Geithner’ Folly

 If I Only Knew It Was This Easy!, Integrity and Responsibility, Is Goldman Sachs Evil?, It Is Nice To Be Part of the Elite!, It Is Supposed to be a Republic!, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, It's Your Turn to Cry FOR ME, Jacksonian Democracy, Let's Call What It Is - DEPRESSION, No Bank Is Indispensable, Obama Bingo, Obama's Hypocrisy, Our phony middle class, Patience is a virtue...Delusion is a vice, Pig-Headed Economic Policy May Still Lead to Disaster, Political Chaos, Regulatory Failures, TARP fruit loops, The American Financial Oligarchy, The Arrogance of Power, The Big Fat Greek Question, The Consequences of Greed, The Dollar's Demise, The Economics of Schumpeter, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Geithner Resignation Watch  No Responses »
Aug 212011
 

  • Summer Rerun: Geithner Plan Smackdown Wrap – 08/21/2011 – Yves Smith

    • Posted by Brian Schuettler at 10:45 am  

    The Rise of the Wrecking-Ball Right

     A Moral Question - Not A Political One, A State of Distress, BANK RESERVES FOR TBTF, Bilderbergers 1 USA 0, Constitutional Questions, Coup d'etat in America, Deleveraging, Devaluation, Dismal Science-Ignorant Scientists?, Economic Analysis Isn't Science, Federal Reserve-Discussion, Figures don't lie but Liars can figure, Goldman: Underwriter or Undertaker?, Greenspan is kind of stupid, HEY AMERICA-STICK 'EM UP!, History of Finance, Insolvency, Integrity and Responsibility, Is The Market Rally Real?, IT'S ALL ABOUT POWER AND MONEY, Jacksonian Democracy, Moral Hazard, Obama's Hypocrisy, Objectivism, Our phony middle class, Patience is a virtue...Delusion is a vice, Political Chaos, Regulatory Failures, Robert Reich, Small Business-Bedrock of America, Smaller Can Be Better, Subsidiarity, TARP fruit loops, The American Financial Oligarchy, The Big Fat Greek Question, The Consequences of Greed, The Democrats Blew It Again, The Dollar's Demise, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Growing American Fascist State, The Habits of Hedge Funds, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, The Obama OMG magic factory, The Sorry State Of American Manufacturing, The Suffering Poor, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe, Unindicted Co-Conspiritors, Unintended Consequences, USA Is the New Japan, Wage Deflation, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World, Who owns Congress-Still!  1 Response »
    Jul 162011
     

    One would have thought the last few years of mine disasters, exploding oil rigs, nuclear meltdowns, malfeasance on Wall Street, wildly-escalating costs of health insurance, rip-roaring CEO pay, and mass layoffs would have offered a singular opportunity to explain why the nation’s collective well-being requires a strong and effective government representing the interests of average people.

    The Rise of the Wrecking-Ball Right

    Posted by Brian Schuettler at 10:53 am  

    The Republican attack on financial regulation

     A Moral Question - Not A Political One, Coup d'etat in America, HEY AMERICA-STICK 'EM UP!, Integrity and Responsibility, It Is Supposed to be a Republic!, IT'S ALL ABOUT POWER AND MONEY, It's Your Turn to Cry FOR ME, Jacksonian Democracy, Moral Hazard, Our phony middle class, Regulation - the Discussion, Regulatory Failures  1 Response »
    Jun 112011
     

    Republicans aren’t content with blocking anyone and everyone from leading the Consumer Financial Protection Bureau. Next week, they’re planning to attach a series of anti-Dodd-Frank amendments to a noncontroversial economic development bill. One amendment would neuter the CFPB, of course. Gotta keep trying, I guess. Another would repeal the whole law. A third would stop the government identifying too-big-to-fail firms and regulating them more tightly. And that doesn’t even get into the ongoing efforts to defund the agencies that need to implement the various regulations, or the language in the GOP budget repealing the government’s authority to dismantle firms that are about to detonate the financial system.

    One possibility here is that I Rip Van Winkled it for a bit and banks got really popular while I was snoring under a tree. So I asked Gallup. The answer? Nope. Wall Street’s got the sort of poll numbers usually reserved for the guy who ran over your dog when you were a kid, or the boss who fired you from your first job. Almost 70 percent of Americans think they’ve got to much power in Washington. That’s four points below the much-beloved lobbyist class and tied with “major corporations.” Allying with the banks is not how you get ahead in American politics.

    Perhaps this just shows that so long as your issue isn’t atop the polls, you can take whatever position you want. Perhaps it shows that substantive positions are meaningless — Republicans often pretend that their agenda is anti-bank, even though it echoes the banks’ agenda almost precisely, and even though they’ve not proposed an alternative package of financial regulations to take its place. Perhaps it just shows what the aforementioned Gallup poll shows: Banks are very powerful in Washington.

     

    But those are all political explanations. What about among Republicans themselves? The tea party doesn’t much like the banks. The Republican legislators who had to vote for TARP and listen to Ben Bernanke talk up the chances of armageddon can’t want to go through that again, right? My only hypothesis here is that the Fannie Man/Freddie Mac/CRA explanation, though discredited, has become such conventional wisdom on the Republican side of the aisle that they think, though can’t clearly say, that regulation of Wall Street isn’t really needed. The problem was Washington, and you can’t solve that with more Washington.

    Nevertheless, it’s depressing. If anything, Dodd-Frank didn’t go nearly far enough. The Consumer Financial Protection Bureau isn’t strong enough. But it barely took three years for the pendulum in Washington to swing from “it’s time to get a handle on Wall Street” to “leave Wall Street alone!” Even if Dodd-Frank survives this round of attacks, it’s pretty obvious that any approach that relies on regulators is an approach that, sooner than later, Congress will undermine.

    Republican Attack On Financial Reform – Klein


    Posted by Brian Schuettler at 4:59 pm  

    Easy Money for the Banksters

     Coup d'etat in America, IT'S ALL ABOUT POWER AND MONEY, Moral Hazard, Obama's Hypocrisy, Political Implications, Regulatory Failures, The American Financial Oligarchy, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Great American Heist, The Growing American Fascist State, The Intrusion of UNLAWFUL Authority, The Joy of Being A Bank, The New American Socialism, The Obama OMG magic factory, The Suffering Poor, Time For A New Third Party, Unemployment Catastrophe, Unindicted Co-Conspiritors, USA Is the New Japan, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
    Jun 042011
     

    A newly-released study from the Congressional Research Service bolsters claims that the nation’s largest banks profited off the Federal Reserve’s financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.

    The report reinforces long-held beliefs that the banking system in essence engaged in taxpayer-financed arbitrage: They got money for free, then lent it back to Uncle Sam while collecting juicy returns. Left out of the equation are the millions of everyday borrowers, like households and small businesses, who were unable to secure loans needed to tide them over until the crisis ended.

    The Fed released records under pressure in December and March that showed the extent of its largesse. The CRS study shows for the first time how some of the most sophisticated financial firms could have taken the Fed’s money and flipped easy profits simply by lending it back to another arm of the government.

    The report was requested by Sen. Bernie Sanders (I-Vt.), who likened the crisis-era emergency loans to “direct corporate welfare to big banks,” in a statement. The cash likely was lent back to Uncle Sam in the form of Treasuries and other debt “instead of using the Fed loans to reinvest in the economy,” Sanders added.

    In all, more than $3 trillion was lent to financial institutions from the Fed, and terms were generous. Junk-rated securities were pledged as collateral for taxpayer-backed loans. The Fed did not provide conditions for how the money was to be used.

    As part of one Fed program, on 33 separate occasions, nine firms were able to borrow between $5.2 billion and $6.2 billion in U.S. government securities for four-week intervals, paying one-time fees that amounted to the minuscule rate of 0.0078 percent.

    Guest Post: Congressional Research Service Confirms Big Banks Borrowed Cash For Next To Nothing, Then Lent It Back to the Federal Government at Much Higher Rates

    Posted by Brian Schuettler at 1:03 pm  

    “Of the 1%, by the 1%, for the 1%”

     A Moral Question - Not A Political One, Joseph Stiglitz, Our phony middle class, Regulatory Failures, Rick Santorum - President, Ron Paul Stands Tall, Small Business-Bedrock of America, The Suffering Poor  No Responses »
    Apr 092011
     

    In an article titled “Of the 1%, by the 1%, for the 1%”

    It’s no use pretending that what has obviously happened has not in fact happened. The upper 1 percent of Americans are now taking in nearly a quarter of the nation’s income every year. In terms of wealth rather than income, the top 1 percent control 40 percent. Their lot in life has improved considerably. Twenty-five years ago, the corresponding figures were 12 percent and 33 percent. One response might be to celebrate the ingenuity and drive that brought good fortune to these people, and to contend that a rising tide lifts all boats. That response would be misguided. While the top 1 percent have seen their incomes rise 18 percent over the past decade, those in the middle have actually seen their incomes fall. For men with only high-school degrees, the decline has been precipitous—12 percent in the last quarter-century alone. All the growth in recent decades—and more—has gone to those at the top. In terms of income equality, America lags behind any country in the old, ossified Europe that President George W. Bush used to deride. Among our closest counterparts are Russia with its oligarchs and Iran. While many of the old centers of inequality in Latin America, such as Brazil, have been striving in recent years, rather successfully, to improve the plight of the poor and reduce gaps in income, America has allowed inequality to grow.

    Posted by Brian Schuettler at 6:20 pm  

    How Carl Levin Got Goldman Sachs’s Goat

     Goldman: Underwriter or Undertaker?, Integrity and Responsibility, Is Goldman Sachs Evil?, It Is Nice To Be Part of the Elite!, IT'S ALL ABOUT POWER AND MONEY, Naked, Negative Cash Flow, No Bank Is Indispensable, Our phony middle class, Regulatory Failures, Residential Market, Stupid!, Sub-Prime anytime, TARP fruit loops, The American Financial Oligarchy, The Arrogance of Power, The Consequences of Greed, The Financial Elite, The Geithner Resignation Watch  No Responses »
    May 012010
     

    carl_levin.bl.top.jpg Interview by Paul Smalera, senior editorApril 30, 2010: 3:21 PM ET

    (Fortune) — At Tuesday’s epic Goldman Sachs hearing, Senator Carl Levin of Michigan led a public grilling of Wall Street not seen by a government panel since the Depression-investigating Pecora Commission. Fortune wanted to know what Levin thought of the answers he got from executives, including CEO Lloyd Blankfein, whether Goldman can save its reputation, and what his committee has learned from its hearings on the financial crisis.

    It was surprising how much the Goldman Sachs (GS, Fortune 500) executives talked. How did you get them to reveal what they did?

    By confronting them with their own documents. A lot of time and work goes into getting huge amounts, literally millions, of documents … I think when people are confronted by their own documents by someone who’s really studied those documents; it’s easier to force them to respond.

    They obviously were trying to delay and evade answering. We had a willingness to take them on and not let them talk forever, telling them, “Hey we’ll stay here all night if we have to, but we’re going to get the information we want.”

    And when they did answer?

    When they did answer, some people have asked me, “Were they telling you the truth?” The answer is yeah, and that’s what’s even more troubling than the evasions — they are defending what most people would say are indefensible actions. They shouldn’t be betting against what they’re selling at the same time they’re telling you: “Here, these are our securities, our names are on the prospectus.”

    I think people think that someone selling something believes their product needs to succeed in some general way; that they want it to succeed. But [Goldman Sachs] are betting against [their product] and basically say they are going to profit from its failure. At that point, in most people’s minds, clearly in mine, there’s a conflict of interest. You’re betting against a product that you’re holding out to the public, by fair assumption, as a good product.

    They were trying to turn this into, “We can’t guarantee that people are making money,” but that’s not the point. The point is that at the same time you’re holding this thing out as something that presumably you’d like to see provide something good for your customer, you’re betting against it and making a heck of a lot of money by its failure. And you’re not disclosing that.

    To add insult to injury, in those emails that call it “junk” that they’re selling, “crap,” and I won’t get into the “shitty” word but anyway, that adds insult to injury. When you’re putting together a product, hold that out and then are betting against that same product, I think it’s a conflict and at minimum you have to tell people, not some boilerplate that you might be on the other side, but in clear language that you’re betting against [the security].

    Regulators have taken a lot of blame for the crisis but doesn’t part of this come from the laws — or lack of laws — surrounding these activities? Goldman seemed to testify that its actions were unseemly but not illegal.

    The reaction of one guy when I asked about his reaction to his emails was, “That shouldn’t have been in an email.” There are two different worlds here. My reaction was, “You shouldn’t believe that, you shouldn’t feel that.”

    I could have understood the reaction [by Goldman] that they should not be selling stuff that they’re betting against and think is junk, but they don’t say that because they don’t believe it. They think they can do anything they want, that it’s a dog-eat-dog market and all these sophisticated buyers know they disagree. The sophisticated buyers see an AAA rating on something: they’re not then going to go into the 500 mortgages referred to in a synthetic CDO. There’s no way they can. They’re not the underwriter, they haven’t put it together Of course with Abacus, when you have the fact that [John Paulson]., who was betting against it, helped put the referenced mortgages together, that’s just a second insult.
    It’s not just Wall Street, it’s upstream: We spent a long time getting into the Washington Mutual issue as an example of lenders putting together shoddy mortgages, securitizing them and getting them off their books. These are mortgages, which never should’ve been issued where the regulator failed to enforce the laws in this case.

    The regulators pointed out things in emails and visits to the bank … but they never enforced it. There’s a failure to stop the abuses. Then you have credit rating agencies susceptible to pressure, acknowledge it in emails, and are involved in an inherent conflict of interest. They’re being pressured to put higher ratings on financial documents by the people who will benefit from those ratings and they’re being paid by those people. You have the problem of the person who pays the fiddler calling the tune.

    Then you get down to Wall Street with their vacuuming up these securities and getting the risk off their books without disclosing it. It’s not limited to Wall Street’s unbridled greed, it comes all the way from upstream.

    How Carl Levin Got Goldman Sachs’s Goat – Paul Smalera, Fortune

    Posted by Brian Schuettler at 12:42 pm  

    The Independence of the Fed

     Political Chaos, Regulatory Failures, Ron Paul Stands Tall, Securitization, Small Business-Bedrock of America, Smaller Can Be Better, Stress Test Mess, TARP fruit loops, The Consequences of Greed, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The New American Socialism, Time For A New Third Party, Unindicted Co-Conspiritors, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
    Mar 212010
     

    There is a thesis that the banks are in control of the Fed and as a result have gained control over the issuance of the currency of the United States. This thesis is based on the fact that the shares of the Federal Reserve Bank are held by these private banks. Does that mean that the private banks own the Fed?

    The short answer is yes, but it is a hollow ownership with very restricted rights. This ownership basically exists to give credence to the claim that the fed is independent. It is appropriately described as follows in the Fed’s own publication “Federal Reserve System Purposes & Functions”:

    The holding of this stock, however, does not carry with it the control and financial interest conveyed to holders of common stock in for-profit organizations. It is merely a legal obligation of Federal Reserve membership, and the stock may not be sold or pledged as collateral for loans. Member banks receive a 6 percent dividend annually on their stock. (p. 12)

    This is exactly the manner in which Special Purpose Vehicles (or Special Purpose Entities) are created in the corporate world. There is usually a promoter who does not wish to be seen to own an entity but who wishes to derive some benefit from the existence of such an entity. Usually, overt ownership would adversely impact the presentation of the promoter’s financial reporting.

    The authorities and regulators, including the Fed, are very aware of these Special Purpose structures, as is the accounting profession. Rules have been devised and implemented to assess any such arrangement in order to establish its true nature. It is therefore appropriate to assess the Fed’s independence — or, alternatively, interdependence — according to the very rules that it uses to assess Special Purpose Entities. First, let’s draw the simple ownership structure.

    Anyone with a rudimentary knowledge of accounting principles would know that ownership of an entity without control over that entity requires further investigation. Consolidation of a group of companies can become complex when ownership and control are split. The GAAP (Generally Accepted Accounting Principles) method in this case disregards ownership and focuses on control.

    For example, a right to appoint the majority of the board of directors even in the absence of ownership would trigger a consolidation of that entity. Thus the controller and the entity would be seen as part of a group and collectively as a single interdependent consolidated entity. It follows that the simple structure of the Federal Reserve Banks drawn above is a split structure, where “ownership” is of limited significance and “control” must be established. Control will tell us whether the entities are independent or interdependent.

    All regulation targets “control,” not just the legal form of ownership. Accounting principles of consolidation have evolved from Special Purpose Vehicles, to Special Purpose Entities, and very lately — with the revision in June 2009 for implementation in January 2010 of Financial Accounting Standard 46(R) (“FIN 46(R)”) — they have evolved into the concept of a “Variable Interest Entity.”

    In effect, the test of whether one organization is a “Variable Interest Entity” controlled by another organization is similar to a DNA test to determine whether two people are members of the same family. FIN 46 (R) defines a “variable interest” as follows:

    The enterprise with a variable interest or interests that provide the enterprise with a controlling financial interest in a variable interest entity will have both of the following characteristics:

    a. The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance

    b. The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. (par. 1A)[1]

    The first test is to check for “the power to direct the activities.” Who exactly holds that power?

    Here we turn to the Federal Reserve Act, which instructs the Regional Federal Reserve Banks to each elect their own board of directors, of which the chairman and vice chairman of the regional board will be appointed by the Board of Governors of the Federal Reserve System. The regional boards must have nine directors in three classes of three each (A, B and C directors): three A directors chosen by the stockholders; three B directors to represent the “public”; and three C directors to be appointed by the Board of Governors of the Federal Reserve System. The Board of Governors of the Federal Reserve System will appoint the chairman and vice chairman from the ranks of the three C directors.

    The Board of Governors of the Federal Reserve System seems to have powers that could indicate “control,” including the appointment of the power positions of chairman and vice chairman. However, we must also ask whether the regional boards have the independent powers normally associated with ownership and control, or if their powers are restricted and controlled in any manner.

    The answer again lies in the Federal Reserve Act:

    Said board of directors shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any member bank or banks and may, subject to the provisions of law and the orders of the Board of Governors of the Federal Reserve System, extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks, the maintenance of sound credit conditions, and the accommodation of commerce, industry, and agriculture. The Board of Governors of the Federal Reserve System may prescribe regulations further defining within the limitations of this Act the conditions under which discounts, advancements, and the accommodations may be extended to member banks. (section 3, par. 8)

    The regional boards are limited in their ability to perform the primary functions of the Regional Federal Reserve Bank by the terms of the act and by the control of the Board of Governors of the Federal Reserve System. It is clear from the Federal Reserve Act that control does not rest in the Regional Federal Reserve Boards, nor are they independent, but they take instruction and are controlled by the Board of Governors of the Federal Reserve System.

    It is now appropriate to update the simplified structure drawn above, in order to add these two steps of control.

    The question of who has control is not yet resolved; the nature of the Board of Governors of the Federal Reserve System must be investigated next. Is the Board of Governors of the Federal Reserve System an independent body or beholden to another entity?

    The “Purposes & Functions” document describes the nature of the Board of Governors of the Federal Reserve System:

    The Board of Governors of the Federal Reserve System is a federal government agency. The Board is composed of seven members, who are appointed by the President of the United States and confirmed by the U.S. Senate.

    The Chairman and the Vice Chairman of the Board are also appointed by the President and confirmed by the Senate. The nominees to these posts must already be members of the Board or must be simultaneously appointed to the Board. (p. 4)

    The Board of Governors of the Federal Reserve System is a federal government agency. The power to appoint its members, chairman, and vice chairman is vested in the president of the United States, with the Senate having a veto power over any appointment.

    The first requirement for a “variable interest,” “the power to direct the activities” is fulfilled: the federal government at the presidential level holds “the power to direct activities.”

    The final version of the structure of control is as follows:

    The next requirement that must be met for a “variable interest” is either an “obligation to absorb losses” or a “right to receive benefits.”

    I would argue that the Fed’s right to create currency, together with the vested interests of federal government, are more than sufficient to infer an “obligation to absorb losses.” The Federal Reserve Act adds a complication to this argument by holding the shareholders responsible to the extent of their stockholding for the liabilities of the Regional Federal Reserve Banks. However, the “obligation to absorb losses” is not a requirement that needs to be met so long as the alternative, the “right to receive benefits” requirement, is met. Since the obligation is not clear cut, it is better to concentrate on the right. Note that neither the obligation nor the right need to be absolute.

    Again we can turn to the two sources, the Federal Reserve Act and the Fed publication “Federal Reserve System Purposes & Functions” for guidance.

    Federal Reserve Act:

    Dividends and Surplus Fund of Reserve Banks

    (a)

      1. After all necessary expenses of a Federal reserve bank have been paid or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock.
      2. The entitlement to dividends under subparagraph (A) shall be cumulative.
    2. That portion of net earnings of each Federal reserve bank which remains after dividend claims under subparagraph (1)(A) have been fully met shall be deposited in the surplus fund of the bank.

    (b) Transfer for fiscal year 2000.

    1. The Federal reserve banks shall transfer from the surplus funds of such banks to the Board of Governors of the Federal Reserve System for transfer to the Secretary of the Treasury for deposit in the general fund of the Treasury, a total amount of $3,752,000,000 in fiscal year 2000.
    2. Of the total amount required to be paid by the Federal reserve banks under paragraph (1) for fiscal year 2000, the Board shall determine the amount each such bank shall pay in such fiscal year.
    3. During fiscal year 2000, no Federal reserve bank may replenish such bank’s surplus fund by the amount of any transfer by such bank under paragraph (1). (section 7)

    “Federal Reserve System Purposes & Functions”:

    The income of the Federal Reserve System is derived primarily from the interest on U.S. government securities that it has acquired through open market operations. Other major sources of income are the interest on foreign currency investments held by the System; interest on loans to depository institutions; and fees received for services provided to depository institutions, such as check clearing, funds transfers, and automated clearinghouse operations.

    After it pays its expenses, the Federal Reserve turns the rest of its earnings over to the U.S. Treasury. About 95 percent of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914. (Income and expenses of the Federal Reserve Banks from 1914 to the present are included in the Annual Report of the Board of Governors.) In 2003, the Federal Reserve paid approximately $22 billion to the Treasury. (p. 11)

    The statement that “about 95% of the Reserve Banks’ net earnings have been paid into the Treasury since the Federal Reserve System began operations in 1914″ says it well enough. It is an irrefutable fact that the federal government possesses the overwhelming “right to receive benefits.”

    The outright, indisputable conclusion is that the Fed, when tested against GAAP as the Fed itself uses it in the Fed’s assessments of those it regulates, is a Special Purpose Entity of the federal government (or, according to the latest definition, is a Variable Interest Entity of the federal government). The rules of consolidation therefore apply, and the Fed must be seen as controlled by federal government, making it indivisibly part of the federal government. The pretence of independence is no more that that, a pretence.

    There is, however, no denying that the banks have tremendous vested interest in influencing the policies of the Fed, nor that the power being so narrowly vested in the president makes him a special target for influence. Still, the power to control the Fed is not in the hands of its “owners” but firmly in the hands of the federal government and the president of the United States.

    Sarel Oberholster is a South African living in Johannesburg, Gauteng province. He is an economist by training, a specialist financial engineer by craft, and an inquisitive spirit by nature. He has been involved in banking for over 30 years. His quest for understanding complex economic phenomena is his muse for writing and he shares his insights on his blog.

    Notes

    [1] Financial Accounting Standards Board of the Financial Accounting Foundation; Connecticut, No 311; June 2009, Statement of Financial Accounting Standards No 167.

    Posted by Brian Schuettler at 9:16 am  

    Does It Make Sense to Resurrect the Glass-Steagall Act?

     A Growing List Of One Term Presidents, A Moral Question - Not A Political One, A Shareholder-Not Just a "Stakeholder", A State of Distress, A Time To Repent, AIG and all that....., Audit the auditors?, “the Greenspan doctrine”, Back to the basics, Bank Failures, Banks - Crisis Discussion, Collateral Damage, Consumption Ran the Old Economy, Coup d'etat in America, Figures don't lie but Liars can figure, Negative Cash Flow, No Bank Is Indispensable, Our phony middle class, PANDEMIC, Regulation - the Discussion, Regulatory Failures, The Consequences of Greed, The Democrats Blew It Again, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Importance of Strategic Planning, The Joy of Being A Bank  No Responses »
    Feb 202010
     

    In the present system, the more unrestricted the banks are, the more money they can generate “out of thin air,” and the more damage they can inflict upon the wealth-generation process. FULL ARTICLE by Frank Shostak

    Posted by Brian Schuettler at 10:03 am  

    What they knew and when they knew it

     A Growing List Of One Term Presidents, A Moral Question - Not A Political One, A State of Distress, A Time To Repent, AIG and all that....., Audit the auditors?, Bilderbergers 1 USA 0, Coming Social Unrest, Commercial Real Estate Bust, Consumption Ran the Old Economy, Coup d'etat in America, Federal Reserve-Discussion, Having Fun With Derivatives, Insolvency, Integrity and Responsibility, IT'S ALL ABOUT POWER AND MONEY, No Bank Is Indispensable, Obama's Hypocrisy, Our phony middle class, Political Chaos, Political Implications, Regulatory Failures, Ron Paul Stands Tall, Securitization, Stress Test Mess, Sub-Prime anytime, TARP fruit loops, The Arrogance of Power, The Consequences of Greed, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Habits of Hedge Funds, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Judeo-Christian Political Coalition, Time For A New Third Party  No Responses »
    Jan 312010
     

    “I have to think this train is probably going to leave the station soon and we need to focus our efforts on explaining the story as best we can. There were too many people involved in the deals — too many counterparties, too many lawyers and advisors, too many people from AIG — to keep a determined Congress from the information.” James P. Bergin, NY Fed, in an email to his Fed colleagues


    ‘Though it is hard to divine much understanding from the unredacted filing, it has become clear that Goldman had more involvement than previously believed: In addition to the credit default swaps it bought from AIG, the filing shows that Goldman Sachs also originated many of the underlying assets that AIG and the New York Fed bought back from Société Générale.

    The American people have the right to know how their tax dollars were spent and who benefited most from this back-door bailout,” said Kurt Bardella, spokesman for Issa. “Now that it’s public, let’s see if the sky really does fall as the New York Fed said it would to justify its coverup.”

    Other lawmakers believed that the New York Fed was trying to hide its ties to Goldman Sachs.’ AIG Reveals the Story – CNN


    “Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

    We’re talking about the Federal Reserve Bank of New York, whose role as the most influential part of the federal-reserve system — apart from the matter of AIG’s bailout — deserves further congressional scrutiny…

    By pursuing this line of inquiry, the hearing revealed some of the inner workings of the New York Fed and the outsized role it plays in banking. This insight is especially valuable given that the New York Fed is a quasi-governmental institution that isn’t subject to citizen intrusions such as freedom of information requests, unlike the Federal Reserve.

    This impenetrability comes in handy since the bank is the preferred vehicle for many of the Fed’s bailout programs. It’s as though the New York Fed was a black-ops outfit for the nation’s central bank…

    New York Fed staff and outside lawyers from Davis Polk & Wardell edited AIG communications to investors and intervened with the Securities and Exchange Commission to shield details about the buyout transactions, according to a report by Issa.

    That the New York Fed, a quasi-governmental body, was able to push around the SEC, an executive-branch agency, deserves a congressional hearing all by itself.” Secret Banking Cabal Emerges From AIG Shadows – Reilly – Bloomberg

    Hat Tip to : Jesse

    NY Fed Conspired to Hide Details of AIG Bailouts from Public and Congress

    Posted by Brian Schuettler at 11:54 am  

    Another Stimulus?

     Analysis & Commentary, Our phony middle class, Political Implications, Politicians, Positive Cash Flow, Regulatory Failures, Residential Market, Risk Management Strategies, The Arrogance of Power, The Consequences of Greed, Unemployment Catastrophe, Unindicted Co-Conspiritors, USA Is the New Japan, We Are All Cooked, We Have Become Beggars To The World  No Responses »
    Nov 212009
     

    By Edward Harrison of Credit Writedowns.

    A reader at Naked Capitalism asked us to respond to a recent article from the Christian Science Monitor asking Does US need a second stimulus to create jobs?

    Marshall Auerback has already done some heavy lifting – and taken all of the heat in the comments. He says emphatically yes.

    Now I want to take a crack at this. My short answer is no. But before I go into this, as an aside, I wanted to mention Marshall’s new smiling, happy picture up at the great blog New Deal 2.0 where he now writes.  Earlier, when Credit Writedowns was hosted at Blogger, he used a picture best described as a mug shot in his profile, but he has changed that one too (although he smiles there a little less). He thinks we haven’t noticed this sleight of hand.  Well I have! Once upon a time, Marshall wrote with a man I called all bearish, all the time this summer. Take a look at that post; you don’t see him smiling now do you? We have Lynn Parramore, New Deal 2.0’s editor to thank for making Marshall Auerback into an optimist.

    Posted by Brian Schuettler at 12:19 pm  

    The Big Government Boss isn’t going away

     A Growing List Of One Term Presidents, A Shareholder-Not Just a "Stakeholder", A State of Distress, AIG and all that....., Analysis & Commentary, “the Greenspan doctrine”, Coming Social Unrest, Commercial Real Estate Bust, Deflation-Inflation-Stagflation, Is Goldman Sachs Evil?, It starts with a foundation, IT'S ALL ABOUT POWER AND MONEY, No Bank Is Indispensable, Obama's Hypocrisy, Our phony middle class, Political Chaos, Regulatory Failures, Small Business-Bedrock of America, Smaller Can Be Better, Socialism, TARP fruit loops, The Arrogance of Power, The Consequences of Greed, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Geithner Resignation Watch, The Habits of Hedge Funds, The Importance of Strategic Planning, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Joy of Being A Bank, The New American Socialism, Unemployment Catastrophe, Unindicted Co-Conspiritors, Wage Deflation, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
    Nov 212009
     

    “Hindsight is a wonderful thing,” said Timothy W. Long, the chief bank
    examiner for the Office of the Comptroller of the Currency. “At the height of
    the economic boom, to take an aggressive supervisory approach and tell people to
    stop lending is hard to do.” Post Mortems Reveal Obvious Risks at Banks, NY Times

    Posted by Brian Schuettler at 11:49 am  

    A Short Question For Senior Officials Of The New York Fed

     Jacksonian Democracy, Let's Call What It Is - DEPRESSION, Monetary Policy - Discussion, Negative Cash Flow, Obama's Hypocrisy, Our phony middle class, Political Implications, Regulatory Failures, Small Business-Bedrock of America, The Arrogance of Power, The Democrats Blew It Again, The End of American Capitalism As We Know It? - Discuss, The excellent adventures of Ben Bernanke, The Financial Elite, The Inherent Disorder of Empires, The Intrusion of UNLAWFUL Authority, The Joy of Being A Bank, Truth In Charity, Unindicted Co-Conspiritors, Who Guarantees the Guarantor?-You Do!  No Responses »
    Oct 042009
     

    At the height of the financial panic last fall Goldman Sachs became a bank holding company, which enabled it to borrow directly from the Federal Reserve.  It also became subject to supervision by the Federal Reserve Board (with the NY Fed on point) – hence the brouhaha over Steven Friedman’s shareholdings.

    Goldman is also currently engaged in private equity investments in nonfinancial firms around the world, as seen for example in its recent deal with Geely Automotive Holdings in China (People’s Daily; CNBC).  US banks or bank holding companies would not generally be allowed to undertake such transactions - in fact, it is annoyed bankers who have asked me to take this up.

    Would someone from the NY Fed kindly explain the precise nature of the waiver that has been granted to Goldman so that it can operate in this fashion?  If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks?  Or will all bank holding companies be allowed to expand on the same basis.  (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

    Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance.  Should Goldman Sachs now be placed in this category?

    Given that the Fed has slipped up so many times and in so many ways with regard to regulation over the past decade, and given the current debate on Capitol Hill, now might be a good time to get ahead of this issue.

    In addition, there is the obvious carry trade (borrow cheaply; lend at higher rates) developing from cheap Fed dollar funding to the growing speculative frenzy in emerging markets, particularly China.  Are we heading for another speculative bubble that will end up damaging US bank balance sheets and all American taxpayers?

    By Simon Johnson

    A Short Question For Senior Officials Of The New York Fed Baseline Scenario

    Posted by Brian Schuettler at 11:19 am  

    Goldman’s Pre-emptive Influence

     Coup d'etat in America, Integrity and Responsibility, Is Goldman Sachs Evil?, It Is Nice To Be Part of the Elite!, IT'S ALL ABOUT POWER AND MONEY, Obama's Hypocrisy, Our phony middle class, Political Implications, Regulatory Failures, TARP fruit loops, The Arrogance of Power, The Democrats Blew It Again, The Financial Elite, The Geithner Resignation Watch, The Suffering Poor, Time For A New Third Party, Truth In Charity, Unemployment Catastrophe, Unindicted Co-Conspiritors, We Are All Cooked, We Are All Guilty, We Have Become Beggars To The World, Who Guarantees the Guarantor?-You Do!, Who owns Congress-Still!  No Responses »
    Oct 032009
     

    An Inside Look at How Goldman Sachs Lobbies the Senate, by Matt Taibbi: …Later on this week I have a story coming out in Rolling Stone that looks at the history of the Bear Stearns and Lehman Brothers collapses. The story ends up being more about naked short-selling and the role it played in those incidents than I had originally planned…, but it turns out that there’s no way to talk about Bear and Lehman without going into the weeds of naked short-selling…

    It’s the conspicuousness … that is the issue here, and the degree to which the SEC and the other financial regulators have proven themselves completely incapable of addressing the issue seriously, constantly giving in to the demands of the major banks to pare back (or shelf altogether) planned regulatory actions. There probably isn’t a better example of “regulatory capture” … than this issue.

    In that vein, starting tomorrow, the SEC is holding a public “round table” on the naked short-selling issue. What’s interesting about this round table is that virtually none of the invited speakers represent shareholders or companies that might be targets of naked short-selling, or indeed any activists of any kind in favor of tougher rules against the practice. Instead, all of the invitees are either banks, financial firms, or companies that sell stuff to the first two groups.

    In particular, there are very few panelists — in fact only one, from what I understand — who are in favor of a simple reform called “pre-borrowing.” Pre-borrowing is what it sounds like; it forces short-sellers to actually possess shares before they sell them.

    It’s been proven to work, as last summer the SEC, concerned about predatory naked short-selling of big companies in the wake of the Bear Stearns wipeout, instituted a temporary pre-borrow requirement…

    The lack of pre-borrow voices invited to this panel is analogous to the Max Baucus health care round table last spring, when no single-payer advocates were invited. So who will get to speak? Two guys from Goldman Sachs, plus reps from Citigroup, Citadel (a hedge fund that has done the occasional short sale, to put it gently), Credit Suisse, NYSE Euronext, and so on.

    In advance of this panel and in advance of proposed changes to the financial regulatory system, these players have been stepping up their lobbying efforts… Goldman Sachs in particular has been making its presence felt.

    Last Friday I got a call from a Senate staffer who said that Goldman had just been in his boss’s office, lobbying against restrictions on naked short-selling. The aide said Goldman had passed out a fact sheet about the issue that was so ridiculous that one of the other staffers immediately thought to send it to me. When I went to actually get the document, though, the aide had had a change of heart.

    Which was weird, and I thought the matter had ended there. But the exact same situation then repeated itself with another congressional staffer, who then actually passed me Goldman’s fact sheet.

    Now, the mere fact that two different congressional aides were so disgusted by Goldman’s performance that they both called me on the same day — and I don’t have a relationship with either of these people — tells you how nauseated they were.

    I would later hear that Senate aides between themselves had discussed Goldman’s lobbying efforts and concluded that it was one of the most shameless performances they’d ever seen from any group of lobbyists, and that the “fact sheet” … was, to quote one person familiar with the situation, “disgraceful” and “hilarious.” …

    Posted by Brian Schuettler at 9:50 am  

    the industry is already aiming to weaken what regulations Treasury has proposed, including centralized clearing of standardized derivatives.

     Regulation - the Discussion, Regulatory Failures  No Responses »
    Sep 252009
     

    Satyajit Das, who knows more about derivatives than I know about anything, has a guest post on naked capitalism about derivatives regulation. The quick summary? Don’t bet on it.

    “‘Holy water’, ‘hosanna’s’ or other utterances (based on particular religious convictions) will be sprinkled or said in the form of initiatives to improve disclosure, increase capital and a new centralised counterparty (’CCP’) to reduce the risk of a major dealer failing. Fundamental issues – the use for derivative for speculation, mis-selling of instruments to less sophisticated market participants, complexity, valuation problems – will not be substantively addressed.”

    In particular, Das points out that the industry is already aiming to weaken what regulations Treasury has proposed, including centralized clearing of standardized derivatives.

    “On 17 September 2009, Robert Pickel, ISDA’s CEO, argued before the U.S. House Agriculture Committee: ‘Not all standardized contracts can be cleared.’ He argued that that even if they have standardized economic terms many derivatives contracts will be ‘difficult if not impossible to clear’ because the CCP depends on such factors as liquidity, trading volume and daily pricing. This would, Pickel argued, make ‘it difficult for a clearinghouse to calculate collateral requirements consistent with prudent risk management.’

    “Dan Budofsky, a partner at Davis Polk & Wardwell LLP, who testified on behalf of the Securities Industry and Financial Markets Association, agreed that ‘it may be more appropriate for products that trade less frequently to trade over-the-counter.’”

    How these debates work out will depend on a few Congressional committees and the regulatory agencies that end up writing the actual rules. That’s why it is important for these debates to happen in the full glare of public attention. Unfortunately, public attention has moved on, which is exactly what the industry is counting on.

    By James Kwak

    Financial Regulation, the Pessimistic View by James Kwak

    Posted by Brian Schuettler at 9:27 am  

    The Madoff Files: A Chronicle of SEC Failure

     Madoff Scam, Regulatory Failures  No Responses »
    Sep 042009
     

    Washington’s top cop for Wall Street, hamstrung by bureaucracy and inexperienced investigators, failed to thoroughly pursue multiple warnings about Bernard L. Madoff’s multibillion-dollar Ponzi scheme, according to a scathing new critique of the Securities and Exchange Commission by its internal watchdog.

    The report, issued Wednesday by the commission’s inspector general, offers the first detailed examination of one of the agency’s most public embarrassments.

    It says the SEC received repeated allegations that Madoff was probably cheating investors, including detailed road maps provided by outside businessmen, only to fail to discover the fraud.

    The SEC opened inquiries five times in a 16-year period. But in each instance, inexperienced officials, at times ignorant of other agency probes into Madoff, took his explanations at face value and did little to verify them.

    Madoff himself told the inspector general that he was “astonished” that the SEC did not verify whether he was carrying out the billions of dollars of trades he claimed to be making after he supplied the agency with account details.

    “The SEC never properly examined or investigated Madoff’s trading and never took the necessary, but basic, steps to determine if Madoff was operating a Ponzi scheme,” the inspector general, H. David Kotz, concludes in the report.

    The extensive number of contacts between the SEC and Madoff raises questions about whether the agency is capable of spotting and stopping other financial frauds. The SEC has said it doesn’t have the resources necessary to oversee the exploding number of financial firms and can review many of them only once every few years. It became aware of Madoff’s fraud only when he confessed to it in December.

    The financial crisis has exposed many breakdowns in regulation, but none has involved such a large fraud by a single person. The inspector general’s report “makes clear that the agency missed numerous opportunities to discover the fraud,” SEC Chairman Mary L. Schapiro said. “It is a failure that we continue to regret, and one that has led us to reform in many ways how we regulate markets and protect investors.”

    The Bernard Madoff Files: A Chronicle of SEC Failure – Washington Post

    Posted by Brian Schuettler at 8:47 am  
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