Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. More on the FCIC HearingsHere is something from The Nation; it is somewhat in contradiction to what I posted late last week (here), which portrayed the hearings as letting Wall Street off the hook, whereas this piece finds the testimony (and the quesstioning?) pretty damning of Wall Street, regulators, and ratings agencies, but says that the media have stopped covering the hearings. Sheila Bair's testimony was great; click here for a pdf of her full testimony.Financial Crisis Inquiry Commission Turns Up the Heat By Greg Kaufmann | January 15, 2010 Two days of Financial Crisis Inquiry Commission hearings have me rattled about how little has changed about our financial system and how much is still at risk. They also have me wondering this: where the hell are the media? For the first day of panels, reporters were squeezed together in the back rows after filling more reserved seating than I've seen at any prior hearing during this session of Congress. But as I wrote previously, after the banksters had preened for the cameras and recited their testimony like four schoolboys BSing their way through an oral report, the press vanished, missing out on more candid and informative witnesses. Yesterday, day two of the hearings, maybe a dozen reporters attended, fewer than were at for the press conference afterward. What did they miss? For starters, FDIC Chairman Sheila Bair testified that the credit-default swaps (CDS) market still poses a systemic threat and that even she can't access CDS information to accurately assess financial institutions' exposure. Bair and SEC Chairman Mary Schapiro were in agreement with Commission Chair Phil Angelides's assessment that the credit rating agencies were "proved to be worthless and remain so today," given that they are paid by the very Wall Street firms who are profiting from AAA-rated securitized assets. State attorneys general Lisa Madigan of Illinois and John Suthers of Colorado revealed that not only were their warnings about unscrupulous and predatory lending practices ignored but that their investigations were actively thwarted by federal regulators who in turn did nothing--under the guise of pre-emption. Madigan also described how rate sheets reveal that Wall Street paid mortgage brokers and loan officers more for risky mortgages--with low teaser rates, pre-payment penalties, low or no documentation--because the consequent higher interest rate paid by the borrower would bring in more income. Wall Street wasn't the victim of bad underwriting that it claims to be; indeed, it incentivized it. Denise Voigt Crawford, a Texas securities regulator for twenty-eight years, discussed the revolving door between agencies and the industries they regulate, and the "chilling effect [it has] on the zeal with which you regulate." Schapiro, Bair and Madigan argued that Wall Street should have to "skin in the game" when securitizing assets. As things stand now they sell them with a bought and paid for AAA-rating, and then take their profits even if the underlying assets are worthless. Madigan said of mortgage-backed securities, "At the end of the day, the people who had the risk were on the very front end, the borrower, and on the very back end, the investor. All the other market participants were paid along the way, and they didn't hold on to any of that risk." Bair said the agency that could have done something about subprime products early on--when it had a report on problems back in 2000--was the Fed. "I think the only place to tackle that on a system-wide basis for both banks and non-banks was through...the Fed [which had] the authority to apply rules against abusive lending across the board to both banks and non-banks," said Bair. "If we had had some good strong constraints at that time, just simple standards like you've got to document income and make sure they can repay the loan--not just at the start, but at the reset rate as well--we could have avoided a lot of this." So why didn't the Fed and other federal agencies act? "It can be very difficult to take away the punch bowl when, you know, people are making money," said Bair. She also talked about "pushback" from both the industry and the Hill--as late as 2007-- when the FDIC tried to "tighten up" on subprime mortgages and commercial real estate. Reforms discussed included a systemic risk council, a consumer financial protection agency, an industry-funded mechanism so that large firms can be broken up and sold off without taxpayer money, greater disclosure of compensation structures and a single clearinghouse for derivatives like credit-default swaps. But the task of this commission isn't to open its hearings by announcing the necessary reforms. It's to tell the story of what caused this meltdown, which should galvanize public demand for the necessary reforms. In that regard I think the commission is off to a decent start. They are breaking down tough concepts, showing the interconnectedness between Wall Street, legislators and regulators and fishing with dynamite when it comes to exposing bad actors. But time is short--the FCIC's report is due in December of this year. It's going to have to be fearless, and build momentum quickly by bringing in big players and asking them tough questions. That's the only way a bipartisan populist backlash will fight for reform--and it's the only way the media might consider showing up too. Read the original article. Labels: Credit Default Swaps, financial crisis, Financial Crisis Inquiry Commission, Sheila Bair, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Change Wall Street can believe in (Holly Sklar)Hat-tip to Mike P.By Holly Sklar Distributed by McClatchy Tribune News Service, 11/6/09 Copyright 2009 Holly Sklar Wall Street is doing to America what private equity firms did to Simmons Bedding and many other productive companies. Taking control with borrowed money, stripping assets, slashing jobs and cashing out. Taxpayer bailouts saved Wall Street from choking on its own greed. Now, as the Wall Street Journal reports, "Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year -- a record high." $140 billion is more than the combined budgets of the U.S. Departments of Commerce, Education, Energy, Housing and Urban Development, the National Science Foundation and the Environmental Protection Agency. Typical workers, meanwhile, make less today adjusting for inflation than they did in the 1970s. Wall Street rewarded CEOs who cut employee wages and benefits and offshored manufacturing, services, and research and development; feasted on Bush's tax cuts; turned mortgages into loan sharking; and vacuumed up home equity, college funds, retirement funds and other private and public investments into their rigged casino. Goldman Sachs, for example, "peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst," McClatchy reports in a new investigative series. The Great Depression gave way to the New Deal. The Great Recession has become the Great Ripoff. The TARP inspector general's latest report to Congress says, "The firms that were 'too big to fail' ... are in many cases bigger still, many as a result of Government-supported and -sponsored mergers and acquisitions; the inherently conflicted rating agencies that failed to warn of the risks leading up to the financial crisis are still just as conflicted; and the recent rebound in big bank stock prices risks removing the urgency of dealing with the system's fundamental problems." Enabled by the Bush and Obama administrations, the megabanks are lending less and gambling more -- using taxpayer money to pay bonuses, float a new stock market bubble and make even riskier bets. The U.S. Treasury and Federal Reserve have become Wall Street's ATMs, while unemployment, foreclosures and homelessness rise, states slash public services, and small businesses are starved of credit. Outside the TARP, trillions of dollars are flowing to the banksters in the form of near-zero interest loans, bond guarantees and extreme leverage for toxic assets. You can follow the money at www.nomiprins.com. Nomi Prins, a former managing director at Goldman Sachs, is author of "It Takes a Pillage." The megabanks are not too big to fail. They're too big and irresponsible to exist. Just months after taking office in 1933, President Roosevelt signed into law the Glass-Steagall Act, which separated the commercial banking of savings, checking and loans from investment banks doing underwriting and speculative trading. The former got depositor insurance, not the latter. Glass-Steagall lasted until Citigroup and other power players killed it in 1999 through the Financial Services Modernization Act, taking us back to the pre-New Deal casino economy on steroids. Now former Citigroup CEO John Reed has joined the growing call to split commercial banking and investment. In 2000, Congress passed the Commodity Futures Modernization Act, ignoring the warnings of Commodity Futures Trading Commission head Brooksley Born who said that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy." By 2002, the four largest bank holding companies -- Bank of America, JP Morgan Chase, Wells Fargo and Citigroup -- had 27 percent of FDIC-insured bank assets. Now, reports the Economic Policy Institute, they have nearly half. They overlap with the biggest derivatives dealers -- JP Morgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup. The government heavily subsidizes the megabanks, but it's the small banks that provide higher savings interest, lower fees, lower loan and credit card rates, and do much of the lending to small business, who in turn create most new jobs. Behind their Main Street rhetoric, Congress and the Obama administration have so far been the change Wall Street can believe in. The administration and Federal Reserve are loaded with revolving door Wall Streeters and their proteges. Campaign donors and lobbyists are working Congress to minimize and distort reform. Make your voices heard. We need to enact tough regulations and bust the banks who busted our economy -- before they do it again. Holly Sklar is the author of "Raising the Minimum Wage in Hard Times" (www.letjusticeroll.org) and "Raise the Floor: Wages and Policies That Work for All of Us." Labels: bailout, financial crisis, Holly Sklar, Nomi Prins, TARP program, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Pensions: The Next Casualty of Wall StreetFrom Mark Brenner at Labor Notes:Pensions: The Next Casualty of Wall Street By Mark Brenner Nobody wants to admit it, but the next casualty of the Wall Street meltdown will probably be your golden years. For years corporations have been trying to choke the life out of traditional pensions, working hard to get out from under the risk—and the cost—of providing for their retirees. Between last year's credit crunch and changes to federal pension laws, they may get their wish. Nearly $4 trillion worth of retirement savings were wiped out in the first weeks of the 2008 financial freefall. Half of the drop was concentrated in traditional pension plans, also known as defined-benefit plans. While most workers in these plans haven't had their monthly benefits cut, unlike the 46 million people riding the stock market with 401(k) defined-contribution plans, the storm clouds are gathering. Labor needs a strategy to protect what we've won. But holding our ground requires moving from defense to offense. If the pension crisis is going to be solved for union members, it has to be solved for everyone. UNCOMFORTABLE ARITHMETIC Even before the financial crisis, traditional pensions were a vanishing breed. Thirty years ago more than a third of the private sector workforce had traditional pensions. Last year that number was down to 16 percent. Driving the decline were employers looking to get off cheap, eliminating pensions entirely when they could get away with it, and when they couldn't, shifting to 401(k)s. These programs were legalized in 1978 and were originally designed to supplement traditional pensions. Now they're choking them out like kudzu. Corporations got a great deal, paying about half what they used to towards their workers' retirement by the '90s. Even more important—as anyone who has opened their 401(k) statement recently can attest—the move shifted risk off companies and onto us. Traditional pensions were a collective solution to a collective problem. Young and old contributing together smoothed out insecurity for all. Now it's just you and the stock market—with far less in your pocket. Even before the crash, studies showed that 401(k)s leave workers with 10 to 33 percent of what traditional pensions provide. Given the 30-year squeeze on wages, most people haven't saved much either, which explains why more than half of all 401(k) participants have less than $75,000 when they retire. WHAT'S IN STORE? Even for those with superior defined-benefit plans, the last 20 years have been rocky. Companies spent much of the 1990s gaming the system, siphoning off pension funds to pad the bottom line. At the start of this year the nation's defined-benefit pension plans had only about 75 percent of what they owed participants. Companies may need to contribute as much as $100 billion to cover these gaps. Although Congress waived compliance with new pension rules this year, the law will eventually take effect, and will force employers to cover these pension gaps. Rather than clean up their act, more and more employers are looking for the exit. By April of this year nearly a third of America's largest companies had frozen their pension plans. Many others are invoking the nuclear option, declaring bankruptcy as a way to unload their pension plans on the taxpayers. Unfortunately, the Pension Benefit Guaranty Corporation (PBGC), established in 1975 to backstop private sector pensions, is already reeling from a decade of high-profile and expensive pension defaults at companies like United Airlines and steelmaker LTV. Nine of the 10 largest pension defaults in history occurred since 2000, leaving the PBGC with a deficit of $11 billion at the end of 2008. That gap could swell to more than $100 billion over the next few years, amounting to a backdoor bailout for big corporations, and a bitter pill for abandoned retirees. Workers at Republic Steel saw first hand how it works when they had their pensions cut by $1,000 a month in 2002 by the PBGC and then cut again in 2004. Five workers from the Lorain, Ohio, plant committed suicide after the first time their pension was diminished. In the second round of cuts, retirees like Bruce Bostick, former grievance chair for USW Local 1104, saw their retirements fall from $1,047 a month to $125. The situation for public sector workers isn't much better. Although 80 percent of public employees have traditional pensions, those benefits are now in the cross-hairs of conservative and liberal politicians. Two-thirds of public sector pension plans are underfunded—to the tune of $430 billion—and state and local budget crises are pitting taxpayers against public employees from California to Maine. ANCHORING RETIREMENT For nearly 20 years the various financial bubbles—from the dot-com frenzy of the 1990s to the recent housing market run-up—papered over the urgent need to address the faltering retirement system. Wall Street's collapse last year revealed how the current patchwork of retirement plans is failing almost everyone. As with health benefits, union workers with stable pensions increasingly find themselves on an island of security in a sea of uncertainty. But the water is rising rapidly. As the debate over the auto bailout and state budget crises revealed, defending your own decent pension is tough work when half the workers in the country don't have any retirement at all. The PBGC—which has been swimming in red ink since 2002—is currently set up to pay less than half of what people were promised. If the funding gaps widen, it could fall to pennies on the dollar. There will be calls to bail the PBGC out—which needs to happen—1.2 million people now depend on it. A sensible demand is to make it function more like the FDIC, by guaranteeing 100 percent of pension benefits up to a reasonable threshold. But reform can't stop there. If it does, workers are on the same path as before the economic collapse, with a temporary reprieve. Employers will still seek to drive union workers down to non-union standards and dump more risk onto individuals. We need to return to the original vision of Social Security: a program that (like in Western European nations) can actually pay for most of your old-age living expenses. Read the original article. Labels: 401(k), financial crisis, Pension Benefit Guarantee Corporation, pensions, Social Security, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Pay Czar's Ruling on CompensationThe Wall Street Journal, and (scroll down) Naked Capitalism, on compensation czar Kenneth Feinberg's ruling on executive pay at seven bailed-out financial firms:Pay Czar to Slash Compensation at Seven Firms Read the rest of the article. Yves Smith of Naked Capitalism is skeptical: Pay Czar Decides to Collect a Few Scalps, a Sign of Weakness Read the original post. Labels: ceo pay, compensation, Kenneth Feinberg, Naked Capitalism, Wall Street, Wall Street bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Life Insurance SecuritizationIs Obama planning to kill grandma? Probably not, unless grandma is Afghani or Pakistani, and the murder weapon is an aerial drone. Or maybe you consider capitulation to private health insurance companies in health care reform an indirect way of killing grandma, given that the true death panels are the ones convened by those companies to deny coverage to, among other people, some grandmas.But another industry that the Obama industry is busy capitulating to—Wall Street—has figured out another way to profit from grandma's death: securitizing her life insurance. Here's how it works, according to an article in today's New York Times: Investment banks would give policy-holders cash for their policies, which would then be securitized and bundled as "life settlements" (with fees going to the bundlers), sold, traded, resold—just the way subprime mortgages were. And there are similar possibilities for fraud and conflict of interest as with the complex derivatives that played such a big role in the current financial crisis. The most striking aspect of this new scheme, though, is that it bets against grandma: "The earlier the policyholder dies, the bigger the return—though if people live longer than expected, investors could get poor returns or even lose money." Hat-tip to Mike P., who points out: "The article gets better the farther you read. It's like a description of the mortgage bubble written before it happened. You can picture gangs of insurance salesmen ripping through elderly housing complexes, badgering old deaf people to sell their life policies. On the first page of the link, to the left of the article, is a fascinating graph showing that 'the market for mortgage securities has shrunk to less than a fifth of its peak size'—a picture of a bubble." Read the full article. Labels: aerial drones, Afghanistan, health care, health care reform, health insurance, life insurance, life settlements, Obama administration, Pakistan, securitization, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). CIA Hiring Failed Wall Street AnalystsAccording to the Wall Street Journal, the CIA is recruiting out of work financial analysts from Wall Street.Why would they seek out the financial expertise of the people most directly responsible for the global economic meltdown? The CIA now produces a daily Economic Intelligence Brief for President Barack Obama, chronicling economic, political, and leadership developments that could impact the world economic order. We can only hope that this explanation is only a cover for their real mission: covertly placing Wall Street's failed finest in charge of the financial and economic sectors of our worst enemies. --d.f. Labels: CIA, Daniel Fireside, economic meltdown, unemployment, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). American Casino (GritTV)Interview about a new documentary, on GritTV (also new? I hadn't heard of it) with Laura Flanders (whom I remember fondly from Fairness and Accuracy in Reporting's radio program, CounterSpin). Flanders also has an interesting post at the Nation's website. Hat-tip to LF for both of these items.While directing a documentary film on Wall Street and the housing bubble, Leslie Cockburn realized that the very subject of her film had become the greatest story of out time. In American Casino Leslie and Andrew Cockburn followed their characters through Wall Street's collapse, the foreclosure crisis, bankruptcy, and homelessness. According to Cockburn, "We watched whole neighborhoods ravaged by the subprime meltdown. I have spent much of my career filming in war zones and post apocalyptic societies—Somalia, Iraq, Afghanistan. But I never expected such a disaster at home." Leslie and Andrew Cockburn discuss their new film, American Casino and explain how we all lost. Watch the interview here. Labels: Americans for Fairness in Lending, casino capitalism, Counterspin, Laura Flanders, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wall Street Digs InGood online piece from Newsweek from a while ago (April 10th). The subtitle is confusing, though: clearly Obama is getting the message (from Wall St.)!Wall Street Digs In The old system refuses to change. Is Obama getting the message? Michael Hirsh | Newsweek Web Exclusive Not long ago, a group of skeptical Democratic senators met at the White House with President Obama, his chief economic adviser, Larry Summers, and Treasury Secretary Tim Geithner. The six senators—most of them centrists, joined by one left-leaning independent, Vermont's Bernie Sanders—said that while they supported Obama, they were worried. The financial reform policies the president was pursuing were not going far enough, they told him, and the people Obama was choosing as his regulators were not going to change things fundamentally enough. His appointed officials and nominees were products of the very system that brought us all this economic grief; they would tinker with the system but in the end leave Wall Street, and its practices, mostly intact, the senators suggested politely. In addition to Sanders, the senators at the meeting were Maria Cantwell, Byron Dorgan, Dianne Feinstein, Carl Levin and Jim Webb. That March 23 gathering, the details of which have gone largely unreported until now, was just a minor flare-up in a larger battle for the future—one that may already be lost. With the financial markets seeming to stabilize in recent weeks, major Wall Street players are digging in against fundamental changes. And while it clearly wants to install serious supervision, the Obama administration—along with other key authorities like the New York Fed—appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression. At issue is whether trading in credit default swaps and other derivatives—and the giant, too-big-to-fail firms that traded them—will be allowed to dominate the financial landscape again once the crisis passes. As things look now, that is likely to happen. And the firms may soon be recapitalized and have a lot more sway in Washington—all of it courtesy of their supporters in the Obama administration. With its Public-Private Investment Program set to bid up and buy toxic assets, the administration is handing these companies another giant federal subsidy. But this time the money will come through the back door, bypassing Congress, mainly via FDIC loans. No one is quite sure how the program will work yet, but it's very likely going to make a lot of the same Wall Street houses much richer at taxpayer expense. Meanwhile, the big banks that still need help will almost certainly get another large infusion once the stress tests are completed by the end of the month. The financial industry isn't leaving anything to chance, however. One sign of a newly assertive Wall Street emerged recently when a bevy of bailed-out firms, including Citigroup, JPMorgan and Goldman Sachs, formed a new lobby calling itself the Coalition for Business Finance Reform. Its goal: to stand against heavy regulation of "over-the-counter" derivatives, in other words customized contracts that are traded off an exchange. Companies like these kinds of contracts, which are agreed to privately between firms, because they allow them to tailor a hedge perfectly against a firm-specific risk for a certain time period. But in order to preserve its right to negotiate these cheaper private contracts, Wall Street is apparently willing to argue for the same lack of public transparency and to permit the systemic risk that led to the crash. Geithner's financial regulation plan, announced April 2, does address some of these concerns. The Treasury chief wants all standardized over-the-counter trading of derivatives to go through an industry clearinghouse, which will give the government more oversight. Geithner said he wants to require "systemically important" firms to reserve more capital. He also wants to rein in "customized" derivatives contracts—those agreed to privately between firms. Whereas once these trades went totally unregulated, Geithner would require that they be "reported to trade repositories and be subject to robust standards" for documenting and collateralizing, among other new rules. But it's unlikely this will do much to change Wall Street. Geithner's new rules would allow the over-the-counter market to boom again, orchestrated by global giants that will continue to be "too big to fail" (they may have to be rescued again someday, in other words). And most of it will still occur largely out of sight of regulated exchanges. The response favored by the administration, the Federal Reserve and even many in Congress is to create a new all-knowing "systemic risk regulator" with as-yet-undetermined powers. Is such a person sitting at 30,000 feet really going to be able to keep up with all this onrushing complexity, especially as over-the-counter trading resumes in quiet places around the world? It is a triumph of hope over experience to think so. Meanwhile, up in Manhattan, the New York Fed has been conducting meetings on future regulation with a group of major Street insiders and their traditional regulators. At the most recent meeting, on April 1, they agreed on creating central clearinghouses for trading and "trade-information warehouses" that will track market data far better than before. But they have resisted anything more dramatic, like requiring all trading to occur on publicly recognized exchanges. Geithner has also put his stock in clearinghouses; he says he only wants to "encourage greater use of exchange-traded instruments." That has placed Geithner at odds with another Democratic senator, Tom Harkin of Iowa, chair of the agriculture committee, who wants all futures contracts traded on exchange. "The senator feels that what he's offering in his bill does include more integrity and transparency than the current Geithner plan," a Harkin spokesman told me. Officials at the firms who took part in the New York Fed meeting and at the Fed maintain that there is little difference between clearinghouses and formal exchanges; both are regulated and both are industry-run, they say. But that misses a major point, says Michael Greenberger, a former top official at the Commodity Futures Trading Commission who has been a critic of the administration's reform efforts. Exchange trading gives the government authority over fraud and manipulation and emergency powers to stop trading, he says, and it creates the kind of public transparency that isn't possible in a privately run clearinghouse. The White House and Treasury Department did not immediately respond to my requests for comment on these issues or on the March 23 meeting (beyond confirming that it took place). But it's noteworthy that more than a month and a half passed before Obama agreed to the meeting, which was prompted by a letter that Dorgan sent in early February. The senators were invited after one of the group, Sanders, put a hold on the nomination of Gary Gensler, Obama's nominee to be head of the Commodity Futures Trading Commission. In an interview, Sanders said he opposes the nomination because Gensler has spent much of his career in Washington working for Wall Street's interests. Gensler, in testimony, has said he has learned from his past mistakes. "At this moment in our history, we need an independent leader who will help create a new culture in the financial marketplace," Sanders said. Instead, the old culture is reasserting itself with a vengeance. All of which runs up against the advice now being dispensed by many of the experts who were most prescient about the crash and its causes—the outsiders, in other words, as opposed to the insiders who are still running the show. Among the outsiders is Nassim Nicholas Taleb, the trader and professor who wrote "The Black Swan: The Impact of the Highly Improbable." Taleb wrote in the Financial Times this week that a fundamental new approach is needed. Not only should firms be prevented from growing too big to fail, "complex derivatives need to be banned because nobody understands them and few are rational enough to know it," he said. Yet even as we are still picking up the debris, we seem to be ready to embrace that world once again. Read the original article. Labels: bailout, Credit Default Swaps, derivatives, financial crisis, Timothy Geithner, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More on AIG Bailout and Goldman's EarningsSent in by our long-lost collective member Faisal Chaudhry:Fresh on the heels of the euphoria in the financial press about Goldman Sachs reported first quarter earnings of $1.66 billion, a recent entry on our blog (Questions About Goldman's Great Quarter) asked how much of the current profit is a result of Goldman's getting full payment for its previous financial bets from AIG. While the answer is not clear yet (and likely will remain so), the Monday edition of Bloomberg's "On the Economy" radio program with Tom Keene and Pim Fox (access the audio here) provided a fascinating look into what Wall Street's take on the matter is. The passage from nonplussed nonchalance to equivocating chagrinned concession that Gary Townsend of Hill Townsend Capital undertakes in the space of two plus minutes is priceless for what it reveals about how these questions are regarded, parsed, and set aside by the lords of finance. (Jump to the 11m 6 sec mark .) With a barely subdued glow, Townsend's monotone first points to Goldman's go getter attitude in proposing to use the newfound confidence it has earned in the eyes of the market by rolling up its sleeves and raising $5 billion in equity through sales of its shares in order to "unpartner" itself from its pesky and "unhappy" TARP-induced relationship with the government. He next lodges his "personal" opinion that the companies "who were not particularly interested in accepting the TARP" funds should not be faced now with any restrictions whatsoever on when they can repay the bailout money and "get out" of said pesky relationship. When faced with the obvious next question from Fox about whether Goldman's first quarter would have been as good as they were had it not taken the TARP money it supposedly "never wanted" in the first place, Townsend's swagger starts fading as he lunges towards evasion by highlighting the "additional expense" from the preferred dividend that Goldman has had to pay out to the government already and that has "presumably, worsened the [first] quarter [earnings]" now being reported already. As if it wasn't curious enough to be apparently unable to parse the type of catastrophic cost Goldman's bottom line might have suffered had the "unwanted" bailout money never been poured into its coffers in the first place, things only get worse when Fox asks Townsend what role the credit default swaps paid out during the quarter to Goldman by AIG (via the "unwanted" moneys the government foisted upon that company) played in the $1.6 billion first quarter. You can hear Townsend start folding under the weight of his own inconsistencies (at the 12m30sec mark) after he is left little choice but to concede that the answer to the "very interesting question" he first suggests awaits more data must certainly be in the affirmative. As he grudgingly concedes "what seems to have happened is that the Government is fulfilling the obligation to Goldman and others on the other side of the CDS's" . Alas, he must let drop that "indeed, the government has provided that value [of the AIG bailout] to Goldman." He is sure, however, to ask rhetorically before closing "[but] isn't that rather obvious?". It would seem that a mere two minutes earlier, of course, it was not, at least, to Townsend's mind. As for Wall Street's collective mind, we won't hold our breath. --FC Labels: AIG, bailout, Bloomberg, Faisal Chaudhry, Goldman Sachs, TARP program, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Frank Rich on Larry SummersA follow-up on the last post (about Harvard money managers lost $11bn): Frank Rich's column in Sunday's New York Times made a nice connection between recent revelations of Larry Summers' $5.2 million hedge fund earnings in 2008 and the fact that Summers, while president of Harvard, chided Cornel West for making a hip-hop album and supposedly thereby neglecting his professorly duties. It turns out that Summers did some real moonlighting while president of Harvard, consulting for the hedge fund Taconic Capital Advisors:On the same Friday that the Labor Department reported the latest jobless numbers, the White House released (in the evening, after the network news) some other telling figures on the financial disclosure forms of its top officials. From those we learned more about how much the bubble's culture permeated this administration. Read the whole column; hat-tip to TM. Labels: financial crisis, Frank Rich, Harvard University, Lawrence Summers, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Virtues of Public Anger, and Need for More Great piece by Glenn Greenwald at Salon.com; hat-tip to Ben C. Ben wrote me: "This article is pretty damn good. I predict that your proposed new title for D&S, 'Jump You Fuckers,' will be conventional wisdom by Sept/Oct." The virtues of public anger and the need for more Glenn Greenwald | Salon | Saturday March 21, 2009 09:08 EDT With lightning speed and lockstep unanimity, opinion-making elites jointly embraced and are now delivering the same message about the public rage triggered this week by the AIG bonus scandal: This scandal is insignificant. It's just a distraction. And, most important of all, public anger is unhelpful and must be contained or, failing that, ignored. This anti-anger consensus among our political elites is exactly wrong. The public rage we're finally seeing is long, long overdue, and appears to be the only force with both the ability and will to impose meaningful checks on continued kleptocratic pillaging and deep-seated corruption in virtually every branch of our establishment institutions. The worst possible thing that could happen now is for this collective rage to subside and for the public to return to its long-standing state of blissful ignorance over what the establishment is actually doing. It makes perfect sense that those who are satisfied with the prevailing order -- because it rewards them in numerous ways -- are desperate to pacify public fury. Thus we find unanimous decrees that public calm (i.e., quiet) be restored. It's a universal dynamic that elites want to keep the masses in a state of silent, disengaged submission, all the better if the masses stay convinced that the elites have their best interests at heart and their welfare is therefore advanced by allowing elites -- the Experts -- to work in peace on our pressing problems, undisrupted and "undistracted" by the need to placate primitive public sentiments. While that framework is arguably reasonable where the establishment class is competent, honest, and restrained, what we have had -- and have -- is exactly the opposite: a political class and financial elite that is rotted to the core and running amok. We've had far too little public rage given the magnitude of this rot, not an excess of rage. What has been missing more than anything else is this: fear on the part of the political and financial class of the public which they have been systematically defrauding and destroying. * * * * * These endless lectures from sober, rational pundits about the relative quantitative insignificance of the AIG bonuses are condescending straw men. Nobody thinks that $165 million in bonuses for the people who destroyed AIG is what has caused the financial crisis. Nobody thinks that recouping those bonuses or having prevented them in the first place would solve or even mitigate systemic collapse. The amounts are miniscule in the context of the broader economic issues. Everyone is aware of that; nobody needs to have that pointed out. As Armando astutely observed, the attempt now to dismiss the anger over the AIG bonuses as the by-product of simple-minded ignorance and/or ideological rigidity (class warfare! crass populism!) is quite similar to how anti-war arguments were stigmatized before the attack on Iraq : ignore the screeching pacifists and let the sober Experts make the decisions, for they know best. The AIG scandal is significant and has resonated so powerfully because it is a microscope that enables the public to see what and who has wreaked the destruction that threatens their security and future and, most important of all, to realize that these practices haven't ended and the perpetrators haven't been punished. The opposite is true: those who caused the crisis continue to exert control over what happens and continue to have huge amounts of public money transferred in order to enrich them. Eliot Spitzer is absolutely right that, even at AIG, there are far larger scandals than the bonuses, such as the undiscounted compensation of AIG's counter-parties such as Goldman Sachs (and just by the way: it is indescribably symbolic that Spitzer has been punished and disgraced for his acts of consensual adult sex while the targets of his prescient Wall St. investigations, who basically destroyed the world economy, remain protected and empowered). But the bonus scandal is illustrative of why the crisis happened, who caused it to happen, and the ongoing political dominance of the perpetrators. It is, as Robert Reich put it, "a nightmarish metaphor for the Obama Administration's problems administering the bailout of Wall Street." The financial crisis has merely unmasked the corruption and rot in our establishment institutions that are staggering in magnitude and reach. Just as the Iraq War was not the by-product of wrongdoing by a few stray bad political and media actors but instead was reflective of our broken institutions generally, the financial crisis is a fundamental indictment on the way the country functions and of its ruling class. What would be unhealthy is if there weren't substantial amounts of public rage in the face of these revelations. Read the rest of the article. Labels: AIG, anger, bailout, financial crisis, Glenn Greenwald, populism, ruling class, Timothy Geithner, Wall Street, Wall Street bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Bit More on Madoff and WieselIn my earlier post expanding on Joe Nocera's column on Madoff's victims, I'd meant to include an excerpt from this article from a while back in the New Yorker. The article was compelling for going at least some of the way toward answering a question that many of us have asked ourselves, but maybe never expected to get an answer: Who falls for those Nigerian scam emails? I mean, if they keep sending them, the scammers must be finding victims. But who? The article profiles an ordained minister and Christian psychotherapist from the suburbs of Boston who got drawn in, and was victimized, by some Nigerian email scammers in a check fraud scheme—and was prosecuted for his role in the scheme. Part of the burden of the article—besides answering that question we thought no one ever would—is to assess the victim's culpability. He was victimized, but he did also participate in fraud. There's a paragraph early in the article that struck me, and that I've been thinking about in recent weeks as the Madoff victims have their say (including especially Elie Wiesel's public expressions of scorn and retributive sentiment for Madoff):Robert B. Reich, the former Labor Secretary, who has studied the psychology of market behavior, says, "American culture is uniquely prone to the 'too good to miss' fallacy. 'Opportunity' is our favorite word. What may seem reckless and feckless and hapless to people in many parts of the world seems a justifiable risk to Americans." But appetite for risk is only part of it. A mark must be willing to pursue a fortune of questionable origin. The mind-set was best explained by the linguist David W. Maurer in his classic 1940 book, "The Big Con": "As the lust for large and easy profits is fanned into a hot flame, the mark puts all his scruples behind him. He closes out his bank account, liquidates his property, borrows from his friends, embezzles from his employer or his clients. In the mad frenzy of cheating someone else, he is unaware of the fact that he is the real victim, carefully selected and fatted for the kill. Thus arises the trite but none the less sage maxim: 'You can't cheat an honest man.'" The whole article is definitely worth a read. Labels: Bernard Madoff, control fraud, Elie Wiesel, Greed, Nigerian Scam, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Madoff's Accomplices: His Victims (Nocera)Finally, somebody in a mainstream publication says something close to what I have been thinking about the Madoff victims. In a column last Friday entitled Madoff Had Accomplices: His Victims, Joe Nocera argues that the investors whom Madoff cheated were irresponsible. As I will argue below, I think they were showed not just personal irresponsibility, but possibly also ethical and political irresponsibility. But here's Nocera:[J]ust about anybody who actually took the time to kick the tires of Mr. Madoff's operation tended to run in the other direction. James R. Hedges IV, who runs an advisory firm called LJH Global Investments, says that in 1997 he spent two hours asking Mr. Madoff basic questions about his operation. "The explanation of his strategy, the consistency of his returns, the way he withheld information—it was a very clear set of warning signs," said Mr. Hedges. When you look at the list of Madoff victims, it contains a lot of high-profile names—but almost no serious institutional investors or endowments. They insist on knowing the kind of information Mr. Madoff refused to supply. I like Nocero's line of thinking, but I wish he'd gone beyond personal investment advice. There is an argument to be made that Madoff's victims—or some of them, at least—and (it should be added) plenty of other big-money investors, are guilty not only of failing in their duties to themselves to invest their money wisely, but also failing ethically to invest their money in ways that don't harm other people. And if this is true of the Madoff investors, then it's true of a lot of other investors in Wall Street's latest high-flying phase. Take Elie Wiesel, for example. Here are some excerpts from the NY Times article about Wiesel's comments at the Portfolio forum Nocera mentions: Elie Wiesel Levels Scorn at Madoff And this:
Now, the punishment Wiesel describes sounds a lot like torture to me—solidary confinement alone is torture—so I was a little taken aback that Wiesel called for it. But what about a humanitarian and professor of ethics like Wiesel failing to look into the source of his and his foundation's investment profits? In the case of Madoff, the source was theft—Madoff and his accomplices used new investors' money to pay interest to older investors (this is what a Ponzi scheme is). But what if Madoff had just been a "good" (i.e., effective) money-manager (albeit with less consistently, and suspiciously, reliable returns), and had been paying Wiesel and his foundation interest that came from, say, companies that outsourced jobs to sweatshops; leveraged buyouts of companies that were then gutted and resold; companies that pollute; companies engaged in predatory lending; etc. etc.—that is to say, the usual sources of Wall Street megaprofits? Madoff was stealing from people, but many a money-manager who hasn't been branded "the most hated man in New York" (as one of the tabloids, I believe, put it), or called a "monster" on the cover of New York magazine has been complicit in plenty of human misery. Would Wiesel have known? Labels: Bernard Madoff, Elie Wiesel, financial crisis, Joe Nocera, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). WSJ and Hightower on Wall Street CompensationThe bonuses and compensation at Merrill Lynch are front-page news in today's Wall Street Journal; here's the teaser from their site:Merrill's $10 Million Men Here's the link, but it's a subscriber-only article. Meanwhile, here's a piece by Jim Hightower on Wall Street compensation from his website: EX-WALL STREET CEO'S STILL GETTING PERKS Labels: Andrea Orcel, ceo pay, Charles Prince, Citigroup, Jim Hightower, Merrill Lynch, Sandy Weill, Wall Street, Wall Street bonuses Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Elderly NYers Angry as Crisis Hits PoorestMore from Reuters; hat-tip to Bob F. More mentions of Madoff. A sweet picture accompanies this article, too. You can just hear them being interviewed.By Claudia Parsons | Tue Feb 17, 2009 1:28pm EST NEW YORK (Reuters) - From housebound grandmothers who rely on charity meal deliveries, to ailing retirees who cannot pay rising costs for medications, older Americans feeling the pinch of the financial crisis are getting angry and forming groups with names like "Senior Outrage." In New York, with city and state tax revenues tumbling, benefits and services to the elderly are being cut, and many older residents are furiously drawing comparisons to the billions of dollars spent to bail out banks -- and pay Wall Street bonuses. Dolores Green, 68, retired as a home help worker and lives on a government Social Security check of $740 a month. She pays $719 a month in rent, leaving just $21 for everything else. To eat, she relies on the federal food stamp assistance program, and worries that her cost for some medication she needs for her diabetes has gone up to $8 from $3. To get by, she said: "I run errands for seniors. They may hand me $2 or $3 or something." Green says she sees more people seeking government assistance, such as her daughter, who lost her job after 25 years. "She's just applied for food stamps, she's got two kids," Green told Reuters at a community center where some 25 elderly New Yorkers were eating a lunch of sandwiches, a gelatin dessert, milk and tomato juice. "That's why she can't help me, because she's got to help her children." "Maybe I'll move in with you," she jokes to her friend Alice Jordan, 80, a retired teacher who suffers from osteoporosis and high blood pressure. Jordan said her food stamp allocation had gradually eroded to $54 a month from $180. When she reads about the well-heeled victims of financier Bernard Madoff's suspected $50 billion Ponzi scheme, she says she wishes they would spare a thought for those who never had such wealth. "Just like this guy Madoff ripped them off, how did they feel when they lost their money and had to change their style of living? Think of us. ... How do you think we feel?" she asked. Read the rest of the article. Labels: Bernard Madoff, elderly, financial crisis, food stamps, ponzi, recession, safety net, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). This Isn't Even Funny AnymoreFrom today's Financial Times:Thanks to Onet? A Polish website, for the link Wall Street 'made rod for own back' By Francesco Guerrera, Nicole Bullock and Julie MacIntosh in New York Published: October 30 2008 23:34 | Last updated: October 30 2008 23:34 Wall Street unwittingly created one of the catalysts for the collapse of Bear Stearns, Lehman Brothers and American International Group by backing new bankruptcy rules that were aimed at insulating banks from the failure of a big client, lawyers and bankers say. The 2005 changes made clear that certain derivatives and financial transactions were exempt from provisions in the bankruptcy code that freeze a failed company’s assets until a court decides how to apportion them among creditors. The new rules were intended to insulate financial companies from the collapse of a large counterparty, such as a hedge fund, by making it easier for them to unwind trades and retrieve collateral. However, experts say the new rules might have accelerated the demise of Bear, Lehman and AIG by removing legal obstacles for banks and hedge funds that wanted to close positions and demand extra collateral from the three companies. Read the rest of the article Labels: AIG, bankruptcy, Bear Stearns, derivatives, financial crisis, financial crisis bailout, Lehman Brothers, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Wall Street and the Return of the RepressedFrom TomDispatch.com; hat-tip to Claire for this one.The Specter of Wall Street Wall Street's Comeback as the Place Americans Love to Hate By Steve Fraser Wall Street sits at the eye of a political hurricane. Its enemies converge from every point on the compass. What a stunning turn of events. For well more than half a century Wall Street has enjoyed a remarkable political immunity, but matters were not always like that. Now, with history marching forward in seven league boots, we are about to revisit a time when the Street functioned as the country's lightning rod, attracting its deepest animosities and most passionate desires for economic justice and democracy. For the better part of a century, from the 1870s through the tumultuous years of the Great Depression and the New Deal, the specter of Wall Street haunted the popular political imagination. For Populists it was the "Great Satan," its stranglehold over the country's credit system being held responsible for driving the family farmer to the edge of extinction and beyond. Read the rest of the article. Labels: bailout, financial crisis, Steve Fraser, TomDispatch.com, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bleak Earnings Swamp StocksJust posted to wsj.com:By PETER A. MCKAY | Faltering profits and fears of global recession sent stocks into a spiral Wednesday, nudging major indicators ever closer to their bear-market lows. The Dow Jones Industrial Average slid for a second straight day, ending down 514.45 points, or 5.7%, at 8519.21, hurt by declines in all 30 of its components. The Dow has tumbled almost 750 points over its two-day slide and now stands about 640 points above its Oct. 10 intraday low, which traders are hoping will hold up as a market trough. Read the rest of the article. Labels: stock market, Wall Street, Wall Street Journal Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Wall Street Coup (Ismael Hossein-zadeh)From the fantastic MRZine.The Wall Street Coup and the Bailout Scam by Ismael Hossein-zadeh The "rescue" plan is not only fraudulent, it is also the wrong medicine for the ailing economy. The Wall Street took the US (and the world) hostage and extracted a heavy ransom. But while the enormous ransom was successfully extracted, there are no guarantees that the hostages will be set free from the shackles of trickle-down economics. On the contrary, there are strong indications that the fraudulent (and perhaps criminal) bailout may turn the current crisis into a protracted agony of a long-bleeding economic depression. Why the Bailout Scam Is More Likely to Fail than to Succeed The bailout scam is doomed to fail because it avoids diagnosis and dodges the heart of the problem: the inability of more than five million homeowners to pay their fraudulently inflated mortgage obligations. Instead of trying to salvage the threatened real assets or homes and save their owners from becoming homeless, the bailout scheme is trying to salvage the phony or fictitious assets of Wall Street gamblers and reward their sins by sending taxpayers' good money after the gamblers' bad money. It focuses on the wrong end of the problem. The apparent rationale for the bailout plan is that, while the injection of tax payers' money into the Wall Street casino may not be fair, it is a necessary evil that will free the "troubled assets" and create liquidity in the financial markets, thereby triggering a much-needed wave of lending, borrowing, and expansion. There are at least five major problems with this argument. Read the rest of the article. Labels: bailout, financial crisis, Ismael Hossein-zadeh, MRZine, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Dow Drops 680--Under 8600From the Wall Street Journal online:By PETER A. MCKAY | OCTOBER 9, 2008, 5:10 P.M. ET The stock market's collapse accelerated Thursday as bank lending remained stubbornly clogged and investors remained unwilling to hold anything except cash and government debt, no matter how tiny the returns for doing so. The Dow Jones Industrial Average declined for a seventh straight day, plunging 678.91 points, or 7.3%, to 8579.19. Blue chips last dipped below the 9000 level five years ago. Thursday's fall was the Dow's third-worst all time in point terms and 11th worst in percentage terms. During its recent losing run, blue chips have fallen by a startling 20.9% and are down 39.4% from their record high, which was hit exactly one year ago. "This is indiscriminate selling," said trader Todd Salamone, of Schaeffer's Investment Research, an analysis and asset-management firm in Cincinnati. "Not until there are massive improvements in the credit markets are we likely to see this really end." Among the Dow's components, General Motors shares plunged 31% after the auto maker's credit ratings and those of its financing unit were put on watch for downgrade by Standard & Poor's. The Dow's financial components suffered as well, with Citigroup dropping 10% and Bank of America falling 11.2%. Exxon Mobil shares fell 11.7% after the front-month crude-oil futures contract settled at $86.59, the lowest settlement since Oct. 23, 2007. Investors worry economic aftershocks from the credit crisis will curb demand for fuel. Investors are generally skeptical that the vast sums of government money that are being pumped into the financial system will do much to unfreeze the credit markets. Economists fear that with companies frozen out of short-term funding sources, a severe recession could result. Markets are beginning to price in such a scenario, analysts say. Read the rest of the article. Labels: Dow Jones Industrial Average, financial crisis, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
