Sean O'Grady | Nov 20

The Independent - When the masters of the universe came crashing down to earth last year, the reverberations were felt far beyond Wall Street and the City. Sean O'Grady surveys the best of the books that explode the myth that greed is good

One of the few welcome consequences of the global recession has been a modest upsurge in economic literacy, or at least interest. That's not to be exaggerated; most people still don't know their asset-backed securities from the elbows, but at least we're making some attempt to redress that deficit of understanding.

No previous economic crisis has brought forth such a crop of words – over 3,000 new books, a few more reprints, trillions of column inches of newspaper, magazine and web pieces, official reports, not to mention a Facebook page devoted to "Recession Survivors" and those Twittering and blogging their way to an understanding of seismic changes. OK, it isn't much to throw into the balance when you have mass unemployment, the derangement of national finances and the destruction of the world's banking system on the other side, but at least we are creeping towards some acknowledgement of what went wrong, and why. That's something.

So, what to read? A bit like the bewildering complexity of "exotic derivatives" that helped to get us into this mess (and which the bankers themselves never understood), the choice seems endless. It really boils down to which of the three prevalent treatments of the crisis you prefer: the anecdotal, the analytical or the apoplectic.

By now most people who follow Goldman Sachs in the news know that it received $13 billion from the Federal Reserve to liquidate its portfolio of derivatives with AIG. Because the Fed was willing to pay Goldman par value on these derivatives, even though the market valued them at about 48 cents on the dollar, Goldman walked away with no loss whatever from the AIG collapse. This has been described as a great gift for Goldman and all the other banks who dealt with AIG and who were treated the same way. Many others have described this as a colossal rip-off of the taxpayers.

How did this come about? We know a lot more this week about these transactions because of a report that has been issued by Neil Barofsky, the Special Inspector General for the bank bailout programs. The press has described this report as particularly damning of the NY Federal Reserve which negotiated these deals with the banks, and which was led at the time by Timothy Geithner, the current Treasury Secretary. These press reports, however, have mischaracterized what happened and what went wrong. The NY Fed acted properly and entirely as one would expect under the circumstances when they negotiated these contract abrogations. To see what really went wrong, follow along on the details below.

Bangkok | November 18

Bangkok Post -

Foreign investment for US bonds and other long term investments, including from China, rose beyond expectations despite concerns over the weakness of the dollar, official data showed Tuesday.

Net long-term capital flows to the United States climbed to 40.7 billion dollars in September from a revised 34.2 billion dollars the prior month, according to the Treasury International Capital Data (TIC) monthly report.

Most economists had expected flows to reach 30.0 billion dollars.

Mary Williams Walsh | Washington | November 16

NYT -
The Federal Reserve Bank of New York gave up much of its power in high-pressure negotiations with the American International Group’s trading partners last year, according to a government report made public on Monday.

Just two days before the New York Fed paid A.I.G.’s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut — but it never got the chance.

UBS, of Switzerland, alone offered to give a break to the New York Fed in the negotiations last November over how to keep A.I.G. from toppling and taking other banks down with it. It would have accepted 98 cents on the dollar.

Like Blanche DuBois, the United States is "down on its uppers." We rely on the kindness of foreigners to finance our government.

A Whole Lot of Kindness

U.S. Department of the Treasury, Oct. 16, 2009

These customers must be extending kindness. How else do you explain the massive purchase of Treasuries Securities? They're ignoring wars that we can't afford and defense expenditures equaling 50% of the world's total spending. They're also ignoring the giveaways to failed Wall Street firms and others plus the forgiveness of the executives in charge by assuring their ongoing positions and bonuses.

It would be easy for an investor to look at the United States and say forget about it. But they don't. As a result, we're able to function, at least for a while, as though we're not totally upside down. Of course, there's self interest involved. If we hit the skids, they're likely to feel the back draft. But their self interest serves us well right now.

But there's another take on our benefactors. A "new kid" on the advocacy new block is sounding the alarm. Economy in Crisis is the new media group and their publication is America's Economic Report Daily.

"The American sellout is happening faster than ever as our companies are being taken over in a buying frenzy by foreign investors – like piranha fish consuming its weakened prey. Many of these companies have taken one hundred or more years to develop and were the source of our wealth, strength, and living standards; now overnight, gone. We should be concerned and even outraged that our government let this happen." About Economy in Crisis

This is golden:

2009's most influential author is a mirthless Russian-American who loves money, hates God, and swings a gigantic dick. She died in 1982, but her spawn soldier on. And the Great Recession is all their fault.

It's a brilliant take down of Rand.

One more quote. I just can't resist:

The days during which that 19-year-old has Rand's worldview vectored into his cerebral cortex are feverish and sleepless. Days of beautiful affliction during which the intransigence of others—roommates, a coed the patient has been hitting on, professors, parents, everyone—are shown to be the product of their shortcomings, their idiocy and sublimated envy of the patient's intelligence and talent. Days during which the infected comes to see himself and Roark/Galt as avatars of one another: superheroically mirthless protagonists in a drama of historical import. It's the damnedest thing. One day you've got a bright young kid dutifully connecting the dots of his liberal-arts education; the next, he's got Roark and Galt in the marrow and has become . . . an insufferable asshole.

Heh!

Nov 15

AFP - After a year of soul-searching over the financial crisis that floored Iceland's economy, Icelanders are apparently yearning for the return of old-fashioned qualities like honesty.

Honesty came top on Saturday when 1,500 Icelanders gathered in Reykjavik were asked to discuss what kind of society they wanted.

A grassroots organisation calling itself The Anthill convened a so-called National Assembly of 1,200 people from the age of 18, chosen randomly, along with 300 representatives of organisations and institutions.

They were asked to name the values Icelandic society should be based upon, as well as their vision for the country's future and possible ways of rebuilding the country's economy and society.
..
Halla Tomasdottir, one of the National Assembly organisers, told AFP one of the reasons for the meeting was to try to halt the negativity that has prevailed in Iceland since the start of the crisis.

"We are seeking positive solutions to the situation we find ourselves in. This is a unique opportunity to ask ourselves what kind of a nation we want to be and what kind of a nation we want to hand down to our children," she said.

Nov 15

BBC - Leaders remain split on specifying targets
World leaders meeting in Singapore have said it will not be possible to reach a climate change deal ahead of next month's UN conference in Denmark.

After a two-day Asia-Pacific summit, they vowed to work towards an "ambitious outcome" in Copenhagen.

But the group dropped a target to halve greenhouse gas emissions by 2050, which was outlined in an earlier draft.

Leaders also vowed to pursue a new strategy for growth after the world's worst economic crisis in decades.

They resolved to conclude the Doha round of global trade talks in 2010.

In a joint declaration issued at the end of their two-day annual summit, they said: "We firmly reject all forms of protectionism and reaffirm our commitment to keep markets open and refrain from raising new barriers to investment or to trade in goods and services."

They also agreed to keep stimulus spending in place until a recovery was seen.

Grant McCool | New York | November 13

Reuters - Two computer programmers provided technical support to falsify documents and trading records for swindler Bernard Madoff and took hush money to help keep the massive fraud going, U.S. authorities said.

The FBI arrested Jerome O'Hara, 46, and George Perez, 43, at their homes on Friday morning on criminal charges of conspiracy for falsifying books and records at both the broker-dealer and investment arms of Bernard L. Madoff Investment Securities LLC in New York.

As I recall Paul Krugman was very critical of the Germans in the early days of the recession. I believe his criticism went something like this: the Germans need to get on board a pan-European proposal to staunch the bleeding caused by the financial crisis. I could be wrong, but I don't think so.

So what happened? Apparently Germany's plan was successful. I don't mean to single Krugman out here, as I usually agree with him. But I cannot help but to point out that sometimes the choices nations make, when they buck the economic consensus--like Malaysia telling the IMF and World Bank to go fuck themselves during the Asian financial crisis--are the right choices.

Even Krugman is prey to the consensus--especially when he's the leading voice of it.

Just something to keep in mind.

Reinstating Glass-Steagall is implicit in my criticism of the Dodd Reform Package and the entire 'Too Big To Fail' theme. I should have made this clearer. I did not. So before I dive into my just microwaved frozen lasagna--ah, the life of tEh bachelor--let me flesh out what that means a little.

One: commercial banks are commercial banks. They manage deposits and make a reasonable return on said business. They need to be forced out of the investment banking business. Period. Same goes for insurance.

Two: investment banks are investment banks. They need to be forced out of the commercial banking business. They should not own credit card companies and the like. Sames goes for insurance.

Three: insurance companies are insurance companies. They should not be involved in either investment banking or commercial banking.

Glass-Steagall was enacted after the Great Depression began for a reason: to prevent entities from becoming systemic risks. It's that simple.

See Ian for more.

I'm going to print this out later this afternoon and see what it is all about. I've already read enough to know this doesn't come close to preventing what Numerian discusses here. Here's a summary of Dodd's proposed financial reforms.

Highlights followed by my commentary:

Consumer Financial Protection Agency: Creates an independent watchdog to ensure American
consumers get the clear, accurate information they need to shop for mortgages, credit cards, and other
financial products, while prohibiting hidden fees, abusive terms, and deceptive practices.

Okay, this is a no brainer. But while we're at it, can't we have some usury laws in this country? I mean, a grandma who has paid her bills on time her entire life that gets her rate jacked up to 29%? We can do better.

Ends Too Big to Fail: Prevents excessively large or complex financial companies from bringing down
the economy by: creating a safe way to shut them down if they fail; imposing tough new capital and
leverage requirements and requiring they write their own “funeral plans”; requiring industry to provide
their own capital injections; updating the Fed’s lender of last resort authority to allow system-wide
support but not prop up individual institutions; and establishing rigorous standards and supervision to
protect the economy and American consumers, investors and businesses.

This does nothing, absolutely nothing to end 'too big to fail.' It's a band-aid, feel good measure that only adds another layer of useless bureaucracy without any real enforcement.

As I have said countless times, over and over and over: if it is too big to fail, it is too big to exist. Period. Can we have some anti-trust enforcement? What's the safe way to shut them down when we will face a systemic collapse, similar to the one we faced last year? How? Requiring industry to provide their own capital injections? Look, if industry could have injected their own capital they wouldn't have come a-begging to the government, you know?

Here's a good alternative to Dodd's bill, that would give the Treasury Secretary power to break up a banks or institutions or "any entity that has grown so large that its failure would have a catastrophic effect on the stability of either the financial system or the United States economy without substantial Government assistance." I approve. The bill seems to be gaining steam as well in Congress.

Protects Against Systemic Risks: Creates an independent agency with a board of regulators to identify
and address systemic risks posed by large, complex companies, products, and activities before they
threaten the stability of the financial system. The agency could require companies that threaten the
economy to divest some of their holdings.

What ever happened to the SEC? Why do we need several new layers of bureaucracy? Why not just beef up the SEC's enforcement division? Am I missing something here?

Single Federal Bank Regulator: Eliminates the convoluted system of multiple federal bank regulators to
increase accountability and end unnecessary overlap, conflicting regulation, and “charter shopping;”
keeps in place the healthy dual banking system that governs community banks.

I can't really speak this one, as commercial banking or banking writ large is not my bailiwick. Asset markets, yes. The Fed System? Nope. Numerian?

Executive Compensation and Corporate Governance: Provides shareholders with a say on pay and
corporate affairs with a non-binding vote on executive compensation and director nominations.

Shareholders already have this right. That's why they are called shareholders, you know? A non-binding vote? That's just weak.

Closes Loopholes in Regulation: Eliminates loopholes that allow risky and abusive practices to go on
unnoticed and unregulated - including loopholes for over-the-counter derivatives, asset-backed securities,
hedge funds, mortgage brokers and payday lenders.

Okay, this is a good idea. But I don't see anything here that will lead to the regulation of CDS' or hedge-funds or absolutely criminal equity extraction schemes by 'private' equity firms.

Protects Investors: Provides tough new rules for transparency and accountability from investment
advisors, financial brokers and credit rating agencies to protect investors and businesses.

Question: does this bill gut Sarbanes-Oxley? (If you haven't read this story, do so now. It will make you weep.) If the bill does gut it, well, what's the point of all the rest of the reforms? Talk about pointless.

Enforces Regulations on the Books: Strengthens oversight and empowers regulators to aggressively
pursue financial fraud, conflicts of interest and manipulation of the system that benefit special interests at
the expense of American families and businesses.

This last one is just boilerplate. My question is: why haven't these laws hitherto been enforced? And for those who might quibble with me that I'm not offering solutions, only criticisms, my reply is read this. I've already offered solutions.

A most revealing comment was made today by The Maestro, Alan Greenspan, speaking at a conference in Alberta on energy and the global economy:

We have been very fortunate that the stock markets moved back and are re-liquifying the whole process.

He pointed to the “wealth effect” created by a rising stock market, especially when investors cash in their capital gains.

In olden times, before Alan Greenspan spent over a decade as Federal Reserve Chairman, Fed officials worried about the growth in money supply, the level of prices in the economy, unemployment, and the strength of the dollar overseas. In fact, if you read the enabling legislation for the Fed, these are the things the Board of Governors should be concentrating on.

What has devastated the US and global economy? The simplest explanation is unrestrained personal greed. People everywhere have had no reservations about abusing business practices, ethics, laws and cultural norms because all they cared about was amassing personal wealth. Most have also betrayed family members, friends, employers or clients. Greed is an ungodly sin that drives desires, ambitions and behavior. Greed pollutes civilization.

Please read the rest of my article at:

http://searchwarp.com/swa554265-Greed-Conquers-Guilt.htm

Greg Gordon | New York | November 3

McClatchy Newspapers -

 

Greg Norton interviewed on the Real News Network (Video)

NEW YORK — Inside the thick Goldman Sachs investment circular were the details of a secret, $2 billion deal channeled through a Caribbean tax haven.

One bond analyst who reviewed the 2006 Cayman deal dismissed it in a report to clients as "a not so cleverly disguised way for Goldman Sachs & Co. to unload its unwanted exposures to the subprime real estate market onto foreign investors."

Here's a novel idea for the New York Times Editorial Board to consider: if it is too big to fail, it is too big to fucking exist. We don't need a systemic risk regulator. What we need is anti-trust enforcement:

Authored by the Treasury Department and Representative Barney Frank, the chairman of the committee, the proposal broaches a number of essential reforms. Chief among them is the creation of a systemic risk regulator to look for problems that could lead to cascading failures. The regulator would also have resolution authority — the power, if necessary, to seize and restructure critically ill bank holding companies and nonbank financial firms whose failure would pose a systemwide threat.

Why is it that little old me, a dirty fucking hippie in his pajamas sitting on a porch, sipping coffee can see the such an elegant and simple solution and the well-educated, credentialed and connected village folks can't?

What am I missing?

Nov 1

BBC - UK: Government to create bank chains

The government is to create three new High Street banking chains by 2015 as part of a major overhaul of the sector.

They will be set up by selling off parts of Royal Bank of Scotland, Lloyds and Northern Rock - the banks which had to be bailed out by the taxpayer.

Ministers and the European Competition Commissioner are in talks over the move, which would go some way to recoup the public money invested in the banks.

There is speculation that buyers might include Tesco and Virgin.

The new chains will be standard retail banks concentrating on deposits and mortgages.

In order to boost competition, they will only be sold to new entrants to the UK banking market and not to existing financial institutions.

Ministers say that creating more competitors on the High Street in this way will invigorate the mortgage market and ultimately lead to a better deal for customers.

The point of an economic stimulus package is to grow the economy. There is no question in my mind that the stimulus enacted by Obama and the Congress succeeded in doing that. I've been pretty clear in giving credit where credit is due on that front. But the problem is this: it was the wrong kind of stimulus--too many tax cuts and not enough money to the states. Cash-for-clunkers? A beefed up subsidy for first time home buyers? Lots of military Keynesianism? Wasn't it this kind of free-for-all in credit what got us here in the first place?

Meanwhile, the states are still in the red, bloody oozing red that it is. And business spending, that engine of economic growth and employment? Where's that? One could go on and on.

As Krugman says, "we’ve gotten the big boost, and it’s clearly far short of what we really need."

Do you feel stimulated? Or are you still personally retrenching?

To repeat: the stimulus was good, but it wasn't enough and was targeted correctly. And we'll see the results of a committee designed stimulus plan soon enough.

If Wall Street bankers are so smart, how can they be so dumb when it comes to paying out bonuses?

Don’t these people read newspapers? Don’t they watch Dylan Ratigan on CNBC or Glenn Beck on FOX News, castigating bankers for their greed and ingratitude to the taxpayers who saved their firms? Haven’t they sat through one speech too many by President Obama insisting that they stop giving million dollar and multi-million dollar bonuses? Have they no idea what it means for the average worker to struggle in an economy with 10% unemployment and another 8% underemployed?

And yet Goldman Sachs is on schedule to give out record bonuses this year totaling nearly $20 billion, or half a million dollars on average per employee. Morgan Stanley is not far behind, and the investment bankers and traders at Merrill Lynch (now wholly owned by Bank of America) and Bear Stearns (now wholly owned by JP Morgan Chase) are going to be treated royally as well. What is it about these people who are supposedly so smart in figuring out the markets but dumb as posts when it comes to judging the larger world in which they operate?

Ashley Seager, Julia Kollewe & Kathryn Hopkins | London | October 23

The Guardian - The British economy is mired in its longest recession on record, as government figures out this morning showed a shock 0.4% drop in gross domestic product (GDP) in the third quarter of the year.

The figures confounded widespread hopes that the economy had returned to growth after five consecutive quarters of recession.

City economists had almost unanimously expected a small increase in GDP. Quarterly records go back to 1955 and show there has never until now been six quarters of contraction in a row.

Lot's of hyperventilating today about tens of thousands of people who cheated on their taxes and defrauded the US government in order to buy new homes:

Tens of thousands of people may have taken advantage of the first-time home buyer tax credit to defraud the government, an IRS watchdog office said Thursday, in testimony that could jeopardize efforts to extend the popular program.

So, here are the facts: Goldman Sachs and other big banks perpetrated the largest fraud in history against the American tax-payer and what does the IRS do? Goes after the little guy.

Fuck yeah!

I meant to write about this yesterday but never got around to it, as I am working on a deadline right now. But here goes. Ian makes a point I have long tried to make about why resuming Glass-Steagall era restrictions on investment banks and commercial banks is so critical:

Splitting banks into retail and investment banks, keeping brokerages and insurance companies separate as well is part of a solution set which kept major financial crises like the recent one from happening for most of the second half of the 20th century. It was put in place by people who were experiencing the Great Depression and had learned the lessons of the roaring 20s.

The idea that this is somehow a 30s-style solution as Ian notes, as well, is balderdash. It worked in the past and it will work again. Ian of course is correct in analysis that the reason such a solution is a non-starter is 'cupidity.' The government of the UK and the US are damn near wholly-owned subsidiaries of modern-finance.

I've long liked to motto 'keep it simple stupid.' And it's obvious corollary, at least in my own life, that when I needed to learn something, or needed help in business, etc. . I went to an old-timer and asked for advice. "How did you do it," I asked frequently in my years at Morgan Stanley. Without fail I always got good advice. Why? Because the old-timers were still around; they had survived; and they had thrived.

We ignore the advice of our elder statesmen like Paul Volcker at our own peril. And as Ian notes, "By not making another financial crisis impossible, they are making another financial crisis inevitable, and next time it will be even worse."

Rex Nutting | Washington | October 21

MarketWatch - The government has spent trillions to rescue the banking system from the brink of disaster, but the biggest cost may be the loss in the government's credibility from an understandably distrustful and angry public, according to a quarterly report released Wednesday by the congressional watchdog over the bank bailout.

"The anger, cynicism and distrust created must be chalked up as one of the substantial, albeit unnecessary costs" of the Troubled Asset Relief Program, said Neil Barofsky, the special inspector general for the TARP, in a report to Congress. Read the report.

Zero Hedge, By Tyler Durden, October 19

When the financial system almost imploded in the fall of 2008, one of the primary responses by the Federal Reserve was the issuance of an unprecedented amount of FX liquidity lines in the form of swaps to foreign Central Banks. The number went from practically zero to a peak of $582 billion on December 10, 2008. The number of swaps outstanding was almost directly inversely correlated with the value of the dollar (much more on that shortly). A graphic representation of this can be seen below: