The Crisis of Our Democracy: Corruption in the Financial Markets and Obama's Failure to Reform

This interview with William Black in Barron's is an articulate and reasonably detailed summary of our own view of the current crisis from an exceptionally well-informed and experienced source.

The big question in our own mind is the depth of complicity and the motivations of the government, the media and major institutions in continuing to support this financial corruption through silence or participation.

Is Obama really merely listening to the wrong advice from highly placed sources in the Democratic Party? And how sincere are they? The record of corruption in the Obama Administration in the form of conflicts of interest and tax evasion is already the smoke that warns of fire.

All good questions, more relating to the length of time to a cure rather than its essential character.

The banks must be restrained, the financial system must be reformed, before there can be a sustained economic recovery.


Barron's
The Lessons of the Savings-and-Loan Crisis
By Jack Willoughby
11 April 2009

AN INTERVIEW WITH WILLIAM BLACK: The current bank scandal dwarfs the 1980s savings-and-loan crisis -- and could destroy the Obama presidency.

WILLIAM BLACK CALLS THEM AS HE SEES THEM, which is why we enjoy talking with him. Black, 57 years old, was a deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, and now serves as an associate professor, teaching economics and law at the University of Missouri, Kansas City. At FSLIC, a government agency that insured S&L deposits, Black prevailed in showdowns with the powerful Democratic Speaker of the House, Jim Wright, and helped identify the infamous Keating Five, a group of U.S. senators (including Sen. John McCain, the Arizona Republican who lost his bid for the presidency in 2008) who tried to quash his attempt to close Charles Keating's Lincoln Savings & Loan. Wright eventually resigned amid unrelated ethics charges, and the senators were reprimanded for poor judgment. Keating went to jail for securities fraud.

For Black's provocative thoughts on the current financial crisis, read on.


Barron's: Just how serious is this credit crisis? What is at stake here for the American taxpayer?

Black: Mopping up the savings-and-loan crisis cost $150 billion; this current crisis will probably cost a multiple of that. The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid's doll set. Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency. The Bush administration was even worse. But they are out of town. This will destroy Obama's administration, both economically and in terms of integrity.

So you are saying Democrats as well as Republicans share the blame? No one can claim the high ground?

We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.

So you aren't a fan of the recently announced plan for the government to back private purchases of the toxic assets?

It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what's so appalling -- numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

Geithner is mistaken when he talks about making deeply unpopular moves. Such stiff resolve to put the major banks in receivership would be appreciated in every state but Connecticut and New York. His use of language like "legacy assets" -- and channeling the worst aspects of Milton Friedman -- is positively Orwellian. Extreme conservatives wrongly assume that the government can't do anything right. And they wrongly assume that the market will ultimately lead to correct actions. If cheaters prosper, cheaters will dominate. It is like Gresham's law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.

His plan essentially perpetuates zombie banks by mispricing toxic assets that were mispriced to the borrower and mispriced by the lender, and which only served the unfaithful lending agent.

We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to.

I keep asking myself, what would we do in other avenues of life? What if every time we had a plane crash we said: 'It might be divisive to investigate. We want to be forward-looking.' Nobody would fly. It would be a disaster.

We know that with planes, every time there is an accident, we look intensively, without the interference of politics. That is why we have such a safe industry.

Summarize the problem as best you can for Barron's readers.

With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. First there needs to be a clearing of the air -- a Pecora-style fact-finding mission conducted without fear or favor. [Ferdinand Pecora was an assistant district attorney from New York who investigated Wall Street practices in the 1930s.] Then, we need to gear up to pursue criminal cases. Two years after the market collapsed, the Federal Bureau of Investigation has one-fourth of the resources that the agency used during the savings-and-loan crisis. And the current crisis is 10 times as large.

There need to be major task forces set up, like there were in the thrift crisis. Right now, things don't look good. We are using taxpayer money via AIG to secretly bail out European banks like Société Générale, Deutsche Bank, and UBS -- and even our own Goldman Sachs. To me, the single most obscene act of this scandal has been providing billions in taxpayer money via AIG to secretly bail out UBS in Switzerland, while we were simultaneously prosecuting the bank for tax fraud. The second most obscene: Goldman receiving almost $13 billion in AIG counterparty payments after advising Geithner, president of the New York Fed, and then-Treasury Secretary Henry Paulson, former Goldman Sachs honcho, on the AIG government takeover -- and also receiving government bailout loans.

What, then, is staying the federal government's hand? Have the banks become too difficult or complex to regulate?

The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership. The people running these banks are some of the most well-connected in Washington, with easy access to legislators. Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn't happening.

The savings-and-loan crisis showed that, too often, the regulators became too close to the industry, and run interference for friends by hiding the problems.

Can you explain your idea of control fraud, and how it applies to the current banking and the earlier thrift crisis?

Control fraud is when a seemingly legitimate corporation uses its power as a weapon to defraud or take something of value through deceit.

In the savings-and-loan crisis, thrifts engaged in control frauds in order to survive. Accounting trickery proved to be the weapon of choice. It is at work today with the banks, and it is their Achilles heel. You report that you are highly profitable when you engage in accounting-control fraud, not only meeting but exceeding capital requirements. These accounting frauds create huge bubbles, which in turn create large bonuses, which in turn lead to huge losses.

Why then is there so much smoke and so little action?

First, they are inundated by the problem. They are trying to investigate the major problems with severely depleted staffs. Honestly. We have lost the ability to be blunt. Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud. The reason we don't see it -- aren't told about it -- is that if they were honest, prompt corrective action would kick in, and they would have to deal with the problem banks.

Are there any parallels between the current crisis and the savings-and-loan crisis that give you hope?

Of course. Objectively, our case was even more hopeless in the S&L debacle than in the current crisis. If we were able to do it in such an impossible circumstance back then, we have reason for hope in the current crisis. I know how easily things can get off course and how quickly things can turn back again. The thrift crisis went through several lengthy courses and distortions before it finally was resolved under the leadership of Edwin Gray, the chairman of the Federal Home Loan Bank Board, which oversaw FSLIC.

We went through almost a decade of cover-ups by a Washington establishment intent on helping thrift owners. Back then, we had the Justice Department threatening to indict Gray, the head of a federal agency, for closing too many thrifts. Next, there were those so-called resolutions, where the regulators worked day and night -- to create even bigger problems for the FSLIC. Years later, these so-called resolution deals had to be unwound at great expense by closing down even larger failures. Or how about the bill to replenish the depleted thrift-insurance fund that was blocked and delayed by then-Speaker of the House, Texas congressman Jim Wright?

You say the evidence of a breakdown in the regulatory structure comes from the fact that America avoided an earlier subprime crisis in the 1990s.

Exactly. Why had no one heard of the subprime crisis back in 1991? Because America's regulators also faced down the crisis early. The same thing happened with bad credits being securitized in the secondary market. Remember the low-doc or no-doc mortgages done by Citibank? Well, the problem didn't spread -- because regulators intervened.

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America's pre-eminence in global financial capitalism at any cost. They remain wedded to the bad idea of bigness, the so-called financial supermarket -- one-stop shopping for all customers -- that has allowed the American financial system to paper the world with subprime debt. Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.

What needs to be done?

Well, these international behemoths need to be broken down into smaller units that can be managed effectively. Maybe they can be broken up the way that the Standard Oil split up back in the early 1900s, through a simple share spinoff.

The big problem for the last decade is that we have had too much capacity in the finance sector -- too many banks have represented a drain on our talent and resources. All these mergers haven't taken capacity out of the system. They have created even bigger banks that concentrate risk to the taxpayer, and put off dealing with problems.

And a new seriousness must be put into regulation. We don't necessarily need new rules. We just need folks who can enforce the ones already on the books.

The bank-compensation system also creates an environment that leads to mismanagement and fraud. No one has to tell someone they have to stretch the numbers. It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20% get the bulk of the benefits and the bottom 10% get fired. You don't directly tell your employees you want them to lie and cheat. You set up an atmosphere of results at any cost. Rank or yank. Sooner rather than later, someone comes up with the bright idea of fudging the numbers. That's big bonuses for the folks who make the best numbers. It sends the message -- making the numbers is what is most important. There is a reason that the average tenure of a chief financial officer is three years.

Compensation systems like I have just described discourage whistleblowing -- the most common way that frauds are found in America -- because the system draws upon the cooperation of everyone.

The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.

Thanks, Bill.

G7 Industrial Production Crashing

The production of real goods in the developed nations is plummeting. Even the mighty export driven economy of Japan appears to be heading lower as though it had fallen off a cliff.

Countries must begin to encourage consumption in their own economies. To do this, they ought not to be stimulating the old credit/speculation machine called the neo-liberal financial system.

Real economic growth is to be found in a broad employment and consumption, and an increase of the median wage.

This is the deep flaws in much of the third world economies, especially in Asia and Latin America. Economic health can be measured by the size and well being of the middle class in a relatively free society.

The reason is simple. Individuals can only borrow so much before they are unable to service the debt. And the greedy few can only spend so much on consumption using the wealth which the tax and financial system has delivered to them from the many.

Gaming the system so that it overtaxes the income of the many for theincreasing benefit of a few has natural limitations, unless one can enforce a type of involuntary servitude. This model has its roots far back in history, in empires like Rome, Egypt, and Sparta.

As the elite few accumulate real assets using their surplus, they will find that holding on to their wealth as the rest of society deteriorates in a downward spiral of privation can be a bit of a challenge.

Until the financial system is reformed and the economy is brought back into a balance, there will be no recovery, and the fabric of order will remain fragile.

If things continue on as they are, despite all the stimulus and fine rhetoric, the madness will once again be unleashed on the earth, and the people will wonder from whence it came, as they do each time it rises from the same sources and ravages civilization: unbridled greed, malinvestment, and corruption.




Thanks to Diapason Trading for this chart.

Obama's Failure and the Unfolding Financial Crisis

Kevin Phillips is a brilliant and insightfuly political commentator, and we have featured his videos and writings here many times.

His latest essay is worth reading over the long weekend.

"This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland...

But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers."

It is ironic that Joe Biden predicted that our Community-Organizer-in-Chief would be tested severely in his first days in office. At the time everyone thought it would be some foreign power, some military machine which would temper the character of this new leader with a significant threat to the national welfare.

Little did we suspect that the test of our sovereign republic would come from the Wall Street and the money center banks.


Table for One - TPMCafe
The "Disaster Stage" of U.S. Financialization
By Kevin Phillips
April 7, 2009, 3:34PM

Thirty to forty years ago, the early fruits of financialization in this country - the first credit cards, retirement accounts , money market funds and ATM machines - struck most Americans as a convenience and boon. The savings and loan implosion and junk bonds of the 1980s switched on some yellow warning lights, and the tech bubble and market mania of the nineties flashed some red ones. But neither Wall Street nor Washington stopped or even slowed down.

In August, 2007, the housing-linked crisis of the credit markets predicted the arriving disaster-stage, the Crash of September-November 2008 confirmed the debacle, and now an angry, fearful citizenry awaits a further unfolding. There is probably no need to fear a second coming of nineteen-thirties Depression economics. This is not the same thing; the day-to-day pain shouldn't be as severe.

Indeed, for all that the 1930s evoke national trauma, that decade was in fact a waiting room for national glory and wellbeing. World War Two ushered in American global ascendancy, the "Happy Days" of the 1950s and an unprecedented middle-class prosperity.

Today's disaster stage of American financialization - the bursting of the huge 25-year, almost $50 trillion debt bubble that helped underwrite the hijacking of the U.S. economy by a rabid financial sector -- won't be nearly so kind. It is already ushering in the reverse: a global realignment in which the United States loses the global economic leadership won in World War Two. The ignominy deserved by Wall Street after 1929-1933 is peanuts compared with the opprobrium the U.S. financial sector and its political and regulatory allies deserve this time.

My 2002 book, Wealth and Democracy, in its section on the "Financialization of America" noted that the "finance, insurance and real estate (FIRE) sector overtook manufacturing during the 1990s, moving ahead in the national income and GDP charts by 1995. By the first years of the next decade, it had taken a clear lead in actual profits. Back in 1960, parenthetically, manufacturing profits had been four times as big, and in 1980, twice as big." Hardly anyone was paying attention.

By 2006, the FIRE sector, its components mixed together like linguine by the 1999 repeal of the old New Deal restraints against mergers of commercial banks, investment firms and insurance, had ballooned to 20.6% of U.S. GDP versus just 12% for manufacturing. The FIRE Sector, now calling itself the Financial Services Sector, lopsidedly dominated the private economy. A detailed chart appears on page 31 of Bad Money. Some New York publications and politicians try to insist that finance per se is only 8%, but the post-1999 commingling makes that absurd.

This represented a staggering transformation of the U.S. economy - doubly staggering now because of the crushing burden of its collapse. You would think that that opinion molders and the national media would have been probing its every aperture and orifice. Not at all.

Thus, it was pleasing to read MIT economics professor Simon Johnson's piece in the April Atlantic fingering financial "elites" who captured the government for the latterday financial debacle. This is broadly true, and judging from my e.mail, even some conservatives accept Johnson's analysis and indictment. After the furor over the AIG bonuses, the public and some politicians may be ready to start identifying and blaming culprits. This would be useful. Having an elite to blame is a often prerequisite of serious reform.

Nevertheless, the extremes of financialization, together with the havoc we now know it to have wrought, represent a much more complicated historical and economic genesis, one which U.S. leaders must be obliged to confront if not fully acknowledge. Elite avarice and culpability has multiple and longstanding dimensions. It has been fifteen years since Graef Crystal, a wellknown employment compensation expert, brought out his incendiary In Search of Excess: the Overcompensation of American Executives. The data was blistering. Over the last decade, New York Times reporter David Cay Johnston has published two books - Perfectly Legal and Free Lunch - describing how the U.S. tax code, in particular, has been turned into a feeding trough for the richest one percent of Americans (especially the richest one tenth of one percent).

The backstop to avarice provided by a wealth culture and market mania from the late 1980s through the Clinton years to the George W. Bush administration, prompted another set of indictments that still resonate: William Greider's Secrets of the Temple: How the Federal Reserve Runs The Country (1987), Robert Kuttner's Everything For Sale (1997), Thomas Frank's One Market Under God (2000) and John Gray's False Dawn (1998). More recently, Paul Krugman's books have been equalled or exceeded in timeliness by his New York Times columns blasting the perversity of the Obama-Geithner financial bail-out and the malfeasance of the financial sector.

James K. Galbraith, in his 2008 book The Predator State, has elaborated the valid point that too many conservatives over last few decades betrayed their free market rhetoric by supporting a relentless use of state power and government financial bail-outs to advance upper-income and corporate causes. On the other hand, some conservative economists of the Austrian school make related indictments of liberal bail-out penchants.

This could be a powerful framework. All of these critiques have merit, and ideally they might converge as earlier indictments of elite and governmental abuse did during the Progressive and New Deal eras. But I have to return to whether the public will ever be given full information on the fatal magnitude of financialization, who was responsible, and how it failed and crashed in 2007-2009. So far, political and media discussion has been so minimal that the early 21st century American electorate has much less readily available information on what took place than did the electorates of those earlier reform eras.

Towards this end, my initial emphasis in the new material included in the 2009 edition of Bad Money is on what techniques, practices and leverage the financial sector used between the mid-1980s and 2007 to metastasize early-stage financialization into an economic and governmental coup and, ultimately, a national disaster.

Perhaps not surprisingly, I found that the principal building blocks that the sector used to enlarge itself from 10-12% of Gross National Product around 1980 to a mind-boggling 20.6% of Gross Domestic Product in 2004 involved essentially the same combination of credit-mongering, massive sector borrowing, highly leveraged speculation, reckless, greedy pioneering of new experimental vehicles and securities (derivatives and securitization) and mega-trillion-dollar abuse of the mortgage and housing markets that became infamous as hallmarks of the 2007-2009 disaster. During Alan Greenspan's 1987-2006 tenure as Federal Reserve Chairman, financial bubble-blowing became a Washington art and total credit market debt in the U.S. quadrupled from $11 trillion to $46 trillion.

To try to put 20-30 pages into a nutshell, the financial sector hyped consumer demand - from teen-ager credit cards to mortgages for the unqualified - to make credit into one of the nation's biggest industries; nearly $15 trillion was borrowed over two decades to leverage de facto gambling at 20:1 and 30:1 ratios; banks, investment firms, mortgage lenders, insurers et al were all merged together to do almost anything they wanted; exotic securities and instruments that even investment chiefs couldn't understand were marketed by the trillions. To achieve fat financial-sector profits, the housing and mortgage markets might as well have been merged with Las Vegas.

The principal inventors, hustlers , borrowers and culprits were the nation's 15-20 largest and best known financial institutions - including the ones that keep making headlines by demanding more bail-out money from Washington and giving huge bonuses. These same institutions got much of the early bail-out money and as of December 2008 they accounted for over half of the bad assets written off.

The reason these needed so much money is that they government had let them merge, speculate, expand and experiment on dimensions beyond all logic. That is why the complicit politicians and regulators have to talk about $100 billion here and $1 trillion there even while they pretend that it's all under control and that the run-amok financial sector remains sound.

This is a much grander-scale disaster than anything that happened in 1929-33. Worse, it dwarfs the abuses of debt, finance and financialization that brought down previous leading world economic powers like Britain and Holland (back when New York was New Amsterdam). I will return to these little-mentioned precedents in another post this week.

But for the moment, let me underscore: the average American knows little of the dimensions of the financial sector aggrandizement and misbehavior involved. Until this is remedied, there probably will not be enough informed, focused indignation to achieve far-reaching reform in the teeth of financial sector money and influence. Equivocation will triumph. This will not displease politicians and regulators leery of offending their contributors and backers.

The Credit Bubble Was a Ponzi Scheme Enabled by the US Dollar

They say a picture is worth a thousand words.

Here is a picture of the US credit bubble, with the deleveraging which has just begun.

It is/was a Ponzi scheme, enabled by the advantages of controlling the reserve currency of the world, pure and simple.



It was the US dollar that was monetized, or more specifically US debt obligations, which are now substantially worthless and will have to take a significant haircut in real terms. This is similar to the Japanese experience in which they monetized their real estate.

Ironically, those expecting this deleveraging to result in a stronger dollar could not be more mistaken. The Obama Administration is scrambling to obtain relief from Europe and Asia, getting them to inflate their own currencies through 'stimulus,' in order to continue to hide the unalterable truth - the US must partially default on its debt as expressed in the dollar and the Bond.

This is the inevitable outcome of all Ponzi schemes. Several smaller, private schemes already have collapsed. The big one is yet to come down. And when it does, the foundations of democracy will shake, several governments will fall, and we will once again experience the kind of uncertainty more familiar to those who lived in the first half of the twentieth century.

The sad truth is that the Obama Administration has barely begun the real work of rebuilding the economy. Everything to date is simple looting, paper-hanging, and the rewriting of history.

Until the median wage improves significantly in real terms, and the economy is put back on a productive basis without relying on the unsupported expansion of credit, there will be no recovery, merely sound byte opportunities for the smoke and mirror crowd.

This is the reality.

Non-Farm Payrolls: Revisio ad Absurdum

Orwellian manipulation of government economic statistics, par excellence.







The moving average of the Non-farm Payrolls marked the downturn in the economic expansion with amazing clarity by a steep drop in late 2007. It will also mark the bottom and a sustained upturn when it arrives.

Derivatives: the Heart of Financial Darkness

The heart of our financial crisis is reckless speculation with "too big to fail" funds by a relatively small group of US based money center banks.

There is sufficient circumstantial evidence from their concerted lobbying efforts to undo and resist regulation to show planning and forethought in what is an almost amazingly straightforward case of fiduciary and financial fraud. Many a blind eye was turned to the decline of the nation as it occurred, as the media and politicians and financial regulators were caught up in a seductive web of corruption.

The perpetrators are still in place, relatively unrestrained, and certainly not facing anything that might be called 'justice.'

Before there is any recovery, the banks must be once again restrained and balance restored to the economy and the financial system. The efforts of the Obama Administration are hopelessly ineffective, conflicted, and supportive of continuing losses.


The Prime Suspects



The Killing Field



The Wagers on Failure



The Wages of Speculation

How the Financial Industry Holds America Captive

You heard this here first.

"The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time."

The Quiet Coup - Simon Johnson - The Atlantic Monthly

Guest Blog: The Cheapest Call Option of All

No doubt Ben and Timmy have it all planned out, how they will use the trickle down machine to reinflate the financial system, and thereby float out loans again, at interest, to the hoi polloi.

From the Irish gnome in Zurich:

The cheapest call option on the planet is being provided by the world's largest HF//Prime broker: the US govt. Its also the best camouflage for a continuing rescue of Citi, GS et al that the Congress and the public cannot penetrate.

TALF Bait and Switch - Zero Hedge

And if it all goes wrong, Geithner is now looking for power to bail out the hedge funds, not to mention Pimco et al.

This sounds like a pretty cheap option to me.

But what has also gone unrecognised is the fact they will all make up this money on their CDS and S&P calls anyway.

If they pay banks their fictional book value, they will be able to pretend that the financial problems were overstated, just a 'liquidity' issue after all.

The banks can claim they HAVE been doing things right and we'll have a huge rally again. Anyone who participates will no doubt reckon on a reduced Prime Brokerage fee and extra leverage from the grateful seller - -which means asset inflation has another leg up.

Remember, ALL banking 'capital' is notional, so it is easy to conjure up the illusion of wealth creation once more.

The Obama Team's Economic Performance Is Pathetic

Wouldn't it be nice if one day the Obama Administration came up with a change, an innovative reform for the financial system that made us sit back and say, "Wow, that's great! That's exactly what we have been looking for."

So far it has been one misstep, one fumble, one tired old Henny Youngman routine after another. The Clinton Administration retread meets the road, and falls apart.

Things went badly beginning with the appointment of Larry Summers as key economic advisor.

Larry was one of the three man miracle team of Greenspan, Rubin and Summers that turned the Asian monetary crisis into the tech bubble after a smoke and mirrors economic recovery while the industrial base of the US continued to slide into the Pacific.

We have seen nothing that speaks of the promise that we felt when America said "enough" and voted for a change in the fall of 2008.

And after the Summers disappointment we received the the Rubin protege, Tim Geithner, with the thinnest of financial backgrounds, who while at the NY Fed helped to help transform the housing bubble collapse into the bailout bust.

His position at Treasury is such an obvious, glaring mismatch that he cannot even staff key jobs in his own department. Who would want to work under such an obvious, embarrassing failure?

This is not a poor performance. This is an abject, incompetent inability to address the most critical issue facing this country.

This is Obama's Iraq: a morass of crippling failure brought on by horrible advice from key advisors with their own agendas.

President Obama throws rhetoric at the problem from a distance, like he is still campaigning against something. He leaves the impression of a more articulate Bush, inspiring no lasting confidence, giving no impression that he is in charge, on top of the situation, in control with a well thought out plan. He can make you feel good while he is speaking, then reality sets in and you realize that there is nothing there. Where are the management skills to back up the rhetoric?

Don't get us wrong. This is still early in the game. But the Democrats are losing the early rounds, as the situation grows more dire.

Well, Mr. Obama, you are President now, and even though you have only a short time in the office, so far you have shown us nothing. Your shepherding of a stimulus bill through the Congress was a nightmare, made worse by Nancy Pelosi who is a mediocre House Speaker at best, but appears a dynamo in comparison to Majority Leader Harry Reid.

Tired old solutions, inbred beltway thinking, old boy insider dealing.

Embarrassing. Unworthy. Amateurish. Pathetic.

You are failing, and we see it, and the anger, and sense of quiet panic, is building.

Time to get serious, to get it together. Time to step up to the job and take command. Time to show us your best stuff, find the levers, roll up your sleeves, and step down from the pulpit.

Teabagging the Congress

You are probably already aware of this 'tea party' invitation making the rounds of email and the internet.

What is remarkable is that I received this today from one of the most conservative people that I can imagine, who STILL won't admit that the George W. Bush administration was a disaster for our economy.

It appears that the full spectrum, from left to right, of the public is angry, very angry, and the Democrats led by Obama are setting themselves up as the lightning rod to receive it, primarily through their bungling of the financial crisis.

Send a teabag if you wish. Personally I would make some tea with it first. Why waste? I am not sharing my Typhoo with anyone.

It is good, though, to do something if you are angry. Symbolic protests are a good first step. But what will get the attention of these power players will be something with a monetary impact, such as a major boycott, or a move away from the dollar and into non-financial assets.

The paid help may be fearful, but the ringleaders are drunk with power. They have been at this for some years now.

It has been some time since I have seen ordinary people so generally angry and disgusted by the US national government. Certainly not since the Nixon Administration. Something will have to give if the current course does not change.

Bailout Anger Creates Peril for Both Parties - MarketWatch

Tea Party - Please mark your Calendars

A tea party, what a wonderful idea, I just wish it had been mine. I have a feeling that USPS is going to have a lot of tea to contend with, after all it only costs 42 cents to send a message, hopefully heard round the world!!!

So please mark your Calendars

There's a storm abrewin'. What happens when good, responsible people keep quiet?

Washington has forgotten they work for us. We don't work for them. Throwing good money after bad is NOT the answer.

I am sick of the midnight, closed door sessions to come up with a plan. I am sick of Congress raking CEO's over the coals while they, themselves, have defaulted on their taxes.

I am sick of the bailed out companies having lavish vacations and retreats on my dollar. I am sick of being told it is MY responsibility to rescue people that, knowingly, bought more house than they could afford. I am sick of being made to feel it is my patriotic duty to pay MORE taxes.

I, like all of you, am a responsible citizen. I pay my taxes. I live on a budget and I don't ask someone else to carry the burden for poor decisions I may make. I have emailed my congressmen and senators asking them to NOT vote for the stimulus package as it was written without reading it first. No one listened. They voted for it, pork and all.

O..K. folks, here it is. You may think you are just one voice and what you think won't make a difference. Well, yes it will and YES, WE CAN!!

If you are disgusted and angry with the way Washington is handling our taxes. If you are fearful of the fallout from the reckless spending of BILLIONS to bailout and "stimulate" without accountability and responsibility then we need to become ONE, LOUD VOICE THAT CAN BE HEARD FROM EVERY CITY, TOWN, SUBURB AND HOME IN AMERICA.

There is a growing protest to demand that Congress, the President and his cabinet LISTEN to us, the American Citizens. What is being done in Washington is NOT the way to handle the economic free fall.

So, here's the plan. On April 1, 2009, all Americans are asked to send a TEABAG to Washington , D.C. You do not have to enclose a note or any other information unless you so desire. Just a TEABAG.

Many cities are organizing protests. If you simply search, "New American Tea Party", several sites will come up. If you aren't the 'protester' type, simply make your one voice heard with a TEABAG. Your one voice will become a roar when joined with millions of others that feel the same way. Yes, something needs to be done but the lack of confidence as shown by the steady decline in the stock market speaks volumes.

This was not my idea. I visited the sites of the 'New American Tea Party' and an online survey showed over 90% of thousands said they would send the teabag on April 1. Why, April 1?? We want them to reach Washington by April 15. Will you do it? I will. Send it to; 1600 Pennsylvania Ave. Washington , D.C. 20500 ..

Visit the website below for more information about the 'New American Tea Party'. I would encourage everyone to go ahead and get the envelope ready to mail, then just drop it in the mail April 1.

Can't guarantee what the postage will be by then, it is going up as we speak, but have your envelope ready. What will this cost you? A little time and a 40 something cent stamp.

What could you receive in benefits? Maybe, just maybe, our elected officials will start to listen to the people. Take out the Pork. Tell us how the money is being spent. We want TRANSPARENCY AND ACCOUNTABILITY. Remember, the money will be spent over the next 4-5 years. It is not too late.

Of course, if you agree with the way things are being done now, just delete this e-mail !!!!!

Senator Grassley: Throw AIG to the Wolves (and Ignore Us)

"You can fool some of the people all of the time, and all of the people some of the time,
but you can not fool all of the people all of the time."
Abraham Lincoln

But you can bloody well try.

Senator Grassley is a ranking member of the Senate Finance Committe. As such, he presided over a decade of erosion of safeguards and balance in our financial system.

He is also a member of a political party and a government that had the lead in ruining our country, undermining the Constitution, and allowing financial racketeers like AIG to flourish.

The fellows at AIG are indeed amoral pigs, and they make no pretentions to be otherwise, whereas Chuck Grassley and his ilk are venal hypocrites who are attempting to deflect attention from their own significant role in the current financial crisis, and a disastrous foreign policy conducted under false pretenses for the enrichment of private interests and corporations.

Those who take his pious pronouncements seriously are born to be shorn, over and over, again and again.

"I don't know whether the [$165 million in bonuses] is an issue as much as just the chutzpah of the people running AIG," Grassley said. "That they could thumb their nose at the taxpayers, it's more that.

"The attitude of these corporate executives and bank executives, and most of them are in New York, that somehow they're not responsible for their company going into the tank," he said.

"I suggest, you know, obviously maybe they ought to be removed, but I would suggest that the first thing that would make me feel a little bit better towards them [is] if they would follow the Japanese example and come before the American people and take that deep bow and say I'm sorry and then either do one of two things: resign or go commit suicide."

AIG: A Scandal of Epic Proportion

"Goldman Sachs had said in the past that its exposure to A.I.G.’s financial trouble was 'immaterial'."

It appears that it was immaterial because Goldman Sachs, through their ex-CEO Hank Paulso, had set things up so they could not lose on their counterparty risk.

This story from last September documents Goldman Sachs involvement, at the highest levels, in the AIG bailout with then Treasury Secretary Hank Paulson.

AIG: A Blind Eye to Risk - NYT Sept 28, 2008

It seems fairly obviously that a relatively small department within AIG, the Financial Products division, was operating under the regulatory radar and was used as a patsy by a number of the Wall Street banks, who had no worries about losses because of their power to obtain the US government as a backstop to losses.

This is a scandal of epic proportion. 'Outrage' barely manages to express the appropriate reaction.

Obama is an educated, intelligent President, and can hardly retreat behind the clueless buffoon defense in vogue with so many CEO's and public officials. He has a directly responsible for this outcome now along with the Bush Administration and the Republicans.

Geithner and Summers should resign over their handling of AIG.

The Fed has no business regulating anything more complex than a checking account.

The difficulty with which we are faced is that despite their mugging for the camera and emotional words the Democrats and Republicans are owned by Wall Street and Big Business because of the existing system of lobbying and campaign funding.

Getting behind a third party for president is symbolic but ineffective. Giving a significant number of congressional seats to a third party will send a chilling and practical message to both the President and the Congress that enough is enough.

And in the meantime--

Contact Your Elected Officials


NY Times
A.I.G. Lists the Banks to Which It Paid Rescue Funds
By MARY WILLIAMS WALSH
March 16, 2009

Amid rising pressure from Congress and taxpayers, the American International Group on Sunday released the names of dozens of financial institutions that benefited from the Federal Reserve’s decision last fall to save the giant insurer from collapse with a huge rescue loan.

Financial companies that received multibillion-dollar payments owed by A.I.G. include

Goldman Sachs ($12.9 billion),
Merrill Lynch ($6.8 billion),
Bank of America ($5.2 billion),
Citigroup ($2.3 billion) and
Wachovia ($1.5 billion).

Big foreign banks also received large sums from the rescue, including

Société Générale of France and
Deutsche Bank of Germany, which each received nearly $12 billion;

Barclays of Britain ($8.5 billion); and
UBS of Switzerland ($5 billion).

A.I.G. also named the 20 largest states, starting with California, that stood to lose billions last fall because A.I.G. was holding money they had raised with bond sales.

In total, A.I.G. named nearly 80 companies and municipalities that benefited most from the Fed rescue, though many more that received smaller payments were left out.

The list, long sought by lawmakers, was released a day after the disclosure that A.I.G. was paying out hundreds of millions of dollars in bonuses to executives at the A.I.G. division where the company’s crisis originated. That drew anger from Democratic and Republican lawmakers alike on Sunday and left the Obama administration scrambling to distance itself from A.I.G.

“There are a lot of terrible things that have happened in the last 18 months, but what’s happened at A.I.G. is the most outrageous,” Lawrence H. Summers, an economic adviser to President Obama who was Treasury secretary in the Clinton administration, said Sunday on “This Week” on ABC. He said the administration had determined that it could not stop the bonuses.

(Among the outrages was the appointment of that sly old fox Larry Summers and his sidekick Tim Geithner by President Obama, and their continued tenure in any so-called reform government. - Jesse)

But some members of Congress expressed outrage over the bonuses. Representative Elijah E. Cummings, a Democrat of Maryland who had demanded more information about the bonuses last December, accused the company’s chief executive, Edward M. Liddy, of rewarding reckless business practices. (Well duh, that was and is the modus operandi of Wall Street Congressman - Jesse)

“A.I.G. has been trying to play the American people for fools by giving nearly $1 billion in bonuses by the name of retention payments,” Mr. Cummings said on Sunday. “These payments are nothing but a reward for obvious failure, and it is an egregious offense to have the American taxpayers foot the bill.” (Hey I have a good idea, lets elect some officials to make the laws and prevent these outrages through regulation. Oh yeah we did. Its you Congress! Its you Obama - Jesse)

An A.I.G. spokeswoman said Sunday that the company would not identify the recipients of these bonuses, citing privacy obligations.

Ever since the insurer’s rescue began, with the Fed’s $85 billion emergency loan last fall, there have been demands for a full public accounting of how the money was used. The taxpayer assistance has now grown to $170 billion, and the government owns nearly 80 percent of the company.

But the insurance giant has refused until now to disclose the names of its trading partners, or the amounts they received, citing business confidentiality.

A.I.G. finally relented after consulting with the companies that received the government support. The company’s chief executive, Edward M. Liddy, said in a statement on Sunday: “Our decision to disclose these transactions was made following conversations with the counterparties and the recognition of the extraordinary nature of these transactions.” (How about the threat of subpoena from the Attorney General? - Jesse)

Still, the disclosure is not likely to calm the ire aimed at the company and its trading partners.

The Fed chairman, Ben S. Bernanke, appearing on “60 Minutes” on CBS on Sunday night, said: “Of all the events and all of the things we’ve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with A.I.G.” (Considering you are presiding over the looting of the middle class, Ben my man, that speaks volumes - Jesse)

He went on: “Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a — we had a situation where the failure of that company would have brought down the financial system.” (AIG was a setup with the very banks, Goldman Sachs and crew, that you are bending our economy over backwards to save, Ben - Jesse)

In deciding to rescue A.I.G., the government worried that if it did not bail out the company, its collapse could lead to a cascading chain reaction of losses, jeopardizing the stability of the worldwide financial system.

The list released by A.I.G. on Sunday, detailing payments made between September and December of last year, could bolster that justification by illustrating the breadth of losses that might have occurred had A.I.G. been allowed to fail.

Some of the companies, like Goldman Sachs and Société Générale, had exposure mainly through A.I.G.’s derivatives program. Others, though, like Barclays and Citigroup, stood to lose mainly because they were customers of A.I.G.’s securities-lending program, which does not involve derivatives. (There ought to have been the managed unwinding and default on those derivatives - Jesse)

But taxpayers may have a hard time accepting that so many marquee financial companies — including some American banks that received separate government help and others based overseas — benefiting from government money.

The outrage that has been aimed at A.I.G. could complicate the Obama administration’s ability to persuade Congress to authorize future bailouts. (I would hope so. Obama has lost all credibility compliments of Geithner, Summers and Bernanke - Jesse)

Patience with the company’s silence began to run out this month after it disclosed the largest loss in United States history and had to get a new round of government support. Members of Congress demanded in two hearings to know who was benefiting from the bailout and threatened to vote against future bailouts for anybody if they did not get the information.

“A.I.G.’s trading partners were not innocent victims here,” said Senator Christopher J. Dodd, the Connecticut Democrat who presided over one recent hearing. “They were sophisticated investors who took enormous, irresponsible risks.” (Do something about it then you windbag - Jesse)

The anger peaked over the weekend when correspondence surfaced showing that A.I.G. was on the brink of paying rich bonuses to executives who had dealt in the derivative contracts at the center of A.I.G.’s troubles.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, implicitly questioned the Treasury Department’s judgment about the whether the bonuses were binding. (I would question if Barney Frank is competent to hold office since he has also been a key player - Jesse)

“We need to find out whether these bonuses are legally recoverable,” Mr. Frank said in an interview Sunday on Fox News.

Many of the institutions that received the Fed payments were owed money by A.I.G. because they had bought its credit derivatives — in essence, a type of insurance intended to protect buyers should their investments turn sour.

As it turned out, many of their investments did sour, because they were linked to subprime mortgages and other shaky loans. But A.I.G. was suddenly unable to honor its promises last fall, leaving its trading partners exposed to potentially big losses.

When A.I.G. received its first rescue loan of $85 billion from the Fed, in September, it forwarded about $22 billion to the companies holding its shakiest derivatives contracts. Those contracts required large collateral payments if A.I.G.’s credit was downgraded, as it was that month.

Among the beneficiaries of the government rescue were Wall Street firms, like Goldman Sachs, JPMorgan and Merrill Lynch that had argued in the past that derivatives were valuable risk-management tools that skilled investors could use wisely without any intervention from federal regulators. Initiatives to regulate financial derivatives were beaten back during the administrations of Presidents Bill Clinton and George W. Bush.

Goldman Sachs had said in the past that its exposure to A.I.G.’s financial trouble was “immaterial.” A Goldman Sachs representative was not reachable on Sunday to address whether that characterization still held. When asked about its exposure to A.I.G. in the past, Goldman Sachs has said that it used hedging strategies with other investments to reduce its exposure.

Until last fall’s liquidity squeeze, A.I.G. officials also dismissed those who questioned its derivatives operation, saying losses were out of the question.

Edmund L. Andrews and Jackie Calmes contributed reporting.

Madoff is Pleading Guilty Without a Deal

Reports are that Bernie Madoff is pleading guilty WITHOUT a deal with the prosecution?

Is there a separate deal with a third party?

He gets to live, albeit in prison, if he doesn't testify about who he worked with and where the money came from and went?

Follow the money (if you can).

According to the US government the total of the Claimed Account balances is now $64.8 Billion with $170 Billion in forfeitures.

Bernie beats the estimate of $50 Billion stolen. Rally time.

Oh and according to Bloomberg, the judge has ruled that the only victims who will be allowed to speak on Friday in court will be those who do NOT think Bernie should be sentenced to any jail time.

Do the thousands of other less forgiving victims get to have their say in a free speech zone in the south Bronx?

SP Futures Hourly Chart at 1 PM EDT - An Appearance of False Vitality Amidst Wasting Disease

Breakout or Fakeout?

The trigger for this rally was an internal memo to the Citigroup employees from Vikram Pandit, designed to bolster morale and most likely the stock price when it was widely leaked to the press. Vik gets a freebie on this one since the memo was 'internal.' No accounting for numbers, right? lol.

Citi CEO Pandit Defends Group Strength

Traders are choosing to interpret this as a positive sign that 'the worst is over' and are squeezing the short interest from an oversold condition. Here is a story on Citi from the WSJ. Does this sound like all is smooth sailing?

U.S. Weighs Further Steps for Citi: Regulators Plan for Contingency - WSJ

Anyone who actually believes the financial crisis is over based on this 'leaked internal memo' is a true believer indeed. In what we are not sure.

Let's see how this rally plays out. Here are the support and resistance levels.

Anything is possible here in the Speculation Nation.

By the way, Turbo Timmy Geithner will be on PBS' Charley Rose talk show this evening. He will say that things are getting dramatically worse in the US economy. But they are committed to fix our dire financial problems no matter what they must do. (hint: print).

Chris Whalen: Tim Geithner is a Disaster and Will Be Out by June

"Tim Geithner has no financial skills. The only reason he is there [the Treasury Secretary] is to protect Goldman Sachs."

Interview with Chris Whalen of Institutional Risk Analytics on TheStreet.com

Weekend Reading: How Wall Street and Washington Are Betraying America

The original title for this essay was "How Wall Street and Washington Betrayed America." As you can see from the above, this blog has a slightly different perspective.

We would like to be able to say that this was an unfortunate problem that has occurred, and that we are dealing with its aftermath. The repair of the economy is just a matter of time and money.

It is not, and we are not.

The problem continues. This was not an exogenous event like an accident. It is a pernicious condition, a chronic wasting disease. The carriers of the infection are still at work.

The system is distorted, sick, incapable of self-cure. Feeding intravenous liquidity to obtain the appearance of health will not work, only allow the disease to progress. Strong medicine is required.

We will have no recovery until we have reform.

We will have no reform until the banks are restrained, and balance is restored.

The looting of the public Treasury will continue while the Congress and the Executive take their direction from Wall Street.

Paying for Policy in Washington
Wall Street's Best Investment
By ROBERT WEISSMAN

"The entire financial sector (finance, insurance, real estate) drowned political candidates in campaign contributions, spending more than $1.7 billion in federal elections from 1998-2008. Primarily reflecting the balance of power over the decade, about 55 percent went to Republicans and 45 percent to Democrats. Democrats took just more than half of the financial sector's 2008 election cycle contributions.

The industry spent even more -- topping $3.4 billion -- on officially registered lobbyists during the same period. This total certainly underestimates by a considerable amount what the industry spent to influence policymaking. U.S. reporting rules require that lobby firms and individual lobbyists disclose how much they have been paid for lobbying activity, but lobbying activity is defined to include direct contacts with key government officials, or work in preparation for meeting with key government officials. Public relations efforts and various kinds of indirect lobbying are not covered by the reporting rules.

During the decade-long period:

* Commercial banks spent more than $154 million on campaign contributions, while investing $383 million in officially registered lobbying;

* Accounting firms spent $81 million on campaign contributions and $122 million on lobbying;

* Insurance companies donated more than $220 million and spent more than $1.1 billion on lobbying; and

* Securities firms invested more than $512 million in campaign contributions, and an additional nearly $600 million in lobbying. Hedge funds, a subcategory of the securities industry, spent $34 million on campaign contributions (about half in the 2008 election cycle); and $20 million on lobbying. Private equity firms, also a subcategory of the securities industry, contributed $58 million to federal candidates and spent $43 million on lobbying.

Individual firms spent tens of millions of dollars each. During the decade-long period:

* Goldman Sachs spent more than $46 million on political influence buying;

* Merrill Lynch threw more than $68 million at politicians;

* Citigroup spent more than $108 million;

* Bank of America devoted more than $39 million;

* JPMorgan Chase invested more than $65 million; and

* Accounting giants Deloitte & Touche, Ernst & Young, KPMG and Pricewaterhouse spent, respectively, $32 million, $37 million, $27 million and $55 million.

The number of people working to advance the financial sector's political objectives is startling. In 2007, the financial sector employed a staggering 2,996 separate lobbyists to influence federal policy making, more than five for each Member of Congress. This figure only counts officially registered lobbyists. That means it does not count those who offered "strategic advice" or helped mount policy-related PR campaigns for financial sector companies. The figure counts those lobbying at the federal level; it does not take into account lobbyists at state houses across the country. To be clear, the 2,996 figure represents the number of separate individuals employed by the financial sector as lobbyists in 2007. We did not double count individuals who lobby for more than one company the total number of financial sector lobby hires in 2007 was a whopping 6,738.

A great many of those lobbyists entered and exited through the revolving door connecting the lobbying world with government. Surveying only 20 leading firms in the financial sector (none from the insurance industry or real estate), we found that 142 industry lobbyists during the period 19982008 had formerly worked as "covered officials" in the government. "Covered officials" are top officials in the executive branch (most political appointees, from members of the cabinet to directors of bureaus embedded in agencies), Members of Congress, and congressional staff.

Nothing evidences the revolving door -- or Wall Street's direct influence over policymaking -- more than the stream of Goldman Sachs expatriates who left the Wall Street goliath, spun through the revolving door, and emerged to hold top regulatory positions. Topping the list, of course, are former Treasury Secretaries Robert Rubin and Henry Paulson, both of whom had served as chair of Goldman Sachs before entering government. Goldman continues to be well represented in government, with among others, Gary Gensler, President Obama's pick to chair the Commodity Futures Trading Commission, and Mark Patterson, a former Goldman lobbyist now serving as chief of staff to Treasury Secretary Timothy Geithner.

All of this awesome influence buying has enabled Wall Street to establish the framework for debates in Washington, and to obtain very specific deregulatory actions, with devastating consequences."

Click below to find the full report with Executive Summary.

Sold Out: How Wall Street and Washington Betrayed America

Is the Bailout of AIG by the Fed a Bailout or a Payoff to the Major Banks?

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG.

The Fed has far overstepped their bounds and are disbursing tax money in secret without the oversight of Congress.


Wall Street Journal
Top U.S., European Banks Got $50 Billion in AIG Aid
By SERENA NG and CARRICK MOLLENKAMP
MARCH 7, 2009

The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.

The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others here for the first time.

Lawmakers Want Names

The AIG bailout has become a political hot potato as the risk of losses to U.S. taxpayers rises. This past week, legislators demanded that the Federal Reserve disclose names of financial firms that have received money from AIG, which Fed officials have described as too systemically important in the financial system to be allowed to fail.

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG. (ROFLMAO - Wary of doing business with AIG? - Jesse)

But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions.

The Fed rescued AIG in September with an $85 billion credit line when investment losses and collateral demands from banks threatened to send the firm into bankruptcy court. A bankruptcy filing would have caused losses and problems for financial institutions and policyholders globally that were relying on AIG to insure them against losses.

Since September, the government has had to extend more aid to AIG as its woes have deepened; the rescue package now has swelled to more than $173 billion.

The government's rescue of AIG helped prevent its counterparties from incurring immediate losses on mortgage-backed securities and other assets they had insured through AIG. The bailout provided AIG with cash to pay the banks collateral on the money-losing trades; it also bought out underlying mortgage-linked securities, many of which are currently worth less than half their original value.

Banks and other financial companies were trading partners of AIG's financial-products unit, which operated more like a Wall Street trading firm than a conservative insurer. This AIG unit sold credit-default swaps, which acted like insurance on complex securities backed by mortgages. When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses.

More Problems

Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets.

Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks.

AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements.

The concern has been that if AIG defaulted, banks that made use of the insurer's business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.

Merrill Lynch Discloses "Trading Irregularities" to Regulators in London

Plenty of smoke here, with the fire to come over the weekend and/or next week.

Why don't we hear about this sort of thing from the US media until after hours? Are they too busy asking softball questions?

The timing of this disclosure, after the BofA acquisitions and the billions in last minute bonuses paid, is priceless.


Economic Times (India)
Merrill review spots trading 'irregularity'
7 Mar 2009, 0047 hrs IST, Bloomberg

LONDON: Merrill Lynch & Co, the securities firm acquired by Bank of America Corp, said it uncovered an “irregularity” during a review of its trading operations.

The bank informed regulators immediately of the discrepancy in “certain trading positions”, Merrill Lynch said in a statement from London. The bank said it’s working with the authorities to investigate further. A spokeswoman for the bank declined to comment further.

Merrill Lynch may have lost hundreds of millions of dollars on currency trading and credit derivatives last year, the New York Times reported earlier on Thursday.

The losses did not “spill into plain view” until after Bank of America investors had approved the $33 billion takeover in December and Merrill Lynch disbursed $3.6 billion in bonuses to bankers, the newspaper said. Bank of America later sought additional government funding. “Senior managers of the business are focused on the issue and believe the risks surrounding possible losses are under control,” Merrill Lynch said in the statement.

Bank of America Chief Executive Officer Kenneth Lewis is trying to rein in Merrill’s traders after their losses brought the bank to the brink of collapse, the New York Times said.

“It was always going to be extremely difficult to integrate a retail bank like Bank of America with an investment bank like Merrill because the cultures are so different,” said Richard Staite, an analyst at Atlantic Equities LLP in London. He has an “underweight” rating on Bank of America’s shares.

The Banking Crisis: Obama's Iraq Part 2

It is hard to assess who among the current DC crew are more limp when it comes to addressing the banking crisis in a meaningful and effective manner: Geithner, Summers or Bernanke.

They are all the very picture of the bureaucrat, which is a nice way of saying "systemic hacks." Have Timmy and Ben have reached their level of incompetency? Larry Summers has far exceededed his some years ago at Harvard.

It is difficult ground when one speculates on motives, but these are all rather bright fellows, albeit creatures nurtured by the system that they serve. It is hard to accept that their inability to address our financial crisis is sheer incompetency. But for now they obtain the benefit of doubt and the CEO's defense made so popular by the Enron crowd.

We wonder how bad it will get before Obama understands that his team is not working, that they have no actionable vision among them for whatever combination of reasons, and that the corruption being perpetuated is starting to stick rather handily to the Democrats.

The banking crisis is starting to look like Obama's Iraq.


Bloomberg
Hoenig Says Treasury Failed to Take ‘Decisive’ Action on Banks
By Steve Matthews and Vivien Lou Chen

March 6 (Bloomberg) -- The U.S. Treasury has failed to take “decisive” action to address the bank crisis, pursuing an ad- hoc approach that leaves management in place and avoids necessary asset writedowns, a veteran Federal Reserve official said.

“If an institution’s management has failed the test of the marketplace, these managers should be replaced,” Fed Bank of Kansas City President Thomas Hoenig said in prepared remarks for a speech in Omaha, Nebraska. “They should not be given public funds and then micro-managed, as we are now doing” with “a set of political strings attached.”

Hoenig’s comments are the most detailed criticism of the Treasury’s actions by a Fed official since the financial crisis began. By contrast, Fed Chairman Ben S. Bernanke has endorsed the approaches taken by Treasury Secretary Timothy Geithner and his predecessor.

Geithner is requiring a “stress test” for the largest 19 U.S. banks to determine if they need more capital. He has stressed that nationalization isn’t the goal.

Last week, the U.S. government moved to convert some of the preferred stock it owned in Citigroup Inc. to common shares, gaining a 36 percent stake in the company and boosting Citigroup’s buffer against future losses. While authorities pushed for changes to the makeup of Citigroup’s board, Chief Executive Officer Vikram Pandit remains at the helm.

Hoenig said while policy makers “understandably” want to avoid nationalizing banks, “We nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.”

The Treasury’s $700 billion Troubled Asset Relief Program “began without a clear set of principles and has proceeded with what seems to be an ad-hoc and less-than-transparent approach,” Hoenig said today.

Banking regulators need to be willing to write down losses, bring in new managers and sell off businesses if institutions can’t survive on their own, “no matter what their size,” said Hoenig, the second-longest serving of the Fed district bank presidents, after Minneapolis’s Gary Stern.

The Banking Crisis: Obama's Iraq Part 1

Its a step in the right direction, but its hardly reform.

Everything about the Obama Administration to date has been 'limp,' toothless, almost apologetic.

Obama is on the road to failure, getting an "A" for rhetoric but "F's" for vision, commitment, team-building, and action.


Bloomberg
Volcker Urges Dividing Investment, Commercial Banks
By Matthew Benjamin and Christine Harper

March 6 (Bloomberg) -- Commercial banks should be separated from investment banks in order to avoid another crisis like the U.S. is experiencing, according to former Federal Reserve Chairman Paul Volcker.

“Maybe we ought to have a kind of two-tier financial system,” Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, said today at a conference at New York University’s Stern School of Business. (Uh, didn't we have one up until a few months ago when Goldman Sachs and Morgan Stanley put on the Fed feedbag? - Jesse)

Commercial banks would provide customers with depository services and access to credit and would be highly regulated, while securities firms would have the freedom to take on more risk and practice trading, “relatively free of regulation,” Volcker said. (OMG - Jesse)

Volcker’s remarks indicated his preference for reinstating some of the divisions between commercial and investment banks that were removed by Congress’s repeal in 1999 of the Great Depression-era Glass-Steagall Act.

Volcker’s proposals, included in a January report he wrote with the Group of 30, would allow commercial banks to continue to do underwriting and provide merger advice, activities traditionally associated with investment banking, he said.

Still, Goldman Sachs Group Inc. and Morgan Stanley, which converted to banks in September, would have to exit some businesses if they were to remain as commercial banks, he said.

‘Separation’

“What used to be the traditional investment banks, Morgan Stanley, Goldman Sachs so forth, which used to do some underwriting and mergers and acquisitions, are dominated by other activities we would exclude -- very heavy proprietary trading, hedge funds,” he said. “So there’s some separation to be made.”

Jeanmarie McFadden, a spokeswoman for Morgan Stanley, declined to comment. A Goldman spokesman couldn’t be immediately reached.

Volcker also said international regulations on financial firms are probably an inevitable consequence of the industry’s current problems.

“In this world, I don’t see how we can avoid international consistency” on securities regulations going forward, he said. “The U.S. is no longer in a position to dictate that the world does it according to the way we’ve done it.”

Volcker’s comments come as President Barack Obama seeks legislative proposals within weeks for a regulatory overhaul of finance, especially companies deemed vital to the stability of the financial system.

Glass-Steagall

The new regulatory framework may stop short of reinstating Glass-Steagall, analysts say, though banks may separate their business lines in order to avoid strong regulatory scrutiny.

Volcker, who ran the Fed from 1979 to 1987, said the financial industry’s problems stem from larger issues. “I don’t think this is just a technical problem, it’s a societal problem,” he said. He cited bankers on Wall Street receiving multimillion-dollar bonuses for engineering failed mergers.

“There’s something wrong with the system,” Volcker said. “What are the incentives, what’s going on here?”