of these assets are turning bad faster than banks can put aside reserves to account for them. The commercial real-estate debacle is still playing out at thousands of banks, even as the overall economy bottoms out and begins to recover.
More…
http://online.wsj.com/article/SB1000142405...24866:b27452892
Pay For Execs At Bailed Out Banks 40% Higher Than Peers: Report
The heads of the 20 banks that have received the biggest government bailouts were paid nearly 40 percent more last year than other CEOs, a study released today shows.
As Bloomberg noted in its piece, "average CEO pay was 430 times larger than for typical workers" and at nine of those 20 banks the value of stock options has soared $90 million this year, based on the study's examination of corporate proxy statements.
http://www.huffingtonpost.com/2009/09/02/p...o_n_274968.html
The heads of the 20 banks that have received the biggest government bailouts were paid nearly 40 percent more last year than other CEOs, a study released today shows.
As Bloomberg noted in its piece, "average CEO pay was 430 times larger than for typical workers" and at nine of those 20 banks the value of stock options has soared $90 million this year, based on the study's examination of corporate proxy statements.
http://www.huffingtonpost.com/2009/09/02/p...o_n_274968.html
Bernanke still blind to danger
By John Browne
Despite vocal criticism of the United States Federal Reserve's stewardship of the economy over the past decade, President Barack Obama's re-nomination of Ben Bernanke to a second term as Fed chairman nevertheless served to reassure and boost financial markets.
While it is true that markets tend to crave predictability from government, rewarding the continuation of horrible George W Bush-era policies is perhaps pushing the boundaries of nostalgia. More interestingly, Obama, who campaigned for "change", has clearly come down once again on the side of continuity.
In supporting his nomination, the president described Bernanke as "an expert on the causes of the Great Depression", reminding everyone that Bernanke had "approached a financial system on the verge of collapse with calm and wisdom".
These were fine-sounding words, but they ignore the crucial fact that, long before he moved into the chairman's office, Bernanke was an active member of the Federal Open Markets Committee, the Fed's ruling body, which systematically stoked and disguised the American financial crisis.
While there, he consistently downplayed the danger signs that others brought to his attention. It appears that these experiences failed to widen the chairman's perspective, as he continues to ignore the same voices now warning that current policy will make our fiscal wounds deeper.
From his senior position under former chairman Alan Greenspan, Bernanke watched as president Bush doubled the US Treasury debt to US$10 trillion and raised the total federal debt to a staggering $48 trillion. He stood on the sidelines as Greenspan pushed a decline in the dollar's value of more than 50% since 1987. This effectively robbed not just taxpayers, but all holders of US dollars of half their wealth.
Most troubling is the fact that Bernanke was a chief advocate of "easy money" in the Greenspan-led Fed, earning the nickname "Helicopter Ben" for his threat to throw cash from helicopters to boost spending. This, along with risk-eliminating federal policy, encouraged the formation and hugely profitable growth of casino-style behemoth banks, which became "too big to fail".
Thankfully for his friends on Wall Street, Helicopter Ben was still at the helm when the system came crashing down. This translated into massive bailouts, funded with trillions of dollars of taxpayers' wealth. Accounting rules were changed to allow for the further camouflage of toxic assets held by the banks. Bernanke himself engaged in some mafioso behavior in forcing Bank of America to absorb an ailing Merrill Lynch.
On top of it all, to keep the appearance of solvency at bankrupt institutions, banks were allowed to borrow from the Fed at 0% and were paid interest on the reserves they held at the Fed!
Now, the same behemoth banks are even larger, with the same pit-boss managers in charge, continuing to pay themselves tens of billions of dollars in bonuses.
The federal government, already encumbered with a staggering debt, has had to rely on the creation of dollars by the Fed to finance its economic "stimulus" and its massive corporate bailouts. This has led Congress to question where sovereignty truly lies: with the people or the bankers?
Judging by the recent spate of tea parties and town-hall meetings, significant forces are rumbling at the grassroots level. Though the protesters are not so versed in economics as to understand the source of their grievances, it most certainly lies with the Fed first and foremost. Fortunately, they are sophisticated enough to understand that they are being cheated - and Bernanke is the chief cheat.
While keeping Helicopter Ben in office was a politically safe decision, it comes with its own dangers. There are efforts to cast this crisis as a failure of capitalism, as personified by Alan Greenspan. Greenspan has gone so far as to claim that his faith in markets was misplaced, and that more regulation is needed. Bernanke concurs, and his continued professional success only serves to cement this erroneous viewpoint.
The line of official history is hardening, and the characters are becoming more firmly cast. Bernanke is emerging as the anti-Greenspan, the banker who resisted the "seductions" of the free market. Of course, this plot fits nicely into the current administration's plans for greater government control of everything.
The truth is that the Greenspan-Bernanke Fed was to blame for the asset bubble, but not because it trusted too strongly in capitalism. Quite the contrary, Greenspan-Bernanke ushered in a new era of big government through their Faustian bargain with administrations from Ronald Reagan to Bush Jr. In this deal, popular social and military spending could continue indefinitely, to be repaid through the printing press. In turn, the federal government would become dependent upon the Fed for funding, and the central bank could paint itself as the savior of a disintegrating financial system.
This wasn't so much a conspiracy as an alignment of interests, and it developed quite organically. To call this a failure of capitalism is to call pollution a failure of air - it is not inherent to the thing, but a corruption of it.
If Bernanke is distinguished by posterity, it will be in the manner of Argentine president Juan Peron, a man who was popular, powerful, but ultimately destructive. Perhaps after another four years of Bernanke's "courageous" intervention, and its disastrous effects, America will tire of populist economics and return to the calm and wisdom of the free market.
John Browne is senior market strategist, Euro Pacific Capital. Euro Pacific Capital commentary and market news is available at http://www.europac.net. It has a free on-line investment newsletter.
(Copyright 2009 Euro Pacific Capital.)
http://www.atimes.com/atimes/Global_Economy/KI03Dj02.html
The Secret That Will Destroy the World's Financial System
by bink
Digg this! Share this on Twitter - The Secret That Will Destroy the World's Financial SystemTweet this submit to reddit Share This
Fri Aug 28, 2009 at 06:11:34 AM PDT
There's a secret out there.
A secret so incredible, so horrifying, so toxic that if the public ever heard about it, it would destroy the world's financial system.
* bink's diary :: ::
*
That sounds like a big claim.
Who's making it? Not some scary Chicken Littles in the Daily Kos diaries. Not some Doomer site. Not wacked-out gold bugs. Not Ron Paul.
This claim is being made by a consortium of the world's biggest and most powerful banks.
What's the secret they don't want you to know?
It all starts here:
In November of last year, the Bloomberg news organization sued the Federal Reserve bank of the United States. The goal of the suit was to force the Fed to disclose information on the alphabet soup of lending programs it created in 2008 to help prop up Wall St. banks:
Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.
The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.
"The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry," said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.
The suit sought to reveal which banks were getting which part of the $1.5 trillion dollars and what assets the banks were putting up as collateral for the loans.
The Federal Reserve fought the case and ...
They lost it:
The Federal Reserve must for the first time identify the companies in its emergency lending programs after losing a Freedom of Information Act lawsuit.
Manhattan Chief U.S. District Judge Loretta Preska ruled against the central bank yesterday, rejecting the argument that loan records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions.
The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under 11 programs, most put in place during the deepest financial crisis since the Great Depression, saying that doing so might set off a run by depositors and unsettle shareholders. Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 on behalf of its Bloomberg News unit.
The Federal Reserve has to identify the companies to whom it gave the $1.5 trillion dollars and it has to list the assets used as collateral for the so-called "loans."
The Federal Reserve says that this might "unsettle shareholders."
OH MY GOD NO, NOT THE SHAREHOLDERS, NOT OUR PRECIOOUSSS SHAREHOLDERS!
Apparently, that is the standard these days.
And since when has the government felt obligated to protect the share prices of certain private businesses over others? Is that role in the Constitution somewhere?
Anyway, an industry group representing the biggest and most powerful banks on the globe, including British, French, Dutch and German as well as American banks, have issued a warning about the disclosure:
If you tell who got the $1.5 tril, you're gonna destroy the world financial system.
The secret is just that big.
(Note that I'm linking to Zero Hedge here, not because I endorse the editorial theme of the blog at all, but because they are the only place I could find that carries the original document in toto.)
The world might "get destroyed."
But we've also got to have access to this information.
For the simple reason that, if we don't, we're going to see a repeat of this in a couple of years with even bigger numbers, bigger handouts from the Fed and the Treasury, bigger payouts to Wall St. executives and other insiders ...
And even bigger secrets that the public can never know.
http://www.zerohedge.com/article/racketeer...ses-information
http://www.dailykos.com/storyonly/2009/8/2...inancial-System
by bink
Digg this! Share this on Twitter - The Secret That Will Destroy the World's Financial SystemTweet this submit to reddit Share This
Fri Aug 28, 2009 at 06:11:34 AM PDT
There's a secret out there.
A secret so incredible, so horrifying, so toxic that if the public ever heard about it, it would destroy the world's financial system.
* bink's diary :: ::
*
That sounds like a big claim.
Who's making it? Not some scary Chicken Littles in the Daily Kos diaries. Not some Doomer site. Not wacked-out gold bugs. Not Ron Paul.
This claim is being made by a consortium of the world's biggest and most powerful banks.
What's the secret they don't want you to know?
It all starts here:
In November of last year, the Bloomberg news organization sued the Federal Reserve bank of the United States. The goal of the suit was to force the Fed to disclose information on the alphabet soup of lending programs it created in 2008 to help prop up Wall St. banks:
Bloomberg News asked a U.S. court today to force the Federal Reserve to disclose securities the central bank is accepting on behalf of American taxpayers as collateral for $1.5 trillion of loans to banks.
The lawsuit is based on the U.S. Freedom of Information Act, which requires federal agencies to make government documents available to the press and the public, according to the complaint. The suit, filed in New York, doesn't seek money damages.
"The American taxpayer is entitled to know the risks, costs and methodology associated with the unprecedented government bailout of the U.S. financial industry," said Matthew Winkler, the editor-in-chief of Bloomberg News, a unit of New York-based Bloomberg LP, in an e-mail.
The suit sought to reveal which banks were getting which part of the $1.5 trillion dollars and what assets the banks were putting up as collateral for the loans.
The Federal Reserve fought the case and ...
They lost it:
The Federal Reserve must for the first time identify the companies in its emergency lending programs after losing a Freedom of Information Act lawsuit.
Manhattan Chief U.S. District Judge Loretta Preska ruled against the central bank yesterday, rejecting the argument that loan records aren’t covered by the law because their disclosure would harm borrowers’ competitive positions.
The Fed has refused to name the financial firms it lent to or disclose the amounts or the assets put up as collateral under 11 programs, most put in place during the deepest financial crisis since the Great Depression, saying that doing so might set off a run by depositors and unsettle shareholders. Bloomberg LP, the New York-based company majority-owned by Mayor Michael Bloomberg, sued on Nov. 7 on behalf of its Bloomberg News unit.
The Federal Reserve has to identify the companies to whom it gave the $1.5 trillion dollars and it has to list the assets used as collateral for the so-called "loans."
The Federal Reserve says that this might "unsettle shareholders."
OH MY GOD NO, NOT THE SHAREHOLDERS, NOT OUR PRECIOOUSSS SHAREHOLDERS!
Apparently, that is the standard these days.
And since when has the government felt obligated to protect the share prices of certain private businesses over others? Is that role in the Constitution somewhere?
Anyway, an industry group representing the biggest and most powerful banks on the globe, including British, French, Dutch and German as well as American banks, have issued a warning about the disclosure:
If you tell who got the $1.5 tril, you're gonna destroy the world financial system.
The secret is just that big.
(Note that I'm linking to Zero Hedge here, not because I endorse the editorial theme of the blog at all, but because they are the only place I could find that carries the original document in toto.)
The world might "get destroyed."
But we've also got to have access to this information.
For the simple reason that, if we don't, we're going to see a repeat of this in a couple of years with even bigger numbers, bigger handouts from the Fed and the Treasury, bigger payouts to Wall St. executives and other insiders ...
And even bigger secrets that the public can never know.
http://www.zerohedge.com/article/racketeer...ses-information
http://www.dailykos.com/storyonly/2009/8/2...inancial-System
POWER WITHOUT CREDIBILITY
Bogged down at the Fed
President Barack Obama's announcement of Ben Bernanke's reappointment as US Federal Reserve chairman overlooked the economist's close involvement with policies that landed the global economy in its current sorry state. It also diverted attention from unwelcome new budget data. - Henry CK Liu
http://www.atimes.com/atimes/Global_Economy/KI11Dj01.html
Bogged down at the Fed
President Barack Obama's announcement of Ben Bernanke's reappointment as US Federal Reserve chairman overlooked the economist's close involvement with policies that landed the global economy in its current sorry state. It also diverted attention from unwelcome new budget data. - Henry CK Liu
http://www.atimes.com/atimes/Global_Economy/KI11Dj01.html
Cash down
the drain
The US Federal Reserve, in the past 12 months alone, bought more than US$1 trillion in US government securities. One trillion!!! Meanwhile, the government is spending $260 billion in interest alone to cover the cost of the national debt! Just the interest!!! And you wonder why we are doomed?
http://www.atimes.com/atimes/Global_Economy/KI11Dj06.html
the drain
The US Federal Reserve, in the past 12 months alone, bought more than US$1 trillion in US government securities. One trillion!!! Meanwhile, the government is spending $260 billion in interest alone to cover the cost of the national debt! Just the interest!!! And you wonder why we are doomed?
http://www.atimes.com/atimes/Global_Economy/KI11Dj06.html
Stiglitz: Banking Problems Worse than in 2007
by CalculatedRisk on 9/13/2009 06:49:00 PM
From Bloomberg: Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman (ht Ron Wallstreetpit)
... “In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” [Joseph] Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”
...
“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”
And on the economy:
"We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”
The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.
“The question then is who is going to finance the U.S. government,” Stiglitz said.
Stiglitz also wrote a comment in the Financial Times: Towards a better measure of well-being and I think this comment is very important:
Too often, we confuse ends with means. ... a financial sector is a means to a more productive economy, not an end in itself.
excerpted with permission
by CalculatedRisk on 9/13/2009 06:49:00 PM
From Bloomberg: Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman (ht Ron Wallstreetpit)
... “In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” [Joseph] Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”
...
“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”
And on the economy:
"We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”
The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.
“The question then is who is going to finance the U.S. government,” Stiglitz said.
Stiglitz also wrote a comment in the Financial Times: Towards a better measure of well-being and I think this comment is very important:
Too often, we confuse ends with means. ... a financial sector is a means to a more productive economy, not an end in itself.
excerpted with permission
Moral Hazard and Economic Donkeys
"It's almost as if the biggest credit bubble in history never occurred. Investors are increasingly convinced that a sustainable global recovery is emerging out of the wreckage. All praise to the central bankers for saving the world! I'm waiting till someone writes about the return of the Great Moderation and suggests Ben Bernanke is the new Maestro. Then I'll know the lunatics have taken over the madhouse...yet again." Albert Edwards, Société Générale
What Simon Johnson is describing in this essay attached below is moral hazard, the corruption of the capitalist system introduced by a Fed (the Economic Donkeys) that recklessly exercises a function as 'lender of last resort,' in conjunction with a political environment (less sophisticated Economic Donkeys) that can be politely described as being driven by 'regulatory capture' rather than the less euphemistic 'rampant corruption.'
Moral hazard is not a popular topic, on the left or on the right. When moral hazard was mentioned as a consideration in the bank bailouts proposed by then Treasury Secretary Hank Paulson, a popular liberal economist bombastically expounding with a blog (PLEBEWAG) went into a hissy fit of self-righteous indignation, condemning those who even think about things like 'moral hazard' as fundamentalist ethical Luddites.
The problem is that moral hazard is an ethical consideration, a restraint on the tools available for centralized financial engineering. This aversion to restraint is characteristic of neither the moderate right nor the left per se, but it does distinguish the statists from those who favor the individuals and 'market-based capitalism.'
What can one think about these things, when so many economists can get it so wrong, for so long, with such passionate intensity, and remain largely unapologetic and unchanged themselves, swearing allegiance to the power of financial engineering with just a little more power and purview? Hence the proposal to centralize regulation in the Fed, surely one of the most bizarre suggestions after a crisis caused by the Fed that one can imagine.
It is all part of the momentum of the status quo, those who enable a system at least in part because they believe it in as a first principle, benefit from it, even if they are not direct participants, or may only wish to be beneficiaries of the greater power and prestige of the State.
It is an essay worth reading. Here is a relevant excerpt.
Until the Banks are restrained, and the financial system reformed, and balance restored to the economy, there can be no sustained economic recovery.
Or anything resembling a return to the moral high ground or social justice.
"The real problem with our financial system is that our economic and political system work together to encourage excessive risk, and this risk in turn leads to cycles of prosperity and collapse. In 1998, a much smaller Lehman Brothers was placed in financial peril by the aftermath of the Asian financial crisis and failure of Long Term Capital Management, a major hedge fund. The Federal Reserve responded by lowering interest rates and other central banks followed suit. This reduced the cost of obtaining funds, effectively bailing out Lehman and other institutions in trouble.
As markets have grown to recognize how quick the Federal Reserve is to bail out institutions (and executives) in trouble, they naturally respond. In the 1990s, people talked about the “Greenspan Put” a term which derisively suggests that it is always safe to invest in risky assets, because the Federal Reserve is ready to bail out investors (a put is effectively a promise to buy an asset at a fixed price if you are unable to sell it to someone else at a higher price – this is a way to lock-in profits or limit losses on investments). However, in months following the collapse of Lehman, we learned that the “Bernanke Put” is even more valuable since Chairman Bernanke, alongside the Bank of England, the European Central Bank, and central banks in much of the rest of the world, is prepared to take drastic measures to prevent asset prices from falling when there are risks of global collapse.
This policy of responding to the aftermath of bubbles, rather than addressing them before they get going, through tighter regulation, has become the mantra of most central banks. It is usually combined with fiscal policy stimulus and other measures to support the economy. Each time banks fail, by bailing the system out again, we teach our finance sector a lesson: you can safely take too much risk because, when you lose, the taxpayer will pick up the bill. We also send a simple message to creditors: it is safe to lend to Goldman Sachs, or Barclays Bank, because taxpayers and our nations’ savers are standing by to cover your losses. Rational bank executives and creditors respond as any person would: creditors lend to banks at low interest rates, and our banks gamble heavily hoping to make large profits. Such a system is destined to fail, but the party can run for a long time."
Economic Donkeys by Simon Johnson and Peter Boone
http://baselinescenario.com/2009/09/13/economic-donkeys/
"It's almost as if the biggest credit bubble in history never occurred. Investors are increasingly convinced that a sustainable global recovery is emerging out of the wreckage. All praise to the central bankers for saving the world! I'm waiting till someone writes about the return of the Great Moderation and suggests Ben Bernanke is the new Maestro. Then I'll know the lunatics have taken over the madhouse...yet again." Albert Edwards, Société Générale
What Simon Johnson is describing in this essay attached below is moral hazard, the corruption of the capitalist system introduced by a Fed (the Economic Donkeys) that recklessly exercises a function as 'lender of last resort,' in conjunction with a political environment (less sophisticated Economic Donkeys) that can be politely described as being driven by 'regulatory capture' rather than the less euphemistic 'rampant corruption.'
Moral hazard is not a popular topic, on the left or on the right. When moral hazard was mentioned as a consideration in the bank bailouts proposed by then Treasury Secretary Hank Paulson, a popular liberal economist bombastically expounding with a blog (PLEBEWAG) went into a hissy fit of self-righteous indignation, condemning those who even think about things like 'moral hazard' as fundamentalist ethical Luddites.
The problem is that moral hazard is an ethical consideration, a restraint on the tools available for centralized financial engineering. This aversion to restraint is characteristic of neither the moderate right nor the left per se, but it does distinguish the statists from those who favor the individuals and 'market-based capitalism.'
What can one think about these things, when so many economists can get it so wrong, for so long, with such passionate intensity, and remain largely unapologetic and unchanged themselves, swearing allegiance to the power of financial engineering with just a little more power and purview? Hence the proposal to centralize regulation in the Fed, surely one of the most bizarre suggestions after a crisis caused by the Fed that one can imagine.
It is all part of the momentum of the status quo, those who enable a system at least in part because they believe it in as a first principle, benefit from it, even if they are not direct participants, or may only wish to be beneficiaries of the greater power and prestige of the State.
It is an essay worth reading. Here is a relevant excerpt.
Until the Banks are restrained, and the financial system reformed, and balance restored to the economy, there can be no sustained economic recovery.
Or anything resembling a return to the moral high ground or social justice.
"The real problem with our financial system is that our economic and political system work together to encourage excessive risk, and this risk in turn leads to cycles of prosperity and collapse. In 1998, a much smaller Lehman Brothers was placed in financial peril by the aftermath of the Asian financial crisis and failure of Long Term Capital Management, a major hedge fund. The Federal Reserve responded by lowering interest rates and other central banks followed suit. This reduced the cost of obtaining funds, effectively bailing out Lehman and other institutions in trouble.
As markets have grown to recognize how quick the Federal Reserve is to bail out institutions (and executives) in trouble, they naturally respond. In the 1990s, people talked about the “Greenspan Put” a term which derisively suggests that it is always safe to invest in risky assets, because the Federal Reserve is ready to bail out investors (a put is effectively a promise to buy an asset at a fixed price if you are unable to sell it to someone else at a higher price – this is a way to lock-in profits or limit losses on investments). However, in months following the collapse of Lehman, we learned that the “Bernanke Put” is even more valuable since Chairman Bernanke, alongside the Bank of England, the European Central Bank, and central banks in much of the rest of the world, is prepared to take drastic measures to prevent asset prices from falling when there are risks of global collapse.
This policy of responding to the aftermath of bubbles, rather than addressing them before they get going, through tighter regulation, has become the mantra of most central banks. It is usually combined with fiscal policy stimulus and other measures to support the economy. Each time banks fail, by bailing the system out again, we teach our finance sector a lesson: you can safely take too much risk because, when you lose, the taxpayer will pick up the bill. We also send a simple message to creditors: it is safe to lend to Goldman Sachs, or Barclays Bank, because taxpayers and our nations’ savers are standing by to cover your losses. Rational bank executives and creditors respond as any person would: creditors lend to banks at low interest rates, and our banks gamble heavily hoping to make large profits. Such a system is destined to fail, but the party can run for a long time."
Economic Donkeys by Simon Johnson and Peter Boone
http://baselinescenario.com/2009/09/13/economic-donkeys/
Bank of America $4 Billion, Taxpayers $425 Million
with 40 comments
I’m trying to figure out if I should be infuriated about the agreement allowing Bank of America to walk away from the asset guarantees it got as part of its January bailout in exchange for a payment of $425 million. I can piece together part of the story from The New York Times, Bloomberg, and NPR, but the complete story is a bit hazy.
The initial deal was that Treasury, the FDIC, and the Fed would guarantee losses on a $118 billion portfolio of assets; B of A would absorb the first $10 billion and 10% of any further losses, so the government’s maximum exposure would be about $97 billion. Part of that guarantee was a non-recourse loan commitment from the Fed, basically meaning that the Fed would loan money to B of A, take the assets as collateral, and agree to keep the assets in lieu of being paid back at B of A’s option. In exchange, the government would get:
(a) An annual fee of 20 basis points on the Fed’s loan commitment, even when undrawn (if B of A drew down the loan, which it didn’t, it would pay a real interest rate). The loan commitment could be interpreted to be only $97 billion, so this comes to $194 million per year.
(
$4 billion of preferred stock with an 8% dividend. That’s a dividend of $320 million per year; B of A can buy back the preferred stock by paying $4 billion.
© Warrants on $400 million of B of A stock. B of A was at $7.18 the day the bailout was announced and yesterday it closed at $17.61, so if Treasury had gotten an exercise price of $7.18, those warrants would be worth about $580 million now.
Read the rest of this entry »
http://baselinescenario.com/2009/09/23/ban...lion/#more-5059
with 40 comments
I’m trying to figure out if I should be infuriated about the agreement allowing Bank of America to walk away from the asset guarantees it got as part of its January bailout in exchange for a payment of $425 million. I can piece together part of the story from The New York Times, Bloomberg, and NPR, but the complete story is a bit hazy.
The initial deal was that Treasury, the FDIC, and the Fed would guarantee losses on a $118 billion portfolio of assets; B of A would absorb the first $10 billion and 10% of any further losses, so the government’s maximum exposure would be about $97 billion. Part of that guarantee was a non-recourse loan commitment from the Fed, basically meaning that the Fed would loan money to B of A, take the assets as collateral, and agree to keep the assets in lieu of being paid back at B of A’s option. In exchange, the government would get:
(a) An annual fee of 20 basis points on the Fed’s loan commitment, even when undrawn (if B of A drew down the loan, which it didn’t, it would pay a real interest rate). The loan commitment could be interpreted to be only $97 billion, so this comes to $194 million per year.
(
$4 billion of preferred stock with an 8% dividend. That’s a dividend of $320 million per year; B of A can buy back the preferred stock by paying $4 billion.© Warrants on $400 million of B of A stock. B of A was at $7.18 the day the bailout was announced and yesterday it closed at $17.61, so if Treasury had gotten an exercise price of $7.18, those warrants would be worth about $580 million now.
Read the rest of this entry »
http://baselinescenario.com/2009/09/23/ban...lion/#more-5059
Guest Post: How Well Has The Federal Reserve Performed for America?
Posted: 27 Sep 2009 10:08 AM PDT
By George Washington of Washington’s Blog.
How well has the Federal Reserve performed for America? Mainstream pundits, of course, say that Bernanke has saved the world . . . . but they said the same thing about Greenspan. So let’s look at the actual historical record to determine how well the Fed has done.
Initially, Milton Friedman and Ben Bernanke have both said that the Federal Reserve caused (or at least failed to cure) the Great Depression through its poor monetary policy.
Many also blame the Fed for blowing an unsustainable bubble between 2001-2007 through artificially low interest rates. If this sounds too much like an Austrian economics perspective, that may be true. But remember that Hayek won the Nobel prize in 1974 partly for arguing that artificially low interest rates lead to the misallocation of capital and to bubbles, which in turn lead to busts.
Moreover, one of the Fed’s main justification has been that it can provide a “counter-cyclical” balance. In other words, during boom times it can put on the brakes (”take the punch bowl away right as the party gets started”), and during busts it can get things moving again. But as economist Jane D’Arista has shown, the Fed has failed miserably at that task:
Jane D’Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit [has a] devastating critique of the central bank. The Federal Reserve, she explains, has failed in its most essential function: to serve as the balance wheel that keeps economic cycles from going too far. It is supposed to be a moderating force in American capitalism on the upside and on the downside, the role popularly described as “leaning against the wind.” By applying its leverage on the available supply of credit, the Fed can slow down a boom that is dangerously overwrought or, likewise, stimulate the economy if it is sinking into recession. The Fed’s job, a former chairman once joked, is “to take away the punch bowl just when the party gets going.” Economists know this function as “counter-cyclical policy.”
The Fed not only lost control, D’Arista asserts, but its policy actions have unintentionally become “pro-cyclical”–encouraging financial excesses instead of countering the extremes. “The pattern that has developed over the last two decades,” she wrote in 2008, “suggests that relying on changes in interest rates as the primary tool of monetary policy can set off pro-cyclical foreign capital flows that tend to reverse the intended result of the action taken. As a result, monetary policy can no longer reliably perform its counter-cyclical function–its raison d’être–and its attempts to do so may exacerbate instability.”…
The Fed is also supposed to act as a regulator for banks and their affiliates, but failed miserably in that role as well.
Indeed, the central bankers’ central banker – BIS – has itself slammed the Fed:
In a pointed attack on the US Federal Reserve, [BIS and its chief economist William White] said central banks would not find it easy to “clean up” once property bubbles have burst…
Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”
“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” [White] said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
As PhD economist Steve Keen has pointed out, the Fed (along with Treasury) has also given money to the wrong people to kick-start the economy.
Remember also that Greenspan acted as one of the main supporters of derivatives (including credit default swaps) between the late 1990’s and the present (and see this).
Greenspan was also one of the main cheerleaders for subprime loans (and see this).
The above list is only partial. And it ignores:
(1) allegations that the Fed has manipulated the markets; and
(2) claims that the Federal Reserve System saddles the U.S. government and American people with trillions of dollars in unnecessary debt (that would not be incurred if the government took back the “power to coin money” granted to the government itself in the Constitution).
Even so, it shows that the Federal Reserve has performed very poorly indeed.
Posted: 27 Sep 2009 10:08 AM PDT
By George Washington of Washington’s Blog.
How well has the Federal Reserve performed for America? Mainstream pundits, of course, say that Bernanke has saved the world . . . . but they said the same thing about Greenspan. So let’s look at the actual historical record to determine how well the Fed has done.
Initially, Milton Friedman and Ben Bernanke have both said that the Federal Reserve caused (or at least failed to cure) the Great Depression through its poor monetary policy.
Many also blame the Fed for blowing an unsustainable bubble between 2001-2007 through artificially low interest rates. If this sounds too much like an Austrian economics perspective, that may be true. But remember that Hayek won the Nobel prize in 1974 partly for arguing that artificially low interest rates lead to the misallocation of capital and to bubbles, which in turn lead to busts.
Moreover, one of the Fed’s main justification has been that it can provide a “counter-cyclical” balance. In other words, during boom times it can put on the brakes (”take the punch bowl away right as the party gets started”), and during busts it can get things moving again. But as economist Jane D’Arista has shown, the Fed has failed miserably at that task:
Jane D’Arista, a reform-minded economist and retired professor with a deep conceptual understanding of money and credit [has a] devastating critique of the central bank. The Federal Reserve, she explains, has failed in its most essential function: to serve as the balance wheel that keeps economic cycles from going too far. It is supposed to be a moderating force in American capitalism on the upside and on the downside, the role popularly described as “leaning against the wind.” By applying its leverage on the available supply of credit, the Fed can slow down a boom that is dangerously overwrought or, likewise, stimulate the economy if it is sinking into recession. The Fed’s job, a former chairman once joked, is “to take away the punch bowl just when the party gets going.” Economists know this function as “counter-cyclical policy.”
The Fed not only lost control, D’Arista asserts, but its policy actions have unintentionally become “pro-cyclical”–encouraging financial excesses instead of countering the extremes. “The pattern that has developed over the last two decades,” she wrote in 2008, “suggests that relying on changes in interest rates as the primary tool of monetary policy can set off pro-cyclical foreign capital flows that tend to reverse the intended result of the action taken. As a result, monetary policy can no longer reliably perform its counter-cyclical function–its raison d’être–and its attempts to do so may exacerbate instability.”…
The Fed is also supposed to act as a regulator for banks and their affiliates, but failed miserably in that role as well.
Indeed, the central bankers’ central banker – BIS – has itself slammed the Fed:
In a pointed attack on the US Federal Reserve, [BIS and its chief economist William White] said central banks would not find it easy to “clean up” once property bubbles have burst…
Nor does it exonerate the watchdogs. “How could such a huge shadow banking system emerge without provoking clear statements of official concern?”
“The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period. Policy interest rates in the advanced industrial countries have been unusually low,” [White] said.
The Fed and fellow central banks instinctively cut rates lower with each cycle to avoid facing the pain. The effect has been to put off the day of reckoning…
“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.
“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.
As PhD economist Steve Keen has pointed out, the Fed (along with Treasury) has also given money to the wrong people to kick-start the economy.
Remember also that Greenspan acted as one of the main supporters of derivatives (including credit default swaps) between the late 1990’s and the present (and see this).
Greenspan was also one of the main cheerleaders for subprime loans (and see this).
The above list is only partial. And it ignores:
(1) allegations that the Fed has manipulated the markets; and
(2) claims that the Federal Reserve System saddles the U.S. government and American people with trillions of dollars in unnecessary debt (that would not be incurred if the government took back the “power to coin money” granted to the government itself in the Constitution).
Even so, it shows that the Federal Reserve has performed very poorly indeed.
The Federal Reserve School of Monetary Witchcraft and Wizardry
Here are some key excerpts from the account by The Institutional Risk Analyst of his trip to "The International Financial Crisis" conference in Chicago.
http://us1.institutionalriskanalytics.com/...ory.asp?tag=383
Here are some key excerpts from the account by The Institutional Risk Analyst of his trip to "The International Financial Crisis" conference in Chicago.
http://us1.institutionalriskanalytics.com/...ory.asp?tag=383
Wall Street's Fraud and Systemic Peril (pdf) - Takavoli
http://www.tavakolistructuredfinance.com/Fraud.pdf
http://www.tavakolistructuredfinance.com/Fraud.pdf
Andy Xie: Why One Bubble Burst Deserves Another
http://english.caijing.com.cn/2009-09-28/110267252.html
http://english.caijing.com.cn/2009-09-28/110267252.html
Guest Post: The Real Reason the Giant, Insolvent Banks Aren’t Being Broken Up
Posted: 03 Oct 2009 09:56 AM PDT
By George Washington of Washington’s Blog.
Why isn’t the government breaking up the giant, insolvent banks?
We Need Them To Help the Economy Recover?
Do we need the Too Big to Fails to help the economy recover?
No.
The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion:
* Nobel prize-winning economist, Joseph Stiglitz
* Nobel prize-winning economist, Ed Prescott
* Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
* MIT economics professor and former IMF chief economist, Simon Johnson (and see this)
* President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)
* Deputy Treasury Secretary, Neal S. Wolin
* The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine
* The Congressional panel overseeing the bailout
* The head of the FDIC, Sheila Bair
* The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
* Economics professor and senior regulator during the S & L crisis, William K. Black
* Economics professor, Nouriel Roubini
* Economist, Marc Faber
* Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
* Economics professor, Thomas F. Cooley
* Former investment banker, Philip Augar
* Chairman of the Commons Treasury, John McFall
Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.
In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer – who was Ben Bernanke’s thesis adviser at MIT – say that – at the very least – the size of the financial giants should be limited.
Even the Bank of International Settlements – the “Central Banks’ Central Bank” – has slammed too big to fail. As summarized by the Financial Times:
The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.
This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.
If We Break ‘Em Up, No One Will Lend?
Do we need to keep the TBTFs to make sure that loans are made?
Nope.
Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation’s smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under…
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
BusinessWeek noted in January:
As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…
At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks…
Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. “Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks,” says Christine Barry, Aite’s research director. “They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.”
And Fed Governor Daniel K. Tarullo said in June:
The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks…
For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.
Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.
Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks’ own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.
Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don’t really need credit in the first place. See this and this.
So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.
The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:
The largest banks often don’t show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.
“They actually experience diseconomies of scale,” Narter wrote of the biggest banks. “There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size.”
And Governor Tarullo points out some of the benefits of small community banks over the giant banks:
Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries–to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.
A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.
It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the “too big to fails” are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.
The Giant Banks Have Recovered, And Are No Longer Insolvent?
Have the TBTFs recovered, so that they are no longer insolvent?
Negatory.
The giant banks have still not put the toxic assets hidden in their SIVs back on their books.
The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.
The overhang of derivatives is still looming out there, and still dwarfs the size of the rest of the global economy. Credit default swaps have arguably still not been tamed (see this).
Indeed, Nobel prize winning economist Joseph Stiglitz said recently:
The U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to “creative accounting”, such as Goldman “skipping” December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.
Some very smart people say that the big banks – even after many billions in bailouts and other government help – have still not repaired their balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.
But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can’t prove they are solvent, they should be broken up.
The Government Lacks the Power to Break Them Up?
Does the government lack the power to break up the TBTFs?
Wrong.
One of the world’s leading economic historians – Niall Ferguson – argues in a current article in Newsweek:
[Geithner is proposing that] there should be a new “resolution authority” for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
Indeed, even the FDIC mentions Continental Illinois in the same breadth as “too big to fail” banks.
And William K. Black (remember, he was the senior regulator during the S&L crisis, and is a Professor of both Economics and Law) – says that the Prompt Corrective Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.
Whether or not the banks’ holding companies can be broken up using the PCA, the banks themselves could be. See this.
And no one can doubt that the government could find a way to break up even the holdign companies if it wanted.
FDR seized gold during the Great Depression under the Trading With The Enemies Act.
Geithner and Bernanke have been using one loophole and “creative” legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).
And the government could use 100-year old antitrust laws to break them up.
So don’t give me any of this “our hands are tied” malarkey. The Obama administration could break the “too bigs” up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument.
Is Temporarily Nationalizing the Giant Banks Socialism?
Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.
That may be true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 months before breaking them up.
In contrast, the Bush and Obama administrations’ actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is – truly – socialism.
Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to a semblance of free market capitalism much quicker.
The Real Reason the Giant Banks Aren’t Being Broken Up
So what is the real reason that the TBTFs aren’t being broken up?
Certainly, there is regulatory capture, cowardice and corruption:
* Joseph Stiglitz (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action
* Economic historian Niall Ferguson asks:
Guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs [too big to fails].
* Manhattan Institute senior fellow Nicole Gelinas agrees:
The too-big-to-fail financial industry has been good to elected officials and former elected officials of both parties over its 25-year life span
* Investment analyst and financial writer Yves Smith says:
Major financial players [have gained] control over the all-important over-the-counter debt markets…It is pretty hard to regulate someone who has a knife at your throat.
* William K. Black says:
There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .
Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well. There have been no prosecutions of the chief executives of the large nonprime lenders that would expose the “epidemic” of fraudulent mortgage lending that drove the crisis. There has been no accountability…
The Obama administration and Fed Chairman Ben Bernanke have refused to investigate the nature and causes of the crisis. And the administration selected Timothy Geithner, who with then Treasury Secretary Paulson bungled the bailout of A.I.G. and other favored “too big to fail” institutions, to head up Treasury.
Now Lawrence Summers, head of the White House National Economic Council, and Mr. Geithner argue that no fundamental change in finance is needed. They want to recreate a secondary market in the subprime mortgages that caused trillions of dollars of losses.
Traditional neo-classical economic theory, particularly “modern finance theory,” has been proven false but economists have failed to replace it. No fundamental reform can be passed when the proponents are pretending that there really is no crisis or need for change.
* Harvard professor of government Jeffry A. Frieden says:
Regulatory agencies are often sympathetic to the industries they regulate. This pattern is so well known among scholars that it has a name: “regulatory capture.” This effect can be due to the political influence of the industry on its regulators; or to the fact that the regulators spend so much time with their charges that they come to accept their world view; or to the prospect of lucrative private-sector jobs when regulators retire or resign.
* Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.
But there is an even more interesting reason . . .
The number one reason the TBTF’s aren’t being broken up is [drumroll] . . . the ‘ole 80’s playbook is being used.
As the New York Times wrote in February:
In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.
In other words, the nine biggest banks were all insolvent in the 1980s.
And the Times is not alone in stating this fact. For example, Felix Salmon wrote in January:
In the early 1980s, when a slew of overindebted Latin governments defaulted to their bank creditors, a lot of big global banks, Citicorp foremost among them, became insolvent.
So the government’s failure to break up the insolvent giants – even though virtually all independent experts say that is the only way to save the economy, and even though there is no good reason not to break them up – is nothing new.
William K. Black’s statement that the government’s entire strategy now – as in the S&L crisis – is to cover up how bad things are (”the entire strategy is to keep people from getting the facts”) makes a lot more sense.
Posted: 03 Oct 2009 09:56 AM PDT
By George Washington of Washington’s Blog.
Why isn’t the government breaking up the giant, insolvent banks?
We Need Them To Help the Economy Recover?
Do we need the Too Big to Fails to help the economy recover?
No.
The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion:
* Nobel prize-winning economist, Joseph Stiglitz
* Nobel prize-winning economist, Ed Prescott
* Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
* MIT economics professor and former IMF chief economist, Simon Johnson (and see this)
* President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)
* Deputy Treasury Secretary, Neal S. Wolin
* The President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, Camden R. Fine
* The Congressional panel overseeing the bailout
* The head of the FDIC, Sheila Bair
* The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
* Economics professor and senior regulator during the S & L crisis, William K. Black
* Economics professor, Nouriel Roubini
* Economist, Marc Faber
* Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
* Economics professor, Thomas F. Cooley
* Former investment banker, Philip Augar
* Chairman of the Commons Treasury, John McFall
Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.
In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer – who was Ben Bernanke’s thesis adviser at MIT – say that – at the very least – the size of the financial giants should be limited.
Even the Bank of International Settlements – the “Central Banks’ Central Bank” – has slammed too big to fail. As summarized by the Financial Times:
The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.
This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.
If We Break ‘Em Up, No One Will Lend?
Do we need to keep the TBTFs to make sure that loans are made?
Nope.
Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition:
Growth for the nation’s smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under…
As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.
BusinessWeek noted in January:
As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…
At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks…
Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. “Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks,” says Christine Barry, Aite’s research director. “They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.”
And Fed Governor Daniel K. Tarullo said in June:
The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks…
For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.
Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.
Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks’ own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.
Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don’t really need credit in the first place. See this and this.
So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.
The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:
The largest banks often don’t show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.
“They actually experience diseconomies of scale,” Narter wrote of the biggest banks. “There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size.”
And Governor Tarullo points out some of the benefits of small community banks over the giant banks:
Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries–to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.
A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.
It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the “too big to fails” are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.
The Giant Banks Have Recovered, And Are No Longer Insolvent?
Have the TBTFs recovered, so that they are no longer insolvent?
Negatory.
The giant banks have still not put the toxic assets hidden in their SIVs back on their books.
The tsunamis of commercial real estate, Alt-A, option arm and other loan defaults have not yet hit.
The overhang of derivatives is still looming out there, and still dwarfs the size of the rest of the global economy. Credit default swaps have arguably still not been tamed (see this).
Indeed, Nobel prize winning economist Joseph Stiglitz said recently:
The U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.
“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”
Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”
While the big boys have certainly reported some impressive profits in the last couple of months, some or all of those profits may have been due to “creative accounting”, such as Goldman “skipping” December 2008, suspension of mark-to-market (which may or may not be a good thing), and assistance from the government.
Some very smart people say that the big banks – even after many billions in bailouts and other government help – have still not repaired their balance sheets. Tyler Durden, Reggie Middleton, Mish and others have looked at the balance sheets of the big boys much more recently than I have, and have more details than I do.
But the bottom line is this: If the banks are no longer insolvent, they should prove it. If they can’t prove they are solvent, they should be broken up.
The Government Lacks the Power to Break Them Up?
Does the government lack the power to break up the TBTFs?
Wrong.
One of the world’s leading economic historians – Niall Ferguson – argues in a current article in Newsweek:
[Geithner is proposing that] there should be a new “resolution authority” for the swift closing down of big banks that fail. But such an authority already exists and was used when Continental Illinois failed in 1984.
Indeed, even the FDIC mentions Continental Illinois in the same breadth as “too big to fail” banks.
And William K. Black (remember, he was the senior regulator during the S&L crisis, and is a Professor of both Economics and Law) – says that the Prompt Corrective Action Law (PCA), 12 U.S.C. § 1831o, not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law by refusing to close insolvent banks.
Whether or not the banks’ holding companies can be broken up using the PCA, the banks themselves could be. See this.
And no one can doubt that the government could find a way to break up even the holdign companies if it wanted.
FDR seized gold during the Great Depression under the Trading With The Enemies Act.
Geithner and Bernanke have been using one loophole and “creative” legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).
And the government could use 100-year old antitrust laws to break them up.
So don’t give me any of this “our hands are tied” malarkey. The Obama administration could break the “too bigs” up in a heartbeat if it wanted to, and then justify it after the fact using PCA or another legal argument.
Is Temporarily Nationalizing the Giant Banks Socialism?
Many argue that it would be wrong for the government to break up the banks, because we would have to take over the banks in order to break them up.
That may be true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 months before breaking them up.
In contrast, the Bush and Obama administrations’ actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is – truly – socialism.
Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to a semblance of free market capitalism much quicker.
The Real Reason the Giant Banks Aren’t Being Broken Up
So what is the real reason that the TBTFs aren’t being broken up?
Certainly, there is regulatory capture, cowardice and corruption:
* Joseph Stiglitz (the Nobel prize winning economist) said recently that the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action
* Economic historian Niall Ferguson asks:
Guess which institutions are among the biggest lobbyists and campaign-finance contributors? Surprise! None other than the TBTFs [too big to fails].
* Manhattan Institute senior fellow Nicole Gelinas agrees:
The too-big-to-fail financial industry has been good to elected officials and former elected officials of both parties over its 25-year life span
* Investment analyst and financial writer Yves Smith says:
Major financial players [have gained] control over the all-important over-the-counter debt markets…It is pretty hard to regulate someone who has a knife at your throat.
* William K. Black says:
There has been no honest examination of the crisis because it would embarrass C.E.O.s and politicians . . .
Instead, the Treasury and the Fed are urging us not to examine the crisis and to believe that all will soon be well. There have been no prosecutions of the chief executives of the large nonprime lenders that would expose the “epidemic” of fraudulent mortgage lending that drove the crisis. There has been no accountability…
The Obama administration and Fed Chairman Ben Bernanke have refused to investigate the nature and causes of the crisis. And the administration selected Timothy Geithner, who with then Treasury Secretary Paulson bungled the bailout of A.I.G. and other favored “too big to fail” institutions, to head up Treasury.
Now Lawrence Summers, head of the White House National Economic Council, and Mr. Geithner argue that no fundamental change in finance is needed. They want to recreate a secondary market in the subprime mortgages that caused trillions of dollars of losses.
Traditional neo-classical economic theory, particularly “modern finance theory,” has been proven false but economists have failed to replace it. No fundamental reform can be passed when the proponents are pretending that there really is no crisis or need for change.
* Harvard professor of government Jeffry A. Frieden says:
Regulatory agencies are often sympathetic to the industries they regulate. This pattern is so well known among scholars that it has a name: “regulatory capture.” This effect can be due to the political influence of the industry on its regulators; or to the fact that the regulators spend so much time with their charges that they come to accept their world view; or to the prospect of lucrative private-sector jobs when regulators retire or resign.
* Economic consultant Edward Harrison agrees:Regulating Wall Street has become difficult in large part because of regulatory capture.
But there is an even more interesting reason . . .
The number one reason the TBTF’s aren’t being broken up is [drumroll] . . . the ‘ole 80’s playbook is being used.
As the New York Times wrote in February:
In the 1980s, during the height of the Latin American debt crisis, the total risk to the nine money-center banks in New York was estimated at more than three times the capital of those banks. The regulators, analysts say, did not force the banks to value those loans at the fire-sale prices of the moment, helping to avert a disaster in the banking system.
In other words, the nine biggest banks were all insolvent in the 1980s.
And the Times is not alone in stating this fact. For example, Felix Salmon wrote in January:
In the early 1980s, when a slew of overindebted Latin governments defaulted to their bank creditors, a lot of big global banks, Citicorp foremost among them, became insolvent.
So the government’s failure to break up the insolvent giants – even though virtually all independent experts say that is the only way to save the economy, and even though there is no good reason not to break them up – is nothing new.
William K. Black’s statement that the government’s entire strategy now – as in the S&L crisis – is to cover up how bad things are (”the entire strategy is to keep people from getting the facts”) makes a lot more sense.
A Short Question For Senior Officials Of The New York Fed
with 62 comments
At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.
Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.
Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)
Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?
Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.
Go to link for additional references
http://baselinescenario.com/2009/10/03/a-s...-fed/#more-5146
In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?
By Simon Johnson
with 62 comments
At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve. It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.
Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC). US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.
Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion? If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)
Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category?
Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.
Go to link for additional references
http://baselinescenario.com/2009/10/03/a-s...-fed/#more-5146
In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China. Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?
By Simon Johnson
CounterPunch Special Investigation: Part One of a Series
Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency
By PAM MARTENS
A federal agency tasked with expanding the American dream of home ownership and affordable housing free from discrimination to people of modest means has been quietly moving a chunk of that role to Wall Street since 2002. In a stealth partial privatization, the U.S. Department of Housing and Urban Development (HUD) farmed out its mandate of working with single family homeowners in trouble on their mortgages to the industry most responsible for separating people from their savings and creating an unprecedented wealth gap that renders millions unable to pay those mortgages. This industry also ranks as one of the most storied industries in terms of race discrimination. Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars.
To what degree this surreptitious program has contributed to putting children and families out on the street during one of the worst economic slumps since the ’30s should be on a Congressional short list for investigation. HUD’s demand for confidentiality from all bidders and announcement of winning bids to parties known only as “the winning bidder” deserves its own investigation in terms of obfuscating the public’s right to know and the ability of the press to properly fulfill its function in a free society.
Despite three days of emails and phone calls to HUD officials, they have refused to provide the names of the winning bidders or the firms that teamed as co-bidders with the winning party. Obtaining this information independently has been akin to extracting a painful splinter wearing a blindfold and oven mitts.
That a taxpayer-supported Federal agency conducts a competitive bid program of over $2 billion and then refuses to announce the names of the winning bidders is beyond contempt for the American people. If the Obama administration does not quickly purge this Bush mindset from these Federal agencies, he is inviting a massive backlash in the midterm elections.
The HUD program was benignly called Accelerated Claims Disposition (ACD) and was said to be a pilot program. A pilot program might suggest to those uninformed in the ways of the new Wall Street occupation of America a modest spending outlay; a go slow approach. In this case, from 2002 to 2005, HUD transferred in excess of $2.4 billion of defaulted mortgages insured by its sibling, the FHA, into the hands of Citigroup, Lehman Brothers and Bear Stearns while providing the firms with wide latitude to foreclose, restructure or sell off in bundles to investors. HUD retained a minority interest of 30 to 40 percent in each joint venture. Citigroup was awarded the 2002 and 2004 joint ventures; Lehman Brothers the 2003; Bear Stearns the 2005. I obtained this information by reconciling the aliases used by these firms in foreclosures of HUD properties to the addresses of the corporate parents. I further confirmed the information by checking the official records at multiple Secretaries of State offices where the firms must register their subsidiaries to do business within the state.
What the program effectively did was allow the biggest retail banks in the country to get accelerated payment on their defaulted, FHA-insured, single family mortgage loans while allowing another set of the biggest investment banks to make huge profits in fees for bundling and selling off the loans as securitizations. Once the loans were securitized (sold off to investors) they were no longer the problem of HUD or the Wall Street bankers. The loans conveniently disappeared from the radar screen and the balance sheet. The family’s fate had been sold off by HUD to Wall Street in exchange for a small piece of the action. Wall Street then sold off the family’s fate to thousands of investors around the world for a large piece of the action.
HUD has attempted to spin this program as a win-win for everyone with the suggestion that families would have more options under this program. In a HUD February 17, 2006 report titled “Evaluation of 601 Accelerated Claims Disposition Demonstration,” a few kernels of truth emerged. It was noted on page 4 that the private partners “determine how best to maximize the return on the loan…Loans liquidated through note sales generally earn a higher return than property sales, so the JV [joint venture] has an incentive to maximize the share of note sales relative to property sales.” Rather than evaluating the success of the program on how many families were able to get a loan modification and remain in their homes, the report notes that “The benchmark for progress is the share of loans that have reached resolution.”
From its 2002 joint venture, Citigroup dumped en masse 2,599 loans in one securitization alone in August 2004. It sold another 1,177 at other unknown times. From its 2004 joint venture, it dumped 1,814 in one fell swoop. The 2006 HUD report notes that following securitization “there is no information available on the [home] retention after the sale.”
According to HUD’s web site, another major award of $400 million to $800 million in defaulted mortgages was slated for October 23 of last year in the midst of a foreclosure and eviction crisis. Lemar Wooley, in HUD’s Office of Public Affairs, advises that the deal never happened as a result of “no acceptable bids being received.” Given that we have been promised change we can believe in, I would have much preferred to hear: “We’ve sacked this program as an abhorrent example of privatizing profits and socializing losses while turning our backs on the neediest of our society.”
While this was clearly not a win-win for families in financial distress, two other red flags come to mind. The 2006 HUD report notes that to be eligible for this program, loans had to be four full payments past due (five full payments past due for the 2005 Bear Stearns deal). But to securitize the loans, the Wall Street firms had to bring the loans into performing status, that is, up to date in their payments. The question arises as to whether the investors in the securitizations were advised that these were heretofore defaulted HUD loans. One might be forgiven for pondering that as a material fact required in a prospectus since there is much data available showing that loans once in default tend to redefault. Some of these investors might unknowingly be you and your family members. The loans could be sitting right now in public employee pension funds, mutual funds held in 401(k)s, etc.
The second concern is that many of the homes in the deals were foreclosed on in 2006, 2007 and 2008. By HUD not keeping these loans and insisting on its legal mandate for lenders to attempt loan modifications, special forbearance or partial claims to bring the loans current, what impact did this program have on the foreclosure glut and overall property value declines.
It is worth noting what happened to the firms that HUD deemed qualified for this program: Lehman Brothers collapsed on September 15, 2008. Bear Stearns required a weekend rescue by JPMorgan Chase and the Fed on March 16/17, 2008. Citigroup, which got the lions share of the HUD deals, exists today only because of a $45 billion direct infusion from unwilling taxpayers (overruled by their Congress) and hundreds of billions of dollars more in various other government backstop operations – some still undisclosed despite Freedom of Information Act requests and litigation.
Future articles in this series will look at how these deals started under the Clinton administration with awards to Goldman Sachs, GE Capital, Blackrock and others, with the dubious protection of Merrill Lynch as the overseer for HUD. This program also went virtually unnoticed until charges of rigged computers and bid rigging erupted in headlines. We will also look at the human suffering resulting from this macabre rewriting of the social contract in America. The series begins today with the most unlikely candidate of all for helping people in need: Citigroup.
* * *
In the early evening of June 26, 2009 I was cleaning up emails I had saved for more careful reading at a later date when I bolted in my chair. A message from a reader whom I have permission to call Melissa X advised that she had documentation that Citigroup was engaging in dubious real estate transactions out west under an alias. I immediately answered with a request for specifics and received the following response:
“…a friend asked me to pull the real property records on a house a few doors down from him that he had heard sold at a very low price in a foreclosure sale. After pulling the property records I just couldn't believe the price this particular house sold for in the ‘foreclosure sale’ and started looking into the foreclosure purchaser, Liquidation Properties, Inc. (LPI). I have been a litigation paralegal for 14 years, thus I have a good amount of investigation experience and also in real estate law as we have a considerable practice in real estate litigation. Needless to say, my instinct told me something wasn't right about this and I Googled the Directors of LPI, who happened to be high level executives at Citigroup Global Markets. At first I thought that LPI wasn't a subsidiary of Citigroup because when I was reviewing court records they have filings that say they are a privately owned company with no connection to a publicly traded company. So, initially, I thought these high level Citigroup execs had formed this company that was purchasing these Citi foreclosures super cheap…one of the Directors of LPI is Jeffrey Perlowitz, who according to his online bio ran the trading desk at [Citigroup’s] Smith Barney during the housing ‘boom’ and is credited for ‘purchase, sales and trading of single family residential mortgages and asset backed securities…’ Then I ran LPI through Edgar [an SEC search engine] to see if I could find anything in SEC filings about this entity and that is how I ended up discovering LPI is actually a Citi subsidiary. I know from reading your articles that you are well aware of how shady Citi is with their subsidiaries. I particularly liked an article you wrote about the oil markets and how we can't expect the sleuths at Congress to figure out why the prices went out of control, and then you linked it to a little talked about Citi subsidiary.”
It took but a few minutes to confirm that Liquidation Properties, Inc. was indeed a subsidiary of Citigroup. Exhibit 21.01 of Citigroup’s December 31, 2008 SEC filing lists Liquidation Properties Holding Company Inc. and Liquidation Properties Inc. as subsidiaries chartered in Delaware. (But how many people are going to notice that when Citigroup has over 2,000 subsidiaries.) A quick click at the Secretary of State web site for Massachusetts, one of the many states in which Liquidation Partners, Inc. conducts business, revealed the following officers as of March 14, 2007: Randall Costa, President; Scott Freidenrich, Treasurer; Robyn Gomez, Secretary; Jeffrey Perlowitz, Director; Mark Tsesarsky, Director. But just as Melissa X had noticed, there was nothing on this filing to connect this firm with Citigroup or any publicly traded company. In fact, the form indicated that there were only 200 shares of common stock outstanding. Citigroup, on the other hand, has an unprecedented and unfathomable 22.9 billion (yes, billion) common shares outstanding, now withering in value alongside the faded dreams of financial security for its shareholders and customers.
I reviewed two other documents Melissa X had sent along: two foreclosure filings by Liquidation Properties, Inc. in the U.S. District Court for the Northern District of Ohio stating that it was not a “party, a parent, a subsidiary or other affiliate of a publicly owned corporation.”
One other item stood out in this filing: the address of this firm was listed as 388 Greenwich Street in the trendy neighborhood of Tribeca, New York City. That is where the raucous trading of exotic derivatives, commodities and mortgage securities has traditionally been handled. The legacy of the swashbuckling culture of the notorious Salomon Brothers, a predecessor firm whose traders rigged the two-year note auction of U.S. Treasurys in 1991, remains alive in these trading rooms. Indeed, Jeffrey Perlowitz was a Salomon protégé. The seminal book on the Salomon culture, Michael Lewis’ “Liar’s Poker,” assigns mortgage traders a philosophy of “ready, fire, aim.”
In other words, this is the address of the investment bank of Citigroup with whom these individuals are involved, not the calm bean counters at the retail bank, Citibank. The investment bank specializes in mergers and acquisitions, lending and trading, with a sophisticated customer base of corporations, governments and institutions. An investment bank is an unfit place for conducting or even overseeing the hand holding and financial counseling of frightened families who need urgent and sincere help to avoid loosing the roof over their heads.
Call it divine intervention or call it happenstance, but Melissa X had chosen to electronically communicate with a stranger on the other side of the country who just happened to have an indelibly forged mental picture of 388 Greenwich Street in Tribeca.
At 1 pm on May 20, 1997 an eclectic group of protesters filled the sidewalk in front of 388 Greenwich Street. I was one of them. My group, which included Gloria Steinem, came to name the firm (then known as Smith Barney) a Merchant of Shame for its privatized justice system which barred employees, as a condition of employment, from suing the firm in a public court setting. Tribeca residents spontaneously joined us as they walked by to raise hell about the company’s bizarre selection of signage.
Cemented into the middle of the sidewalk in front of the firm was a 16 foot, 5300 pound, red steel umbrella representing the company’s logo at the time and, I imagined, the physical equivalent of Sandy Weill’s ego, then CEO of the firm. A Business Week article once quoted a former employee saying Weill would steal pennies off a dead man’s eyes. Mr. Weill’s pennies, plucked from the dying firm’s eyes, eventually added up to $1 billion and he retired not long before the tens of billions of losses squirreled away in Structured Investment Vehicles (SIVs) in the Cayman Islands came home to roost.
In what I now recognize as the electronic manifestation of the whoring of Wall Street, a four-story red neon lighted umbrella was mounted near the top of this 39-floor building. Both the sidewalk and building umbrellas were later removed but I did note in a recent visit to Manhattan that giant and bizarre electronic signs flash messages to pedestrians from the formerly sedate wealth management offices of major Wall Street firms in midtown.
Having verified Melissa X’s information that Liquidation Properties, Inc. was indeed a subsidiary of Citigroup with officers employed by the firm, endowed with the uncanny knack of capturing an inordinate amount of winning bids at foreclosure auctions in depressed neighborhoods, I sat about unraveling the multitude of Byzantine transactions in which it was involved.
The trail led to four more entities: Reo Management 2002, Reo Management 2004, SFJV-2002, and SFJV-2004. (Reo is an acronym for real estate owned by a bank, typically after an unsuccessful foreclosure auction.) SFJV, I would later learn, was the name of the HUD joint ventures, an acronym for Single Family Joint Venture. SFJV-2002 and SFJV-2004 were, indeed, subsidiaries of Citigroup and being used to facilitate the transfer of foreclosed homes around the country.
The Reo Management firms were listed as subsidiaries of Residential Capital Corp. (ResCap) on its July 15, 2005 filing with the SEC but filings with the Secretary of State in Massachusetts showed the same Citigroup officials at 388 and 390 Greenwich Street in Tribeca as officers and directors: Costa, Freidenrich, Perlowitz, Tsesarsky. Filings with other Secretaries of State showed these same four individuals along with numerous other officials at Citigroup. Reo Management 2002 showed 200 shares of stock issued to unnamed parties while Reo Management 2004 said stock details were not available online.
Why on earth would Citigroup managers be officers of a competitor? I called people in the know on Wall Street. No one had ever heard about it or could offer an explanation. I called Jeffrey Perlowitz’ secretary and sent her an email requesting an explanation from Mr. Perlowitz. Mr. Perlowitz took the same position as HUD: silence.
ResCap’s operations include General Motors Acceptance Corp. Mortgage (GMAC Mortgage) and GMAC-RFC. Until 2006, GMAC was a wholly owned subsidiary of General Motors, a company that had been around since 1919 to provide car financing to GM dealers and customers. In 2006, a majority stake was sold to Cerberus Capital Management, a private equity/hedge fund whose investors are a tightly held secret. The firm is now known as GMAC Financial Services. In 2008 the Federal Reserve waived its magic wand and GMAC became a bank holding company (now called Ally Bank) and TARP gave $5 billion of taxpayer funds to the entity. Another $7.5 billion was provided in 2009. As of June 30th of this year, you and I involuntarily own 35.4 per cent of the firm with Cerberus and its secret investors owning 22 percent.
Since all of us hold the largest block of stock, I felt I might get some answers. I emailed GMAC and asked what all of this was about. A spokeswoman responded that “the loans which we acquired from the [HUD] auction happened to be those in which we co-bid with Citi. The Reo Management 2002 and 2004 entities were set up as subs of those joint ventures to hold the resulting Reo properties until they were resolved.” I countered with: “Why were officials of Citigroup serving as principals and directors of subsidiaries of ResCap?” The spokesperson replied that both Reo Management 2002 and Reo Management 2004 had been dissolved and she had no further information.
After scrutinizing every scrap of paper available through HUD on these deals for endless weeks, I was, as a taxpayer, more than a little nonplussed that I had seen nary a word about co-bidders. Citigroup operating under an alias in consumer real estate transactions was scary enough, but allowed to team up with another giant player also operating under an alias, all under the imprimatur of a Federal agency, that was beyond rational comprehension.
It’s not like the Federal government didn’t know Citigroup was a serial rogue. Our tax dollars have been used since this Frankenbank was created to investigate serious crimes, while letting the company off with a fine so it could live on to create even bigger problems the next time around. In 2001, Citigroup settled with the Federal Trade Commission for $215 million for predatory lending at one of its divisions. In 2003, Citigroup paid $400 million to U.S. regulators for fraudulent research reports and improper handling of new stock offerings. In 2004, Citigroup paid $2.65 billion to WorldCom stock and bond holders over its role in the demise of the firm. Also in 2004 its private bank was kicked out of Japan for money laundering. In 2005 Citigroup was fined $26 million by Europe’s Financial Services Authority for conducting a trade it internally named “Dr. Evil” that roiled the European bond market. In that same year, it settled with the SEC for $101 million for helping Enron inflate cash flows and under report debt. Also in 2005, it settled a private litigation over its role in the bankruptcy of Enron for $2 billion.
HUD’s own Regional Inspector General wrote in a 45-page report issued on November 13, 2008 that CitiMortgage, a unit of Citigroup, placed the FHA insurance fund at an increased risk of loss on one-third of the loans HUD audited at CitiMortgage as result of improper underwriting practices.
Melissa X took her concerns not just to me but to the U.S. Attorney’s office. In one passage of an email to this U.S. Attorney she wrote: “It is such a disappointment to me that our Government has failed us so, and only continues to do so…One must wonder how much the American people will take of this before a total revolution occurs…”
While I was researching this story, a friend forwarded a video clip of Laura Flanders of Grit-TV interviewing the filmmakers of “American Casino,” Andrew and Leslie Cockburn. (Yes, they’re all – Laura included - part of that intrepid Cockburn clan whose spirit resides here at CounterPunch in the form of Alexander Cockburn.) Carefully observe the face of Flanders, the Cockburns and the victims in the film clips. They all muster a brave front but I sense an ever present emotion to hang one’s head and weep for the nation. At one point Flanders asks: “So you think it was all really a scam to transfer money from the vulnerable and the poor to the wealthy? There was no positive interest in home ownership distribution involved?” The answers from the Cockburns go to the heart of this crisis. Both this clip and the movie “American Casino,” playing now in theatres across the U.S., provide a critical foundation for understanding that while our government and mighty military chased down men in caves in Afghanistan, the ivy league educated enemy within sacked our nation. The film premiered in the U.S. in April, ironically, in Tribeca, just moments away from the real, live American Casino, Citigroup. Watch the interview and clips from the film here: http://lauraflanders.firedoglake.com/2009/...merican-casino/
Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
http://www.counterpunch.org/martens10052009.html
Wall Street Titans Use Aliases to Foreclose on Families While Partnering With a Federal Agency
By PAM MARTENS
A federal agency tasked with expanding the American dream of home ownership and affordable housing free from discrimination to people of modest means has been quietly moving a chunk of that role to Wall Street since 2002. In a stealth partial privatization, the U.S. Department of Housing and Urban Development (HUD) farmed out its mandate of working with single family homeowners in trouble on their mortgages to the industry most responsible for separating people from their savings and creating an unprecedented wealth gap that renders millions unable to pay those mortgages. This industry also ranks as one of the most storied industries in terms of race discrimination. Rounding out its dubious housing credentials, Wall Street is now on life support courtesy of the public purse known as TARP as a result of issuing trillions of dollars in miss-rated housing bonds and housing-related derivatives, many of which were nothing more than algorithmic concepts wrapped in a high priced legal opinion. It’s difficult to imagine a more problematic resume for the new housing czars.
To what degree this surreptitious program has contributed to putting children and families out on the street during one of the worst economic slumps since the ’30s should be on a Congressional short list for investigation. HUD’s demand for confidentiality from all bidders and announcement of winning bids to parties known only as “the winning bidder” deserves its own investigation in terms of obfuscating the public’s right to know and the ability of the press to properly fulfill its function in a free society.
Despite three days of emails and phone calls to HUD officials, they have refused to provide the names of the winning bidders or the firms that teamed as co-bidders with the winning party. Obtaining this information independently has been akin to extracting a painful splinter wearing a blindfold and oven mitts.
That a taxpayer-supported Federal agency conducts a competitive bid program of over $2 billion and then refuses to announce the names of the winning bidders is beyond contempt for the American people. If the Obama administration does not quickly purge this Bush mindset from these Federal agencies, he is inviting a massive backlash in the midterm elections.
The HUD program was benignly called Accelerated Claims Disposition (ACD) and was said to be a pilot program. A pilot program might suggest to those uninformed in the ways of the new Wall Street occupation of America a modest spending outlay; a go slow approach. In this case, from 2002 to 2005, HUD transferred in excess of $2.4 billion of defaulted mortgages insured by its sibling, the FHA, into the hands of Citigroup, Lehman Brothers and Bear Stearns while providing the firms with wide latitude to foreclose, restructure or sell off in bundles to investors. HUD retained a minority interest of 30 to 40 percent in each joint venture. Citigroup was awarded the 2002 and 2004 joint ventures; Lehman Brothers the 2003; Bear Stearns the 2005. I obtained this information by reconciling the aliases used by these firms in foreclosures of HUD properties to the addresses of the corporate parents. I further confirmed the information by checking the official records at multiple Secretaries of State offices where the firms must register their subsidiaries to do business within the state.
What the program effectively did was allow the biggest retail banks in the country to get accelerated payment on their defaulted, FHA-insured, single family mortgage loans while allowing another set of the biggest investment banks to make huge profits in fees for bundling and selling off the loans as securitizations. Once the loans were securitized (sold off to investors) they were no longer the problem of HUD or the Wall Street bankers. The loans conveniently disappeared from the radar screen and the balance sheet. The family’s fate had been sold off by HUD to Wall Street in exchange for a small piece of the action. Wall Street then sold off the family’s fate to thousands of investors around the world for a large piece of the action.
HUD has attempted to spin this program as a win-win for everyone with the suggestion that families would have more options under this program. In a HUD February 17, 2006 report titled “Evaluation of 601 Accelerated Claims Disposition Demonstration,” a few kernels of truth emerged. It was noted on page 4 that the private partners “determine how best to maximize the return on the loan…Loans liquidated through note sales generally earn a higher return than property sales, so the JV [joint venture] has an incentive to maximize the share of note sales relative to property sales.” Rather than evaluating the success of the program on how many families were able to get a loan modification and remain in their homes, the report notes that “The benchmark for progress is the share of loans that have reached resolution.”
From its 2002 joint venture, Citigroup dumped en masse 2,599 loans in one securitization alone in August 2004. It sold another 1,177 at other unknown times. From its 2004 joint venture, it dumped 1,814 in one fell swoop. The 2006 HUD report notes that following securitization “there is no information available on the [home] retention after the sale.”
According to HUD’s web site, another major award of $400 million to $800 million in defaulted mortgages was slated for October 23 of last year in the midst of a foreclosure and eviction crisis. Lemar Wooley, in HUD’s Office of Public Affairs, advises that the deal never happened as a result of “no acceptable bids being received.” Given that we have been promised change we can believe in, I would have much preferred to hear: “We’ve sacked this program as an abhorrent example of privatizing profits and socializing losses while turning our backs on the neediest of our society.”
While this was clearly not a win-win for families in financial distress, two other red flags come to mind. The 2006 HUD report notes that to be eligible for this program, loans had to be four full payments past due (five full payments past due for the 2005 Bear Stearns deal). But to securitize the loans, the Wall Street firms had to bring the loans into performing status, that is, up to date in their payments. The question arises as to whether the investors in the securitizations were advised that these were heretofore defaulted HUD loans. One might be forgiven for pondering that as a material fact required in a prospectus since there is much data available showing that loans once in default tend to redefault. Some of these investors might unknowingly be you and your family members. The loans could be sitting right now in public employee pension funds, mutual funds held in 401(k)s, etc.
The second concern is that many of the homes in the deals were foreclosed on in 2006, 2007 and 2008. By HUD not keeping these loans and insisting on its legal mandate for lenders to attempt loan modifications, special forbearance or partial claims to bring the loans current, what impact did this program have on the foreclosure glut and overall property value declines.
It is worth noting what happened to the firms that HUD deemed qualified for this program: Lehman Brothers collapsed on September 15, 2008. Bear Stearns required a weekend rescue by JPMorgan Chase and the Fed on March 16/17, 2008. Citigroup, which got the lions share of the HUD deals, exists today only because of a $45 billion direct infusion from unwilling taxpayers (overruled by their Congress) and hundreds of billions of dollars more in various other government backstop operations – some still undisclosed despite Freedom of Information Act requests and litigation.
Future articles in this series will look at how these deals started under the Clinton administration with awards to Goldman Sachs, GE Capital, Blackrock and others, with the dubious protection of Merrill Lynch as the overseer for HUD. This program also went virtually unnoticed until charges of rigged computers and bid rigging erupted in headlines. We will also look at the human suffering resulting from this macabre rewriting of the social contract in America. The series begins today with the most unlikely candidate of all for helping people in need: Citigroup.
* * *
In the early evening of June 26, 2009 I was cleaning up emails I had saved for more careful reading at a later date when I bolted in my chair. A message from a reader whom I have permission to call Melissa X advised that she had documentation that Citigroup was engaging in dubious real estate transactions out west under an alias. I immediately answered with a request for specifics and received the following response:
“…a friend asked me to pull the real property records on a house a few doors down from him that he had heard sold at a very low price in a foreclosure sale. After pulling the property records I just couldn't believe the price this particular house sold for in the ‘foreclosure sale’ and started looking into the foreclosure purchaser, Liquidation Properties, Inc. (LPI). I have been a litigation paralegal for 14 years, thus I have a good amount of investigation experience and also in real estate law as we have a considerable practice in real estate litigation. Needless to say, my instinct told me something wasn't right about this and I Googled the Directors of LPI, who happened to be high level executives at Citigroup Global Markets. At first I thought that LPI wasn't a subsidiary of Citigroup because when I was reviewing court records they have filings that say they are a privately owned company with no connection to a publicly traded company. So, initially, I thought these high level Citigroup execs had formed this company that was purchasing these Citi foreclosures super cheap…one of the Directors of LPI is Jeffrey Perlowitz, who according to his online bio ran the trading desk at [Citigroup’s] Smith Barney during the housing ‘boom’ and is credited for ‘purchase, sales and trading of single family residential mortgages and asset backed securities…’ Then I ran LPI through Edgar [an SEC search engine] to see if I could find anything in SEC filings about this entity and that is how I ended up discovering LPI is actually a Citi subsidiary. I know from reading your articles that you are well aware of how shady Citi is with their subsidiaries. I particularly liked an article you wrote about the oil markets and how we can't expect the sleuths at Congress to figure out why the prices went out of control, and then you linked it to a little talked about Citi subsidiary.”
It took but a few minutes to confirm that Liquidation Properties, Inc. was indeed a subsidiary of Citigroup. Exhibit 21.01 of Citigroup’s December 31, 2008 SEC filing lists Liquidation Properties Holding Company Inc. and Liquidation Properties Inc. as subsidiaries chartered in Delaware. (But how many people are going to notice that when Citigroup has over 2,000 subsidiaries.) A quick click at the Secretary of State web site for Massachusetts, one of the many states in which Liquidation Partners, Inc. conducts business, revealed the following officers as of March 14, 2007: Randall Costa, President; Scott Freidenrich, Treasurer; Robyn Gomez, Secretary; Jeffrey Perlowitz, Director; Mark Tsesarsky, Director. But just as Melissa X had noticed, there was nothing on this filing to connect this firm with Citigroup or any publicly traded company. In fact, the form indicated that there were only 200 shares of common stock outstanding. Citigroup, on the other hand, has an unprecedented and unfathomable 22.9 billion (yes, billion) common shares outstanding, now withering in value alongside the faded dreams of financial security for its shareholders and customers.
I reviewed two other documents Melissa X had sent along: two foreclosure filings by Liquidation Properties, Inc. in the U.S. District Court for the Northern District of Ohio stating that it was not a “party, a parent, a subsidiary or other affiliate of a publicly owned corporation.”
One other item stood out in this filing: the address of this firm was listed as 388 Greenwich Street in the trendy neighborhood of Tribeca, New York City. That is where the raucous trading of exotic derivatives, commodities and mortgage securities has traditionally been handled. The legacy of the swashbuckling culture of the notorious Salomon Brothers, a predecessor firm whose traders rigged the two-year note auction of U.S. Treasurys in 1991, remains alive in these trading rooms. Indeed, Jeffrey Perlowitz was a Salomon protégé. The seminal book on the Salomon culture, Michael Lewis’ “Liar’s Poker,” assigns mortgage traders a philosophy of “ready, fire, aim.”
In other words, this is the address of the investment bank of Citigroup with whom these individuals are involved, not the calm bean counters at the retail bank, Citibank. The investment bank specializes in mergers and acquisitions, lending and trading, with a sophisticated customer base of corporations, governments and institutions. An investment bank is an unfit place for conducting or even overseeing the hand holding and financial counseling of frightened families who need urgent and sincere help to avoid loosing the roof over their heads.
Call it divine intervention or call it happenstance, but Melissa X had chosen to electronically communicate with a stranger on the other side of the country who just happened to have an indelibly forged mental picture of 388 Greenwich Street in Tribeca.
At 1 pm on May 20, 1997 an eclectic group of protesters filled the sidewalk in front of 388 Greenwich Street. I was one of them. My group, which included Gloria Steinem, came to name the firm (then known as Smith Barney) a Merchant of Shame for its privatized justice system which barred employees, as a condition of employment, from suing the firm in a public court setting. Tribeca residents spontaneously joined us as they walked by to raise hell about the company’s bizarre selection of signage.
Cemented into the middle of the sidewalk in front of the firm was a 16 foot, 5300 pound, red steel umbrella representing the company’s logo at the time and, I imagined, the physical equivalent of Sandy Weill’s ego, then CEO of the firm. A Business Week article once quoted a former employee saying Weill would steal pennies off a dead man’s eyes. Mr. Weill’s pennies, plucked from the dying firm’s eyes, eventually added up to $1 billion and he retired not long before the tens of billions of losses squirreled away in Structured Investment Vehicles (SIVs) in the Cayman Islands came home to roost.
In what I now recognize as the electronic manifestation of the whoring of Wall Street, a four-story red neon lighted umbrella was mounted near the top of this 39-floor building. Both the sidewalk and building umbrellas were later removed but I did note in a recent visit to Manhattan that giant and bizarre electronic signs flash messages to pedestrians from the formerly sedate wealth management offices of major Wall Street firms in midtown.
Having verified Melissa X’s information that Liquidation Properties, Inc. was indeed a subsidiary of Citigroup with officers employed by the firm, endowed with the uncanny knack of capturing an inordinate amount of winning bids at foreclosure auctions in depressed neighborhoods, I sat about unraveling the multitude of Byzantine transactions in which it was involved.
The trail led to four more entities: Reo Management 2002, Reo Management 2004, SFJV-2002, and SFJV-2004. (Reo is an acronym for real estate owned by a bank, typically after an unsuccessful foreclosure auction.) SFJV, I would later learn, was the name of the HUD joint ventures, an acronym for Single Family Joint Venture. SFJV-2002 and SFJV-2004 were, indeed, subsidiaries of Citigroup and being used to facilitate the transfer of foreclosed homes around the country.
The Reo Management firms were listed as subsidiaries of Residential Capital Corp. (ResCap) on its July 15, 2005 filing with the SEC but filings with the Secretary of State in Massachusetts showed the same Citigroup officials at 388 and 390 Greenwich Street in Tribeca as officers and directors: Costa, Freidenrich, Perlowitz, Tsesarsky. Filings with other Secretaries of State showed these same four individuals along with numerous other officials at Citigroup. Reo Management 2002 showed 200 shares of stock issued to unnamed parties while Reo Management 2004 said stock details were not available online.
Why on earth would Citigroup managers be officers of a competitor? I called people in the know on Wall Street. No one had ever heard about it or could offer an explanation. I called Jeffrey Perlowitz’ secretary and sent her an email requesting an explanation from Mr. Perlowitz. Mr. Perlowitz took the same position as HUD: silence.
ResCap’s operations include General Motors Acceptance Corp. Mortgage (GMAC Mortgage) and GMAC-RFC. Until 2006, GMAC was a wholly owned subsidiary of General Motors, a company that had been around since 1919 to provide car financing to GM dealers and customers. In 2006, a majority stake was sold to Cerberus Capital Management, a private equity/hedge fund whose investors are a tightly held secret. The firm is now known as GMAC Financial Services. In 2008 the Federal Reserve waived its magic wand and GMAC became a bank holding company (now called Ally Bank) and TARP gave $5 billion of taxpayer funds to the entity. Another $7.5 billion was provided in 2009. As of June 30th of this year, you and I involuntarily own 35.4 per cent of the firm with Cerberus and its secret investors owning 22 percent.
Since all of us hold the largest block of stock, I felt I might get some answers. I emailed GMAC and asked what all of this was about. A spokeswoman responded that “the loans which we acquired from the [HUD] auction happened to be those in which we co-bid with Citi. The Reo Management 2002 and 2004 entities were set up as subs of those joint ventures to hold the resulting Reo properties until they were resolved.” I countered with: “Why were officials of Citigroup serving as principals and directors of subsidiaries of ResCap?” The spokesperson replied that both Reo Management 2002 and Reo Management 2004 had been dissolved and she had no further information.
After scrutinizing every scrap of paper available through HUD on these deals for endless weeks, I was, as a taxpayer, more than a little nonplussed that I had seen nary a word about co-bidders. Citigroup operating under an alias in consumer real estate transactions was scary enough, but allowed to team up with another giant player also operating under an alias, all under the imprimatur of a Federal agency, that was beyond rational comprehension.
It’s not like the Federal government didn’t know Citigroup was a serial rogue. Our tax dollars have been used since this Frankenbank was created to investigate serious crimes, while letting the company off with a fine so it could live on to create even bigger problems the next time around. In 2001, Citigroup settled with the Federal Trade Commission for $215 million for predatory lending at one of its divisions. In 2003, Citigroup paid $400 million to U.S. regulators for fraudulent research reports and improper handling of new stock offerings. In 2004, Citigroup paid $2.65 billion to WorldCom stock and bond holders over its role in the demise of the firm. Also in 2004 its private bank was kicked out of Japan for money laundering. In 2005 Citigroup was fined $26 million by Europe’s Financial Services Authority for conducting a trade it internally named “Dr. Evil” that roiled the European bond market. In that same year, it settled with the SEC for $101 million for helping Enron inflate cash flows and under report debt. Also in 2005, it settled a private litigation over its role in the bankruptcy of Enron for $2 billion.
HUD’s own Regional Inspector General wrote in a 45-page report issued on November 13, 2008 that CitiMortgage, a unit of Citigroup, placed the FHA insurance fund at an increased risk of loss on one-third of the loans HUD audited at CitiMortgage as result of improper underwriting practices.
Melissa X took her concerns not just to me but to the U.S. Attorney’s office. In one passage of an email to this U.S. Attorney she wrote: “It is such a disappointment to me that our Government has failed us so, and only continues to do so…One must wonder how much the American people will take of this before a total revolution occurs…”
While I was researching this story, a friend forwarded a video clip of Laura Flanders of Grit-TV interviewing the filmmakers of “American Casino,” Andrew and Leslie Cockburn. (Yes, they’re all – Laura included - part of that intrepid Cockburn clan whose spirit resides here at CounterPunch in the form of Alexander Cockburn.) Carefully observe the face of Flanders, the Cockburns and the victims in the film clips. They all muster a brave front but I sense an ever present emotion to hang one’s head and weep for the nation. At one point Flanders asks: “So you think it was all really a scam to transfer money from the vulnerable and the poor to the wealthy? There was no positive interest in home ownership distribution involved?” The answers from the Cockburns go to the heart of this crisis. Both this clip and the movie “American Casino,” playing now in theatres across the U.S., provide a critical foundation for understanding that while our government and mighty military chased down men in caves in Afghanistan, the ivy league educated enemy within sacked our nation. The film premiered in the U.S. in April, ironically, in Tribeca, just moments away from the real, live American Casino, Citigroup. Watch the interview and clips from the film here: http://lauraflanders.firedoglake.com/2009/...merican-casino/
Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com
http://www.counterpunch.org/martens10052009.html
"They Lied: Watchdog Says Treasury and Fed Knew Bailed-Out Banks Were Not 'Healthy'"
http://abcnews.go.com/Business/lied-watchd...tory?id=8748299
"U.S. Lost Credibility by Saying Banks Were Healthy, Audit Says"
http://www.bloomberg.com/apps/news?pid=206...id=a8m5sPx1dFAc
TARP Watchdog's Report: Treasury Misled Public On Bailouts
Tarp
http://www.huffingtonpost.com/2009/10/05/t...e_n_309301.html
Tarp
http://www.huffingtonpost.com/2009/10/05/t...e_n_309301.html
FDIC Chief: "Too Big To Fail" Must End For All
Fdic
http://dealbook.blogs.nytimes.com/2009/10/...dic-chief-says/
Fdic
http://dealbook.blogs.nytimes.com/2009/10/...dic-chief-says/
Obama, Geithner & Bernanke Have It Wrong - Nomi Prins, The Daily Beast
http://www.thedailybeast.com/blogs-and-sto...bank-bust/full/
http://www.thedailybeast.com/blogs-and-sto...bank-bust/full/
Stiglitz: The Banks Must Be Restrained, The Financial System Must Be Reformed
"We will have another armed robbery unless we prevent the banks, the banks that are too big to fail. We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.” Joe Stiglitz
If a Nobel Prize winnter in economics says the obvious, besides a few diligent bloggers, perhaps other economists will obtain 'air cover' in speaking about the economic and regulatory absurdity taking place today in the US and the UK. Winning the Nobel is even better than tenure.
Here is a video of his speech in Brussels, because this Bloomberg article leaves out some of the more 'pithy' remarks on the Wall Street bank bonuses, the errors efficient market theory, political and ideological capture, lies (his wording) told by central bankers including Alan Greenspan, unproductive "taxes" by banks on the real economy, and the social costs of this financial crisis from Joe Stiglitz from the Brussels banking conference.
Can you imagine if Joltin' Joe was the Fed Chairman, and not Gentle Ben? An exchange between Congressman Grayson and Fed Chairmain Stiglitz could be a smash hit on Pay-Per-View.
Bloomberg
Stiglitz Says Banks Should Be Banned From CDS Trading
By Ben Moshinsky
October 12, 2009 06:28 EDT
Oct. 12 (Bloomberg) -- Large banks should be banned from trading derivatives including credit default swaps, said Joseph Stiglitz, the Nobel prize-winning economist.
The CDS positions held by the five largest banks posed “significant risk” to the financial system, Stiglitz said at a press conference in Brussels. Big banks should have extra restrictions placed on them, including a ban on derivative trading, because of the risk that they would need government money if they fail, he said in a speech today.
“We will have another armed robbery unless we prevent the banks, the banks that are too big to fail,” Stiglitz said. “We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.”
Derivative trading and excessive risk-taking are blamed for helping to spark the worst financial crisis since World War II. American International Group Inc., once the world’s largest insurer, needed about $180 billion of government money after its derivative trades faltered and pushed the company toward bankruptcy.
Financial markets should be subject to taxes that will discourage “dysfunctional” trading and help pay for the effects that the global crisis had on poorer nations, Stiglitz said last week.
U.S. and European regulators have pushed for tighter regulation of the $592 trillion over-the-counter derivatives market, amid concerns that it could create systemic failures in the financial system. Lawmakers have called for global rules covering derivatives to prevent financial institutions from exploiting jurisdictional differences in regulation.
Stricter Standards
Former German finance minister Hans Eichel said in an interview today that global regulation would ultimately be needed. The European Union should enforce tougher legislation, even if the U.K. is reluctant to adopt stricter standards, he said.
“The Eurozone is strong enough economically to go it alone,” Eichel said. European legislation could then become the blueprint for global rules, said Eichel.
http://www.bloomberg.com/apps/news?pid=206...id=a65VXsI.90hs
"We will have another armed robbery unless we prevent the banks, the banks that are too big to fail. We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.” Joe Stiglitz
If a Nobel Prize winnter in economics says the obvious, besides a few diligent bloggers, perhaps other economists will obtain 'air cover' in speaking about the economic and regulatory absurdity taking place today in the US and the UK. Winning the Nobel is even better than tenure.
Here is a video of his speech in Brussels, because this Bloomberg article leaves out some of the more 'pithy' remarks on the Wall Street bank bonuses, the errors efficient market theory, political and ideological capture, lies (his wording) told by central bankers including Alan Greenspan, unproductive "taxes" by banks on the real economy, and the social costs of this financial crisis from Joe Stiglitz from the Brussels banking conference.
Can you imagine if Joltin' Joe was the Fed Chairman, and not Gentle Ben? An exchange between Congressman Grayson and Fed Chairmain Stiglitz could be a smash hit on Pay-Per-View.
Bloomberg
Stiglitz Says Banks Should Be Banned From CDS Trading
By Ben Moshinsky
October 12, 2009 06:28 EDT
Oct. 12 (Bloomberg) -- Large banks should be banned from trading derivatives including credit default swaps, said Joseph Stiglitz, the Nobel prize-winning economist.
The CDS positions held by the five largest banks posed “significant risk” to the financial system, Stiglitz said at a press conference in Brussels. Big banks should have extra restrictions placed on them, including a ban on derivative trading, because of the risk that they would need government money if they fail, he said in a speech today.
“We will have another armed robbery unless we prevent the banks, the banks that are too big to fail,” Stiglitz said. “We should say that if you’re too big to fail then you are too big to be. They need more restrictions, such as no derivative trading.”
Derivative trading and excessive risk-taking are blamed for helping to spark the worst financial crisis since World War II. American International Group Inc., once the world’s largest insurer, needed about $180 billion of government money after its derivative trades faltered and pushed the company toward bankruptcy.
Financial markets should be subject to taxes that will discourage “dysfunctional” trading and help pay for the effects that the global crisis had on poorer nations, Stiglitz said last week.
U.S. and European regulators have pushed for tighter regulation of the $592 trillion over-the-counter derivatives market, amid concerns that it could create systemic failures in the financial system. Lawmakers have called for global rules covering derivatives to prevent financial institutions from exploiting jurisdictional differences in regulation.
Stricter Standards
Former German finance minister Hans Eichel said in an interview today that global regulation would ultimately be needed. The European Union should enforce tougher legislation, even if the U.K. is reluctant to adopt stricter standards, he said.
“The Eurozone is strong enough economically to go it alone,” Eichel said. European legislation could then become the blueprint for global rules, said Eichel.
http://www.bloomberg.com/apps/news?pid=206...id=a65VXsI.90hs
CEPR on "Too Big To Fail Banks"
CEPR's recent paper, which outlines how, in the year since the TARP and other bank rescue efforts, taxpayer dollars have essentially been subsidizing borrowing for major banks, was featured in the Oct 3, 2009 edition of the New York Times. On October 6, 2009, CEPR's Co-Director Dean Baker discussed the implicit bank subsidies from the TBTF policy on Democracy Now. CEPR has also been a leading critic of Federal Reserve policies, pointing out here that Fed Chief Ben Bernanke, having missed the $8 trillion housing bubble whose bursting led to the current recession, continues to fight efforts to allow Congress to audit the Fed
http://www.cepr.net/index.php/publications...o-fail-subsidy/
CEPR's recent paper, which outlines how, in the year since the TARP and other bank rescue efforts, taxpayer dollars have essentially been subsidizing borrowing for major banks, was featured in the Oct 3, 2009 edition of the New York Times. On October 6, 2009, CEPR's Co-Director Dean Baker discussed the implicit bank subsidies from the TBTF policy on Democracy Now. CEPR has also been a leading critic of Federal Reserve policies, pointing out here that Fed Chief Ben Bernanke, having missed the $8 trillion housing bubble whose bursting led to the current recession, continues to fight efforts to allow Congress to audit the Fed
http://www.cepr.net/index.php/publications...o-fail-subsidy/
US Oligarchs and their Minions
Simon Johnson, former chief economist for the International Monetary Fund and co-author of The Baseline Scenario takes American oligarchs to task in The Quiet Coup, Atlantic Monthly, May 2009. Johnson believes, going forward, that we should seek smaller, better-regulated banking/finance houses incapable of doing systemic damage, and overseen by a different set of oligarchs (Wiki link). Maybe? Or maybe we'll find a way to regulate bigger entities effectively? Or maybe we'll just set the stage for the next big mess? Who knows?
In any case we certainly need to find something to hope for. Burning existing oligarchs at the stake is likely out. So maybe just replacing them, rewriting regulatory rules, and starting over is the best we can hope for. Somehow I think that is where Team Obama will ultimately attempt to take us. In any case, read Simon's thought provoking, controversial article. Here is a somewhat-lengthy excerpt:
Becoming a Banana Republic
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn't be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn't roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
But there's a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a "buck stops somewhere else" sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for "safety and soundness" were fast asleep at the wheel.
But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector's profits—such as Brooksley Born's now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.
The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry's ascent. Paul Volcker's monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.
Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.
The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.
Continue reading "US Oligarchs and their Minions"
http://forestpolicy.typepad.com/economics/...nions.html#more
Simon Johnson, former chief economist for the International Monetary Fund and co-author of The Baseline Scenario takes American oligarchs to task in The Quiet Coup, Atlantic Monthly, May 2009. Johnson believes, going forward, that we should seek smaller, better-regulated banking/finance houses incapable of doing systemic damage, and overseen by a different set of oligarchs (Wiki link). Maybe? Or maybe we'll find a way to regulate bigger entities effectively? Or maybe we'll just set the stage for the next big mess? Who knows?
In any case we certainly need to find something to hope for. Burning existing oligarchs at the stake is likely out. So maybe just replacing them, rewriting regulatory rules, and starting over is the best we can hope for. Somehow I think that is where Team Obama will ultimately attempt to take us. In any case, read Simon's thought provoking, controversial article. Here is a somewhat-lengthy excerpt:
Becoming a Banana Republic
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn't be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn't roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
But there's a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a "buck stops somewhere else" sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for "safety and soundness" were fast asleep at the wheel.
But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector's profits—such as Brooksley Born's now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.
The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry's ascent. Paul Volcker's monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.
Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.
The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.
Continue reading "US Oligarchs and their Minions"
http://forestpolicy.typepad.com/economics/...nions.html#more
Dylan Ratigan: Turn Goldman Anger Into Government Action
AP/Mark Lennihan
Dylan Ratigan: In a world where real competition, modern technology and lack of special government standing means most American businesses have no choice but to adapt and innovate -- Wall Streets wimps only apparent skill is rigging the game. In fact, on Wall Street there have always been only two basic ways to make money. The first and most difficult: Be a great investor -- to the best investors go the profits, rewarding those who are best at picking winning businesses for America and punishing those who fail through the loss of their money. The second, and seemingly preferred method, exploit those who know less than you -- and take their money, even if you have to change the laws to do so. Click here to read more.
http://www.huffingtonpost.com/dylan-ratiga...g_b_321730.html
AP/Mark Lennihan
Dylan Ratigan: In a world where real competition, modern technology and lack of special government standing means most American businesses have no choice but to adapt and innovate -- Wall Streets wimps only apparent skill is rigging the game. In fact, on Wall Street there have always been only two basic ways to make money. The first and most difficult: Be a great investor -- to the best investors go the profits, rewarding those who are best at picking winning businesses for America and punishing those who fail through the loss of their money. The second, and seemingly preferred method, exploit those who know less than you -- and take their money, even if you have to change the laws to do so. Click here to read more.
http://www.huffingtonpost.com/dylan-ratiga...g_b_321730.html
All of Tim Geithner's (Wall Street) Men
from SeekingAlpha.com: Home Page by TraderMark
Trader Mark submits:
The revolving door between Wall Street and government is now legendary. Here is a random article from Bloomberg that I found - some eye opening stats, but it's mostly eye candy. I was (a) "shocked" that a top lobbyist at Goldman Sachs was Geithner's Chief of Staff ( how much Bloomberg pays for a column writer! and © how much it pays to be a director on the Philadelphia Stock Exchange. I don't even know what trades on the "PSE" - do you? How many times could the directors possibly meet a year?
It just shows you how much money is sloshing around in this one sector of our economy and the complete misallocation of resources. I'm all for trading and making big money if you are a success and can kill what you eat, but c'mon... we don't have basic funding for innovation or infrastructure, yet countless trillions are ready in the financial sector for "selling stuff". This is not hedge funds which have to actually perform or die I am grousing about - this is just the magic wand-waving financial innovation sector. The used car salesmen with $6000 suits.
Complete Story »
http://seekingalpha.com/article/166816-all...men?source=feed
from SeekingAlpha.com: Home Page by TraderMark
Trader Mark submits:
The revolving door between Wall Street and government is now legendary. Here is a random article from Bloomberg that I found - some eye opening stats, but it's mostly eye candy. I was (a) "shocked" that a top lobbyist at Goldman Sachs was Geithner's Chief of Staff (
how much Bloomberg pays for a column writer! and © how much it pays to be a director on the Philadelphia Stock Exchange. I don't even know what trades on the "PSE" - do you? How many times could the directors possibly meet a year?It just shows you how much money is sloshing around in this one sector of our economy and the complete misallocation of resources. I'm all for trading and making big money if you are a success and can kill what you eat, but c'mon... we don't have basic funding for innovation or infrastructure, yet countless trillions are ready in the financial sector for "selling stuff". This is not hedge funds which have to actually perform or die I am grousing about - this is just the magic wand-waving financial innovation sector. The used car salesmen with $6000 suits.
Complete Story »
http://seekingalpha.com/article/166816-all...men?source=feed
Diana Farrell And The White House Theory Of Bank Size
On Friday morning, Diana Farrell – a senior White House official – made a significant statement on NPR’s Morning Edition, with regard to whether our largest banks are too big and should be broken up.
“Ms. DIANA FARRELL (Deputy Assistant for Economy Policy): We understand Simon Johnson’s views on this, and I guess the response is the following….
“Ms. FARRELL: We have created them [our biggest banks], and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we’re unlikely to ever come back to or want to come back to.” (full transcript)
Ms. Farrell is Larry Summers’s deputy on the National Economic Council and the former director of McKinsey Global Institute, and she has a strong background on banking issues – based on extensive professional experience with global financial institutions.
Her statement contains three remarkable points. Read the rest of this entry
http://baselinescenario.com/2009/10/13/dia...size/#more-5224
On Friday morning, Diana Farrell – a senior White House official – made a significant statement on NPR’s Morning Edition, with regard to whether our largest banks are too big and should be broken up.
“Ms. DIANA FARRELL (Deputy Assistant for Economy Policy): We understand Simon Johnson’s views on this, and I guess the response is the following….
“Ms. FARRELL: We have created them [our biggest banks], and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we’re unlikely to ever come back to or want to come back to.” (full transcript)
Ms. Farrell is Larry Summers’s deputy on the National Economic Council and the former director of McKinsey Global Institute, and she has a strong background on banking issues – based on extensive professional experience with global financial institutions.
Her statement contains three remarkable points. Read the rest of this entry
http://baselinescenario.com/2009/10/13/dia...size/#more-5224
““If they’re too big to fail, they’re too big” – Greenspan
with one comment
Bloomberg story.
“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
My jaw is still on my desk.
By James Kwak
http://www.bloomberg.com/apps/news?pid=206...id=aJ8HPmNUfchg
with one comment
Bloomberg story.
“If they’re too big to fail, they’re too big,” Greenspan said today. “In 1911 we broke up Standard Oil — so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.”
My jaw is still on my desk.
By James Kwak
http://www.bloomberg.com/apps/news?pid=206...id=aJ8HPmNUfchg
Who Needs Big Banks?
with 101 comments
At a panel discussion at the Pew Charitable Trusts (captured for posterity by Planet Money), Alice Rivlin floated the idea of breaking up big banks. Luckily for us, Scott Talbott of the Financial Services Roundtable (a lobbying group for big banks) was there to slap that idea down.
Talbott: “We need big companies, and they can be managed, and they are being managed …”
Alex Blumberg (Planet Money): “But why, why do we need big companies?”
Talbott: “They provide a number of benefits across the globe. We have a global economy, and these institutions can handle the finances of the world. They can also handle the finances of large, non-bank institutions like General Electric or Johnson & Johnson. They need these institutions [that] can handle the complex transactions. Simply breaking them up … then you’re discouraging a company from achieving the American Dream, working hard, earning money, producing products, and getting bigger.”
There are two things I object to strongly. The second is easy. The American Dream is for people, not companies. And people dream of working hard, being successful, making money, and having an impact on the world. The American Dream does not imply any particular company size. There are situations in which your products are just so much better than anyone else’s that your company becomes big as a result; Google comes to mind. But Citigroup is the product of no one’s American Dream. When Talbott says “American Dream,” what he really means is “American Bank CEO’s Dream” — because, as we all know, CEO compensation in the financial sector is extremely correlated with assets.
Read the rest of this entry
http://baselinescenario.com/2009/10/12/who...anks/#more-5216
with 101 comments
At a panel discussion at the Pew Charitable Trusts (captured for posterity by Planet Money), Alice Rivlin floated the idea of breaking up big banks. Luckily for us, Scott Talbott of the Financial Services Roundtable (a lobbying group for big banks) was there to slap that idea down.
Talbott: “We need big companies, and they can be managed, and they are being managed …”
Alex Blumberg (Planet Money): “But why, why do we need big companies?”
Talbott: “They provide a number of benefits across the globe. We have a global economy, and these institutions can handle the finances of the world. They can also handle the finances of large, non-bank institutions like General Electric or Johnson & Johnson. They need these institutions [that] can handle the complex transactions. Simply breaking them up … then you’re discouraging a company from achieving the American Dream, working hard, earning money, producing products, and getting bigger.”
There are two things I object to strongly. The second is easy. The American Dream is for people, not companies. And people dream of working hard, being successful, making money, and having an impact on the world. The American Dream does not imply any particular company size. There are situations in which your products are just so much better than anyone else’s that your company becomes big as a result; Google comes to mind. But Citigroup is the product of no one’s American Dream. When Talbott says “American Dream,” what he really means is “American Bank CEO’s Dream” — because, as we all know, CEO compensation in the financial sector is extremely correlated with assets.
Read the rest of this entry
http://baselinescenario.com/2009/10/12/who...anks/#more-5216
Larry Summers on Banks: "Time has come for fundamental change"
by CalculatedRisk on 10/16/2009 12:10:00 PM
From MarketWatch: Summers: 'Time has come' for deep change for banks
White House senior economic adviser Lawrence Summers challenged U.S. financial institutions Friday to think about what they can do for their country by stepping up and accepting the regulations imposed upon them in the wake of the largest financial crisis since the Great Depression.
"Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country -- by accepting the necessary regulation to protect the American people," Summers said in remarks prepared for delivery at the Economist's Buttonwood Gathering in New York. "There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system."
...
"The time has come for fundamental change in the financial sector of our economy -- both in how financial institutions conduct their business and how they are regulated," Summers said.
...
"[We have] one crisis every three years," Summers said. "Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform."
Clearly this means much more than consumer protection and aligning compensation with the goals of the corporation (not on taking short term risks). Those are good first steps - as is regulating derivatives - but the key is that no bank should be “systemically important” or "too big to fail".
Posted by CalculatedRisk on 10/16/2009 12:10:00 PM
http://www.calculatedriskblog.com/
by CalculatedRisk on 10/16/2009 12:10:00 PM
From MarketWatch: Summers: 'Time has come' for deep change for banks
White House senior economic adviser Lawrence Summers challenged U.S. financial institutions Friday to think about what they can do for their country by stepping up and accepting the regulations imposed upon them in the wake of the largest financial crisis since the Great Depression.
"Financial institutions that have benefited from government support can, should and must use this moment to think about what they can do for their country -- by accepting the necessary regulation to protect the American people," Summers said in remarks prepared for delivery at the Economist's Buttonwood Gathering in New York. "There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system."
...
"The time has come for fundamental change in the financial sector of our economy -- both in how financial institutions conduct their business and how they are regulated," Summers said.
...
"[We have] one crisis every three years," Summers said. "Surely a system that produces this many accidents and accidents this severe is a system that is in very much need of reform."
Clearly this means much more than consumer protection and aligning compensation with the goals of the corporation (not on taking short term risks). Those are good first steps - as is regulating derivatives - but the key is that no bank should be “systemically important” or "too big to fail".
Posted by CalculatedRisk on 10/16/2009 12:10:00 PM
http://www.calculatedriskblog.com/
Gawker To Start Stalking Goldmanites (GS)
Joe Weisenthal|Oct. 16, 2009, 7:19 AM | 955 |comment20
Know of a Goldman Sachs employee who spend $500 on a bottle of wine? Gawker wants to track it.
Read »
http://www.businessinsider.com/watch-out-g...ing-you-2009-10
SEC Enforcement Division Hires Goldman Sachs VP As COO
http://www.businessinsider.com/sec-hires-g...-as-coo-2009-10
How the Bankers Bought Washington
Our Cheap Politicians
By ANDREW COCKBURN
http://www.counterpunch.org/andrew10152009.html
Our Cheap Politicians
By ANDREW COCKBURN
http://www.counterpunch.org/andrew10152009.html
How to downsize the US financial sector
I was heartened to hear that Alan Greenspan has repudiated the Too Big to Fail doctrine (as practiced in the Bush and Obama Administrations) in such unequivocal terms. He almost sounded like a Teddy Roosevelt trust buster.
Nevertheless, President Obama clearly believes the line fed to him by Wall Street. He is no Teddy Roosevelt. The question you should be asking is, will the tentative
Continue reading
http://www.creditwritedowns.com/2009/10/ho...ial-sector.html
I was heartened to hear that Alan Greenspan has repudiated the Too Big to Fail doctrine (as practiced in the Bush and Obama Administrations) in such unequivocal terms. He almost sounded like a Teddy Roosevelt trust buster.
Nevertheless, President Obama clearly believes the line fed to him by Wall Street. He is no Teddy Roosevelt. The question you should be asking is, will the tentative
Continue reading
http://www.creditwritedowns.com/2009/10/ho...ial-sector.html
Quelle Suprise! Banking Profits Might Be Due to Big Government Subisdies!
Posted: 17 Oct 2009 01:33 AM PDT
Actually, despite the somewhat churlish headline, the story “Bailout Helps Fuel a New Era of Wall Street Wealth,” by Graham Bowley at the New York Times, is a solid job of reporting and does not tiptoe around the issue of the big bennies that the financial services industry is enjoying and their role in creating outsized profits. It also makes a distinction, which has escaped many writers, that the firms that are doing really well are the big capital markets players, not conventional banks (or firms like Citi and Bank of America, that are capital markets firms with very substantial commercial banking operations). It was the markets that the powers that be were panicked to save (debt is now heavily intermediated on over-the-counter credit markets, vastly less on bank balance sheets than it once was). And with the subsidies directed mainly at shoring up credit markets and the firms that own and operate the crucial trading infrastructure, it should be not wonder that the players that were most deeply involved are showing the greatest gains.
The reason for the tart headline is that this view should be conventional wisdom by now (well, it is among folks who understand financial services, but not in the wider world). And it should have been widely commented on when first and second quarter bank earning came out,. Instead the meme was “isn’t it wonderful those banks we thought were dead are actually making money!” No one wanted to look to closely and ascertain that the pretty profits were the result of government props, not sounder fundamentals. The one who came closest to saying the truth was Meredith Whitney, who described the earnings as “manufactured” (recall the role of AIG swaps unwinds in 1Q results) but added that the banks could keep it up for another quarter or two.
The New York Times story warm up indicates that comparatively few are in on the role of the government support in the supercharged profits. The price provides a short recap and notes that the Federal aid is contributing to lofty bonuses:
It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington. Many of the steps that policy makers took last year to stabilize the financial system — reducing interest rates to near zero, bolstering big banks with taxpayer money, guaranteeing billions of dollars of financial institutions’ debts — helped set the stage for this new era of Wall Street wealth.
Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder — a benefit of less competition after the failure of some investment firms last year.
So even as big banks fight efforts in Congress to subject their industry to greater regulation — and to impose some restrictions on executive pay — Wall Street has Washington to thank in part for its latest bonanza…
Not all banks are doing so well. Giants like Citigroup and Bank of America, whose fortunes are tied to the ups-and-downs of ordinary consumers, are struggling to turn themselves around, as are many regional banks.
It is admittedly a high level treatment (for instance, it does not enumerate the various types of support, but does make clear it extends well beyond the TARP) but delivers its message in a clear, matter-of-fact, and unqualified fashion.
Some economists and bloggers have been on this theme (the extent of the subsidies and the lack of quid pro quo for the taxpayer) for quite some time, and their drumbeat continues. One salvo comes today from Jesse in “How Goldman Sachs Leveraged $70 Billion in Government Money For Record Profits.” While this is admittedly close to conspiracy theory, most investment professionals I know regard the latter phases of the stock market rally with great suspicion (too much end of day tape painting, too many heavy handed short squeezes, continued thin volume, and suspicious moves on indexes when they near levels that are significant to technicians). That of course begs the question, “If the market is being manipulated, how and by whom?” When I worked with the Japanese, it was widely known that the Japanese securities firms manipulated the markets and the politicians were tipped off early and bought stocks the brokers were about to ramp (look, if I as a mere gaijin heard about it, it was hardly secret). Yet when it came out in the Japanese media years later, it was treated as a huge scandal. I was and am perplexed that a widely-known practice could be treated as such a remarkable event. I regard much of this rally as a similar open secret, except how this is being carried out is a mystery (is this mere trader opportunism and brute force that looks like collusion, with the perps secure in the knowledge that the government won’t act against rule violations, since the outcome serves their interests, or something more deliberate?)
On the wonky/policy end of the spectrum, Willem Buiter continues to be Not Happy about the wondrously bank-friendly regimes that have been put in place. He provided some commentary from Nobel prize winner János Kornai on one of his ideas, that of soft versus hard budget constraints (Buiter had invoked the idea in a post earlier in the week).
The problem is that the concept is important, but this (established) turn of phrase does not slip swimmingly off the tongue. A hard budget constraint means when you run out of something (dough, usually, but it could be other scarce resources) you are stuck. No magic fairy dust to rescue you. Kornai explains:
To simplify matters, a contrast is often made between the soft and the hard budget constraint. In fact there are grades between these two extremes. The budget constraint that corporate decision-makers sense may be very soft, moderately soft, quite hard and so on, depending on their subjective awareness of the probability of rescue….
Let us turn for a minute to the dawn of capitalism. A debtor unable to pay was threatened by the debtors’ prison. Business failure in the early period of capitalism was more than a fatal material blow, for it ruined the bankrupt’s moral reputation. The budget constraint in those days was still absolutely hard. The perilous results of loss and indebtedness forced entrepreneurs to be extremely cautious.
But the historical development of property relations and the credit system gradually brought essential changes. The principle of limited liability became legitimated, and joint stock companies based on that new principle appeared. At the same time, the hitherto close connection between the material and moral position of decision-makers and the financial state of their companies became weaker.
As property and management separated, so the relation weakened between the individual destiny, income and reputation of the managers making the practical business decisions on the one hand, and the presence or absence of financial destinies of their companies, on the other. Successive legislation on business failure provided some protection for firms caught up in a spiral of debt. These changes and others not mentioned here contributed to a steady softening of the budget constraint….Early capitalism rewarded success richly and punished failure fiercely. As time went by, the rewards not only remained, but in several countries increased dramatically, while the penalties became lighter. That disproportional change has weakened the incentive for business to pursue efficiency and adaptability to change. It encourages irresponsible decisions on borrowing, investment and expansion.
The one bit I find troubling with Kornai’s discussion is he conflates soft budget constraints with socialistic regimes, namely the sort he saw in Hungary in the late 1960s, when companies were urged to adopt “market socialism” but that meant that if the manager did well, the company got a bonus, but if the company produced a loss, no matter, the state would fund the shortfall.
But this is not a function of socialist systems per se; it took place in all the examples that George Akerlof and Paul Romer cited in their classic 1994 paper on looting, and included the Chicago School free market experiment in Pinochet’s Chile, which resulted in a plutocratic land grab. To put it more simply, “socialized losses” can occur under a socialist system (where the goal is to preserve employment), in looting (where lax regulation and accounting allow companies to report largely bogus profits and syphon out funds, either directly to the owners/managers, or to affiliated companies), or in Mussolini-style corpocracy.
Note that Korzai stresses that rescues per se are not bad things, provided they are made judiciously and infrequently:
Softness of the budget constraint cannot yet be said to apply in a singular case where a firm in deep financial trouble is bailed out. The syndrome appears if such rescues occur frequently, if managers can begin to count on being rescued. We face here a mental phenomenon, an expectation in decision-makers’ minds that strongly influences their behaviour.
It isn’t hard to imagine that with a clear “no more Lehmans” policy in force in the US, UK, and EU, that banks are very well conditioned by now to expect a rescue if they screw up.
Separately, even the Times manages to undercut the pointed message of its story on source of bank profits with another story today: “All This Anger Against the Rich May Be Unhealthy.” A cultural aside: since the early 1800s in England, there was a distinction between the deserving and undeserving poor. Someone who was able to work but didn’t was undeserving (there were other ways the line might be drawn, but that was one of the most consistent). We see that carried through today (when talking about those over their heads in debt, some readers like to demonize them all as profligate, while others jump in and point out how, for instance, medical expenses can push a lot of people who had lived reasonably within their means into debt pronto. Again, it’s a “deserving v. undeserving” distinction.
Given the row over the suspect level of pay in certain areas of finance, it may be time to apply that notion to the upper end of the food chain more formally. Most people have no problem with self made men and women making a lot of money; heck, that’s the American dream. The fact that the “if you are rich, you must be deserving” Calvinist assumption is beginning to be questioned is positive; we just need to be careful not to replace old stereotypes with new ones.
Posted: 17 Oct 2009 01:33 AM PDT
Actually, despite the somewhat churlish headline, the story “Bailout Helps Fuel a New Era of Wall Street Wealth,” by Graham Bowley at the New York Times, is a solid job of reporting and does not tiptoe around the issue of the big bennies that the financial services industry is enjoying and their role in creating outsized profits. It also makes a distinction, which has escaped many writers, that the firms that are doing really well are the big capital markets players, not conventional banks (or firms like Citi and Bank of America, that are capital markets firms with very substantial commercial banking operations). It was the markets that the powers that be were panicked to save (debt is now heavily intermediated on over-the-counter credit markets, vastly less on bank balance sheets than it once was). And with the subsidies directed mainly at shoring up credit markets and the firms that own and operate the crucial trading infrastructure, it should be not wonder that the players that were most deeply involved are showing the greatest gains.
The reason for the tart headline is that this view should be conventional wisdom by now (well, it is among folks who understand financial services, but not in the wider world). And it should have been widely commented on when first and second quarter bank earning came out,. Instead the meme was “isn’t it wonderful those banks we thought were dead are actually making money!” No one wanted to look to closely and ascertain that the pretty profits were the result of government props, not sounder fundamentals. The one who came closest to saying the truth was Meredith Whitney, who described the earnings as “manufactured” (recall the role of AIG swaps unwinds in 1Q results) but added that the banks could keep it up for another quarter or two.
The New York Times story warm up indicates that comparatively few are in on the role of the government support in the supercharged profits. The price provides a short recap and notes that the Federal aid is contributing to lofty bonuses:
It may come as a surprise that one of the most powerful forces driving the resurgence on Wall Street is not the banks but Washington. Many of the steps that policy makers took last year to stabilize the financial system — reducing interest rates to near zero, bolstering big banks with taxpayer money, guaranteeing billions of dollars of financial institutions’ debts — helped set the stage for this new era of Wall Street wealth.
Titans like Goldman Sachs and JPMorgan Chase are making fortunes in hot areas like trading stocks and bonds, rather than in the ho-hum business of lending people money. They also are profiting by taking risks that weaker rivals are unable or unwilling to shoulder — a benefit of less competition after the failure of some investment firms last year.
So even as big banks fight efforts in Congress to subject their industry to greater regulation — and to impose some restrictions on executive pay — Wall Street has Washington to thank in part for its latest bonanza…
Not all banks are doing so well. Giants like Citigroup and Bank of America, whose fortunes are tied to the ups-and-downs of ordinary consumers, are struggling to turn themselves around, as are many regional banks.
It is admittedly a high level treatment (for instance, it does not enumerate the various types of support, but does make clear it extends well beyond the TARP) but delivers its message in a clear, matter-of-fact, and unqualified fashion.
Some economists and bloggers have been on this theme (the extent of the subsidies and the lack of quid pro quo for the taxpayer) for quite some time, and their drumbeat continues. One salvo comes today from Jesse in “How Goldman Sachs Leveraged $70 Billion in Government Money For Record Profits.” While this is admittedly close to conspiracy theory, most investment professionals I know regard the latter phases of the stock market rally with great suspicion (too much end of day tape painting, too many heavy handed short squeezes, continued thin volume, and suspicious moves on indexes when they near levels that are significant to technicians). That of course begs the question, “If the market is being manipulated, how and by whom?” When I worked with the Japanese, it was widely known that the Japanese securities firms manipulated the markets and the politicians were tipped off early and bought stocks the brokers were about to ramp (look, if I as a mere gaijin heard about it, it was hardly secret). Yet when it came out in the Japanese media years later, it was treated as a huge scandal. I was and am perplexed that a widely-known practice could be treated as such a remarkable event. I regard much of this rally as a similar open secret, except how this is being carried out is a mystery (is this mere trader opportunism and brute force that looks like collusion, with the perps secure in the knowledge that the government won’t act against rule violations, since the outcome serves their interests, or something more deliberate?)
On the wonky/policy end of the spectrum, Willem Buiter continues to be Not Happy about the wondrously bank-friendly regimes that have been put in place. He provided some commentary from Nobel prize winner János Kornai on one of his ideas, that of soft versus hard budget constraints (Buiter had invoked the idea in a post earlier in the week).
The problem is that the concept is important, but this (established) turn of phrase does not slip swimmingly off the tongue. A hard budget constraint means when you run out of something (dough, usually, but it could be other scarce resources) you are stuck. No magic fairy dust to rescue you. Kornai explains:
To simplify matters, a contrast is often made between the soft and the hard budget constraint. In fact there are grades between these two extremes. The budget constraint that corporate decision-makers sense may be very soft, moderately soft, quite hard and so on, depending on their subjective awareness of the probability of rescue….
Let us turn for a minute to the dawn of capitalism. A debtor unable to pay was threatened by the debtors’ prison. Business failure in the early period of capitalism was more than a fatal material blow, for it ruined the bankrupt’s moral reputation. The budget constraint in those days was still absolutely hard. The perilous results of loss and indebtedness forced entrepreneurs to be extremely cautious.
But the historical development of property relations and the credit system gradually brought essential changes. The principle of limited liability became legitimated, and joint stock companies based on that new principle appeared. At the same time, the hitherto close connection between the material and moral position of decision-makers and the financial state of their companies became weaker.
As property and management separated, so the relation weakened between the individual destiny, income and reputation of the managers making the practical business decisions on the one hand, and the presence or absence of financial destinies of their companies, on the other. Successive legislation on business failure provided some protection for firms caught up in a spiral of debt. These changes and others not mentioned here contributed to a steady softening of the budget constraint….Early capitalism rewarded success richly and punished failure fiercely. As time went by, the rewards not only remained, but in several countries increased dramatically, while the penalties became lighter. That disproportional change has weakened the incentive for business to pursue efficiency and adaptability to change. It encourages irresponsible decisions on borrowing, investment and expansion.
The one bit I find troubling with Kornai’s discussion is he conflates soft budget constraints with socialistic regimes, namely the sort he saw in Hungary in the late 1960s, when companies were urged to adopt “market socialism” but that meant that if the manager did well, the company got a bonus, but if the company produced a loss, no matter, the state would fund the shortfall.
But this is not a function of socialist systems per se; it took place in all the examples that George Akerlof and Paul Romer cited in their classic 1994 paper on looting, and included the Chicago School free market experiment in Pinochet’s Chile, which resulted in a plutocratic land grab. To put it more simply, “socialized losses” can occur under a socialist system (where the goal is to preserve employment), in looting (where lax regulation and accounting allow companies to report largely bogus profits and syphon out funds, either directly to the owners/managers, or to affiliated companies), or in Mussolini-style corpocracy.
Note that Korzai stresses that rescues per se are not bad things, provided they are made judiciously and infrequently:
Softness of the budget constraint cannot yet be said to apply in a singular case where a firm in deep financial trouble is bailed out. The syndrome appears if such rescues occur frequently, if managers can begin to count on being rescued. We face here a mental phenomenon, an expectation in decision-makers’ minds that strongly influences their behaviour.
It isn’t hard to imagine that with a clear “no more Lehmans” policy in force in the US, UK, and EU, that banks are very well conditioned by now to expect a rescue if they screw up.
Separately, even the Times manages to undercut the pointed message of its story on source of bank profits with another story today: “All This Anger Against the Rich May Be Unhealthy.” A cultural aside: since the early 1800s in England, there was a distinction between the deserving and undeserving poor. Someone who was able to work but didn’t was undeserving (there were other ways the line might be drawn, but that was one of the most consistent). We see that carried through today (when talking about those over their heads in debt, some readers like to demonize them all as profligate, while others jump in and point out how, for instance, medical expenses can push a lot of people who had lived reasonably within their means into debt pronto. Again, it’s a “deserving v. undeserving” distinction.
Given the row over the suspect level of pay in certain areas of finance, it may be time to apply that notion to the upper end of the food chain more formally. Most people have no problem with self made men and women making a lot of money; heck, that’s the American dream. The fact that the “if you are rich, you must be deserving” Calvinist assumption is beginning to be questioned is positive; we just need to be careful not to replace old stereotypes with new ones.
Krugman on Sick Banks, Bad Policy Choices, and Team Obama’s (Misplaced) Anger
Posted: 18 Oct 2009 11:17 PM PDT
Paul Krugman is back to his old form on the financial services beat, now that the cracks in the Paulson/Geithner/Bernanke “give the banks what they want now, in size, worry about cleanup later” strategy is proving to have been the wrong way to go.
My big beef is that he didn’t go far enough and is WAAY too forgiving of the motivations and actions of Larry Summers and by extension, Team Obama.
Krugman draws the distinction, which is crucial, between capital markets operations and traditional banking, meaning on balance sheet lending (and some of that was treated as off balance sheet but really isn’t. Big case in point here is credit cards, where issuers are stepping in to shore up trusts that are showing much larger losses than anticipated). Krugman argues that the capital markets players have rebounded nicely, but lenders, on whom the economy depends too, are still in trouble:
…while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not…
You may recall that earlier this year there was a big debate about how to get the banks lending again. Some analysts, myself included, argued that at least some major banks needed a large injection of capital from taxpayers, and that the only way to do this was to temporarily nationalize the most troubled banks. The debate faded out, however, after Citigroup and Bank of America, the banking system’s weakest links, announced surprise profits. All was well, we were told, now that the banks were profitable again.
But a funny thing happened on the way back to a sound banking system: last week both Citi and BofA announced losses in the third quarter. What happened?
Part of the answer is that those earlier profits were in part a figment of the accountants’ imaginations. More broadly, however, we’re looking at payback from the real economy. In the first phase of the crisis, Main Street was punished for Wall Street’s misdeeds; now broad economic distress, especially persistent high unemployment, is leading to big losses on mortgage loans and credit cards.
And here’s the thing: The continuing weakness of many banks is helping to perpetuate that economic distress. Banks remain reluctant to lend, and tight credit, especially for small businesses, stands in the way of the strong recovery we need.
Yves here. This is directionally correct, and I am glad to see Krugman bang the drum on nationalization, or temporary receivership, or whatever brand you need to slap on it to get Americans to stomach it. Taking out dud banks, resolving their bad loans, and recapitalizing and privatizing the viable parts has been shown to be the fastest way of a financial crisis. All other roads lead to Japan, and the Japanese told us loudly and clearly in the early stages of the crisis not to repeat their mistakes.
But there are a couple of crucial omissions. Recall that Meredith Whitney seemed a bit stunned at the brazenness of 1Q bank earnings games. She called the profits “manufactured” but also said the banks could keep it up for another quarter or two. And remember the other tidbit: the massive credit default swap unwinds by AIG at par in January and February. The beneficiaries of this largesse said they were the most profitable trades they had EVER seen. So a big stealth earnings (and balance sheet) boost, from taxpayers to banks via AIG was also part of the surprise 1Q results.
The other bit is that Krugman sees is that the continued grind of scarce credit on the real economy serves as a feedback loop back to banks. But there is no way to avoid a good bit of deleveraging pain. In the “best practice” examples of financial crisis resolution that everyone likes to point to (in particular, the Nordic countries in the early 1990s) all showed very nasty, but comparatively short downturns. And they all cut their rates with the ECU and used an export recovery to pull their economies out of the dumps. And ALL showed permanent reductions in their standard of living. But in the realm of painful choices, taking the hit early has led to better results than muddle-through and denial.
But we also have the bit where Krugman is far too kind to the Administration:
But as one critic recently put it: “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.”….
So who was this thundering bank critic? None other than Lawrence Summers, the Obama administration’s chief economist — and one of the architects of the administration’s bank policy, which up until now has been to go easy on financial institutions and hope that they mend themselves.
Why the change in tone? Administration officials are furious at the way the financial industry, just months after receiving a gigantic taxpayer bailout, is lobbying fiercely against serious reform. But you have to wonder what they expected to happen. They followed a softly, softly policy, providing aid with few strings, back when all of Wall Street was on the ropes; this left them with very little leverage over firms like Goldman that are now, once again, making a lot of money.
Yves again. Dear readers, do you think the Adminstration’s supposed fury is sincere, or merely playing to the crowd? Actions speak louder than words. The Administration, ONLY because the public was rip-snorting mad, announced plans to have tougher reforms in June, with details of various measures coming over July and August. Many have been largely empty (grand promises like clawbacks, with no follow up of any substance, juxtaposed with the spectacle of the poor pay czar Kenneth Feinberg floundering with a hollow mandate). Worse, the supposedly substantive ones have been an utter joke. The “derivatives” (read credit default swaps) reform was misguided from the get-go. I was an early fan of the idea of putting them on exchanges, but I am now persuaded that that will never work (unlike real derivatives, you cannot have adequate initial margining. It would kill the product, hence you will have an inadequately capitalized exchange. And in the 1987 crash, the Merc was on the verge of failure, and if it had gone down, it would have taken down the NYSE, so exchange failures can propagate into related markets).
But not to worry, we won’t get that far, the Administration’s proposal had an industry-favoring loophole you could drive a truck through: only “standardized” contracts would trade on an exchange (or via a clearinghouse). So this reform was mere window dressing.
So why is the Administration so angry? It isn’t that there is no reform. There was never any intent to have real reform. The Administration has been an absolutely shameless backer of the banksters’ interests (and John Dizard remarked that central banks had gone from being vestal virgins to camp followers, so they are now in good company). It is the industry has become such pigs that they are making a joke of even the bogus reform put forward. They are so confident of their mastery of the gameboard that they are refusing even to go along with token concessions necessary to preserve appearances.
To put it more simply: The Executive Branch does not like being revealed as being a puppet of the banking industry. But it made this Faustian bargain, it has no one else to blame.
http://www.nakedcapitalism.com/2009/10/kru...obamas-misplace
Posted: 18 Oct 2009 11:17 PM PDT
Paul Krugman is back to his old form on the financial services beat, now that the cracks in the Paulson/Geithner/Bernanke “give the banks what they want now, in size, worry about cleanup later” strategy is proving to have been the wrong way to go.
My big beef is that he didn’t go far enough and is WAAY too forgiving of the motivations and actions of Larry Summers and by extension, Team Obama.
Krugman draws the distinction, which is crucial, between capital markets operations and traditional banking, meaning on balance sheet lending (and some of that was treated as off balance sheet but really isn’t. Big case in point here is credit cards, where issuers are stepping in to shore up trusts that are showing much larger losses than anticipated). Krugman argues that the capital markets players have rebounded nicely, but lenders, on whom the economy depends too, are still in trouble:
…while the wheeler-dealer side of the financial industry, a k a trading operations, is highly profitable again, the part of banking that really matters — lending, which fuels investment and job creation — is not…
You may recall that earlier this year there was a big debate about how to get the banks lending again. Some analysts, myself included, argued that at least some major banks needed a large injection of capital from taxpayers, and that the only way to do this was to temporarily nationalize the most troubled banks. The debate faded out, however, after Citigroup and Bank of America, the banking system’s weakest links, announced surprise profits. All was well, we were told, now that the banks were profitable again.
But a funny thing happened on the way back to a sound banking system: last week both Citi and BofA announced losses in the third quarter. What happened?
Part of the answer is that those earlier profits were in part a figment of the accountants’ imaginations. More broadly, however, we’re looking at payback from the real economy. In the first phase of the crisis, Main Street was punished for Wall Street’s misdeeds; now broad economic distress, especially persistent high unemployment, is leading to big losses on mortgage loans and credit cards.
And here’s the thing: The continuing weakness of many banks is helping to perpetuate that economic distress. Banks remain reluctant to lend, and tight credit, especially for small businesses, stands in the way of the strong recovery we need.
Yves here. This is directionally correct, and I am glad to see Krugman bang the drum on nationalization, or temporary receivership, or whatever brand you need to slap on it to get Americans to stomach it. Taking out dud banks, resolving their bad loans, and recapitalizing and privatizing the viable parts has been shown to be the fastest way of a financial crisis. All other roads lead to Japan, and the Japanese told us loudly and clearly in the early stages of the crisis not to repeat their mistakes.
But there are a couple of crucial omissions. Recall that Meredith Whitney seemed a bit stunned at the brazenness of 1Q bank earnings games. She called the profits “manufactured” but also said the banks could keep it up for another quarter or two. And remember the other tidbit: the massive credit default swap unwinds by AIG at par in January and February. The beneficiaries of this largesse said they were the most profitable trades they had EVER seen. So a big stealth earnings (and balance sheet) boost, from taxpayers to banks via AIG was also part of the surprise 1Q results.
The other bit is that Krugman sees is that the continued grind of scarce credit on the real economy serves as a feedback loop back to banks. But there is no way to avoid a good bit of deleveraging pain. In the “best practice” examples of financial crisis resolution that everyone likes to point to (in particular, the Nordic countries in the early 1990s) all showed very nasty, but comparatively short downturns. And they all cut their rates with the ECU and used an export recovery to pull their economies out of the dumps. And ALL showed permanent reductions in their standard of living. But in the realm of painful choices, taking the hit early has led to better results than muddle-through and denial.
But we also have the bit where Krugman is far too kind to the Administration:
But as one critic recently put it: “There is no financial institution that exists today that is not the direct or indirect beneficiary of trillions of dollars of taxpayer support for the financial system.”….
So who was this thundering bank critic? None other than Lawrence Summers, the Obama administration’s chief economist — and one of the architects of the administration’s bank policy, which up until now has been to go easy on financial institutions and hope that they mend themselves.
Why the change in tone? Administration officials are furious at the way the financial industry, just months after receiving a gigantic taxpayer bailout, is lobbying fiercely against serious reform. But you have to wonder what they expected to happen. They followed a softly, softly policy, providing aid with few strings, back when all of Wall Street was on the ropes; this left them with very little leverage over firms like Goldman that are now, once again, making a lot of money.
Yves again. Dear readers, do you think the Adminstration’s supposed fury is sincere, or merely playing to the crowd? Actions speak louder than words. The Administration, ONLY because the public was rip-snorting mad, announced plans to have tougher reforms in June, with details of various measures coming over July and August. Many have been largely empty (grand promises like clawbacks, with no follow up of any substance, juxtaposed with the spectacle of the poor pay czar Kenneth Feinberg floundering with a hollow mandate). Worse, the supposedly substantive ones have been an utter joke. The “derivatives” (read credit default swaps) reform was misguided from the get-go. I was an early fan of the idea of putting them on exchanges, but I am now persuaded that that will never work (unlike real derivatives, you cannot have adequate initial margining. It would kill the product, hence you will have an inadequately capitalized exchange. And in the 1987 crash, the Merc was on the verge of failure, and if it had gone down, it would have taken down the NYSE, so exchange failures can propagate into related markets).
But not to worry, we won’t get that far, the Administration’s proposal had an industry-favoring loophole you could drive a truck through: only “standardized” contracts would trade on an exchange (or via a clearinghouse). So this reform was mere window dressing.
So why is the Administration so angry? It isn’t that there is no reform. There was never any intent to have real reform. The Administration has been an absolutely shameless backer of the banksters’ interests (and John Dizard remarked that central banks had gone from being vestal virgins to camp followers, so they are now in good company). It is the industry has become such pigs that they are making a joke of even the bogus reform put forward. They are so confident of their mastery of the gameboard that they are refusing even to go along with token concessions necessary to preserve appearances.
To put it more simply: The Executive Branch does not like being revealed as being a puppet of the banking industry. But it made this Faustian bargain, it has no one else to blame.
http://www.nakedcapitalism.com/2009/10/kru...obamas-misplace
Where The Hell Is The Outrage?
The number of articles and opinions on Goldman Sachs earnings, bonuses, and influence peddling over the past several days is quite stunning.
Many have pointed out the problems; few have expressed outrage over what is happening in general, not just at Goldman Sachs. Let's take a look.
My take is at the end.
Letting The Dice Roll
Rolfe Winkler at Contingent Capital is writing Letting Goldman Roll The Dice.
Is Goldman really such an indispensable financial intermediary? One look at the firm’s revenue breakdown shows that it’s more casino than anything else, and some of the markets it makes still put the economy in danger.
Goldman, in other words, generates most of its revenue trading its own money and earning vigorish on customer transactions. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.
With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for the $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?
Saving Goldman was largely about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JPMorgan Chase in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.
To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”. But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses.
Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit.
Geithner's Appointment Book
The New York Times is taking A Look Inside Geithner’s Appointment Book
As Treasury secretary in the aftermath of last fall’s Wall Street meltdown, Timothy F. Geithner needs to keep in touch with the nation’s top bankers. But it seems that he connects with some financial chiefs much more often than others.
An analysis of Mr. Geithner’s calendars, which the Associated Press obtained through the Freedom of Information Act, shows that Mr. Geithner had contact with top executives at Citigroup, Goldman Sachs and JPMorgan Chase more than 80 times during his first seven months at Treasury — while the heads of Bank of America and Morgan Stanley appeared on his calendars a total of just six times.
The Associated Press describes one spring evening when Mr. Geithner had a series of particularly high-powered calls:
After one hectic week in May in which the nation faced the looming bankruptcy of General Motors and the prospect that the government would take over the automaker, Mr. Geithner wrapped up his night with a series of phone calls.
First he called Lloyd Blankfein, the chairman and C.E.O. at Goldman. Then he called Jamie Dimon, the boss at JPMorgan. Obama called next, and as soon as they hung up, Mr. Geithner was back on the phone with Mr. Dimon.
Gee what might those calls have been about? Derivative bets on GM by any chance?
How Goldman Sachs Leveraged $70 Billion In Government Money
Jesse's Café Américain is reporting How Goldman Sachs Leveraged $70 Billion In Government Money.
Guess which two Wall Street banks were acting as informal agents of the government in order to support the bond and stock markets and reinflate them?
Two big banks that are showing record trading profits, and a small group of enablers and assistants.
Exchange Stabilization Fund - wise, its a near layup when the US fronts you the money and then works with you to take the markets higher. Especially when it is on thin volumes based on 'news' which you help to create and control via frequent calls to young Tim who is your coordinator, in addition to all your other well-placed backchannel sources. You get a heads up, you use the futures to prop the markets. You need some good news, some can be arranged. Just like the good old days when Timmy was riding herd on the NY Fed desk.
All for the good of the country. And if you happen to make a billion per month in trading profits, well, that is the price of freedom for a job well done.
Max Keiser On Fraud
Robert Parsons: Is this froth and no substance or is there something to this?
Max Keiser: The word is not froth the word is fraud. JPMorgan, Goldman Sachs, Citigroup, are all engaged in accounting fraud. They are not realizing losses on trillions of dollars worth of bad debts on their books, giving themselves big bonuses this year, deferring losses to next year ...."
Part One
Part Two
The Goldman Tithe
Joe Peyronnin at The Huffington Post is writing Tithe Goldman Tithe
So Goldman Sachs is now concerned its company has a perception problem? They are even going to undertake a huge public relations offensive to turn things around? Well they sure have plenty of money to throw at this problem.
For sure, Goldman Sachs bankers work hard at creating value for their customers and shareholders. And their success should be rewarded. But a report that the firm had set aside about $20 billion for employee bonuses has caused a backlash. Critics say that Goldman Sachs is just back to its old money making ways.
Sadly Goldman Sachs doesn't really care what Main Street thinks. Rather they are concerned what Congress or the U.S. Government might do.
The projected 2009 Goldman Sachs bonus pool will be around $20 billion, a near record amount. Therefore the average pay out per employee could be more than the $661,490 given in 2007. Memo to Goldman Sachs: most Americans don't make that much in a lifetime of working.
This year Goldman Sachs should tithe. Take 10% right off the top of the bonus pool, or $2 billion, and donate it to rebuilding New Orleans and the Gulf Coast of Mississippi and Alabama. Tap into their own brainpower to develop a plan to target the money on specific worthwhile projects so it does not get diverted to corrupt contractors and politicians. For starters, money could be used to rebuild the 9th ward of New Orleans, and devastated sections of Biloxi and Bay St. Louis, Mississippi.
Subsequently, Goldman Sachs should donate 10% of their bonus pool each year to a particular cause, helping injured and needy US military veterans, underwriting national after school programs designed to keep kids off the streets and out of trouble, curing diseases and the list goes on.
The US taxpayers supported the financial community when its collapse was imminent. Now it is time for financial institutions to help their country in its time of need.
Goldman's Public Relations Bind
The New York Times says Bonuses Put Goldman in Public Relations Bind.
Goldman executives are perplexed by the resentment directed at their bank and contend the criticism is unjustified. But they find themselves in the uncomfortable position of defending Goldman’s blowout profits and the outsize paydays that are the hallmark of its success.
For Goldman employees, it is almost as if the financial crisis never happened. Only months after paying back billions of taxpayer dollars, Goldman Sachs is on pace to pay annual bonuses that will rival the record payouts that it made in 2007, at the height of the bubble. In the last nine months, the bank set aside about $16.7 billion for compensation — on track to pay each of its 31,700 employees close to $700,000 this year. Top producers are expecting multimillion-dollar paydays.
Goldman employees reaped rewards that most people can only dream about. Goldman paid out $4.82 billion in bonuses last year, awarding 953 employees at least $1 million each and 78 executives $5 million or more. The rewards for 2009 will be far greater.
Goldman executives know they have a public opinion problem, and they are trying to figure out what to do about it — as long as it does not involve actually cutting pay.
Another Goldman Executive Named To Key Government Post
Glenn Greewald writing for Salon notes Another Goldman executive named to key government post as its profits skyrocket.
Apparently, the U.S. government didn't have enough Goldman Sachs executives in key financial and regulatory positions so Goldman Exec Named First COO of SEC Enforcement.
In October of last year, a Goldman Sachs Vice President, Neel Kashkari, was named by former Goldman CEO and then-Treasury Secretary Hank Pauslon to oversee the$700 billion TARP bailout. In January of this year, Tim Geithner hired a former Goldman Sachs lobbyist, Mark Patterson, to be his top aide and Chief of Staff. In March, President Obama nominated Goldman Sachs executive Gary Gensler to head the Commodity Futures Trading Commission, which regulates futures markets, even though (or "because") Gensler confessed to lax regulation during the Clinton administration over the very derivative instruments that caused the financial crisis. In April, Goldman hired as its top lobbyist Michael Paese, the top aide to Rep. Barney Frank on the House Financial Services Committee which Frank chairs.
According to ABC News in October, 2008, Goldman "spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989" and their "bankers have been the country's top political campaign contributors this year." "They are almost in a class by themselves," said Sheila Krumholz, the executive director for the Center for Responsive Politics. As Michael Moore has been pointing out, Goldman was the number one source of funding for the Obama 2008 presidential campaign. The bailout of AIG -- which resulted in massive federal government monies to Goldman -- was engineered at a meeting between Paulson, Geithner and Goldman CEO Lloyd Blankfein. Last year, Goldman paid top Obama economics adviser Larry Summers $135,000 for a one-day visit to Goldman.
That the administration continues, so brazenly, to place Goldman Sachs executives in the very government positions with the greatest power over the financial industry illustrates how little effort is devoted to hiding what is really taking place.
Adam Storch COO of the SEC
The Business Insider has posted an image and qualifications of Adam Storch, 29-Year-Old Goldman Guy Who Is Now COO Of The SEC.
Storch graduated from SUNY Buffalo. During college he did a stint as a summer intern at Neuberger Berman and worked at Deloitte & Touche for two years after graduating.
Storch then went to NYU's Stern School of Business. This lead to a job at Goldman, where he worked for the last five years.
Derivatives Bill’s Loophole May Exempt Most Firms
Gary Gensler, Chairman of the Commodity Futures Trading Commission says Derivatives Bill’s Loophole May Exempt Most Firms.
Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.
A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.
“It is clearly the weakest of all the proposals I’ve seen to date,” said Christopher Whalen, managing director of Institutional Risk Analytics in Torrance, California, in an interview before the hearing. Whalen, who has testified before Congress on derivatives regulation, is an independent bank analyst. “Frank’s committee seems to be intent on gutting any meaningful reform.”
The draft would ease trading and clearing requirements for derivatives dealers such as Morgan Stanley and Goldman Sachs Group Inc., compared with the administration’s proposal.
The Rich Have Stolen the Economy
Paul Craig Roberts, writing for CounterPunch says From Offshoring Jobs to Bailing Out Bankers The Rich Have Stolen the Economy.
Bloomberg reports that Treasury Secretary Timothy Geithner’s closest aides earned millions of dollars a year working for Goldman Sachs, Citigroup and other Wall Street firms. Bloomberg adds that none of these aides faced Senate confirmation. Yet, they are overseeing the handout of hundreds of billions of dollars of taxpayer funds to their former employers.
The gifts of billions of dollars of taxpayers’ money provided the banks with an abundance of low cost capital that has boosted the banks’ profits, while the taxpayers who provided the capital are increasingly unemployed and homeless.
Except for the banksters and the offshoring CEOs, there is no source of consumer demand to drive the US economy.
The political system is unresponsive to the American people. It is monopolized by a few powerful interest groups that control campaign contributions. Interest groups have exercised their power to monopolize the economy for the benefit of themselves, the American people be damned.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.
Tenacious Goldman
Here is one more article, from July, courtesy of New York Magazine: Tenacious G
On the weekend of September 12, 2008, as the financial system shuddered and appeared to be on the verge of lurching to a halt, two Goldman Sachs men, former CEO Hank Paulson and current CEO Lloyd Blankfein, huddled with other banking heads at the Federal Reserve Bank of New York to consider how to stave off disaster. Bear Stearns was dead. Merrill Lynch, run by another former Goldman man, John Thain, was in desperate need of a savior. And now Lehman Brothers was on the brink. As secretary of the Treasury, Paulson asked the banks to come up with a private-funding solution for Lehman before it imploded from lack of cash. But all the banks had been scrambling for cash reserves or strategic mergers to buffer against a rapid freeze in lending. No one was able, or willing, to help. And Paulson, a free-market purist, had made one thing clear up front: The government would not bail out the firm. Lehman Brothers, a longtime Goldman rival, prepared to declare bankruptcy, ending its 158-year run on Wall Street.
By Sunday night, Paulson realized he had an even bigger problem: the insurance giant AIG. AIG had sold billions in credit-default swaps to several major banks, what amounted to unregulated insurance on risky subprime-mortgage investments, the very ones that were bringing down the economy.
Hank Paulson and then–New York Fed chief Tim Geithner called an emergency meeting for the following Monday morning at the Federal Reserve Bank, ostensibly to discuss whether a private banking syndicate could be established to save AIG—one in which Goldman Sachs and JPMorgan Chase, two of the ailing insurance giant’s clients, would play prominent roles.
At the meeting, it was hard to discern where concerns over AIG’s collapse ended and concern for Goldman Sachs began: Among the 40 or so people in attendance, Goldman Sachs was on every side of the large conference table, with “triple” the number of representatives as other banks, says another person who was there. The entourage was led by the bank’s top brass: CEO Blankfein, co-chief operating officer Jon Winkelried, investment-banking head David Solomon, and its top merchant-banking executive Richard Friedman—all of whom had worked closely with Hank Paulson two years prior. By contrast, JPMorgan CEO Jamie Dimon did not attend.
The Goldman domination of the meetings might not have raised eyebrows if a private solution had been forthcoming. But on Tuesday, Paulson reversed course and announced that the government would step in and save AIG, spending $85 billion in government money to buy a majority stake.
Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York’s insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG’s counterparties, Goldman being the most prominent, “got to collect on an insurance policy without having the loss.”
Somehow not recognizing (or perhaps not caring about) the brewing backlash, Paulson continued to appoint Goldman Sachs alumni to positions of power after the AIG decision—he named Edward C. Forst, a former head of Goldman’s investment-management division, to help draft the $700 billion Toxic Asset Relief Program (of which $10 billion went to Goldman Sachs), and then Neel Kashkari, a former Goldman V.P., as the TARP manager. And of course Edward Liddy, former Goldman board member, was already serving as the new CEO of AIG. Suddenly, everywhere you looked, men who had passed through the Goldman gauntlet of loyalty and rewards were now in key positions overseeing the rescue of the financial system. The company was earning its nickname: “Government Sachs.”
Both Rogers and Paulson (who’s publishing a book this fall that will presumably attempt to justify his decisions and save his damaged legacy) have argued that the AIG decision was about saving the system as a whole, not Goldman in particular.
Similarly, they say, when it came to AIG, the firm was “prudent” in hedging its bets, buying credit-default swaps from Bank of America, JPMorgan, Société Générale and other banks in case AIG failed to pay the money it owed Goldman—in effect, hedging its hedge against the mortgage market. Goldman Sachs had no “material exposure” to AIG, they argue. One senior executive goes so far as to suggest the firm might even have benefited from AIG’s demise. “We might have done very well,” he says, “but I wouldn’t be so presumptuous as to say that. Who knows?”
Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system. A large loss would have been inevitable as lending evaporated, and Goldman Sachs would have struggled to shrink the company to a fraction of its size overnight. But the most glaring argument against Goldman is Goldman’s own: If AIG’s biggest and most important bank customer was hedged against losses in AIG, as it claims, why did the government need to pay Goldman Sachs the full $13 billion?
Lost in the haze of Goldman’s recent record profits is the fact that the firm nearly went under even after the AIG bailout last fall. As the market continued to plunge and Goldman’s stock price nose-dived, people inside the firm “were freaking out,” says a former Goldman executive who maintains close ties to the company.
Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill.
Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”
Even Goldman alumni were struck by the company’s shameless posture in ramping up the leverage again so soon after the government bailouts. “It’s a statement of arrogance,” says one former executive.
Goldman claims that there is a Chinese Wall between the advisory business and the trading business. “There are rules and laws regarding information sharing, and we scrupulously follow them,” says a company spokesman.
But two former clients told me they had observed firsthand how Goldman traded against their interests to improve its own bottom line—one who didn’t like it, the other accepting it with a shrug and saying, admiringly, that Goldman’s ability to convince the world that it is a “client-oriented” business was its most masterful PR coup.
Goldman’s profiting from this ethical gray area was exemplified by the real-estate market and the subprime-mortgage collapse: Goldman Sachs sold subprime-mortgage investments to its clients for years, but then in 2006 began trading against subprime on its own balance sheet without informing its clients, a hedge that ultimately let it profit when the real-estate market cratered. For some, this was a prescient call; for others, a glaring conflict of interest and inherently dishonest, since the firm let its clients take the fall.
Earlier this month, Goldman had an ex-employee arrested for allegedly stealing computer codes that could be used, as the prosecutor noted, “to manipulate markets in unfair ways.” Some hedge-fund traders and financial bloggers have speculated that Goldman itself could have been using the codes for the same purpose.
Now attention is turning to Goldman’s dominance of trading on the New York Stock Exchange—as the exchange’s biggest high-speed program trader as well as a provider of liquidity to other traders—and whether that ubiquity has afforded the firm undue advantage. If Goldman’s database knows nearly every trade that is about to be made, sophisticated computer codes could, theoretically, instantly execute fail-safe trades on Goldman’s behalf milliseconds beforehand. This, some are insisting, is where the company is manipulating the markets and making hundreds of millions of dollars a day.
The New York Magazine article is 8 pages long and well worth a read in entirety.
The number of articles and opinions on Goldman Sachs earnings, bonuses, and influence peddling over the past several days is quite stunning.
Many have pointed out the problems; few have expressed outrage over what is happening in general, not just at Goldman Sachs. Let's take a look.
My take is at the end.
Letting The Dice Roll
Rolfe Winkler at Contingent Capital is writing Letting Goldman Roll The Dice.
Is Goldman really such an indispensable financial intermediary? One look at the firm’s revenue breakdown shows that it’s more casino than anything else, and some of the markets it makes still put the economy in danger.
Goldman, in other words, generates most of its revenue trading its own money and earning vigorish on customer transactions. It’s a hybrid hedge fund and bookie, with an investment bank and asset management business thrown in for good measure.
With that in mind, one is left to wonder whether Goldman was really worth saving last year. What have taxpayers received for the $50 billion worth of cash and guarantees, for giving Goldman access to the Federal Reserve as its lender of last resort?
Saving Goldman was largely about saving the derivatives market, which is so big and unstable that the death of one counterparty could mean the death of all. With big commercial banks like JPMorgan Chase in deep, saving the derivatives business was as much about protecting depositors and maintaining the integrity of the payment system as it was derivatives themselves.
To Goldman’s credit, they’ve rebuilt their capital levels faster than anyone. Their leverage ratio has fallen from 35 to 16 in less than two years, despite pressure from equity analysts to juice returns by deploying “excess capital”. But at $50 billion, the bank’s mark-to-myth, or level 3, assets remain as high as its tangible common equity, the cushion it has to absorb losses.
Wall Street and its protectors at the Fed and Treasury tell us the bailout was necessary to protect the financial system, to protect Main Street. That may be. But Main Street still owns much of the risk while Wall Street gets all of the profit.
Geithner's Appointment Book
The New York Times is taking A Look Inside Geithner’s Appointment Book
As Treasury secretary in the aftermath of last fall’s Wall Street meltdown, Timothy F. Geithner needs to keep in touch with the nation’s top bankers. But it seems that he connects with some financial chiefs much more often than others.
An analysis of Mr. Geithner’s calendars, which the Associated Press obtained through the Freedom of Information Act, shows that Mr. Geithner had contact with top executives at Citigroup, Goldman Sachs and JPMorgan Chase more than 80 times during his first seven months at Treasury — while the heads of Bank of America and Morgan Stanley appeared on his calendars a total of just six times.
The Associated Press describes one spring evening when Mr. Geithner had a series of particularly high-powered calls:
After one hectic week in May in which the nation faced the looming bankruptcy of General Motors and the prospect that the government would take over the automaker, Mr. Geithner wrapped up his night with a series of phone calls.
First he called Lloyd Blankfein, the chairman and C.E.O. at Goldman. Then he called Jamie Dimon, the boss at JPMorgan. Obama called next, and as soon as they hung up, Mr. Geithner was back on the phone with Mr. Dimon.
Gee what might those calls have been about? Derivative bets on GM by any chance?
How Goldman Sachs Leveraged $70 Billion In Government Money
Jesse's Café Américain is reporting How Goldman Sachs Leveraged $70 Billion In Government Money.
Guess which two Wall Street banks were acting as informal agents of the government in order to support the bond and stock markets and reinflate them?
Two big banks that are showing record trading profits, and a small group of enablers and assistants.
Exchange Stabilization Fund - wise, its a near layup when the US fronts you the money and then works with you to take the markets higher. Especially when it is on thin volumes based on 'news' which you help to create and control via frequent calls to young Tim who is your coordinator, in addition to all your other well-placed backchannel sources. You get a heads up, you use the futures to prop the markets. You need some good news, some can be arranged. Just like the good old days when Timmy was riding herd on the NY Fed desk.
All for the good of the country. And if you happen to make a billion per month in trading profits, well, that is the price of freedom for a job well done.
Max Keiser On Fraud
Robert Parsons: Is this froth and no substance or is there something to this?
Max Keiser: The word is not froth the word is fraud. JPMorgan, Goldman Sachs, Citigroup, are all engaged in accounting fraud. They are not realizing losses on trillions of dollars worth of bad debts on their books, giving themselves big bonuses this year, deferring losses to next year ...."
Part One
Part Two
The Goldman Tithe
Joe Peyronnin at The Huffington Post is writing Tithe Goldman Tithe
So Goldman Sachs is now concerned its company has a perception problem? They are even going to undertake a huge public relations offensive to turn things around? Well they sure have plenty of money to throw at this problem.
For sure, Goldman Sachs bankers work hard at creating value for their customers and shareholders. And their success should be rewarded. But a report that the firm had set aside about $20 billion for employee bonuses has caused a backlash. Critics say that Goldman Sachs is just back to its old money making ways.
Sadly Goldman Sachs doesn't really care what Main Street thinks. Rather they are concerned what Congress or the U.S. Government might do.
The projected 2009 Goldman Sachs bonus pool will be around $20 billion, a near record amount. Therefore the average pay out per employee could be more than the $661,490 given in 2007. Memo to Goldman Sachs: most Americans don't make that much in a lifetime of working.
This year Goldman Sachs should tithe. Take 10% right off the top of the bonus pool, or $2 billion, and donate it to rebuilding New Orleans and the Gulf Coast of Mississippi and Alabama. Tap into their own brainpower to develop a plan to target the money on specific worthwhile projects so it does not get diverted to corrupt contractors and politicians. For starters, money could be used to rebuild the 9th ward of New Orleans, and devastated sections of Biloxi and Bay St. Louis, Mississippi.
Subsequently, Goldman Sachs should donate 10% of their bonus pool each year to a particular cause, helping injured and needy US military veterans, underwriting national after school programs designed to keep kids off the streets and out of trouble, curing diseases and the list goes on.
The US taxpayers supported the financial community when its collapse was imminent. Now it is time for financial institutions to help their country in its time of need.
Goldman's Public Relations Bind
The New York Times says Bonuses Put Goldman in Public Relations Bind.
Goldman executives are perplexed by the resentment directed at their bank and contend the criticism is unjustified. But they find themselves in the uncomfortable position of defending Goldman’s blowout profits and the outsize paydays that are the hallmark of its success.
For Goldman employees, it is almost as if the financial crisis never happened. Only months after paying back billions of taxpayer dollars, Goldman Sachs is on pace to pay annual bonuses that will rival the record payouts that it made in 2007, at the height of the bubble. In the last nine months, the bank set aside about $16.7 billion for compensation — on track to pay each of its 31,700 employees close to $700,000 this year. Top producers are expecting multimillion-dollar paydays.
Goldman employees reaped rewards that most people can only dream about. Goldman paid out $4.82 billion in bonuses last year, awarding 953 employees at least $1 million each and 78 executives $5 million or more. The rewards for 2009 will be far greater.
Goldman executives know they have a public opinion problem, and they are trying to figure out what to do about it — as long as it does not involve actually cutting pay.
Another Goldman Executive Named To Key Government Post
Glenn Greewald writing for Salon notes Another Goldman executive named to key government post as its profits skyrocket.
Apparently, the U.S. government didn't have enough Goldman Sachs executives in key financial and regulatory positions so Goldman Exec Named First COO of SEC Enforcement.
In October of last year, a Goldman Sachs Vice President, Neel Kashkari, was named by former Goldman CEO and then-Treasury Secretary Hank Pauslon to oversee the$700 billion TARP bailout. In January of this year, Tim Geithner hired a former Goldman Sachs lobbyist, Mark Patterson, to be his top aide and Chief of Staff. In March, President Obama nominated Goldman Sachs executive Gary Gensler to head the Commodity Futures Trading Commission, which regulates futures markets, even though (or "because") Gensler confessed to lax regulation during the Clinton administration over the very derivative instruments that caused the financial crisis. In April, Goldman hired as its top lobbyist Michael Paese, the top aide to Rep. Barney Frank on the House Financial Services Committee which Frank chairs.
According to ABC News in October, 2008, Goldman "spent more than $43 million dollars on lobbying and campaign contributions to cultivate friends and buy influence in Washington, D.C. since 1989" and their "bankers have been the country's top political campaign contributors this year." "They are almost in a class by themselves," said Sheila Krumholz, the executive director for the Center for Responsive Politics. As Michael Moore has been pointing out, Goldman was the number one source of funding for the Obama 2008 presidential campaign. The bailout of AIG -- which resulted in massive federal government monies to Goldman -- was engineered at a meeting between Paulson, Geithner and Goldman CEO Lloyd Blankfein. Last year, Goldman paid top Obama economics adviser Larry Summers $135,000 for a one-day visit to Goldman.
That the administration continues, so brazenly, to place Goldman Sachs executives in the very government positions with the greatest power over the financial industry illustrates how little effort is devoted to hiding what is really taking place.
Adam Storch COO of the SEC
The Business Insider has posted an image and qualifications of Adam Storch, 29-Year-Old Goldman Guy Who Is Now COO Of The SEC.
Storch graduated from SUNY Buffalo. During college he did a stint as a summer intern at Neuberger Berman and worked at Deloitte & Touche for two years after graduating.
Storch then went to NYU's Stern School of Business. This lead to a job at Goldman, where he worked for the last five years.
Derivatives Bill’s Loophole May Exempt Most Firms
Gary Gensler, Chairman of the Commodity Futures Trading Commission says Derivatives Bill’s Loophole May Exempt Most Firms.
Legislation by Representative Barney Frank to tighten derivatives regulation contains an exemption that may let most financial firms escape new collateral and disclosure rules, the head of the Commodity Futures Trading Commission said.
A plan offered by the Obama administration would subject all swaps dealers and “major market participants” to new regulations for capital, business conduct, record-keeping and reporting. Frank’s version would exempt corporations from that definition if they use derivatives for “risk management” purposes.
“It is clearly the weakest of all the proposals I’ve seen to date,” said Christopher Whalen, managing director of Institutional Risk Analytics in Torrance, California, in an interview before the hearing. Whalen, who has testified before Congress on derivatives regulation, is an independent bank analyst. “Frank’s committee seems to be intent on gutting any meaningful reform.”
The draft would ease trading and clearing requirements for derivatives dealers such as Morgan Stanley and Goldman Sachs Group Inc., compared with the administration’s proposal.
The Rich Have Stolen the Economy
Paul Craig Roberts, writing for CounterPunch says From Offshoring Jobs to Bailing Out Bankers The Rich Have Stolen the Economy.
Bloomberg reports that Treasury Secretary Timothy Geithner’s closest aides earned millions of dollars a year working for Goldman Sachs, Citigroup and other Wall Street firms. Bloomberg adds that none of these aides faced Senate confirmation. Yet, they are overseeing the handout of hundreds of billions of dollars of taxpayer funds to their former employers.
The gifts of billions of dollars of taxpayers’ money provided the banks with an abundance of low cost capital that has boosted the banks’ profits, while the taxpayers who provided the capital are increasingly unemployed and homeless.
Except for the banksters and the offshoring CEOs, there is no source of consumer demand to drive the US economy.
The political system is unresponsive to the American people. It is monopolized by a few powerful interest groups that control campaign contributions. Interest groups have exercised their power to monopolize the economy for the benefit of themselves, the American people be damned.
Paul Craig Roberts was Assistant Secretary of the Treasury in the Reagan administration. He is coauthor of The Tyranny of Good Intentions.
Tenacious Goldman
Here is one more article, from July, courtesy of New York Magazine: Tenacious G
On the weekend of September 12, 2008, as the financial system shuddered and appeared to be on the verge of lurching to a halt, two Goldman Sachs men, former CEO Hank Paulson and current CEO Lloyd Blankfein, huddled with other banking heads at the Federal Reserve Bank of New York to consider how to stave off disaster. Bear Stearns was dead. Merrill Lynch, run by another former Goldman man, John Thain, was in desperate need of a savior. And now Lehman Brothers was on the brink. As secretary of the Treasury, Paulson asked the banks to come up with a private-funding solution for Lehman before it imploded from lack of cash. But all the banks had been scrambling for cash reserves or strategic mergers to buffer against a rapid freeze in lending. No one was able, or willing, to help. And Paulson, a free-market purist, had made one thing clear up front: The government would not bail out the firm. Lehman Brothers, a longtime Goldman rival, prepared to declare bankruptcy, ending its 158-year run on Wall Street.
By Sunday night, Paulson realized he had an even bigger problem: the insurance giant AIG. AIG had sold billions in credit-default swaps to several major banks, what amounted to unregulated insurance on risky subprime-mortgage investments, the very ones that were bringing down the economy.
Hank Paulson and then–New York Fed chief Tim Geithner called an emergency meeting for the following Monday morning at the Federal Reserve Bank, ostensibly to discuss whether a private banking syndicate could be established to save AIG—one in which Goldman Sachs and JPMorgan Chase, two of the ailing insurance giant’s clients, would play prominent roles.
At the meeting, it was hard to discern where concerns over AIG’s collapse ended and concern for Goldman Sachs began: Among the 40 or so people in attendance, Goldman Sachs was on every side of the large conference table, with “triple” the number of representatives as other banks, says another person who was there. The entourage was led by the bank’s top brass: CEO Blankfein, co-chief operating officer Jon Winkelried, investment-banking head David Solomon, and its top merchant-banking executive Richard Friedman—all of whom had worked closely with Hank Paulson two years prior. By contrast, JPMorgan CEO Jamie Dimon did not attend.
The Goldman domination of the meetings might not have raised eyebrows if a private solution had been forthcoming. But on Tuesday, Paulson reversed course and announced that the government would step in and save AIG, spending $85 billion in government money to buy a majority stake.
Of the $52 billion paid to AIG’s counterparties, Goldman Sachs was the biggest recipient: $13 billion, the entire balance of its claim. The amount was surprising: Banks like Merrill Lynch that had bought credit-default swaps from failed insurers other than AIG were paid 13 cents on the dollar in deals moderated by New York’s insurance regulator. Eric Dinallo, the former New York State insurance commissioner, who was at the AIG meetings, characterizes the decision this way: AIG’s counterparties, Goldman being the most prominent, “got to collect on an insurance policy without having the loss.”
Somehow not recognizing (or perhaps not caring about) the brewing backlash, Paulson continued to appoint Goldman Sachs alumni to positions of power after the AIG decision—he named Edward C. Forst, a former head of Goldman’s investment-management division, to help draft the $700 billion Toxic Asset Relief Program (of which $10 billion went to Goldman Sachs), and then Neel Kashkari, a former Goldman V.P., as the TARP manager. And of course Edward Liddy, former Goldman board member, was already serving as the new CEO of AIG. Suddenly, everywhere you looked, men who had passed through the Goldman gauntlet of loyalty and rewards were now in key positions overseeing the rescue of the financial system. The company was earning its nickname: “Government Sachs.”
Both Rogers and Paulson (who’s publishing a book this fall that will presumably attempt to justify his decisions and save his damaged legacy) have argued that the AIG decision was about saving the system as a whole, not Goldman in particular.
Similarly, they say, when it came to AIG, the firm was “prudent” in hedging its bets, buying credit-default swaps from Bank of America, JPMorgan, Société Générale and other banks in case AIG failed to pay the money it owed Goldman—in effect, hedging its hedge against the mortgage market. Goldman Sachs had no “material exposure” to AIG, they argue. One senior executive goes so far as to suggest the firm might even have benefited from AIG’s demise. “We might have done very well,” he says, “but I wouldn’t be so presumptuous as to say that. Who knows?”
Not a single Wall Street executive I spoke with, including several Goldman Sachs alumni, believe those hedges would have survived an overall collapse of the financial system. A large loss would have been inevitable as lending evaporated, and Goldman Sachs would have struggled to shrink the company to a fraction of its size overnight. But the most glaring argument against Goldman is Goldman’s own: If AIG’s biggest and most important bank customer was hedged against losses in AIG, as it claims, why did the government need to pay Goldman Sachs the full $13 billion?
Lost in the haze of Goldman’s recent record profits is the fact that the firm nearly went under even after the AIG bailout last fall. As the market continued to plunge and Goldman’s stock price nose-dived, people inside the firm “were freaking out,” says a former Goldman executive who maintains close ties to the company.
Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill.
Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”
Even Goldman alumni were struck by the company’s shameless posture in ramping up the leverage again so soon after the government bailouts. “It’s a statement of arrogance,” says one former executive.
Goldman claims that there is a Chinese Wall between the advisory business and the trading business. “There are rules and laws regarding information sharing, and we scrupulously follow them,” says a company spokesman.
But two former clients told me they had observed firsthand how Goldman traded against their interests to improve its own bottom line—one who didn’t like it, the other accepting it with a shrug and saying, admiringly, that Goldman’s ability to convince the world that it is a “client-oriented” business was its most masterful PR coup.
Goldman’s profiting from this ethical gray area was exemplified by the real-estate market and the subprime-mortgage collapse: Goldman Sachs sold subprime-mortgage investments to its clients for years, but then in 2006 began trading against subprime on its own balance sheet without informing its clients, a hedge that ultimately let it profit when the real-estate market cratered. For some, this was a prescient call; for others, a glaring conflict of interest and inherently dishonest, since the firm let its clients take the fall.
Earlier this month, Goldman had an ex-employee arrested for allegedly stealing computer codes that could be used, as the prosecutor noted, “to manipulate markets in unfair ways.” Some hedge-fund traders and financial bloggers have speculated that Goldman itself could have been using the codes for the same purpose.
Now attention is turning to Goldman’s dominance of trading on the New York Stock Exchange—as the exchange’s biggest high-speed program trader as well as a provider of liquidity to other traders—and whether that ubiquity has afforded the firm undue advantage. If Goldman’s database knows nearly every trade that is about to be made, sophisticated computer codes could, theoretically, instantly execute fail-safe trades on Goldman’s behalf milliseconds beforehand. This, some are insisting, is where the company is manipulating the markets and making hundreds of millions of dollars a day.
The New York Magazine article is 8 pages long and well worth a read in entirety.
Public must learn to 'tolerate the inequality' of bonuses, says Goldman Sachs vice-chairman
Bankers' soaring pay is an investment in the economy, Lord Griffiths tells public meeting on City morality
http://www.guardian.co.uk/business/2009/oc...es-goldmansachs
Big Banks Fail
with 10 comments
In the Wall Street Journal on Tuesday morning, Charles Calomiris, a leading banking expert, published an op ed entitled “In the World of Banks, Bigger can be Better.” http://online.wsj.com/article/SB1000142405...2678425130.html It begins,
“Legitimate concern about the risks to taxpayers and the economy posed by banks that are “too-big-to-fail” has prompted some observers, among them Simon Johnson, former chief economist of the International Monetary Fund, to favor draconian limits on financial institution size. This is misguided. There are sizable gains from retaining large, complex, global financial institutions—and other ways to credibly protect taxpayers from the cost of government bailouts.”
And the article goes on to make the detailed case for keeping intact our largest banks – in contrast to the recently expressed views of two former Federal Reserve chairs (Paul Volcker http://www.nytimes.com/2009/10/21/business...cker&st=cse, Alan Greenspan, http://dealbook.blogs.nytimes.com/2009/10/...o-big-to-fail/) and – late Tuesday – the current governor of the Bank of England (Mervyn King, http://www.ft.com/cms/s/7056b56a-bda8-11de...-banks-fail%2F), who are calling for these banks to be broken up in some fashion. Read the rest of this entry
http://baselinescenario.com/2009/10/22/big...fail/#more-5295
with 10 comments
In the Wall Street Journal on Tuesday morning, Charles Calomiris, a leading banking expert, published an op ed entitled “In the World of Banks, Bigger can be Better.” http://online.wsj.com/article/SB1000142405...2678425130.html It begins,
“Legitimate concern about the risks to taxpayers and the economy posed by banks that are “too-big-to-fail” has prompted some observers, among them Simon Johnson, former chief economist of the International Monetary Fund, to favor draconian limits on financial institution size. This is misguided. There are sizable gains from retaining large, complex, global financial institutions—and other ways to credibly protect taxpayers from the cost of government bailouts.”
And the article goes on to make the detailed case for keeping intact our largest banks – in contrast to the recently expressed views of two former Federal Reserve chairs (Paul Volcker http://www.nytimes.com/2009/10/21/business...cker&st=cse, Alan Greenspan, http://dealbook.blogs.nytimes.com/2009/10/...o-big-to-fail/) and – late Tuesday – the current governor of the Bank of England (Mervyn King, http://www.ft.com/cms/s/7056b56a-bda8-11de...-banks-fail%2F), who are calling for these banks to be broken up in some fashion. Read the rest of this entry
http://baselinescenario.com/2009/10/22/big...fail/#more-5295
It's Not Ridiculous That Wall Street Pays 50% Of Revenue In Bonuses
from Clusterstock by Joe Weisenthal
rickwagoner sad tbi
In another piece on bonuses at bailed-out banks, NYT columnist Joe Nocera lets out a real whopper.
The truth is, Wall Street simply pays its people too much money. No other segment of industry pays out 50 percent of its revenue in bonuses, only Wall Street. In no other segment do so many people get rich for doing so little for the broader society. As it happens, Mr. Feinberg made this point, at least inferentially, when he issued his reports on Thursday.
What he says is true, and totally meaningless at the same time. The primary business expense on Wall Street is people. Other companies are forced to spend a ton of money on steel, oil, food, and raw chemicals. But Wall Street (like law), the only real cost is getting the people in place.
Nocera goes on:
In his Citigroup memorandum, 14 of the 25 best-paid executives are going to make $5 million to $9 million. Compare that with General Motors, where they make, you know, automobiles. The chief executive will make a little more than $5 million. But only six others will make more than $1 million, and none will top $1.8 million. Most of the rest make mid-six-figure salaries.
Tell me again: what in the world does a Citi trader do that makes him worth so much more than a General Motors executive? Go figure.
Rather than end the discussion with "go figure," let's actually try to answer the question.
In finance, principal actors matter a lot more. The competence of JPMorgan's (JPM) management and Morgan Stanley's (MS) management has made a huge difference in the fate of those two organizations as compared to, say, the fate of Lehman Brothers and Citigroup ©, where management was significantly worse.
In the auto industry, Steve Rattner's condemnation of Rick Wagoner aside, inertia matters a lot more than key leaders. The die has been cast for Detroit for years, owing to a combination of the industry's insularity, the union, environmental regulations, trade rules, energy prices, American car-buying patterns, etc. You can blast Wagoner all you want, but we've yet to hear a plausible argument that if, five years ago, a different CEO had been in place, GM would be in a different position today. Even 10 years ago. So it just doesn't make as much sense for the CEO (or other top management) to be paid as much in a company like that.
Beyond that, there's specialization. Whereas a successful finance chief needs to know the business inside and out, the best CEO in Detroit came from Beoing, which is a similar business, but not the same, and it means that the pool of candidates that could run a car company is less specialized and wider. Chrysler hired a former Home Depot CEO -- that turned out horrible, but then, Chrysler was a pure basket case even before Cerberus made its horrible purchase.
The bottom line is that attacking bonuses is the wrong fight. For one thing, it's arbitrary to say that bank shareholders should get more money than they currently are. We don't hear any shareholder of Goldman Sachs (GS) complaning, now do we? But if you think people are paid too much, then the effort should not be about limiting pay, but about pushing for a much simpler Wall Street, where specialization and willingness to take risk matters less. Accomplish that (very difficult), and the pay problem will go away.
http://www.businessinsider.com/its-not-rid...bonuses-2009-10
from Clusterstock by Joe Weisenthal
rickwagoner sad tbi
In another piece on bonuses at bailed-out banks, NYT columnist Joe Nocera lets out a real whopper.
The truth is, Wall Street simply pays its people too much money. No other segment of industry pays out 50 percent of its revenue in bonuses, only Wall Street. In no other segment do so many people get rich for doing so little for the broader society. As it happens, Mr. Feinberg made this point, at least inferentially, when he issued his reports on Thursday.
What he says is true, and totally meaningless at the same time. The primary business expense on Wall Street is people. Other companies are forced to spend a ton of money on steel, oil, food, and raw chemicals. But Wall Street (like law), the only real cost is getting the people in place.
Nocera goes on:
In his Citigroup memorandum, 14 of the 25 best-paid executives are going to make $5 million to $9 million. Compare that with General Motors, where they make, you know, automobiles. The chief executive will make a little more than $5 million. But only six others will make more than $1 million, and none will top $1.8 million. Most of the rest make mid-six-figure salaries.
Tell me again: what in the world does a Citi trader do that makes him worth so much more than a General Motors executive? Go figure.
Rather than end the discussion with "go figure," let's actually try to answer the question.
In finance, principal actors matter a lot more. The competence of JPMorgan's (JPM) management and Morgan Stanley's (MS) management has made a huge difference in the fate of those two organizations as compared to, say, the fate of Lehman Brothers and Citigroup ©, where management was significantly worse.
In the auto industry, Steve Rattner's condemnation of Rick Wagoner aside, inertia matters a lot more than key leaders. The die has been cast for Detroit for years, owing to a combination of the industry's insularity, the union, environmental regulations, trade rules, energy prices, American car-buying patterns, etc. You can blast Wagoner all you want, but we've yet to hear a plausible argument that if, five years ago, a different CEO had been in place, GM would be in a different position today. Even 10 years ago. So it just doesn't make as much sense for the CEO (or other top management) to be paid as much in a company like that.
Beyond that, there's specialization. Whereas a successful finance chief needs to know the business inside and out, the best CEO in Detroit came from Beoing, which is a similar business, but not the same, and it means that the pool of candidates that could run a car company is less specialized and wider. Chrysler hired a former Home Depot CEO -- that turned out horrible, but then, Chrysler was a pure basket case even before Cerberus made its horrible purchase.
The bottom line is that attacking bonuses is the wrong fight. For one thing, it's arbitrary to say that bank shareholders should get more money than they currently are. We don't hear any shareholder of Goldman Sachs (GS) complaning, now do we? But if you think people are paid too much, then the effort should not be about limiting pay, but about pushing for a much simpler Wall Street, where specialization and willingness to take risk matters less. Accomplish that (very difficult), and the pay problem will go away.
http://www.businessinsider.com/its-not-rid...bonuses-2009-10
Tim Geithner's $14 Billion Gift to Goldman Sachs
Tim Geithner should be given the option to resign immediately, or be fired. He is either incompetent, too conflicted to do his job with the banks properly, or most likely, both.
Stephen Friedman should be investigated for $5.4 million in profits made through potential insider trading. His breach of fiduciary responsibility is shocking. The entire integrity of the Federal Reserve bank should be called into question. There is no place for the Fed as the primary regulator of the financial system given their penchance for secrecy and cronyism. They are a private company owned by the banks. The proposal to give them that responsibility is patently absurd.
Obama's administration of the financial system, cloaked in excessive secrecy, conflicts of interest, and enormous payoffs to campaign contributors demands a Congressional investigation, except of the course those doing the investigating are also implicated in the scandal.
An appointment of an independent prosecutor to investigate the Treasury bailouts is the decent thing for the Justice Department to do in any presidential adminstration, not to mention one that is a reform government that had promised transparency and an end to crony capitalism and lobbyists running the process.
Obama is a failure, and is in danger of becoming a disgrace. If the Democrats lose their significant majority in the Congress in the 2010 elections, we would expect a thorough investigation to be conducted.
New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers
By Richard Teitelbaum and Hugh Son
Oct. 27 (Bloomberg) -- In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.
Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.
Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.
By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.
The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.
Subprime Mortgages
CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.
Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.
The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.
Habayeb, who left AIG in May, did not return phone calls and an e-mail.
Goldman Sachs
The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.
In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.
AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.
New York Fed
The New York Fed, one of the 12 regional Reserve Banks that are part of the Federal Reserve System, is unique in that it implements monetary policy through the buying and selling of Treasury securities in the secondary market. It also supervises financial institutions in the New York region.
The New York Fed board, which normally consists of nine directors, in November 2008 included Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Friedman. The directors have no direct role in bank supervision. They’re responsible for advising on regional economic conditions and electing the bank president.
Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.
“There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”
Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.
Unwinding Derivatives
In March 2009, congressional hearings and public demonstrations targeted AIG after it was disclosed it had paid $165 million in bonuses that month to the employees of AIGFP, which is unwinding billions of dollars in derivatives under the supervision of Gerry Pasciucco, a former Morgan Stanley managing director who joined AIG after the CDS payments were mandated.
Far more money was wasted in paying the banks for their swaps, says Donn Vickrey of financial research firm Gradient Analytics Inc. “In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.
A spokeswoman for Geithner, now secretary of the Treasury Department, declined to comment. Jack Gutt, a spokesman for the New York Fed, also had no comment.
One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.
A Range of Options
People familiar with the transaction say the New York Fed considered a range of options, including guaranteeing the banks’ CDOs. They say that by buying the securities, AIG got the best deal it could.
According to a quarterly New York Fed report on its holdings, the $29.6 billion in securities held by Maiden Lane III had declined in value by about $7 billion as of June 30.
Edward Grebeck, CEO of Stamford, Connecticut-based debt consulting firm Tempus Advisors, says the most serious breach by the government was to keep the process of approving the bank payments secret.
“It’s inexcusable,” says Grebeck, who teaches a course on CDSs at New York University. “Everybody should be privy to the negotiations that went on. We can’t have bailouts like this happening behind closed doors.”
Secret Deliberations
The deliberations of the New York Fed are not made public. In this case, even the identities of the AIG counterparties weren’t disclosed until March 2009, when U.S. Senator Christopher Dodd, head of the Senate Finance Committee, demanded they be made public.
Bloomberg News has filed a Freedom of Information Act request seeking copies of the term sheets related to AIG’s counterparty payments, along with e-mails and the logs of phone calls and meetings among Geithner, Friedman and other New York Fed and AIG officials. The request is pending.
The Federal Reserve has been reluctant to publish information on its efforts to stabilize the financial system since the crisis began. The Fed has loaned more than $2 trillion, yet it refuses to name the recipients of the loans, or cite the amount they borrowed, saying that doing so may set off a run by depositors and unsettle shareholders.
Bloomberg LP, the parent of Bloomberg News, sued in November 2008 under the Freedom of Information Act for disclosure of details about 11 Fed lending programs. In August, Manhattan Chief U.S. District Judge Loretta Preska ruled in Bloomberg’s favor, saying the central bank had to provide details of the loans.
The Fed has appealed to the Second Circuit Court of Appeals, and the data remain secret while the appeal proceeds.
‘Cataclysmic Financial Crisis’
Information on the borrowers is “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” attorneys for Bloomberg said in the Nov. 7 suit.
Questions about the New York Fed transactions may be answered by Neil Barofsky, inspector general for the Troubled Asset Relief Program, or TARP. He is working on a report, which may be released next month, on whether AIG overpaid the banks. TARP is the vehicle through which the Treasury invested more than $200 billion in some 600 U.S. financial institutions.
William Poole, a former president of the Federal Reserve Bank of St. Louis, defends the New York Fed’s action. The financial system had suffered through months of crisis at the time, he says. The investment bank Bear Stearns Cos. had been swallowed by JPMorgan; mortgage packagers Fannie Mae and Freddie Mac had been taken over by the government; and the day before AIG was rescued, Lehman Brothers Holdings Inc. had filed for bankruptcy.
‘Enough Trouble’
“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”
Still, officials at AIG object to the secrecy that surrounded the transactions. One top AIG executive who asked not to be identified says he was pressured by New York Fed officials not to file documents with the U.S. Securities and Exchange Commission that would divulge details.
“They’d tell us that they don’t think that this or that should be disclosed,” the executive says. “They’d say, ‘Don’t you think your counterparties will be concerned?’ It was much more about protecting the Fed.”
‘An Outrage’
Friedman’s role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.
Both purchases took place before the payments to Goldman Sachs were publicly disclosed under pressure from Senator Dodd in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a share, meaning Friedman had paper profits of $5.4 million.
Jerry Jordan, former president of the Federal Reserve Bank of Cleveland, says Friedman should have resigned from the New York Fed as soon as it became clear that Goldman stood to benefit from its actions.
“It’s an outrage,” Jordan says. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.”
98,600 Goldman Shares
Friedman remains a member of Goldman’s board and held a total of 98,600 shares of the firm’s stock as of Jan. 22.
Vickrey says that one reason the New York Fed should have insisted on discounted payments for AIG’s CDSs is that the banks likely had hedges against their insured CDOs or had already written down their value. On March 20, Goldman Sachs CFO David Viniar said in a conference call with investors that Goldman was protected.
“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”
In any event, former St. Louis Fed President Poole says the entire process should have been public and transparent. “There should be a high bar against not disclosing,” Poole says. “The taxpayer has every right to understand in detail what happened.”
http://jessescrossroadscafe.blogspot.com/
Tim Geithner should be given the option to resign immediately, or be fired. He is either incompetent, too conflicted to do his job with the banks properly, or most likely, both.
Stephen Friedman should be investigated for $5.4 million in profits made through potential insider trading. His breach of fiduciary responsibility is shocking. The entire integrity of the Federal Reserve bank should be called into question. There is no place for the Fed as the primary regulator of the financial system given their penchance for secrecy and cronyism. They are a private company owned by the banks. The proposal to give them that responsibility is patently absurd.
Obama's administration of the financial system, cloaked in excessive secrecy, conflicts of interest, and enormous payoffs to campaign contributors demands a Congressional investigation, except of the course those doing the investigating are also implicated in the scandal.
An appointment of an independent prosecutor to investigate the Treasury bailouts is the decent thing for the Justice Department to do in any presidential adminstration, not to mention one that is a reform government that had promised transparency and an end to crony capitalism and lobbyists running the process.
Obama is a failure, and is in danger of becoming a disgrace. If the Democrats lose their significant majority in the Congress in the 2010 elections, we would expect a thorough investigation to be conducted.
New York Fed’s Secret Choice to Pay for Swaps Hits Taxpayers
By Richard Teitelbaum and Hugh Son
Oct. 27 (Bloomberg) -- In the months leading up to the September 2008 collapse of giant insurer American International Group Inc., Elias Habayeb and his colleagues worked nights and weekends negotiating with banks that had bought $62 billion of credit-default swaps from AIG, according to a person who has worked with Habayeb.
Habayeb, 37, was chief financial officer for the AIG division that oversaw AIG Financial Products, the unit that had sold the swaps to the banks. One of his goals was to persuade the banks to accept discounts of as much as 40 cents on the dollar, according to people familiar with the matter.
Among AIG’s bank counterparties were New York-based Goldman Sachs Group Inc. and Merrill Lynch & Co., Paris-based Societe Generale SA and Frankfurt-based Deutsche Bank AG.
By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.
The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.
Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.
Subprime Mortgages
CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.
Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.
The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.
Habayeb, who left AIG in May, did not return phone calls and an e-mail.
Goldman Sachs
The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.
In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.
AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.
New York Fed
The New York Fed, one of the 12 regional Reserve Banks that are part of the Federal Reserve System, is unique in that it implements monetary policy through the buying and selling of Treasury securities in the secondary market. It also supervises financial institutions in the New York region.
The New York Fed board, which normally consists of nine directors, in November 2008 included Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Friedman. The directors have no direct role in bank supervision. They’re responsible for advising on regional economic conditions and electing the bank president.
Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm, says the government squandered billions in the AIG deal.
“There’s no way they should have paid at par,” she says. “AIG was basically bankrupt.”
Citigroup Inc. agreed last year to accept about 60 cents on the dollar from New York-based bond insurer Ambac Financial Group Inc. to retire protection on a $1.4 billion CDO.
Unwinding Derivatives
In March 2009, congressional hearings and public demonstrations targeted AIG after it was disclosed it had paid $165 million in bonuses that month to the employees of AIGFP, which is unwinding billions of dollars in derivatives under the supervision of Gerry Pasciucco, a former Morgan Stanley managing director who joined AIG after the CDS payments were mandated.
Far more money was wasted in paying the banks for their swaps, says Donn Vickrey of financial research firm Gradient Analytics Inc. “In cases like this, the outcome is always along the lines of 50, 60 or 70 cents on the dollar,” Vickrey says.
A spokeswoman for Geithner, now secretary of the Treasury Department, declined to comment. Jack Gutt, a spokesman for the New York Fed, also had no comment.
One reason par was paid was because some counterparties insisted on being paid in full and the New York Fed did not want to negotiate separate deals, says a person close to the transaction. “Some of those banks needed 100 cents on the dollar or they risked failure,” Vickrey says.
A Range of Options
People familiar with the transaction say the New York Fed considered a range of options, including guaranteeing the banks’ CDOs. They say that by buying the securities, AIG got the best deal it could.
According to a quarterly New York Fed report on its holdings, the $29.6 billion in securities held by Maiden Lane III had declined in value by about $7 billion as of June 30.
Edward Grebeck, CEO of Stamford, Connecticut-based debt consulting firm Tempus Advisors, says the most serious breach by the government was to keep the process of approving the bank payments secret.
“It’s inexcusable,” says Grebeck, who teaches a course on CDSs at New York University. “Everybody should be privy to the negotiations that went on. We can’t have bailouts like this happening behind closed doors.”
Secret Deliberations
The deliberations of the New York Fed are not made public. In this case, even the identities of the AIG counterparties weren’t disclosed until March 2009, when U.S. Senator Christopher Dodd, head of the Senate Finance Committee, demanded they be made public.
Bloomberg News has filed a Freedom of Information Act request seeking copies of the term sheets related to AIG’s counterparty payments, along with e-mails and the logs of phone calls and meetings among Geithner, Friedman and other New York Fed and AIG officials. The request is pending.
The Federal Reserve has been reluctant to publish information on its efforts to stabilize the financial system since the crisis began. The Fed has loaned more than $2 trillion, yet it refuses to name the recipients of the loans, or cite the amount they borrowed, saying that doing so may set off a run by depositors and unsettle shareholders.
Bloomberg LP, the parent of Bloomberg News, sued in November 2008 under the Freedom of Information Act for disclosure of details about 11 Fed lending programs. In August, Manhattan Chief U.S. District Judge Loretta Preska ruled in Bloomberg’s favor, saying the central bank had to provide details of the loans.
The Fed has appealed to the Second Circuit Court of Appeals, and the data remain secret while the appeal proceeds.
‘Cataclysmic Financial Crisis’
Information on the borrowers is “central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression,” attorneys for Bloomberg said in the Nov. 7 suit.
Questions about the New York Fed transactions may be answered by Neil Barofsky, inspector general for the Troubled Asset Relief Program, or TARP. He is working on a report, which may be released next month, on whether AIG overpaid the banks. TARP is the vehicle through which the Treasury invested more than $200 billion in some 600 U.S. financial institutions.
William Poole, a former president of the Federal Reserve Bank of St. Louis, defends the New York Fed’s action. The financial system had suffered through months of crisis at the time, he says. The investment bank Bear Stearns Cos. had been swallowed by JPMorgan; mortgage packagers Fannie Mae and Freddie Mac had been taken over by the government; and the day before AIG was rescued, Lehman Brothers Holdings Inc. had filed for bankruptcy.
‘Enough Trouble’
“I think the Federal Reserve was trying to stop the spread of fear in the market,” Poole says. “The market was having enough trouble dealing with Lehman. If you add, on top of that, AIG paying off some fraction of its liabilities, a system which is already substantially frozen would freeze rock-solid.”
Still, officials at AIG object to the secrecy that surrounded the transactions. One top AIG executive who asked not to be identified says he was pressured by New York Fed officials not to file documents with the U.S. Securities and Exchange Commission that would divulge details.
“They’d tell us that they don’t think that this or that should be disclosed,” the executive says. “They’d say, ‘Don’t you think your counterparties will be concerned?’ It was much more about protecting the Fed.”
‘An Outrage’
Friedman’s role remains controversial. In December 2008, weeks after the payments to the banks were authorized in November, Friedman bought 37,300 shares of Goldman stock at $80.78 a share, according to SEC filings. On Jan. 22, he bought 15,300 more at $66.61.
Both purchases took place before the payments to Goldman Sachs were publicly disclosed under pressure from Senator Dodd in March. On Oct. 26, Goldman Sachs stock closed at $179.37 a share, meaning Friedman had paper profits of $5.4 million.
Jerry Jordan, former president of the Federal Reserve Bank of Cleveland, says Friedman should have resigned from the New York Fed as soon as it became clear that Goldman stood to benefit from its actions.
“It’s an outrage,” Jordan says. “He needed to either resign from the Fed board or from Goldman and proceed to sell his stock.”
98,600 Goldman Shares
Friedman remains a member of Goldman’s board and held a total of 98,600 shares of the firm’s stock as of Jan. 22.
Vickrey says that one reason the New York Fed should have insisted on discounted payments for AIG’s CDSs is that the banks likely had hedges against their insured CDOs or had already written down their value. On March 20, Goldman Sachs CFO David Viniar said in a conference call with investors that Goldman was protected.
“We limited our overall credit exposure to AIG through a combination of collateral and market hedges,” Viniar said. “There would have been no credit losses if AIG had failed.”
In any event, former St. Louis Fed President Poole says the entire process should have been public and transparent. “There should be a high bar against not disclosing,” Poole says. “The taxpayer has every right to understand in detail what happened.”
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