CFPA Gets Big Boost From Obama

The White House actually made news today. Really, and it had nothing to do with Norway. The President came out with a full-throated endorsement of the Consumer Financial Protection Agency, actually foregrounding it among all the other elements of financial regulatory reform.

But a central part of our reform effort is also aimed at protecting Americans who buy financial products and services every day -- from mortgages to credit cards. It's true that the crisis we faced was caused in part by people who took on too much debt and took out loans they couldn't afford. But my concern are the millions of Americans who behaved responsibly and yet still found themselves in jeopardy because of the predatory practices of some in the financial industry. These are folks who signed contracts they didn't always understand offered by lenders who didn't always tell the truth. They were lured in by promises of low payments, and never made aware of the fine print and hidden fees [...]

As we've seen over the last year, abuses like these don't just jeopardize the financial well-being of individual Americans -- they can threaten the stability of the entire economy. And yet, the patchwork system of regulations we have now has failed to prevent these abuses. With seven different federal agencies each having a role, there's too little accountability, there are too many loopholes, and no single agency whose sole job it is to stand up for people like Patricia, Susan, Maxine, Andrew and Karen -- no one whose chief responsibility it is to stand up for the American consumer, and for responsible banks and financial institutions who are having to compete against folks who are not responsible.

So under the reforms we've proposed, that will change. The new Consumer Financial Protection Agency that I've asked Congress to create will have just one mission: to look out for the financial interests of ordinary Americans. It will be charged with setting clear rules of the road for consumers and banks, and it will be able to enforce those rules across the board.

This was an idea from Elizabeth Warren that had absolutely no traction in Washington, and now the President of the United States is backing it in major speeches. He even attacked the US Chamber of Commerce for opposing it. To me, that's a big deal. But Oslo went and ruined everything. Oslo!!

I was on a conference call with Austan Goolsbee after the speech, and he emphasized three key points:

1) transparency - the importance of writing rules for credit cards, loans, etc., in clear language with full disclosures
2) fairness - it's time to get rid of unfair or predatory practices like payday lenders, and level the playing field for community banks.
3) accountability - not only would financial institutions and regulators be held accountable (the thinking is that the only thing a CFPA regulator would do is protect consumers, instead of the current disparate nature), but consumers would be able to take responsibility without being taken advantage of.

There was a reporter from the Philly Inquirer on the call who had the gall to say that the people affected by deceptive practices in the financial industry "made some dumb decisions." This is going to be the standard claim from the right (remember Rick Santelli's "I don't want to subsidize the loser's mortgages" rant?) so it's important to be armed with the facts. The fact is that regardless of whether you "go out there and shop" (another claim by this lunatic), financial products are written currently in deliberately obtuse ways, and the profit margins of the lenders or banks are directly proportional to how much of the fine print they can hide. People intuitively know this, and all the associated games along with it. And they deserve a federal agency at least tasked with looking out for them.

Now unfortunately, some of this comes a little late, as the National Community Reinvestment Coalition mentioned today:

“We applaud the President’s necessary leadership on financial reform. Clearly the President felt it necessary today to speak out against the weakening of the bill. Unfortunately, the damage from corporate lobbying in Congress may have already been done,” said John Taylor, president and CEO of NCRC.  "The ability of the proposed Consumer Financial Protection Agency (CFPA) to protect the most financially vulnerable individuals and communities has already been undermined by substantial changes to the bill.”

“Most importantly, the proposed agency will not have sufficient independence from the existing regulators, whose failure to enforce the law was the reason for the establishment of the agency,” said Taylor. “The exclusion of enforcement of the Community Reinvestment Act was also a major concession to the financial services lobby, and allows them to continue to shirk affirmative obligations to serve and lend to working class Americans, within the constraints of safe and sound underwriting.”

In particular, Taylor is talking about the removal of "plain vanilla" financial products that would set a baseline standard for what's minimally required. And that's true. But it's good that Obama jumped in now before this weakens any further. And it would be good to re-emphasize this after the Nobel fervor blows over.

A Missed Opportunity

Here's a report from the Inspector General for the TARP program saying that Treasury lied to get money into the hands of the banks.

The inspector general who oversees the government’s bailout of the banking system is criticizing the Treasury Department for some misleading public statements last fall and raising the possibility that it had unfairly disbursed money to the biggest banks.

A Treasury official made incorrect statements about the health of the nation’s biggest banks even as the government was doling out billions of dollars in aid, according to a report on the Troubled Asset Relief Program to be released on Monday by the special inspector general, Neil M. Barofsky [...]

Mr. Barofsky’s office also says that regulators were wrong to tell the public last year that the earliest bailout recipients were all healthy.

Former Treasury Secretary Henry M. Paulson Jr., for instance, said on Oct. 14 that the banks were “healthy,” and that they accepted the money for “the good of the U.S. economy.” The banks, he said, would be better able to increase their lending to consumers and businesses.

That was George Bush's Treasury Department. And this practice of private equity companies and Wall Street investment firms looting the Simmons Bedding Company through borrowing the company into debt and taking out profits, is a fairly common practice. Neither should be intimately associated with the Obama Administration. Neither should the TARP program, initiated by Henry Paulson and the Bush White House. And yet, these revelations are happening on a Democrat's watch. And Chris Bowers is absolutely right to note that the bailout has constrained Obama's moves on the economy and threatened the Democratic majority for years to come.

The $810 billion Wall Street Bailout is a loadstone hanging around the neck of the Democratic Party. It thwarting what should have been a realigning moment in American electoral politics. Upon regaining control over the federal government following the 2008 elections, Democrats should have been able to cement their image as, in the words of Al Gore, "the people versus the powerful." Instead, we have become complicit in perpetuating a federal government that is more responsive to the wishes of powerful moneyed interests at the expense of the vast majority of Americans. And so, our chances at realignment are slipping away [...]

Maybe it wasn't possible to pass a $1.2 trillion stimulus in early 2009. However, this was due as much to Congress passing a $700 billion Wall Street bailout in October 2008 as it was to anything else. From October 2008 through February 2009, Congress did actually pass more than $1.2 trillion in economic stimulus. The problem was that, in the form of the Wall Street bailout, most of that money went to the same people financial institutions who caused the economic meltdown.

Perhaps the distinction between the stimulus and the bailout is clear in the minds of most economists and policy wonks, but it is not clear to many Americans. As such, passing the Wall Street bailout imposed a huge opportunity cost on the amount of money the Obama administration could realistically ask for in the February stimulus / jobs package. If they had not asked for $700 billion to hand over to Wall Street, they might very well have been able to ask for, and pass, the $1.2 trillion needed in the stimulus package.

Again, the bailout began prior to Obama's election, but Democrats in Congress held the majority when it passed, Obama endorsed it, and he even started pressuring members of his own party about it. He clearly had no problem with it, and yet it has narrowed his options on a sagging economy that has not seen much of a comeback on the jobs front. As Paul Krugman notes today, Christina Romer knew that the stimulus package would need to be twice as large as it ultimately became, but Larry Summers didn't even offer that as an option for political reasons. They didn't think they could move a $1.2 trillion dollar stimulus. So Summers talked himself into calling the stimulus “an insurance package against catastrophic failure,” admitting its lack of sufficiency. And the bailout contributed to that. Bowers is right that people don't make the distinction between the bailout and the stimulus in their minds; to them it's all government spending. And the right has used this skillfully, taking advantage of the anxiety people feel with job loss and financial insecurity to advance a kind of right-wing populism that ultimately serves corporate interests as much as the bailout did. As a result the teabaggers are gaining the upper hand in this debate:

Having said all that, there is great, HUGE value in this movie as an emotional, populist polemic for the left, something I've been screaming about since the beginning of the financial crisis. It's extremely disheartening to see the administration and so many Democrats in congress completely ignore the political and policy ramifications of failing to engage in fundamental financial reform and fiery populist rhetoric at a time like this. This teabagger movement is happening in a vacuum created by a lack of interest in this topic by liberals who are so enamored of being members of the new "creative class" and the like that they aren't paying attention to the cynicism and anger that's reaching critical mass among average working stiffs out there. It's easy to dismiss it, but very, very foolish. The issues Moore raises in this film will be answered on the right with authoritarianism, militarism, immigrant bashing and violence. It's a recipe for disaster unless the left takes this on in direct, political terms.

It's all there in Ryan Lizza's beat sweetener on Larry Summers and the Obama economic team. Fairly or unfairly, they are being tarred as corporate sellouts and tagged as the ones who ushered in the bailout. What that really suggests is that the parties in this country are interchangeable in the face of corporate hegemony, where powerful interests can write the laws no matter which party nominally controls the government. Right now, that's being proven by an economy working only for the banks and not regular people. And the Democrats are in power at this moment.

This is a dangerous time, where a party at near-historic lows in the public consciousness could actually rise to power, because they can credibly claim the mantle of being the party of the people. If the Democrats don't show Americans they are on their side, that's exactly what will happen.

Veto Threat?

This is a gentle veto option, but if Obama actually carries through with it, I'd have to hand it to him.

The White House on Tuesday suggested that President Obama would consider vetoing regulatory reform legislation if it did not include strong enough protections for consumers of credit cards, mortgages and other financial instruments.

Press Secretary Robert Gibbs told reporters that there were "big" concerns inside the administration over reports that Congress was scaling back a key pillar of the president's approach to reform: the creation of a Consumer Financial Protection Agency (CFPA). And, in a warning shot to the legislative branch, he suggested that proposed legislation to create the CFPA might not pass the president's desk if it becomes too watered down in the process.

"The president would not sign any bill that he thought was too weak," said Gibbs. "I think we have seen what happens whether it is credit card companies, mortgage companies, we now see it more in stories covering the charges for bank overdrafts and the amount of money that costs the American people each year. The American people deserve an advocate on their behalf dealing with these entities. The president believes that strongly and believes that at the end of the day we will have a strong Consumer Finance Protection Agency working on behalf of the American people."

This is the proper use of the bully pulpit. The CFPA has already been gutted to an extent. Obama laying a marker can help assure it won't get gutted any further.

Obama veto threats have been rare to this point. The only other I can remember had to do with eliminating the F-22 fighter plane. This is a very good sign, if he's willing to go up against powerful interests, and his own party in the Congress, and siding with the people.

The banks are still running roughshod over Congress. They've beaten back any serious attempt to rein them in, and even now, after taking hundreds of billions if not trillions from the federal government, they are still taking major risks, still not engaging in consumer lending, still playing with derivatives at the same numbers from before the crisis. Clearly the Congress has shown no ability to stop them, and to this point, neither has the President. I hope this signals a true change.

Rating For Fun And Profit

Via Ezra Klein, James Surowiecki has a story about the nation's credit ratings agencies - Moody's, S&P, Fitch - who gave toxic waste sterling ratings that encouraged investors to buy them, leading to a collapse of the financial system. You can add to this the fact that the ratings agencies are funded by the banks, who have a compelling interest in having their crap be given triple-A ratings. But Surowiecki argues that government needs to take some of the blame for this as well.

[O]ver the years the government has made the agencies an increasingly important part of the financial system. Rating agencies have been around for a century, and their ratings have been used by regulators since the thirties. But in the seventies the S.E.C. dubbed the three biggest agencies — S. & P., Moody’s, and Fitch — Nationally Recognized Statistical Rating Organizations, effectively making them official arbiters of financial soundness. The decision had a certain logic: it was supposed to make it easier for investors to know that the money in their pension or money-market funds was going into safe and secure investments. But the new regulations also turned the agencies from opinion-givers into indispensable gatekeepers. If you want to sell a corporate bond, or package a bunch of mortgages together into a security, you pretty much need a rating from one of the agencies. And though the agencies are private companies, their opinions can effectively have the force of law. The ratings often dictate what institutions like banks, insurance companies, and money-market funds can and can’t do: money-market funds can’t have more than five per cent of their assets in low-rated commercial paper, there are limits on the percentage of non-investment-grade assets that banks can own, and so on.

The conventional explanation of what’s wrong with the rating agencies focusses on the fact that most of them are paid by the very people whose financial products they rate. That problem needs to be fixed, and last week the S.E.C. proposed new rules to address conflicts of interest. But there’s a much bigger problem, which is that, even though nearly everyone knows that the agencies are compromised and exert too much influence, the system makes it impossible not to rely on them.

Predictably, despite the ratings agencies' central role in the financial crash, nothing has changed with them, because the government has stamped them with authority and investors need their numbers to carry out deals, pretty much by law.

If government created this monster, they need to play a role in reversing it. In New York, inspectors with the state Insurance Department are considering dropping Moody's from its list of approved ratings agencies. The National Association of Insurance Commissioners (who collectively oversee an industry with $3 trillion in rated bonds) has proposed the same for the entire Big Three. And Jerry Brown has issued a subpoena to the Big Three agencies to investigate the ratings they gave to subprime mortgages. But ultimately, while this may keep the ratings agencies in line, you need to eliminate the official imprimatur from government and force the ratings agencies to compete on their own credibility. Further, the regulatory requirements actually force investors to sell downgraded securities quickly, leading to panic selling based on ratings that don't have a lot of backing behind them. That needs to be tweaked as well.

Surowiecki explains why this won't happen:

Oddly, the ratings system, broken as it is, remains attractive to many investors who have been burned by it. For one thing, it provides an easily comprehensible standard: without it, we’d need to come up with new ways of measuring risk. More insidiously, the ratings system provides a ready-made excuse for failure: as long as you’re buying AAA-rated assets, you can say you’re being responsible. After the housing crash, though, we know how illusory those AAA ratings can be. It’s time for investors to face reality: working with a fake safety net is more dangerous than working without any net at all.

I think, given the safety net under the bottoms of the major banks, that they'll take that fake one from the ratings agencies and live with it, thank you.

Financial Reform Already Takes A Hit

The Obama Administration has begun the agonizing process of scaling back their financial regulatory reform package to please bankers. This one's going to be so ugly I'll have trouble looking at how the sausage is made.

In a step toward overhauling the nation’s financial regulation, a senior Democrat on Wednesday announced a plan that preserved the core of the White House’s proposal for a new consumer financial protection agency, while jettisoning a smaller though symbolically significant provision that had posed political obstacles [...]

An Obama proposal that Mr. Frank rejected would have required banks and other financial services companies to offer so-called plain vanilla products, like 30-year fixed mortgages and low-interest, low-fee credit cards.

That proposal set off criticism by Democrats and Republicans, some with close ties to the banking industry, that it was the first step toward having government bureaucrats approve and disapprove an array of products.

At a hearing on Wednesday before the financial services committee, Treasury Secretary Timothy F. Geithner said: “There has been a lot of concern that if you invest the government with the ability to decide what’s appropriate here and there, that will lead to less competition and choice. The chairman’s proposals, which I’ve had a chance to read quickly, provide a better balance of choice and protection.”

Consumer groups are hanging their hats on the fact that the Consumer Financial Protection Agency hasn't been eliminated completely... yet. But Frank would exempt merchants, retailers, accountants, real estate brokers and IRA providers from any of its laws, and I would expect that list to grow. Banksters remain unconvinced that the CFPA needs to exist, and I'm fairly confident that they'll continue to advocate aggressively against it.

"We are pleased that a number of the issues we raised have been addressed," said Edward L. Yingling, president of the American Bankers Association. "At the same time, there are some very significant issues that still need to be addressed."

Among those issues, Yingling said, is that under the current proposal, states could go beyond the federal guidelines for consumer protection set by the new agency, an approach that financial firms say could lead to burdensome and conflicting regulation. A separate agency for consumer protection "still will have conflicts with the safety and soundness regulators," Yingling said. He and others also argue that the new regulator would be too powerful. "The agency still will have very, very broad, legislative-like powers. It can basically do anything it wants," he said. "We think that's a problem."

Also Tuesday, at an event outlining the chamber's objections to the CFPA, David Hirschmann, head of the organization's Center for Capital Markets, described the proposed new agency as an "overly broad, overly sweeping, big government solution."

It's good news that Frank pushed back hard against an alternate proposal floated by the Blue Dogs, but I fear we're seeing a slow walk toward something right in the wheelhouse of that alternative.

...Felix Salmon calls it the beginning of the end of meaningful reform:

There’s no good reason for this capitulation, except for the financial lobby has so effectively captured Congress that no reform would be able to get through with such a common-sense provision in place. This has nothing to do with the government “approving and disapproving a wide array of financial products”, it just says that anybody who wants to call themselves a bank should provide simple, basic banking products which aren’t prone to hidden fees and lucrative opacity. I fear that by the time Congress is done, the Consumer Financial Protection Agency won’t be able to protect consumers at all — and that’s assuming it’ll even exist.

Maybe Everyone In The Country Can Send A YouTube Testimonial

Ann Minch sent a debtor's revolt video to YouTube a couple weeks ago, refusing to pay off her credit card debt with Bank of America unless the company negotiated a lower rate, which they could easily do since they are receiving interest-free loans from the Federal Reserve. After some Internet notoriety and a handful of conversations, she actually succeeded in getting BofA to lower her interest payment.

The executive "tried to get me to agree to 16.99 percent and I said, 'No, nope, I believe because you guys are getting your money from the Fed at zero percent interest... that 12.99 percent is a more than generous profit margin for you guys.' So he did finally agree to that and he also agreed to send me that in writing."

Unfortunately, it's not practical for everyone facing an exorbitant usury fee from a major bank to shame them into compliance. We need the federal government undertaking a debtor's revolt, not individuals who don't have the same leverage.

However, with respect to Bank of America we may be turning a corner. The SEC is broadening its investigation against the bank, perhaps in response to the company's foot-dragging on compliance with that probe. BofA just missed a Congressional deadline to turn over documents to the House Oversight Committee about the takeover of Merrill Lynch. And as Chris Dodd sought to hammer banks for their automatic overdraft fees to customers, BofA and other banks are moving to change their practices.

Maybe this revolt thing is catching on.

Keep An Eye On This

As much of the content of the traditional media rankles many of us, the editorial decisions should as well. Dozens of potentially game-changing stories go unreported while the Umbrage Brigade on cable talk about what Joe Wilson said about Jimmy Carter or whether Michelle Obama is overstepping her boundaries by talking about health care (I caught that one today). Meanwhile, the biggest financial crisis in 70 years just happened, and even people who consider themselves well-informed don't understand the entire story. The Congress enacted the Financial Crisis Inquiry Commission (some are calling it the new Pecora Commission, given its similarity to the Depression-era commission of that name led by chief investigator Ferdinand Pecora), headed by former California Treasurer and gubernatorial candidate Phil Angelides, and they held their first public session yesterday. The meeting was introductory in nature, but Tim Fernholz came away with a few thoughts.

• Given the membership [PDF], I worried that the committee would be beset with partisan bickering and/or clashing ideologies, like the Congressional Oversight Panel. The COP, appointed by Congress to provide oversight of the bank rescues, is regularly undermined by dissents from Representative Jeb Hensarling, whose deeply conservative economic views preclude almost any reasonable discussion about regulation and finance. But though some tensions showed, I though the conservative New Pecora commissioners seemed open-minded; former Bush administration economic official Keith Hennessey and McCain economic adviser Douglas Holtz-Eakin made productive comments, though Peter Wallison, a more doctrinaire conservative than either of the other two, seemed to have his mind made up about the financial crisis, essentially blaming Fannie Mae and Freddie Mac right from the outset. He may be the poison pill on this committee.

• Most surprising was Vice-Chairman Bill Thomas, a former Republican Congressman and Committee Chair. Thomas seemed to agree broadly with Chairman Phil Angelides goals of non-partisan fact-finding, and went out of his way to compliment the views of every member of the commission. He even singled out Commissioner Brooksley Born, who strongly advocated regulating derivatives during the Clinton administration, telling her that the crisis would have been much more manageable had her advice been acted on. Later, asked by a reporter if the issue of regulating markets would divide the committee, Thomas stepped forward to say that he thought regulatory reform was inevitable and that making it work correctly was critical. Though it is easy for him to say that now, Thomas' early impressions are much less doctrinaire than had been anticipated.

• One concern: There is no liberal economist on the committee, while there are three conservative economic thinkers in Hennessey, Holtz-Eakin and Wallison. The Democratic appointees have regulatory, legal, political and private business experience, but no specific economic expertise.

• Early in the week, the New Pecora Commission announced the appointment of Thomas Greene as its Executive Director. Greene, a lawyer, has done complex investigatory work both in Washington, D.C. and in California, coordinating anti-trust and securities investigations in a variety of venues. The appointment is critical; recall that the Pecora Commission was named after it's executive director, Ferdinand Pecora, not the members of congress who constituted the actual committee. And more talent is coming: As Greene hung around after the hearing, several different people, including several lawyers, approached him about working for the commission.

The FCIC will hold hearings and issue regular reports between now and December 2010. This needs to be watched. We all have a sense that the banksters turned Wall Street into their private gambling hall and took huge risks, secure in the knowledge that they could get the government to bail them out if things went awry. Currently there have been no prosecutions of the major players in the scandal, no accountability to any degree, and a year later, Wall Street appears to be going back to their same old ways, entirely at our expense. Michael Hirsh believes that this commission offers one last chance to make the record public, and use it as a lever to change the system. He's not optimistic, however. The ideological shadings of the commission and Angelides' wariness of using the subpoena power he's been given worry him (I actually think Angelides can be a lot tougher than Hirsh or anyone gives him credit for). But he offers a glimmer of hope.

Still, Angelides and his team may yet surprise us. It's happened before. The history of "blue ribbon" commissions like this one is rich and storied in Washington; one of them, in 1942, was led by an obscure senator from Missouri who was also seen as a political hack at the time. His name was Harry Truman, and he turned his commission on defense malfeasance into a ticket into the White House and the history books [...]

What we do need, however, is a parade of witnesses who will provide what's been missing so far in this crisis—a prominent outlet for public outrage. In the last nine months, the Obama administration and the grandees in Congress have been designing solutions without much input from the outside, often using experts from Wall Street (especially "Government Sachs"). It's pretty much been a closed system. Even Paul Volcker, considered perhaps the greatest Federal Reserve chairman in history (now that the Alan Greenspan era looks much worse retrospectively), has been all but ignored by the president he is advising. Volcker has been making a series of speeches around the country calling for sensible changes to the structure of Wall Street that the administration and Congress are not yet considering. He wants federally guaranteed bank deposits to be cordoned off from heavy risk-taking and proprietary trading. Volcker wants banks, in other words, to be barred from behaving like hedge funds. "Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," Volcker told a corporate group Wednesday in Los Angeles. He should be invited to Washington to say the same thing.

I can remember a time when commissions like these, from the Pecora Commission to the Truman Commission to Watergate to Iran-Contra to even the 9-11 Commission, were major public news, followed intensely by the media. You'd think that a similarly designed commission tasked with uncovering the greatest loss of wealth in world history would generated more than a few words on the cable news crawl. But we have to make this important, too. The FCIC may fall into partisan bickering, or it may create some powerful narratives about the criminal enterprise on Wall Street. But none of it will matter if nobody pays any attention.

Imagining The Paul Volcker Treasury Department

Paul Volcker was pretty heavily involved with the Obama transition team, and certainly had the ear of the Administration at some point. I don't know the status of that now. But hopefully they pick up on this article in the Wall Street Journal:

Former Federal Reserve Chairman Paul Volcker on Wednesday said banks should operate in a much less risky fashion, including not making trading bets with their own capital, comments that could provoke intensified debates over the future of financial regulation.

Mr. Volcker, who currently is chairman of the White House's Economic Recovery Advisory Board, suggested banks should be restricted to trading on their client's behalf instead of making bets with their own money through internal units that often act like hedge funds.

"Extensive participation in the impersonal, transaction-oriented capital market does not seem to me an intrinsic part of commercial banking," he said in a speech to the Association for Corporate Growth in Los Angeles [...]

Mr. Volcker said banks should be banned from "sponsoring and capitalizing" hedge funds and private-equity firms, which are largely unregulated. He also said "particularly strict supervision, with strong capital and collateral requirements, should be directed toward limiting proprietary securities and derivatives trading."

He also said collateral and leverage restrictions against the largest nonbank financial institutions "may be needed."

That's because it isn't, it's just become a growth center for banks that can operate like a casino and get the government to bail them out if things go wrong.

Volcker is basically advocating a similar version of the reforms that came out of the Great Depression. Then, banks were separated into commercial and investment entities under the Glass-Steagall Act, and bank holding companies could not own other financial firms. That came out of the Pecora Commission recommendations, which dug up so much of Wall Street's corrupt practices that the necessity of reform could not be refuted.

In a Volcker Treasury Department, instead of Tim Geithner, we would have a chance to make these the starting points for reform, and invigorate the modern-day Financial Crisis Inquiry Commission, or Angelides Commission, to dig deep and look into what the financial firms did to nearly destroy the economy. The banksters would be fending off the cries for reform instead of using their lobbying arms to channel them in business-friendly ways.

Now wouldn't that be nice?

...Matt Taibbi says that Volcker was basically beached after the campaign along with a lot of the other more progressively minded economic advisers. It sounds pretty right.

Financial Reform FAIL And A New Metric For Recessions

Simon Johnson had the same problem as I did with the President's speech on financial reform:

As a diagnosis of the problems that let us into financial crisis, it was his clearest and best effort so far. He didn’t say it was a rare accident for which no one is to blame; rather he placed the blame squarely on the structure, incentives, and actions of Wall Street.

But then he said: our regulatory reforms will fix that. This is hard to believe. And even the President seems to have his doubts, because he added a plea that – in the meantime – the financial sector should behave better [...]

Louis Brandeis, of course, would have seen things differently. The author of “Other People’s Money: And How The Bankers Use It,” was under no illusions concerning the underlying financial power structures and how they operated. He would have regarded an appeal to the better nature of bankers as somewhere between humorous and sad.

The only thing that will make a different is regulation. This is the lesson of the 1930s in the US – the regulations imposed at that time created a financial sector that did not impede growth after World War II; basic intermediation (connecting savers and borrowers) worked fine and destabilizing frenzies were avoided. During this period, the financial sector came up with venture capital, ATMs, and credit cards – arguably the three most important financial innovations of the past 100 years, and much more helpful of real innovation than anything you’ve seen since 1980.

As Johnson has repeatedly argued, we need to break up the biggest banks, end the revolving door between Wall Street and Washington and ensure that the executives taking the risks put their own fortunes at stake instead of gambling with our money. Sadly, none of these elements exist in the more modest reform proposals from the President, and even those are faltering in the face of institutional pressure.

As a result, we muddle through, resetting the clock to the pre-bailout days without having fundamentally fixed the system or prevented the possibility of a relapse. It's great that Ben Bernanke thinks the recession is over. But the 9.4 million people who have lost their jobs would disagree with him. Their personal depressions continue, and I would argue that this is a direct result of allowing the titans of Wall Street trillions in Treasury wealth while ordinary Americans suffer with a too-small stimulus and not much prospect for recovery.

Fifteen million Americans are locked in the nightmare of unemployment, nearly 10 percent of the work force. A third have been jobless for more than six months. Thirteen percent of Latinos and 15 percent of blacks are out of work. (Those are some of the official statistics. The reality is much worse.)

Consider this: Some 9.4 million new jobs would have to be created to get us back to the level of employment at the time that the recession began in December 2007. But last month, we lost 216,000 jobs. If the recession technically ends soon and we get to a point where some modest number of jobs are created — say, 100,000 or 150,000 a month — the politicians and the business commentators will celebrate like it’s New Year’s [...]

At some point the unemployment crisis in America will have to be confronted head-on. Poverty rates are increasing. Tax revenues are plunging. State and local governments are in a terrible fiscal bind. Unemployment benefits for many are running out. Families are doubling up, and the number of homeless children is rising.

It’s eerie to me how little attention this crisis is receiving. The poor seem to be completely out of the picture.

Joseph Stiglitz has a similar view in today's Guardian, arguing that the Administration through saving the financial system has perversely created banks that are not only too big to fail but too big to resolve, the way you would other entities which cannot meet their obligations. In a separate piece, he argues that the metric for evaluating recession - gross domestic product - now has almost no bearing on everyday lives, and ought to be scrapped in favor of something that truly reflects the outlook for ordinary people.

The big question concerns whether GDP provides a good measure of living standards. In many cases, GDP statistics seem to suggest that the economy is doing far better than most citizens' own perceptions. Moreover, the focus on GDP creates conflicts: political leaders are told to maximise it, but citizens also demand that attention be paid to enhancing security, reducing air, water, and noise pollution, and so forth – all of which might lower GDP growth.

The fact that GDP may be a poor measure of well-being, or even of market activity, has, of course, long been recognised. But changes in society and the economy may have heightened the problems, at the same time that advances in economics and statistical techniques may have provided opportunities to improve our metrics.

I remember Andy Stern coming up with the same idea in his book a few years ago. If we continue to use a metric based on the desires of elites, then they will please themselves with growth results even though the mass of people continue to suffer. Believe it or not, common statistics can actually change policy for the better. The problem lies in getting everybody to use it.

...Kevin Drum offers up real median income growth as a better metric. If that's the case, we've actually been in a depression for a decade.

Excuse Me, Now?

President Obama's speech on financial reform laid out the basis for a new regulatory structure, but this part puzzled me to no end.

So restoring a willingness to take responsibility -- even when it's hard to do -- is at the heart of what we must do. Here on Wall Street, you have a responsibility. The reforms I've laid out will pass and these changes will become law. But one of the most important ways to rebuild the system stronger than it was before is to rebuild trust stronger than before -- and you don't have to wait for a new law to do that. You don't have to wait to use plain language in your dealings with consumers. You don't have to wait for legislation to put the 2009 bonuses of your senior executives up for a shareholder vote. You don't have to wait for a law to overhaul your pay system so that folks are rewarded for long-term performance instead of short-term gains.

The fact is, many of the firms that are now returning to prosperity owe a debt to the American people. They were not the cause of this crisis, and yet American taxpayers, through their government, had to take extraordinary action to stabilize the financial industry. They shouldered the burden of the bailout and they are still bearing the burden of the fallout -- in lost jobs and lost homes and lost opportunities. It is neither right nor responsible after you've recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system, and a more broadly shared prosperity.

So I want to urge you to demonstrate that you take this obligation to heart. To put greater effort into helping families who need their mortgages modified under my administration's homeownership plan. To help small business owners who desperately need loans and who are bearing the brunt of the decline in available credit. To help communities that would benefit from the financing you could provide, or the community development institutions you could support. To come up with creative approaches to improve financial education and to bring banking to those who live and work entirely outside of the banking system. And, of course, to embrace serious financial reform, not resist it.

Yeah, same with the health insurance industry. You don't see them rushing to accept anyone regardless of pre-existing condition or renouncing the dumping of sick patients. The way our system works, for-profit companies don't change their ways unless forced to by law. Is this some rhetorical trick that benefits nobody in the end, or is the President really asking Wall Street nicely to reform themsleves, trim their sails and stop taking risks with our money?

Financial titans are not going to play fair because somebody tells them to. That's what makes them FINANCIAL TITANS. The only way to hold Wall Street responsible is through holding them directly responsible and investigating every nook and cranny of their dirty dealings. The President is not powerless to simply beg and grovel for responsibility. He has significant tools at his disposal. Turning the Justice Department loose on the fraudsters isn't a bad start. Or empowering the Angelides Commission to really attack the root causes. Point being, if you want any kind of significant regulatory reform to pass, you'd better get tough on Wall Street instead of engaging them as some kind of buddy.

Still, the measure is proving more troublesome than expected in the House, where top Democrats had initially thought it would pass easily.

Unease among Democrats prompted House Financial Services Chairman Barney Frank (D-Mass.) to postpone a markup on the Consumer Financial Protection Agency proposal scheduled before the August recess. It’s now expected to occur in early October.

Industry efforts to kill the CFPA seem to be having an effect. And moderate Democrats still aren’t entirely on board. “Distinct parts [of the bill] are real problems for a lot of people,” including the enforcement powers granted to the agency and the lack of state pre-emption, said a Democratic aide.

Maybe the thinking in the White House is to turn over regulatory reform to Richard Shelby the way other progressive policy agenda items have been turned over to Republicans and moderates.

What happened in the financial market should have been a wake-up call. As Phil Angelides said, "If this shock doesn't do it, I don't know what would." But that requires leadership to see the changes through. And it's frankly lacking at the top.

...Arianna nails it.

And that's the way it is with our leaders. They stand on the bridge making theatrical gestures they claim will steer us in a new direction while, down in the control room, the autopilot, programmed by politicians in the pocket of special interests, continues to guide the ship of state along its predetermined course [...]

I don't dispute for a minute that his heart is in the right place, and that he means it when he says "the old ways that led to this crisis cannot stand" and touts "the need for change and change now."

But we've been hearing similarly great sentiments for months now -- and they've had the same impact as my friend's ten year-old yanking on the cruise ship wheel. None. President Obama won't be able to change the course our financial system is on unless he goes down into the boiler room and disengages the autopilot -- which means taking on the bankers and their hordes of lobbyists who continue to dictate policy in DC.

I'd give Obama a little more agency here - the Presidency carries tremendous power - but basically this is right.

A Year After Lehman

A year ago, Lehman Brothers collapsed, sparking a financial meltdown that nearly took the global economy with it. The problem, as many saw it, concerned giant banks taking huge risks and putting greed ahead of responsibility. The solution, one year out, has been to stuff those giant banks with money to prop them up, while making them bigger and allowing them to take exactly the same risks.

One year after the collapse of Lehman Brothers, the surprise is not how much has changed in the financial industry, but how little.

Backstopped by huge federal guarantees, the biggest banks have restructured only around the edges. Employment in the industry has fallen just 8 percent since last September. Only a handful of big hedge funds have closed. Pay is already returning to precrash levels, topped by the 30,000 employees of Goldman Sachs, who are on track to earn an average of $700,000 this year. Nor are major pay cuts likely, according to a report last week from J.P. Morgan Securities. Executives at most big banks have kept their jobs. Financial stocks have soared since their winter lows.

The Obama administration has proposed regulatory changes, but even their backers say they face a difficult road in Congress. For now, banks still sell and trade unregulated derivatives, despite their role in last fall’s chaos. Radical changes like pay caps or restrictions on bank size face overwhelming resistance. Even minor changes, like requiring banks to disclose more about the derivatives they own, are far from certain.

Coming on the same weekend as the 11th-hour bailout of the giant insurer American International Group, and the sale of Merrill Lynch, Lehman’s failure was the climax of a cataclysmic weekend in the financial industry. In the days that followed, nearly everyone seemed to agree that Wall Street was due for fundamental change. Its “heads I win, tails I’m bailed out” model could not continue. Its eight-figure paydays would end.

In fact, though, regulators and lawmakers have spent most of the last year trying to save the financial industry, rather than transform it. In the short run, their efforts have succeeded. Citigroup and other wounded banks have avoided bankruptcy, and the economy has sidestepped a depression. But the same investors and economists who predicted, and in some cases profited from, the collapse last fall say the rescue has come at an extraordinary cost. They warn that if the industry’s systemic risks are not addressed, they could cause an even bigger crisis — in years, not decades. Next time, they say, the credit of the United States government may be at risk.

First Alan Greenspan, and then Ben Bernanke, have offered the biggest forces in the financial industry a "put" - a price at which they will bail out investors for any risky asset they manage to buy. Asset prices have been artificially inflated by the threat of collapse and the overriding principle of "too big to fail". In fact, Lehman is seen by many in the halls of power as an EXAMPLE of too big to fail - as their collapse triggered a crisis, the decree was made that such a collapse can never happen again.

And so we have the big firms growing even bigger. And the level of risk they take on basically the same, although leverage is a little bit reduced (maybe 15:1 instead of 25:1). And the regulatory structure is largely unchanged. The same regulators are accumulating even more power despite having missed all the signs of collapse a year ago.

Here’s a novel thought. Instead of creating more regulations to try to prevent this kind of mess from recurring, why not figure out how to hold regulators accountable when they perform as poorly as they did in recent years?

Edward J. Kane, a professor of finance at Boston College and an authority on the ethical and operational aspects of regulatory failure, has some ideas about how to do this and right our damaged system in the process. He outlined them in a recent paper titled “Unmet Duties in Managing Financial Safety Nets.”

This ugly financial episode we’ve all had to live through makes clear, Mr. Kane says, that taxpayers must protect themselves against two things: the corrupting influence of bureaucratic self-interest among regulators and the political clout wielded by the large institutions they are supposed to police. Finally, he argues, taxpayers must demand that the government publicize the costs of efforts taken to save the financial system from itself.

What we have now is the same self-interested power brokers holding control over the financial industry, and a federal government which has plugged its fingers in the dike, from which they are reluctant to let go lest disaster strike again. The industry has been weaned on these tremendous public investments and become used to them. The exit could be painful and I'm not convinced that the overall industry even welcomes it. They've got a pretty good thing going - the profits get privatized, the risk gets socialized.

To the extent there is a recovery, the President deserves a little credit. Yet he is rapidly squandering the opportunity to truly recast the financial industry into their traditional role, as facilitators of the flow of capital but not hoarders of it. The crisis point was a natural time to make the necessary changes to the system, not after that feeling of crisis has lifted and the Masters of The Universe are playing with house money again. Politically, it gives the sense that the bailouts were simply a handout to industry instead of an exchange of help in the near term for wide-ranging fixes in the long term. The President took to Wall Street today to argue for financial regulatory reform, but it's going to be difficult to get this through while the banks have all the leverage. He's going to say that normalcy cannot lead to complacency. He's going to say that the rules must be tightened to ensure that we never again subsidize the casino that has become Wall Street. That includes a Consumer Financial Protection Agency to protect those who buy mortgages and take out credit cards. It includes reining in derivatives and leverage. It includes accountability for the credit ratings agencies who got their job completely wrong because their incentives were allied with the same interests who sold the crap. It includes the ability to wind down banks that are too big to fail, making them too big to exist.

I'm pessimistic that all of this will actually happen, though. A year after Lehman, it feels like the time for reform has passed. And that's extremely dangerous for the nation.

The Huge Looming Fight Over Financial Regulations

Today's the anniversary of 9-11, I guess. Why don't they just make it the following Monday and give us all a three-day weekend?

But another anniversary looms around this same time. On September 14, 2008, Lehman Brothers collapsed, and it sparked the biggest financial crisis since the Great Depression. America and other countries committed trillions in resources to keep the biggest banks afloat, and as a result we have rescued the system without fundamentally changing it or ensuring that the same bubble-and-crash couldn't happen again. Instead of taking advantage of the crash and responding to the bailout by immediately moving to financial regulatory reform, to prove that the banksters weren't getting free reign, the Administration waited, and is now trying to move forward without the urgency created by the crisis. Which is why you see high-fiving in the financial media that this regulatory reform effort will not succeed.

Large staffs of lobbyists with powerful financial interests behind them will use time-honored techniques to water down or kill anything that would drain profits and force the banksters to stop gambling with our money. The same interests killed a proposed Consumer Protection Agency in the 1970s with irrational fears about how it would harm ordinary Americans. And in the Senate, that same kind of coalition is forming to kill the Consumer Financial Protection Agency proposed by the Administration.

Nonetheless, I have a couple reasons to be optimistic, as this article in The Hill was the other day. First of all, the push to empower the Fed as a single regulator for a banking sector that it basically is enjoined to has faded rapidly.

The Obama administration's vision for revamping the nation's financial regulatory system could face significant revisions in the Senate, where proposed reform legislation departs from the White House proposal on several key points, according to staff members, lobbyists and a lawmaker briefed on the plans.

A bill taking shape in the Senate Banking Committee could give the Federal Reserve far less authority than the administration sought in the reform proposal it unveiled in June. Senators on both sides of the aisle have expressed a lack of confidence in the Fed in the wake of the financial crisis, challenging everything from the central bank's transparency to its ability to protect consumers.

Some lawmakers oppose giving the Fed responsibility for monitoring systemic risk in the economy, as proposed by the administration, favoring instead vesting that authority with a council of regulators.

"We really do take what the administration did as advisory. We have our own ideas," said one Democratic staff member familiar with the legislation who was not authorized to speak on the record. "We've been thinking about this a long time."

The second reason why I'm sanguine is that the Justice Department is finally stepping up with enforcement - and I think AIG represents the beginning, not the end.

U.S. investigators are probing the former head of American International Group Inc's (AIG.N) Financial Products unit, Joseph Cassano, and other executives for securities fraud, a law enforcement source familiar with the case said on Friday.

The source said that a grand jury may be impaneled this month in New York to consider potential charges that executives failed to disclose the value of toxic assets to the bailed-out insurance company's outside accountants and shareholders.

"The investigation is really who knew what and when about these assets," said the source, who asked not to be identified because the probe was ongoing. "They were holding toxic credit default swaps and may not have disclosed their real worth."

I don't think there's a single part of this sector that couldn't be probed in the same way. Look at this horrow show of overdraft fees on debit cards, for example. You cannot literally promise lighter enforcement in exchange for tighter regulation, but I think the firms get the message.

This actually will be a more expensive fight than health care reform in terms of lobbying, once everyone gets down to it. Chris Dodd's centrality to it while he fights for his political life is a bit worrying, but he's not the real problem here. It's the Mark Warner types who can deep-six anything meaningful.

...Yves Smith is not so hopeful.

Johnson To Banking?

I don't want to sound insensitive to the disabled, and Tim Johnson appears to have all of his mental faculties with him. But Johnson is two years out from a debilitating stroke, and chairing a committee in the Senate is demanding work. Robert Byrd lost his gavel because he was physically incapable of performing the chairmanship on Appropriations. I would just be very surprised to see Johnson get the chair of the Senate Banking Committee if Chris Dodd moved over to run the HELP Committee to replace the late Ted Kennedy.

There's the other matter that Johnson clearly is a total shill for corporate banking interests, many of which are hid away in his low-regulation state of South Dakota. With consumer protection legislation coming up, absolutely nothing of worth would get through a Banking Committee under Johnson. But it would be simply terrible optics to have someone who may not be able to handle the job up there trying to put together this high-profile legislation. I just can't see it.

Next in line on Banking after Johnson would be Jack Reed, which would be a major improvement over Johnson and Dodd. If Reed gets it, we're seeing some serious change. If Dodd stays put and Barbara Mikulski takes over HELP, it's the status quo. If Johnson really gets that seat, the country is seriously ruled by corporate whores and sellouts.

Maybe I shouldn't be so unequivocal in my prediction.

Conservatives Never Met A Criminal They Didn't Like

The Bush Administration sure had a knack for letting criminals get away with it, didn't they? They failed to stop 9/11, never caught bin Laden, and now we're learning about the total incompetence of the SEC in responding to Bernie Madoff's Ponzi scheme.

The U.S. Securities and Exchange Commission repeatedly missed chances to catch Bernard Madoff’s $65 billion fraud over 16 years by assigning inexperienced investigators and accepting “implausible” explanations after catching him in lies, the agency’s internal watchdog said.

At least six warnings from sources including a money manager, a “respected hedge-fund manager” and a firm that studied Madoff’s business failed to spur a “thorough and competent” probe, Inspector General H. David Kotz wrote in a summary of a report released today. Madoff, in an interview with Kotz, said even he “was astonished” when investigators failed to check trading records that would have exposed his scam.

“Despite numerous credible and detailed complaints, 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,” Kotz wrote.

This is not only an incredible report, it plays into a larger truth about the conservative conception of regulation as a needless bother rather than a diligent effort to protect the consumer. One incredible moment, referenced above but covered in detail by Zachary Roth, shows that Madoff basically thought he was caught and the scheme had been discovered by federal regulators, only to find himself safe once again.

The agency's biggest screw up, says the summary, was the fact that examiners never verified Madoff's trading through an independent third party.

The details of that failure are more astonishing still. Madoff at one point told examiners that all his trades were cleared through his account at the Depository Trust Company (DTC), a clearing agency -- and he gave the examiners his DTC account number. At that point, Madoff told Kotz in an interview, "I thought it was the end game, over. Monday morning they'll call DTC and this will be over." Amazingly, the SEC never followed up with DTC. Madoff said he was "astonished."

The summary almost makes clear that the SEC's right hand didn't know what the left was doing. It notes with astonishment that at one point, two Madoff examinations were going on at the same time within the agency, without either being aware of the other. It was Madoff himself who informed one team of the other's existence [...]

The final, failed Madoff investigation of 2006 -- triggered by a detailed Markopolos complaint -- was perhaps the most egregious. According to the summary, most of the investigative work was done by a staff attorney "who recently graduated from law school and only joined the SEC nineteen months before she was given the Madoff investigation. She had never previously been the lead staff attorney on any investigation, and had been involved in very few investigations overall. The Madoff assignment was also her first real exposure to broker-dealer issues."

According to the summary, that inexperience helps explain why, when Madoff told the examiners that he got such unprecedentedly good return simply because he had a good "feel" for the market, they took that nonsensical explanation at face value.

Bush's SEC didn't bother to check up on Madoff's dealings, and they took his explanations as good enough for them, because their attitude toward regulation was "don't mess with a good thing." Indeed, the entire stock market during the Bush years was kind of operating under a false reality in its own right. Madoff was a crook, but at least an honest crook. And even he couldn't get caught.

This is not just the story of one agency's embarrassing failure. The failure lied in the theory of government, existing to make profits for cronies and lay off the connected and the powerful. The failure to catch Madoff and the failure of conservatism are essentially the same stories.

Too Bigger To Fail

We were told during the financial crisis that the consolidation of the banks presented a situation where they had to be saved. Now we have the resultant outcome, that the banks which managed to survive the crisis are even bigger.

The crisis may be turning out very well for many of the behemoths that dominate U.S. finance. A series of federally arranged mergers safely landed troubled banks on the decks of more stable firms. And it allowed the survivors to emerge from the turmoil with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.

J.P. Morgan Chase, an amalgam of some of Wall Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

A year after the near-collapse of the financial system last September, the federal response has redefined how Americans get mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

FDIC head Sheila Bair is quoted in this article at least sounding concerned about this. Nobody else seems to be.

The American consumer will pay the biggest price for this, by the way. Not just in terms of having to bail out the few remaining banks if things get rough, but in higher fees and charges that accompany less competition.

I'm out, I'm going to a credit union from now on.

Auditing the Fed Coming To Pass?

I got a hold of some video of that infamous Barney Frank town hall meeting, where he asked the Larouchie holding the Obama-as-Hitler sign, "On what planet do you spend most of your time." Turns out that a not-nearly-as-crazy questioner asked Frank about HR 1207, the bill to audit the Federal Reserve, which has bailed out the banks for hundreds of billions of dollars under a virtual cover of secrecy. Frank said he supported the audit and promised to pass it by October. He also vowed to curtail the kind of lending power that allowed the Fed to float $80 billion dollars to AIG, and said that the Consumer Financial Protection Agency would curtail the Fed's power by taking the consumer protection elements of their mandate away from them.



There are now at least 282 co-sponsors to audit the Fed, on a bipartisan basis, mostly because people just want these world-historical interventions in the economy to come with some transparency. Frank, who talked about this effort to the Boston Globe the other day, appears sincere in meeting this goal. The economic powers in the Obama Administration really don't want any part of this, saying that "You want to keep politics out of monetary policy," but this isn't really about politics but about giving the public a sense of what they're paying for on a daily basis. The Federal Reserve just lost a lawsuit that will require more disclosure about the emergency deals they have cut. If Barney Frank and Ron Paul are getting together on this, I think the tide is turning.

Whaddya Know, They Found An Asshole To Run AIG

You'd think we weren't paying this guy $7 million dollars to do his job.

(Robert) Benmosche told employees that he “had the luxury to say to the government, I’m not going to rush to do this. I’m appalled at how much pressure has been put on all of you to just sell it no matter what, because the Fed wants out, or the Treasury wants out. If they want out in a hurry, they shouldn’t have come in in the first place.”

He's not being rushed at all, actually. He's starting his tenure with a two-week vacation to his Croatian villa.

Also, the government "came in" because AIG was hundreds of billions in the hole and begging for a rescue. These Masters of the Universe have still deluded themselves into thinking that the big bad government intruded on their party, and everything was going just fine until the crippling weight of socialism came to bear. In fact, we have socialism for the rich, and scraps for everyone else. And guys like Benmosche aren't even satisfied with that.

Yves says:

The government owns 79.9% of AIG. Any private sector owner who had an overwhelming majority interest and got that kind of attitude from a CEO would fire him immediately. But no, we live in a world where arrogant members of the financial services industry engage in looting, dictate terms to the government, and try to rewrite history to make baldfaced lies seem plausible. Why shoudn't the government pressure AIG? The idea that owners don't pressure companies (the subtext of this remark) is an absurd misrepresentation. Go talk to the management of any underperforming company owned by a PE or venture capital firm. For the most part, they do not play nice, and would never tolerate Benmoshe's posturing, and he knows that. He is simply playing the media and the public for fools.

Matt Taibbi details the web of lies that Benmosche has thus far subscribed to in his public statements. It's absolutely stunning that anyone would try to peddle a fiction that AIG was a super-awesome business and their only problem was that their regulator failed to rein them in. That's actually what the argument is.

One, let’s not forget that AIG went out of its way to cherry-pick the weak and understaffed OTS as its primary regulator by chartering an S&L called the AIG Federal Savings Bank in Wilmington, Delaware back in 1999. By this little maneuver AIG got itself declared a thrift holding company, which made the OTS, which only had one insurance expert on its staff, the primary regulator for the world’s largest insurance company.

Two, the notion that AIGFP was AIG’s only problem is bananas. It may not even have been AIG’s biggest problem. This legend obscures the fact that playing a nearly equal role in the demise of AIG was AIG’s securities-lending business, headed by yet another bombastic narcissist (AIG must lead the world in the hiring of these to senior management) named Win Neuger. Neuger back in the earlier part of this decade issued a clarion call to his subordinates, announcing a plan he called “10 cubed” — securing 1000 million (i.e. $1 billion) dollars a year in profits. Back in 2005 he told his staff that anyone who wasn’t on board with the plan to make a billion in profits a year could hit the road, literally, saying, “If you do not want to be on this bus, it’s a good time to step off.” [...]

This was a company that was tired of the boring, safe insurance business and decided not only to take its assets and bet them on the residential housing market, but to borrow massively and double and triple down on those bets. This was a systemic, company-wide insanity. So for Benmosche to blame all of this on the OTS is… well, it’s characteristic of what these people are like. On some level they really believe that if the government is not kicking their doors in and wrapping them all up in hoods and zip-ties, then whatever they are doing is not only okay but good business.

And we, the taxpayer, just hired this guy. Unbelievable.

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.

CA-10: An Interview With Sen. Mark DeSaulnier

Mark DeSaulnier has had a rapid ascent through the state legislature and now, potentially, into Congress. Within three years, this former restaurant owner won elections to the State Assembly (in 2006) and the State Senate (in 2008), with a Congressional primary scheduled for September 1. Prior to that, he was a 3-time member of the Contra Costa County Board of Supervisors and the California Air Resources Board. A former liberal Republican in the mold of Edward Brooke, DeSaulnier switched parties several years ago and compiled a liberal voting record in the State Legislature. His first ad of the campaign covered the topic of health care, and I asked him about this and several other issues in an interview conducted last week. Having taken place before the crucial budget vote, I spent a good deal of time asking DeSaulnier about that, and you can see his responses here. Depending on your perspective, he either did or did not fulfill the promise to vote against "most" of the budget, by the way, voting no on 11 of 26 bills, including all of the more controversial ones.

I'll pick up with a paraphrased transcript of the rest of the interview below:

DD: So, other than the budget, how's it going with your campaign?

Mark DeSaulnier: Well, this is a tough campaign, with a big field and a lot of good candidates. The polls we've done show us winning. We've got 70% of the money that we need to compete, and a lot of great endorsements. I would say we have the most local endorsements inside the district. And we're going to be able to put together a great ground campaign, with people I've worked with for 20 years in the district. I think we're going to be concentrated in Contra Costa County, where we can post a big number. I think we're putting ourselves out there as the local candidate, who has represented the district for a long time. And we have people out there walking and phoning, putting forward that message.

DD: As long as we're on California, obviously you've seen the dysfunction at the local level. What do you think you can do at the federal level to remedy this situation?

MD: You know, I read a lot of Paul Krugman, and I agree with him that we're going to need a second stimulus package. And I think we need it sooner and not later. I think we can take what's been learned from the stimulus package that we're doing now. I think the problem is that the banks like Citi and Bank of America aren't lending, and so we need to require the banks to lend, with relief for the credit worthy who are falling behind on their payments, and more money out to the credit unions who have done a better job handling this crisis. Next, I think we have to do some sort of fiscal stabilization. I see it in this state, people who need to access the safety net go up when the economy goes down. And so we have to break that cycle, and I think we can by providing some relief. Finally, we should say that we can do things more efficiently. There shouldn't be this silo mentality. I'll give you an example. We put together these "one-stops," places where you can go for unemployment and job training. And people tell me that you have to get out of one line and pick up a phone in the office to get your unemployment benefits. That just doesn't seem like good government to me. And I think we have an opportunity to make government work better.

DD: Let's move on to health care. Seems to be a big issue for you. What are the principles you carry in this debate?

MD: To me, the gold standard is single payer. We have the problem of getting health care to those who need it, and also how we get control of costs. I think the public option is the first step, and if we do it right, it could be, and really I think it should be, single payer. The question is what are the Democrats willing to give up to get moderates on board, and I think there have to be some lines we cannot cross there. In the end, it has to be about flexibility and more choice. That's the way you're going to sell this thing. It's telling that the moderates want firewalls in their plan, they don't want the people to have more choice, they want to preserve something for the insurance companies.

DD: Will you commit to not vote for anything that doesn't have a quality public plan available on day one, not a trigger, open to everyone, and with the kind of rates necessary to force the insurance companies to compete?

MD: Yes. I think as liberals, as progressives, something we don't do a lot but which we can learn from Republicans, sometimes we've just got to say no.

DD: Congress has started to debate the regulatory reform ideas put forward by the Obama Administration, and they're getting a ton of pushback from the banking industry, particularly on the concept of the Consumer Financial Protection Agency. It's the same way on a lot of these issues, the banks just won't relent. How do we solve this problem?

MD: Honestly, the politics will never get totally fixed without a public finance system in this country. And then people say, "why should we pay for elections?" The truth is that the average American is paying disproportionately already, when the giveaways to businesses and corporations are factored in. They buy elections fairly cheaply, and they get the rewards. So that's something we have to pursue. As far as your question, yes, I think we need a Consumer Financial Protection Agency, in fact I think it should be cabinet-level. A Secretary of Consumer Protection. The point to all of this is that if middle income people don't have wealth, democracy ends. That's just the bottom line. And one way to ensure that is by protecting consumers, so you don't see all their wealth go into someone else's pockets. Inequality is just killing us right now. Kevin Phillips wrote about this years ago, in Bad Money, and he was very prophetic. I also think that you can't reform the financial system without holding people accountable. And so I would involve the Department of Justice right at the beginning. That's the only way to really ensure it doesn't happen again.

DD: You mention inequality, it's something Democrats don't talk about enough. A recent Wall Street Journal story talked about the top 1% earning 35% of all the compensation in the country.

MD: It's stunning. And our tax structure, by the way, rewards the accumulation of wealth, not work. This happens when you get a financial services economy, which is completely not sustainable. We don't have manufacturing, we just have this financial services giant, and it trades in bubbles. So one way to reduce that inequality is to retool the financial services sector, make it smaller, make it more boring.

DD: OK, last question. I wanted to ask you about SB375, the smart growth measure that you played a big part in passing last year. This bill doesn't get a lot of attention, but it really offers a blueprint to how to achieve smart growth policies with the statewide authority working in concert with local communities. Do you plan to scale that up if you make it to Congress?

MD: Oh, absolutely, and this is where I think my background really suits me to replace Ellen Tauscher. I chaired the Transportation Committee in the Assembly as a freshman, I think the first person to do that. I spent ten years on the California Air Resources Board, and I co-authored SB375. I'm pretty sure there's a companion bill in Congress right now. Doris Matsui (CA-05) is carrying it right now. I have honed in throughout my career on the changing transportation and mobility side of the energy issue. We accomplish this, in part by reducing miles, and also finding new energy sources for transportation. We need more transit, and a move away from single-occupancy vehicles and long commutes. It's about bringing the work space closer to the living space, and creating livable communities. So I think I'm naturally suited for such a task. I'd like to get on the Transportation Committee if I get to Congress.

DD: Thanks for your time today.

MD: No problem, thank you.

Get It In Writing

Despite some slightly better housing news in the past few months, the threat of foreclosure still hangs over the head over a record number of Americans, and this shock to the economy still threatens recovery. One thing is clear - the modification programs attempted over the past year haven't worked at all. In fact, banks would rather foreclose than unentangle the maze of who owns the mortgage and how to legally alter the terms.

Government initiatives to stem the country's mounting foreclosures are hampered because banks and other lenders in many cases have more financial incentive to let borrowers lose their homes than to work out settlements, some economists have concluded.

Policymakers often say it's a good deal for lenders to cut borrowers a break on mortgage payments to keep them in their homes. But, according to researchers and industry experts, foreclosing can be more profitable.

The problem is that modifying mortgages is profitable to banks for only one set of distressed borrowers, while lenders are actually dealing with three very different types. Modification makes economic sense for a bank or other lender only if the borrower can't sustain payments without it yet will be able to keep up with new, more modest terms.

A second set are those who are likely to fall behind on their payments again even after receiving a modified loan and are likely to lose their homes one way or another. Lenders don't want to help these borrowers because waiting to foreclose can be costly.

Finally, there are those delinquent borrowers who can somehow, even at great sacrifice, catch up without a modification. Lenders have little financial incentive to help them.

Because it's in the banks' economic self-interest to foreclose, the plans brought forth by the government to avert foreclosures haven't had much of an effect. Banks are using all sorts of tricks and schemes, to delay modification almost endlessly and raise questions about who qualifies. So today, the President met with mortgage lenders and struck yet another handshake deal.

The Obama administration, scrambling to get its main housing initiative on track, extracted a pledge from 25 mortgage company executives to improve their efforts to assist borrowers in danger of foreclosure.

In an all-day series of meetings Tuesday at the Treasury Department, government officials reached a verbal agreement with the executives for a new goal of about 500,000 loan modifications by Nov. 1 and stressed the program's urgency.

The sessions came amid concerns that the Obama administration will fall far short of its original goal of helping up to 3 million to 4 million troubled borrowers with modified loans.

The bottom line is that voluntary deals with the lending industry or practically any company in finance will not work. They've been deliberately dragging their feet on offering modified loans because they have every incentive not to do it. I don't know how many different housing bills you can enact without teeth and expect some different result. The Administration is acting like they have no authority on this front. And until they demand formal agreements instead of assurances, they'll be trampled upon over and over again.