Here are some excerpts from the Op-Ed piece by Michael Lewis and David Einhorn that appeared in the NY Times on Saturday.
It is a portrait of government in partnership with a corrupt financial system, in a remarkably cynical and materialistic age, generally ignored by a frightened and complacent people.
And where was the outrage? Where was the rest of the world? Turning a blind eye to the corruption and enjoying the returns. Like many of Madoff's enablers and investors they thought they were insiders, the smart ones, and saw only the gains, ignoring the rest, and the eventual outcome.
This is not an historical review, as the problems still remain, a little exhausted, but largely uncorrected. No confessions of guilt, just denials, excuses, diversions and coverups.
Caveat Emptor. Buyer beware.
NY Times
The End of the Financial World as We Know It
By MICHAEL LEWIS and DAVID EINHORN
January 3, 2009
AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street...
Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness...
Our financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense...
Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest...
Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become. Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors.
The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.
It's not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it...
In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival...
04 January 2009
Caveat Emptor - Buyer Beware - In Times of General Corruption
A New Year's Resolution on US Financial Markets from the Incoming Administration
These are strong, almost startling words from Bart Chilton, part of Obama's incoming administration, currently on the CFTC.
The message is good and to the point. The illustration of the performance of the regulators over the past ten (not eight) years is remarkable, an indictment of the existing Federal regulatory system as a whole.
Actions will speak louder than words. We will all look forward to seeing what happens in Washington over the next few months, and in particular, what is done by the CFTC and the SEC in reforming US financial markets.
Washington
Time to restore mission of regulators
By Bart Chilton
January 1, 2009
In the building that currently houses the president-elect's transition team, there used to be an imposing bronze plaque with the visage of the Securities and Exchange Commission's redoubtable third chairman, William O. Douglas. It was emblazoned with the inspiring legend, "We are the Investor's Advocate."
For many decades, the SEC enjoyed the reputation of living up to the noble standard of public service. The plaque no longer graces the entryway of the SEC's new quarters, and with the recent revelations of failure to detect and prosecute incidents of egregious securities fraud and abuse, both internally and externally, the agency's reputation has been severely tarnished.
These types of disclosures make us as public servants ask some fundamental questions: Why are we here? The Founding Fathers had the answer: We are employed to protect the common wealth and serve the public good. We are not here to serve amorphous philosophical, economic or ideological concepts such as "financial markets" or "economies."
Our task is to serve the public -- those people in the hinterlands, many of whom have recently lost 30 percent or more of their retirement funds and/or home values and who now face losing their jobs. Our "client," our "constituent," is the American consumer and worker, the businessman or woman who generates and uses the products and services that comprise our "markets" and our "economy." If we fail to protect, first and foremost, these individual Americans, we cannot succeed in assuring the strength of our economy, nor in protecting the integrity of our financial market system.
Do we need to have statutes and regulations in place to ensure reliability of the marketplace? Of course we do, but over the past decade "the marketplace" has been exalted to a position perceived as virtually omnipotent and omniscient, while consumer protections have been generally neglected. The consequence lies scattered around us.
By veering too sharply to the right and letting go of the regulatory reins, we provided neither the market nor the consumer a great service. Rather we harmed both, and have a long hike to escape the resulting global economic meltdown. We must be careful not to over-correct -- not to go so far in the other direction that we stifle innovation and market growth. But it is clearly time for federal financial regulators to re-evaluate our current statutes and regulations, and to put "common sense rules of the road," as the president-elect has suggested, in place to protect consumers and bring our economy back into balance.
The SEC isn't the only federal financial regulator to have failed in serving the public. The Treasury Department appears to have lost its way as well, when a $700 billion bailout package, purportedly written to ensure against unconscionable executive compensation was, within weeks after passage, found to have a loophole allowing such compensation.
Federal banking regulators seem to be off course, permitting casino-like buying and selling of trillions of dollars worth of virtually worthless transactions. When gasoline topped $4 a gallon, the Commodity Futures Trading Commission dropped the ball, unable to oversee speculation's uneconomic role in the U.S. commodities markets.
In decades past, the CFTC has been charged with being too tied to the industry, too closely aligned with the regulated, and overly concerned with protecting "markets" rather than consumers. We've made good progress, and there are very fine people in all of these agencies and departments, but we too can and must do much better.
I have advocated a comprehensive legislative reform of the laws governing over-the-counter trading, and requested that authority over these critically important markets be vested in the Commodity Futures Trading Commission. The CFTC, a small agency in comparison to the SEC, has exclusive jurisdiction over risk-management markets in the United States, and has in recent years carved several significant notches in its enforcement belt.
At any one time, this small agency, with one-tenth the enforcement staff of the SEC, is investigating or prosecuting anywhere between 750 and 1,000 individuals or entities for violations of the Commodity Exchange Act. The agency has, just in the past year, tagged bad actors with more than $630 million in fines and settlements, in actions involving fraud, manipulation and other misconduct. Not a bad record for a small agency operating on a shoestring budget -- and we'd be able to do even more if given the authority.
With the collapse of the economy, the transition of government already under way with the new Obama administration, and the appointment of an excellent new federal financial regulatory team, it will soon be time to implement this new legislation, and similar consumer protection initiatives.
Also, we need to restore the clarity of our own mission in government: that we are here to assure financial opportunity and market fairness to the public. We need to regain the public trust.
With a shared vision of our mission and much needed reforms, our duties and responsibilities will flow clearly. Chief among these duties is a strong and aggressive enforcement arm. Markets must be free from fraud and manipulation for them to operate as they should -- for all Americans. This baseline approach to enforcement protects consumers and allows for open and free markets that are able to grow and innovate.
Investor's Advocate: A good legend, apparently forgotten. All federal financial regulators should use a new door sign: Consumers First. Everything else will follow.
Bart Chilton is a commissioner on the Commodity Futures Trading Commission, a Democrat, and a member of the Obama transition team.
The Last Time the Feds Devalued the Dollar to Save the Banks
14 January 2009
We dipped once again into the Federal Reserve Bulletin Publication from June, 1934 to take a closer look at the growth of the monetary base, and found an interesting graphic that shows the accounting for the January 1934 devaluation of the dollar and the subsequent result on Bank Reserves in the Federal Reserve System.
As you will recall, the Gold Act, or more properly Executive Order 6102 of April 5, 1933, required Americans to surrender their gold coinage and certificates to the Federal Reserve Banks by May 1, 1933. There were no prosecutions for non-compliance except one benchmark case which was brought voluntarily by a person who wished to challenge the act in court.
After a substantial portion of the gold was turned in by US citizens and taken from their bank based safe deposit boxes, the government officially devalued the dollar from 20.67 to 35.00 per ounce in the Gold Reserve Act of January 31, 1934.
The proceeds from this devaluation were used to provide a significant boost to the Federal Reserve member bank positions as shown in the first chart below.
The inflation visited on the American people because of this action helped to take the CPI as it was then measured up 1200 basis points from about -8% to +4% by the end of 1933. To somewhat offset the monetary inflation the Fed also contracted the Monetary Base which served the nascent recovery in the real economy rather poorly and is viewed widely as one of a series of policy errors.
Considering that the actions did little for the employment situation this was painful medicine indeed to those who were dependent on wages.
Fortunately at the same time FDR was initiating the New Deal programs which, despite continual opposition from a Republican minority in Congress, managed to provide a small measure of relief for the 20+% public that was suffering from unemployment and wage stagnation.
People ask frequently "Will the government seize gold again?"
While there is no certainty involved in anything if a government begins to overturn the law and seize private property, one has to ask for the context and details first to understand what happened and why, to understand the precedent.
Technically, the government did not engage in a pure seize of private property, since at that time the US was on the gold standard, and much of the gold holdings of US citizens were in the form of gold coinage and certificates.
Governments always make the case that the currency is their property and that the user is merely holding it as a medium of exchange. The foundation of the argument was that the government required to recall its gold to strengthen the backing of the US dollar against the net outflows of gold for international trade. The devaluation helped with this as well, since dollars brought less gold for trade balances.
People also ask, "Why didn't the government just revalue the dollar without trying to recall all the gold from the American public?"
The answer would seem to be that this would have been more just, more equitable recompense for the public. The Treasury could have purchased gold from the public to support its foreign trade needs.
But it would have left much less liquidity for the banks.
One can make a better case that the recall of the gold, with the subsequent revaluation to benefit a small segment of the population in the Banks, was a form of seizure of wealth without due compensation. Hence the lack of active prosecutions.
So, will the government take back gold again to save the banks by devaluing the dollar?
Highly unlikely, because they not only do not need to this, since the dollar is no longer backed by gold, and is a form of secular property except perhaps for gold eagles, but they do not have to, because they are devaluing the dollar already to save the banks.
This time the confiscation of wealth to save the banks is called TARP.
If one thinks about it, US Dollars are being created and provided directly to the banks to boost their free reserves significantly, at a scale comparable and beyond to 1933-34.
The confiscation of wealth is being spread among all holders of US dollars and dollar assets, foreign and domestic, in the more subtle form of monetary inflation.
Granted, the government must be more opaque to mask their actions in order to sustain confidence in the dollar while the devaluation occurs, but this is exactly what is happening, and all that is required to happen in a fiat regime.
There is no need to seize widely held exogenous commodities like gold and oil, but merely dampen any bellwether signals that a significant devaluation of the dollar is once gain being perpetrated on the American people in order to save the banks.
Its fascinating to look carefully at this next chart below.
First, notice the big drop in gold in circulation of 9.8 million ounces, or roughly 36% of the measured inventory at the end of 1932. Think someone was front-running the dollar devaluation? We suspect that the order went out to start pulling in the gold stock to the banks.
The reduction in gold in circulation AFTER the announcement of the Gold Act in April would be about 3.9 million ounces, or roughly 22% of the gold remaining in circulation in March 1933.
Considering that all gold coinage held by banks in the vaults was automatically seized, the voluntary compliance rate is not all that impressive. We are not sure how much of this was being held in overseas hands by non-US entities.
But beyond a doubt, there was a unjust, if not illegal, seizure of wealth by requiring citizen to turn in their gold to the banks, which was then revalued at the beginning of 1934 by 69% from 20.67 to 35 dollars.
It would have been much more equitable to devalue the dollar and to change the basis for dollar/gold first, before requiring private citizens to surrender their holdings. But of course, this would have lessened the liquidity available for direct infusion into the Federal Reserve banks.
