Derivatives - Represent Consumers

Latest D.C.-Wall Street brainstorm – bailouts with your bank deposits

Think your federally insured bank deposits are safe? Think again.

The geniuses that are supposed to be protecting your money have dreamed up a scary idea to use your money to help fund the next bailout.

This is not some paranoid conspiracy theory.

In December, the U.S. Federal Deposit Insurance Corp. (which is supposed to insure your money in the bank) and the Bank of England proposed using your bank deposits to defray the costs of rescuing a too big to fail bank when it gets in trouble. Wall Street hates the term “bailout,” so they’ve came up with a more innocuous term: “resolution.” The report, “Resolving Globally Active, Systematically Important Financial Institutions,” is linked here.

“In all likelihood [in a bank collapse],” the report’s authors write, “shareholders would lose all value and unsecured creditors [including depositors] should thus expect that their claims would be written down to reflect any losses that shareholders did not cover.”

People who trusted the bank and put their money there would not get their money back under this proposal. Instead their deposits would be turned into shares in the newly resuscitated bank.

A version of this already happened as a result of the Cyprus financial crisis. Now FDIC/BOE have proposed a similar approach for the U.S. and England the next time the big bankers fail.

Inside the Washington-Wall Street bubble, that’s not an “if.” It’s a “when.”

This latest proposal is what passes for smart thinking inside the bubble, untroubled by the bad banker behavior it enables or any concern for the public outrage simmering outside.

The proposal stems from a fact that surprised me when I learned it: when you put your money in the bank, you no longer own it; the bank does. It becomes the banks’ asset, which it promises to give you back under certain conditions. In legal terms, the depositor becomes an “unsecured creditor” of the bank. Under the terms of the FDIC/BOE joint December 2012 proposal, the unsecured creditors’ money could be used to offset the costs of resuscitating a bank that the geniuses in Washington and Wall Street determine is too big to fail.

The bankers and their faux regulators are in the hunt for new source of bailout fund because, under Section 716 of the Dodd-Frank law passed in the aftermath of the 2008 meltdown, they can’t use taxpayer funds the next time the $230 trillion derivatives market tanks.

Derivatives, you will recall, are those pieces of paper, unconnected to any physical assets, that created the house of cards that collapsed back in 2008 because nobody could figure out what the derivatives were worth.

Why not just let banks that engage in derivatives speculations and lose fold? The firms’ executives, bondholders and investors would get hurt. And we can’t let that happen, of course.

So they want to “resolve” a bank’s excessive risk-taking with our money.

In Cyprus, only the wealthiest’s deposits were seized. The FDIC is supposed to insure individual depositors’ account up to $250,000 per depositor per account. But under the FDIC/BOE proposal, even accounts of $250,000 or less could be seized by the failing bank and converted to stock as part of a bailout scheme.

Meanwhile, what about the purchasers of those risky derivatives, which the banks are still trafficking in more than ever? They would fare better than lowly depositors because they are treated as “secured creditors,” under a little-noticed provision that the bankers’ lobbyists had inserted into a 2005 rewrite of U.S. bankruptcy law.

I’ve been surprised by how little attention this proposal has gotten. It’s been covered mainly by Ellen Brown, a longtime critic of the banking sector and the government’s failure to regulate it. Certainly a major reason for the paucity of mainstream coverage is the lack of transparency around the regulation of banking institutions, and the media’s failure to push back against that. The big media, with few exceptions, has largely bought the narrative that the Obama administration has been selling, which is that the Dodd-Frank financial reform law successfully reined in banks and solved the TBTF issue, and that we have left the bad old days of financial collapses and bailouts behind us.

Nothing could be further from the reality, as the FDIC/BOE proposal makes clear. The banks continue to engage in risky derivatives gambling, resist any efforts to get them to stop, and enlist their allies at the Fed and other faux regulators to find someone else to absorb the costs of their own inevitable gambling losses.

Much of the regulations that would implement Dodd-Frank are being watered down behind closed doors, where the public is locked out and bank lobbyists have easy access to apply relentless pressure.

Even after multiple foreclosure fraud scandals, the LIBOR interest-rate fixing scandal, and the J.P. Morgan London Whale derivatives trade scandal, the media is more interested in touting the revival of the merger and acquisitions market than doing skeptical reporting on big banks and regulators.

Another reason that the reality gets lost is that it doesn’t fit neatly into the Republican-Democrat frame through which most of the media sees all policy. While Democrats at least rhetorically favor regulation and Republicans blame government for all the banks’ problems, beyond a little political stagecraft the two parties have collaborated smoothly to continue to bury the issue and let the bankers off the hook. This gives members of both parties a wide berth to keep raising campaign money from the bankers, and their congressional staffers a pathway unobstructed by any unpleasantness on their way to lucrative employment on Wall Street when they want to cash in.

This FDIC/BOE proposal is just the latest example of the government regulators protecting the bankers’ interests and throwing the rest of us to the wolves. That’s not what a majority of Americans want, obviously. According to this Rasmussen poll, 50 percent of all Americans favor breaking up the big banks so they don’t pose such a threat to our financial future, and can’t continue to dominate our political landscape. Only 23 percent oppose such a breakup.

Sen. Bernie Sanders, the independent socialist from Vermont, has introduced legislation to break up the banks. Rep. Brad Sherman, a Democratic legislator from Los Angeles, has said he will introduce companion legislation in the House.

Breaking up the banks is critical, but its only the first step. We need the re-imposition of a modern-day version of the Glass-Steagall Act, the Depression-era law that barred banks from mixing in other financial businesses that place depositors’ money at risk. Its repeal in 1999 led directly to the 2008 meltdown.

In the updated Glass-Steagall, federally insured banks should be barred from gambling in derivatives or other complicated investments.

Meanwhile, we need full public hearings on the FDIC/BOE proposal, and any other proposals regulators are considering about how to pay for future bailouts that involves taxpayers or consumers.

Contact your senator and representative and demand an end to big banks and publicly insured bank gambling. This FDIC/BOE proposal is a grim reminder of what we get when we’re left out of the political process, and we leave our financial system in the hands of the politicians, the experts and the bankers.

For Jamie Dimon, it's a free country; others must pay

America's favorite banker is at it again.

At the posh gathering of the world’s global financial elite at Davos, Switzerland, J.P. Morgan Chase’s CEO has been whining that bankers have been scapegoated for the financial collapse.

You might be inclined to have some sympathy for Dimon, who got whacked with a 50 percent pay cut last year after his bank lost nearly $6.2 billion, and possibly up to $9 billion, in the notorious “London whale” trades, in which a J.P. Morgan Chase employee speculated with federally-insured deposits, as part of a hedging strategy gone awry – bets intended to reduce the bank’s risk increased it instead.

So Dimon was only paid $11.5 million and lost the distinction of being America’s highest paid banker.

If you don’t have your scorecard handy, Dimon is the one banker who managed to emerge from the financial collapse with his reputation intact, because of the widely held perception that J.P. Morgan had managed its risk well, avoiding the worst excessive behavior that typified too big to fail banks.

But since then Dimon and his bank have been tarnished by his continuing swaggering arrogance and revelations of the bank’s own numerous misdeeds.

He’s a fierce, if smooth, advocate for his fellow bankers against increased financial regulation. The “London whale” debacle, which he initially dismissed as a “tempest in a teapot” before going on Meet the Press to acknowledge the bank’s gargantuan mistakes, has not increased his capacity for introspection or self-criticism. “Life goes on,” he observed blithely.

Federal regulators ordered the bank to improve risk management in the wake of its stupendous London whale losses and to tighten money-laundering controls. A Senate subcommittee is also investigating the London whale trades.

Nor did the London whale losses increase his humility. Last August, Dimon came out roaring in an interview with New York magazine, saying he was not going to be one of those wimpy bankers afraid to criticize increased bank regulation because of fear of retribution. “We recently had an event with a hundred small bankers here, and 85 percent of them said they can’t challenge the regulation because of the potential retribution,” he told New York’s Jessica Pressler. “That’s a terrible thing. Okay? This is not the Soviet Union. This is the United States of America. That’s what I remember. Guess what,” he said, almost shouting at Pressler. “It’s a free. Fucking. Country.”

It may be a free country, but taxpayers and customers are going to pay dearly for J.P. Morgan Chase’s business practices.

Here’s a list of some of the controversies surrounding J.P Morgan:

• The New York Times recently reported that when outside analysts discovered serious flaws in thousands of mortgages that were packaged into securities by J.P. Morgan Chase, the bank either ignored the criticisms or watered them down. Evidence of J.P. Morgan’s handling of the outside reviews surfaced in emails disclosed in a lawsuit brought by investors who said they were misled about the value of the $1.6 billion in the packaged mortgage investments.

• The bank is also one of three U.S. banks under investigation for its role in manipulating the LIBOR interest rate, which determines the interest charged for a wide variety of retail and commercial loans. Authorities have already fined the British Barclays Bank $452 million for its role in the manipulation. The cost of LIBOR rigging to taxpayers is estimated at around $3 billion.

J.P Morgan paid $228 million and admitted wrongdoing to settle accusations that it rigged bids to win municipal bond business. Prosecutors said the bank entered into secret agreements with bidding agents to improperly see competitors’ bids..
The bank has agreed to pay authorities about $2 billion to settle claims of massive fraud and abuse in its foreclosure process across the country.
In 2011, the bank apologized for overcharging thousands of veterans on their mortgages and improperly foreclosed on others while they were on active duty overseas. J. P Morgan agreed to pay more than $30 million in damages.

In each of these cases, the amount of penalties is hardly going to worry J.P. Morgan, the country’s second-largest financial institution. In the fourth quarter of 2012, the company enjoyed record profits of $5.7 billion, up 53 percent over the same period a year earlier, on revenues of $23.7 billion.

Meanwhile, Dimon has found time to join with other top CEOs to champion a grand bargain to reduce the federal deficit, similar to the Simpson-Bowles plan that grew out of President Obama’s fiscal crisis commission. Dimon and other CEO’s have bravely concluded that the best way to reduce America’s debt is to shred the social safety net that Americans who suffered most through our deep recession have been clinging to.

Does Jamie Dimon’s track record really qualify him to offer us advice on the best way to fund the government and deliver essential government services like Social Security and Medicare. We can’t stop him from offering his two cents, but that’s about what’s it worth. While we’re free to ignore him, our politicians not so much, since J.P. Morgan’s PAC and individuals associated with the company spent $3.7 million on the 2012 elections. And while it favored Republicans, the bank still donated more than $236,000 to President Obama. Unless we decide to say otherwise, that could buy Jaime Dimon a lot of freedom.

Derivatives / Executive Pay / Financial Crisis / Martin Column - 02/13/2013

Biggest Loser, Too Big to Fail Edition

Welcome to this week’s episode of the Biggest Loser, Too Big to Fail Bank edition!

Each week we tally up the bad behavior of a banker who took taxpayers’ money in the bailout, only to engage in more obnoxious antics calculated to hurt the very taxpayers whose generosity has guaranteed the bankers’ gazillion dollar annual compensation.

This week we’re featuring a surprise guest, a banker who, in the past, the press fawned over as one of the savviest Wall Street titans, who managed to actually enhance his reputation during and after the 2008 financial collapse.

Please welcome JPMorgan Chase CEO Jamie Dimon, whose bank is the biggest in the nation, with total assets of $2.3 trillion.

He’s not one of those CEOs who presides over a big bank that everybody assumes is a zombie, like Bank of America and Citibank.

No, Dimon and his bank actually made money. He was presumed to know what he was doing. Especially by President Obama, who welcomed him to the White House on numerous occasions.

And Dimon has distinguished himself as the most vocal opponent of bank regulation, which Dimon says could be bad, not just for him, but for America.

Dimon is tops in the public relations game – his reputation wasn’t tarnished even after federal authorities found that his bank was improperly foreclosing on the nation’s veterans and JPMorgan Chase had to pay $45 million two months ago to settle a lawsuit.

Dimon was still invited to the White House and fancy seminars where the attendees hung on his every word.

That was before Dimon admitted last week that one of his top traders had lost $2 billion on trades that were supposed to hedge against other risky bets that the banks’ traders were taking.

These were bets that were supposed to reduce the bank’s risks, not cost it $2 billion.

It’s just the latest evidence that not even the smartest banker, not even Jamie Dimon, who just a couple of weeks ago had dismissed warnings about the bets as a “tempest in a teapot,” has a clue as to how their own firm’s complicated financial engineering works.

Admittedly, the competition for too big to fail biggest loser is tough because the bailed-out bankers’ behavior has been so bad.

Determining the biggest winners is easy, however: the politicians and lobbyists who have collected millions in campaign contributions and lobbying fees from bankers who have successfully crippled efforts at real reform. JP Morgan Chase’s latest losses will no doubt reinvigorate the debate over financial reform, causing the banks to shovel yet more money to the politicians and lobbyists in their effort to make sure that the only true reform – breaking up the big banks, so they’re not too big to fail – never happens.

Beyond the reality TV theatrics of the political debate, we know who the real losers are – the taxpayers who foot the bill and citizens who are shut out of political debate by the corporations who dominate it with their money.

President Obama and his administration like to brag that taxpayers are making a profit from big chunks of the bailout. But that PR covers up the real story on the bailout: the federal government spent trillions to make the too big to fail banks like JP Morgan Chase bigger and more powerful, not to rein them in.

As Charlie Geist, a Wall Street historian and professor at Manhattan College told Politico, “The guy in the street in 2008 and 2009 was worried about his or her deposits, and now it’s clear they should still be worried.”

Derivatives / Martin Column / Too Big To Fail - 05/16/2012

Main Street talks back

Inside the D.C. bubble, Wall Street’s titans continue to have their way.

Their Republican allies in the Senate helped the titans kill the Buffet Rule, which would have required those who made more than $1 million a year to pay at least 30 percent in taxes, double what investors pay on capital gains income.

Wall Street has continued to stifle efforts to regulate risky derivatives like the ones that led to the financial collapse, while most of the Dodd-Frank financial reform enacted in the wake of the financial crisis has yet to be implemented.

In the Wall Street Journal (no link), columnist David Weidner asserted Wednesday that Wall Street has gotten some of its swagger back. “Big financial interests,” Weidner wrote, “are beating back every broadside with a vigor not seen since the financial-bubble days.”

But outside Washington it is a different story.

Voting for the first time on the CEO compensation of a too-big –to-fail bank, Citibank shareholders rejected a $14.9 million annual compensation for its top executive. The “say on pay” vote, mandated as part of Dodd-Frank, is strictly advisory. Citibank officials can ignore it if they want.

For years, the company’s executives had promised that their pay would be strictly tied to performance. The CEO, Vikram Pandit, had been making $1 a year since the bailout during which time the bank performed miserably. But this year, the bank’s directors decided that Pandit deserved to get back on the gravy train with the rest of the industry’s CEOs.

The following day, shareholders at another smaller regional bank, FirstMeritCorp of Akron, Ohio, rejected the compensation package for their CEO in another “say on pay” vote. Directors of that bank wanted to raise the CEO’s pay $1 million to $6.4 million a year, after the bank’s stock had fallen 20 percent during the past year.

They’re just a couple of non-binding votes. But I found it striking that when Main Street voters had the opportunity to express their opinion directly on one aspect of Wall Street’s practices, the voters voiced disapproval.

Wall Street can’t dismiss their shareholders as a bunch of Occupy Wall Street types out to destroy the system, or marginalize their rejection as mere envy. These are hardnosed investors who would like nothing better than for Wall Street banks to get on solid footing and make money. But these voters realize that despite all the administration’s happy talk about how well the bailouts have worked, the banks still aren’t sound, and that the outrageous pay for top executives who haven’t delivered is a big part of the problem because it encourages focus on short-term profit, loading up on risk and relying on continuing government help to prop up their businesses.

According to Weidner, polls show that most voters have moved on from anger at Wall Street. That may be so. But if ordinary citizens, rather than Washington insiders beholden to Wall Street, were making decisions, I think they would coolly, calmly and rationally favor the wealthy paying their fair share of taxes, and sensible regulation that would keep the titans from getting too carried away with themselves and their schemes.

Congress / Derivatives / Executive Pay / Financial Reform Legislation / Martin Column - 04/20/2012

Bipartisanship for dummies

Ever notice how all the dysfunctional wrangling in D.C. stops the minute our politicians need to do the 1 percent’s bidding?

When it comes to taking away your rights as an investor, consumer or citizen, politicians who can’t seem to agree on anything else seem to work together fine.

The latest proof that “bipartisanship” is a cynical gimmick is the so-called JOBS act, passed by the House with bipartisan support and now under consideration by the Senate, with the blessing of President Obama.

In this case, the bill’s original Republican sponsors came up with the idea of packaging a collection of measures that would weaken investor and consumer protections by the acronym JOBS, which stands for Jumpstart Our Business Startups.

After all, who could be against JOBS? Most Democrats in the House were happy to sign on – only 23 voted against it. Even Democratic representatives Nancy Pelosi and Maxine Waters voted for it.

Maybe these politicians thought the JOBS branding and the bipartisan marketing would conceal what the bill really was – the latest of several disastrous bills dismantling sensible financial regulation.

The JOBS act is the ugly stepchild of the 1999 Gramm-Leach-Billey Act repealing the Depression-era Glass-Steagall Act, which kept banks from mingling federally-guaranteed banking activities from riskier activities, and the 2000 Commodities Futures Modernization Act, a Frankenstein bill that kept credit default swaps deregulated and led to the Enron scandal in 2001.

Both pieces of legislation contributed directly to the 2008 financial collapse.

In the case of the JOBS act, it would gut many of the accounting reforms contained in the Sarbanes-Oxley Act, which was passed in the wake of the Enron debacle. The JOBS act would exempt emerging companies worth up to $1 billion from disclosure, reporting and governance rules. It would allow such companies to operate for 5 years without regulatory oversight.

John Coffee, securities law professor at Columbia University Law School, says it could be more accurately described as the “boiler room legalization act” because it would allow companies to raise money from small investors on the Internet, without any regulatory supervision, evoking the small operations that sold dubious investments over the phone using high-pressure tactics.

Arthur Levitt, former head of the SEC, told San Francisco Chronicle columnist Kathleen Pender the bill was “a disgrace.”

In a scathingly sarcastic column in the New York Times, Pro Publica’s Jessie Eisenger wrote: “Nigeria shouldn’t be the only country to benefit from the Web. Right here in America, the elderly are increasingly attractive to a variety of entrepreneurial spirits. If JOBS becomes the law, such innovators could flourish.”

Barbara Roper, the Consumer Federation of America’s director of investment protection suggested that “Republicans cannot believe they have suckered the Democrats into taking up their idea that deregulation is the way to promote job growth.”

I don’t think the Democrats got suckered. I think they know exactly what they’re doing. President Obama has been struggling in his fundraising because Wall Street and the big-money donors have lost their enthusiasm for him this electoral cycle.

But he’s showing signs of bouncing back, after his campaign manager, Jim Messina, issued a pledge that the president would stop demonizing Wall Street. In February, the president went on a fundraising blitz, raising $45 million, up from $29 million the previous month.

But it’s still far less than the $56 million he raised during the same month in 2008, when he was fighting Hilary Clinton in a bruising primary campaign. The president and his party have to deliver for their funders, and the JOBS act is a perfect gift to show the big donors what they can expect for their generosity.

But they all must take us for a bunch of clods if they think we can’t tell the difference between a nasty attack on our rights and real jobs promotion.

Call your senator today and remind them you can’t be fooled by an acronym. Suggest you know how to spell jobs, and this awful piece of legislation doesn’t.

Congress / Derivatives / Jobs crisis / Martin Column / President Barack Obama - 03/20/2012

Around The Web: Nothing Natural About Financial Disaster

Maybe this is the one that will finally cause people to take to the streets.

The crack investigative journalists at Pro Publica and NPR’s Planet Money have uncovered the latest evidence of how the big bankers schemed to keep their bonuses and fees coming by creating a phony market for their mortgage-backed securities, which were tumbling in value as the housing market tanked in 2006.

The Pro Publica/NPR investigation shows how the bankers from Merrill-Lynch, Citigroup and other “too big to fail” financial institutions undermined a system of independent managers who were supposed to be evaluating the value of the securities. The banks simply browbeat the managers into buying their products rather than face losing the banks’ business.

Meanwhile, the bankers continued to make money off every deal, even though the rest of us paid a high price for their continued trafficking in complicated financial trash.

Then when the entire business unraveled in the financial collapsed, these bankers got a federal rescue and a return to profitability.

Pro Publica acknowledges it’s complex material, so they’ve accompanied their investigation with a cartoon and graphs to make it easier to understand.

My WheresOurMoney colleague Harvey Rosenfield wrote recently about the falseness of the claim that either Hurricane Katrina or the financial collapse were primarily natural disasters. The NPR/ProPublica investigation is yet more evidence that the bankers’ irresponsible self-dealing turned a downturn in the housing market into full-blown catastrophes.

Writing on his blog Rortybomb, Mike Konczai hones in on the stark contrast in the fate of the bankers and many of the rest of us: “Remember that by keeping the demand artificially high for the housing market in the post-2005, these banks created its own supply of crap mortgages. These mortgages inflated and then crashed local housing prices. Meanwhile the biggest banks got tossed a lifeline and homeowners can’t even short sale their home much less have a bankruptcy judge that can set their mortgage to the market price with a large penalty. And everyone lines up to tell those people what ‘losers’ they are, how `irresponsible’ they’ve been for being pulled into becoming the artificial supply for artificially created demand of housing debt. What sad times we are living in.”

Meanwhile the SEC is supposedly investigating the self-dealing. We’re still waiting for the tougher new SEC that the Obama administration promised. In the latest indication that we may have to wait a while longer, a federal judge has rejected the agency’s proposed $75 million settlement with Citibank over charges that the bank misled its own shareholders about the shrinking value of its mortgage-backed securities. The SEC said the bank misled investors in conference calls by saying its subprime exposure was $13 billion, when it was actually more than $50 billion. Among the pointed questions the judge asked: Why should the shareholders have to pay for the misdeeds of the bank executives, and why didn’t the SEC go after more of the executives?

The judge’s questions about accountability mirror the uneasy questions a lot of us have about this administration’s reluctance to take on the bankers whose behavior led to ruin for the country while they profited.

Around the Web / Derivatives / Executive Pay / Martin Column / Outrage / Securities and Exchange Commission (SEC) / Too Big To Fail / Uncategorized - 08/31/2010

Funny Money

I had to laugh when I saw Treasury Secretary Geithner and Fed Chair Bernanke announce, with great fanfare, a new high-tech $100 bill. It’s supposed to ward off counterfeiters.

How big is the currency fraud the two G-men are after? Of the roughly $625 billion in “Franklins” in circulation, less than 1/100 of one percent is reported counterfeit, according to the Treasury Department.

That means that Geithner and Bernanke are trying to protect the taxpayers against the loss of $62.5 million from phony hundred dollar bills. That might seem to be a big hit on the American people – we need every dollar we can get these days - except that’s nothing when you compare it to, say, the $750 billion in taxpayer money that went to rescue Wall Street from speculation and outright thievery.

It’s less than nothing when compared to the estimated $600 trillion dollars in “derivatives” – packages of investments – that are sitting in investment portfolios throughout the global economy. That sum is about ten times the value of the entire output of goods and services by every country on earth. The geniuses on Wall Street were giddy trading derivatives with each other, getting a cut of every transaction, until suddenly the players realized they had no idea what the derivatives were worth. Indeed, many derivatives have no intrinsic economic value, but rather are simply bets on how other packages of investments will perform on Wall Street. Derivatives were at the core of the Wall Street collapse that threw our economy into a deep dive.

Our two crime-fighting government officials missed the real crime against the taxpayers – like everyone else who was supposed to be looking after the public’s interest. They sat idly by while hundreds of wealthy and politically-connected individuals made billions of dollars trading worthless securities until greed and the laws of gravity caught up with them.

Geithner and Bernanke remain at the scene of the crime. Which, of course, is still going on, day and night, and will continue until Congress puts an end to it, if our elected representatives can overcome the power of the Dark Side – derivatives lobby.

Meanwhile, we are meant to be thrilled and comforted by the spectacle of a greenback that is tough to duplicate. It’s like a cheap magic trick designed to distract us from what’s really going on.

You can see a $100 bill, after all. And it's easy to imagine some lowlife printing it up in a shed in his backyard. But no Americans ever saw a Wall Street trader concoct a derivative or try to foist one off on a clerk at the local grocery store. The derivatives that brought America to its knees exist only as electronic apparitions on a bank of monitors in front of some speculator at a Goldman Sachs or similar operation. Those are the people who were really “making” money.

Meanwhile, the new U.S. $100 bill introduced by Geithner and Bernanke has a big blue stripe down the middle, and all sorts of busy and confusing images designed to thwart criminals. It looks like something that has been run over several times by a truck. Just like our economy.

Derivatives / Harvey Column - 04/22/2010

Around the Web: Rewarding Fed Failure

Bottom line on the new Chris Dodd reform proposal: much watered down from his earlier proposal and maybe even weaker than the weak House bill.

Here’s the summary from A New Way Forward: “The bill contains no real solution to too-big-to-fail, no real enforcement guarantees, the bad guys are off the hook, the financial system will continue to be as big and dangerous and full of risk taxpayers will likely own. Dodd made a few good steps forward and major steps backwards”. The rest of their analysis is here.

From the Atlantic Wire, a solid roundup of assessments. The takeaway: Too many concessions to the big banks, and it is still faces many obstacles to passage. And who exactly besides Chris Dodd and Wall Street thinks it’s a great idea to house consumer protection within the Federal Reserve? Only last year, Reuters reminds us, Dodd was labeling the Fed “an abymsal failure."

But Elizabeth Warren, the congressional bailout monitor who has campaigned aggressively for strong reform, including an independent agency to protect financial consumers, offered a lukewam endorsement of Dodd’s plan.

I’ll give Alan Sherter the last word. When Dodd says that he doesn’t have the votes for an independent financial consumer protection agency, what he really means is that “lawmakers have more to gain by advocating the interests of banks than those of consumers.”

Around the Web / Consumer Financial Protection Agency / Derivatives / Executive Pay - 03/15/2010

Innovation Just Isn't What It Used To Be

When Wall Street wants to get out the big intellectual artillery in the argument against strong financial reform, they haul out innovation.

Regulation will strangle innovation, and we can’t have that, the financial titans contend. Innovation is the strength of America, without it we will lose our competitiveness, yadda yadda yadda.

But over the past several decades financial innovation has focused too much on mathematical models and not enough on a vision of improving the country and people’s lives.

Selling mortgages with exploding balloon payments doesn’t qualify as innovation; it’s a cruel trap.

The recent version of financial innovation, complex investments and gambling vehicles like derivatives and credit default swaps, no doubt made many bankers wildly rich, but these “weapons of mass of financial destruction,” as Warren Buffet labeled them back in 2003, also planted hidden, little-understood land mines of risk that helped create the financial crisis when they blew up.

It’s no longer just the pitchforks that are questioning the value of these innovations. Paul Volcker, the former Fed chief born again as the lone voice for meaningful financial reform in the Obama administration, recently said the only modern innovation that brought real benefit to people was the ATM card.

And the financing of innovation in the rest of the economy isn’t faring any better.

A couple of top economists, including a Nobel Prize winner, weighed in recently with a scathing view of the financial system in the Harvard Business Review.

Edmund S. Phelps (the 2006 economics Nobel winner) and Leo M. Tilman, both of Columbia University, wrote in the January issue [no link]: “The current financial system is choking off funds for innovation...Outdated accounting conventions and inadequate disclosures make it impossible to evaluate the business models and risks of financial firms. Excessive resources are allocated to proprietary trading, to lending to overleveraged consumers, to regulatory arbitrage and to low-value-added financial engineering. Financing the development of innovation takes a back seat.”

To finance opportunities in clean and nanotechnology that the current financial system is ill equipped to serve, the authors propose a government-sponsored bank of innovation.

The bank bailouts have no doubt soured people on the notion of the government in the banking business and rightly so.

But this hasn’t always been the case.

It’s worth remembering that the greatest financial innovation of the past 70 years was a government-sponsored program called the G.I. bill.

I heard about the G.I. bill growing up because it financed my dad’s education after he returned from World War II. Many others got help with home loans.

Ed Humes, an author and former Pulitzer Prize winning investigative newspaper reporter, has written a splendid account of the G.I. bill, “Over Here.” It captures how individual lives as well as the entire nation was shaped by the ambitious program.

The idea of a massive program to help veterans was first articulated by FDR, in part to prevent a reoccurrence of the bitter 1932 Bonus March, when angry World War I veterans and their families descended on Washington, D.C. to demand promised benefits. The government response was a fiasco – soldiers were ordered to fire on the persistent veterans. Nearly 10,000 were driven from the veterans’ encampment; two babies died. The resulting stink helped Roosevelt defeat the sitting president, Herbert Hoover.

I spoke with Humes about the history behind the G.I. bill.

The proposal faced stiff opposition from the financial industry and the education community.

“They argued that the average Joe returning from World War II was capable of being neither a college student nor a homeowner. The bill was basically rammed through over their objections, because of a combination of altruism and fear.”

It didn’t hurt that the bill was created by the American Legion, a conservative veterans’ group.

The G.I. bill was an overwhelming success, not only for the veterans but the college system, the building industry (it helped create the suburbs) the economy at large and the banking industry as well (it created the modern mortgage industry). “For every dollar spent,” Humes said, “seven was returned to the economy.”

Humes draws a direct connection from the G.I. bill to today’s bailouts. “They had a dead housing market, it had never recovered from the Depression. But did they throw money at the banks? No. They encouraged people to buy homes.”

The G.I. bill shows what’s possible when those who are governing possess large vision, heart, will, persistence – and fear. No mathematical model can come close.

Derivatives / Martin Column - 03/03/2010

Around the Web: Declaring Independence on Consumer Protection

Read Reuters’ economic blogger Felix Salmon’s intriguing takeaway from the weekend’s depressing news that Repubs have rejected even Chris Dodd’s watered-down, weakened version of the financial consumer protection agency. Salmon’s prescription: the Dems should accept whatever the key Republican senators, Richard Shelby and Bob Corker, want. It won’t be that much worse than Dodd’s current “toothless” proposal is now.

Then, consumer advocate Elizabeth Warren should team up with a non-governmental organization like the Center for Responsible Lending and perform the function of a real independent consumer financial protection agency, warning people about particularly bad loans or institutions that are rip-offs, and commending good ones.

Are the Republicans really thwarting the Democrats? Or do Democrats not get anything done by design? Salon’s Glenn Greenwald tells you how and why the Democrats have perfected ineffectiveness and timidity into a high art. Read it and weep.

Meanwhile, the old dinosaur print media isn’t dead yet. New York Times’ columnist Gretchen Morgenstern has a scathing take on the naiveté of Fed chair Ben Bernanke’s takes on Goldman and their Greek default swaps. As for Bernanke’s “quaint” insight that the SEC will probably be interested in looking into the matter, Morgenstern writes: “If the past is prologue we might see a case or two emerge from the inquiry five years from now. The fact is that credit default swaps and other complex derivatives that have proved to be instruments of mass destruction still remain entrenched in our financial system three years after our financial system was almost brought to its knees.”

Around the Web / Consumer Financial Protection Agency / Derivatives / Federal Reserve - 03/01/2010