One Ha'penny, Please

Since the New York Times' story dropped last week about high-frequency trading, lots of people have been trying to wrap their heads around it. To me it just sounds like straight-up theft. Information is currency in the market, and Goldman Sachs and the other high-frequency traders are simply buying information low and cashing in high. It's a money machine, as K-Drum notes.

Fortunately, there's a simple and elegant fix that would allow Goldman or whoever to keep with their HFT while improving the federal budget situation and maybe, just maybe, voluntarily curbing the practice. Just tax individual financial transactions.

Dean Baker is probably the most aggressive advocate of this approach. But Larry Summers has promoted it in the past. And Britain actually has a version of it on the books. At base, it's simply a microtax on financial transactions. Say, one-half of one percent on stock transactions. The average investor would hardly notice it. Most investors would hardly notice it. But high-volume traders would notice it quite a bit. Baker estimates that the tax could raise more than $100 billion annually, even taking into account the resulting drop-off in high-volume trading. That's money the federal treasury desperately needs.

And it's money that's coming from something that the financial sector does not particularly need. I've not heard many analysts say that the problem with the financial market is that it's just too slow. Rather the opposite, in fact. If high-frequency trading is really worth something to these firms, they can pay the transactions tax, and the rest of us can have the guarantee that this financial innovation is actually helping the country. If it's not even worth a half of one percent, it's probably not something the market -- or the rest of us -- need all that much.

'Xactly. Free market in action and all that. We can try to site mainframe computers and come up with all sorts of regulatory hoops that HFTs can jump through (and over), or we can take half a penny on every trade. If the stock market is oh-so-valuable and important to our economic future, then they can gladly afford half a penny.

I even like this better than restricting CEO compensation, because the latter smacks of intervention in the marketplace and can also be easily subverted, while a simple tax on transactions, which are widely available as data, just cannot. To put this in context, a half-penny on every trade would, over the course of ten years, pay for the entire health care bill. If giant investment firms are going to gamble with our money, they can at least ensure that some of it returns to the taxpayer.

In The Hands Of President Baucus

Jon Chait gets at something I've been noticing for a while, which is that the Blue Dogs in the House don't necessarily want to stop health care reform at this stage so much as they want to stop having to vote on health care reform before the Senate Finance Committee releases their bill. The House went first on climate change, and these moderate Dems think it's better for their political futures if the Senate goes first on health care. That's why I believe Nancy Pelosi when she says a health care bill will pass the House without question: if the Senate goes ahead and passes, a lot of that opposition from the Blue Dogs will melt away. They just want to avoid a tough vote, like all politicians.

Which means that the action on health care has shifted to that Finance Committee in the Senate, which remains on lockdown:

No one knows what Sen. Max Baucus is doing right now. Well, that's not quite true. Chuck Grassley probably knows. And Olympia Snowe probably knows. And Kent Conrad. And a few other senators and staff members. But that's about it. The Finance Committee, in recent months, has entered total lockdown -- even from itself. Sen. Jay Rockefeller, who chairs Finance's health subcommittee, has been totally shut out of the process. So too have a number of other Democrats on the Committee.

That's created a huge amount of uncertainty at the center of health-care reform. Baucus is the key senator on the key committee. And very few know what he's doing, or why it's taking this long, or what the sticking points are. House Democrats are terrified that they'll take a tough vote on an aggressive health-care reform bill only to see their legs cut out from underneath them when Baucus emerges with a tepid -- but bipartisan -- alternative. Senate Democrats are furious that Chuck Grassley and Olympia Snowe have had more of a role in the process than they have. And above all, everybody is confused.

My semi-informed guess is that if you want to see where Finance is going, look at what Doug Elmendorf, the director of the Congressional Budget Office, is doing. He is systematically, and fairly explicitly, closing off every door to control costs save for reforming the employer tax exclusion. He has dismissed any serious savings from the Independent Medicare Advisory Council proposal and the public plan and comparative effectiveness and general efficiencies. He has said that in the House bill, "the curve is being raised." This prompted Grassley to say that Finance is working to "overcome the shortcomings" of the House's effort.

Doing away with the employer deduction has no political support on the Hill. But capping it, and particularly through taxing the insurers who distribute Cadillac policies to executives, could potentially have lots of support. I love how Goldman Sachs' health care benefits has entered the discussion today.

Goldman’s 400 or so managing directors and its top executive officers participate in the bank’s executive medical and dental program as part of their benefits, according to documents filed with the Securities and Exchange Commission. The program generally costs the bank $40,543 in premiums annually for each participant’s family.

Those taking part in the plan include the company’s chief executive, Lloyd C. Blankfein, and four other top officers, as well as managing directors, whose base salary is $600,000.

Goldman’s medical coverage entered the health care discussion on Sunday when David Axelrod, senior adviser to President Obama, cited the Goldman program as an example of the expensive benefits the administration might consider taxing to help pay for its health care program.

“The president actually was asked this the other day by Jim Lehrer, and what he said was that this was an intriguing idea to put an excise tax on high-end health care policies like the ones that the executives at Goldman Sachs have, the $40,000 policies,” Mr. Axelrod said.

However, this is not the only thing that the Senate Finance Committee has up its sleeve. They're also looking to lower the subsidies available in the bill to people who cannot afford health insurance. This is one of those elements that will tangibly impact millions of Americans, and should be among the first order of importance. But Baucus and his gang want to keep the subsidies down to keep the cost of the bill down to an arbitrary number.

Under the legislation, insurers generally must accept all applicants and could not deny coverage because of a person’s medical history.

But Senator Ron Wyden, Democrat of Oregon, acknowledged that “there are some questions” about whether insurance would be affordable. “People who are making $50,000 or $60,000 a year and are spending $13,000 on health insurance may not get much of a subsidy,” said Mr. Wyden, a member of the Finance Committee. “Those people will ask, ‘How am I going to make this work for me and my family?’ “ [...]

The Senate Finance Committee is considering proposals to limit eligibility for subsidies, a move favored by some fiscally conservative Democrats in the House Blue Dog Coalition. One proposal would bar subsidies for people with incomes over 300 percent of the poverty level ($66,150 for a family of four.)

Richard J. Kirsch, the national campaign manager of Health Care for America Now, a consumer group, expressed concern. “If Congress sets the limit at 300 percent of the poverty level,” Mr. Kirsch said, “millions of middle-income families would not be able to buy insurance because they could not afford the premiums on their own.”

A similar reform concerns limiting out-of-pocket expenses for individuals and families.

As Krugman says today, complaining about subsidies while working to expand federal outlays for health care in other areas makes no sense whatsoever, but that's essentially what a lot of Blue Dogs have been arguing for many weeks. I really think that's because they don't want to move first on the bill, so they're throwing up every objection possible and inventing impossible hoops for House leaders to jump through.

More Evidence Of Goldman Sachs' Blood Funnel

I saw Bill Maher offer Matt Taibbi some pushback last night about his Rolling Stone piece on Goldman Sachs. Maher wasn't willing to believe that Goldman has been uniquely positioned to profit from the breakdown of the financial system and the various bubbles created. Maher offered the predictable "why just Goldman" response, and Taibbi decided to talk about the many Goldman officials in high positions in the government. He could have just pointed to this story that leaped from Zero Hedge to the New York Times yesterday.

It is the hot new thing on Wall Street, a way for a handful of traders to master the stock market, peek at investors’ orders and, critics say, even subtly manipulate share prices.

It is called high-frequency trading — and it is suddenly one of the most talked-about and mysterious forces in the markets [...]

Nearly everyone on Wall Street is wondering how hedge funds and large banks like Goldman Sachs are making so much money so soon after the financial system nearly collapsed. High-frequency trading is one answer.

And when a former Goldman Sachs programmer was accused this month of stealing secret computer codes — software that a federal prosecutor said could “manipulate markets in unfair ways” — it only added to the mystery. Goldman acknowledges that it profits from high-frequency trading, but disputes that it has an unfair advantage.

Yet high-frequency specialists clearly have an edge over typical traders, let alone ordinary investors. The Securities and Exchange Commission says it is examining certain aspects of the strategy.

“This is where all the money is getting made,” said William H. Donaldson, former chairman and chief executive of the New York Stock Exchange and today an adviser to a big hedge fund. “If an individual investor doesn’t have the means to keep up, they’re at a huge disadvantage.”

They literally place their super-fast computers physically close to the machines that govern NYSE trades, to get the jump on competitors and make enough pennies off of the brief ups and downs of stocks to rake in mounds of cash. And in some cases, investors can buy access to buy and sell order information on certain exchanges that can be used to make these quick orders. When Chuck Schumer is calling for an investigation of Wall Street, you know something has gone horribly wrong.

No, Goldman Sachs is not the only organization profiting from this scheme, or any of the numerous others. But their name keeps surfacing among those that are, in pretty much every case. I don't know how much evidence it takes to understand their role in all of this. Taibbi may not have gotten every single solitary thing right in his very long piece, but he got enough right to make some very powerful people nervous. And rightly so.

We need to go further in determining what caused this financial crisis and what pitfalls remain. The new iteration of the Pecora Commission, a Depression-era panel that uncovered the origins of that crisis, can lead the way.

We, the undersigned, call on you to fulfill the responsibilities of your position by joining together in non-partisan cooperation to investigate the origins of the financial crisis in ways that lead to a full understanding of the institutions, people and practices that are responsible for our economic collapse.

In particular, we encourage the adoption of three guidelines that history has taught us are essential to an effective inquiry:

Appoint a single investigator. This individual must have a proven record of exposing fraudulent elites and institutions, and must provide a professional, non-political spirit to the investigation.

Afford no special treatment. No one is off-limits or gets special protection in the investigation.

Provide the tools to do the job. The investigator must be given ample budget and time, full subpoena authority, and the ability to hire and fire staff.

These principles were applied in the 1930s when Congress launched a formal inquiry into the causes of the Great Depression. That commission - led by Ferdinand Pecora - was willing to reach into the highest levels of Wall Street and finance to determine the causes of the economic collapse of 1929. The courage with which the commission greeted its task - and the revelations that courage ensured - inspired the sweeping banking and financial reforms that were the bedrock of our financial system for decades.

Building a new financial foundation requires us to begin on solid ground - the truth. It is only by illuminating the mistakes of the past that we will be able to meet the great challenges of the future.

And they can start by photocopying Matt Taibbi's notes.

Not Stupid, Just Secure In Their System

A few days ago, AmericaBlog asked if Goldman Sachs was tone deaf, politically stupid or foolish to boast about high bonuses during a recession. I think the right answer was "they know they can get away with it." Indeed, those record profits from the banks were a feature, not a bug. The government decided to indirectly bail Goldman and other banks out by allowing them to make bushels of money, much of it handed over by the Feds, and essentially recapitalize themselves. It hasn't fully worked, and much of it is illusory, but it's worked enough to give profits for now to a lot of banks, and as a result, compensation shoots up. That's just a byproduct of the decision on how to help the banks out of their mess. That decision itself gets clearer when you look at the revolving door between D.C. and Wall Street, which apparently doesn't stop even if the individual in question helped to fund the Sudan genocide.

As for the political pitfalls of announcing record profits right at the beginning of talks over financial regulatory reform, that doesn't appear to be a great obstacle, either.

Intense lobbying pressure from Wall Street has slowed the progress of a major piece of financial regulatory reform legislation. Financial Services Committee chairman Barney Frank (D-Mass.) informed committee members Monday night that a vote on the creation of the Consumer Financial Product Safety Commission will be pushed back until September.

"We wanted to give consumer groups and their allies time to work with their members, organize and get their message out," said committee spokeswoman Elizabeth Esfahani. "So far in this debate, we've only heard from one side, the banking lobbyists, so we want to give both sides time to be heard."

The setback is a wake-up call for Democrats, said Rep. Brad Miller (D-N.C.), an original sponsor of the measure.

"Now some of those who thought with a conciliatory approach we might get agreement, I think they now know that it's going to be a battle," said Miller.

Further undermining the efforts to create a Consumer Financial Protection Agency, beyond the bank lobbyists, is the chairman of the Federal Reserve Ben Bernanke, who thinks that the Fed can manage that on their own. Of course, the Fed is a quasi-governmental partnership with... those same big banks whose lobbyists want to tear the heart out of the CFPA. I'm not hopeful that the Federal Reserve would somehow become this uber-regulator over those who partially own them.

Brad Miller is sure to not give up on this, nor will Elizabeth Warren, who can be credited with the idea. Her article on the myths of a CFPA is must-reading. But clearly, they have a big set of hurdles, not the least of which is the perspective that the bankers still "own the place" when it comes to cracking down on them in any meaningful way.

Sure, Goldman won't be able to get everything it wants. After haggling over the purchase of government warrants, they paid them off at a solid price for taxpayers. But that's a small price to pay for keeping the regulatory efforts in their direction.

Charles Schwab Makes The Mistake Of Telling The Truth

Maybe it's because their headquarters are on Montgomery Street in San Francisco instead of Wall Street in New York, but Charles Schwab Co. is telling investors that California is not about to go out of business.

In a rhetorical question-and-answer missive to investors, Schwab income planning director Rob Williams, says "California has severe financial problems, but we think it's unlikely that the state will default on its general obligation (GO) bonds."

Then he lists five reasons for reaching that conclusion, including constitutional guarantees; the fact the state can't file for bankruptcy, and the fact that "states can't just disappear."

So does the firm see the state's current travails as "a buying opportunity?" "No one can say for certain," says Williams.

Here's the document. As Williams says, general obligation bonds are guaranteed by the state constitution, and only education is ahead of paying off these bonds. Here's a sample:

Many analysts point out that the state’s revenues are collapsing, its spending is out of control, and the structure of government prevents the state from ever being fiscally stable. Are these concerns valid?

All of these statements may be true, depending on your political view. But these troubles don’t inevitably translate into default on California GO bonds, for all of the reasons cited above.

However, they do translate into serious concerns for other parties interested in the state’s solvency—of which there are many. The politics of the situation can also be noisy, leading to steady reporting of the budget drama and ebbs and flows in market sentiment, likely adding to uncertainty and reducing confidence among investors. As confidence drops, the prices of outstanding bonds drop, and yields rise.

The situation has also resulted in changes to the state’s bond rating, including a downgrade by Fitch Ratings to BBB on July 6 and Moody’s to Baa1 on July 15. These ratings are two and three notches, respectively, from "junk" bond status. The rating is also on negative "Rating Watch," meaning that the rating will remain on review for additional downgrades "if institutional gridlock" persists.

While ratings alone should not drive an individual investment decision, comments in Fitch’s rating report are worth quoting: "The BBB rating indicates that expectations of default risk remain low, although the rating is well below that of most other tax-supported issuers. GO debt in California has a constitutional prior claim on revenues, although after education."

In other words, diving into Fitch's rating report, they essentially admit that their rating is bullshit. They are dropping the ratings because of perceptions of crisis that don't match constitutional obligations. This is gouging. It's almost the textbook definition of it.

And if you don't think that goes on, check out this investigative report from last November:

Goldman, Sachs & Co. urged some of its big clients to place investment bets against California bonds this year despite having collected millions of dollars in fees to help the state sell some of those same bonds.

The giant investment firm did not inform the office of California Treasurer Bill Lockyer that it was proposing a way for investment clients to profit from California's deepening financial misery. In Sacramento, officials said they were concerned that Goldman's strategy could raise the interest rate the state would have to pay to borrow money, thus harming taxpayers.

"It could exaggerate people's worries about our credit," said Paul Rosenstiel, head of the public finance division of the treasurer's office.

That's exactly what's happening. The big banks are sparking irrational worry over California's ability to repay bonds to increase their yields. The federal government needs to step in with a backstop, not just to save the state money, but to prevent the commission of a crime.

Still Masters Of The Universe

What we're seeing from the big bank earnings reports is that the government reacted to a situation where the financial industry titans were too big to fail, and facilitated theconsolidation of them so that they grew even bigger. Goldman Sachs and JP Morgan Chase are the biggest of the lot, having seen their competition either eliminated or weakened.

“One theme here is that Goldman Sachs and JPMorgan really have emerged as the winners, as the last of the survivors,” said Robert Reich, a professor at the University of California, Berkeley, who was secretary of labor in the Clinton administration.

Both banks now stand astride post-bailout Wall Street, having benefited from billions of dollars in taxpayer support and cheap government financing to climb over banks that continue to struggle. They are capitalizing on the turmoil in financial markets and their rivals’ weakness to pull in billions in trading profits.

Even Bank of America and Citigroup posted big profits in the last quarter, although the elimination of mark-to-market accounting plays a major role in hiding the true weakness of a lot of these banks. The imminent failure of more community banks and larger firms like CIT present opportunities for JP Morgan and Goldman Sachs as well.

Paul Krugman gets shrill on Goldman Sachs today, and he makes the larger point that we have only made Wall Street more dangerous to the overall economy through no-strings bailouts and failing to rein in the excess.

Over the past generation — ever since the banking deregulation of the Reagan years — the U.S. economy has been “financialized.” The business of moving money around, of slicing, dicing and repackaging financial claims, has soared in importance compared with the actual production of useful stuff. The sector officially labeled “securities, commodity contracts and investments” has grown especially fast, from only 0.3 percent of G.D.P. in the late 1970s to 1.7 percent of G.D.P. in 2007.

Such growth would be fine if financialization really delivered on its promises — if financial firms made money by directing capital to its most productive uses, by developing innovative ways to spread and reduce risk. But can anyone, at this point, make those claims with a straight face? Financial firms, we now know, directed vast quantities of capital into the construction of unsellable houses and empty shopping malls. They increased risk rather than reducing it, and concentrated risk rather than spreading it. In effect, the industry was selling dangerous patent medicine to gullible consumers [...]

The huge bonuses Goldman will soon hand out show that financial-industry highfliers are still operating under a system of heads they win, tails other people lose. If you’re a banker, and you generate big short-term profits, you get lavishly rewarded — and you don’t have to give the money back if and when those profits turn out to have been a mirage. You have every reason, then, to steer investors into taking risks they don’t understand.

And the events of the past year have skewed those incentives even more, by putting taxpayers as well as investors on the hook if things go wrong.

Basically, Krugman hinges the success of the bailout on meaningful financial regulation to keep Wall Street from making the same gambles. I'm not hopeful about that. But what I am hopeful about is the recognition, from across the political spectrum, that the bailout has produced perverse incentives that need to be reversed in whatever way possible.

The (Wall Street) Journal's take -- "We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business" -- is actually more in keeping with that of Robert Reich, who says that "Goldman's resurgence should send shivers down the backs of every hardworking American who has lost a large chunk of retirement savings in this economic debacle, as well as the millions who have lost their jobs.... Goldman's high-risk business model hasn't changed one bit from what it was before the implosion of Wall Street." [...]

There is much in the Wall Street Journal that I don't agree with but, when it comes to the failure of the administration to address and fundamentally reform what Kessler calls "the structural problems that got us into trouble in the first place," we are of the same mind. There is no daylight between a progressive position focused on the paramount need to get the real economy going and one based purely on what makes free markets work.

The editorial goes so far as to suggest imposing a tax (yes, the Wall Street Journal is proposing a tax!), an FDIC-style bailout tax to be precise, "for those in the too-big-to-fail camp."

Even Reagan-era economist Bruce Bartlett is arguing for higher taxes, albeit regressive ones. I actually think the proper context is in terms of the health care debate. Goldman Sachs and other Wall Street firms took advantage of a financial crisis to redistribute wealth upwards. To pay for health care for the indigent, we should unwind that redistribution, perhaps with Charlie Rangel's surtax that adds brackets at the high end. It is impossible for conservatives to argue against redistribution of wealth with a straight face, given the example of Goldman Sachs.

...Simon Johnson:

We are looking at a concentration of political power in the US banking system that we haven’t seen since the 1830s: Shades of Andrew Jackson vs. the Second Bank of the United States. We put up with a lot from our banking elite in this country, but historically we draw the line at financial power so concentrated it can confront the power of the President.

The logic for reform and for breaking up the big banks begins to build. Bank of America’s fall was, in some senses, a fortunate accident for Goldman and JP Morgan. But it has also given them an excessive and unsustainable degree of political power.

Of course, you also have to ask: Who can break that power, when, and how?

...This is a dangerous time, politically. 80% of the public believe that Wall Street benefited from the bailouts, and not taxpayers. That's an unsurprising result. The question is how the public reacts. We could see a right-wing populism take shape if the teabaggers ever get their act together, or a New Deal coalition reformed. I talked to a writer last night who said he felt like he was living through history, as the Depression-era battle lines are being drawn. We don't know who will win yet, but it doesn't look good from where I sit.

Goldman's Record Taxpayer-Subsidized Profits

Matt Taibbi's excellent reported piece on Goldman Sachs is now online, and he's created a kind of sequel with this piece about Goldman's big profits, mostly the result of handout after handout from the Feds:

Last year, when Hank Paulson told us all that the planet would explode if we didn’t fork over a gazillion dollars to Wall Street immediately, the entire rationale not only for TARP but for the whole galaxy of lesser-known state crutches and safety nets quietly ushered in later on was that Wall Street, once rescued, would pump money back into the economy, create jobs, and initiate a widespread recovery. This, we were told, was the reason we needed to pilfer massive amounts of middle-class tax revenue and hand it over to the same guys who had just blown up the financial world. We’d save their asses, they’d save ours. That was the deal.

It turned out not to happen that way. We constructed this massive bailout infrastructure, and instead of pumping that free money back into the economy, the banks instead simply hoarded it and ate it on the spot, converting it into bonuses. So what does this Goldman profit number mean? This is the final evidence that the bailouts were a political decision to use the power of the state to redirect society’s resources upward, on a grand scale. It was a selective rescue of a small group of chortling jerks who must be laughing all the way to the Hamptons every weekend about how they fleeced all of us at the very moment the game should have been up for all of them.

Goldman's profits only count as "profit" if you consider a pass-through federal subsidy to AIG, quick and easy loans and multiple bailout programs made available to them by the FDIC and the Fed after converting themselves into a bank holding company, the forced collapse of much of its competition and fees from stock issuance from other banks having to repay TARP to be something based on hard work and ingenuity and not political connections and corporate welfare.

But what's most amazing about all of this is how Goldman Sachs is taking all this federal largesse and plowing it back into the market at HIGHER rates of leverage than even during the crisis which amount burnt down the entire financial system:

As Felix Salmon notes, Goldman last year, after it converted to bank holding company status, announced that it was “taking steps to reduce leverage.” But what’s happened since then is that Goldman has actually been emboldened by all its state backing to borrow more and gamble more than ever. This is the equivalent of a regular casino gambler who hears that the house has doubled down on his credit line and decides to stay up at the tables all night, instead of going home and sobering up. Just look at Goldman’s VaR, or Value at Risk, which measures the amount of money the bank puts at risk on any given day: it’s soared since last year.



Taken altogether, what all of this means is that Goldman’s profit announcement is a giant “fuck you” to the rest of the country. It is a statement of supreme privilege, an announcement that it feels no shame in taking subsidies and funneling them directly into their pockets, and moreover feels no fear of any public response. It knows that it’s untouchable and it’s not going to change its behavior for anyone. And it doesn’t matter who knows it.

And meanwhile, out in the country, unemployment will top 10 percent soon, and lots of people will be wondering why those Wall Street profits haven't trickled down.

Ian Welsh has a lot more.

Color Me Surprised

No bailout for CIT. Reserved for the 20 richest banks in the world, thank you very much.

CIT Group Inc. shares tumbled more than 75 percent Thursday morning as its inability to get emergency government funding raised expectations that the commercial lender will file for bankruptcy protection.

But it is unclear how such a filing by a company that lends to thousands of small and mid-size businesses would affect shaky financial markets hobbled by an economy in recession and bleeding hundreds of thousands of jobs a month. Small businesses are seen as keys to economic recovery.

I fully expect conservatives to rally around the President letting the free market work and allowing businesses who get themselves in trouble to fail.

Oh wait, they'll probably accuse the President of not caring about small businesses.

Simon sez:

CIT had friends, but not enough - and maybe this tells us something about the shifting political sands. The Financial Services Roundtable (top financial CEOs) came out in force, the House Committee on Small Business reportedly made worried noises, and Barney Frank sounded supportive. But the American Bankers Association (the broader mass of bankers) publicly stood on the sidelines and Senate Banking – and prominent senators – seemed otherwise engaged.

CIT’s small and mid-size customers are important to the recovery. But the reckoning is that this business can be easily sold to someone else – after all, this is exactly what bankruptcy can get right in the U.S.

So the question became: is CIT too big – on its liabilities side – to fail? And if $80bn financial firms are now “too big to fail”, what does that imply for other potential bailout conversations and for our fiscal future? [...] The bottom line: we need fewer $800bn firms and more $80bn firms. If Goldman Sachs were broken into 10 independent pieces, we could all sleep much more soundly.

Instead, something like CIT's core businesses will be absorbed by a Goldman.

Sex and the Single Political Culture

I want you to watch a politician who understands the financial services industry, now the most important factor in returning us to economic growth, and who is at the top of his game discussing how we sold out the manufacturing base of the country while in thrall to that financial services industry, particularly Goldman Sachs, which created artificial paper profits and used their vast political connections to cut the line and receive trillions in handouts when those paper profits went up in smoke. As a result, the banks have rebounded thanks to the intense effort of the federal government, but that money has not flowed through them and into the creation of new productive sectors of the economy that would create jobs.

The only additional piece of information you need is that this particular politician cannot practice politics anymore because he solicited prostitutes, and as a Democrat not named Larry Craig, David Vitter, John Ensign or Mark Sanford, he must resign for a sex-related mistake. Funny how that worked out right at the time that the financial sector was on the verge of melting.



I don't glorify Eliot Spitzer's conduct. But clearly he is virtually the most important politician in America for the times who cannot use his skill and talent because of a personal indiscretion. And this has become a real paradox in America, where personal failings get confused with real and thoroughgoing criminal activity, and the over-moralists in Washington pick and choose which to emphasize. Thus we have a situation where Marcy Wheeler says blowjob on television and everyone in the media runs for the fainting couch, but hours earlier on the same network good ol' boy Pat Buchanan can advocate for murdering a 19 year-old and nobody had any similar reaction, just a shrug of the shoulders and words like "Oh, Pat!"

Our sexual hangups date back to our Puritan ancestry. They will always spark attention and furious twitterings (the offline kind) back and forth. When they get in the way of legitimate investigations into the rule of law and the work of public servants uniquely qualified to fight back against the corporate control of government by the financial industry, they become real barriers to progress. And no matter how many moralizers fall under the spell of passion and fall from their own personal standards, this zing of attention to sex will never cease.

Where's My Pitchfork?

At a time when economic news, including today's report on retail sales, has dampened hopes of a recovery this year and raised the near-certainty of double-digit unemployment, we can all comfort ourselves with the great success of Goldman Sachs:

Comfortably beating analysts’ forecasts, Goldman Sachs earned second-quarter net profits of $3.44 billion, or $4.93 a share, the bank announced on Tuesday.

The results continue a robust turnaround for the firm since it rode out the final tumultuous months of last year with the aid of a federal rescue. They come just one month after it paid back its $10 billion in federal aid.

Goldman’s profit was lifted by record quarterly revenue of $6.8 billion in its fixed income, currency and commodities unit, where mortgage and other credit instruments are traded, the bank said in a statement. This business has performed well since the bank has taken on greater levels of risk since the end of last year.

Its equity underwriting business also generated record net revenue, worth $736 million in the second quarter, it said, as Goldman benefited among other things from a rush by other troubled banks to issue shares and raise their capital levels.

“We are performing well across the board,” said David A. Viniar, chief financial officer, who said the strong performance reflected “blocking and tackling every day” by Goldman’s employees.

Glenn Greenwald ably details the extraordinary actions taken on behalf of Goldman Sachs during the financial crisis right on through until today, so I need not repeat them. Even if they had not done so, Goldman would be in an excellent position to capitalize on the failures of other firms because of the implosion of Lehman Brothers and Bear Stearns - their competition has been euthanized, essentially. But that wasn't enough. They were allowed to change themselves into a bank holding company to qualify for Federal Reserve largesse. They received billions in federal money passed through AIG to pay off on their credit default swaps, putting them in a better position that any other US financial institution. They used their contacts throughout government to get favorable terms and handouts in virtually every program aimed at rescuing the financial system.

And to this day, the Treasury Department refuses to answer Congressional queries about accepting the recommendations of bailout auditors, nor will the Federal Reserve divulge the whereabouts of the trillions of dollars in funds they've let out since last September. I have a feeling that we'd throw an even bigger fit if we had more transparency. But what is already known, frankly, is enough.

In a related story, like everyone else I recommend Michael Lewis' article on AIG and Joseph Cassano in Vanity Fair. It focuses on understanding the past crisis rather than the credibility crisis we now face as a consequence of bailing out banks over people, but it's worth reading.

What Could Possibly Go Wrong?

Morgan Stanley has this amazing plan to take a bunch of toxic crap, call it a different name, put a bow on it and sell as a magic moneymaking product. Innovative!

Morgan Stanley plans to repackage a downgraded collateralized debt obligation backed by leveraged loans into new securities with AAA ratings in the first transaction of its kind, said two people familiar with the sale.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Two years after the credit markets began to seize up, costing the world’s biggest financial institutions $1.47 trillion in writedowns and losses, banks are again taking so- called structured finance securities and turning them into new debt investments with top credit ratings. While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

A lot of banks and insurers “cannot buy anything but AAA,” said Sylvain Raynes, a principal at R&R Consulting in New York and co-author of “Elements of Structured Finance,” which is due to be published in November by Oxford University Press. “You’re manufacturing AAA out of not AAA, therefore allowing those people who have AAA written on their forehead to buy.”

That last paragraph is my favorite part - investors cannot buy anything but AAA, so we'll call a bunch of garbage AAA and sell it to them! Genius! And if you're still wondering why that federal buy-up of toxic assets has amounted to nothing, I guess it's because enough customers have been found for this "New and Improved Shitt With Two T's."

It says in the article that Goldman Sachs is preparing a similar sale. Matt Taibbi, you have the floor.

It's Good To Be The King

The loss of 467,000 jobs last month and the loss of practically every single job created this decade aside, at least some employees are back in business.

Business is back on Wall Street. If the good times continue to roll, lofty pay packages may be set for a comeback as well.

Based on analysts' earnings forecasts for 2009, Goldman Sachs Group Inc. is on track to pay out as much as $20 billion this year, or about $700,000 per employee. That would be nearly double the firm's $363,000 average last year, and slightly higher than the $661,000 for the average Goldman employee in fiscal 2007, according to analyst estimates reviewed by The Wall Street Journal.

Well, that was a close one! For a second I thought the banksters would have to SUFFER for the damage they caused blowing a hole in the global economy. Thankfully, that task will fall only to the rest of the population.

By the way, you really shouldn't miss Matt Taibbi's epic takedown of Goldman Sachs, arguably the most devious actor in this whole mess, in the latest issue of Rolling Stone. They haven't put it on their website yet, but Zero Hedge has a very hard-to-read copy. It's a comprehensive look at Goldman's increasing ubiquity throughout practically all of modern life, and their role in manipulating Wall Street and K Street to get favorable outcomes. Goldman is like the Borg, and the ruling class has been assimilated. Needless to say, Goldman's none too happy about having their agenda exposed. Taibbi responds here. He's one of the only journalists who would dare to write this story, and he should be credited for that.

...Taibbi's article is on the Rolling Stone site. But I agree with those in comments, anything that can be done to support Taibbi's work in this matter ought to be encouraged. Also, he appears to have stumbled upon a very serious issue about Goldman Sachs front-running its clients, which is basically buying a stock before executing a large trade for its clients and taking the profit.

Meg Whitman: Maths Iz Hard: UPDATE Arnold Enjoyes Meg Math

UPDATED at the top, as the Governor lays off 5,000 state workers, the perfect thing to get California working again. He's basically borrowing from the Whitman playbook here. See below for why that's crazy.

It's a long way until the 2010 Governor's race, but I think Calitics needs to do our part in pointing out that Meg Whitman is frequently full of crap. She's seized on this idea that California's problems can merely be solved by firing all the state employees. Now, first of all, California has the second-lowest rate of state employees per capita in the entire nation, a conveniently forgotten fact by eMeg and the rest of the swinging corporate raiders in the Yacht Party. Next, as Josh Richman explains:

“We haven’t looked hard enough at where we can cut. We can lay off 20,000 to 30,000 state employees while prioritizing public safety and teachers,” Whitman told the Long Beach Chamber of Commerce. “We shouldn’t have to lay off teachers, we need to lay off bureaucrats.”

Fact is, “cut the bloated bureaucracy” has been a GOP rallying cry for decades, and yet whenever the study, the audit or the blue-ribbon commission report comes back, we’re suddently talking about far less “waste, fraud and abuse” than they’d implied. Is there some fat to cut? Sure. Should we? Probably. Will it fix this deficit? Not even close.

The budget deficit now looks to be about $21.3 billion; it would be about $15 billion if voters approved Propositions 1C, 1D and 1E next week, but that almost certainly ain’t gonna happen. And $21 billion isn’t 30,000 jobs, as George Skelton so eloquently put it back in February:

According to the state budget document, there is the equivalent of 205,000 full-time jobs controlled by the governor. There actually are more workers than that because some are part-time. Do the math based on 16 months, since that’s now the time frame of the projected deficit, assuming a balanced-budget package could be implemented by March 1.

You could lay off all those state workers — rid yourself of their pay and benefits — and save only $24.4 billion.

Meanwhile, you would have dumped 160,000 convicted felons onto the streets because all the prisons were closed after the guards and wardens were fired. There’d be no Highway Patrol because all the officers were canned. State parks would be closed because there were no fee-collectors or rangers.

Truth is the savings wouldn’t even add up to $24.4 billion because some of those employees are paid out of small special funds that are self-sustaining.

If these people were in an empty trash bin, they'd still clamor to "cut the waste."

Let me again commend Chris Kelly's Meg Whitman week on the Huffington Post, he's doing an oppo research job that should practically ensure him a spot on any number of campaign staffs. I particularly like the part detailing the $1.78 million she stole from Goldman Sachs, which for all I know might make her a folk hero.

Next year oughta be fun.

...by the way, I'm not letting other Yacht Party gubernatorial hopefuls off the hook either, like Tom Campbell. He predictably dissembles about California's low per-pupil spending on K-12 education, making the same debunked "hey, the schools have plenty of money" claim that Dan Walters likes to peddle. Allow me to introduce them both to Julia Rosen circa April 2008, which by the way is before the even deeper cuts to schools made in the February budget agreement.

Chairman Of The New York Fed Resigns

This got shockingly little attention:

Stephen Friedman, the chairman of the Federal Reserve Bank of New York, abruptly resigned on Thursday, days after questions arose about his ties to Goldman Sachs.

Mr. Friedman was chairman of the New York Fed at the same time he was a member of Goldman’s board. He also had a substantial stake in the firm as the Fed was crafting a solution to keep Wall Street banks afloat. Denis M. Hughes, deputy chair of the board, will take over as the interim chairman, the New York Fed said in a statement.

Because the New York Fed approved a request by Goldman to become a bank holding company, the chairman’s involvement in Goldman was a violation of Fed policy, The Wall Street Journal said in an article earlier this week.

Incidentally, Friedman replaced Tim Geithner in this capacity.

Well, score one for the forces of good against the endless culture of cronyism and conflicts of interest between Wall Street and Washington. Now we just need to find out about Byron Dorgan's wife, who lobbied against the cramdown provision as her husband voted against it, and Barney Frank and Nancy Pelosi, who refused amendments capping credit card interest rates in the House reform bill, and just about every manager of every public pension fund in America, and...

Stress'd

Arianna Huffington delivers the verdict on the Administration's stress tests before they come out later this week, and it's hard to argue with her:

For starters, why the holdup in releasing the results? It's been ten days since the Treasury Department and the Fed let the banks in on the preliminary results of the tests. So how come the public -- you know, the ones who keep bailing out the banks -- are still, ten days later, in the dark?

The reason is, the banks are using this time to negotiate how much information about their portfolios the hoi polloi will be privy to, and are trying to get the government to reconsider its analyses (which are already iffy, since they are based on the banks' own estimates and on assumptions about the economy - including unemployment rates, and cumulative real estate and credit card losses -- that are hardly stress-inducing). This is the equivalent of a teacher giving a student a look at his grades and allowing the student to try to cut a better deal before report cards are sent home to mom and dad [...]

And then there is the trouble with the assumptions at the heart of the stress tests. As Nouriel Roubini put it: "These are not stress tests but rather fudge tests... The results of the stress tests -- even before they are published -- are not worth the paper they are written on."

Nassim Taleb agreed: "This stress test is the equivalent of testing the Brooklyn Bridge by running a single heavy truck on it."

The ongoing horse-trading between the banks and the government has only exacerbated the mistrust, creating what the New York Times' Andrew Ross Sorkin, appearing on Charlie Rose, described as a lose-lose:

"Either you are going to be very realistic, perhaps even too realistic for many people, and you're going to suggest that some of these banks really are insolvent...or you're going to decide that the entire process is a whitewash and you're going to have no confidence in the test to begin with."

The fact that the releases, in absence of official information, have moved from all the banks being well-capitalized to now 10 of them requiring more funding simply destroys whatever positive spin will be overlaid on the eventual release. What some call "requires more capitalization" I call "insolvent," and needing a restructuring of their debt to flush out the toxic waste. Yet that option, as Arianna notes, has been taken off the table. Administration leaders insist that all capital requirements can be met through the private sector and no additional interventions from the government will be necessary. That may be the case on the surface, but considering that multiple government lending programs currently exist that save banks billions of dollars, it doesn't really mean anything. In fact, the web of government largesse outside of direct capital infusions going to the banks suggests a far too cozy relationship between the banksters and the policymakers:

The Federal Reserve Bank of New York shaped Washington's response to the financial crisis late last year, which buoyed Goldman Sachs Group Inc. and other Wall Street firms. Goldman received speedy approval to become a bank holding company in September and a $10 billion capital injection soon after.

During that time, the New York Fed's chairman, Stephen Friedman, sat on Goldman's board and had a large holding in Goldman stock, which because of Goldman's new status as a bank holding company was a violation of Federal Reserve policy.

The New York Fed asked for a waiver, which, after about 2½ months, the Fed granted. While it was weighing the request, Mr. Friedman bought 37,300 more Goldman shares in December. They've since risen $1.7 million in value.

Mr. Friedman also was overseeing the search for a new president of the New York Fed, an officer who has a critical role in setting monetary policy at the Federal Reserve. The choice was a former Goldman executive.

Of course, only the bankers understand the economy, so we should just shut up and let them raid the Treasury.

As Simon Johnson notes, this adds up to a major credibility problem for the Treasury Department.

In any case, this is a serious problem for Treasury’s optics. After long negotiations, the bank stress tests were set to show most banks are close to have their Goldilocks level of capital (i.e., just right) Given that we generally agree (and the President has long stressed) this is the biggest financial crisis since the Great Depression, we seemed to be on the the verge of a capital adequacy miracle.

But instead of this being seen as some combination of good luck and smart policy, ”everyone is basically fine” would look like the banks are running the show. My Treasury friends swear up and down this is not true, but that is now beside the point. Whatever the reality, it looks increasingly to everyone like the banks really are in charge. It’s a nasty rule of politics that you are damaged by where perceived blame lands, rather than by what you actually do.

Perhaps the normal ebb and flow of the business cycle will mask over this continued giveaway to Wall Street interests. But Obama has long said that the financial industry must shrink in size and prestige relative to the economy. I see no way for that to happen in the current environment, which means we'll still be chasing bubbles well into the future, at the expense of ordinary Americans.

...Roubini and Richardson in the WSJ:

The hope was that the stress tests would be the start of a process that would lead to a cleansing of the financial system. But using a market-based scenario in the stress tests would have given worse results than the adverse scenario chosen by the regulators. For example, the first quarter's unemployment rate of 8.1% is higher than the regulators' "worst case" scenario of 7.9% for this same period. At the rate of job losses in the U.S. today, we will surpass a 10.3% unemployment rate this year -- the stress test's worst possible scenario for 2010 [...]

Stress tests aside, it is highly likely that some of these large banks will be insolvent, given the various estimates of aggregate losses. The government has got to come up with a plan to deal with these institutions that does not involve a bottomless pit of taxpayer money. This means it will have the unenviable tasks of managing the systemic risk resulting from the failure of these institutions and then managing it in receivership. But it will also mean transferring risk from taxpayers to creditors. This is fair: Metaphorically speaking, these are the guys who served alcohol to the banks just before they took off down the highway.

I just feel like there's no political will to do this, however necessary it may be.

Making Money Coming And Going

You'll lack surprise when you discover that Edward Liddy, the head of AIG installed after the company imploded, owns a large stake in Goldman Sachs, which has been bailed out by AIG counter-party payments.

Edward M. Liddy, the dollar-a-year chief executive leading the American International Group since its bailout last fall, still owns a significant stake in Goldman Sachs, one of the insurer’s trading partners that was made whole by the government bailout of A.I.G.

Mr. Liddy earned most of his holdings in Goldman, worth more than $3 million total, as compensation for serving on the bank’s board and its audit committee until he stepped down in September to take the job at A.I.G. He moved to A.I.G. at the request of Henry M. Paulson Jr., then the Treasury secretary and a former Goldman director.

I think this has to be the end of Mr. Liddy. When your alibi is that the $3 million is “a small percentage of his total net worth,” you're really grasping at straws. No really, that's his alibi, check the link.

The 100% pass-through of AIG counter-party payments to Goldman and other banks is absolutely insidious, maybe the worst part of this whole thing. This is why Goldman and these other banks can self-righteously claim to be renouncing government help while accepting it through pass-throughs and separate federal aid programs. They'd rather get their payoffs in black bags than in public, that's all they're whining about.

I don't necessarily think that Liddy is only making Goldman whole because of his financial stake; it's more that he's a bankster helping out his other bankster pals. It's the culture of coziness between elites that must be stopped.

Have we completely lost of sense of what is and is not a conflict of interest? Have we really built a system in which greed fully overshadows responsibility? Is it not time for a complete rethink of what constitutes acceptable executive behavior?

One of our country’s leading corporate attorneys made a telling point to me on Wednesday night, “the only way to control executive behavior is to criminalize it,” i.e., civil penalties do not change behavior - the prospect of jail time has to be on the table. His broader point was that antitrust action can make a difference in today’s world, but only if this includes potential criminal charges [...]

Let me be very clear on my position vis-a-vis AIG-Goldman and the broader Washington-Wall Street Corridor. I’m not saying that anyone has broken any laws, but rather that laws need to be changed. I’m not even saying that there have been transgressions against the prevailing code of ethics for executives and politicians - although surely we agree that this code needs to be dragged, kicking and screaming, into the 21st century.

I’m just saying that we have a problem - ultimately, with the belief system that underpins how big finance behaves - and we need to fix it.

...more AIG hilarity: Jake DeSantis, who "resigned" in a letter picked up by the New York Times, still works for the company. What a bunch of WATBs who want to rule the universe in secret like the good old days instead of under public scrutiny.

Banksters Losing Their Grip?

With all the talk of torture and wiretapping and tea parties, I have neglected that little story about how the banks have the economy by the cojones and won't let go. While more banksters release earnings reports completely tarnished by the creative accounting and cheap bailout money (as well as conveniently forgetting major write-downs that would show a loss), they are continuing to tell everyone they're just about to repay the government, a fact somewhat sullied by the fact that they have no money:

Former Treasury Secretary Paul O'Neill noted that at the start of the TARP program, the heads of the major U.S. banks were summoned to Washington and told they were required to take the money so that those who needed it would not be stigmatized.

"So they all took the money. Stop and think about that. What was the purpose of this policy? To deceive the people so that the public would not know which banks were in danger of failing? Why didn't any of the CEO's, claiming not to need the money, have the courage to refuse?" O'Neill said in an e-mail to ABC News. "If banks now claim they want to return the money because they don't need it, why do they have to raise new capital to replace the money from we the people in order to repay the government?"

O'Neill said that unfortunately the government is permitted to practice a policy of deception for the greater good of the society.

"Is the public ever going to have clear facts regarding any of the individual institutions?" he said. "For months I have been calling for a public disclosure of all bank assets by rating class, along with facts showing the face value of so-called toxic assets along with the associated current book keeping value and associated reserve account. The public and members of Congress seem to be accepting of the idea that a handful of people in the administration and the Fed should do all of this in secret."

The banksters clearly want to return the money to get out from under executive pay restrictions. They care more about their own salaries than they do the greater economy. But of course, if a bank like Goldman Sachs does manage to return TARP money, they are still a ward of the state given all the special treatment it has gotten from special-purpose vehicles and cheap money from the Fed, without which they would be in the toilet right now. Oh, and the creative accounting and counter-party payments from AIG, too.

Now, the Treasury Department has actually pushed back on this a bit. They oppose the banks repaying the TARP funds. They replaced Neel Kashkari as head of the TARP. And they will now release the stress test results, and they claimed that Goldman's desire to repay the TARP money was a factor.

The administration’s hand may have been forced in part by the investment firm Goldman Sachs, which successfully sold $5 billion in new stock on Tuesday and declared that it would use the proceeds and other private capital to repay the $10 billion it accepted from the government in October.

That money came from the Troubled Asset Relief Program, or TARP, and Goldman’s action was seen as a way of predisclosing to the markets the company’s confidence that it would pass its stress test with flying colors.

Goldman’s action has put pressure on other financial institutions to do the same or risk being judged in far worse shape by investors. The administration feared that details on healthier banks would inevitably leak out, leaving weaker banks exposed to speculation and damaging market rumors, possibly making any further bailouts more costly.

The Goldman move also puts pressure on the administration to decide what conditions will apply to institutions that return their bailout funds. It is unclear if Goldman, for example, will continue to be allowed to benefit from an indirect subsidy effectively worth billions of dollars from a federal government guarantee on its debt, a program the Federal Deposit Insurance Corporation adopted last fall when the credit markets froze and it was virtually impossible for companies to raise cash.

“The purpose of this program is to prevent panics, not cause them,” said one senior official involved in the stress tests who declined to speak on the record because the extent of the disclosures were still being debated. “And it’s becoming clearer that we and the banks are going to have to explain clearly where each bank falls in the spectrum.”

Yves Smith thinks that this information was leaked specifically to blame Goldman for releases that would possibly result in receivership or worse for the most struggling banks. And Emptywheel hones in on those FDIC subsidies:

Shorter Anonymous Senior Official: "Goddamn it Goldman, you risk starting a panic here! And as punishment, we're going to reconsider the terms of that FDIC backing." [...]

Goldman Sachs, you see (and Bank of America, and JP Morgan Chase, and Citi, and Morgan Stanley, and Wells Fargo) have been benefiting from higher credit ratings than they themselves merit because the FDIC has been backing their loans to the tune of billions of dollars [...]

Now, frankly I'm most interested in this from the same perspective that Yves is. These two stories, taken together, appear to be a welcome new tactic from the Administration, to start laying out all the value the government has given the banksters. It's time to make these banks squirm with the recognition that they're deadbeats for a change.

There are plenty of tactics available to the regulators here, and if they get sufficiently pissed off, I'll bet they have no problem using them. Significantly raising capital requirements, for example, or calling in the antitrust division of the Justice Department to investigate the market share of leading banks, or even letting Nancy Pelosi loose with her (very noble) idea for a 21st-century Pecora Commission:

Democratic House Speaker Nancy Pelosi, saying that the American people are demanding "discipline and accountability" after the multibillion-dollar federal bailouts, promised Wednesday to create a legislative commission with broad oversight to investigate the causes of Wall Street irregularities and their full costs to taxpayers.

Pelosi, speaking to the Commonwealth Club of California, said she wants the panel to be modeled after the Pecora Commission, a bipartisan investigative body established by the U.S. Senate in 1932 to examine the causes and abuses of the Wall Street crash of 1929 and to prevent a repeat.

"They investigated what happened in the markets," including conflicts of interests and irregularities that set off such devastating effects on the U.S. economy, she said. When the commission issued its findings during the administration of President Franklin Delano Roosevelt, "they had tangible recommendations," she said, which helped generate widespread public support for major banking system reforms and new securities laws.

Liberals are cheering this move by Pelosi and the Congress because it could result in the same kind of systemic reform we saw after the Depression. And with even the teabaggers angry about the bailouts, Republican leaders would be in little position to mount a defense.

Anyway, I don't know where this will lead, but it seems to me that the banksters have a slightly weaker hand than they did a couple weeks ago. They still have the power to overrun the country, but the anger is rising and Treasury has a few tools in the toolkit; and what's more, they might actually use them.

The Nationalization Argument

In my earlier post I mentioned in passing that Obama offered a full response to critics on the left who think the banks have leveraged their power to prevent the necessary solutions to the financial crisis, like nationalization. Here it is:

On the other hand, there have been some who don’t dispute that we need to shore up the banking system, but suggest that we have been too timid in how we go about it. They say that the federal government should have already preemptively stepped in and taken over major financial institutions the way that the FDIC currently intervenes in smaller banks, and that our failure to do so is yet another example of Washington coddling Wall Street. So let me be clear – the reason we have not taken this step has nothing to do with any ideological or political judgment we’ve made about government involvement in banks, and it’s certainly not because of any concern we have for the management and shareholders whose actions have helped cause this mess.

Rather, it is because we believe that preemptive government takeovers are likely to end up costing taxpayers even more in the end, and because it is more likely to undermine than to create confidence. Governments should practice the same principle as doctors: first do no harm. So rest assured – we will do whatever is necessary to get credit flowing again, but we will do so in ways that minimize risks to taxpayers and to the broader economy. To that end, in addition to the program to provide capital to the banks, we have launched a plan that will pair government resources with private investment in order to clear away the old loans and securities – the so-called toxic assets – that are also preventing our banks from lending money.

Greg Sargent reads the tea leaves and thinks that Obama substantively responded by saying he wasn't ideologically opposed to nationalization. I think that's less important that his substantive disagreement, which is that nationalization would be more costly. Which is largely true - we saw in the IndyMac receivership that the cost totals were much larger than expected, and as Yglesias notes, nationalization would require up front money that Congress would be highly unlikely to appropriate. However, there's a bit of a false frame here. Lining up the PPIP against nationalization and saying that the PPIP is cheaper only makes sense if you think both have an equal potential of working. If, as I do, you think that the PPIP probably won't work, and that the problem is not one of liquidity but insolvency, then getting to nationalization quickly before throwing hundreds of billions more down a rathole would be significantly cheaper.

And evidence on my side of things, that the banks are insolvent, can be seen in the silly games some of them are playing to try and look profitable.

Goldman Sachs reported a profit of $1.8 billion in the first quarter, and plans to sell $5 billion in stock and get out of the government’s clutches, if it can.

How did it do that? One way was to hide a lot of losses in not-so-plain sight.

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

Ingenious - dump all the write-downs into a missing month. Barry Ritholtz and James Kwak have more.

But when you scratch the surface of all this, you can plainly see that even the banks announcing record profits are hopelessly insolvent, and will continue to spiral downward as the economy remains stuck.

Wells Fargo & Co., the second- biggest U.S. home lender, may need $50 billion to pay back the federal government and cover loan losses as the economic slump deepens, according to KBW Inc.’s Frederick Cannon.

KBW expects $120 billion of “stress” losses at Wells Fargo, assuming the recession continues through the first quarter of 2010 and unemployment reaches 12 percent, Cannon wrote today in a report. The San Francisco-based bank may need to raise $25 billion on top of the $25 billion it owes the U.S. Treasury for the industry bailout plan, he wrote.

First-quarter net income rose 50 percent to about $3 billion, Wells Fargo said last week in announcing preliminary results that topped the most optimistic Wall Street estimates and sparked a 32 percent jump in the stock. The bank attributed the profit to a surge in mortgage originations and revenue from Wachovia Corp., acquired in December. Full results are scheduled for April 22.

The $120 billion in "stress losses" kind of puts that whole $3 billion quarterly profit in perspective, don't it?

So while I agree that nationalization would be more expensive on a one-to-one basis, and I don't even totally fault Obama for, given the institutional constraints, giving some separate option the old college try, the inevitability of dealing with the insolvent banks argues for a quick remedy.

Banksters Getting Money From Everyone

Cue the world's tiniest violin for the poor souls who just can't cut it for under $1 million a year on Wall Street.

There is an air of exodus on Wall Street — and not just among those being fired. As Washington cracks down on compensation and tightens regulation of banks, a brain drain is occurring at some of the biggest ones. They are some of the same banks blamed for setting off the worst downturn since the Depression.

Top bankers have been leaving Goldman Sachs, Morgan Stanley, Citigroup and others in rising numbers to join banks that do not face tighter regulation, including foreign banks, or start-up companies eager to build themselves into tomorrow’s financial powerhouses. Others are leaving because of culture clashes at merging companies, like Bank of America and Merrill Lynch, and still others are simply retiring early.

Yes, I'm awfully choked up about the assholes driven out of the big Wall Street firms.

To the Times' credit, they go on to explain how this is a good thing, because it shrinks the size of the bigger banks and spreads the risk-taking. To their detriment, they fail to explain that the most likely reason for executives darting from the biggest banks is that they are insolvent. Sure, they're playing accounting games to keep up appearances, at the same time trying to raise billions in private money from investors. Simon Johnson explains all this.

How can the large banks persuade potential shareholders to put large amounts of new capital with them, given that their systems just failed massively, these systems have not been substantially changed, and - while there has been a bailout for insiders and creditors - shareholders were largely wiped out from mid 2007-end 2008?

It could, of course, be the case that shareholders see great upside. Anything that has fallen greatly may see some rebound. The large banks have demonstrated their political muscle, so that should help with other forms of government protection and “rents” (economics jargon for easy money from business that others aren’t allowed into). In the early stages of a recovery, perhaps the banks will be more generous to their shareholders; it could be that the excessive tunneling is a feature of a mad boom, and we seem some distance from having another of those.

But probably we are looking at a deeper market failure. Big money managers - including mutual funds, pension funds and insurance companies -have arguably failed in their fiduciary duty to ensure that major financial companies are run properly and in the interest of shareholders. These money managers have great resources, many years of experience, and real power vis-a-vis the companies. Why didn’t they push for stronger risk management? Why are they so eager to hand over our money again? Where exactly was or is their due diligence?

We're coming to a reckoning between the banksters and the regulators trying to rein them in. Shareholders really ought to know the risks at this point, and I weep little for them if they want to finance Goldman Sachs. What we cannot allow are the same people sucking the Treasury dry to then fleece their customers.

The committee overseeing federal banking-bailout programs is investigating the lending practices of institutions that received public funds, following a rash of complaints about increases in interest rates and fees.

Since the Troubled Asset Relief Program was launched last October, banks bolstered by capital infusions have boosted charges on a wide range of routine transactions, hiked rates on credit cards and continued making loans criticized as predatory by consumer advocates. The TARP funds are intended to open lending spigots and make it easier for people to borrow money.

Let me try to put this all together. The banks took billions from the government. They're offering stock sales to get billions from investors to pay some of the TARP money back (but they're balking at the interest rates the government is demanding). And they're bilking their customers for even more money.

No wonder they show good earnings.

Taibbi FTW

Earlier this week, Jake DeSantis, an executive at the AIG Financial Products division, quit, and published his resignation letter in the New York Times. Matt Taibbi has the ultimate response.

DeSantis has a few major points. They include: 1) I had nothing to do with my boss Joe Cassano's toxic credit default swaps portfolio, and only a handful of people in our unit did; 2) I didn't even know anything about them; 3) I could have left AIG for a better job several times last year; 4) but I didn't, staying out of a sense of duty to my poor, beleaguered firm, only to find out in the end that; 5) I would be betrayed by AIG senior management, who promised we would be rewarded for staying, but then went back on their word when they folded in highly cowardly fashion in the face of an angry and stupid populist mob.

I have a few responses to those points. They are 1) Bullshit; 2) bullshit; 3) bullshit, plus of course; 4) bullshit. Lastly, there is 5) Boo-Fucking-Hoo. You dog.

There's the big piece of fiction, that DeSantis knew nothing about the exotic financial deals at his 377-person unit, but had to be retained (and compensated with a bonus) to unwind those very same exotic deals. Then there's this other fiction that DeSantis and other Wall Street bonus babies could have gotten all kinds of other good offers from competing firms, even though half of Wall Street is out of work at the moment. But Taibbi focuses on the third argument:

But all of this is really secondary to the tone of DeSantis' letter. He acts like he's a victim because he didn't get to keep his after-tax bonus of $742,006.40 in the middle of a global depression. And he really loses his fucking mind when he writes:

"None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house."

First of all, Jake, you asshole, no plumber in the world gets paid a $740,000 bonus, over and above his salary, just to keep plumbing. Second, try living on a plumber's salary before you even think about comparing yourself to one; you're inviting a pitchfork in the gut by even thinking along those lines. Third, Jake, if you were a plumber, and the electrician burned the house down -- well, guess what? If you and that electrician worked for the same company, you actually wouldn't get paid for that job.

Out in the real world, when your company burns a house down, you're not getting paid by that client. It's only on Wall Street, where the every-man-for-himself ethos is built into an insanely selfish and greed-addled compensation system, that people like you expect to get paid in a bubble -- only there do people expect their performance bonuses no matter how much money the shareholders lose overall, no matter how many people get laid off after the hostile takeover, no matter how ill-considered the mortgages lent out by your division were.

That sense of entitlement has sparked the public anger. It's part of a mindset that assumes the virtue of selfishness and striving for the most dollars as an end in itself. It leads to perversities like Goldman Sachs bailing out their own executives even while the company was being bailed out themselves. It leads to self-interest being valued over the public interest. And it's led, in a very real sense, to the current crisis.