Fear Factor, Financial Crisis Edition

The administration has been touting what a good deal the Troubled Asset Relief program turned out to be for taxpayers – most of the $700 billion has been repaid; the banks after all, did not collapse, and it only ended up costing us around $50 billion after repayments.

“TARP undoubtedly helped to stem the financial panic in the fall of 2008 and contributed to the stabilization of the financial system,” Tim Geithner, the treasury secretary, said in a statement today.

But now we’ve got a whole new threat to the financial system, according to the bankers. They contend that if the public ever finds out the facts surrounding the rest of the bailout, it will cause them “irreparable harm.”

This is the part of the bailout the administration doesn’t talk about, with costs that dwarf the piddling billions spent on the TARP program. These are the trillions in secret loans the Federal Reserve provided financial institutions.

If it wasn’t for a dogged reporter at Bloomberg News, it would all still remain a big secret.

But the reporter, Mark Pittman, convinced his employer that the public had a right to know who the Fed was loaning the taxpayer’s money to, and under what terms. Bloomberg filed suit in November 2008.

The Fed and the banks fought the lawsuit for nearly two years. But in August a federal appeals court rejected the Fed and the banker’s arguments. Fed president Ben Bernanke announced in late September that the agency would finally make the information public by December 1.

Anybody care to bet on the chances that the big banks will fold when the information comes out? Any bets on revelations that will graphically show just how cozy both Bush and Obama administrations were with the big banks?

The banks’ response to the lawsuit reminds me of the atmosphere of fear and crisis the previous administration and the banks created, with the major media’s assistance, at the time of the original bailout. No time for questions, no time for debate. Hand over the blank check now or the whole economic system will blow up, they screamed.

Pittman died last year at 52. He remains one of the few heroes that emerged from the financial collapse, who raised tough questions in the months and years leading to the meltdown and was not intimidated by the banks’ fear mongering, continuing to demand answers.

Meanwhile, at some point, the bureaucrats will get around to the audit of the Federal Reserve’s activity since 2007. Congress passed that audit with broad bipartisan support in the face of fierce opposition from the administration, as part of financial reform. No doubt we will hear another round of predictions of disastrous consequences as the results of that audit are readied for release. It’s supposed to be conducted by the General Accounting Office.

From the beginning of the crisis to today, fear has been the most potent weapon used by the bankers and the bureaucrats to get their way, along with the complexity of the system the banks are always ready to clobber the public with. The spirit of reporter Mark Pittman remains one of the strongest antidotes we’ve got.

Around the Web / Federal Reserve / Martin Column - 10/06/2010

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

Quotable: Martha Roper

"One of the biggest concerns about this (financial reform) legislation, which we support, it relies on its success on regulators to do, effectively, what they did very poorly in the run up to this crisis."

Barbara Roper, director of investor protection at the Consumer Federation of America

Homepage Content / Quotable - 05/04/2010

Quotable: Sen. Carl Levin

"The recent financial crisis was not a natural disaster; it was a man-made economic assault...People did it. Extreme greed was the driving force. And it will happen again unless we change the rules."

Sen. Carl Levin

Homepage Content / Quotable - 04/13/2010

Obama's 'Hostage' Crisis

Tonight’s state of the union speech will be the least important of President Barack Obama's political career. No doubt it will be a dazzling performance, as the president pivots from pugilistic to professorial, from left to right. We know the president comes through with the rhetoric in the clutch. But the true test of his presidency is no longer what he says he will do or how he says it.

The test is whether Obama and his team wage a credible and effective fight for financial reform and economy recovery for Main Street, with the same vigor and urgency they threw into the Wall Street bailout. That will take more than a speech or even a series of speeches. It will take a real self-critical assessment of the president's strategy up til now and a tough, savvy and sustained political battle plan in the face of significant obstacles.

Both have been lacking in the president's approach so far. That’s the real pivot he needs to make now, and it has only partly to do with oratorical skills.

Obama’s credibility is suffering because he and his team keep suggesting that they have overseen a recovery that most people aren’t enjoying. They helped engineer a bailout that they say was absolutely necessary that helped the financial sector but left out the rest of us. Obama and his team don’t have credibility because they’re working Capitol Hill as hard as they can, not to create jobs for millions of out of work Americans, but to save the job of one of the few Americans who could have helped forestall both the financial crisis and the Wall Street –friendly bailout but didn’t, Ben Bernanke, head of the Federal Reserve.

Sen. Tom Harkin summed up what many people are feeling in reacting to comments from Tim Geithner, Obama’s treasury secretary who had warned that the stock market would tumble if Bernanke were not confirmed.

Geithner was just acting as a messenger boy for Wall Street, Harkin suggested. “How long will our economic policy be held hostage to Wall Street who threaten us that there’ll be total collapse if we don’t do everything they want?  Wall Street wants Bernanke,” Harkin said. “They’re sending all these signals there’ll be this total collapse if he’s not approved. You know, I’m tired of being held hostage by Wall Street.”

Wall Street doesn’t like key planks of the president’s financial reform plan, like the Consumer Financial Protection Agency and his recently announced plan to separate some of the largest bank’s risky business from its more traditional functions. The Senate’s banking committee chair, Christopher Dodd has signaled he’s ready to surrender on the consumer protection agency. Will the president announce tonight how he and his team plan to win that fight when congressional leaders are giving up? Or will the president treat the consumer protection agency and bank size as just details that should be left up to Congress, as he did in the battle over crucial aspects of health care reform?

A different kind of hostage crisis helped bring down a previous Democratic president. All Jimmy Carter had to grapple with were a bunch of Iranian revolutionaries holding 53 Americans in an embassy in Tehran. President Obama’s challenge is much tougher – 250 million people and our entire political process held hostage by some of the world’s wealthiest corporations and individuals. Carter’s hands were tied. Are Obama’s?

Martin Column / President Barack Obama - 01/27/2010

Barack Obama, Meet Gray Davis

The Massachusetts Massacre rocked the D.C. establishment. But when it comes to political earthquakes, there’s no place like California. A look back at the Golden State’s electricity crisis, when a cautious governor let the state’s taxpayers bear the financial brunt of deregulation and was later ousted, suggests that last Tuesday’s vote was merely a foreshock of what lies ahead unless President Obama and congressional Democrats step up.

Nine years ago, Wall Street energy traders took advantage of California’s newly deregulated electricity market to do what Wall Street always does. By gaming the system, buying and selling electricity contracts multiple times, sending power out of state and ultimately shutting down their power plants to create blackouts, the speculators drove the price of electricity through the roof, until the state’s utilities collapsed and the California economy seized up. It was a massive windfall for Wall Street.

Although deregulation had been signed into law by Republican Governor Pete Wilson, it didn’t take full effect for several years. By the time deregulation proved to be the disaster myself and other consumer advocates predicted it would be, the Governor of California was Gray Davis, a moderate Democrat who was on the short list of contenders for the Presidency in 2004.

Then the lights went off – in middle of January, when consumption in California is at its lowest of the year. The energy industry said its plants were down for maintenance. The Bush Administration blamed California for not building enough power plants. But anyone not on the industry’s payroll or blinded by worship of the free market could figure out that California was being scammed, big time, by an artificial shortage.

With traffic signals dark and businesses shutting down, we called upon Governor Davis to send in the National Guard, seize control of the power plants, and turn the juice back on.

Davis didn’t know what to do. Deregulation wasn’t his idea, but it melted down on his watch. We later heard that representatives of the California Public Utilities Commission and some of the state’s utility companies had privately urged him to use the power of eminent domain to take over the plants. But Davis declined.

Instead, he brought in Wall Street advisors from firms like the Blackstone Group to guide him. At that point, the state’s utility companies had run out of money to pay for electricity. The energy companies refused to generate any more electricity unless the state of California – the taxpayers – stepped in. The Wall Street rating agencies piled on, threatening to downgrade the state’s credit rating if Sacramento didn’t agree. It was “blackout blackmail,” but Davis’s Wall Street advisors convinced him that it was the only solution, and he capitulated.

California borrowed tens of billions of dollars to pay the energy companies their vastly inflated prices for electricity. Our electricity bills will reflect that debt for another 20 years. Meanwhile, Wall Street firms reaped billions of dollars – from the phony crisis, and from the bonds that were floated to pay for it.

The lights came back on. But California voters never forgot how Gray Davis handled the confrontation between Wall Street and Main Street. And when an action figure from the movies gave them an opportunity, they terminated Davis’s political career.

Similar forces were at work in the Massachusetts election. Bay State voters were simply the first in 2010 to have the opportunity to express their dismay at how Washington has handled the financial crash that Wall Street engineered.

Like Davis, President Obama wasn’t even on the scene when Congress and federal regulators dismantled the Depression era safeguards that protected us against a speculation-driven collapse. But when confronted with an unprecedented crisis, President Obama, like Governor Davis, choked.

Instead of using every measure of his presidential authority to stop the speculation, punish the perpetrators, reform the financial system and relieve struggling Americans, Obama brought in a cadre of Wall Street players whose advice was, not surprisingly, to spend trillions of taxpayer dollars to bail out the banks, credit card companies and hedge funds, and let Wall Street go back to business as usual with barely a slap on the wrist. The hundreds of millions of Americans who didn’t qualify for a federal bailout were left empty-handed.

Like Davis, Obama will have a couple of years to turn this political and personal debacle around.

Putting a cap on the interest rates we pay to borrow our own money from banks and credit card firms would help millions of consumers weather the coming months and get the economy going again.  Replacing Geithner, Summers and others who used to work for the industry with a few Nobel Laureates like Joseph Stiglitz who warned of the coming collapse would be good for the White House, now trapped in its own pro-Wall Street bubble. Last week, Obama proposed breaking up the too-big-to-fail banks, which would prevent more reckless speculation and future crash/bailouts. But Americans now wonder if the President will follow his words with deeds, or surrender to the industry lobbyists without a fight, as he did before.

Whether Obama will find the courage that eluded Gray Davis remains to be seen.

Harvey Column / President Barack Obama / Too Big To Fail - 01/25/2010

"Apology Accepted, Captain Needa"

It’s not about “sorry” anymore.

Even before the Wall Street titans were sworn in last week, it appeared as if the goal of the Financial Crisis Inquiry Commission’s chair, Californian Phil Angelides, was to wring an apology from the men whose companies led the nation into an economic abyss. Whereas most Americans, let me venture, would like to wring their necks.

About twenty-five years ago, I wrote about “inseki jishoku,” the Japanese tradition of accepting responsibility for one’s actions and resigning one’s position as penitence. “These social balancing mechanisms are powerfully ingrained within the Japanese culture. In business activity, they create by necessity a ‘state of intimacy’ among management and employees,” William Ouchi, a management expert, told me at the time. I suggested that there would be less corporate crime in this country if American CEOs embraced a similar approach. 

That never happened.

So what would be the point of a symbolic apology from the titans of the Money Industry – assuming they would be willing to offer one (they tried hard not to, in the event)?

No amount of apology is going to salve the grievous wound in the American psyche as the banks’ profits and bonuses break records.

Like most Americans, I am having a hard time getting my head around how these companies can claim to be earning a “profit” and their executives billions of dollars in extra compensation after American taxpayers were forced to pitch in trillions of dollars to keep the companies afloat.

The truth is that they were able to get away with it because no one in Washington ever imposed any kind of quid pro quo for the bailout.

No cap on the exorbitant interest rates we now pay to borrow our own money from the credit card companies, for example.

No relief for people trying to keep up with their mortgages and pay the rest of the bills.

If symbolism is what this is all about, I say we’ve moved beyond the “apology” stage. How about sending some of these people to jail for twenty years? Or is it "legal" to destroy an economy and cost Americans their life savings and jobs? I had hoped the Angelides investigation would be the beginning of an intensive investigation that, like the Watergate hearings, would lead to holding people criminally accountable for their actions. Not so far, at least.

As I watched the politicians and the leaders of Goldman Sachs, Chase and Bank of America sashay around an apology at the witness table, it reminded me of a scene from the Empire Strikes Back. Han Solo and the Millenium Falcon have just managed to elude Darth Vader’s entire fleet of starships. Informed that Vader wants an update on the search, Captain Needa replies, “I shall assume full responsibility for losing them, and apologize to Lord Vader.”  Vader, using the Force, strangles him. “Apology accepted, Captain Needa.”

Executive Pay / Financial Crisis Inquiry Commission / Harvey Column - 01/18/2010

Angelides Panel Day 2: Bair, But No Flair

The first two days of the long-awaited Financial Crisis Inquiry Commission hearings have been largely rambling and listless, with commissioners leading witnesses around the same debates and issues that even casual observers of the meltdown and bailout have heard many times.

Those with patience were rewarded Thursday with some nuggets of straight talk from FDIC’s Sheila Bair and state regulators skeptical of the benefits of financial innovation.

Phil Angelides is getting some raves for his clash with the head of Goldman-Sachs Wednesday and his knowledge of how the financial system works. Angelides compared Goldman to a used car salesman selling vehicles with bad brakes, and chided the firm’s chairman for describing the financial meltdown as a natural disaster like a hurricane.

I’m not buying it.

One dustup in the middle of two days of hearings did nothing to illuminate the meltdown. Goldman’s thick-skinned and well-paid Blankfein has already stared down the president of the United States and Congress. I doubt he’s going to change course after Angelides’ comments.

Angelides, his vice-chair Bill Thomas and the other commissioners seem to have no sense of urgency or flair for how to hold a public hearing. Angelides and company are either unprepared or appear not to have the stomach to bring out the story in a compelling way or hold bankers and regulators publicly accountable.

We have a long, proud history in this country of public hearings that focused on key issues, electrified the country, and galvanized political change, starting with the hearings on which the current panel is based, the 1930s Senate probe into the financial shenanigans preceeding the stock market crash, headed by Ferdinand Pecora.

Michael A. Perino, a professor specializing in securities regulation at St. John's University School of Law who's writing a book about Pecora, told "Bill Moyers Journal" that Pecora took complex financial transactions and turned them into simple morality plays. “Pecora was, if nothing else, a brilliant lawyer. He knew how to ask questions. He was a pit bull. He would not let people get away with hemming and hawing and hedging their answers. And he would go after them, politely, of course. But he would go after them until he got the answer he wanted.”

In the early 1950s Sen. Estes Kefauver went after organized crime. Later in the decade, Sen. Robert Kennedy targeted corrupt union bosses.  In the 1970s, the country was riveted by the Senate hearings into the Watergate scandal, led by a superb lawyer named Sam Dash.

Each of those hearings, from Pecora to Watergate, was characterized by relentless preparation, tenacious questioning and savvy stage managing.

Dash unfolded the Watergate story like an episode of the old courtroom drama Perry Mason. It’s worth quoting Dash’s method at length for the stark contrast with Angelides.

“Having been a trial lawyer, I know that you begin a trial by starting at the very beginning,” Dash told NPR’s “On the Media” in 2003.  “It's like a detective story. In this particular case, there was the Watergate burglary; there were the cops that arrested the burglars. And then I would bring in a number of accusers like John Dean who had been counsel to the president who was pointing the finger at the president and [H.R.] Haldeman and [John] Erlichman, and so I was setting up this tension of the police work, the work of the people who were involved as co-conspirators, who were accusing, and then ultimately bring the accused – Haldeman, [John] Mitchell, and Ehrlichman – and in order to make sure that our story would be told in a consecutive and interesting fashion, every witness that I called had been prior called, before an executive committee.

“In other words I knew exactly what my questions were going to be and I knew exactly what the answers were going to be so that I could put it in a form that this would come out like a story, and I think it, it succeeded in the sense that the American people were glued to their television sets waiting for the next episode.”

In Thursday’s session we got the attorney general, Eric Holder, touting his successful prosecution of Ponzi schemer Bernard Madoff and other cases that had nothing to do with the financial crisis. His office continues to investigate 2,800 mortgage fraud cases, Holder said.

No commissioner asked Holder any follow-ups about the recent failed prosecution of Bear Stearns hedge fund managers who were acquitted of lying to their clients about the funds’ mortgage investments, or lessons that the Justice Department might have learned from that embarrassing defeat.

Nor did the commissioners ask SEC chief Mary Schapiro, seated close by Holder, about the SEC’s colossal failure in ignoring repeated warnings about Madoff’s crooked deals.

What’s particularly frustrating is that Angelides appears to have the seeds of a theme: how banks and regulators ignored warnings of trouble prior to the meltdown. He has asked a couple of times about a 2004 FBI report that warned of a looming explosion of mortgage fraud. Surprisingly, though Angelides had raised it Wednesday with the bankers, when Angelides asked Holder about it Thursday, Holder replied that he wasn’t familiar with the warning but said, “We’ll look into that.”

That’s some indication of just how seriously the country’s top law enforcement officer is taking the hearings.

The commission’s second day of hearings focused on regulatory efforts of the SEC and FDIC as well as state efforts at financial regulation.

Amid strong lobbying by the big banks, state regulators have been largely pre-empted from financial regulation. Whether or not to give states back that authority is a key point of contention in on-going debate over financial reform; financial institutions continue to bitterly oppose it.

Sheila Bair, FDIC chair, whose strong voice for reform has sometimes been drowned out by those of other members of the Obama economic team, got a chance Thursday to reiterate her view of the failures that contributed to the crisis.

“Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities,” Bair said. Record profits across the banking sector, Bair added, also served to limit “second-guessing” among the regulatory community.

The Texas securities commissioner, Denise Crawford, also offered a sharp perspective not usually heard either on Wall Street or in Washington. “The great minds of Wall Street are probably right now coming up with new securitization products,” she told the commissioners. “It's not just mortgages. It's the entire structure of Wall Street and the super-wealthy that create the demand for new speculative products.”

Financial Crisis Inquiry Commission / Martin Column - 01/14/2010

Rating Wall Street's New Sheriff

By Martin Berg

In the 1930s, the Senate Banking committee appointed a no-nonsense assistant district attorney named Ferdinand Pecora to lead an investigation into the causes of the stock crash of 1929.

Pecora held hearings that were equal parts public spectacle and tough scrutiny of the financial industry’s abuses. His investigation, closely followed by an angry American public, led to a raft of reforms of the banking system, most notably the Glass- Steagal Act, which kept the federally guaranteed business of making loans and taking deposits separate from other, riskier aspects of banking and investing.

Now Congress has appointed a financial inquiry commission to explore our recent financial meltdown.

The panel will not be headed by a hard-nosed prosecutor but by a real estate developer who became Democratic California treasurer from 1999 to 2007 and then an unsuccessful gubernatorial candidate, Phil Angelides.

Uncategorized - 11/18/2009

Heads banks win, tails taxpayers lose

Remember when high risk and reckless trading led to economic collapse?

That was so five minutes ago.

Goldman-Sachs is back to its old tricks, roaring to record profits from high-risk trading - and the federal government is aiding and abetting the whole thing.

You might have thought the feds would be discouraging Goldman from using the economy as its private casino, but that’s far from the case.

Goldman-Sachs / Martin Column - 09/15/2009