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?

President Obama to Indonesians: Look Backward, Not Forward

26 Friday Mar 2010

Posted by in Obama, Politics, torture, war on terror

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From the Department of ‘Do As I Say, Not As I Do’ comes this from Glenn Greenwald at Salon:

“President Obama gave an interview earlier this week to an Indonesian television station in lieu of the scheduled trip to that country which was canceled due to the health care vote.  In 2008, Indonesia empowered a national commission to investigate human rights abuses committed by its own government under the U.S.-backed Suharto regime “in an attempt to finally bring the perpetrators to justice,” and Obama was asked in this interview:  “Is your administration satisfied with the resolution of the past human rights abuses in Indonesia?”  He replied:

We have to acknowledge that those past human rights abuses existed.  We can’t go forward without looking backwards . . . .

Did I miss something or isn’t that the polar opposite of Obama’s policy toward officials in the Bush administration accused of human rights violations by way of “enhanced interrogation techniques” (aka torture) in pursuit of the “war on terror?”

Greenwald:

“Why, as Obama sermonized, must Indonesians first look backward before being able to move forward, whereas exactly the opposite is true of Americans?  If a leader is going to demand that other countries adhere to the very “principles” which he insists on violating himself, it’s probably best not to use antithetical clichés when issuing decrees, for the sake of appearances if nothing else.

[…]

Nothing enables the glorification of crimes, and nothing ensures their future re-occurrence, more than shielding the criminals from all accountability.  It’s nice that Barack Obama is willing to dispense that lecture to other countries, but it’s not so nice that he does exactly the opposite in his own.”

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.”

Pre-Existing Condition Loophole?

26 Friday Mar 2010

Posted by in Congress, health care, lobbyists, Politics

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When Speaker Pelosi said of health care reform legislation on March 9 that “we have to pass the bill so that you can find out what is in it, away from the fog of the controversy,” I would guess she was referring to all the positive elements of the bill which would come to light after all the sturm und drang of the debate had passed. However, there appears to be some controversy only 2 days after the bill’s passage over the ban on denying coverage based on pre-existing conditions. From AP via Firedoglake:

“President Barack Obama’s new health care law has a gap when it comes to one of its much-touted immediate benefits, improved coverage for children in poor health, congressional officials confirmed Tuesday.

Under the new law, insurance companies still would be able to refuse new coverage to children because of a pre-existing medical problem, said Karen Lightfoot, spokeswoman for the House Energy and Commerce Committee, one of the main congressional panels that wrote the bill that Obama signed into law Tuesday.”

According to Kaiser, the language in the legislation is a bit murky (intentionally perhaps?) :

“…health advocates and some insurers say the law does not clearly state that such protection starts this year. If it doesn’t, uninsured children with pre-existing conditions might not get help until 2014, when the law requires  insurers to issue policies for all applicants regardless of health condition.

…One thing is clear: The law does nothing to stop insurers from charging higher rates for children with pre-existing illnesses until 2014 when insurers can no longer use health status in setting premiums.”

Of course the insurance companies and their lobbyists jumped all over this possible loophole:

“Randy Kammer, a vice president for Blue Cross and Blue Shield of Florida, the largest health insurer in that state, said she interprets the law as allowing insurers to reject coverage for children in some cases until 2014.

America’s Health Insurance Plans, the main insurance lobbying group, says through a spokesman that it interprets the new law as not requiring insurers to cover all child applicants this year.”

It’s almost as if the insurance companies knew the loophole was there. Couldn’t have anything to do with Liz Fowler, a former VP of WellPoint, being a senior aide to Sen. Baucus and director of the Senate Finance Committee health care staff, could it?

The response from the administration is that “clarifying regulations” will be forthcoming from the Department of Health and Human Services. “Clarifying regulations” for 2-day old legislation? The old carpenter’s adage about ‘measure twice, cut once’ comes to mind.

Where Are the Deficit Hawks on Pentagon Spending?

25 Thursday Mar 2010

Posted by in Afghanistan, budget, economy, Iraq, Pentagon, Politics, war on terror

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Think of what the reaction of the self-anointed deficit hawks in Washington would be to this headline in relation to any government spending not affiliated with the Pentagon:

“Cost of (insert name of program here) Will Be Double the Original Estimates”

Members of Congress would be stampeding to find a microphone and rail against wasteful government spending. The Tea Party movement would take to the streets in protest. Radio and TV talkers would be ranting about “stealing money from our children and grandchildren.” So why no outcry over this:

“Since 2001, when an F-35 Joint Strike Fighter was expected to cost an already hefty $50 million, the plane’s cost has soared into the stratosphere…The estimated cost today is $113 million per plane.  Yes, that’s per plane….It’s also 2 ½ years behind schedule.  Keep in mind that the Marines, the Air Force, and the Navy are planning to buy a combined 2,450 of them for what’s now an eye-popping $323 billion.”

That’s assuming there are no more cost overruns. Quite a stretch, to say the least.

“In other words, if all goes well from here (an unlikely possibility), a single future weapons system is now estimated to cost the American taxpayer almost one-third of what the Obama administration’s health-care plan is expected to cost over a decade.”

Where are Sens. Nelson, Landrieu, and Lincoln? Where are Sen. McConnell, Rep. Boehner and the born-again fiscal conservatives in the Republican Party? Strangely silent. To his albeit limited credit, Sen. McCain offered this scathing rebuke (sarcasm intended) :

“The taxpayers are a little tired of this. I can’t say that I can blame them.”

Strong stuff there, huh?

White House Set to “Overrule” Justice Department on Civilian Trials for Gitmo Detainees

25 Thursday Mar 2010

Posted by in George W. Bush, Justice Department, Obama, Politics, terrorism, war on terror

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One “change” I had hoped to see on January 20, 2009 was the end of the politicization of the Justice Department. Judging from this report at Newsweek by Michael Isikoff that isn’t going to be the case, as the Obama administration is set to “overrule” and “overturn” the decision of Attorney General Eric Holder to try detainees at Guantanamo Bay in civilian courts rather than military tribunals. The reason being political pressure from New York City mayor Bloomberg and Republicans in Congress:

“The White House may yet be several weeks away from announcing whether it plans to overrule Attorney General Eric Holder and order that the 9/11 conspirators be tried before military commissions rather than in civilian courts. But it’s not hard to figure out which way the wind is blowing.

…The embrace of military tribunals follows months of controversy over Holder’s decision to try Khalid Sheikh Mohammed and other 9/11 conspirators in federal court in New York–a move that generated opposition from New York political figures such as Mayor Michael Bloomberg, and Republicans in Congress. Administration officials have acknowledged it was looking increasingly likely that Congress would block any funding for civilian trials of the 9/11 conspirators.”

…”All the indications we’ve been given are to get ready for a lot of activity in Guanantamo,” said a military prosecutor, who asked not to be identified talking about upcoming cases. “It’s full steam ahead.”

…the big decision everyone is waiting for is whether President Obama, as is increasingly expected inside the Beltway, will overturn Holder’s decision and return Khalid Sheikh Mohammed and four other 9/11 co-conspirators to the military commissions.

Remember the days of an independent Department of Justice? When who was prosecuted and how was done at the discretion of the Attorney General? When an Attorney General would resign rather than succumb to political pressure from the White House?

Those days are apparently gone. No matter who occupies the Oval Office.

Let’s Move On From Health Care. Please.

24 Wednesday Mar 2010

Posted by in bailout, Congress, Financial Crisis, financial reform, financial regulation, health care, Obama, Politics, Wall Street

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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.