Fumbling the Foreclosure Crisis

Remember when former President Bush landed on an aircraft carrier less than 2 months after the Iraq invasion while a banner unfurled to declare, “Mission Accomplished?”

President Obama hasn’t surrounded himself with the dramatic props, but he reminds me of his predecessor when he brags about how he and his administration have reformed the recklessness and lack of accountability of a seriously out of whack financial system.

Unfortunately for all of us, the bombs going off in the middle of what’s supposed to be a budding economic recovery keep reminding us that the system is as broken as ever.

We still have a system where the big banks play by one set of rules (that favor them) while the rest of us have to live by another set of rules.

The latest proof are the big banks' foreclosure follies, now unfolding across the country after it was revealed that bank officials were improperly submitting key documents in foreclosure cases without actually reading them in what has been labeled “robo-signing.”

Among the widespread irregularities: bank officials who claim to have verified how much borrowers owe when in fact they hadn’t determined the amount, documents related to the foreclosures with signatures that appeared to be forgeries and documents that were improperly notarized.

Lawyers who challenge foreclosures say this is not just a technical problem.

Because of the way mortgages were sliced and diced in the securitization process, these lawyers have uncovered a variety of problems in the foreclosure paperwork – most importantly. the inability to determine who exactly owns the mortgage at issue in a particular foreclosure. Banks, overwhelmed by the flood of foreclosures, have made serious mistakes – including illegally foreclosing on homes. In Florida, for example, a man paid cash for his house, but then Bank of America foreclosed on it anyway.

In the wake of the latest disclosures, a number of big banks have now halted some, but not all, foreclosures while they sort the mess out. There’s no help for those in some of the worst-hit states in the foreclosure crisis, such as California, which is known as a non-judicial foreclosure state.

Basically that means that under state law, lenders can foreclose on your property without going to court. So if you want to challenge your foreclosure you have to sue. But the laws are tough and lawyers in California have had little success in getting judges to block foreclosures. Judges have been reluctant to challenge the way big banks do their business on behalf of distressed borrowers behind on their mortgage payments.

The foreclosure fiasco points out the failure of the Obama administration to come up with a robust remedy, in part because banks have resisted government interference that would force them to acknowledge how much value their real estate holdings have lost. The administration’s foreclosure program, which offers meager incentives for banks to reduce payments for borrowers who are about to lose their homes, has been a dismal failure. President Obama failed to fight for his own proposal to give bankruptcy judges the power to adjust mortgage payments, which could have encouraged judges to modify more mortgages on their own. That proposal was defeated last year in the Senate in the face of bank opposition.

So we’re left with the spectacle of the banks that made their own rules in the real estate bubble continuing to make their own rules in how to deal with the collapse, still largely unaccountable to government officials or courts.

Now would be a good time for the president to get the message: asking nicely has not worked. Pretending to solve the problem hasn’t worked. It’s time to make the big banks play by the same rules everybody else has to play by.

If the president chooses not to get the message he won’t have the Republicans to blame. He’ll have nobody to blame but himself.

Bank of America (BoA) / Foreclosures / Martin Column / President Barack Obama - 10/04/2010

Financial Firm Finds Profit Center in Fallen Warriors

When it comes to battling the fine print that rules the financial realm, the nation’s military families have been taking a beating.

And the government officials who were supposed to be protecting the solders have been MIA.

Earlier this summer I wrote about how members of the military mobilized in a losing effort to have the nation’s auto dealers covered by the newly created Consumer Financial Protection Agency.

The nation’s military was no match for the lobbying firepower of 18,000 well-organized car dealers.

Now, thanks to Bloomberg News, we’ve learned how top Obama administration officials signed off on a secret deal that allowed the country’s second biggest life insurance company to make millions of dollars off life insurance policies for the families of deceased veterans.

It turns out that in 1999, authorities made a verbal agreement with Prudential Life to allow them to withhold the lump-sum life insurance payments the company was supposed to hand over to some 6 million veterans’ families. Instead, the life insurer were permitted to offer the survivors a checkbook, which amounted to an IOU known as “retained-asset accounts.” Meanwhile, the insurer would deposit the lump sum into its own accounts earning eight times as much in interest from the settlements as they paid to the military families.

What’s worse, those accounts weren’t even insured by the Federal Deposit Insurance Corporation.

So what happened when the Obama administration discovered the shameful deal?

Remember, this wasn’t the Bush administration, that believed that the best way to protect consumers was to let financial institutions run amok. These were Obama people, who had been sobered up by the financial collapse, who knew the dangers that lurked when financial deals were done in the dark, who promised to toughen financial regulations.

Did the Obama administration jump in and call the whole disgraceful thing off? Hardly. Bloomberg found that Obama administration officials in 2009 turned what had been a verbal agreement into a written one. Though a committee filled with top administration officials, including Timothy Geithner, was supposed to be monitoring government life insurance programs, when the committee actually had a meeting, those officials didn’t bother to show up.

Since Bloomberg revealed the deal earlier this summer, more than 10 years after it was struck, elected officials have leaped into action to condemn Prudential’s actions and demand investigations. While the Obama administration didn’t make the original deal, they formalized it rather than calling it off. It’s another unfortunate example of the Obama administration going soft while the financial industry takes advantage of consumers.

But they have the opportunity to make it right. It will be tough. The administration would have to admit a mistake. As of June 30, Prudential had made $662 million in interest off the lump-sum settlements.

Prudential has offered a pathetic paternalistic excuse, saying the company was actually helping emotionally distraught families by withholding their money during their time of grief.

The Obama administration should demand that Prudential return that windfall to veterans’ families. The company can certainly afford it. It received $4.5 billion last December when it got out of a securities brokerage joint venture with Wells Fargo. Since posting a $1.6 billion loss in the fourth-quarter of 2008, the company has recovered nicely, posting seven quarterly profits, most recently for more than $1 billion. The company’s stock posted a whopping 64 percent gain last year. The company’s CEO, John Strangfeld, is doing OK too, with total compensation of $18.4 million in 2009, though that was down from his 2008 payday, which amounted to $21.6 million.

President Obama has taken some admirable steps to improve veterans’ care after years of Bush era neglect. He should do the right thing and make Prudential turn over the profits it made from the nation’s war dead to their families.

Martin Column / Outrage / President Barack Obama - 10/01/2010

Around The Web: Wall Street Rules

When it comes to the big money, we’re still playing by Wall Street rules.
For example, California pension officials are paying their investment advisors hefty bonuses  even though the funds suffered whopping losses in the real estate crash, an investigation by Associated Press found.

The pension fund faces unfunded liabilities of billions of dollars, though there are sharp differences about the exact amount.

While the rest of the state suffers layoffs, cutbacks and furloughs, life is good for the crew at CALPERS. Fifteen employees were paid more than $200,000 – two more than two years earlier. Though the fund lost nearly $60 billion, all the funds investment managers got bonuses of more than $10,000, and several got more than $100,000.
CALPERS’ generosity extended beyond its investment advisers; the agency also gave its public affairs officer nearly $19,000 in bonuses for two straight years, and a human resources executive who got nearly $16,000 for those years.
Officials at CALPERS offer a variety of explanations: they say the bonuses cover 5 years to encourage their advisers to think long term, not short term. As a result, some of the managers’ funds that saw the steepest short-term declines got the largest bonuses. They have to pay the big bonuses despite the losses because they’re contractually obligated. They insist they have to pay the bonuses because if they don’t, their investment advisers will go to work at hedge funds.

Sound familiar? These are the same explanations we got from the big, bailed out banks who insisted that they had to hand over huge bonuses even though had to go on the dole.
CALPERS’ bonus system seems guaranteed to give its investment advisers lavish bonuses. When times are tough, the bonuses are a little less lavish. But none of the investment experts are actually accountable or will lose out for plunging the state’s pension in too deep into an unsustainable real estate bubble.

California’s pension system is hardly alone in making sure that those who manage its money are rewarded handsomely whether they win or lose.

In Massachusetts, the executive director of the state employees pension fund quit earlier this year while the Legislature contemplated a pay cap. Michael Travelgini, was paid a base salary of $322,000. In 2008, even though the fund’s investments lost money, they did better than other states, so he was given a $64,000 bonus.

Travelgini said the state’s investment managers weren’t paid enough. He’s going through the revolving door to work at a hedge fund that does business with the state, though he won’t solicit the state for a year.

These compensation issues are a strong reminder for the rest of us the lingering issues of the bubble culture. The people who run the pension systems seem to have been infected by the culture of Wall Street and forgotten whose money they’re managing. It will take a powerful disinfectant to remind them.

Around the Web / Executive Pay / Martin Column - 09/27/2010

Suck it in And Cope, Buddy

Charlie Munger is one of the world’s richest men, a partner to Warren Buffet in Berkshire-Hathaway, which was a major recipient of taxpayers’ generosity in the bailout.

So it’s no surprise that Munger recently told a crowd at the University of Michigan: “Thank God for the bailout.”

Having come through the financial collapse unscathed, Munger went on to offer some advice to those less fortunate than himself, who are suffering in distress without the benefit of much federal help.

Munger sees a sharp distinction between the necessity of bailing out the wealthy, like himself, and everybody else.

"Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies," he continued.

The bailouts were required to save America, according to Munger, but bailing out Americans who aren’t bankers would have been a big mistake.

"There's danger in just shoveling out money to people who say, 'My life is a little harder than it used to be,'" Munger said. "At a certain place you've got to say to the people, 'Suck it in and cope, buddy. Suck it in and cope.'"

Munger, at 86, is probably not as comfortable navigating the vernacular as he is the corridors of power, probably meant, “suck it up.”

Full disclosure: I worked for a newspaper of which Munger, who also founded Los Angeles-based mega law firm Munger Tolles & Olson, was a primary owner. I had plenty of opportunity to watch his philosophy in action.

His view of the workplace and his employees seemed to be shaped by a close reading of Charles Dickens, not so much as social critique but as a how to manual.

Dickens is especially relevant with a new report about all of the people who will need to be “sucking it in” – 1 in 7 Americans now live in poverty, according to a report issued last week by the Census Bureau. That’s the highest level in 15 years. Four million more people descended poverty in 2009. Especially hard hit are children: one 1 in 5 in the U.S. now live below the poverty line.

Suck it in, kids.

Another recent outburst from a member of the nation’s uber-rich shows that Munger is not alone in his self-righteous entitlement.  Steve Schwartzman, billionaire head of one of the nation’s largest and most successful hedge funds, Blackstone Group, recently compared President Obama’s proposal to let the Bush tax cuts for the wealthiest Americans expire to the Nazi invasion of Poland in 1939. “It’s a war,” Schwartzman said.

He didn’t elaborate on the metaphor, but as I understand his perverse analogy, he’s comparing the president  to the Nazis and the nation’s rich to Poles, who thought they  were safe, because they had negotiated a peace treaty with the Reich. Hitler’s Army invaded  anyway.

Apparently Schwartzman believed that he and Wall Street had a deal with Obama that he would go easy on them. After all, the administration did oppose the toughest proposals for financial reform, instead leading the effort to pass a timid tinkering that doesn’t limit Wall Street’s risky behavior or offer enough public protection from its excesses. So Obama suggesting that the Bush tax cuts should expire would amount to a giant betrayal.

Schwartzman later apologized, but it’s breathtaking that a person – especially one of such prominence and presumed sophistication – not only sees the world in such distorted terms, but feels OK about saying so.

Munger and Schwartzman’s comments reflect not only their profound sense of entitlement, but just how far the nation’s most wealthy and powerful have gone in their war on the middle class.

Men like Munger and Schwartzman have not—at least in the recent past—felt the need to vent their contempt for those who don’t share their advantages. Instead, they would negotiate and lobby for deregulation behind closed doors, and when their investments went south, scare the taxpayers into bailing them out.

What’s striking now is their bold frankness. In the wake of this financial collapse and bailout, which strengthened them while crushing ordinary folks, Munger and Schwartzman aren’t afraid to come out from behind the closed doors of the boardroom and strut their stuff.

Martin Column - 09/22/2010

Elizabeth Warren's Inside Move

So President Obama did not appoint bailout critic and middle-class champion Elizabeth Warren to head the new Consumer Financial Protection Agency.

He did appoint her to an important-sounding post as a White House adviser with responsibility to set up the agency, which after all was her idea in the first place.

Is the president actually marginalizing her with the window dressing of a fancy title? Or will she have a meaningful role in setting up the agency and shaping policy?

The punditocracy has gone into overdrive analyzing the president’s handling of Warren.

The positive spin is that it’s a savvy political move on Obama’s part to get her to work right away creating the agency and avoid a Republican filibuster, and that the president will finally be hearing from an insider not under Wall Street’s spell.

The more skeptical interpretation sees it as the latest example of the president’s failure to push back against Wall Street on issues that Wall Street cares about. As he has in the past, rather than picking a principled fight with Wall Street (and Republicans) Obama found a way around it.

The third spin, from Barney Frank, is that Warren actually didn’t  want a permanent appointment now, keeping her options open to either exit the administration or accept the job later.

Writing on WheresOurMoney.org earlier, Harvey Rosenfield, eloquently described why Warren is the best person to lead the new agency.

Warren has been a long-time critic of predatory lending practices and the American way of debt. In her role as congressional monitor of the federal bank bailout she’s been a fearless straight shooter and a down-to-earth demystifier of the complexities and foibles of high finance.

But Obama’s handling of her appointment reinforces the impression that he’s weak in the face of Wall Street’s power. Why in the world, with a high-stakes election less than 2 months away, would the president want to avoid a fight with Wall Street and Republicans on behalf of the undisputed champion of the middle-class and consumers? If the president does intend to appoint Warren to head the agency later, does he seriously think it will be easier later?

Unlike most of the president’s other top economic advisers, Warren has never been cozy with Wall Street. But it’s simply not realistic to expect the president is about to get more aggressive in reining in the big banks with Warren on the inside.

The president has shown that he is capable of ignoring perfectly good advice from well-respected advisers with impressive job titles within his administration. Remember Paul Volcker? The former Fed adviser has been a lonely voice within the Obama administration warning about the continuing dangers of the too big to fail banks and too much risky business in the financial system. But the president used Volcker as little more than a populist prop, preferring the more conciliatory approach championed by his other top economic adviser, Larry Summers, Treasury Secretary Tim Geithner and Fed president Ben Bernanke. These three effectively fought off the tougher aspects of financial regulation at the same they time touted themselves as real reformers. While the president made clear Warren will work directly for him, will she be able to match Summers, Geithner and Bernanke, all seasoned bureaucratic infighters? She’s done little to endear herself to them and has publicly tangled with Geithner.

There’s no question that Warren, a Harvard bankruptcy law professor, has already played an extraordinary and important role in helping understand the financial collapse and its fallout. She’s never been anything but forthright, no-nonsense, principled, unafraid to speak truth to financial power and to demand accountability. She will need all those qualities as well as thick skin and nerves of steel for her new job. The stakes are high. I wish her well.

Consumer Financial Protection Agency / Martin Column / Paul Volcker / President Barack Obama - 09/17/2010

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

The Credit Wolves Stalk South-Central

Before they fell into a costly cycle of subprime refinancing, Harold and Patricia King could afford to live in their modest two-bedroom home in south-central Los Angeles. They had paid $17,500 for it in 1968 with the help of a low-interest G.I loan.They raised two children and two grandchildren there. Harold retired in 1994 after 30 years on General Motors’ assembly line. His wife retired a few years later from her clerical job with the school district. They had a monthly fixed income of $2,900 and a fixed monthly mortgage payment of less than $1,000. They could handle it.

Unlike some who were able to take advantage of the cash they squeezed from the value of their homes, the Kings have little more than financial devastation to show for it. They refinanced 10 times — eight times between 2000 and 2006 — through various financial institutions. They wound up with more than a half million dollars in debt and payments more than their monthly income. Earlier this year they joined the more than 1 million other homeowners across the country that face foreclosure.

While we’ve seen and heard lots of stories of families suffering through losing homes they could never actually afford, the King’s saga puts into sharp focus one of the overlooked aspects of the on-going foreclosure crisis –many homeowners who had traditional– and affordable – mortgage loans were sold into subprime hell via refinancing deals.

In its 2006 study, “Losing Ground,” the Center for Responsible Lending found that between 1998 and 2006, “the majority of subprime loans have been refinances rather than purchase mortgages to buy homes,” and that homeowners who repeatedly refinance face a higher likelihood of facing foreclosure.

In February, the Kings packed their belongings in boxes, preparing for the loss of their long-time home. But they decided to fight for the home they’ve lived in for more than 40 years.  With the help of their lawyer, they’ve been able to stave off foreclosure, at least through the rest of the year. They’ve gone on the offense, suing their most recent lenders earlier this year for fraud and elder abuse.

Tracking the complex cast of characters and institutions with key roles on the business side of the Kings’ plight also offers a stark reminder that the explosive growth in subprime created vast wealth that never trickled down to hard-hit communities like south-central Los Angeles, a once-vibrant largely African-American and Latino neighborhood increasingly blighted by the lasting marks of the severe recession – high unemployment and high rates of foreclosure.

Take for example Deutsch Bank, which bought the MortgageIT firm that provided one of their Kings’ refinancings. In 2009, the banking giant increased its compensation to its executive board nine-fold over the previous year, led by the bank’s president, who was paid $13 million. Deutsch Bank’s path through the rocky financial crisis was helped along by its share of more than $50 billion it got in funds from the taxpayer bailout–funds the federal government paid to insurance giant AIG, which were then passed on to AIG’s clients – what has been labeled the “back-door bailout.”

The Kings also crossed paths with a lesser-known firm called Green Tree, which at one time was hired to act as the servicer on their loan – collecting the Kings’ mortgage payments every month. Founded by Lawrence Coss, a former car salesman, the firm had made a fortune in the 1990s by loaning money to people to buy mobile homes. Around the time Harold King was retiring from GM, Coss was drawing attention as the country’s highest-paid executive, winning a $69 million bonus ­– the largest bonus of all time when it was awarded in 1996. The following year he did even better, with a $102 million bonus. However, the fat profits that got Coss the bonus later turned out to be a mirage, built from bundles of risky loans and shaky accounting. Coss had to give some of his bonus back but managed to hang onto his ranches and philanthropic foundation. If anybody had been paying attention back in 2001, the unraveling of Green Tree’s business could have provided an early warning signal of the problems to come.

But in places like south-central Los Angeles, the country’s financial institutions were on a lending spree.  The Kings originally borrowed some money against their equity to supplement their retirement income. But then a series of lenders decided that the retired couple on a fixed income were good candidates for much larger refinancing.  What they offered the Kings were adjustable-interest rate loans with low teaser rates and exorbitant closing costs, fees and prepayment penalties. The Kings readily acknowledge now that they are financially unsophisticated and didn’t understand what they were getting themselves into. The deeper they went into debt the worse they felt.

“I felt guilty; I didn’t want to discuss it,” Patricia King says now. “I knew that something was deeply wrong. You hope for the best. But nothing good ever happened.”

Eventually lenders told the Kings that they needed to find somebody with better credit if they wanted to refinance their home. They brought in their 35-year-old grandson Antonio, who at the time worked at the Coca-Cola bottling plant.

According to the Kings’ lawsuit, Antonio King informed lenders that his monthly income was $3,700 a month, but when the broker or lender prepared the application, it showed his monthly income as $10,200 a month. The application, submitted on Antonio King’s behalf, also exaggerated the value of the home, from $154,000 to $540,000.  The Kings’ lawyer, Philip Koebel said of their grandson: “He threw himself to the credit wolves.”

Koebel said Antionio King found an ad for what sounded like an attractive new loan with a monthly payment of about $1,000 a month.

The Kings didn’t understand that they were getting into a negative amortization loan. The Kings were told that they would save $1,000.00 per month in comparison to a conventional mortgage if they made the minimum payment. They were not told that the minimum payment didn't even cover the interest. They were not told that the difference would be added to the principal of their mortgage and that they would be charged additional interest on the ever increasing balance of their mortgage.

With the money they got, the Kings paid off the previous loan. But they couldn’t keep up with the new payments. Antonio tried to work out a loan modification but Green Tree, which was servicing the loan,  “was not interested in making the loan affordable to the Kings,” according to their lawsuit.  Eventually Antonio filed bankruptcy in an effort to save his grandparents’ house. His 80-year old grandfather mows lawns in the neighborhood to bring in a couple of hundred dollars a month.

The lenders have fought to have the Kings lawsuit thrown out, so far unsuccessfully. In court papers their defense lawyers characterize the lawsuit as nothing more than “vague allegations and broad generalizations.” The Kings, they say, were “reaping the rewards of the strong housing market at the time and taking cash-out payment after cash-out payment each time they refinanced the loans.”

The Kings “were clearly very familiar with the loan refinancing process,” the lenders’ lawyers contend.

Like many others, the Kings didn’t see that the world had fundamentally changed, Koebel said. “Once a mortgage loan had been a relatively simple matter; a talk with a banker and a fixed payment for life. They’re not supposed to put your home at risk.”

Foreclosures / Martin Column - 08/09/2010

Around the Web: Volcker Rules - Not!

Until the morning of January 21, 82-year-old former Federal Reserve president Paul Volcker had been a lonely and largely ignored figure among President Obama’s economic advisers.

Volcker seemed to be the only one of Obama’s advisers not under the spell of the “too big to fail banks” and their highly touted innovations.

Volcker was especially vocal about protecting the public from the financial world’s riskier innovations. As he told a financial conference last year, “Riskier financial activities should be limited to hedge funds to whom society could say: ‘If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected.’ ”

It was Volcker who had said that the only financial innovation to benefit consumers in the last 20 years was the ATM card.

But he wasn’t getting much traction with the president and his advisers.

Then the Democrats lost Ted Kennedy’s Senate seat.

In a lurch back toward the populism he had embraced during his campaign, President Obama hastily reached out for Volcker.

During a press conference, the president endorsed something he called the Volcker rule as an essential plank of his financial reform plan. That rule would restrict banks from risky proprietary trades with their own (borrowed) money.

Here’s what the president said:

“Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers.  If financial firms want to trade for profit, that's something they're free to do.  Indeed, doing so –- responsibly –- is a good thing for the markets and the economy.  But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.”

For more on proprietary trading and the Volcker rule, read this from Rortybomb’s Mike Konczal and the NYT. For more about why the Volcker rule was a good idea, see this from WSJ’s Dealbreaker.

Obama mentioned the Volcker Rule a couple more times, as did the man who was marshaling financial reform through the House, Rep. Barney Frank.

But neither the president nor anybody else in the Democratic leadership ever mounted a public campaign to make it an essential part of reform. In fact, within a month, the president was already backing off his support of the Volcker rule.

And now, like many other parts of the reform that would have protected consumers and inconvenienced banks, it has been largely gutted.

Bloomberg reports “lobbying by banks and congressmen sympathetic to Wall Street’s views, as well as some administration members in the banks’ defense, trampled the views of Volcker and others who favored a stronger proposal.”

The weaker provisions won’t even go into effect for as many as 12 years.

It would have been one thing for Obama and the Democrats to go down swinging on the Volcker Rule. But they didn’t even put up much of a fight.

If you’re as disappointed as I am with the president’s lack of leadership on this, after he made such a big deal about it, why not let him know?

Around the Web / Financial Reform Legislation / Martin Column / Paul Volcker / President Barack Obama - 06/30/2010

Bombing Ants in the Sausage Factory

The only aspect of the financial reform legislation that’s truly strong is the level of rhetorical nonsense that both parties have unleashed around it: Democrats and the media exaggerate when they praise it as “the toughest financial overhaul since the Great Depression.”

Not to be outdone, the Republican House minority leader, John Boehner, has weighed in, describing the proposal as a nuclear weapon being used to kill an ant.

Which would make the financial crisis the ant, I guess.

On Tuesday, the nuclear bomb had to go back to the, uh, sausage factory, for some more grinding after Sen. Robert Byrd’s death and the defection of a former Republican reform supporter left the Dems with less than the 60 votes they need to overcome the wall of Republican opposition.

One of the few chinks in that wall had been Sen. Scott Brown. But Brown balked after a $20 billion tax on hedge funds and banks was inserted into the legislation to pay for the costs of modest additional regulation. The Republican senator from Massachusetts said he opposed placing a greater burden on financial institutions and he feared the costs of the tax would be passed on to consumers. So the reform proposal is headed back to the conference committee.

Let’s be clear: overheated and mangled rhetoric aside, the financial reform proposal does nothing to reduce the risk posed by our “too-big to fail” banks or to prevent another crisis. The proposal leaves much of the details to regulators subject to lobbying by the very institutions they’re supposed to oversee.

Now legislators think they’ve found a better bet to fund their reform: you!

According to the New York Times, they’re considering ending the Troubled Asset Relief Program early and diverting about $11 billion in taxpayer funds.

The Times observed this leaves legislators with a couple of awkward choices. “So,” the Times concludes, “the choice becomes a tax that might be passed along to consumers, or a charge directly to American taxpayers.”

Is this the best they can do? I’m increasingly sympathetic to Sen. Russ Feingold, the Wisconsin Democrat who is bucking his president and party, opposing reform because it doesn’t get the job done.

I would suggest that Boehner got it wrong, that the ant[s] are not the financial crisis; they’re the legislators scrambling around serving the banks’ interests when they’re supposed to be serving ours.

But that would give ants a bad name.

Financial Reform Legislation / Martin Column / TARP - 06/29/2010

Around the Web: Landmark or Pit Stop?

I understand why people feel the need to tout the historical significance of the financial reform package that passed the conference committee. The president needs it politically and those who support him want to give him credit for getting anything at all in the face of the onslaught of bank lobbyists. Lots of folks worked very hard against tremendous odds to get something passed.

But I think a more sober analysis shows that what’s been achieved is pretty modest. It hands over many crucial details to the same regulators who oversaw our financial debacle.

Summing up, Bloomberg reports: “Legislation to overhaul financial regulation will help curb risk-taking and boost capital buffers. What it won’t do is fundamentally reshape Wall Street’s biggest banks or prevent another crisis, analysts said.”

Zach Carter characterizes it as a good first step. The Roosevelt Institute’s Robert Johnson writes: “This first round was not the whole fight. It was the wake-up call and the beginning of the fight. Rest up and get ready. There is so much more to do.”

The question is when we’ll get the chance to take the additional steps that are needed. The public is skeptical that the new rules will prevent another crisis, according to this AP poll. The Big Picture’s Barry Ritholtz grades the various aspects of the reform effort. Overall grade? C-. Top marks go to the new minimum mortgage underwriting standards. But legislators get failing grades for leaving four critical issues on the table: “to big to fail banks,” bank leverage, credit rating agencies and corporate pay.

Ritholtz saves some of his harshest evaluation for the proposal to house the new consumer protection agency inside the Federal Reserve, which he finds “beyond idiotic.”

Around the Web / Executive Pay / Financial Reform Legislation / Martin Column - 06/25/2010