Big Banks Get Big Time Changes

Jun 17, 7:13 PM (ET)

hp3By JIM KUHNHENN and MARTIN CRUTSINGER

ASSOCIATED PRESS

WASHINGTON (AP) – From simple home loans to Wall Street’s most exotic schemes, the government would impose and enforce sweeping new “rules of the road” for the nation’s battered financial system under an overhaul proposed Wednesday by President Barack Obama.

Aimed at preventing a repeat of the worst economic crisis in seven decades, the changes would begin to reverse a determined campaign pressed in the 1980s by President Ronald Reagan to cut back on federal regulations.

Obama’s plan would do little to streamline the alphabet soup of agencies that oversee the financial sector. But it calls for fundamental shifts in authority that would eliminate one regulatory agency, create another and both enhance and undercut the authority of the powerful Federal Reserve.

The new agency, a consumer protection office, would specifically take over oversight of mortgages, requiring that lenders give customers the option of “plain vanilla” plans with straightforward and affordable terms. Lenders who repackage loans and sell them to investors as securities would be required to retain 5 percent of the credit risk – a figure some analysts believe is too low.

In all, the Obama’s broad proposal cheered consumer advocates and dismayed the banking industry with its proposed creation of a regulator to protect consumers in all their banking transactions, from mortgages to credit cards. Large insurers protested the administration’s decision not to impose a standard, federal regulation on the insurance industry, leaving it to the separate states as at present. Mutual funds succeeded in staying under the jurisdiction of the Securities and Exchange Commission instead of the new consumer protection agency.

Obama cast his proposals as an attempt to find a middle ground between the benefits and excesses of capitalism.

“We are called upon to put in place those reforms that allow our best qualities to flourish – while keeping those worst traits in check,” Obama said.

The president’s plan lands in the lap of a Congress already preoccupied by historic health care legislation, consideration of a new Supreme Court justice and other major issues. Still, Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year’s end.

“We’ll have it done this year,” pledged Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee.

“Absolutely,” agreed Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.

But fissures quickly developed.

Dodd, who had been at Obama’s side in the East Room of the White House for the announcement, raised questions about one of the plan’s key features – giving the Federal Reserve authority to oversee the largest and most interconnected players in the financial world.

“There’s not a lot of confidence in the Fed at this point,” Dodd said.

Obama’s proposal would require the Federal Reserve, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury Department approval before extending credit to institutions in “unusual and exigent circumstances,” a change designed to mollify critics who say the Fed should be more accountable in exercising its powers as a lender of last resort.

But the proposal also would do away with a restriction imposed on the Fed in 1999 when Congress lifted Depression-era restrictions that allowed banks to get into securities and insurance businesses. The Fed, as the regulator for the larger financial holding companies, had been prohibited from examining or imposing restrictions on those firms’ subsidiaries. Obama’s proposal specifically lifts that restriction, giving the Fed the ability to duplicate and even overrule other regulators. At the same time, the new consumer agency would take away some of the Fed’s authority.

Fed defenders argue that none of the major institutional collapses – AIG, Bear Stearns, Lehman Bros., Merrill Lynch or Countrywide – were supervised by the Federal Reserve. Critics argue the Fed failed to crack down on dubious mortgage practices that were at the heart of the crisis.

Administration officials concede their plan responds to the current crisis- in national security terms, it prepares them to fight the last war. But they also insist that a central tenet of their plan is a requirement that from now on financial institutions will have to keep more money in reserve – the best hedge against another meltdown.

That may appear to be a no-brainer: If banks and other large institutions have more money, they won’t be vulnerable if their risky bets go bad.

However, banking regulators have been arguing for years over implementation of an international standard for bank capital. Geithner said Wednesday hoped to move on enhanced capital standards “in parallel with the rest of the world.”

Obama’s overall plan, laid out in an 88-page white paper, was the result of extensive consultations with members of Congress, regulators and industry groups and represented a compromise from bolder ideas the administration ended up abandoning because of heavy opposition.

The plan had its share of winners and losers, both inside and outside government.

Sheila Bair, the chair of the Federal Deposit Insurance Corp., lost her campaign to have a regulatory council, not the Fed, regulate large firms whose failure could undermine the entire system. SEC Chairman Mary Schapiro also had expressed support for Bair’s push for a more powerful risk council.

The regulatory overhaul ended up eliminating only one agency, the Office of Thrift Supervision, generally considered a weak link among current banking regulators. The OTS oversaw the American International Group, whose business insuring exotic securities blew up last fall, prompting a $182 billion federal bailout.

The failure to merge all four current banking agencies into one super regulator could open the door for big banks to continue to exploit weak links in the current system. Sen. Charles Schumer of New York, a leading Democratic voice on Wall Street issues, praised the administration’s plan but said he would consider further consolidation.

“We’re removing one major agency-shopping opportunity, but there’s a real potential for others,” said Patricia McCoy, a law professor at the University of Connecticut who has studied bank failures.

Associated Press writers Marcy Gordon, Anne Flaherty, Jeannine Aversa and Stevenson Jacobs contributed to this report.

Greenwald: The Individuals Obama Chose to be His Top Economic Officials Embody Exactly the Corruption He Repeatedly Vowed to End

Larry Summers, Tim Geithner and Wall Street’s ownership of government

Glenn Greenwald- SALON

Apr. 04, 2009 |

White House officials yesterday released their personal financial disclosure forms, and included in the millions of dollars which top Obama economics adviser Larry Summers made from Wall Street in 2008 is this detail:bailout

Lawrence H. Summers, one of President Obama’s top economic advisers, collected roughly $5.2 million in compensation from hedge fund D.E. Shaw over the past year and was paid more than $2.7 million in speaking fees by several troubled Wall Street firms and other organizations. . . .

Financial institutions including JP Morgan Chase, Citigroup, Goldman Sachs, Lehman Brothers and Merrill Lynch paid Summers for speaking appearances in 2008. Fees ranged from $45,000 for a Nov. 12 Merrill Lynch appearance to $135,000 for an April 16 visit to Goldman Sachs, according to his disclosure form.

That’s $135,000 paid by Goldman Sachs to Summers — for a one-day visit.  And the payment was made at a time — in April, 2008 — when everyone assumed that the next President would either be Barack Obama or Hillary Clinton and that Larry Summers would therefore become exactly what he now is:  the most influential financial official in the U.S. Government (and the $45,000 Merrill Lynch payment came 8 days after Obama’s election). Goldman would not be able to make a one-day $135,000 payment to Summers now that he is Obama’s top economics adviser, but doing so a few months beforehand was obviously something about which neither parties felt any compunction.  It’s basically an advanced bribe.  And it’s paying off in spades.  And none of it seemed to bother Obama in the slightest when he first strongly considered naming Summers as Treasury Secretary and then named him his top economics adviser instead (thereby avoiding the need for Senate confirmation), knowing that Summers would exert great influence in determining who benefited from the government’s response to the financial crisis.

Last night, former Reagan-era S&L regulator and current University of Missouri Professor Bill Black was on Bill Moyers’ Journal and detailed the magnitude of what he called the on-going massive fraud, the role Tim Geithner played in it before being promoted to Treasury Secretary (where he continues to abet it), and — most amazingly of all — the crusade led by Alan Greenspan, former Goldman CEO Robert Rubin (Geithner’s mentor) and Larry Summers in the late 1990s to block the efforts of top regulators (especially Brooksley Born, head of the Commodities Futures Trading Commission) to regulate the exact financial derivatives market that became the principal cause of the global financial crisis.  To get a sense for how deep and massive is the on-going fraud and the key role played in it by key Obama officials, I highly recommend watching that Black interview (it can be seen here and the transcript is here).

This article from Stanford Magazine — an absolutely amazing read — details how Summers, Rubin and Greenspan led the way in blocking any regulatory efforts of the derivatives market whatsoever on the ground that the financial industry and its lobbyists were objecting:

As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives. . . . One type of derivative—known as a credit-default swap—has been a key contributor to the economy’s recent unraveling. . .

Back in the 1990s, however, Born’s proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. . . . But even the modest proposal got a vituperative response. The dozen or so large banks that wrote most of the OTC derivative contracts saw the move as a threat to a major profit center. Greenspan and his deregulation-minded brain trust saw no need to upset the status quo. The sheer act of contemplating regulation, they maintained, would cause widespread chaos in markets around the world.

Born recalls taking a phone call from Lawrence Summers, then Rubin’s top deputy at the Treasury Department, complaining about the proposal, and mentioning that he was taking heat from industry lobbyists. . . . The debate came to a head April 21, 1998. In a Treasury Department meeting of a presidential working group that included Born and the other top regulators, Greenspan and Rubin took turns attempting to change her mind. Rubin took the lead, she recalls.

“I was told by the secretary of the treasury that the CFTC had no jurisdiction, and for that reason and that reason alone, we should not go forward,” Born says. . . . “It seemed totally inexplicable to me,” Born says of the seeming disinterest her counterparts showed in how the markets were operating. “It was as though the other financial regulators were saying, ‘We don’t want to know.’”

She formally launched the proposal on May 7, and within hours, Greenspan, Rubin and Levitt issued a joint statement condemning Born and the CFTC, expressing “grave concern about this action and its possible consequences.” They announced a plan to ask for legislation to stop the CFTC in its tracks.

Rubin, Summers and Greenspan succeeded in inducing Congress — funded, of course, by these same financial firms — to enact legislation blocking the CFTC from regulating these derivative markets.  More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works.  People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting.  When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal.  Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government.  Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced.  This corruption is so tawdry and transparent — and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity — that it is mystifying that it is not provoking more mass public rage.

All of that leads to things like this, from today’s Washington Post:

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials. . . .

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials. . . .

In one program, designed to restart small-business lending, President Obama’s officials are planning to set up a middleman called a special-purpose vehicle — a term made notorious during the Enron scandal — or another type of entity to evade the congressional mandates, sources familiar with the matter said.

If that isn’t illegal, it is as close to it as one can get.  And it is a blatant attempt by the White House to brush aside — circumvent and violate — the spirit if not the letter of Congressional restrictions on executive pay for TARP-receiving firms.  It was Obama, in the wake of various scandals over profligate spending by TARP firms, who pretended to ride the wave of populist anger and to lead the way in demanding limits on compensation.  And ever since his flamboyant announcement, Obama — adopting the same approach that seems to drive him in most other areas — has taken one step after the next to gut and render irrelevant the very compensation limits he publicly pretended to champion (thereafter dishonestly blaming Chris Dodd for doing so and virtually destroying Dodd’s political career).   And the winners — as always — are the same Wall St. firms that caused the crisis in the first place while enriching and otherwise co-opting the very individuals Obama chose to be his top financial officials.

Worse still, what is happening here is an exact analog to what is happening in the realm of Bush war crimes — the Obama administration’s first priority is to protect the wrongdoers and criminals by ensuring that the criminality remains secret.  Here is how Black explained it last night:

Black:  Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it’s going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they’re allowing all the banks to report that they’re not only solvent, but fully capitalized. Both statements can’t be true. It can’t be that they need $2 trillion, because they have masses losses, and that they’re fine.

These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because…

Moyers:  What do you mean?

Black: Well, Geithner has, was one of our nation’s top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he’s a failed legacy regulator. . . .

The Great Depression, we said, “Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?” Where’s our investigation?

What would happen if after a plane crashes, we said, “Oh, we don’t want to look in the past. We want to be forward looking. Many people might have been, you know, we don’t want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. . . .

Moyers: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?

Black: Absolutely.

Moyers: You are.

Black: Absolutely, because they are scared to death. . . . What we’re doing with — no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson’s firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn’t want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Where Congress said, “We will not give you a single penny more unless we know who received the money.” And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.

Moyers: Even though Goldman Sachs had a big vested stake.

Black: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn’t be allowed in civilized society.

This is exactly what former IMF Chief Economist Simon Johnson warned about in his vital Atlantic article:  “that the finance industry has effectively captured our government — a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises.”   This is the key passage where Johnson described the hallmark of how corrupt oligarchies that cause financial crises then attempt to deal with the fallout:

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique — the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large. . . .

As much as he campaigned against anything, Obama railed against precisely this sort of incestuous, profoundly corrupt control by narrow private interests of the Government, yet he has chosen to empower the very individuals who most embody that corruption.  And the results are exactly what one would expect them to be.

* * * * *

I was on the Moyers program last night after the Black interview — along with Amy Goodman — discussing the media’s role in this establishment corruption (that segment can be viewed here), and yesterday morning I was on C-SPAN’s Washington Journal with the primary topic being this blatant, sleazy oligarchical control of both the Executive and legislative branches (which can be seen here).

UPDATE:  Just to get a sense for how propagandistic, sycophantic and fact-free are the most extreme Obama worshippers in our “journalist” class, consider this recent article from The New Republic‘s Noam Scheiber in which he urged the White House to “free its economic oracle” — Summers — and defended and praised Summers on the ground that “his exposure to Wall Street over the years has been limited.”  As Jonathan Schwarz asks, citing the massive compensation on which Summers engorged himself by feeding at the Wall Street trough last year:  “I wonder what would have constituted ‘significant’ exposure to Wall Street? Maybe if he’d worked for D.E. Shaw full time? (Amazingly, Summers was paid $5.2 million for a part-time position.)”

— Glenn Greenwald

George Soros Calls G20: “Make or Break”

By Joe Lynam

071113_p00_soros

Billionaire investor Gorge Soros has said the G20 summit will be a “make or break” event for the world’s economy.

In a BBC interview, Mr Soros said the international financial system had collapsed because it was flawed and it had to be restructured.

Mr Soros say it may be the last chance to prevent a full-scale depression.

He said the G20 meeting had to come up with concrete solutions to help the developing world in particular, which had been been worst hit.

‘Depression’

Mr Soros warned that any attempt to pull economies out of recession had to be done co-operatively.

He said: “The G20 meeting is make or break because unless they do something for developing world there will be serious collapse in that part of the world.

“I’m using phrase depression because unless we take the right measures we’re liable to end up there.

If countries start doing it [engineering a new financial world order] bilaterally instead of multilaterally, the system will fall apart and we’ll end up in depression.”

He also said the rebuilding meant the previous economic system had to be scrapped.

The International financial system has collapsed and cannot be restored in its current form ”
George Soros

“I don’t think we’ll ever be back to where we came from. It should be recognised that the last 25 years were an aberration and we cannot go back there. We have to reconstruct the financial system from its foundations up.”

Mr Soros said regulators and the financial sector shared the blame for the meltdown, as they “participated in this crazy boom built on false premises on the belief that markets are self-regulating and should be left alone”.

Mr Soros also warned the UK economy was in a deep recession “which is going to be a lasting one”.

He added: “The International financial system has collapsed and cannot be restored in its current form. It will have to be restructured because it was flawed and collapsed under its own weight.”

In May last year, Mr Soros was interviewed by the BBC’s business editor Robert Peston and said he was worried about the US and UK’s ability to deal with the downturn because of their reliance on credit.

Mr Soros urged wealthy nations to give their allocations of the IMF’s internal currency, called Special Drawing Rights, to poorer ones because developing countries were not in a position to bail out their own failing banks.

George Soros famously made his name – and $1bn – when he bet that sterling would have to withdraw from the European Exchange Rate Mechanism in 1992. He’s also said to have accurately predicted and profited from the Asian financial crisis in 1997.

The 78-year-old Hungarian is one of the largest aid donors in Africa, having donated around $6bn to his favourite causes.

Paul Krugman: “On the Edge”

February 6, 2009
Op-Ed Columnist
On the Edge

A not-so-funny thing happened on the way to economic recovery. Over the last two weeks, what should have been a deadly serious debate about how to save an economy in desperate straits turned, instead, into hackneyed political theater, with Republicans spouting all the old clichés about wasteful government spending and the wonders of tax cuts.

It’s as if the dismal economic failure of the last eight years never happened — yet Democrats have, incredibly, been on the defensive. Even if a major stimulus bill does pass the Senate, there’s a real risk that important parts of the original plan, especially aid to state and local governments, will have been emasculated.

Somehow, Washington has lost any sense of what’s at stake — of the reality that we may well be falling into an economic abyss, and that if we do, it will be very hard to get out again.

It’s hard to exaggerate how much economic trouble we’re in. The crisis began with housing, but the implosion of the Bush-era housing bubble has set economic dominoes falling not just in the United States, but around the world.

Consumers, their wealth decimated and their optimism shattered by collapsing home prices and a sliding stock market, have cut back their spending and sharply increased their saving — a good thing in the long run, but a huge blow to the economy right now. Developers of commercial real estate, watching rents fall and financing costs soar, are slashing their investment plans. Businesses are canceling plans to expand capacity, since they aren’t selling enough to use the capacity they have. And exports, which were one of the U.S. economy’s few areas of strength over the past couple of years, are now plunging as the financial crisis hits our trading partners.

Meanwhile, our main line of defense against recessions — the Federal Reserve’s usual ability to support the economy by cutting interest rates — has already been overrun. The Fed has cut the rates it controls basically to zero, yet the economy is still in free fall.

It’s no wonder, then, that most economic forecasts warn that in the absence of government action we’re headed for a deep, prolonged slump. Some private analysts predict double-digit unemployment. The Congressional Budget Office is slightly more sanguine, but its director, nonetheless, recently warned that “absent a change in fiscal policy … the shortfall in the nation’s output relative to potential levels will be the largest — in duration and depth — since the Depression of the 1930s.”

Worst of all is the possibility that the economy will, as it did in the ’30s, end up stuck in a prolonged deflationary trap.

We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s, and there will be much more of that if the economy continues to weaken.

As the great American economist Irving Fisher pointed out almost 80 years ago, deflation, once started, tends to feed on itself. As dollar incomes fall in the face of a depressed economy, the burden of debt becomes harder to bear, while the expectation of further price declines discourages investment spending. These effects of deflation depress the economy further, which leads to more deflation, and so on.

And deflationary traps can go on for a long time. Japan experienced a “lost decade” of deflation and stagnation in the 1990s — and the only thing that let Japan escape from its trap was a global boom that boosted the nation’s exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time?

Would the Obama economic plan, if enacted, ensure that America won’t have its own lost decade? Not necessarily: a number of economists, myself included, think the plan falls short and should be substantially bigger. But the Obama plan would certainly improve our odds. And that’s why the efforts of Republicans to make the plan smaller and less effective — to turn it into little more than another round of Bush-style tax cuts — are so destructive.

So what should Mr. Obama do? Count me among those who think that the president made a big mistake in his initial approach, that his attempts to transcend partisanship ended up empowering politicians who take their marching orders from Rush Limbaugh. What matters now, however, is what he does next.

It’s time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation’s future at risk. The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.

White House: Priority Is Legislation That “Doesn’t Signal A Change In Our Overall Stance on Trade

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