Geithner must go

Please, President Obama, fire Timothy Geithner today and hire a treasury secretary to fight for the U.S. economy as hard as Geithner fights to protect bankers’ profits.

I know you’re intensely loyal to Geithner and have resisted such calls in the past.

But Mr. President, times and circumstances have changed. For your own good and especially for the good of the country, you should reconsider. You’re in an especially close election and you need to cut yourself loose from the failed policies you’ve pursued for the past four years that have coddled the financial sector at the expense of the rest of the economy.

Your loyalties are with Geithner but his, Mr. President, are with the too big to fail banks, not with the public.

The most recent evidence comes from this Huffington Reports piece which details how Geithner, while president of the New York Fed responded when he heard about the big banks manipulating a key interest rate known as LIBOR when he was chair of the New York Federal Reserve in 2007.

Recently disclosed emails show that while Geithner expressed concerns over the integrity of the LIBOR, or London Interbank Offered Rate, he did little to investigate or stop the manipulation.

What he did to was cut and paste the bankers’ own proposals into his own proposal to the Bank of England about how to address the LIBOR concerns. It should have been an early warning sign of how Geithner and his big bank cronies spoke with one voice – theirs.

The public may not understand just how critical the integrity of LIBOR is, but you do, Mr. President. You know that it’s how it’s used as a benchmark for trillions worth of transactions every day, on everything from complex credit default swaps to credit cards.

You also shouldn’t underestimate the public’s ability to grasp what’s at the root of this LIBOR scandal, which is the same theme that’s underlying JP Morgan London Whale trading losses – that bankers have been manipulating the financial system for their own interests, with your administration either fully cooperating or looking the other way.

Don’t underestimate the ability of the ruthless and hypocritical Republican attack machine to clobber you with those policies even as the Republicans embrace more banker-friendly policies than you are.

They’ll get a good shot this week when Geithner testifies before the House Banking Committee over what he knew and what he did about banks.

The public may not be focused on the LIBOR in the middle of a hot summer, Mr. President, But the scandal is just beginning to wash up on the our shores after causing tremendous damage after it erupted in England, after Barclays Bank acknowledged its own LIBOR manipulation and cut a deal with regulators. Meanwhile the investigation into 16 U.S. banks and their LIBOR shenanigans is just getting cooking.  It could be heating up at the same time as the presidential race.

Mr. President, you have another opportunity to do something that is good politics and good for the country too, and will distinguish your policy on the banks from your opponent’s do-nothing approach.

Get rid of Geithner and begin to chart a new course toward a system not rigged in favor of big bankers and their fat bonuses. We need a treasury secretary who doesn’t measure prosperity solely by the size of bankers’ wealth.

Bankers' gambles – now with a bailout guaranteed

After the 2008 banks bailout, we were promised that financial reform was going to prevent future bailouts.

Never again.

But as we approach the fourth anniversary of the financial collapse, we’re learning just how hollow those promises were.

The most recent example stems from reports that regulators have secretly designated derivatives clearinghouses too big to fail in a financial emergency.

That means that in a crisis, such clearinghouses, in which risky credit default swaps are traded, would be bailed out at taxpayer expense through secret access to cheap money at the Federal Reserve’s credit window.

That’s where the big banks and the rest of corporate America lined after the 2008 to borrow trillions at low interest – with no strings attached.

The Fed didn’t require the banks to share that low interest with consumers or homeowners. The Fed didn’t require that banks make some attempt to fix the foreclosure mess. The Fed didn’t require corporations hire the unemployed or lower outrageous CEO pay.

The Fed just shoveled out the cheap loans.

Now the Fed is planning to extend that generosity, as a matter of policy, to derivative clearinghouses – which puts taxpayers directly on the hook for Wall Street’s risky gambles, like the ones that recently cost J.P. Morgan Chase $2 billion.

While those trades didn’t threaten to sink the economy, it was the unraveling of those kinds of complex gambles that tanked the economy in 2008.

Nobody knows for sure how large the derivatives market is, but the estimates are truly mind-boggling. One derivatives expert estimates that there were $1.2 quadrillion in derivatives last year – 20 times the size of the world’s economy.

While requiring these derivatives to be traded on clearinghouses is supposed to increase transparency, that assumes regulators are aggressive, diligent and understand the trades.

But signaling that these derivatives should be eligible for a bailout is nothing short of insane, at least from the taxpayers’ perspective. From the bankers’ perspective, it’s a pretty good deal, and a reassuring indication that nothing much has changed since the financial crisis: the regulators are still deep in the bankers’ pocket.

Meanwhile, the real reforms that might have a shot at actually fixing the problems and protecting our economy from the big bankers’ addiction to risk get little or no consideration in what passes for political debate.

The best step we could take is to re-impose the Depression-era   Glass-Steagall Act, which creates walls between safe, vanilla, and consumer banking (which have traditionally been federally guaranteed, and riskier investment banking and derivatives trading But the bankers oppose Glass-Steagall, and for the present, they remain in control of both political parties and the regulators’ financial policies.

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.

 

All the President's Millionaires

While there’s some shuffling of desks close to President Obama, the most important factor isn’t changing ¬– the 1 percent is retaining a tight grip on the administration.

Exit Bill Daley (income from J.P. Morgan in 2010 = $8.7 million). Enter Jacob Lew (income from Citigroup in 2010 = $1.1 million). Lew was CEO of the Citigroup division that invested in credit default swaps, among other risky investments that sank the economy. But the bank, which survived only thanks to taxpayer generosity, paid Lew a $900,000 bonus.
Were they really paying him for overseeing the investments that nearly sank the bank – or were they compensating him for the work he did for the bank while he served in the Clinton administration, betting that Lew would serve again?
And who can forget Daley’s predecessor, Rahm Emanuel, who got paid $16.2 million during a 2 1/2/ year as an investment banker, and remained a hedge fund favorite?
Meanwhile, still firmly in place near President Obama’s ear as his closest outside adviser on creating jobs is Jeffrey Immelt, CEO of General Electric. The Center for Public Integrity’s i-watch news is out with a devastating investigation into how GE under Immelt lost more than $1 billion getting into the subprime loan business, ignoring its own whistleblowers who were trying to tell their bosses how the irresponsible pursuit of profits led to widespread fraud.
This is more than just inside baseball – with these people in charge of the Democrats and the Republicans as well, there’s little hope that the administration will come to grips with the foreclosure crisis – or hold bankers accountable for looting and tanking the economy. Only a huge public outcry, much larger than the Occupy has mustered so far, can hope to change that.

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.

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.”