Category Archives: financial reform

Elizabeth Warren on CNBC

31 Wednesday Mar 2010

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In an interview with Maria Bartiromo yesterday on CNBC, TARP Oversight Panel chairperson Elizabeth Warren commented on a wide range of topics from the alleged “profit” the government will receive from the sale of shares of Citigroup, to “pulling the plug” on Fannie and Freddie, to the impending crash of the commercial real estate market.

About the sale of Citi stock, Dave Dryden at Firedoglake has the explanation of why it’s all accounting hocus pocus. The upshot is this–the TARP money Citi received was only a small portion of the total federal commitment.

This message to the TBTF’s made me want to stand up and cheer:

“I don’t care how big you are, if you make serious enough mistakes, then your business can be wiped out. There is no guarantee anymore.”

Are they listening at the White House, the Treasury, and the Fed? One can only hope.

But the most ominous warning was on commercial real estate, calling it a “very serious problem that we’re going to have to resolve over the next 3 years,” Warren added that nearly 3,000 mid-size banks have what she called a “dangerous concentration” in commercial real estate lending. Asked if she saw a “return to normalcy” in 2010, Warren said, “I don’t think so, I don’t see it.” Watch:Vodpod videos no longer available.

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Too Big To Fail is Too Big–Break ‘Em Up

30 Tuesday Mar 2010

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The chorus of those calling for breaking up the big banks is growing larger and louder by the day. Senator Ted Kaufman (D-DE) in a speech on the floor of the Senate last Friday:

“These mega-banks are too big to manage, too big to regulate, too big to fail and too interconnected to resolve when the next crisis hits.  We must break up these banks and separate again those commercial banking activities that are guaranteed by the government from those investment banking activities that are speculative and reflect greater risk.”

Richard Fisher, President of the Federal Reserve Bank of Dallas, March 3:

“A truly effective restructuring of our regulatory regime will have to neutralize what I consider to be the greatest threat to our financial system’s stability—the so-called too-big-to-fail, or TBTF, banks. In the past two decades, the biggest banks have grown significantly bigger. In 1990, the 10 largest U.S. banks had almost 25 percent of the industry’s assets. Their share grew to 44 percent in 2000 and almost 60 percent in 2009.

…Given the danger these institutions pose to spreading debilitating viruses throughout the financial world, my preference is for a more prophylactic approach: an international accord to break up these institutions into ones of more manageable size—more manageable for both the executives of these institutions and their regulatory supervisors.”

Senator Kaufman and Mr. Fisher are just the latest additions to the list that includes former Fed chairman Paul Volcker, Nobel prize-winning economist Joseph Stiglitz, FDIC head Sheila Bair, Sen. Cantwell, and Sen. McCain, among many others. Unfortunately, two names not on the list are Treasury Secretary Geithner and Chairman of the Senate Banking Committee, Chris Dodd.

And as if on cue, Citigroup gives us a prime example of why these financial behemoths need to be dissolved, and have what was once the “boring” business of commercial banking–taking deposits and making loans–separated from the risky business in which the banksters love to engage (with OPM of course) and why Wall Street cannot be left to its own devices:

“It appears that the pain of the recession is not deep enough to teach Citigroup Inc. what it needs to learn. The bank..is now readying a new unregulated insurance credit derivative, the CLX…The company is heading back into familiar territory where they’re putting taxpayer money into play on another risky bet. Simply put the instrument will enable it to gamble on future events by issuing complex financial instruments which attempt to quantify risk. This is very similar to the original business that Citigroup was heavily involved with that precipitated their fall from glory.”

Leopards and banksters never change their spots.

Too Big To Jail?

28 Sunday Mar 2010

Posted by in bailout, Financial Crisis, financial reform, financial regulation, Justice Department, Politics, Wall Street

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Only in the bizarro world of high finance can one be named as a co-conspirator and not subject to criminal charges:

“March 26 (Bloomberg) — JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and UBS AG were among more than a dozen Wall Street firms involved in a conspiracy to pay below-market interest rates to U.S. state and local governments on investments, according to documents filed in a U.S. Justice Department criminal antitrust case.

…None of the firms or individuals named on the list has been charged with wrongdoing.”

A government list of previously unidentified “co- conspirators” contains more than two dozen bankers at firms also including Bank of America Corp., Bear Stearns Cos., Societe Generale, two of General Electric Co.’s financial businesses and Salomon Smith Barney, the former unit of Citigroup Inc., according to documents filed in U.S. District Court in Manhattan on March 24.

Apparently “too big to fail” is also “too big to jail.”

Regulatory Capture and the Washington/Wall Street Revolving Door

28 Sunday Mar 2010

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Regulatory capture: a term used to refer to situations in which a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating.

See also John C. Dugan, Office of the Comptroller of the Currency. Related subject: Washington/Wall Street revolving door. From today’s New York Times:

Houston

John C. Dugan, a former bank lobbyist, has been comptroller since 2005…and he’s responsible for regulating banks with national charters, including giants like Citibank and Chase. Like his recent predecessors, Mr. Dugan often takes positions that align with banks, even as they have come under withering attack for their role in the financial crisis.”

“For now at least, the nation’s front line for consumer financial protection resides on the 34th floor of a downtown office tower here…The Office of the Comptroller of the Currency operates this service center, fielding thousands of complaints each year about the nation’s banks…What many customers may not realize is that the man who oversees the operation used to represent the very banks they are complaining about.

Here comes the revolving door:

“A 2005 appointee of President George W. Bush, Mr. Dugan came to the O.C.C. after working for 12 years as a lawyer and lobbyist representing the banking industry. Before that, he worked for the federal government, including stints as counsel for the Senate Banking Committee and as an assistant secretary in the Treasury Department.”

Mr. Dugan’s term expires in August. Any guesses where he’s headed after that?

The Charade of Financial Reform

26 Friday Mar 2010

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Simon Johnson at Baseline Scenario sheds light on Sen. Dodd’s proposed financial reform legislation, and it’s more of the same old, same old we’ve come to expect from Washington—the appearance of doing something while actually doing nothing:

“…officials are lining up to solemnly confirm that “too big to fail” will be history once the Dodd bill passes. But this is simply incorrect.  Focus on this: How can any approach based on a US resolution authority end the issues around large complex cross-border financial institutions?  It cannot.

The resolution authority, you recall, is the ability of the government to apply a form of FDIC-type intervention (or modified bankruptcy procedure) to all financial institutions, rather than just banks with federally-insured deposits as is the case today.  The notion is fine for purely US entities, but there is no cross-border agreement on resolution process and procedure – and no prospect of the same in sight.

[…]

Why exactly do you think big banks, such as JP Morgan Chase and Goldman Sachs, have been so outspoken in support of a “resolution authority”?  They know it would allow them to continue not just at their current size – but actually to get bigger.  Nothing could be better for them than this kind of regulatory smokescreen.  This is exactly the kind of game that they have played well over the past 20 years – in fact, it’s from the same playbook that brought them great power and us great danger in the run-up to 2008.

When a major bank fails, in the years after the Dodd bill passes, we will face the exact same potential chaos as after the collapse of Lehman.  And we know what our policy elite will do in such a situation – because Messrs. Paulson, Geithner, Bernanke, and Summers swear up and down there was no alternative, and people like them will always be in power.  If you must choose between collapse and rescue, US policymakers will choose rescue every time…

Once you understand that the resolution authority is an illusion, you begin to understand that the Dodd legislation would achieve nothing on the systemic risk and too big to fail front.

On reflection, perhaps this is exactly why the sponsors of this bill are afraid to have any kind of open and serious debate.  The emperor simply has no clothes.”

Let’s Move On From Health Care. Please.

24 Wednesday Mar 2010

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Now that health care reform, such as it is, has been signed, sealed, and set to be delivered in varying stages between now and 2014, can we please move on to other things. Believe it or not there are some significant storm clouds on the horizon which have the potential to come on shore sooner than 4 years from now, and which might merit some attention from policymakers in Washington, D.C. Such as:

The next wave of the housing crisis:

“This month, the Fed confirmed that it will no longer make open market purchases of mortgage backed securities after March 31st…As the Fed begins to unwind its historic intervention, it faces a second wave of toxic mortgage maturities that could be even more damaging than the last wave of subprime mortgages. These are the 3 and 5 year Option ARM mortgages, and they were the credit bubble’s absolute creme de la creme…these loans will reset at rates that are far higher than the initial “teaser” rate. Sadly, this may spell doom for borrowers who used these loans to fund overpriced home purchases in 2006-2007, especially in high-priced markets along the coasts.”

Add to that the lack of success of the foreclosure prevention program which has fallen far short of its original goals of helping 4 million homeowners. The number so far is less than 170,000.

“The program risks helping few, and for the rest, merely spreading out the foreclosure crisis over the course of several years” at significant expense for taxpayers and borrowers, the inspector general’s office wrote. If too many participants re- default, the modification plan “will have done little to achieve the goal of assisting homeowners who would still find themselves losing their homes.”

Then there’s the commercial real estate “ticking time bomb”:

“Estimates published last November by the Urban Land Institute and PricewaterhouseCoopers suggest that commercial real estate vacancies will continue to increase in 2010, while prices could tumble further during the year. Prices could fall as low as half their peak levels from 2007.

If that happens, that would only darken borrowers’ hopes that banks will refinance their outstanding loans. And some $1.4 trillion is commercial real estate debt is expected to come due over the next three years.”

Existing home sales have fallen for the third straight month, to their lowest level since last July:

“Resales of U.S. homes and condominiums fell 0.6% in February to a seasonally adjusted annual rate of 5.02 million, the lowest level in eight months, raising doubts about the durability of the housing recovery, the National Association of Realtors reported Tuesday.

…”We need to have a second surge,” said Lawrence Yun, chief economist for the real estate lobbying group. However, the jury’s still out, he said…A double-dip recession is a “possibility” if a second surge of buying doesn’t occur, he said.”

And last but not least, the economic “recovery” which is being felt in few places outside of big business and Wall Street:

“The earnings of companies in the Standard & Poor’s 500 stock index tripled in the fourth quarter, but this does not mean the rest of the US economy is doing well. Much of their sales were into fast-growing markets in places like India, China and Brazil. Meanwhile, they continued to slash jobs and cut costs at home.”

Large corporations are flush with cash, but:

“…Much is being used to buy other companies, which usually leads to more job losses. Much of the rest is being used to buy back their own stock in order to boost their share prices…The major beneficiaries are shareholders, including top executives, whose pay is linked to share prices. But the buy-backs do nothing for most Americans.

…The economy shows signs of improvement largely because the government is spending huge sums and the Fed is essentially printing even more money. But where will demand come from when the stimulus is over and the Fed tightens? That question hangs over the economy like a dense cloud. Until there is an answer, a sustainable recovery for any other than America’s largest corporations, Wall Street and the wealthy is a mirage.”

Just a few things for our elected representatives to consider. You’ve done your touchdown dance, now it’s time to get ready for the kickoff—the game is far from over.

Geithner and Dodd Oppose Fed Audit Which Could Reveal Billions in Toxic Assets

23 Tuesday Mar 2010

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How much more of these “junk loans” are bring “warehoused” on the books at the Fed? A question to which we may never know the answer if Treasury Secretary Geithner and Senator Chris Dodd have anything to say about it:

“As Lehman Brothers careened toward bankruptcy in 2008, the New York Federal Reserve Bank came to its rescue, sopping up junk loans that the investment bank couldn’t sell in the market, according to a report from court-appointed examiner Anton R. Valukas.

Without an audit, the Fed is able to conceal the specifics of what it holds on its balance sheet. If the Lehman deal is any indication, the Fed is hiding billions of dollars in toxic loans on its books.”

The New York Fed, under the direction of now-Treasury Secretary Tim Geithner, knowingly allowed itself to be used as a “warehouse” for junk loans, the report says, even though Fed guidelines say it can only accept investment grade bonds.

Meanwhile, the Fed and Geithner both strongly oppose a congressional measure to authorize an independent audit of the central bank and its lending facilities. The provision passed the House but is under attack in the Senate, where Banking Committee Chairman Chris Dodd (D-Conn.) says he hopes to stop it.

I suspect this has a lot to do with Secretary Geithner’s strong opposition:

“The Valukas report found clear evidence that the New York Fed  knew that Lehman was sending it garbage that it had no intention to market. In other words, the baskets of assets were created for the specific purpose of selling to the Fed for far more than they were worth.

Lehman knew it too: “No intention to market” was scrawled on one of the internal presentations about the assets…Geithner himself was aware that there was a gap between what Lehman claimed the assets were worth and what they were really worth.”

What else don’t we know? The stonewall is on:

“The Fed won’t say how much more toxic “garbage” is in the Fed’s “warehouse”…The Treasury didn’t immediately respond to a request for comment.”

Sounds an awful lot like fraud and obstruction of justice to me.

Dodd’s Toothless Consumer Protection “Watchdog”

17 Wednesday Mar 2010

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Sen. Chris Dodd’s so-called “sweeping overhaul of the U.S. financial system” creates a Bureau of Consumer Financial Protection, which is supposed to be “a new, independent consumer watchdog.” You just know there’s a “but” coming here, right? Right:

“…the legislation would impose significant limits on the autonomy of the new watchdog. It would establish a Financial Stability Oversight Council [with veto power over the bureau] of nine members, all but one of whom would be existing financial regulators such as the Treasury Secretary and Comptroller of the Currency, which oversees national banks.”

In just one example, let’s take a look at what those “existing regulators” and the now-Treasury Secretary were doing in the case of Lehman Brothers, as revealed in the report by the examiner of Lehman’s bankruptcy. While management at Lehman was engaging in Enron-stlye accounting, where were the federal regulators? Looking on:

“One crucial move was to shift assets off its books at the end of each quarter in exchange for cash through a clever accounting maneuver…to make its leverage [debt] levels look lower than they were. Then they would bring the assets back onto its balance sheet days after issuing its earnings report.

And where was the government while all this “materially misleading” accounting was going on? In the vernacular of teenage instant messaging, let’s just say they had a vantage point as good as POS (parent over shoulder).”

What’s worse is that “there is no evidence that Lehman kept two sets of books or tried to hide what it was doing from regulators.” Among the spectators:

“The NY Fed, the regulatory agency led by then FRBNY President Geithner [which] stood by while Lehman deceived the public through a scheme that FRBNY officials likened to a “three card monte routine.”

The FRBNY knew that Lehman was engaged in smoke and mirrors designed to overstate its liquidity and, therefore, was unwilling to lend as much money to Lehman. The FRBNY did not, however, inform the SEC, the public, or the OTS (which regulated an S&L that Lehman owned) of what should have been viewed by all as ongoing misrepresentations.”

So much for the “watchdog” capabilities of existing regulators and the Treasury Secretary. What about the other named mentioned, the Comptroller of the Currency. That would be John Dugan, a name not many are familiar with, but who was called in an article in The Nation last December, “one of the earliest architects of the too big to fail economy”:

“Too big to fail banks were a ticking time bomb, but they might not have ravaged the global economy in 2008 without major shortcomings in consumer protection over the previous five years. As head of the Office of the Comptroller of the Currency, Dugan played a leading role in gutting the consumer protection system, allowing big banks to take outrageous risks on the predatory mortgages that led to millions of foreclosures.

“For years, the OCC has had the power and the responsibility to protect both banks and consumers, and it has consistently thrown the consumer under the bus,” says Harvard University Law School professor Elizabeth Warren, chair of the Congressional Oversight Panel for the Troubled Asset Relief Program.”

Consumer Financial Protection? Sounds more like Wall Street Financial Protection to me.

Health Care “Sleight of Hand”

16 Tuesday Mar 2010

Posted by in Congress, financial reform, health care, Politics, Uncategorized

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If members of Congress have any question as to why they rank somewhere below used car salesmen on the trustworthy scale, there are 2 shining examples relating to 2 pieces of proposed legislation in today’s news—one on health care reform and one on financial reform—which should make it crystal clear. First there’s this from the Washington Post:

“After laying the groundwork for a decisive vote this week on the Senate’s health-care bill, House Speaker Nancy Pelosi suggested Monday that she might attempt to pass the measure without having members vote on it.”

Wait a minute, I thought President Obama said it was time for an up or down vote on health care reform? Que pasa? I guess that only applies when the votes are there. Failing that, the need for an alternative procedure arises. Such as:

“Instead, Pelosi (D-Calif.) would rely on a procedural sleight of hand: The House would vote on a more popular package of fixes to the Senate bill; under the House rule for that vote, passage would signify that lawmakers “deem” the health-care bill to be passed.”

Note to Speaker Pelosi: For future reference, any time the words “sleight of hand” are used in relation to an action by Congress, it doesn’t exactly inspire confidence that what you’re trying to do is on the up and up.

“The tactic — known as a “self-executing rule” or a “deem and pass” — has been commonly used, although never to pass legislation as momentous as the $875 billion health-care bill. It is one of three options that Pelosi said she is considering for a late-week House vote, but she added that she prefers it because it would politically protect lawmakers who are reluctant to publicly support the measure.”

Wait another minute. Haven’t the Speaker and the Democratic leadership been extolling the virtues of this “reform” and how good it will be for us ( just trust them)?  Then why the need for “political protection?” I’m confused.

The other bit of news is Sen. Chris Dodd’s release of his so-called “sweeping financial regulatory reform” bill. This quote from Dodd at the end of a Huffington Post article says it all:

“Interestingly, Dodd seemed to want to minimize expectations for the proposed legislation’s impact by saying several times that it is not enough to prevent another crisis: “This legislation will not stop the next crisis from coming. No legislation can…”

Yes it can, Sen. Dodd. If you want it to. Ay, there’s the rub.