'Politicization' of the Fed (Dean Baker)

by Dollars and Sense

There's an interesting article in today's New York Times about how Ben Bernanke has had to learn politicking, now that some in Congress are eager to provide more oversight of the Federal Reserve. The article discusses Ron Paul's bill that would allow the Government Accountability Office to audit the Fed:

Mr. Paul's bill would require the Government Accountability Office, an arm of the Congress, to complete a wide-ranging assessment of the Fed's financial operations by the end of 2010. The audit would delve into bailouts of individual firms, short-term loans to banks, currency swaps with foreign central banks and the Fed's effort to prop up mortgage lending by purchasing $1.25 trillion in mortgage-related securities.

Mr. Bernanke initially reacted to the bill in almost apocalyptic terms. The G.A.O. audits, he told a House hearing in late June, could lead to a Congressional "takeover" of monetary policy that would be "highly destructive to the stability of the financial system, the dollar and our national economic situation."

That did not go over well with many lawmakers, who were competing to describe the Fed in dark and conspiratorial tones.

Bernie Sanders is sponsoring the Senate version of Paul's bill.

Meanwhile, a Washington Post editorial is claiming that Christopher Dodd's proposed banking regulation would "politicize" the Fed by impinging on its independence in setting monetary policy, to which Dean Baker, in his blog Beat the Press, had this amusing response:

Washington Post: Taking Away the Banks' Control of the Fed is "Politicization"

Yes folks, according to the Washington Post, if the banks don't get to call the shots, then it's politicization. This is not a joke, that is exactly what the Washington Post said in an editorial about Senator Dodd's plan to have the Fed's district bank presidents approved by Congress rather than the banks in the district.

In Washington Post land if we let Pfizer and Merck appoint the directors of the Food and Drug Administration, then we can depoliticize the FDA. We can let Disney and Time-Warner appoint the directors of the Federal Communications Commission to depoliticize the FCC. It's an interesting conception of government.

—Dean Baker

I'm sure those changes are all in the works (and some of them well underway), alas, but in case they aren't, we wish you wouldn't give them any ideas, Dean!

Labels: banking regulation, Ben Bernanke, Bernie Sanders, Christopher Dodd, Dean Baker, Ron Paul

 

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11/11/2009 04:12:00 PM 0 comments

 

The Public Purpose of Banking

by Dollars and Sense

Maybe Goldman Sachs should have used some of its bonus money to hire better P.R. folks—the company has really been taking a beating, and not just because it is "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," as Matt Taibbi put it in Rolling Stone. Really, the company's making it even worse than it has to be.

First (back in October) there was the Goldman Sachs international adviser Brian Griffiths telling people that inequality was good for society as a whole

"We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all," Brian Griffiths, who was a special adviser to former British Prime Minister Margaret Thatcher, said yesterday at a panel discussion at St. Paul's Cathedral in London. The panel's discussion topic was, "What is the place of morality in the marketplace?"

This is true, apparently, because higher compensation encourages more charitable giving. "To whom much is given much is expected," Griffiths said, according to Bloomberg. "There is a sense that if you make money you are expected to give."

Later that month, Goldman Sachs abandoned adorable kittens. No kidding. As reported on the website of New Deal 2.0 (where we notice that a number of D&S authors, and at least one ex-boyfriend of a current D&S co-editor, are among the "braintrusters"), The Villager newspaper in lower Manhattan reported that Goldman Sachs "neglected to pay the vet bills for homeless kittens found in its nearly-completed Battery Park City headquarters." The newspaper offered this apology on Goldman's behalf:

Since Goldman Sachs has been a big part of the Lower Manhattan fabric for almost a century and a half, we'd like to take this opportunity to apologize to the rest of the country on behalf of our neighbor, a financial giant personifying much of what is wrong on Wall St.

Before we get to the multibillion-dollar stuff, we'd first like to apologize that the firm has not yet paid a few thousand dollars of vet bills for the five kittens born in its headquarters building nearing completion in Battery Park City. In August, after our sister publication Downtown Express reported the kittens' discovery, Goldman offered to pay the bills and encourage its employees to adopt the 'BlackBerries.'

It may be just a matter of Goldman waiting to get the vet invoices—we can't imagine they'd stiff kittens while writing out bonus checks worth $23 billion—but the cats still need adoptive homes. (Incidentally, anyone interested in one of these adorable kittens should e-mail their rescuer, the Brotmans, at rbrotpaw--at--aol.com.)

(This was a while back—I doubt any of the kittens are still homeless.)

Now Goldman's CEO, Lloyd Blankfein, is mouthing off to the London Times about how bankers do "God's work." The whole article is terrific, but here's the quotable quote:

Is it possible to make too much money?

"Is it possible to have too much ambition? Is it possible to be too successful?" Blankfein shoots back. "I don't want people in this firm to think that they have accomplished as much for themselves as they can and go on vacation. As the guardian of the interests of the shareholders and, by the way, for the purposes of society, I'd like them to continue to do what they are doing. I don't want to put a cap on their ambition. It's hard for me to argue for a cap on their compensation."

So, it's business as usual, then, regardless of whether it makes most people howl at the moon with rage? Goldman Sachs, this pillar of the free market, breeder of super-citizens, object of envy and awe will go on raking it in, getting richer than God? An impish grin spreads across Blankfein's face. Call him a fat cat who mocks the public. Call him wicked. Call him what you will. He is, he says, just a banker "doing God's work"

See what I mean? They need to hire better P.R. folks or at least forbid travel to London.

This is all a lead-up to the following piece, by Marshall Auerback (also of New Deal 2.0), from Naked Capitalism. Auerback takes Blankfein as his jumping-off point for a discussion of Christopher Dodd's new banking regulation bill.

Attention Lloyd Blankfein: The Public Purpose of Banking

By Marshall Auerback, a fund manager and investment strategist who writes for New Deal 2.0.

It seems odd that days after we were told by Goldman Sachs's CEO, Lloyd Blankfein, that bankers are doing "God's work", we are still having active debates about how to regulate these selfless apostles of capitalism.

The latest foray into financial reform comes from the Senate. Senator Christopher Dodd will propose creating a single U.S. regulator that would strip the Federal Reserve and Federal Deposit Insurance Corp. of bank-supervision authority, according to a report from Bloomberg. Dodd, according to the Bloomberg report, has faulted the U.S. bank regulation system, saying "it encourages charter shopping and a 'race to the bottom' by agencies to win oversight roles." Bloomberg notes that "his proposal goes further than proposals by President Barack Obama and House Financial Services Committee Chairman Barney Frank to merge the OTS and OCC."

Certainly, almost anything is an improvement over the abomination that came out of Barney Frank's committee. But we feel that the 'race to the regulatory bottom' could easily be solved via a simple mechanism: If you don't fall in line with our regulatory requirements, you're simply denied a banking license to operate in this country. Problem solved. The United States is the biggest banking market in the world. Do you think any major bank would willingly vacate this market?

And even if the "too big to fail" behemoths decided to transplant a bunch of their operations elsewhere, the country would still be left with thousands of community banks which could fill the void and better fulfill the public purpose described by Mr Blankfein: namely, to "help companies to grow by helping them to raise capital", rather than extracting their pound of flesh via grotesquely high financial intermediary fees, as is the case today.

We have argued before on New Deal 2.0 that the FDIC is best suited to carry on the role of chief systemic regulator, given its role as deposit insurer. That regulator has the best institutional incentives to be concerned with systemic risk and to be a vigorous regulator. It should be the least subject to regulatory capture (a pervasive problem at the Fed, which is full of quant economists who have virtually no interaction with other Fed examiners).

But WHO controls the banks is ultimately less important than HOW we control the banks' activities. Oversight is all very nice, but at times it pays to get back to first principles. What on earth is the public purpose of these things?

Banks are set up and supported by government for the further benefit of the macro economy via providing a payments system and lending in a way that is specifically defined by regulators. Newsflash: the public purpose of banking is NOT to provide profits per se to shareholders. Rather, the provision of the ability to earn profits is only a tool used to support the attendant public purpose. Banks should only be allowed to lend directly to borrowers, and then service and keep those loans on their own balance sheets. There is no further public purpose served by selling loans or other financial assets to third parties, but there are substantial real costs to government in regulating and supervising those activities. There are severe consequences for failure to adequately regulate and supervise those secondary market activities as well.

Banks should be prohibited from engaging in any secondary market activity because it serves no public purpose and may result in severe social costs in the case of regulatory and supervisory lapses. Some argue that these areas might be profitable for the banks, but this is not a reason to extend government sponsored enterprises into those areas. Therefore, banks should not be allowed to buy (or sell) credit default insurance. The public purpose of banking as a public/private partnership is to allow the private sector to price risk, rather than have the public sector pricing risk through publicly owned banks.

If a bank instead relies on credit default insurance, then it is transferring that pricing of risk to a third party, which is counter to the public purpose of the current public/private banking system. Banks should not be allowed to engage in proprietary trading or any profit-making ventures beyond basic lending. If the public sector wants to venture out of banking for some presumed public purpose it can be done through other outlets.

If the activities of the banks are not facilitating the production and movement of real goods and services what public purpose do they serve? It is clear they have made a small number of people fabulously wealthy. It is also clear that they have damaged the prospects for disadvantaged workers in many parts of the world.

It's more obvious to all of us now that when the system comes unstuck through the complexity of these transactions and the impossibility of correctly pricing risk, the real economies across the globe suffer. The consequences have been devastating in terms of lost employment and income and lost wealth.

All governments should sign an agreement which would make all financial transactions that cannot be shown to facilitate funding for real goods and services illegal. Simple as that. When we keep these principles at the front of the argument, we can see that what Senator Dodd and Congressman Frank are arguing about is akin to how to rearrange the deck chairs on the Titanic.

Read the original post.

Labels: banking regulation, Brian Griffiths, Goldman Sachs, kittens, Lloyd Blankfein, Matt Taibbi, New Deal 2.0

 

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11/11/2009 03:13:00 PM 0 comments

 

Several Items on Banking Regulation

by Dollars and Sense

Several interesting items about financial (re-)regulation, and the unlikelihood of anything approaching adequate regulation getting through Congress, have come across our desk.

First, the business section of Friday's New York Times had a pretty good piece by Joe Nocera on financial regulation, Have Banks No Shame? He partially skewers Barney Frank for watering down the planned regulations, and there are some nice quotes from MIT economist Simon Johnson, a vocal critic of the banking industry. But Nocera ends up endorsing the flawed bill, even with its severely weakened provision for a consumer financial protection agency.

Next, our friends Jane D'Arista and Gerald Epstein and folks at the Political Economy Research Institute have started a new organization of economists pushing for tougher banking regulation:

Economists' Committee for Stable, Accountable, Fair and Efficient Financial Reform
September 2009 -- The Economists' Committee for Stable, Accountable, Fair and Efficient Financial Reform (SAFER) is a focal point, clearinghouse and coordinating mechanism for progressive economists and analysts to gather and present their views on financial re-regulation and reform; to reach, to the degree possible, a consensus on the key issues relating to regulation and reform; and to help incorporate this work into the public debate over these issues that will ensue over the coming six to nine months or so. By bringing these analysts together to speak in a concerted voice, we will be able to broaden the perspective on financial regulation and reform, and enhance our impact on this public debate.

SAFER was founded by economists Gerald Epstein and Jane D'Arista. Read more about them and the other analysts involved with SAFER here.

Next, the Sunlight Foundation's blog has a great post (with this great graphic) about how members of the House Financial Services Committee are "on F.I.R.E":

One year after the biggest economic collapse since the Great Depression, Congress is still debating new financial regulations to protect consumers and prevent risk-taking in the financial sector. The House Committee on Financial Services is currently undertaking the important first step of writing, amending and voting on some of the pieces of the long-proposed financial regulatory reform. While debating these issues top committee members have been the recipients of disproportionate campaign contributions from the very industry that they are tasked with regulating. Twenty-seven committee members have so far received over one-quarter of their contributions from the finance, insurance and real estate (FIRE) sector. This includes Chair Barney Frank, Ranking Member Spencer Bachus, four subcommittee chairs and four subcommittee ranking members. Of the twenty-seven, twelve committee members received over 35% of their contributions in 2009 from the FIRE sector. Ranking Member Bachus, a crucial decision maker on the committee, received 71% of his campaign contributions from the finance, insurance and real estate (FIRE) sector so far this year. (These numbers run from January 1-June 30.) For his career, the Alabama congressman receives 45% of his contributions from the FIRE sector. Bachus leads the committee in his reliance on FIRE sector campaign contributions. Bachus has taking a position in opposition to most of the regulatory reforms. Bachus recently stated in a hearing, “this is absolutely the wrong time to be creating a new government agency empowered not only to ration credit, but to design the financial products offered to consumers.

Read the rest of the post.

Last but not least, the Buffalo News had an article on the conference of post-Keynesians that was held in the rust-belt city last weekend (with D&S classroom readers available at the book exhibit). The article has its charmingly corny moments, starting with the title (get it?) and the first quotation, but it's nice coverage.

Scholars Are "Keynes" on Regulation

Economists Argue Financial Instruments Need More Scrutiny

By George Pyle | The Buffalo News, N.Y. | Oct 10, 2009

Before the financial meltdown, before the housing bubble, even before the dot.com crash, the weakness of the American economy had its roots in the collapse of its industrial base.

That was the argument of a Cornell University scholar, who said Friday that it was therefore appropriate that a conference of economists pondering the roots and the remedies of the Great Recession chose to meet in Buffalo.

"All progressive economists, wherever they live, are residents of Buffalo," said Charles J. Whalen, a Ph.D. economist and former Buffalo resident, in an echo of the speech President John F. Kennedy delivered in West Berlin. "And, therefore, as an economist, I take pride in the words 'Ich bin ein Buffalonian.' "

Whalen was a presenter at the Cross-Border Post Keynesian Conference, a bi-annual gathering of like-minded scholars hosted this year at the Burchfield Penney Art Center by the Buffalo State College economics department. He was among those arguing that an economy that no longer invests in the manufacture of tangible goods finds itself inventing other, much more mysterious things in which to invest and, hopefully, make money.

But, they said, exotic instruments such as securitized mortgage certificates and credit default swaps not only don't provide the industrial infrastructure -- and the jobs -- that the old manufacturing economy built up, they also aren't fully understood by those who create them, those who buy them and those who regulate them. Or those who would regulate them if the law hadn't been changed to allow those financial processes to operate beyond the reach of government.

Eric Tymoigne, an economics professor from Lewis and Clark College in Portland, Ore., argued that new financial instruments should be regulated in the same manner as medicines, tested and approved before they are allowed on the market.

"If the side effects kill you," Tymoigne said, "it probably wasn't a good innovation."

Presenters in Friday morning's sessions condemned the deregulation of financial institutions that has been going on over the past 15 years, with the support of both Democrats and Republicans.

Robert W. Dimand, economics professor at Brock University in St. Catharines, Ont., said investment bankers convince themselves, and then convince government, that they can control their own creations and that they no longer need the kind of regulatory regime that was put in place in answer to the Great Depression.

"The mistakes in policy did not just happen," Dimand said. "They were mistakes that the banks lobbied for."

Participants said the deregulatory trend ignores the lessons of history as well as the precepts of noted economists such as the namesake of their conference, John Maynard Keynes, and the post-Keynes scholar that most of them cite in their work, Hyman Minsky.

Both taught that governments need to be more aggressive than they usually are in regulating financial markets and in stepping in with such things as public works spending during economic downturns. But, while Keynes is often cited (wrongly, these scholars contend) as arguing that government intervention is needed only rarely, Minsky was more explicit in claiming that markets are inherently unstable and run the risk of frequent global crashes without outside supervision and, as needed, intervention.

Whalen lamented that it is only in times of financial crisis that government leaders, and even most mainstream economists, heed Keynes or even hear tell of Minsky. The rest of the time, they said, both government and academia hew to the belief, which he called seriously mistaken, that markets are rational and self-regulating.

Buffalo State professor William T. Ganley quoted 19th century journalist Charles McKay to make his point: "Men think in herds and go mad in herds. They only recover their senses slowly, and one by one."

The conference continues today with sessions for scholars, students and, starting at 2 p.m., presentations that are open to the public at no charge. They include a lecture by Buffalo State history professor Mark Goldman on the Great Depression and Buffalo art culture, a panel discussion on the future of capitalism and, at 8 p.m. a presentation of songs, stories and images from the Great Depression entitled "... Whose Names Are Unknown."

Read the original article.

Labels: banking regulation, barney frank, Gerald Epstein, Jane D'Arista, Joe Nocera, PERI, post-Keynesianism

 

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10/14/2009 01:14:00 PM 0 comments

 

Casino Capitalism as Usual

by Dollars and Sense

The latest from our pal Mark Engler, from Foreign Policy in Focus.

Casino Capitalism as Usual
G20 leaves needed reforms for global economy off the table

by Mark Engler

Last week’s Group of 20 (G20) meeting in Pittsburgh brought together leaders from the most significant players in the global economy and charged them with renovating the financial system at the heart of the economic crisis. Change was on the agenda, and the heads of state claimed to deliver. As the summit concluded, The New York Times hailed the meeting’s final statement as a momentous shift, reporting that “Leaders of G20 Vow to Reshape Global Economy.”

Unfortunately, the changes left off the table at the summit were far more significant than the modest reforms actually debated, and the few alterations that did make it into the final agreement are likely to be further watered down in implementation. Even the most common-sense reforms are being met with determined corporate opposition. Indeed, given the depths of the collapse one year ago and the volume of public outcry for change, the real surprise is how little transformation has yet taken place.


Late and Little

Many of the items on the Pittsburgh agenda were not bad in themselves. They were merely limited in scope and under siege by lobbyists. The G20 moved in the right direction by announcing that it would require banks and other financial institutions to have greater capital reserves. Mandating that a bank keep more in reserve for every dollar it lends out makes it less likely that the institution will be caught short and need a bailout. While such a change may sound arcane, it could mark a significant break from the past if done right and made part of broader regulations. After all, leveraging assets in order to obtain greater profits—whereby overextended firms made high-risk wagers with ever-greater amounts other people’s money—went far in provoking the crisis.

While higher capital ratios and greater oversight would limit this kind of wanton speculation, the G20 statement is short on specifics about the actual requirements that financial institutions would be made to respect. And, sadly, the determined opposition of European bankers will likely keep changes to minimal levels. The difficulty with implementing even this most minor and reasonable of reforms shows how entrenched corporate power remains in post-crisis policymaking.

This bodes ill for the prospects of other heralded changes. On Wall Street’s behalf, the Obama administration worked to curtail a French and German push for caps on executive pay—specifically, controls on the outrageous bonuses given to top bankers whose institutions have lost billions. As a result, the G20 agreement forgoes any hard limits on compensation. It instead promotes guidelines that would somewhat delay when bankers receive their multi-million dollar payouts. Ostensibly designed to focus executives on long-term performance, this substitute measure is a far weaker alternative.

Why is the Obama administration going to bat for Wall Street firms at international meetings? It’s hard to say, especially since this has not produced any apparent goodwill at home. Despite the White House’s efforts on their behalf, the financial industry is fervently opposing the president’s proposed Consumer Financial Protection Agency, which would protect Americans from predatory lending by credit card and mortgage companies. A representative of the U.S. Chamber of Commerce’s Center for Capital Markets recently explained to McClatchy Newspapers that the Chamber is “spending about $2 million on ads, educational efforts, and a grassroots campaign to kill the agency.”

Such backlash against reform suggests that the global economy is still being run like a gambling hall. The betting limits at some tables may be modestly reduced and payouts to the highest of high-rollers slightly reined in, but we have not strayed far from Harrah’s or the MGM Grand.


The Muscle Behind Market Fundamentalism

The G20 is only one component of the global economy’s management. As it turns out, the activities of other bodies compromise the G20’s declarations of reform. While agreements at the G20 are notoriously lacking in enforcement, financial institutions that can discipline and punish—such as the International Monetary Fund (IMF) and World Trade Organization (WTO)—appear notably unreformed and unrepentant.

After a previous meeting of the G20 in London last April, British Prime Minister Gordon Brown announced, “the old Washington consensus is over.” However, key tenets of market fundamentalist economic policy that defined this consensus -- including fiscal austerity and pro-corporate deregulation -- still prevail.

At the April G20 meeting, world leaders vowed to provide as much as $1.1 trillion in new resources to the developing world to blunt the impact of economic downturn. However, much of this funding has yet to materialize, and only a fraction of it is slated to go to low-income countries (rather than middle-income states). Moreover, the bulk of these resources are to be channeled through the IMF, which has typically demanded that recipients of its loans accept harsh neoliberal polices as a condition of receiving money. While Fund officials claim to have changed with the times by relaxing “conditionality” and easing their previously stern attitudes toward countries that dare to buck the neoliberal Washington Consensus, many of their recent loans suggest that, in practice, their conversion has been quite limited.

A recent report from the Center for Economic Policy Research indicates that the IMF “has tied pro-cyclical, contractionary economic conditions on Eastern European countries to sorely needed loans.” While struggling economies are desperately in need of government social spending and monetary stimulus, IMF agreements with Latvia, Hungary, and Ukraine demand slashed budgets and policy restrictions that look a lot like the “structural adjustment” of old. In advance of the April G20 summit Gordon Brown had admitted, “Too often our responses to past crises have been inadequate or misdirected, promoting economic orthodoxies that we ourselves have not followed and that have condemned the world’s poorest to a deepening crisis of poverty.” Sadly, the IMF has yet to demonstrate that it is truly breaking from this established pattern.

The WTO is not helping things either, especially when it comes to reviving financial regulation that can protect the public good. As Lori Wallach, director of Public Citizen’s Global Trade Watch Division, observed last week, “the G20 leaders have announced a very perplexing plan of action that calls for reregulation of the financial sector to try to avoid the next economic crisis while simultaneously calling for completion of the WTO Doha Round, which would require additional financial deregulation, including new WTO limits on accounting standards through a text the disgraced Arthur Andersen firm had a hand in formulating.” New “free trade” rules may prohibit countries from shielding themselves from exotic derivates such as credit default swaps or from capping the size of mega-banks that threaten to take down the entire system when they fail.


Left Off The Table

That the G20 is not undertaking a more serious transformation of global financial structures might reflect the power of continued corporate lobbying. It does not, however, reflect a lack of good ideas. A broad array of financial experts and civil society organizations – ranging from the Stiglitz Commission tasked with making recommendations to the UN, to grassroots coalitions such as Put People First, the Citizens’ Trade Campaign, and the labor network Global Unions – have advocated for sensible and needed reforms that could be easily enacted if the political will existed.

One example is the “Tobin Tax”—a small tax on international financial transfers first advocated in the 1970s by Nobel economist James Tobin as a way of cooling speculation on foreign currencies. ATTAC (the Association for the Taxation of financial Transactions for the Aid of Citizens), a leading organization for globalization activism in many parts of Europe, takes its name from this proposal and has pushed for it for over a decade. A version of the tax recently gained an even higher profile in Europe owing to the support of Adair Turner, the head of the British Financial Services Authority, which regulates UK banking. Oxfam argues that, beyond discouraging short-term gambling on currencies, a tax as small as 0.005% could raise between $33 billion and $50 billion per year. This pool of money could support sustainable development in places where the majority of people are still living on less than $2 per day.

Reform proposals also include debt cancellation for countries in the global South. Many poorer nations must spend substantial portions of their budgets on interest payments to the North rather than serve populations hit hard by the crisis. Often, their debts were unjust to begin with, accumulated by dictators who have since been thrown out of power. In most cases the countries’ citizens have already sent back payments that dwarf the original loans. Rather than having to submit to the IMF to receive new loans, poorer countries should be allowed to keep their own resources as part of a just stimulus program.

Reflecting the widespread agreement that no corporation should be “too big to fail,” citizen advocates have pushed for a much more aggressive application of anti-trust and anti-monopoly laws. In this vein, the Stiglitz Commission recommended the creation of a “Global Competition Authority” to provide “adequate oversight of these large institutions” and to “limit their size and the extent of their interactions.” These suggestions have a strong grounding in the public interest but are of course anathema to corporate chiefs. Accordingly, they have thus far remained off the table at the G20.

Read the rest of the article.

Labels: bailout, banking regulation, capital reserves, casino capitalism, G20, G20 summit, Mark Engler, Too Big to Fail

 

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10/01/2009 12:07:00 PM 0 comments

 

The Preliminary G20 Financial Reform Meeting

by Dollars and Sense

Yves Smith cautions us to view the communique with caution. She also says this on the quibble on the Basel II (which were wholly ineffective in the run-up to the crisis, and indeed contributed mightily to it) capital adequacy standards between the US and France.


Simon Johnson says that assumption that we need modern (characteristic of the last 30 years) finance for economic growth, which all the G20ers seems to assume as gospel, is misconceived. He also says that modern finance has provided, more than anything else, a means for the wealthy to capture state power. The former point cannot be made emphatically enough after the bogus recapitalization of the banks.

Finally, perhaps to illustrate the latter point in a particularly enraging way, here's what some of the creative minds in finance have been up to lately.

Labels: bailout, banking regulation, Baseline Scenario, financial crisis, G20 summit, insurance industry, international finance, Naked Capitalism, securitization, shadow banking system, Simon Johnson

 

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9/05/2009 02:47:00 PM 0 comments

 

Two More Items on Reform of Financial Regulation

by Dollars and Sense

Two more items on the Obama administration's proposed reforms of financial regulation. First, one by William Greider in the Nation:

Obama's False Financial Reform
By William Greider | June 19, 2009

The most disturbing thing about Barack Obama's call for financial reform was the way in which the president falsified our predicament. He tried to make it sound as though everyone was implicated in the financial breakdown and therefore no one was really to blame. "A culture of irresponsibility took root from Wall Street to Washington to Main Street," Obama explained. "And a regulatory system basically crafted in the wake of a 20th century economic crisis--the Great Depression--was overwhelmed by the speed, scope and sophistication of a 21st century global economy."

That is not what happened, to put it charitably. Unlike some other presidents, Obama is much too intelligent not to know this. The regulatory system was not overwhelmed by historic forces. It was systematically gutted and dismantled by the government in Washington at the behest of the banking interests. If Obama wants details, he can consult his economic advisors--Summers-Geithner--who participated directly as accomplices in unwinding the prudential rules and regulations. Cheers were led by the Federal Reserve with heavy lifting by both political parties.

The president's benign version of events reminds me of what compliant politicians and opinion leaders said after the war in Iraq they had endorsed turned disastrous. "Hey, we were all fooled." If Obama were to tell the truth now about what went wrong in the financial system, he would face a far larger political problem trying to clean up the mess. Instead, he has opted for smooth talk and some fuzzy reforms that effectively evade the nasty complexities of our situation. He might get away with this in the short run. Congress doesn't much want to face the music either. But Obama's so-called reform is literally "kicking the can down the road," as he likes to say about other problems. In the long run, it will haunt the country because it fails to confront the true nature of the disorders.

Giving more power to the Federal Reserve to be the uber-regulator of banking and finance is a terrible idea (I examine the dangers in a forthcoming Nation article). Asking the cloistered central bank to resolve all the explosive questions about the over-reaching power of financial institutions is like throwing the problem into a black box and closing the lid, so people will be unable to see what happens next. That is the idea, after all, the reason Wall Street's leading firms first proposed the Fed as super-cop, then sold it to George W. Bush and now Barack Obama. Give the mess to the Wizard of Oz, the guy behind the curtain. He can do miracles with money, but don't watch too closely. This constitutes the high politics of evasion.

Read the rest of the article.

And this, from Jane Hamsher at Firedoglake:

238 Members of Congress Disagree with the President: The Fed Needs More Accountability
By: Jane Hamsher Monday June 22, 2009 7:09 am

The President wants to give the Federal Reserve more power to oversee systemic risk in the economy:

Obama, in an interview shown on the CBS Early Show, said the administration wants an overseer that "is accountable and clear when it comes to these large systemic firms that could potentially bring down the entire financial system. The Fed has the expertise and the credibility I think to do it."

Asked whether lapses by the Fed contributed to last year's crisis, Obama said, "It wasn't the Fed where regulations broke down here."

But 238 members of Congress disagree that the Fed is "accountable and clear," and there are now 237 bipartisan cosponsors to Ron Paul's H.R. 1207, the Federal Reserve Transparency Act, which would give the GAO the authority to audit the Fed and report its findings to Congress. Because right now, the Fed has loaned trillions of dollars in bailout money, and refuses to say where it went.

As Alan Grayson said in a letter to his colleagues, asking them to cosponsor the bill:

[T]he Federal Reserve has refused multiple inquiries from both the House and the Senate to disclose who is receiving trillions of dollars from the central banking system. The Federal Reserve has redacted the central terms of the no-bid contracts it has issued to Wall Street firms like Blackrock and PIMCO, without disclosure required of the Treasury, and is participating in new and exotic programs like the trillion-dollar TALF to leverage the Treasury's balance sheet. With discussions of allocating even more power to the Federal Reserve as the 'systemic risk regulator' of the credit markets, more oversight over the central bank's operations is clearly necessary.

As a result of Grayson's efforts to whip Democratic cosponsors, 47 have signed on in the past two weeks alone, including Donna Edwards, Carol Shea-Porter, Jackie Speier, Dennis Kucinich, Heath Shuler, Jim McGovern and Jared Polis.

5780 people have endorsed Grayson's efforts to bring accountability to the Fed, including Dean Baker, Naomi Klein, Bill Greider, Tyler Durden, Bill Black and Jamie Galbraith.

See the original post.

Labels: banking regulation, Federal Reserve, financial regulation, The Fed, William Greider

 

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6/23/2009 05:28:00 PM 0 comments

 

Two Views of the Crisis

by Dollars and Sense

A brief, clear comparison from Simon Johnson on the Baseline Scenario blog:

There are two views of the global financial crisis and—more importantly—of what comes next. The first is shared by almost all officials and underpins government thinking in the United States, the remainder of the G7, Western Europe, and beyond. The second is quite unofficial—no government official has yet been found anywhere near this position. Yet versions of this unofficial view have a great deal of support and may even be gaining traction over time as events unfold.

The official view is that a rare and unfortunate accident occurred in the fall of 2008. The heart of the world’s financial system, in and around the United States, suddenly became unstable. Presumably this instability had a cause—and most official statements begin with “the crisis had many causes”—but this is less important than the need for immediate and overwhelming macroeconomic policy action.

The official strategy, for example as stated clearly by Larry Summers is to support the banking system with all the financial means at the disposal of the official sector. This includes large amounts of cash, courtesy of Federal Reserve credits; repeated attempts to remove “bad assets” in some form or other, and—the apparent masterstroke—regulatory forbearance, as signaled through the recent stress tests.

But most important, it includes a massive fiscal stimulus implying, when all is said and done, that debt/GDP in the United States will roughly double (from 41% of GDP initially, up towards 80% of GDP).

Not surprisingly, funneling unlimited and essentially unconditional resources into the financial sector has buoyed confidence in both that sector and at least temporarily helped shore up confidence in financial markets more broadly.

And now, in striking contrast to the dramatic action they call for on the macroeconomic/bailout front, the official consensus claims relatively small adjustments to our regulatory system will be enough to close the case—and presumably prevent further recurrence of problems on this scale. If the exact causes and presumed redress are lost in mind-numbingly long list of adjustments, so much the better.

This is, after all, a crisis of experts—they deregulated, they ran risk management at major financial firms, they opined at board meetings—and now they have fixed it.

Maybe.

The second view, of course, is rather more skeptical regarding whether we are really out of crisis in any meaningful sense. In this view, the underlying cause of the crisis is much simpler—the economic supersizing of finance in the United States and elsewhere, as manifest particularly in the rise of big banks to positions of extraordinary political and cultural power.

If the size, nature, and clout of finance is the problem, then the official view is nothing close to a solution. At best, pumping resources into the financial sector delays the day of reckoning and likely increases its costs. More likely, the Mother of All Bailouts is storing up serious problems for the near-term future.

We’ll double our national debt (as a percent of GDP), and for what? To further entrench a rent-seeking set of firms that the government determined are “too big to fail,” but will not now take any steps to break up or otherwise limit their size.

We need to disengage from a financial sector that has become unsustainably large (see slides before and after #19; the cross-country data should be handled with care). We can do this in various ways; there is no need to be dogmatic about any potential approach—if it works politically, do it. But the various current proposals for dealing with this issue—both from the administration and the leading committees of Congress—would make essentially zero progress.

As moving in this direction does not seem imminent, the probable consequences or—if you prefer—collateral damage looks horrible. You can see it as higher taxes in the future, lower growth, a bigger drag on our innovative capacity, fewer startups, and less genuinely productive entrepreneurship. Plenty of people will be hurt, and they are starting to figure this out—and to think harder about what needs to be done and by whom.

“Small enough to fail” may well prevail eventually—at least sensible ideas have won through in past US episodes—but it will take a while. The official consensus always seems immutable, right up until the moment it changes completely and forever.

Go to the original blog for links, including the slides he mentions.

Labels: bailout, banking crisis, banking regulation, Baseline Scenario, deregulation, finance sector, financial crisis, financial regulation, fiscal stimulus, larry Summers

 

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6/23/2009 09:57:00 AM 0 comments

 

U.S. May Add New Financial Watchdog

by Dollars and Sense

From today's Washington Post; hat-tip to LF:

Consumer Agency Under Consideration

By Zachary A. Goldfarb, Binyamin Appelbaum and David Cho
Washington Post Staff Writers
Wednesday, May 20, 2009

The Obama administration is actively discussing the creation of a regulatory commission that would have broad authority to protect consumers who use financial products as varied as mortgages, credit cards and mutual funds, according to several sources familiar with the matter.

The proposed commission would be one of the administration's most significant steps yet to overhaul the financial regulatory system. It would also be one of its first proposals to address causes of the financial crisis such as predatory mortgage lending.

Plans for a new body remain fluid, but it could be granted broad powers to make sure the terms and marketing of a wide range of loans and other financial products are in the interests of ordinary consumers, sources said.

Sources, who spoke on condition of anonymity because discussions are ongoing, said talks have begun with industry officials, lawmakers and other financial experts about the proposal, which would require legislation. Last night, senior policymakers, including Treasury Secretary Timothy F. Geithner and National Economic Council Director Lawrence H. Summers, were to discuss the idea at a dinner held at the Treasury Department.

Responsibility for regulation of consumer financial products is currently distributed among a patchwork of federal agencies. Some of these regulators regard consumer protection as a low priority. And some financial products are not regulated at all.

The proposal could centralize enforcement of existing laws and create a vehicle for imposing tougher rules.

The idea is likely to face significant opposition from industry groups, which argue that stricter regulation limits the availability of financial products to consumers.

It could also trigger a massive regulatory turf war. Banking regulators and agencies such as the Securities and Exchange Commission, which regulates mutual funds, could stand to lose powers, personnel and funding. Those agencies are likely to argue they are positioned to protect consumers because they oversee the financial firms directly and have experience writing and enforcing rules governing financial products.

The proposal is part of the administration's broader plan to improve financial regulation. Officials have proposed the creation of a systemic risk regulator whose job would be to spot threats to the health of the overall financial system. Officials also have called for tighter regulation of individual financial firms and markets, including new rules governing hedge funds and derivatives.

While those proposals focus on the guts of the financial system, this new plan would concentrate on the front end -- consumers who borrow money to buy homes and products and who invest their money for retirement, college education and savings.

The leading proponent of such a commission is Elizabeth Warren, a Harvard University law professor who now chairs the Congressional Oversight Panel for the government's financial rescue initiative. Her plan is the kernel of the idea the White House is now considering, sources said.

Warren wrote in a 2007 article in the journal Democracy that the government had failed to protect American consumers in their relationships with financial companies.

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street," Warren wrote. "Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?"

Warren proposed creating a new commission modeled on the Consumer Product Safety Commission, which protects buyers of products such as bicycles and baby cribs.

Such a commission could be very powerful. A number of sweeping federal laws already offer broad protection to consumers of financial products, but those laws have been lightly enforced in recent years.

The Department of Housing and Urban Development, for example, has clear authority to crack down on companies that charge excessive closing costs on mortgage loans, but repeatedly postponed planned reforms in the face of industry opposition.

Warren's proposal initially found little support in Washington, but the mood has shifted dramatically with the onset of the financial crisis and the election of a Democratic administration.

In March, Sen. Richard J. Durbin (D-Ill.) introduced legislation to create a commission like the one that Warren had described. The legislation is co-sponsored by Sen. Charles E. Schumer (D-N.Y.) and Sen. Edward M. Kennedy (D-Mass.). The White House's support would greatly improve its chances of passing.

In proposing the legislation, the senators said that the commission would be responsible for identifying emerging problems and for educating consumers.

They were also critical of the existing process.

"The Federal Reserve was supposed to do this, but they were asleep at the switch," Schumer said at the time.

Staff writer Neil Irwin contributed to this report.

Read the original article t.

Labels: banking regulation, Elizabeth Warren, financial crisis, financial regulation

 

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5/20/2009 03:58:00 PM 0 comments

 

Soros: U.S. banks 'basically insolvent'

by Dollars and Sense

Just posted to Reuters; hat-tip to Bob F. Too bad that he says nationalization is "out of the question." But interesting in particular that Soros "warned about the danger of watering down mark-to-market accounting rules."

NEW YORK (Reuters)—The U.S. economy is in for "a lasting slowdown" and won't recover this year, while "the banking system as a whole is basically insolvent," billionaire investor George Soros told Reuters Financial Television on Monday.

While nationalization of banks is "out of the question," he said stress tests being conducted by the U.S. Treasury could be a precursor to a more successful recapitalization.

But he warned about the danger of watering down mark-to-market accounting rules, saying this creates conditions for prolonging the life of U.S. 'zombie' banks.

Soros also said the U.S. dollar is under pressure and may eventually be replaced as a world reserve currency, possibly by the IMF's Special Drawing Rights, a synthetic currency basket comprising dollars, euros, yen and sterling.

China recently proposed greater use of Special Drawing Rights, possibly as an eventual global reserve currency.

"In the long run, having an international accounting unit other than the dollar may be to our advantage," Soros said.

He added that the system that has allowed the United States to spend more than it earns has to be reformed. "That is coming to an end and it will not be allowed to recur. There will have to be some change."

While a global recovery is possible in 2010, Soros said the timing will ultimately depend on the depth of the recession. China, he said, will be the first country to emerge from recession, probably this year, and will spearhead global growth in 2010.

He said world policy-makers are "actually beginning to catch up" with the crisis and efforts to fix structural problems in the financial system.

The system was "fundamentally flawed, and there is no returning to where we came from," he said.

Read the rest of the article.

Labels: bank nationalization, banking crisis, banking regulation, financial crisis, George Soros, mark-to-market, recession

 

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4/06/2009 01:17:00 PM 0 comments

 

Obama vs. Cuomo on Bank Investigations

by Dollars and Sense

From Bloomberg:

Obama Backs Banks, Seeks to Block Fair-Lending Probe

By Greg Stohr

March 26 (Bloomberg) -- The Obama administration's call for greater financial regulation may have its limits.

The administration late yesterday urged the U.S. Supreme Court to bar New York and other states from enforcing their fair-lending and other consumer-protection laws against federally chartered banks including JPMorgan Chase & Co. and Wells Fargo & Co.

The legal brief, which adopts the Bush administration's position, is a setback for consumer and civil-rights groups that had urged President Barack Obama's team to switch positions. The filing puts the administration at odds with New York Attorney General Andrew Cuomo over the respective roles of state and federal regulators. The high court will hear arguments April 28.

"National banks are created by the government to serve federal purposes," argued Solicitor General Elena Kagan, the Obama administration's top courtroom lawyer. "Oversight of the banks is therefore principally entrusted to the United States."

The court filing coincides with this week's proposal by the administration to put large hedge funds, private-equity firms and derivatives under federal supervision for the first time.

Reviving Investigation

Cuomo is seeking to revive an investigation, begun by predecessor Eliot Spitzer, into the real-estate lending practices of units of JPMorgan, Wells Fargo and HSBC Holdings Plc. A lower court barred the probe, saying a regulation issued by the U.S. Comptroller of the Currency blocks state scrutiny of national banks.

The case will determine whether federal regulators have exclusive governmental authority to press fair-lending and other types of complaints against national banks. More broadly, the case will shape how much ability agencies have to shield companies from state-level scrutiny.

Kagan filed the brief on behalf of the OCC, an independent Treasury Department bureau still being run by Republican appointee John Dugan, whose term expires in 2010. Obama has decided to retain Dugan, two people familiar with the decision said last month.

"We're disappointed to see it," said Gail Hillebrand, a San Francisco-based Consumers Union attorney who had sent a letter urging the administration to switch sides in the case. "We hope they just haven't gotten around to getting rid of those regulations. It's certainly a missed opportunity."

Read the rest of the article (it's short).

Labels: Andrew Cuomo, banking regulation, Barack Obama, Eliot Sptizer, financial crisis

 

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3/27/2009 01:17:00 PM 0 comments

 

Regulators Despair Of 'Ponzimonium'

by Dollars and Sense

Is it Ponzimonium or Ponzapalooza?

From Reuters:

Hundreds of people in the United States are under investigation for financial scams, many involving Ponzi schemes, a U.S. regulator said on Friday, calling the phenomenon "rampant Ponzimonium."

While none are as mammoth as disgraced financier Bernard Madoff's $65 billion fraud, multimillion-dollar "mini Madoffs" are proliferating from New York to Hawaii, the head of the Commodity Futures Trading Commission said.

So far this year, the agency has uncovered 19 Ponzi schemes, which depend on an influx of new capital instead of investment profits to pay existing investors.

That compares with just 13 for all of 2008.

"Because of the economy, people are seeking redemptions more than they ever have and that's making a lot of these scams go belly up," Bart Chilton, commissioner of the Washington-based Commodity Futures Trading Commission, said in a telephone interview.

In the last month alone, his agency has pursued investment fraud in Pennsylvania, New York, North Carolina, Iowa, Idaho, Texas and Hawaii.

Chilton called the problem "rampant Ponzimonium" and "Ponzipalooza" -- a play on the word "Lollapalooza," an American music festival featuring a long list of acts.

Many of the financial scams are small but grew fast to support lavish lifestyles, like the suspected $40 million, five-year Ponzi scheme that came to light last month when a North Carolina man, Bruce Kramer, committed suicide.

Claiming he was an expert mathematician, Kramer is accused of persuading 79 people to invest in what he said was a foreign currency trading operation, Barki LLC. He promised monthly returns of at least 3 percent to 4 percent, the CFTC said.

Instead, he funneled money into a Maserati sports car, a $1 million horse farm and artwork while holding "extravagant" parties, according to a CFTC complaint released on Wednesday.

As the economy soured, Kramer struggled to find new clients to keep the scheme going. In the days before his suicide, his investors demanded their money back and grew suspicious when they couldn't access their own funds, said Chilton.

The Commodity Futures Trading Commission shares oversight of financial markets with the Securities and Exchange Commission, which also faces a swelling casebook of Ponzi schemes, including charges against Texas billionaire Allen Stanford, who is accused of bilking investors of $8.8 billion.

The SEC has taken emergency action in 24 cases this year "to halt ongoing fraud," said SEC spokesman John Heine.

The FBI is also ramping up probes of financial wrongdoing. The agency has 43 corporate fraud cases under way directly related to the financial crisis, FBI Deputy Director John Pistole told a Congressional panel on Friday.

The CFTC, which set up a task force last year to pursue foreign currency Ponzi schemes and fraud, discovered about $80 million invested in four Ponzi schemes this month. That followed 10 such schemes in February totaling about $1.46 billion, and about $450 million in such scams in January.

More here.

Labels: banking regulation, Corporate Fraud, Corporate Swindles, financial regulation, ponzi, SEC

 

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3/22/2009 08:19:00 PM 1 comments

 

Obama Plans To Avoid Repeat of Crisis

by Dollars and Sense

From Bloomberg:

Obama to Outline Regulation Changes to Avoid Repeat of Crisis

By Hans Nichols

March 22 (Bloomberg) The Obama administration will this week outline regulatory changes aimed at avoiding a repeat of the financial crisis that's crippled the banking system and pushed the U.S. into the deepest recession since 1982.

The proposals will address the risks that remain in financial regulation, an administration official said, including the need for an agency to have the power to resolve a breakdown at a major financial institution. Federal Reserve Chairman Ben S. Bernanke two weeks ago called for regulators to be given the authority to seize such firms, in the way the Federal Deposit Insurance Corp. already has for deposit-taking institutions.

Officials favor giving the Fed greater responsibility for managing risk across the financial system as was proposed almost a year ago by former Treasury secretary Henry Paulson, support for which is waning in Congress. President Barack Obama may also subject executive pay to greater scrutiny, the New York Times reported. An administration official denied that curbing compensation will be a major focus of the regulatory plan.

"There’s still a need for a systemic-risk regulator," Representative Barney Frank, the Massachusetts Democrat who chairs the House Financial Services Committee, said on March 20. "The argument for the Fed alone has lost a lot of political support. I think that’s now got to be re-looked at."

Treasury Secretary Timothy Geithner will testify before Frank's committee on March 26 as Obama prepares to travel to London for a summit of the Group of 20 industrial and developing nations.

G-20 Summit

Obama has said that the meeting must deal with how to prevent further crises like the current financial meltdown that began almost two years ago with the collapse of the market for subprime mortgages.

American banks have suffered more than $800 billion in writedowns and credit losses since then. The credit contraction that followed dragged first the U.S., and then Europe and Japan, into recession. A surge in unemployment and collapse in house prices has added to bad loans and further discouraged banks from lending.

The crisis also pushed the U.S. government into pouring hundreds of billions of dollars into financial institutions, including Citigroup Inc., Bank of America Corp. and American International Group Inc.

Like the White House, Congress is trying to overhaul U.S. financial regulations and agencies that lawmakers have faulted for lax oversight. Frank, who is playing a lead role in the redesign, has been pushing to expand the Fed's authority.

Read the rest of the article

Labels: bailout, banking regulation, Barack Obama, barney frank, financial crisis, Timothy Geithner

 

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3/22/2009 12:02:00 PM 0 comments

 

Jobless Hit with Bank Fees on Benefits

by Dollars and Sense

Here's another one that I have been meaning to post for a while. I haven't seen this anywhere else, so maybe you haven't either.

Bank of America is particularly egregious, imho. A few examples: although I am not among the "unbanked," I can identify with them, since sometimes I am close enough to living paycheck-to-paycheck that I need money fast and can't wait for a check to clear at my bank. The bank I use is a locally-owned one (Cambridge Trust), but my (other) employer, Harvard University, pays me in two lump sums twice a year drawing on Bank of America.

The BoA branch in Harvard Square has appalled me for many years. Over the past few years (ten or so) Harvard Square, formerly chocked full of locally-owned businesses, independent bookstores, coffee shops, etc. (does anyone else remember The Tasty?) has been repopulated by high-end chains, cellular phone stores, and ATMs. Sometime in this period, the Harvard Square BoA branch remodeled itself so that the street-level part of the branch, gleaming with marble and flat-screen TVs with stock-tickers, is reserved for—I'm not sure for whom, but I'm assuming big-account investors (with huge banks of ATMs, too, of course). Anyone who wants to go to a teller has to go downstairs into a dingy and low-ceilinged space reminiscent of a welfare office.

Last fall when I went to cash my twice-yearly paycheck from Harvard, not only did I have to go to the dingy downstairs, but the teller informed me that I would have to pay a $6 fee. For BoA to cash a check drawing on a BoA account. A check made payable to me, not to BoA. Since I really needed the money, I reluctantly agreed. Then the kicker: the teller pointed to a small black ink pad. They needed my fingerprint before they would cash my check. "It's for security," I was told. Apparently all this is legal. When I went to deposit my cash at my own bank, I told the teller about my experience. She was appalled. "That check was payable to you," she said.

(More recently, I've noticed that at least some BoA ATMs charge an outrageous $3 for out-of-network users.)

BoA (and the other big banks) are still following a profit model that involves leeching huge amounts of money, bit by bit, from the "unbanked" and the semi-banked. The big banks want a piece of the huge payday loan and check-cashing industry (which they themselves fund), and they are able to get it because so many people are locked out of mainstream banking, or are otherwise living on a financial edge. (For background on the big "respectable" banks' role in the "fringe economy," see this article from D&S a couple of years ago.)

Anyhow, this article from the Associated Press shows how such practices might fit into BoA's model for returning to profitability:

Jobless hit with bank fees on benefits

By CHRISTOPHER LEONARD | AP Business Writer | Fri Feb 20

For hundreds of thousands of workers losing their jobs during the recession, there's a new twist to their financial pain: Even as they're collecting unemployment benefits, they're paying bank fees just to get access to their money.

Thirty states have struck such deals with banks that include Citigroup Inc., Bank of America Corp., JPMorgan Chase and US Bancorp, an Associated Press review of the agreements found. All the programs carry fees, and in several states the unemployed have no choice but to use the debit cards. Some banks even charge overdraft fees of up to $20 — even though they could decline charges for more than what's on the card.

"It's a racket. It's a scam," said Rachel Davis, a 38-year-old dental technician from St. Louis who was laid off in October. Davis was given a MasterCard issued through Central Bank of Jefferson City and recently paid $6 to make two $40 withdrawals.

The banks say their programs offer convenience. They also provide at least one way to tap the money at no charge, such as using a single free withdrawal to get all the cash at once from a bank teller. But the banks benefit from human nature, as people end up treating the cards like all the other plastic in their wallets.

The fees are raising questions from lawmakers who just recently voted to infuse banks with taxpayer money to keep them afloat.

Rep. Carolyn Maloney, D-N.Y., a member of the House Financial Services Committee, said the situation points to "yet another example of how we need to regulate the ways in which banks charge overdraft and other fees."

Read the rest of the article.

(By the way, does anyone else wish that Carolyn Maloney had been NY Gov. Patterson's pick to replace Hillary Clinton? I don't know much about her, but I like what I've heard.)

Labels: Bank of America, banking crisis, banking regulation, Harvard University, unemployment, unemployment benefits

 

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3/16/2009 10:10:00 AM 4 comments

 

Lessons from Global Corporate Frauds

by Dollars and Sense

An interesting article by Jayati Ghosh that discusses "control fraud" in a global context, including work by former banking regulator William K. Black, who has written for D&S on the topic (here). Hat-tip to Lynn F. This is from the website of IDEAs (the International Development Economics Association).

By Jayati Ghosh

As global capitalism lurches around in crisis, it seems that there is no end to the worms crawling out of the woodwork. The financial crash and economic downswings have been accompanied by more than just cyclical bad news from companies that have been engaged in bona fide business. The adverse market conditions are making it harder to disguise corporate frauds that could flourish in the earlier boom, and so more and more details of unsavoury business operations are emerging among a wide range of firms all over the world.

In India the Satyam scam may be grabbing the headlines, but corporate frauds are likely to be uncovered in many countries. In the leading capitalist economy, the United States, such corporate frauds have been rising sharply in recent years, according to data from the official investigating agency, as the accompanying chart shows. Between 2001 and 2007, the number of corporate fraud cases that were opened by the FBI (covering both corporate fraud per se and securities and commodities fraud) increased by 43.7 per cent, even though convictions barely increased. And in 2008, the number of scandals that has come to light, and the sheer extent and audacity of several of them, almost defy description.

This ought to surprise us, because after the huge corporate accounting scandals of the early part of the decade, exemplified by the Enron scandal and the subsequent exposure of significant firms like WorldCom, Adelphia, Peregrine Systems and others, the US government took steps to enact legislation that would regulate corporate markets specifically to prevent such frauds.

The Sarbanes-Oxley Act that was passed by the US Congress in 2002 (officially known as the Public Company Accounting Reform and Investor Protection Act of 2002) was meant to strengthen and tighten corporate accounting procedures. It established a new quasi-public agency to oversee, regulate, inspect and discipline accounting firms in their roles as auditors of public companies. It also specified tighter rules for corporate governance, including internal control assessments and enhanced financial disclosure.



[Source: Report of the Corporate Fraud Task Force, 2008, US Government, Page 1.19]

All this, it could be supposed, would operate to prevent any future Enron-type scandals from occurring at all. Indeed, those who opposed the act argued that it created a complex over-regulated environment for US companies, which reduced their competitive edge over foreign firms. (However, a number of other countries—Japan, Germany, France, Italy, Canada, as well as developing countries like South Africa—have passed similar legislation.)

Sarbanes-Oxley, or indeed any attempts to control and regulate corporate behaviour especially in the financial realm, have been much criticised by representatives of large firms and by many market-friendly economists as well. Consider this typical academic justification for not regulating markets: "While corporate fraud can impose significant costs of the economy when left unchecked, the evidence shows that market mechanisms discipline much bad behaviour while the criminalisation of corporate behaviour, coupled with bringing highly complex cases before juries that can neither understand the issues nor their instructions, imposes significant costs on the economy by deterring socially efficient risk-taking behaviour by corporations and their executives... The result is harm to the general public, whose members depend on a dynamic, competitive economy for their welfare." (Howard H. Chang and David S. Evans, "Has the pendulum swung too far?" Regulation, Vol. 30, No. 4, Winter 2007-2008).

Yet it now turns out that, far from being too restrictive, if anything the Sarbanes-Oxley Act was not effective enough. After the spate of corporate financial scandals that actually resulted in the collapse of several companies in the early part of the decade, corporate fraud has apparently continued almost unabated even in the US. One reason for this may have been in the design and implementation of the legislation, which did not take in to account the crucial features of such scams, and the structure of incentives that both allowed and encouraged such malpractices to occur.

A quick look at some of the more famous of these corporate frauds may illustrate this point. Consider first Enron, the gigantic scam that has unfortunately set the bar for all the other scandals that have followed since 2001. This was a financial scandal that could occur because energy sector liberalisation and financial deregulation in the US allowed for trading in electricity and natural gas futures, partly because of intense lobbying by Enron and similar firms. While the resulting energy price volatility adversely affected consumers, it delivered high speculative profits to what was originally a power generation firm but rapidly became dominantly an energy trading firm. Enron then created as number of offshore subsidiaries, which provided ownership and management with full freedom of currency movement. This also allowed any losses in such trading to be kept off the balance sheets.

Read the rest of the article.

Labels: banking regulation, control fraud, Corporate Fraud, credit crisis, Enron, financial crisis, fraud, Sarbanes-Oxley, Satyam, William K. Black

 

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3/02/2009 11:37:00 AM 0 comments

 

More on Canada (N. Folbre on NYT econ blog)

by Dollars and Sense

More on Canada's banking system, as Pres. Obama visits our neighbor to the north. This one is by left economist and UMass-Amherst professor Nancy Folbre, at the New York Times Economix blog, to which she seems to be contributing regularly (we re-posted something by her from there on early childhood education last week). She makes some of the same points that Maurice Dufour makes in the article we posted this morning, but Folbre's discussion of public spending, and single-payer in particular, is excellent. And it is nice to see her criticize the fatuous Fareed Zakaria. (For a great critique of Zakaria's oeuvrre, see frequent D&S author Roger Bybee's article in Extra! from a few months back.

Canada and the Recession: Angles of Deflection

By Nancy Folbre

O Canada. That big, beautiful country to the north is a lot like us, just colder and a few degrees less ... neoliberal. Canada has moved more slowly than the United States to deregulate its economy and shrink its social safety net. The resulting differences in the impact of global recession are small, but instructive.

As Fareed Zakaria points out in a recent Newsweek article, Canada is weathering the financial crisis better than we are. Canadian banks are more old-fashioned (that is, centrally regulated) than our own. Stricter leverage requirements have been enforced. Subprime mortgages have not been encouraged. Prohibitions against foreign bank takeovers have protected Canadian institutions from competition from the United States, but also buffered them against financial contagion.

Mr. Zakaria overstates the case when he claims that no government bailout has taken place there. The Canadian government has provided substantial assistance to the financial sector. But its efforts to increase available credit remain far less costly than our trillion-dollar subsidies. A more serious concern for Canadians is the likelihood that the sinking American and global economy will pull them down.

If unemployment continues to rise over the next few months in the United States, as predicted, many families will lose their health insurance coverage or struggle to pay premiums they can ill afford. By contrast, increased unemployment won't reduce Canadian access to health care.

As the economist (and fellow Economix blogger) Uwe Reinhardt explains, the single-payer Canadian health care system delivers very good results for about half the per-person cost of ours—with huge savings from reduced paperwork. Economic disparities in access to health care are significantly lower there.

President Obama promises to expand health insurance coverage in the United States with little threat or inconvenience to the private sector. But some Democrats in Congress, led by Representative John Conyers, advocate a single-payer "Medicare for All" bill strongly influenced by the Canadian model.

Both American and Canadian unemployment insurance systems are less generous than those of most countries of Northwestern Europe. Neither provides assistance for more than 40 percent of the unemployed. But Canadians have long provided a higher replacement rate for lost earnings.

According to latest estimates from the Organization for Economic Cooperation and Development, a married worker earning the average wage, with two children, could expect 78 percent wage replacement in Canada, compared to 52 percent in the United States. The differences are even greater for those earning higher than average wages, because of low benefit ceilings.

The recently passed Economic Stimulus and Recovery Act offers incentives to states to expand unemployment provision to part-time workers and to those leaving jobs for "compelling family reasons." The Canadian unemployment insurance system offers more comprehensive family benefits, including paid sick leave, paid compassionate care leave, and paid maternal and parental leaves of up to 50 weeks. Many American workers aren't even eligible for the 12 weeks of unpaid family leave guaranteed by the Family and Medical Leave Act—although President Obama promises to change that.

There's no evidence that Canada's public provision of health care and social benefits has reduced its economic growth, and the federal budget just presented is the first to show a deficit in 11 years.

What explains more support for public spending there? Slightly lower income inequality may encourage slightly more solidaristic policies. Such policies, in turn, reduce income inequality. The French social-democratic traditions of the province of Quebec exert a distinct influence. The Canadian political scientist Keith Banting argues that explicit efforts to develop a strong but multicultural national identity have strengthened norms of mutual support.

The national anthem ends with a promise (at least in translation of the original French) to protect Canadian homes and rights.

(This is the full post.)

Labels: bailout, banking crisis, banking regulation, Barack Obama, Canada, Fareed Zakaria, financial crisis, Maurice Dufour, Nancy Folbre, Roger Bybee

 

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2/19/2009 02:51:00 PM 0 comments

 

Julian Delasantellis on Stress Testing

by Dollars and Sense

The witty Delasantellis offers his thoughts. Nice to read in conjuction with our post on Bill Black today:
Perhaps a cool hand
by Julian Delasantellis
Asia Times
February 17th, 2008

It wasn't the planet-killing asteroid from 1998's Armageddon that you heard slamming into Earth with a deafening thud last week, but the consequences of what it was may be just about as serious. It was but the latest attempt, the Treasury Secretary Tim Geithner plan, to pull the US financial system out of the deep hole it so aggressively and enthusiastically threw itself into during the great credit boom early in this decade.

How bad was it? Well, as Wall Street secretary pretending to be investment banker Tess McGill (Melanie Griffith), in 1988's Working Girl, observed on her attempt to pitch a corporate buyout seemingly going badly, "They don't exactly have bouncers atthese things, they're a little more subtle than that."

Geithner should be thankful for that as well. If not, he would have been grabbed by his collar and thrown out into the gutter on Pennsylvania Avenue, beneath the statue of Alexander Hamilton, his country's first Treasury secretary, realizing that, on the basis of the tax problems and this dubious financial system rescue plan that have essentially become the coming-out party for the Treasury debutante, he has a long way to go to even match up to the standards of Ogden Livingston Mills, Herbert Hoover's second Treasury secretary, let alone the giants in the office such as Hamilton.

The basic complaint about the Geithner plan was that it was vague. At a time as dire as this, the press, and, it turns out, the markets, with the Dow Jones Industrial Average dropping over 350 points just as Geithner was speaking, wanted something a bit more substantial than just the Treasury secretary playing coy and batting his baby-blue eyes before the entire world.

Read the rest of the article

Labels: bailout, bank failures, bank stress testing, banking regulation, banking system, financial crisis, Julian delasantellis

 

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2/17/2009 01:34:00 PM 0 comments

 

Bill Black on 'Stress Tests' (Yves Smith)

by Dollars and Sense

Yves Smith of Naked Capitalism interviews Bill Black, who wrote this article for Dollars & Sense for our Nov/Dec 2007 issue (we've posted about him frequently on the blog; he's been quoted frequently in the NYT and elsewhere since the credit crisis really started getting bad, and also on topics like John McCain's role in the S&L crisis). Hat-tip to LP.

By way of background, William Black is a former senior bank regulator, best known for his thwarted but later vindicated efforts to prosecute S&L crisis fraudster Charles Keating. He is currently an Associate Professor of Economics and Law at the University of Missouri—Kansas City.

More germane for the purpose of this post, Black held a variety of senior regulatory positions during the S&L crisis.He managed investigations with teams of examiners reporting to him, redesigned how exams were conducted, and trained examiners.

Via e-mail, he has confirmed our suspicions about the bank stress tests announced by Treasury Secretary Timothy Geithner: they simply cannot be adequate, given the number and experience of the staff, and perhaps as important, their relationship with the banks (see detailed comments below).

I also asked him about the fact that bank examiners examine banks (duh) and would not have much (any?) experience in the capital markets operations or sophisticated products that the big investment bank, now banks, participated in. Goldman and Morgan Stanley ought to be subject to these exams; Citi, JP Morgan, and Bank of America have large capital markets operations. These firms are where the biggest risks and exposures lie. Do the examiners what to look for in a even the low-risk operations, like repo desks, much the less derivatives and proprietary trading books? He agreed (as presented below) that it was a near certainty that this was beyond their skill level.

Read the rest of the post.

Labels: banking regulation, credit crisis, financial crisis, stress tests, Timothy Geithner, William K. Black, Yves Smith

 

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2/17/2009 11:36:00 AM 0 comments

 

Capitalism Hits the Fan: The Film

by Dollars and Sense

Rick Wolff, professor of economics at UMass-Amherst and author of Capitalism Hits the Fan, which ran in our November/December issue, has out with a documentary film on the current economic crisis of the same title. Here are the details from Rick:

I hope that you may find a new film that I made with the Media Education Foundation (MEF) interesting and useful. Called "Capitalism Hits the Fan," it is aimed at colleges, universities, and also high schools for instructional use, but it can serve other purposes as well. You can get a sense of it at www.capitalismhitsthefan.com.

The dvd can be ordered now and will be shipped by month's end. It is also possible to view the full-length version (just under an hour) freely, albeit in low resolution, at the MEF website. While the institutional prices are high, individuals can order the dvd for $ 19.95.

The dvd contains both the full-length version and a shorter 35-minute version.

You may be especially interested in the critical analytical approach to explaining the causes of the current crisis, in the critique of Keynesian stimulus-cum-reregulation "solutions," and in the sketch of an alternative solution.

You gotta love his new website's domain name. I wonder why no one had registered that yet?

Labels: banking regulation, capitalism, financial crisis, Keynesianism, Rick Wolff

 

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2/12/2009 01:18:00 PM 0 comments

 

Obama Plans To Tighten Financial Rules

by Dollars and Sense

From The New York Times:

January 25, 2009
Obama Plans Fast Action to Tighten Financial Rules
By STEPHEN LABATON

WASHINGTON The Obama administration plans to move quickly to tighten the nation's financial regulatory system.

Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.

Broad new outlines of the administration's agenda have begun to emerge in recent interviews with officials, in confirmation proceedings of senior appointees and in a recent report by an international committee led by Paul A. Volcker, a senior member of President Obama's economic team.

A theme of that report, that many major companies and financial instruments now mostly unsupervised must be swept back under a larger regulatory umbrella, has been embraced as a guiding principle by the administration, officials said.

Some of these actions will require legislation, while others should be achievable through regulations adopted by several federal agencies.

Officials said they want rules to eliminate conflicts of interest at credit rating agencies that gave top investment grades to the exotic and ultimately shaky financial instruments that have been a source of market turmoil. The core problem, they said, is that the agencies are paid by companies to help them structure financial instruments, which the agencies then grade.

"Until we deal with the compensation model, we're not going to deal with the conflict of interest, and people are not going to have confidence that the ratings are worth relying on, worth the paper they're printed on," Mary L. Schapiro said in testimony earlier this month before being confirmed by the Senate to head the Securities and Exchange Commission.

Timothy F. Geithner, the nominee for Treasury secretary, made similar comments in written and oral testimony before the Senate Finance Committee.

Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.

Read the rest of the article

Labels: bailout, banking regulation, Barack Obama, derivatives, financial crisis, financial regulation, hedge funds, Ratings agencies

 

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1/25/2009 04:49:00 PM 0 comments

 

Lame-Duck Administration Still Has Priorities

by Dollars and Sense

From the Washington Post:

A Quiet Windfall For U.S. Banks
With Attention on Bailout Debate, Treasury Made Change to Tax Policy

By Amit R. Paley
Washington Post Staff Writer
Monday, November 10, 2008; A01

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. "This is part of our overall effort to provide relief," he said.

The Treasury itself did not estimate how much the tax change would cost, DeSouza said.

Read the rest of the article

Labels: banking regulation, financial crisis bailout, Henry Paulson, Tax law, Treasury Department, Washington Post

 

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11/10/2008 03:34:00 PM 0 comments