Thursday, March 18, 2010

The Futility of Financial Reform

As I mentioned on Saturday March 13th it is unlikely that effective or relevant change to what ails Wall Street will be accomplished due to the excessive influence that lobbyists from the banking community have on the legislators. The following article by Chris Whalen of Institutional Risk Analytics sheds light on this discouraging situation.

Why is the President's Working Group Oppossing the FDIC Reform Proposals on Residential Mortgage Securitization by Banks? (from Zero Hedge and Jesse's Cafe Americain)

We hear that the FDIC rule making process could start as soon as next month, but more likely will wait till the FDIC's board meeting in May. We also hear that the President's Working Group (PWG) on Financial Services is preparing a "white paper," in cooperation with the Federal Reserve Board and the Office of the Comptroller, to block the FDIC reform effort. This campaign, which apparently was orchestrated by the largest dealer banks, is intended to derail the new rules proposed by the FDIC mandating greater transparency and disclosure for bank sponsored residential mortgage securitization deals.

The President's Working Group, in case you don't know, is an informal group created in 1988 by President Ronald Reagan that allows the executives of the biggest banks to influence public policy in Washington, but without going through the trouble of registering as lobbyists or other public disclosure. Sometimes referred to the "plunge protection team," the PWG is part of the invisible government of Washington," an agency which operates within the government, but at the behest of private interests.

Barry Ritholtz has a nice summary on the PWG in his book, Bailout Nation, and also in his Blog, "The Big Picture." As Barry notes, the PWG is every bit as incompetent as most other people in Washington, but they do have one special skill: pushing the banking industry's agenda in Washington via informal "guidance" and white papers that are written by and for compliant regulators. The PWG essentially acts as a super-lobbying channel for the largest banks focused right at regulators. Only "team players" need apply.

The Federal Reserve Bank of New York and the OCC in Washington are reportedly drafting the "guidance" on reform of bank securitizations and at the request of the PWG. No clue whether the White House is involved directly yet or if this is merely a Tim Geithner operation. These PWG white papers are never released to the public even though the Treasury acts as the de facto public affairs organ for this corporate influence group.

We called out former Wachovia Bank CEO and Goldman Sachs (GS) banker Robert Steel on the subject of the PWG last year at the Chicago Fed's international banking conference. He was unapologetic and more than a little offended, or so he claimed. The PWG acts with impunity in Washington, in part because the members of Congress understand their subordinate role. We hear that Senator John Warner (D-VA) is now competing with Judd Gregg (R-NH) to be the next "Senator from Wall Street" and specifically seems to be angling to join a private equity firm. Gregg's tastes seem to run more along the lines of a large OTC derivative dealer bank.

The fact that the PWG is in league with the Fed and Treasury against the FDIC board is all you need to know about the politics of reforming private label mortgage securitization.

If Barack Obama were really interested in reforming Washington, he would rescind President Reagan's executive order and disband the PWG for good. Allowing the big banks which participate in the PWG to lobby financial regulators and members of Congress without any public disclosure is a national scandal and makes a mockery of any claim by Barrack Obama to be changing the business of Washington.

We noted in our comment last Tuesday in American Banker, "Viewpoint: Stop Blocking FDIC Securitization Effort," that "the practical policy issue is the losses observed in failed banks over the past two years, averaging over 30% of total assets, versus just 11% on average in the S&L crisis. The common factor in failed banks with high loss rates is unsafe and unsound securitizations practices, thus the FDIC initiative on securitization."

It is very telling to us that the FDIC is advocating greater openness and transparency in bank sales of mortgage loans to securitizations, but the Fed and OCC are standing with the larger dealer banks that arguably caused the financial crisis in complex structured assets. Hopefully these federal agencies and the industry groups they seem to be allied with will realize that the FDIC's rule making process holds the potential to revive private label mortgage finance and that they can influence the outcome - but only if they participate constructively.

One mortgage market veteran who ran risk for one of the largest private conduits in the business put the situation succinctly last week: "You can argue against the FDIC securitization proposals, looking at them in a bundle, as perhaps being overkill, but each piece of their proposal, taken separately, is pretty compelling. The other bank regulators and industry groups could easily negotiate a better, more streamlined deal that would help the market if they bothered to push back and participate constructively, instead of simply attacking the FDIC."

Chris Whalen, Institutional Risk Analytics, March 15, 2010
The President's Working Group on Financial Markets consists of:
  • Tim Geithner, The Secretary of the Treasury, as Chairman of the Working Group;
  • Ben Bernanke, The Chairman of the Board of Governors of the Federal Reserve System,
  • Mary Shapiro, The Chairman of the Securities and Exchange Commission; and
  • Gary Gensler, The Chairman of the Commodity Futures Trading Commission.
It appears that in addition to the clandestine lobbyists peddling their influence on the Senators assigned the task of reforming an obvious defective financial system, the Obama administration have chosen to have the foxes guard the henhouse.

The following articles will attest to how much influence Wall Street and the 'Too Big to Fail' crowd have on Financial Reform. Seems strange that citizens who have lost their savings, homes and jobs due to the misdeeds and breaches of trust of some members of Wall Street have little or no say in determining how to ensure that these transgressions wont happen again--perhaps sooner than many people think!

Deutsche Bank, JPMorgan, UBS Are Charged With Derivatives Fraud

Chamber, Wall Street mobilize lobbyists to clip Sen. Christopher Dodd's financial reform plan

Fearing Powerful Lobbying From Industry, Financial Reform Proponents Target Key Lawmakers

Hedge Funds, Private Equity Firms, Payday Lenders Seek Financial Security from Congress

Effective Regulation: Part 4 Turning Good Ideas Into Good Outcomes Goldman Sachs (pdf)

In-Your-Face Influence Peddling

Bernanke Will Tell Congress Bank Oversight Aids Monetary Policy

House Republicans Huddle With Lobbyists to Kill Financial Reform Bill

Citigroup Taxpayer Ownership Doesn’t Prevent Lobbying

Top 10 lobbying fights over financial reform overhaul legislation

Monday, March 15, 2010

The 21st Century Opus of Delusions and the Madness of Crowds

In 1841 Charles MacKay published Extraordinary Popular Delusions and the Madness of Crowds which describes phenomena such as 'national delusions, 'peculiar follies' and 'philosophical delusions'. If Mackay were alive today he most certainly would include the recent Wall Street fiasco with events such as the South Sea Bubble and the infamous Dutch Tulip Mania.
On March 14th Sixty Minutes did a piece on the MBS and CDS induced 'panic' which gripped Wall Street--and as a consequence the rest of the world --which can be viewed below.
Several buzzwords come to mind while viewing this video.
  • incompetence
  • delusion
  • greed
  • hubris
  • malfeasance
  • corruption
  • condescension
There are many other monikers and adjectives that come to mind but I try to keep this blog free of profanity.

Watch CBS News Videos Online

Institutionalizing CSR through B Corporations

As the ethical transgressions of various members of the business community come to light as a consequence of the Wall Street fiasco, I thought that this would be of interest to readers. This is from the Crane and Matten blog:

Crane and Matten blog: Institutionalizing CSR through B Corporations

Saturday, March 13, 2010

U.S. bankruptcy-court investigation of the collapse of Lehman Brothers Holdings Inc.

It appears that the blogosphere has put a bear hug on the Lehman bankruptcy estate auditors report. (see below). The greed, negligence and malfeasance that occurred at Lehman screams for finance reform--reform that thoroughly addresses subjects such as accountability, transparency and responsibility. Unfortunately, with lobbyists calling the shots in Washington it is doubtful that anything genuine or tangible will get accomplished. Having Wall Street lobbyists as the de facto legislators is akin to a drug dealer driving a crack addict to a Narcotics Anonymous meeting.

More from Jesse's Cafe American and Naked Capitalism

Friday, March 12, 2010


This essay by James Quinn of Financial Sense is interesting. It compliments the generational discoveries of Neil Howe and William Strauss--authors of Millennials Rising: The Next Great Generation (2000) and The Fourth Turning. (1997) Both this essay and the books mentioned should be requisite reading for all politicians and CEO's.

21st Century Breakdown: by James Quinn

Lehman execs, auditor blamed for company's collapse - The Globe and Mail

As the dust settles from the financial tempest of 2008 it is becoming apparent that blame cannot justifiably be assigned to any one party--although the actions of the Clinton Administration and HUD seem to bare the brunt of the condemnation from critics and apologists for laissez-faire ideology. Like the Enron scandal, it is becoming apparent that many parties were complicit in the actions that led to the near systemic collapse of the financial system.
The recent findings of the court-appointed examiner of the Lehman debacle found that trick accounting--not unlike Enron-- and deceptive valuation practices for their alchemic portfolios led to exasperating the disaster that was brewing beneath the surface of Wall Street. The examiner, Anton Valukas, stated that while some of Lehman's management's decisions “can be questioned in retrospect” and the firm's valuation procedures for its assets “may have been wanting,” those responsible for the firm had used their business judgment and were largely not liable for the firm's collapse. But in a contradictory manner he goes on to say that the Lehman bankruptcy estate creditors could have claims against --Dick Fuld and chief financial officers Chris O'Meara, Erin Callan and Ian Lowitt.

It is interesting that, like Enron and the Credit Rating scandal, two essential bulwarks of the financial system were debased.
  • The notion of fiduciary duty was abused and exercised in an irresponsible manner.
  • The duties of the firm's auditors had been carried out in a “negligent” manner and that Lehman could pursue claims against the firm for “professional malpractice.”

In both these cases--as has become common in our society--the spirit of the law is largely ignored while the letter of the law is manipulated by contemptible 'wordsmiths'

The time has come for 'the authorities' to quit attempting to assign blame, ostensibly to divert accountability and responsibility from themselves, and to make an attempt at restructuring the regulatory apparatus to reflect the changes that have taken place in the mechanics of finance. However any effort will prove to be feckless and ineffectual unless the presence of both intellectual and moral virtue is established and nurtured in the character of those that will lead capitalism out of its self imposed dark ages.
It is quite possible that a financial tempest of greater pugnacity is on the horizon--if so and the lessons from 2008 are not heeded, the power of capitalist dynamics will not be so forgiving.

Lehman execs, auditor blamed for company's collapse - The Globe and Mail

Thursday, March 11, 2010

Escape Plan: Socialize your idiocy

If this is a precursor to financial reform in the USA perhaps it is time to abandon any hope that lawmakers will ever do the right thing.

"Money doesn't talk--it swears" Bob Dylan: It's alright Ma

Jesse's Café Américain: Investors Who Lost In Madoff and Stanford Schemes Want Government to "Make Them Whole"

Wednesday, March 10, 2010

The Invisible Hand at work.

The inherit function of the capitalist paradigm to find balance (harmony) is being validated during the recovery from the 'money lender' driven panic investors endured last year. Expectations of "The West" have become more prudential--albeit somewhat vigorously for many individuals--while our Asian counterparts are becoming increasingly perturbed with regard to wages and both working and social conditions. As the video indicates, the consequences of the One Child policy initiated by the Chinese are coming home to roost.
The nascent generation of Chinese are no longer prepared to work for low wages and austere working conditions. This 'generational turning' is used to getting what it wants--not impeded by competitive siblings. In the West on the other hand the new generation will be forced to lower expectations since much of their wealth has been effectively confiscated by the Wall Street bail out and ancillary stimulus package.
One generation--one from the East--one from the West--being compelled by free market forces that manifested as result of each societies diametric ethos.
One is to wonder what our politicians will do now to inhibit the natural corrective mechanism of the free market.
The invisible 'hand' works in wondrous ways.

Monday, March 8, 2010

Iceland Voters Reject Bank Bailouts in Crushing Electoral Defeat; Neo-Liberalism In Context

The market implosion of 2007-2008 effectively demonstrated the contempt that neo-liberal democracies have for the individual. However, in a recent referendum Icelanders rejected by a massive majority a bill that would saddle each citizen with $16,400 of debt in protest at U.K. and Dutch demands that they cover losses triggered by the failure of a private bank. Several Icelandic banks fell victim to the collateralized mortgage obligation and credit default swap fiascoes that rocked financial markets in 2007-2008. It is encouraging to see that the citizens of this democratic nation had the opportunity and the mettle to stand up to the shenanigans of the corporate elite and their politician sycophants.

Jesse's Café Américain: Iceland Voters Reject Bank Bailouts in Crushing Electoral Defeat; Neo-Liberalism In Context