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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
6/23/2009 05:28:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
6/23/2009 09:57:00 AM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
5/20/2009 03:58:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
4/06/2009 01:17:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
3/27/2009 01:17:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
3/22/2009 08:19:00 PM 1 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
3/22/2009 12:02:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
3/16/2009 10:10:00 AM 4 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
3/02/2009 11:37:00 AM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
2/19/2009 02:51:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
2/17/2009 01:34:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
2/17/2009 11:36:00 AM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
2/12/2009 01:18:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
1/25/2009 04:49:00 PM 0 comments links to this post

 

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

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
11/10/2008 03:34:00 PM 0 comments links to this post

 

Good Review of Subprime

by Dollars and Sense

The excellent Julian Delasantellis, who contributes regularly to Asia Times, reviews Confessions of a Subprime Lender, by Richard Bitner, who worked in the industry and coundn't take it anymore. The review serves as a good refresher on some of the chronology, arcana and issues, and is just fun to read because of Delasantellis' writing style and wit.

BOOK REVIEW
Subprime--an (im)morality tale
Confessions of a Subprime Lender by Richard Bitner
Reviewed by Julian Delasantellis

In 1949, the hard-boiled American crime writer Raymond Chandler observed that "Such is the brutalization of commercial ethics in this country that no one can feel anything more delicate than the velvet touch of a soft buck." It wasn't that "velvet touch of a soft buck" that the subprime mortgage business felt, and fell victim to, these past few years; it was the creamy caress of about 3 trillion of those soft bucks. It was the heady intoxication of this sensation that caused the industry to abandon all pre-existing standards of banking probity and morality, and this is the story that Richard Bitner tells in his new book, Confessions of a Subprime Lender.

By 2006, Bitner, co-founder of subprime broker Kellner Mortgage, had seen so much of his industry's blatant balderdash, howling half truths, and malevolent mendacities that he could stand no more. Walking away from a business that had made him, and everyone in his business, insanely wealthy in an insanely brief amount of time, he pledged to write a book that would tell the truth about this business. Amazingly enough, considering the dross that winds up in the business sections of the bookstores these days (The Way of the Bushido Method to Sell Your Timeshare or, 12 Apostles=12 Successful Salescalls--The New Testament Sales, Commission and Wealth Plan) Bitner could not find a publisher for his work, so he self-published.

Buzz spread and word got around, John Wiley and Sons put out an edition in early summer. On Amazon.com, the book is now ranked number 4 in the "mortgages" sub-category of Business and Investing/Real Estate


Read the rest of the article

Labels: Asia Times, banking regulation, financial crisis, financial crisis bailout, Julian delasantellis, mortgage meltdown, subprime lending

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
11/07/2008 01:12:00 PM 0 comments links to this post

 

On The Ratings Agencies

by Dollars and Sense

From Mother Jones:

Credit Rating Exec: "We Sold Our Souls to the Devil"
Internal documents show that while rating firms publicly defended their practices, executives privately wondered when the house of cards would fall. "

Nick Baumann

October 22, 2008 For years, credit rating agencies--the referees of Wall Street--insisted they were an impartial source of information, despite their financial reliance on the companies they rated. Then came the market meltdown--and a chorus of accusations that firms had artificially inflated their risk ratings to please their clients and gain a competitive edge. And now there's plenty of evidence to suggest the "referees" were unduly influenced by the players.

According to internal documents released at a congressional hearing Tuesday, while rating agencies strenuously defended their independence publicly, some of their top executives acknowledged privately that they faced fundamental conflicts. As one executive at Moody's, a major credit rating agency, put it following an internal discussion on the implosion of the subprime mortgage market, "These errors make us look either incompetent at credit analysis, or like we sold our soul to the devil for revenue." The documents lend credibility to charges by Wall Street executives that the rating agencies deserve part of the blame for the current financial crisis. "The story of the credit rating agencies is a story of colossal failure," said Henry Waxman (D-Calif.), the chairman of the House Committee on Oversight and Government Reform, which is holding a series of hearings to investigate the causes of the market meltdown. (Mother Jones also covered hearings on Lehman Brothers and AIG.)

Read the rest of the article

Labels: banking regulation, financial crisis, financial crisis bailout, Ratings agencies

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
11/07/2008 09:01:00 AM 0 comments links to this post

 

'You Can't Make This Stuff Up...'

by Dollars and Sense

...is the universal response to this item circulating through the blogosphere this morning. From Clustershock Beta. Hat tip to Across the curve:

Fed Hires Bear Stearns Risk Boss
John Carney | Nov 3, 08 8:35 AM

In a move that is sure to put to rest the notion that there are no second acts in American life, former Bear Stearns chief risk officer Michael Alix has landed a job in the office of the Federal Reserve charged with assessing the safety and soundness of domestic banking institutions.

We suppose that Alix at least has plenty of experience with unsound banking institutions. He was the chief risk officer of Bear Stearns from 2006 until 2008. So, basically, he was the guy on the mast charged with yelling "iceberg" just before the titantic introduced its bow to a floating hunk of ice. Prior to that he ran credit risk management for Bear from 1996 to 2006, Jon Keehner at Bloomberg points out. That worked out just great.

"Alix will be a senior adviser to William Rutledge, executive vice president of the bank supervision group, according to a statement on the New York Fed's Web site. Staff in the group 'assess the safety and soundness of domestic banking institutions,'" Keehner reports.

Labels: banking regulation, Bear Stearns, financial crisis bailout, Michael Alix, The Fed

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
11/04/2008 08:41:00 AM 0 comments links to this post

 

Bright Greetings Dear American- -Paulson's Scam

by Dollars and Sense

- - - - - - - - - - - - - - - - -
From: Henry Paulson
Date: 9/23/2008
Subject: Supper secret transaction Need you're help

Bright Greetings Dear American:

I need to ask you to support an urgent secret business relationship with a transfer of funds of great magnitude.

I am Ministry of Treasury of the Republic of America. My country has had a crisis that has caused the need for a large transfer of funds of 700 billion dollars US. If you would assist me in this transfer, it would be most profitable to you.

I am working with renowned Mr. Phil Gram, lobbyist for UBS, who will be my replacement as Ministry of Treasury in January. As a Senator, you may know him as the leader of the American banking deregulation movement in the 1990s. This transactin is 100% safe.

This is a matter of great urgency. We need a blank check. We need the funds as quickly as possible. We cannot directly transfer these funds in the names of our close friends because we are constantly under surveillance. My family lawyer advised me that I should look for reliable and trustworthy person who will act as a next of kin so the funds can be transferred.

Please reply with all of your bank account, IRA and college fund account numbers and those of your children and grandchildren to wallstreetbailout@treasury.gov so that we transfer your commission for this transaction. After I receive you're information, I will respond with detailed information about safeguards that will be used to protect the funds.

Wonderful salutations to you cherish friend from Republic of America.

Yours Faithfully Minister of Treasury Paulson

- - - - - - - - - - - - - - - - - -

Labels: bailout, banking regulation, financial crisis, Henry Paulson

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
9/23/2008 10:42:00 AM 0 comments links to this post

 

Is the Bailout Justified?

by Polly Cleveland

This is a Q&A session with Mason Gaffney, professor of economics at the University of California at Riverside. (Visit his website.) Gaffney points out that banks are in their very nature highly leveraged. Bernanke and Paulson must intervene, not to save the bad guys, but to keep the whole banking system from shutting down as it did in 1932. Of course the devil is in the details. And their intervention won't work in the long run without tax and regulatory reform.

QUESTION: We hear that the feds had to bail out Fannie and Freddie because of the terrible consequences of letting them fail. How much of that is real and how much is bunk? I'd have thought that if the companies go bankrupt, their stock sells for pennies on the dollar and the new owners can re-negotiate loans down to lower interest rates for people who can afford to pay something, while foreclosing and selling (cheap) those homes that had been bought on false pretenses and weren't going to be paid off at any positive interest rate. Where's the catastrophe? Am I missing something important?

ANSWER: Yes, you are missing something important. Banking is a confidence game because banks borrow short to lend long, making their income on the spread of interest rates. That means they are at all times technically insolvent, so when confidence hangs by a thread the whole system can crash, even though for years it has operated smoothly.

They insure all this with a cushion of capital and surplus that is a small fraction of their liabilities, well under 10%. So if a small fraction of their borrowers default it wipes out their capital and surplus, and they stop lending.

When they move too much of their funds into long-term investments like buildings, plus land purchases which are even slower to pay out, their loan turnover slows down so every year they have fewer funds to finance current production. This is the case today, and it chokes off lots of productive businesses.

Superficially the lower (commercial) banks avoid this slowdown by selling their assets to higher (investment) banks, but that just blows dust over what is really happening. The higher banks end up holding the bag, as now, and they collapse, as now.

Since FDR, strict banking regulations held the system in check. The Glass-Steagall Act of 1933 separated commercial banks from investment banks precisely to protect consumers and commercial borrowers from the risky behavior of higher banks. Since Newt Gingrich and Rush Limbaugh and Tom DeLay took over, these regs have been repealed, including Glass-Steagall in 1999. The ensuing crash, set up by doctrinaire neocons blinded by Chicago-school economic theology and Bush imperialism, is likely to match 1929.

In previous busts the U.S. Treasury could hold the final bag. Now, however, the U.S. Treasury itself is vulnerable, depending on loans from foreign nations. So we inflate the currency and devalue the dollar in a vain effort to prevent further collapse of real estate values and further seizing up of the commercial banking system.

Bernanke and Paulson, no fools, are making lemonade as best one could hope. I would nonetheless fault them for cooperating with an administration that refuses to raise taxes or cut military spending and related puppet-propping subventions. We need to do what Clinton did: "reverse crowding out"--paying off government bonds to put money back into the hands of consumers and, especially, investors.

Of course this leads right into income tax reform, which is more Paulson's business than Bernanke's. We need steeply progressive income and corporate taxes and an end to special treatment of real estate, oil and other natural resources.

Bernanke's business should be to promote selective credit controls, especially to restrict bank lending on real estate collateral.

Labels: bailout, banking regulation, Ben Bernanke, credit crisis, Fannie Mae, Freddie Mac, Henry Paulson

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
9/22/2008 12:51:00 PM 0 comments links to this post

 

The Banks and Private Equity

by Dollars and Sense

A good editorial from today's New York Times, cautioning against private equity firms' efforts to get the Fed to relax bank ownership regulations. The current issue of Dollars & Sense includes a feature article by a former industry insider that exposes how an already favorable regulatory landscape allows private equity firms to reap megaprofits at the expense of the companies they buy and sell and the communities that depend on them.

The Banks and Private Equity

Many banks are ailing, lamed by hundreds of billions of dollars in bad loans and poor investments and hamstrung by the prospect of continued multibillion- dollar losses.

There is no painless solution. If banks retrench by making fewer loans, families and businesses are hurt and with them, the broader economy. If banks cope by building bigger cushions against losses, shareholders take the hit in the form of lower dividends, lower earnings per share, lower stock prices or some combination.

Yet, for the past month, some private equity firms have been promoting what they claim would be a relatively pain-free fix of the nation’s banks. And the Federal Reserve — which must know that if it sounds too good to be true, it probably is — has yet to say no, as it should.

Private equity firms say they are ready to invest huge amounts in ailing banks — provided the Fed eases up on the regulations that would otherwise apply to such large investments. The firms’ desire to jump in makes perfect sense. Bank shares are cheap now, but for the most part, are likely to rebound when the economy improves. The firms’ push for easier rules, however, is a dangerous power grab, and should be rejected.

Under current rules, if an investment firm owns 25 percent or more of a bank, it is considered, properly, a bank holding company, subject to the same federal requirements and responsibilities as a fully regulated bank. If a firm owns between 10 percent and 25 percent of a bank, it is typically barred from controlling the bank’s management. To place a director on a bank’s board, an investor’s ownership stake must be less than 10 percent. The rules exist to prevent conflicts of interest and concentration of economic power. They protect consumers and businesses who rely on well-regulated banks, as well as taxpayers, who stand behind the government’s various subsidies and guarantees to banks.

To maximize their profits, private equity firms want to own more than 9.9 percent of the banks they have their eye on and they want more managerial control — and they want it all without regulation. They argue that because they tend to be shorter-term investors, problems that the rules address are unlikely to occur on their watch. That is a weak argument. It does not necessarily take a great deal of time to do damage. And as the financial crisis demonstrates daily, decisions and actions taken by unregulated and poorly supervised firms can prove disastrous years later.

Worse, the private equity firms are exploiting the desperation of banks and regulators. They know that banks are desperate to raise capital and that doing so is a painful process bankers would rather avoid. They also know that regulators and other government officials, many of whom where asleep on the job as the financial crisis developed, want to avoid the political fallout and economic pain of bank weakness and failure.

Federal regulators would be wrong to cave. Now, when there is great uncertainty about which institutions are too big or too interconnected to fail, is exactly the wrong time to allow less transparency and less regulation. And with confidence in the financial system badly shaken, it would be a mistake to signal to global markets and American citizens that the government is willing to put expediency above long-term stability.

Held to the same rules as other investors, private equity firms may choose to invest less. Some banks may have a tougher time repairing the damage to their institutions. Some banks will fail. That, unfortunately, is what happens in a financial crisis.

Labels: banking regulation, New York Times, private equity, The Fed

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
8/03/2008 08:30:00 PM 1 comments links to this post

 

McCain in Bed with Lobbyists; Taxpayers Get Screwed

by Dollars and Sense

Today's New York Times quotes D&S author Bill Black, in the article critical of Sen. John McCain that is raising such a ruckus among the political commentariat—especially among the right-wing types who had been so down on McCain until recently.

Black was deputy director of the Federal Savings and Loan Insurance Corporation when McCain, along with the rest of the "Keating Five" (Sens. Alan Cranston, Dennis DeConcini, John Glenn, and Don Riegle) tried to influence regulators on behalf of Charles Keating, chairman of the then-failing Lincoln Savings & Loan. Black was one of the regulators the senators tried to influence; Edwin J. Gray, chairman of the Federal Home Loan Bank Board, was another. Keating had donated to all the senators' campaigns, and McCain's wife, Cindy, whom the Times describes as "the heiress to a beer fortune" in Arizona, had "joined Mr. Keating in investing in an Arizona shopping mall."

The collapse of the Lincoln S&L cost taxpayers approximately $3.4 billion; the S&L crisis as a whole cost taxpayers more than $124 billion, according to the General Accounting Office.

(Side note: the scandal did not end the careers of any of the Keating Five; Cranston, DeConcini, and Riegle all served out their terms; Glenn and McCain both stood for re-election and won. Perversely, after his senate term ended, DeConcini was appointed by President Clinton to the the Board of Directors of the Federal Home Loan Mortgage Corporation, aka "Freddie Mac".)

The fuss about the Times article seems to be mostly about the somewhat weakly sourced suggestion that McCain had an affair with a lobbyist named Vicki Iseman. But to our way of thinking, McCain's participation in the Keating Five scandal and the S&L crisis is still the bigger story. Here is what Bill Black told the Times:

Some people involved think Mr. McCain got off too lightly. William Black, one of the banking regulators the senator met with, argued that Mrs. McCain’s investment with Mr. Keating created an obvious conflict of interest for her husband. (Mr. McCain had said a prenuptial agreement divided the couple’s assets.) He should not be able to “put this behind him,” Mr. Black said. “It sullied his integrity.”

Black presents a full history of the S&L crisis in his book The Best Way to Rob a Bank Is to Own One: How Corporate Executives and Politicians Looted the S&L Industry. That crisis—much like the current banking crisis—was the result of banking deregulation and the "control fraud" that inevitably follows it, as Black's recent D&S article shows.

Labels: banking regulation, Bill Black, deregulation, john mccain, Keating Five, savings and loan crisis, William Black, William K. Black

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
2/21/2008 06:08:00 PM 0 comments links to this post