Foreclosures- The End Game of Wall Street’s Fraud, Lies and Deceit

Source:Matt Weidner Blog
May 9th, 2010 · 9 Comments · Foreclosure

One of the many problems those who are fighting foreclosures have to deal with is the fact that some judges and most people on the “outside” of the mortgage meltdown don’t understand that the Fat Cats set the mortgages up to fail from the very beginning–because mortgages that were “bad” paid the Fat Cats much more at the outset. Now this is wild and insane stuff….how can mortgages given to people that have no hope of ever paying them (even if the economy didn’t crash)? The answer lies in the lies, greed, fraud and arrogance that dominated Wall Street when these loans were created–a culture that continues to victimize normal Americans today.

If you really want to go insane watch this CBS News report here which details how Goldman Sachs was making millions of dollars by selling “shitty” deals to their institutional investors. It just makes me furious to hear these guys gloating over making millions while at the same time refusing to admit to even the slightest amount of wrongdoing. The homeowners really were on the lowest end of the “dupes” totem pole, but they were not the only ones taken.


The book Chain of Blame details the unholy alliances that were formed between the subprime lenders and Wall Street and how the subprime lenders and Wall Street kept competing with one another to create “shittier” and “shitter” deals. The bottom line is in order to keep making more insane profits, the bad actors had to keep making loans that were increasingly less likely to be paid in the long term because loans that performed would not provide the bigger payouts that came from the bets they made on the back end that the portfolio of loans would fail.

The national media is starting to pick up on this. The quotes below are from a story in today’s St. Petersburg Times.

A central part of Lehman’s business was making and selling “liar’s loans” under its Aurora subsidiary. It was a suicidal enterprise. These kinds of loans, where borrowers have an incentive to inflate income or assets, are set up to fail. Black estimates that every dollar lent on a liar’s loan loses 50 to 85 cents.

In the short term, making these loans produces significant apparent but fictional income — and correspondingly huge bonuses for executives. Only later do the loans create real catastrophic losses for those holding them.

Lehman was the world leader in originating these loans. In the first six months of 2007, Aurora was lending more than $3 billion a month of subprime and liar’s loans. This guaranteed senior management extraordinary paydays. Even as the fall was becoming evident, the firm’s CEO and chairman, Richard Fuld, was awarded $40 million in total compensation for 2007. (Much of it in stock that later became worthless.)

Undoubtedly, the firm’s top executives knew that making fraudulent loans was its primary source of income. But Lehman assiduously attempted to hide that fact, classifying its liar’s loans as “prime” loans in disclosures, Black says. Had Lehman disclosed the true nature of the loans it was selling, no one would buy them and the firm would have been found out as insolvent.

To various degrees this kind of deceit was the business model of every player in the subprime mortgage lending and securities market: every bank that loaned money without documenting a borrower’s credit worthiness, every firm that securitized loans without examining the lender’s loan files, every accounting and law firm that helped fudge disclosures, and every credit rating agency that rated a mortgage-related security as safe without sampling the underlying loans.


So what’s all this got to do with the little ‘ole homeowner sitting in foreclosure today?

One of the most important things we’ve all got to understand, and a key point we’ve got to make sure our judges start to understand, is that the very same lies, fraud, greed and unethical conduct that is now being exposed on such a massive scale in Wall Street and in Washington has migrated into our courtrooms.

Many judges and attorneys still cling to a naive and antiquated professional worldview wherein attorneys, as officers of the court, remembered that they are officers of the court and do not make false statements or engage in misleading practices before the court. The problem is the entire foreclosure system is now functioning based on fabricated documents, forged documents, false and misleading statements and gross violations of the most basic ethical standards. Two documents that are part of nearly every foreclosure file illustrate this point.

1)The affidavits of amounts due and owing that are filed in nearly every case do not meet the most basic evidentiary standards and they cannot be relied upon as evidence to grant foreclosure.

2)The assignments of mortgages or endorsements that are filed in nearly every case are either outright improper on their face (such as when the assignment post-dates filing of the suit) or questionable such as endorsements that “appear” on documents from failed or defunct subprime lenders that ceased functioning years ago.

Advocates and judges have only recently become aware of just how failed this whole system is. Some judges are just covering their eyes, holding their noses and continuing to grant foreclosures despite the growing body of evidence that the law firms and the clients they represent are engaged in such widespread and systemic improper practices. This will all come back to haunt every American for decades to come. The biggest problem is this represents a fundamental breakdown in the rule of law. Courtrooms and judges are no longer owed respect and honor and fear…the pressures placed on our courts have turned them into fast food flop houses operating in servitude to the Millionaire Foreclosure Mills. The only real objective is to plow through these hundreds of thousands of foreclosures as quickly as possible so that the foreclosure mills and their clients can continue to make millions.

Ignore long established rules of evidence

Ignore new rules of the Supreme Court of Florida

Ignore blatant and not so blatant fraud

Ignore expectations of professionalism and respect for judges and the courts by Millionaire Foreclosure Mills that have decided their profits are more important than treating the courts with respect.

There is one thing missing from this whole calculus and that is the fact that these practices and procedures are producing failed titles to property. In the rush to plow through all these foreclosures, we’re creating a nightmarish scene of destruction where title to real property will be thrown into chaos for decades to come. Some judges get it (do a google search for New York Judge Schack) and many, many more will get it in the decades to come when we title lawyers come back before them to vacate judgments of foreclosure that were improperly granted. That’s enough for this morning, but obviously much more of this to come.
 

 

By Marcella Mroczkowski is a lawyer, activist and Huffington Post Citizen Journalist.
Posted: May 28, 2010 04:39 PM

Wall Street's War on the Middle Class: My Response to Hedge Fund President David Einhorn

Regarding your New York Times op-ed, "Easy Money, Hard Truths," your figures comparing federal civilian salaries with private sector wages are bogus.

First, federal employees are heavily weighted toward the highly educated and the highly skilled - lawyers, scientists, engineers, economists, physicians, educators and accounting professionals. There is just not that much call in the federal government for retail clerks, dishwashers, shampooers, day laborers, and restaurant wait staff.

Comparing them as a lump like you did is highly misleading.

It is much more accurate to compare federal and private employees by profession, and there the difference all but vanishes. Assistant Attorney Generals in Washington DC may have job security and benefits, but their salaries are several thousand dollars less than the earnings of their classmates toiling as contract attorneys, the lowest paid paeans in private sector law firms.

Do some research job by job and city by city and the pattern emerges; salary levels in the public sector are lower but balanced by better benefit packages and greater job security. Balancing lower salaries with higher benefits makes abundant economic sense. Given its size relative to most private entities, the Federal government can offer benefits more economically. Competing this way with the private sector for the top talent makes economic sense and actually saves the taxpayer money.

There are also good reasons why there is more job security. The federal government is not as vulnerable to the volatility of the business world. Whether it's Tyson, Perdue or any other competitor provisioning the nation's supermarkets, the nation's overall appetite for chicken and therefore the need for USDA, FDA and OSHA regulatory personnel is steadier than the market for any individual competitor's product.

But the greater natural volatility of the private sector has been greatly and unnecessarily exacerbated by the recklessness of our prevailing business culture. Thousands of jobs are eliminated or outsourced with the keystroke of an executive email. The constant firing and re-hiring of personnel is hugely wasteful and cruelly disruptive, but it pays off today's generation of executives in a cowed and fearful workforce and the relentless erosion of middle class pay and benefits, leaving more money for lavish pay and perks at the top.

Private sector employees in the middle and lower ranges have seen their earnings steadily diminish in the Reagan and Bush administrations, with some growth in the Clinton years. Trickle-down, a centerpiece of Reaganomics, has proven to be a fraud.

I'll believe your pious calls for Federal fiscal restraint, Mr. Einhorn, when you and your fellows put some serious money on the table. You can start by giving up declaring ordinary income to be capital gains because it's paid from clients' capital gains. That "death tax" nonsense? Give it up or give up stepped-up basis. Why should we subsidize you?

Instead you play the rest of us for fools, with ploys to con and cheat us, dividing us up, whipping up hate and resentment and setting us against each other. This is a racket, Mr. Einhorn, as contemptible as it is contemptuous.

And don't think we haven't noticed that attacking federal employees' salaries and benefits is a backdoor way of attacking regulation.

Hedge funds and their allied banks use an enormous amount of the nation's credit leveraging your financial plays to multiply your profits, crowding out of the credit markets the main street businesses that actually create jobs and wealth and local tax bases for the rest of us.
Much more insidious are the kind of "dumb money" deals revealed by the Goldman-Paulson affair - the targeting of less favored investors to take the losing end of deals deliberately designed to fail, creating a windfall for the player shorting the deal. Wall Street is currently smacking its lips over one of their favorite forms of "dumb money" - middle class retirement savings. With these unregulated deals, investors like you can effectively confiscate the lifetime retirement savings of thousands of middle class people in one fell swoop, by placing their funds in deals designed to fail for them and enrich wealthy insiders at their expense.

A neighbor recently confided how he paid into his retirement fund for over forty years through hard work and savings. Because of recent market events this retirement fund was decimated. If Wall Street gets their way many millions more middle class Americans will find themselves in this position. Union funds are fat, juicy targets and government employee pension funds are the fattest targets of all.

Whipping up hate like this means people may not notice when these funds are robbed and eviscerated by Wall Street tricks.

When it comes to protecting Middle Class America's hard-earned savings from financial shenanigans, I want the best regulators money can buy.

Federal employees are not overpaid, Mr. Einhorn.

You are.
 

Factbox: Key Washington players in Wall Street reform fight

Mon May 24, 2010 12:48pm EDT

(Reuters) - The broadest overhaul of financial regulations since the 1930s is entering the final stage on Capitol Hill now that both the U.S. House of Representatives and the Senate have passed legislation.

Lawmakers from both chambers will be named to a conference committee to hammer out a compromise bill. Democrats, who control both chambers of Congress, will likewise hold a majority on the negotiating committee.

Representative Barney Frank, who is overseeing the effort in the House, and his Senate counterpart Christopher Dodd have said they expect to produce a final bill by July 4 that President Barack Obama can sign into law.

Following are snapshots of key players in the struggle over tightening bank and capital market rules:

CHRISTOPHER DODD, SENATE BANKING COMMITTEE CHAIRMAN

The silver-tongued, snowy-haired Connecticut Democrat caps his legislative career with a big victory after shepherding the bill through the minefield of the Senate, book-ending his role in passing healthcare reform.

The battle is not yet over, however, as he now has to help forge a compromise bill that can win support in both the House and Senate.

The son of a senator, Dodd, 66, first won election to the House of Representatives in 1974. He moved to the Senate in 1980 and was reelected four times. The past two years have been tough, however, as he has had to answer questions about a sweetheart mortgage deal and whether he neglected his Senate duties while he pursued a presidential bid.

He decided not to seek reelection in January.

BARNEY FRANK, HOUSE FINANCIAL SERVICES COMMITTEE CHAIRMAN

The Massachusetts Democrat last year emerged as the House's chief architect of Wall Street reform and a key ally of President Barack Obama, who has made an overhaul of financial rules a top administration priority.

Frank's short temper and sharp tongue win him few friends on Capitol Hill, but he is both widely feared and respected for his ability as a lawyer, legislator and debater.

He pushed a bill through the House in December that achieved much of the administration's original reform agenda.

Frank, 70, will play a central part in merging his bill with the Senate version. He has said the two are more alike than different and is looking to push for a quick agreement.

RICHARD SHELBY, SENATE BANKING COMMITTEE'S TOP REPUBLICAN

The patient, cool-headed senior senator from Alabama -- often the tallest man in the room -- held immense sway over the reform debate, but his efforts to weaken the bill largely failed amid widespread public support for tougher regulations.

In the end, he voted against the legislation. While he will likely be named to the conference committee, Shelby's influence is diminished given his opposition to the bills on the table.

A lawyer with a distinctive Southern drawl, Shelby, 76, was first elected to the House in 1978 as a Democrat. He moved to the Senate in 1986 and switched parties in 1994.

BLANCHE LINCOLN, SENATE AGRICULTURE COMMITTEE CHAIRMAN

The senior senator from Arkansas, Lincoln added a hard-hitting measure that would require banks to separate their swap-trading desks from their core businesses.

Dodd tried to kill her swaps provision, but then backed off after Lincoln vowed she would fight to defend it.

Lincoln, 49, is facing a tough reelection challenge from the left and will be eager to show voters she is tough on Wall Street ahead of the June 8 runoff election.

If she is named to the conference committee, look for her to push hard to make sure her provision -- a main target for financial industry lobbyists -- is in the final bill.

A self-styled "farmer's daughter" and former House aide, she was elected to the House in 1992 and the Senate in 1998.

COLLIN PETERSON, HOUSE AGRICULTURE COMMITTEE CHAIRMAN

A straight-talking Minnesotan, Peterson moved quickly on legislation to regulate over-the-counter derivatives. His committee approved a bill that requires standardized swaps to go through clearinghouses in most cases. Transactions that involve "end users," such as manufacturers, processors, utilities and airlines, would be exempt from clearing.

Peterson is a skeptic of the Federal Reserve as a regulator and says there should be no bailouts of clearinghouses. He supported the exemption for end users with the argument they did not cause the 2008 financial crisis.

HARRY REID, SENATE DEMOCRATIC LEADER

Facing a tough reelection challenge at home in Nevada, Reid, 70, has nevertheless prodded the Senate to pass top Obama priorities such as the Wall Street bill, a massive economic stimulus package and landmark healthcare legislation.

When the conference bill is completed, Reid will once again have to ensure that it has enough support to pass the Senate.

A former boxer and Capitol Police officer, Reid practiced law in his home state before winning election to the state assembly and then becoming lieutenant governor. He was elected to the House in 1982 and the Senate in 1986.

MITCH MCCONNELL, SENATE REPUBLICAN LEADER

The patrician senior senator from Kentucky is widely admired for his tactical skill and mastery of Senate procedure. Though he has not managed to defeat top Democratic initiatives, his ability to keep Republicans united in opposition has slowed their progress and ratcheted up their political cost.

Expect McConnell to lead opposition to the conference bill when it comes back to the Senate for approval.

McConnell, 68, is a career politician and lawyer. He recently suffered a stinging defeat in his home state when his favored candidate to join him in the Senate lost in the Republican primary to a Tea Party outsider, Rand Paul.

BARACK OBAMA, PRESIDENT

The charismatic U.S. president wants to rein in the financial sector and end decades of deregulation, rising banker bonuses and reckless Wall Street risk-taking blamed for the 2008-09 financial crisis that rocked economies worldwide.

Obama, 48, unveiled a comprehensive set of reform proposals in mid-2009 and administration officials have been active on Capitol Hill during the legislative process. Administration officials will continue to work behind the scenes to broker a compromise and Obama himself could continue to weigh in publicly to keep up pressure.

PAUL VOLCKER, WHITE HOUSE ECONOMIC ADVISER

At 82, the former Federal Reserve chairman is a legend in his own time. Known for vanquishing stagflation during the Carter and Reagan administrations, the 6-foot-7-inch Volcker commands deep bipartisan respect in financial circles.

Obama brought Volcker into the White House as an economic adviser. The two stunned markets in January with a three-part proposal to limit banks' proprietary trading, get them out of the hedge fund business and limit their future growth.

The proposals became known as "the Volcker rule," and were included in the Senate bill. They could be toughened further during negotiations between the two chambers.

BEN BERNANKE, FEDERAL RESERVE CHAIRMAN

The stoic, bearded U.S. central bank chief survived sharp criticism in January of the Fed's failures ahead of the crisis, and won Senate confirmation to a second four-year term.

Since then, the 56-year-old former Princeton University professor has had much success in restoring the Fed's image in Congress, fending off efforts to strip its bank supervision and consumer protection authorities.

Fed officials will likely continue to play a behind-the-scenes role as negotiations move forward. In particular, they would like lawmakers to drop a House provision that would open up monetary policy decisions to audits, in favor of a milder audit plan contained in the Senate bill.

TIMOTHY GEITHNER, TREASURY SECRETARY

As President Obama's point man on financial reform, the youthful-looking Treasury secretary dominated the headlines from early to mid-2009, but Congress is now center stage.

Still, Geithner, 48, and his deputies at Treasury are important emissaries for Obama in helping to push a deal.

Once the reform bill is signed into law by Obama, Geithner, and other regulators will play key roles in implementing it.

SHEILA BAIR, FEDERAL DEPOSIT INSURANCE CORP CHAIRMAN

Popular in Congress, the outspoken, unflappable FDIC chairman is an advocate for tough financial reform and a fierce defender of her agency's turf as a bank supervisor.

She is a self-described moderate Republican, appointed by Bush. Her term expires in 2011. Like Bernanke, Bair, 56, was formerly an academic, having also worked at the Treasury Department, the New York Stock Exchange and on Capitol Hill.

GARY GENSLER, COMMODITY FUTURES TRADING COMMISSION

CHAIRMAN

A former Treasury undersecretary, Gensler, 51, has tried to push Congress, with limited success, toward a firm crackdown on the $615 trillion over-the-counter derivatives market that includes compulsory clearing of over-the-counter derivative contracts.

(Reporting by Kevin Drawbaugh, Andy Sullivan, Rachelle Younglai and Charles Abbott; Editing by James Dalgleish)

Wednesday May 26, 2010

Bloomberg

Wall Street Rules May Fall Short of Glass-Steagall

 (Update1)
May 26, 2010, 2:30 AM EDT


(Adds creation of Citigroup in eighth paragraph.)

By Robert Schmidt and Jesse Westbrook

May 26 (Bloomberg) -- It’s been almost 80 years since the U.S. government has reached as deeply into the financial markets as it will do when the regulatory overhaul being crafted in Congress becomes law.

Few historians, market participants or former regulators say they expect the current bill to put an end to financial crises any more than the post-Depression rules did. In one major area the new legislation is weaker because it departs from a central goal of 1930s lawmakers -- to control the size and scope of the largest financial institutions.

The Glass-Steagall Act, which separated commercial and investment banking in 1933, “was the most effective antitrust law we’ve ever had,” said Charles Geisst, a finance professor at Manhattan College in New York, who has written about Wall Street’s history.

Glass-Steagall was as much about breaking up companies as ensuring customer deposits wouldn’t be used for risky practices, Geisst said. Today’s Congress may live to regret that they’ve done almost nothing to shrink firms such as JPMorgan Chase & Co., Goldman Sachs Group Inc. and Citigroup Inc., he said.

In the current debate, people are buying the lobbyists’ argument that “you just can’t live without a series of powerful banks that are all too big to fail,” Geisst said.

One-Stop Shopping

Government regulation of Wall Street began in earnest after the 1929 stock market crash, when Congress passed the Securities Act of 1933 and the Securities Exchange Act of 1934, which created the SEC, required investment banks to disclose material information about securities they peddled and prohibited brokers from deceiving clients. The laws responded to abuses that were rampant in the 1920s, such as banks selling stocks and bonds in companies that were already bankrupt.

Congress repealed Glass-Steagall in 1999, contributing to mergers and the growth one-stop-shopping financial services companies.

The repeal helped pave the way for the formation of Citigroup by the $46 billion merger of Citicorp and Travelers Group Inc. It also made it possible for Goldman Sachs and Morgan Stanley, the two biggest U.S. securities firms, to convert into bank holding companies, enabling them to get cheap funding from the Federal Reserve during the financial crisis. If the law hadn’t been repealed, Bank of America Corp. wouldn’t have been allowed to acquire Merrill Lynch & Co.

Savings-and-Loan

Under Glass-Steagall, the financial system didn’t approach a meltdown. The law also didn’t prevent government rescues when banks failed. The biggest collapse before the 2008 crisis occurred in 1984, when Continental Illinois National Bank and Trust became insolvent, prompting the Federal Deposit Insurance Corp. to buy $4.5 billion of its bad loans. The savings-and-loan crisis of the 1980s and 1990s cost the taxpayers about $124 billion.

The legislation approved by the Senate last week and the measure adopted by the House in December arose amid public outrage over the $700 billion federal bailout of the financial markets in 2008. The bills emphasize the role of regulators and rules in constraining abusive practices.

Among other things the bills would create a new agency to oversee consumer financial products, establish a council to monitor systemic risk and increase regulation of derivatives, mortgage brokers, credit-rating companies and hedge funds.

Derivatives Contracts

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates or weather.

Although it is unlikely to prevent future crises, the congressional bill, with all its weaknesses and loopholes, probably will mitigate the impact of the next blow-up, said Harvey Goldschmid, a former SEC commissioner who is a professor at Columbia Law School.

“Undoubtedly there will be further problems, it’s just the nature of business and the financial business in particular,” Goldschmid said. “But this will avoid some significant problems and limit the impact of others.”

Goldschmid, who sat on the SEC as it implemented an overhaul of corporate accounting in 2002 and 2003, the Sarbanes- Oxley Act, said the new bill will have a large impact on the way Wall Street works, increasing scrutiny of the biggest banks.

“You’re going to create oversight in areas where we just haven’t had it and in areas that have been part of the problem,” he said. “Will it make it perfect? Of course not. Will it make it better? Definitely.”

Credit Impact

Others, particularly banks and their lobbyists, see a historical over-reaching by Congress that has the potential to stifle the economy for years to come.

“We’re beginning to see people price in the impact on this on the entire financial system, on the availability of credit,” said David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “There are estimates that range up to $2 trillion of credit that would be sucked out of the economy.”

William Sweet, a former attorney at the Federal Reserve Board, disagrees. Assuming that some of the measure’s more contentious aspects get changed in a House-Senate conference, including a requirement that banks wall off their swaps-trading desks and another that directs higher capital requirements, the legislation isn’t likely to be as disruptive as the 1930s changes, said Sweet, a partner at Skadden, Arps, Slate, Meagher & Flom in Washington.

‘More Vigilant’

“This gives the regulators more authority to be more vigilant, it gives them new tools and powers, but doesn’t do anything like Glass-Steagall,” said Sweet. “While this is a political response to a similar situation, it avoids doing too much damage.”

Another issue of concern in the current legislation is that it may lead to unintended consequences, which has happened before when lawmakers have tried to rein in U.S. corporations. The risk is higher, opponents argue, in complex areas such as financial regulation.

For example, Congress in 1993 tried to curb excessive pay by prohibiting tax deductions on annual salaries that exceeded $1 million. Companies could continue deducting pay that they didn’t dole out as salary, such as stock options.

As a result, businesses issued a flood of options to their employees. Some companies then began abusing options by backdating grants to periods when stock prices were lower to ensure big payouts to executives -- prompting more than two dozen enforcement actions by the SEC.

Bond Market

During the legislative debate over the past year, firms have argued that the overhaul would unintentionally push derivatives trading overseas, for example. Mutual funds have fought another provision that would allow the FDIC to pay some creditors more than others after a big bank fails, saying it could disrupt the bond market.

“There is nobody who knows everything that is in” the Senate’s financial overhaul bill, said former SEC Chairman Harvey Pitt, who was appointed by President George W. Bush. “We run a big risk of feeling the love of unintended consequences and feeling it in all its unleashed fury.”

Pitt, who headed the SEC during the Sarbanes-Oxley era, said the broader problem with the new legislation is that it leads investors to believe the political rhetoric that a law can solve all the problems that created the mess. The 2002 law he helped implement was born out of the massive accounting frauds at Enron Corp. and WorldCom Inc. It required corporate executives to attest to the accuracy of their books and put new strictures on the accounting industry.

“We needed a bill that demonstrated that this country wouldn’t tolerate financial shenanigans, but it got sold to the American public as the solution for everything that went wrong,” he said. “If Sarbanes-Oxley had really been all that good, would we have had what we’ve seen in the financial meltdown? I think the answer to that is no.”

--With reporting by Phil Mattingly in Washington. Editors: Lawrence Roberts, Gregory Mo

May 25, 2010...5:26 PM

The second Bernanke crash
By Martin Hutchinson
PrudentBear.com.
May 26, 2010

The turbulence in financial markets in the last couple of weeks has been ascribed by reporters to doubts about the long-term stability of the euro, and concern over the finances of southern European countries. This is over-optimistic. Whether or not the current market downdraft proves temporary, monetary and fiscal policies in the United States and worldwide have been excessively stimulative since the September 2008 market meltdown. Thus we are at some point in the near future going to suffer the second Bernanke crash.

As I have frequently discussed, there were a number of causes of the 2008 crash, some of them rooted as far back in the past as financial theories devised in the 1950s and housing regulation designed in the 1960s. Nevertheless, if one single cause has to be assigned, it would be the excessive money creation in the United States after 1995 and worldwide after 2002. This caused a massive asset bubble, initially in stocks and later in housing. Once the bubble had inflated, a commensurate crash was inevitable.

Had monetary policy returned to sanity after September 2008 (and fiscal policy not itself relapsed into madness) that would have been the end of it. Banks would have been provided with unlimited funding, as Walter Bagehot recommended in his 1873 Lombard Street, but at high interest rates. The global economy would have undergone a sharp recession, steep because of the deflation of value that had become necessary, but by the middle of last year would have begun a healthy and sustained recovery.

Apart from the direct bailouts of the basket cases Citigroup and AIG and the “stimulus” packages, the important difference between what happened in 2008 and what should have happened lies in the interest rate charged for the liquidity supplied in the crisis. A great deal of capital had been destroyed in the subprime mortgage meltdown, and risk premiums had gone sky high. Accordingly, while capital should have been made available by the world’s central banks to their banking systems, it should have been available only at penalty rates. Rates of 8%, even 10% would have been appropriate levels for the federal funds rate and the rate for Fed “quantitative easing”.

There would in that case have been no banks borrowing money from the Fed at ultra-low interest rates and investing it in Treasury bonds or government guaranteed mortgage bonds. Conversely, since money at high interest rates was readily available, high-yield uses for that money, such as lending to small business, would have remained quite attractive to the banking system.

A high interest rate in 2008 would have balanced the limited available supply of funds (other than at penalty rates) with the demand for them, balancing financial markets naturally. Instead, we have seen another explosion of leverage, as banks and above all hedge funds have borrowed money at current exceptionally low interest rates to invest in whatever seemed attractive that week. That explosion of leverage has been made worse by the Fed’s persistence in keeping ultra-low interest rates for at least a year after the excuse for them had vanished. With the US economy bottoming out around May 2009 and the “stress tests” of that date showing that the banking system was now in decent shape, ultra-low interest rates should have been raised quickly and short-term rates should now be at normal levels, at a minimum in the 3-4% range.

As in 2002-03, ultra-low interest rates caused the stock market to bottom out excessively rapidly at a level well above its natural floor and to engage in an explosive rally that rapidly pushed stock prices above their sustainable level to a point at which equities once again represented poor value.

This has caused two problems. First, the US savings rate, which had shown encouraging signs in the downturn of returning to 8-10%, a level at which consumers have some chance of saving for their retirement and the economy some chance of financing itself, quickly dropped back to below 3%. With overvalued stocks (which both look expensive and make investment portfolios look fatter) and interest rates below inflation, it’s surprising anybody saves at all.

Second, the excessive leverage that caused such problems in 2006-08 has returned. Risk premiums on lower-tier corporate and emerging markets debt have declined artificially towards the levels of 2007, at which they were clearly inadequate to compensate for the risks involved in holding those assets.

An additional hidden but connected problem is the further intensification of Wall Street’s trading culture, exemplified by the explosion in “fast trading” volume, now three quarters of the trading volume on the New York Stock Exchange. This trading simply exploits the benefits of insider knowledge of money flows; in aggregate it subtracts value from the economy. Its participation in the recent “flash crash” in which over US$1 trillion was wiped off the value of US equities in 15 minutes is symptomatic of the problem – with “fast trading” computers in control, doing thousands of trades a minute there seems no reason why that loss should not have been $10 trillion or even more.

Maybe the theory that advanced galactic civilizations don’t exist because they wiped themselves out with super-atomic weapons before developing interstellar travel is wrong. Maybe they simply invented computerized fast trading and reduced their civilizations to impoverished rubble that way.

With excessive leverage and inadequate saving, the US capital base is not being renewed as it would normally be after a speculative blowout. In the financial sector, this brings additional risk of a meltdown such as occurred in 2008. In the rest of the economy, it means in the long run that the US will no longer have sufficient capital supporting the skills of its workforce. If the US comes to have capital per head equivalent to that of China, and its education system is no better, why should it enjoy higher living standards?

Only those of us in the media, who live on reporting and analyzing excitement and chaos, can rejoice that the monetary policies of Federal Reserve chairman Ben Bernanke are unlikely to produce gradual, civilized decline to the living standards of China. Instead, because of the leverage and speculation they generate, they are much more likely to produce a gigantic bursting bubble, with major financial institution bankruptcies. The destruction of wealth will be greater than that of a slow decline, but the impoverished masses will be able to blame the evil private sector bankers instead of the public sector follies of the Fed.

It seems increasingly likely that the generator of the second Bernanke crash will lie in the global public sector. Budget deficits of 10% of gross domestic product (GDP) are not a normal response to economic downturns, and so we have very little idea what pathological market behavior they will produce. Currently, long-term US dollar interest rates are falling rather than rising, as crazed investors “fly to safety” into the bonds of a polity whose current fiscal policies are unsustainable and which under the current administration is showing no significant sign of reforming them. That seems very unlikely to last for long.

Should investor enthusiasm for US Treasuries disappear quickly, as it did for Greek government bonds, the crash in the Treasury market will doubtless be dismissed by Wall Street’s risk managers as another “25-standard-deviation event” – or even, this time, a 50-standard-deviation event if the bang is big enough.

The justification for bailout at taxpayer expense will again be trotted out that the crash should not have happened in the lifetime of a billion universes, according to Wall Street’s best risk models. The government will look for excuses to get round the new banking legislation and institute those bailouts. However, the one disadvantage for Wall Street of a financial calamity caused by a crash in the Treasury bond market is that taxpayers will not be available to fund bailouts through additional state borrowing. Thus bailouts will have to be funded by direct Fed money printing, making the experience more unpleasant for Wall Street and a lot more unpleasant for the rest of us.

The result of the second Bernanke crash, particularly if it is indeed centered on the Treasury bond market, must therefore be high inflation. I can’t see how it can be avoided. Only by robbing the nation’s savers of a large portion of their remaining savings through rampant inflation will the government be able to achieve its twin aims, of reducing the value of government’s outstanding obligations and reducing the living standards of Americans to a level at which they are once more competitive, given the country’s diminished capital base.

For investors, the only safe haven is of course gold. I have written elsewhere how I expect the gold price at some point to enter a “spike” like that of 1978-80 in which it soars to $5,000 – given the monetary expansion since 1980 that price, not the mere $2,400 given by an inflation calculation, is the equivalent of 1980′s peak of $875.

Before gold bugs go into their victory dance, however, I would point out that when gold gets to that level, $5,000 may not buy very much.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005)

Tuesday, May 25, 2010

Global Crisis

The Global Economic Crisis,

The Great Depression of the XXI Century

Global Research, May 25, 2010


The following text is the Preface of The Global Economic Crisis. The Great Depression of the XXI Century, Michel Chossudovsky and Andrew Gavin Marshall (Editors), Montreal, Global Research, 2010, which is to be launched in late May.

Each of the authors in this timely collection digs beneath the gilded surface to reveal a complex web of deceit and media distortion which serves to conceal the workings of the global economic system and its devastating impacts on people's lives.

The complex causes as well as the devastating consequences of the economic crisis are carefully scrutinized with contributions from Ellen Brown, Tom Burghardt, Michel Chossudovsky, Richard C. Cook, Shamus Cooke, John Bellamy Foster, Michael Hudson, Tanya Cariina Hsu, Fred Magdoff, Andrew Gavin Marshall, James Petras, Peter Phillips, Peter Dale Scott, Bill Van Auken, Claudia von Werlhof and Mike Whitney.

Despite the diversity of viewpoints and perspectives presented within this volume, all of the contributors ultimately come to the same conclusion: humanity is at the crossroads of the most serious economic and social crisis in modern history.

In all major regions of the world, the economic recession is deep-seated, resulting in mass unemployment, the collapse of state social programs and the impoverishment of millions of people. The economic crisis is accompanied by a worldwide process of militarization, a "war without borders" led by the United States of America and its NATO allies. The conduct of the Pentagon’s "long war" is intimately related to the restructuring of the global economy.

We are not dealing with a narrowly defined economic crisis or recession. The global financial architecture sustains strategic and national security objectives. In turn, the U.S.-NATO military agenda serves to endorse a powerful business elite which relentlessly overshadows and undermines the functions of civilian government.

This book takes the reader through the corridors of the Federal Reserve and the Council on Foreign Relations, behind closed doors at the Bank for International Settlements, into the plush corporate boardrooms on Wall Street where far-reaching financial transactions are routinely undertaken from computer terminals linked up to major stock markets, at the touch of a mouse button.

Each of the authors in this collection digs beneath the gilded surface to reveal a complex web of deceit and media distortion which serves to conceal the workings of the global economic system and its devastating impacts on people’s lives. Our analysis focuses on the role of powerful economic and political actors in an environment wrought by corruption, financial manipulation and fraud.

Despite the diversity of viewpoints and perspectives presented within this volume, all of the contributors ultimately come to the same conclusion: humanity is at the crossroads of the most serious economic and social crisis in modern history.

The meltdown of financial markets in 2008-2009 was the result of institutionalized fraud and financial manipulation. The "bank bailouts" were implemented on the instructions of Wall Street, leading to the largest transfer of money wealth in recorded history, while simultaneously creating an insurmountable public debt.

With the worldwide deterioration of living standards and plummeting consumer spending, the entire structure of international commodity trade is potentially in jeopardy. The payments system of money transactions is in disarray. Following the collapse of employment, the payment of wages is disrupted, which in turn triggers a downfall in expenditures on necessary consumer goods and services. This dramatic plunge in purchasing power backfires on the productive system, resulting in a string of layoffs, plant closures and bankruptcies. Exacerbated by the freeze on credit, the decline in consumer demand contributes to the demobilization of human and material resources.

This process of economic decline is cumulative. All categories of the labor force are affected. Payments of wages are no longer implemented, credit is disrupted and capital investments are at a standstill. Meanwhile, in Western countries, the "social safety net" inherited from the welfare state, which protects the unemployed during an economic downturn, is also in jeopardy.

The Myth of Economic Recovery

The existence of a "Great Depression" on the scale of the 1930s, while often acknowledged, is overshadowed by an unbending consensus: "The economy is on the road to recovery".

While there is talk of an economic renewal, Wall Street commentators have persistently and intentionally overlooked the fact that the financial meltdown is not simply composed of one bubble – the housing real estate bubble – which has already burst. In fact, the crisis has many bubbles, all of which dwarf the housing bubble burst of 2008.

Although there is no fundamental disagreement among mainstream analysts on the occurrence of an economic recovery, there is heated debate as to when it will occur, whether in the next quarter, or in the third quarter of next year, etc. Already in early 2010, the "recovery" of the U.S. economy had been predicted and confirmed through a carefully worded barrage of media disinformation. Meanwhile, the social plight of increased unemployment in America has been scrupulously camouflaged. Economists view bankruptcy as a microeconomic phenomenon.

The media reports on bankruptcies, while revealing local-level realities affecting one or more factories, fail to provide an overall picture of what is happening at the national and international levels. When all these simultaneous plant closures in towns and cities across the land are added together, a very different picture emerges: entire sectors of a national economy are closing down.

Public opinion continues to be misled as to the causes and consequences of the economic crisis, not to mention the policy solutions. People are led to believe that the economy has a logic of its own which depends on the free interplay of market forces, and that powerful financial actors, who pull the strings in the corporate boardrooms, could not, under any circumstances, have willfully influenced the course of economic events.

The relentless and fraudulent appropriation of wealth is upheld as an integral part of "the American dream", as a means to spreading the benefits of economic growth. As conveyed by Michael Hudson, the myth becomes entrenched that "without wealth at the top, there would be nothing to trickle down." Such flawed logic of the business cycle overshadows an understanding of the structural and historical origins of the global economic crisis.

Financial Fraud

Media disinformation largely serves the interests of a handful of global banks and institutional speculators which use their command over financial and commodity markets to amass vast amounts of money wealth. The corridors of the state are controlled by the corporate establishment including the speculators. Meanwhile, the "bank bailouts", presented to the public as a requisite for economic recovery, have facilitated and legitimized a further process of appropriation of wealth.

Vast amounts of money wealth are acquired through market manipulation. Often referred to as "deregulation", the financial apparatus has developed sophisticated instruments of outright manipulation and deceit. With inside information and foreknowledge, major financial actors, using the instruments of speculative trade, have the ability to fiddle and rig market movements to their advantage, precipitate the collapse of a competitor and wreck havoc in the economies of developing countries. These tools of manipulation have become an integral part of the financial architecture; they are embedded in the system.

The Failure of Mainstream Economics

The economics profession, particularly in the universities, rarely addresses the actual "real world" functioning of markets. Theoretical constructs centered on mathematical models serve to represent an abstract, fictional world in which individuals are equal. There is no theoretical distinction between workers, consumers or corporations, all of which are referred to as "individual traders". No single individual has the power or ability to influence the market, nor can there be any conflict between workers and capitalists within this abstract world.

By failing to examine the interplay of powerful economic actors in the "real life" economy, the processes of market rigging, financial manipulation and fraud are overlooked. The concentration and centralization of economic decision-making, the role of the financial elites, the economic thinks tanks, the corporate boardrooms: none of these issues are examined in the universities’ economics programs. The theoretical construct is dysfunctional; it cannot be used to provide an understanding of the economic crisis.

Economic science is an ideological construct which serves to camouflage and justify the New World Order. A set of dogmatic postulates serves to uphold free market capitalism by denying the existence of social inequality and the profit-driven nature of the system is denied. The role of powerful economic actors and how these actors are able to influence the workings of financial and commodity markets is not a matter of concern for the discipline’s theoreticians. The powers of market manipulation which serve to appropriate vast amounts of money wealth are rarely addressed. And when they are acknowledged, they are considered to belong to the realm of sociology or political science.

This means that the policy and institutional framework behind this global economic system, which has been shaped in the course of the last thirty years, is rarely analyzed by mainstream economists. It follows that economics as a discipline, with some exceptions, has not provided the analysis required to comprehend the economic crisis. In fact, its main free market postulates deny the existence of a crisis. The focus of neoclassical economics is on equilibrium, disequilibrium and "market correction" or "adjustment" through the market mechanism, as a means to putting the economy back "onto the path of self-sustained growth".

Poverty and Social Inequality

The global political economy is a system that enriches the very few at the expense of the vast majority. The global economic crisis has contributed to widening social inequalities both within and between countries. Under global capitalism, mounting poverty is not the result of a scarcity or a lack of human and material resources. Quite the opposite holds true: the economic depression is marked by a process of disengagement of human resources and physical capital. People’s lives are destroyed. The economic crisis is deep-seated.

The structures of social inequality have, quite deliberately, been reinforced, leading not only to a generalized process of impoverishment but also to the demise of the middle and upper middle income groups.

Middle class consumerism, on which this unruly model of capitalist development is based, is also threatened. Bankruptcies have hit several of the most vibrant sectors of the consumer economy. The middle classes in the West have, for several decades, been subjected to the erosion of their material wealth. While the middle class exists in theory, it is a class built and sustained by household debt.

The wealthy rather than the middle class are rapidly becoming the consuming class, leading to the relentless growth of the luxury goods economy. Moreover, with the drying up of the middle class markets for manufactured goods, a central and decisive shift in the structure of economic growth has occurred. With the demise of the civilian economy, the development of America’s war economy, supported by a whopping near-trillion dollar defense budget, has reached new heights. As stock markets tumble and the recession unfolds, the advanced weapons industries, the military and national security contractors and the up-and-coming mercenary companies (among others) have experienced a thriving and booming growth of their various activities.

War and the Economic Crisis

War is inextricably linked to the impoverishment of people at home and around the world. Militarization and the economic crisis are intimately related. The provision of essential goods and services to meet basic human needs has been replaced by a profit-driven "killing machine" in support of America’s "Global War on Terror". The poor are made to fight the poor. Yet war enriches the upper class, which controls industry, the military, oil and banking. In a war economy, death is good for business, poverty is good for society, and power is good for politics. Western nations, particularly the United States, spend hundreds of billions of dollars a year to murder innocent people in far-away impoverished nations, while the people at home suffer the disparities of poverty, class, gender and racial divides.

An outright "economic war" resulting in unemployment, poverty and disease is carried out through the free market. People’s lives are in a freefall and their purchasing power is destroyed. In a very real sense, the last twenty years of global "free market" economy have resulted, through poverty and social destitution, in the lives of millions of people.

Rather than addressing an impending social catastrophe, Western governments, which serve the interests of the economic elites, have installed a "Big Brother" police state, with a mandate to confront and repress all forms of opposition and social dissent.

The economic and social crisis has by no means reached its climax and entire countries, including Greece and Iceland, are at risk. One need only look at the escalation of the Middle East Central Asian war and the U.S.-NATO threats to China, Russia and Iran to witness how war and the economy are intimately related.

Our Analysis in this Book

The contributors to this book reveal the intricacies of global banking and its insidious relationship to the military industrial complex and the oil conglomerates. The book presents an inter- disciplinary and multi-faceted approach, while also conveying an understanding of the historical and institutional dimensions. The complex relations of the economic crisis to war, empire and worldwide poverty are highlighted. This crisis has a truly global reach and repercussions that reverberate throughout all nations, across all societies.

In Part I, the overall causes of the global economic crisis as well as the failures of mainstream economics are laid out. Michel Chossudovsky focuses on the history of financial deregulation and speculation. Tanya Cariina Hsu analyzes the role of the American Empire and its relationship to the economic crisis. John Bellamy Foster and Fred Magdoff undertake a comprehensive review of the political economy of the crisis, explaining the central role of monetary policy. James Petras and Claudia von Werlhof provide a detailed review and critique of neoliberalism, focusing on the economic, political and social repercussions of the "free market" reforms. Shamus Cooke examines the central role of debt, both public and private.

Part II, which includes chapters by Michel Chossudovsky and Peter Phillips, analyzes the rising tide of poverty and social inequality resulting from the Great Depression.

With contributions by Michel Chossudovsky, Peter Dale Scott, Michael Hudson, Bill Van Auken, Tom Burghardt and Andrew Gavin Marshall, Part III examines the relationship between the economic crisis, National Security, the U.S.-NATO led war and world government. In this context, as conveyed by Peter Dale Scott, the economic crisis creates social conditions which favor the instatement of martial law.

The focus in Part IV is on the global monetary system, its evolution and its changing role. Andrew Gavin Marshall examines the history of central banking as well as various initiatives to create regional and global currency systems. Ellen Brown focuses on the creation of a global central bank and global currency through the Bank for International Settlements (BIS). Richard C. Cook examines the debt-based monetary system as a system of control and provides a framework for democratizing the monetary system.

Part V focuses on the working of the Shadow Banking System, which triggered the 2008 meltdown of financial markets. The chapters by Mike Whitney and Ellen Brown describe in detail how Wall Street’s Ponzi scheme was used to manipulate the market and transfer billions of dollars into the pockets of the banksters.

We are indebted to the authors for their carefully documented research, incisive analysis, and, foremost, for their unbending commitment to the truth: Tom Burghardt, Ellen Brown, Richard C. Cook, Shamus Cooke, John Bellamy Foster, Michael Hudson, Tanya Cariina Hsu, Fred Magdoff, James Petras, Peter Phillips, Peter Dale Scott, Mike Whitney, Bill Van Auken and Claudia von Werlhof, have provided, with utmost clarity, an understanding of the diverse and complex economic, social and political processes which are affecting the lives of millions of people around the world.

We owe a debt of gratitude to Maja Romano of Global Research Publishers, who relentlessly oversaw and coordinated the editing and production of this book, including the creative front page concept. We wish to thank Andréa Joseph for the careful typesetting of the manuscript and front page graphics. We also extend our thanks and appreciation to Isabelle Goulet, Julie Lévesque and Drew McKevitt for their support in the revision and copyediting of the manuscript.

Tuesday, May 25, 2010

Overseas Madoff investors get 100 cents on the dollar back

MADRID — About 720,000 investors outside the United States who lost money to the convicted swindler Bernard L. Madoff have settled with their banks, receiving about $15.5 billion in all, according to law firms representing those victims of the fraud.

The settlements cover about 80 percent of the clients represented by the firms, said Javier Cremades, founder of Cremades & Calvo-Sotelo, a Madrid law firm, who helped organize the global alliance of 60 firms a year ago.

The $15.5 billion figure represents, in theory, 100 percent of the amount clients had invested, Mr. Cremades said, but excludes in almost all cases the bogus paper gains that were listed on investor statements.

Looks like the oversea banks didn't want any discovery on their boo

Originally published May 25, 2010 at 10:58 AM | Page modified May 25, 2010 at 11:13 AM
Written by Jon Talton

Sound Economy:What's causing stock market volatility

Beyond primal greed and fear, the movements of the stock market are often a mystery, whatever comic-book explanation may be given by commentators in the moment. The real causes are usually cloaked by millions of individual investor decisions.


Beyond primal greed and fear, the movements of the stock market are often a mystery, whatever comic-book explanation may be given by commentators in the moment. The real causes are usually cloaked by millions of individual investor decisions.

With Tuesday's swoon on Wall Street, following a worldwide sell-off and days of volatility, fear is definitely in command. What else? Lets run through the suspects.

• North Korea. Definitely. The rogue nation is the crazy uncle in the attic, armed with at least rudimentary nuclear weapons and apparently locked in a power struggle as Kim Jong-il fades. Anything could happen. Worse, this unpredictable and dangerous state is located in the heart of the rising world economy.

• European sovereign debt. Not exactly. Europe has long had what Americans would consider lavish welfare states, big government, outlandishly superb infrastructure, etc. The issue is more complicated. First, the euro is a currency experiment that may not survive the Great Disruption — it's a common monetary policy without a common fiscal or political system. Weak nations (Greece) have the potential to drag down strong ones (Germany). Many investors diversified into the euro and now regret it. Second, the exposure of major banks to complex, opaque bets made on the debt could become subprime redux. Some players are no doubt driving down the euro by profitably betting against it. The global financial system's hyper-interconnectivity is once again akin to the malevolent Skynet in the Terminator movies.

• Flash trading: Yes. The so-called flash crash of May 6, caused or worsened by the computerized trading operation, is still spooking markets. Regulators still don't know the extent of flash trading's role, adding to uncertainty. The Securities and Exchange Commission is investigating whether market makers backed away during the crash, eliminating a crucial backstop to a market plunge. Is this yet another way casino capitalism is pulling swindles?

• Financial reform. Nah. The pending bills have been so watered down that Wall Street has little to fear, which means average Americans have much over which to fret. The too-big-to-fail banks remain. Derivatives rules have been fatally weakened. The shadow banking system, the little-regulated laboratory of crashes and fraud, remains in the shadows. A new Glass-Steagall Act to separate risky investment banking from taxpayer-insured commercial banking was dead on arrival. None of this is to say the big Wall Street institutions wouldn't use the market decline to demonize any attempt at enacting new rules.

• Leverage. Oh, yeah. Unlike classic downs in the business cycle, the Great Recession failed to clean up most of the imbalances that helped cause it. This is especially true of heavy debt loads. Australia is now facing a housing collapse fed by debt that is spreading to its banking system. Sound familiar? America's private and corporate debt loads remain very high by historical standards.

• Rally fatigue. Yes. The fuel for the past year's market rise is largely spent. This includes the hot money using dollars and cheap credit to buy equities, low interest rates, bargain stocks, and the bailout and stimulus. Now the market is overvalued and the real economy is recovering too slowly.

The result: We're uncomfortably close to a double-dip recession. Meanwhile, many average Americans burned in the stock market during the 2000s, might be asking themselves why they rushed back to the casino. Those in deficit panic attack might consider where the world still sees a safe haven: U.S. Treasury securities.
 

Posted by Moss M.Jacques

Regulation vs. Structural Change

Written by James Kwak


Co-author of The Baseline Scenario and of 13 Bankers
Posted: May 25, 2010 11:01 AM

 

Robert Reich discusses a theme that I think I've discussed before (and first heard expressed by Ezra Klein):

"The most important thing to know about the 1,500 page financial reform bill passed by the Senate last week -- now on he way to being reconciled with the House bill -- is that it's regulatory. It does nothing to change the structure of Wall Street."


Reich's post weirdly cuts off in the middle on his site, but Mark Thoma has a longer excerpt. In that excerpt, Reich concludes this way:

"The only way to have a lasting effect on industries as large and intransigent as banking and health care is to alter their structure. That was the approach taken to finance by Franklin D. Roosevelt in the 1930s, and by Lyndon Johnson to health care (Medicare) in the 1960s.



"So why has Obama consistently chosen regulation over restructuring? Because restructuring Wall Street or health care would surely elicit firestorms from these industries. Both are politically powerful, and Obama did not want to take them on directly."

I would add that Obama is also a political pragmatist with a strong belief that getting something done is better than nothing. I think that on health care he and the administration probably did the best they could. Remember, they barely got a majority in the House, then barely got sixty votes in the Senate, then barely got a majority in the House again (to pass the revised bill), and public opinion was very divided.

But on financial reform I think they could have gotten more done. First of all, public opinion wanted more; and second, the administration lobbied against some of the most far-reaching changes, such as Kaufman-Brown and Blanche Lincoln's derivatives spinout provision, and Merkley-Levin never got a vote. The whole theater of the administration trying to put the bill into stone before it got much stronger should have been embarrassing to them, but they decided they could take the hit.

I think the explanation for this is some combination of (a) the economic policy guys really think that the financial system we have today is basically fine and just needs a little better oversight and (b) Obama just doesn't care that much and wants to save his political capital (and his support from the financial sector) for other issues, like (hopefully) jobs and climate change.

Here's Thoma's conclusion:

"Structural change is harder than imposing new regulations. The fact that legislators are shying away from the harder to impose types of change out of fear of losing reelection support from the financial industry points to the political power the industry still has, and to the need for structural change to reduce this political (and economic) power. If we cannot muster the political will to make such changes in light of the most devastating financial collapse since the Great Depression, that does not bode well for the future."

One false move in Europe could set off global chain reaction

By Howard Schneider and Neil Irwin
Washington Post Staff Writer
Monday, May 24, 2010; A01


If the trouble starts -- and it remains an "if" -- the trigger may well be obscure to the concerns of most Americans: a missed budget projection by the Spanish government, the failure of Greece to hit a deficit-reduction target, a drop in Ireland's economic output.

But the knife-edge psychology currently governing global markets has put the future of the U.S. economic recovery in the hands of politicians in an assortment of European capitals. If one or more fail to make the expected progress on cutting budgets, restructuring economies or boosting growth, it could drain confidence in a broad and unsettling way. Credit markets worldwide could lock up and throw the global economy back into recession.

For the average American, that seemingly distant sequence of events could translate into another hit on the 401(k) plan, a lost factory shift if exports to Europe decline and another shock to the banking system that might make it harder to borrow.

"If what happened in Greece were to happen in a large country, it could fundamentally mark our times," Angelos Pangratis, head of the European Union delegation to the United States, said Friday after a panel discussion on the crisis in Greece sponsored by the Greater Washington Board of Trade.

That local economic development boards are sponsoring panels on government debt in Greece is perhaps proof enough that Europe's problems are the world's. That the dominoes can tumble fast was shown Thursday when a new and narrowly drawn stock-trading policy in Germany helped trigger a sell-off on Wall Street.

It marks a change, Barclays Capital chief European economist Julian Callow wrote in a Friday analysis, from a situation in which the bonds of European countries were considered to carry virtually zero risk to a "brave new world" where sovereign default in one of the world's core economic areas is a tangible threat. Bank holdings of European debt are now being studied with the same focus given to holdings of U.S. mortgage-backed securities as the global financial crisis unfolded in 2008 -- and with the same suspicion that problems in one part of the world could wreck others.

The most vulnerable European countries -- Greece, Spain, Portugal and Ireland -- may represent only about 4 percent of world economic activity, but "the debt crisis and its ripple effects are bad news for all corners of the world," said Cornell University economist Eswar Prasad.

The risk of a worst-case scenario is still considered remote. European countries have pledged hundreds of billions of dollars to aid indebted neighbors that run into trouble, and they say they are committed to fixing the continent's larger economic problems. The euro and U.S. markets were both higher Friday after the German Parliament approved a key piece of that support program. A renewed effort by the U.S. Federal Reserve to ensure that European banks have adequate access to dollars has generated little demand -- a sign that a feared shortage of cash is not in the offing.

U.S. banks are not heavily exposed to the weaker European countries, Fed governor Daniel K. Tarullo said in testimony on Capitol Hill last week. Banks are in better shape overall, after fresh infusions of capital. Meanwhile, the U.S. economic recovery has been strengthening through the year, with jobs added in five of the last six months, and recent consumer spending and industrial output stronger than most forecasts.

But the fallout from Europe could still be widely felt. U.S. trade officials, hoping the country can dramatically boost its exports, are dismayed at the steep drop in the value of the euro -- which is around $1.25, down from more than $1.50 in November. The decline makes American goods more expensive compared with those produced in Europe. The slide in the common European currency could also change the way China and a host of Asian countries approach their currency policies, possibly making them less likely to agree with U.S. demands to raise the value of their money. If they raised it, Asian goods would become more expensive in world markets, making it easier for U.S. products to compete.

The connections are being closely watched. Analysts are studying how the involvement of Greek financial institutions in Eastern Europe, or Spanish banks in Latin America, could affect those economies. The International Monetary Fund and E.U. officials are doing biweekly checks on Greece's progress to ensure its economic reform program stays on track, according to Vassilis Kaskarelis, Greece's ambassador to the United States.

Inside the euro zone, banks are intimately linked, with a web of investments and cross-country bond holdings that could be a main vector for financial "contagion," with a default in one country weakening banks elsewhere.

There are some positive impacts in all this for the United States.

For one, uncertainty about European government debt has driven global investors toward U.S. government bonds, which in turn is pushing down long-term interest rates. The 10-year Treasury bond had a rate of 3.2 percent Friday compared with nearly 4 percent last month. Those lower rates should flow through to private borrowing, helping Americans getting mortgages or businesses looking to grow.

The European panic is also lowering the price of oil and other commodities on global markets, potentially making it cheaper for Americans to fuel their cars and heat their homes. A barrel of oil went for about $70 on Friday, down from almost $87 on April 6.

A final positive for the U.S. economy is that the stronger dollar will help keep inflation in check by reducing the cost of imports. That, combined with renewed worry about the strength of the recovery, is likely to give the Fed some leeway to delay raising interest rates above their current extremely low levels longer than it would have otherwise.

The most precise comparison is to the East Asian financial crisis that enveloped Thailand, Indonesia, South Korea and other nations in 1997 and 1998. There were widespread fears that the crisis would damage the U.S. economy, including through a financial contagion effect. The Fed even cut interest rates in the fall of 1998 to try to forestall a weakening in U.S. growth.

But there was little obvious impact on the U.S. economy, which grew 4.5 percent in 1997, 4.4 percent in 1998, and 4.8 percent in 1999.

Posted by Moss M.Jacques

Wall Street crash exposes world of stock market electronic trading

Published on 05-12-2010  



In 10 bone-shaking minutes on Thursday the Dow Jones Industrial Average - representing the 30 most venerable US firms - briefly lost almost a tenth of its value.

Open-jawed investors blanched as the pensions and savings of millions of Americans were decimated, along with the livelihoods of countless more.

Days and a partial recovery later, the most fundamental question has still not been answered: What happened?

Concerns about Europe's debt crisis no doubt contributed, but few analysts believed worries about Greece's fiscal malfeasance - as serious as it may be - would cause US equities markets to go through a near-death experience.

The Securities and Exchange Commission, the New York Stock Exchange and even President Barack Obama have vowed to uncover the causes of the fall.

In the meantime, homespun theories have been shot down one-by-one.

The major US stock markets said a glitch on their trading platforms was not to blame.

Citigroup angrily brushed aside the notion that one of its traders had mistakenly hit the billion rather than million button on a sale.

Some bolder television commentators speculated that cyber-terrorism may be to blame, although evidence appeared to be lacking.

Whatever the trigger, blame for the severity of the crash is now aimed squarely at algorithmic trades.

At their simplest, "algos" are used to buy or sell shares at a certain trigger point, to limit losses or seek new profits.

They are responsible for anywhere between 60 and 90 per cent of trading on a normal day.

In a market that is driven by endless reams of data, algorithms are able to spot and act on opportunities at a speed investors could not hope to match.

"One program can trade thousands of stocks in milliseconds," explained Terrence Hendershott, a professor of finance at the University of California, Berkeley.

New figures for consumer spending or one stock's deviation from the broader price trend can trigger a rash of buying and selling while a human trader is off getting coffee.

But when the flow of data is disrupted or unusual, the effects can be dramatic.

Hendershott speculated that Thursday crash could have been caused by a badly programmed algorithm, or a trader's mistake.

That could have sparked automated selling that forced stock prices down and triggered a cascade of other automated sales. This domino effect could have occurred at such a pace that humans had no idea what was happening.

It is a scenario that proponents of algorithmic trading, like Hendershott, had thought improbable, until Thursday.

"What computers are particularly good at is processing the same information in the same ways and optimizing that very, very quickly," he said.

"What they might not be so good at is dealing with some new situations that have never occurred before."

The response from regulators and Congress has been swift. "A temporary one trillion drop in market value is an unacceptable consequence of a software glitch," said Senators Ted Kaufman and Mark Warner in a letter a colleagues.

A Congressional hearing is planned for Tuesday and calls are growing for regulation.

The Securities and Exchange Commission is urging exchanges to put better "speed bumps" in place that would slow down trade, turning more decisions back to human brokers.

Many on Wall Street see resolving the quandary as crucial to restoring the trust of ordinary investors.

"America's confidence in Wall Street was already low. It is now eroded even more than before," worried David Kotok of Cumberland Advisors - a financial firm.

But according to Hendershott, algorithms have also made markets more efficient, better able to assess the true value of an asset.

They were also responsible for the equally rapid recovery seen in stock markets on Thursday, he said, as programs spotted ultra-low prices for some stocks.

"It was bad that it went down so fast, but there was no way the humans were reacting fast enough to make it come back."

Thanks to algorithms, 10 minutes is now a very long time in the stock market.

Source: London Telegraph

Posted by Moss M.Jacques

Washington reins in Wall Street:

What happens next?

 Stefanie Fogel    Date last updated: 5/23/2010 8:36:43 PM 

written By Paul Davidson, USA TODAY The sweeping overhaul of financial regulations passed the Senate last week after a sometimes-acrimonious debate. Now, another battle begins: reconciling differences between House and Senate versions of the 1,500-page bill in conference.  While the two bills are largely similar, there are key differences whose resolution could determine how tightly the reins on Wall Street will be pulled and how many safeguards are provided to consumers. For example, the Senate bill requires banks to divest their derivatives trading units and encourages regulators to prohibit banks from using their own capital for high-risk investments. The House bill doesn't. FINANCIAL REGULATION: House and Senate differences The Senate places a new consumer watchdog agency within the Federal Reserve. The House measure calls for a stand-alone entity but exempts car dealers - which lawmakers say sometimes steer buyers into bad loans - from agency oversight. The Senate bill provides for the orderly liquidation of failing financial firms but doesn't set aside a specific amount of money to pay for it. The House calls for a $150 billion fund, paid by assessments on financial institutions. "We expect (the conference) to be contentious," says Steve Adamske, spokesman for the House Financial Services Committee. Committee Chairman Barney Frank, D-Mass., will chair the conference committee, which will also feature Senate Banking Committee Chairman Chris Dodd, D-Conn., chief author of the Senate bill, and other members of committees with roles in financial regulation. All told, about 20 lawmakers from each of the chambers and both parties will participate, though the makeup will reflect the Democrats' majority. The conference is expected to begin after Memorial Day and last about two weeks. The legislation that emerges must then be passed again by the House and Senate. Frank and Dodd said Friday that they expect to present a final bill to President Obama by July 4. Frank also said he would like the conference to be televised, though that will be decided by the entire committee. Frank "wants to give the people the confidence that we are working to resolve the issues that led to taxpayer bailouts of the financial industry," Adamske says. Typically, the House passes stricter regulatory bills. But the Senate overhaul was toughened as public outrage boiled after the government filed fraud charges against Goldman Sachs last month. The House measure passed in December. As a result, Joe Lieber of Washington Analysis believes the final product "is likely to look more like the Senate bill. It's likely to be less moderated." Key parts of the Senate financial overhaul bill and how they differ from the House bill passed in December. Main issues What Senate bill does How House bill is different Consumer protection Consumers have not been adequately protected against predatory mortgages, credit cards and other financial products. Regulators such as the Federal Reserve and Federal Deposit Insurance Corp. are focused mainly on safeguarding the safety and soundness of the institutions they regulate, not looking out for consumers. It would create an independent Consumer Financial Protection Bureau in the Federal Reserve that would write rules and oversee a range of financial products offered by myriad providers, including banks, mortgage brokers and payday lenders. A new oversight council could veto its regulations with a two-thirds vote. The bill helps consumers by: ? Making it easier for merchants to give discounts for paying cash. ? Capping fees merchants pay for debit transactions, savings that could be passed to consumers. ? Requiring that consumers get their credit scores free when they're denied credit. Consumer bureau would be stand-alone agency, rather than in the Fed. Unlike the Senate bill, its rules would not be subject to a possible veto by the oversight council. However, some small businesses such as auto dealers, which Democrats say sometimes steer buyers into deceptive or high-cost loans, would be exempt from oversight by the agency. Ending "too big to fail" During the financial crisis, the government had no way to wind down large non-bank financial companies such as Bear Stearns and AIG without threatening the entire economy, because institutions are so closely interconnected. The firms took big risks, knowing taxpayers would foot the bill. The government had to spend hundreds of billions of dollars to bail them out. The firms would face tighter regulation, such as having to keep higher capital reserves. If they failed, certain creditors would be made whole to protect the financial system, but shareholders and unsecured creditors would bear losses and pay the costs of winding them down. It would create a $150 billion fund financed by large financial companies to pay for the dissolution of failing companies. The Senate version originally included a $50 billion fund, but that was removed after critics said it would encourage bailouts and possibly limit the government's ability to assess more fees on firms. Executive pay Big Wall Street bonuses rewarded short-term profits over the long-term health of the firms. That gave executives incentives to take big risks with high leverage as the housing bubble formed and stick taxpayers with the bill when their bets fizzled. The bill would give shareholders a non-binding vote on executive pay and require public companies to claw back compensation based on inaccurate financial statements that don't comply with accounting standards. It would require directors to win by a majority vote in uncontested elections. The House bill would require financial institutions with more than $1 billion in assets to disclose compensation structures that include any incentive-based elements. Derivatives Derivatives, which are bets on the price movement of a stock, commodity or other security, were squarely behind the collapse of AIG, the most expensive government bailout in U.S. history. Because they are often private agreements between parties, they are hard to value. The volume of outstanding derivatives worsened some firms' financial troubles as the mortgage market spiraled down. The bill would require most derivatives to be traded on exchanges to increase transparency and to be cleared through third parties to ensure there's collateral behind the deals. A controversial provision would require Wall Street banks to spin off their derivatives trading units, which are very lucrative for them. Many industry players such as farmers and utilities which purchase derivatives to hedge the risk of price changes for their products would be exempt. Also, the bill would not require banks to spin off their derivatives units. Oversight powers No federal agency is in charge of monitoring the stability of the entire financial system. A large interconnected company, such as insurance giant AIG, whose failure would have had wide ripple effects, might have been stopped from placing big bets on the mortgage market if such an entity existed. Bill would create a nine-member council of regulators including officials from the Fed, the SEC and FDIC to identify risks posed by large financial firms. It can recommend to the Fed that such a firm increase capital reserves and even approve, with a two-thirds vote, a Fed decision forcing the firm to divest some holdings if it poses a grave threat to the economy. It would create a council to monitor risks to the system and make recommendations but would leave it to various relevant agencies to implement them rather than the Fed exclusively. Credit-rating agencies Agencies such as Standard & Poor's and Moody's gave misleadingly high ratings to bad securities during the crisis. A big reason, critics say, is that the agencies are paid by the financial firms issuing the debt, such as mortgage-backed securities. A new independent board would randomly select the agency providing the initial rating to a security. Agencies also would have to disclose more information about how they assign ratings. Ratings agencies would have to register with the Securities and Exchange Commission. There's no stipulation for how an agency is selected.

Posted By Moss M.Jacques

Senators shrug off 'flaws' in financial reform bill Harkin and Grassley are less than giddy about watered-down overhaul package, but cast votes in its favor. Written BY COURTNEY BLANCHARD TH STAFF WRITER Sunday, May 23, 2010

Pass a massive bill these days and it's hard to come by a completely glowing critique. even many of those who voted for it said the financial reform bill was only a "step in the right direction." After the late Thursday passage of the financial reform package, lawmakers issued a barrage of press releases decrying or celebrating the bill, often with the same message -- it doesn't go far enough. Republican opponents said the bill would put too much power in the hands of the government. Those who voted for it, including both Iowa senators, said it was a good start, but they would like to see more reforms.

"I voted for this measure because it is a step in the right direction," U.S. Sen. Tom Harkin, D-Iowa, said. "This bill will create a strong consumer financial protection bureau that will put a stop to a whole range of predatory financial practices targeting ordinary Americans."

The bill would strengthen the role of the inspectors general to fight fraud and mismanagement at the major federal financial agencies, including the Securities and Exchange Commission and the Federal Reserve. A "financial stability oversight council" would work to find risks in the financial system. Hedge funds would be subject to registration with the SEC. Banks would have to spin off their derivatives trading into new subsidiaries. The bill also strives to prevent another massive bailout at taxpayer expense.

Two area senators crossed party lines in the vote -- U.S. Sen. Russ Feingold, D-Wis., broke with Democrats to vote against the bill, and Sen. Chuck Grassley, R-Iowa, was among four Republicans to vote for the measure.

"The bill does not eliminate the risk to our economy posed by 'too big to fail' financial firms," said Feingold in a statement. "Nor does it restore the proven safeguards established after the Great Depression, which separated Main Street banks from big Wall Street firms and are essential to preventing another economic meltdown."

Before the vote, Grassley told reporters that the adoption of an amendment strengthening the role of inspectors general to oversee financial agencies pushed him closer to supporting the bill. The other Republicans to support of the bill were Sen. Scott Brown, of Massachusetts, and the two senators from Maine, Olympia Snowe and Susan Collins.

"There's no question this bill has flaws, but a message needs to be sent to Wall Street that business-as-usual is over," Grassley said in a statement. "This bill takes a step in the direction of trying to fix things. It starts to open up the Fed. It puts the massive derivatives market in the light of day. Other reform is needed, too, starting with Fannie and Freddie. It's a matter of transparency and accountability."

Grassley has advocated reform for the two federally subsidized mortgage lenders, Fannie Mae and Freddie Mac, but the bill doesn't address that. Harkin supported a measure to limit ATM fees, but that amendment never came up for a vote.

Most Senate Republicans didn't buy the "step in the right direction" argument and opted to vote against the bill.

"The federal government has doubled in size over the past decade," said Republican Senate leader Mitch McConnell, of Kentucky. "And yet every day this administration devises some new way to make it bigger, costlier and more intrusive."

The bill must now be reconciled with a House version that passed in December.