Sunday, August 15, 2010


How to Thwart the Assassins of the American Dream

By Janet Tavakoli


Arianna Huffington's new book, Third World America: How Our Politicians are Abandoning the Middle Class and Betraying the American Dream, paints a grim picture of the State of the Union:
"Every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials such as food, housing, and medical care -- the costs of which continue to escalate. But, as their debt rises, they find it harder to keep up with their payments. When they don't, banks, trying to offset losses in other areas, turn around, hike interest rates, and impose all manner of fees and penalties..."
Third World America, (P. 77)

Our mediocre grammar school and high school educational system continues its downward slide. The Great Recession is squeezing school budgets. We are failing our children, our most important resource of all.

In 2009, the American Society of Civil Engineers gave the nation's infrastructure a near failing D rating:

"Flip on a light switch, and you are tapping into a seriously overtaxed electrical grid. Go to the sink, and your tap water may be coming to you through pipes built during the Civil War. Take a drive, and pass over pothole-filled roads and cross-if-you-dare bridges. The evidence of decay is all around us." (P. 95)

The over-hyped American Recovery and Reinvestment Act of 2009 earmarked only $72 billion of the $787 billion appropriation of taxpayer dollars to projects to improve the country's infrastructure.

Meanwhile, multi-national corporations avoid taxes, sheltering $700 billion in foreign earnings to end up with a measly $16 billion (2.3%) tax bill. GM is among those companies, yet it took almost a half billion dollars in bailout loans. Boeing and KBR Halliburton are among the defense contractors that avoid taxes, while enjoying government contracts worth tens of billions.

Banks (not Fannie and Freddie) Crippled the Housing Market

Fannie and Freddie do not make loans. They purchase mortgage loans and earn fees for guaranteeing payments on the loans. According to the Mortgage Bankers Association, in 2006, Fannie and Freddie accounted for 33% of total mortgage backed securities issuance. In the first half of 2010, they accounted for around 64% of new issuance. They were forced to pick up the slack and buy more when Wall Street's private label securitization Ponzi scheme blew up.

Fannie and Freddie are Wall Street's dumping ground. They would have had problems on their own, but their problems would not have been close to their current scale, and they did not create the housing bubble.

Congress twisted arms to make Fannie and Freddie buy more than $300 billion of phony "AAA" rated mortgage-backed securities from banks, not counting loans that didn't meet their stated requirements. Today Fannie and Freddie want banks to repurchase tens of billions of these loans, since they fail to meet representations and warranties, and the banks are fighting this obligation.

Top subprime lenders included Wells Fargo; Countrywide, purchased by Bank of America); Washington Mutual, now part of JPMorgan Chase; CitiMortgage, part of Citigroup; First Franklin (now closed), purchased by Merrill Lynch, which was purchased by Bank of America; ChaseHome Finance, JPMorgan Chase; Ownit, partly owned by Merrill Lynch, which was later purchased by Bank of America; and EMC, part of Bear Stearns, which was purchased by JPMorgan Chase. Most of the rest depended on massive loans from Wall Street. Many of these lenders were sued by states for fraud and paid billions in settlements.

According to Inside Mortgage Finance, the top mortgage backed securities underwriters during 2005-2006, only two of the subprime abuse years, included now defunct Lehman Brothers ($106 billion); RBS Greenwich Capital ($99 billion); Countrywide Securities, which is now part of Bank of America ($74 billion), Morgan Stanley ($74 billion), Credit Suisse First Boston ($73 billion); Merrill Lynch ($67 billion), Bear Stearns, which is now part of JPMorgan Chase ($61 billion), and Goldman Sachs ($53 billion).

The above doesn't even include the credit derivatives, collateralized debt obligations (CDOs), and structured investment vehicles (SIVs) that amplified losses. Yet, Arianna notes how America imploded while bankers soared:

"Someone like [Robert] Rubin is able to wreak destruction, collect an ungodly profit, then go along his merry way, pontificating about how 'markets have an inherent and inevitable tendency -- probably rooted in human nature -- to go to excess, both on the upside and the downside.' This from the man who, as Bill Clinton's Treasury secretary, was vociferous in opposing the regulation of derivatives -- a key factor in the current economic crisis -- and who lobbied the Treasury during the Bush years to prevent the downgrading of the credit rating of Enron -- a debtor of Citigroup." (P. 150)

Robert Rubin operated an economic wrecking-ball from prestigious positions of influence including: former co-chairman of Goldman Sachs, director of the National Economic Council, former Treasury Secretary under President Bill Clinton, board member and senior "risk wizard" counselor at Citigroup, member of the President's Advisory Committee for Trade Negotiations, and member of the SEC's Oversight and Financial Services Advisory Committee, unofficial econmic adviser to President Obama, and co-chairman of the Council on Foreign Relations.

Rubin is just one example of the many bankers, who helped destroy the economy while creating a connected financial oligarchy.

Hide Billions of Losses, Take Bailouts, Collect Billions, Skip Jail

Instead of apologizing for screwing up, the banks demanded the Great Bailout. At the start of the meltdown, the IMF and the U.S. administration estimated losses of $2 to $2.5 trillion. Unemployment and the losses are now shockingly worse. What was merely a recession escalated into the Great Recession.

How big are the actual losses? No one knows.

After destroying the value of major banks, culprits used their enormous political influence -- funded with taxpayer dollars -- to get Congress to force the accounting board to change accounting rules (as of April 2009) so banks don't have to recognize losses until they sell the assets.

According to William K. Black, after the much tinier S&L crisis, there were over 1,000 successful felony prosecutions, several thousand successful enforcement actions, and roughly 1,000 successful civil actions.

This time Congress gave us the Great Cover-up. Bank officers dodged jail time and collected billions in bonuses. As one of my South American friends observes, he's witnessed this third-world corruption before, and this time it's in English.

Banks Stall the Recovery and Prolong the Great Recession

Unemployment marched upward, delinquencies soared, and banks stalled foreclosures. The longer banks delay foreclosures and sales, the longer they can avoid acknowledging losses. Phony accounting and zero cost funding from taxpayers created an illusion of recovery.

Stalling helps banks while they pressure Congress to bail out failed mortgages with taxpayer dollars. Instead of working out mortgages with homeowners, they can wait for a government program to buyout or subsidize their failing loans. The markets aren't recovering, because banks own colossal chunks of mystery-meat assets.

It's a black hole of debt. If banks were forced to price these assets at market values and sell them, the market would clear, and the market would make a faster recovery. When Japan did this, it stalled its economy for twenty years, and it still hasn't recovered.

Voters Must Demand the Solution

Voters must demand that Congress uncovers and publicizes facts and prosecutes the financial system's massive multi-year frauds. This will mean thousands of felony prosecutions, enforcement actions, and civil actions.

Congress completely failed in genuine regulation and enforcement. It must start over on financial reform, regulate derivatives, commodities trading, update Glass-Steagall, and more. It will have to break-up the Too Big to Fail financial institutions.

CEOs of our Systemically Dangerous Institutions (SDI's) fail to manage them, because no one is capable of doing it. Like a morbidly obese junk food addict, banks won't even get on a scale. Our banks refuse to properly measure (account for) the problem.

Third World America elegantly summarizes the way forward. Arianna Huffington names the culprits and gives a roadmap for solutions. The rest is up to us. We deserve better than a third world economy divided by ultra-rich on one side and debt-ridden middle class and dirt poor citizens on the other. Citizens must demand a clean-up of corruption and a foundation for healthy growth.

Wall Street Lies, Main Street Dies, Washington Yawns
century 21
06.06.2010

Wall Street was reeling in the aftermath of that fateful day in September of 2001 and all of America joined together and lent support of every kind, to help with the financial and psychological recovery. What did the Wall Street wizards do to repay the kindness of their fellow citizens? They created financial products that have destroyed many families and businesses, and put America at great risk. They did this by grabbing almost every person they could find and putting pens in their hands. They then convinced people to buy houses and real estate at prices they would normally never have considered paying. Why not? Because common sense told them they couldn’t afford them.

But the Wall Street snake-oil salesmen convinced them that “new rules” of the 21st century made common sense obsolete. The Street’s new 21st century rules were also “Amended” by the “Maestro”, Fed Chairman Alan Greenspan and Congress. Wall Street then took the mortgages and by a process called “financial re-engineering”, turned the mortgages and other loans into financial time bombs. When they went off, they caused more destruction in every corner of America than the most determined terrorist group could ever hope to accomplish. In some places entire subdivisions went vacant as foreclosures swept through them.

At the same time, Wall Street continued encouraging companies to lower cost by sending American jobs overseas so they could make Wall Street’s “numbers.” Why could they not see the ultimate results of these practices? Guess you need an Ivy League MBA to answer that question. What does a hardworking, tax paying member of the “mere citizen” class know, compared to the financial gods of Mt.Wall Street. Or more likely, they just do not care what happens to us.

Now here we are, the “green shoots” are brown, foreclosures at Depression-era levels, companies having laid off employees by the thousands and bank failures a norm. Families are under severe stress from job losses and debt encouraged by the money merchants. Companies considered rock solid are no longer in existence and politicians that looked the other way became wealthy while the riches of the false prosperity flowed their way.

But don’t fear, every politician keeps reminding us of that great American spirit that has seen us through so much. Yes it has, but after September 2001, hurricanes Katrina and Ike, foreign wars, deadly tornadoes and floods, and now people losing houses, pensions and jobs, the American spirit has been severely damaged. To add further to the loss of hope, like the moment in the Wizard of Oz, when the curtain is pulled back to reveal just an ordinary man using gimmickry to appear larger than life, the curtain has been pulled back on our political and corporate elites. What is revealed is a group of mostly greedy, egotistical people who’s every decision and action seems first and foremost to enrich themselves and boost their egos. While we, the “masses” get the crumbs.

The travesty of it all, the financial problems and the human tragedies they have spawned, were man-made, born in the USA by the rich, greedy, “I know what is best for you” Wall Street crowd. This never had to be. To see how “repentant” the Wall Street financial world is, just watch financial television during market hours. Listen to the giddiness as they applaud another company taking the ‘bold’ step of announcing more layoffs. Reminding us high unemployment keeps wages down, which keeps prices low, making Wall Street’s money go even farther.

Recently we got a lesson on what passes for ‘economic’ wisdom in Washington and on Wall Street. When the unemployment rate rose from 9.7% to 9.9%, we were told that is a good thing and a sign of economic recovery. Well gee, wait until it hit’s 13%, then we can pop the cork and let the champagne flow.

This economy has been really tough on many of you. The green shoots are withering and the double dip is still just picking up steam as our dreams of those once “secure” jobs evaporate before our eyes. If you would like to break free from the insecurity of relying on a job, that may or may not be around next week, here is a simple home based business involving Gold and Silver that may just be your answer
 

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)