The Huffington Post’s Peter S. Goodman points to a bizarre report in Politico this morning:
Much was made of a brief item in the FCIC report (pg. 378) alleging that Goldman Sachs took $2.9 billion for its own account from a bailed-out AIG. Goldman has long contended that around $14 billion it received from AIG went to clients and counterparties, not to its own balance sheet. FCIC affirmed Goldman’s account on the $14 billion. And according to a person familiar with the matter, the $2.9 billion was no different.
The money was meant to cover AIG’s guarantees on Abacus, a synthetic CDO. Goldman had hedged its exposure to Abacus so the $2.9 billion would have flowed directly to clients. It’s a somewhat mind numbing bit of arcanum in the massive report. But left unchallenged, the FCIC’s description of the $2.9 billon transfer could have re-started the currently defunct argument that Goldman received a “backdoor” bailout from the Uncle Sam.
Uh, that backdoor bailout argument is not currently defunct, nor has it ever been.
How do you take the word of a “person familiar with the matter” (read: an anonymous Goldman executive) here when it directly contradicts what the FCIC found—that these were proprietary trades? Read Shahien Nasiripour’s scoop from yesterday.
— ProPublica’s Jesse Eisinger and Jake Bernstein find some interesting information from the Financial Crisis Inquiry Commission report—that hedge fund Magnetar “selected hundreds of millions of dollars’ worth of assets that went into a billion dollar Merrill Lynch mortgage securities deal,” as ProPublica reported in an investigation last year.
This further rebuts Magnetar’s denials that it picked the assets.
Magnetar used a CDO called Norma to create a $600 million bet against subprime mortgage securities, according to the document. The CDO itself took the other side of the bet, and ultimately cost investors in Norma hundreds of millions of dollars. Merrill Lynch underwrote and marketed the $1.5 billion Norma.
According to the commission report, Magnetar made the selections without the knowledge of the manager legally charged with picking the assets for the CDO or the risk department of the bank that helped create the deal.
The collateral manager, NIR Capital Management, was paid to manage the deal and was supposed to be independent of the investment bank and act in the interests of the CDO as a whole. The Norma offering document says that NIR would select the assets that went into the CDO, and no mention is made of other parties’ roles in asset selection.
“When one Merrill employee learned that Magnetar had executed approximately $600 million in trades for Norma without NIR’s apparent involvement or knowledge, she e-mailed colleagues, ‘Dumb question. Is Magnetar allowed to trade for NIR?’ ” according to the report.
— How many business-press stories over the last couple of years (heck, the last couple of decades) could have had this lede:
The banks got what they wanted.
That’s David Reilly in The Wall Street Journal’s Heard on the Street column yesterday looking at how the financial industry knocked down mark-to-market rules yet again. Mark-to-market rules force banks to value their assets at their current market prices rather than valuing them at what the bank thinks they should be worth (which is known as “mark to myth”).
Its decision means banks largely will continue to value loans as they do today, basing values on their original cost less a reserve to reflect the possibility of loss. FASB has yet to decide if the market value for loans will be disclosed on the balance sheet or buried in the footnotes, as they are now.
This isn’t the first time FASB has retreated in the face of opposition. In 2009, under congressional pressure, it watered down mark-to-market rules. Sadly, FASB now seems to be guided by public pressure, rather than striving to see that investors get the most relevant and reliable information.
I don’t know about calling it “public pressure,” but point made.
@Ryan
All this high-flying financial stuff is mystifying and arcane and too complex to discern what's okay and what's illegal. I'm pretty sure I don't want to invest the time and effort it would take to wrap my head around all the details.
But here's what has been missing and what needs to be reported: Who, exactly, is responsible for this state of affairs? Don't tell me "Congress" or "FASB," that tells me nothing. Was Barney Frank or Nancy Pelosi, or Christopher Cox, or Tim Geithner, or Henry Paulson, or Ben Bernake, or Alan Greenspan -- who exactly bears responsibility for this? I realize that it was not one single person. I'd like to see an accounting of what exactly went wrong and who bears the responsibility for each part of this debacle. From the White House, who exactly was advising the President? Who should he have listened to, but didn't? All these vague allegations mean nothing to a person like me, and no reporter has yet been able to lay out exactly who bore responsibility for what, and why they failed. I want names.
It's one thing to blame Goldman Sachs and AIG and all the rest for nefarious dealings -- which I assume they were nefarious because you are writing about it, but it doesn't compute for me -- but isn't this ultimately a failure of government? Please don't let the people in government off the hook. Otherwise you are just blaming the fox for raiding the henhouse. Someone was in charge of protecting the henhouse and didn't do the job.
Journos thus far have been reporting the pieces, and that's fine, it needs to be done, but someone needs to connect these arcane dots for us regular folks and hold the people in our government responsible. By name.
#1 Posted by James, CJR on Fri 28 Jan 2011 at 07:57 PM
OK, James. Here's who I can remember off the top of my head:
1. Alan Greenspan. He was the Chairman of the Federal Reserve--that's the number one, primary bank regulator--during the runup to the crisis. Greenspan was a disciple of Ayn Rand, who believed that wealth = virtue and that markets are inherently self-correcting. So Greenspan decided not to enforce the laws on the books. He (in)famously argued that even laws forbidding fraud were unnecessary in a self-correcting market. So he's number 1.
2. Phil Gramm. The former Senator from the great state of Texas shared Mr. Greenspan's philosophy. Still does, in fact. And his wife, Wendy, sat on the board of Enron Corporation. Gramm did everything in his power, generally, to ease bank and financial services regulations, but he played a special role in creating a law preventing the regulation of over-the-counter derivatives. Stay with me here. OTC derivatives were the contracts big banks and hedge funds made with each other in order to bet that, for instance, subprime mortgages would collapse. They were betting slips. They should have been regulated because they allowed various big financial players to take on lots of risk invisibly. This kept regulators in the dark about what was going on in the world of finance. Enron used derivatives and accounting tricks to count money it had borrowed as "earnings." What big banks did nearly a decade later was pretty similar.
3. Robert Rubin. He was Treasury Secretary under Bill Clinton and, while there, helped get the Glass Steagall Act repealed in favor of the Gramm (yup, No. 2 again) Leach Bliley Act. The Glass Steagall law had kept investment banks separate from "normal" banks like you and I use for checking and savings accounts, and kept both of those separate from insurance companies. It had been passed during the Great Depression, after government folks found out that the close ties between these kinds of financial companies worsened the panic (and increased the fraud). CitiGroup broke the law by buying The Travelers Insurance company circa 1997, and then got the law changed, with the help of Rubin and CT Sen. Christopher Dodd. Then Rubin took a big job at CitiGroup. Gramm Leach Bliley was keystone legislation creating the "too big to fail" policy that led to massive taxpayer bailouts of the financial system.
4. Bill Clinton. He went along with it all. Should have known better.
5. George W. Bush. He went along too, and pushed for even more deregulation generally, as he was (and probably still is) of Greenspand's mind on regulation of business. Bush appointees throughout the federal regulatory apparatus--Cristopher Cox at the Securities and Exchange Commission; John Reich at the Office of Thrift Supervision, for example. But he is also mentally retarded, and so perhaps could not be held to the standards we expect from the others.
For the banker and trader villains, consider Roland Arnall, a godfather of subprime lending, as well as Sanford Weill, who assembled CitiGroup atop the shaky foundation of subprime. Read "The Monster," a book by Michael W. Hudson, which lays out in sharp detail the connections between the extreme fraudsters who revolutionized the U.S. mortgage system and the Market Fundamental cases in government who abetted their crimes.
#2 Posted by edward ericson jr., CJR on Fri 28 Jan 2011 at 08:56 PM
That's a great start, @Mr. ericson. Thanks for that. Reporters have been warned off connecting Phil Gramm (and Leach and Bliley) with the financial crisis on pain of rightwing anger, and Robert Rubin lurks in the background, always, always. Greenspan, too, is off the hook. In way, I can understand Bill Clinton getting bamboozled by these hucksters in those high-flying days.
And we know about Republican policy of deregulation, and Bush's incompetence, and this happened on Bush's watch and most of the responsibility for this very predictable collapse can be attributed to his appointments -- Cox, Bernake, Paulson, Reich, whoever in Congress was in charge of oversight during the 108th and 109th Congress, the shoddy Senate approval process for appointments in those days. And your description of John Reich seems apt.
And it's been left to the Democrats to clean up the mess. So Obama appoints a Rubin disciple, Tim Geithner, Barney Frank (was) Chairman of the House Financial Services Committee, Dodd (was) the Chairman of the Senate Banking Committee -- there's Dodd again! (your #3).
Who was responsible for putting the commission together? I'm not trying to blame the Dems for the financial blowup -- that should be squarely on the Republicans -- but they are responsible for the cleanup, and responsible for trying to make certain that the public is protected from these vulturous scoundrels. And so, they aren't doing that job.
Is this on Obama, for casting his lot with the Rubinites, excluding advice from people outside that inner circle? Or is this attributable to lobbyist pressure on Congress (Barney Frank and Chris Dodd), Obama being at sea and helpless against the friends of Wall Street on the Hill?
This isn’t the first time FASB has retreated in the face of opposition. In 2009, under congressional pressure, it watered down mark-to-market rules. Sadly, FASB now seems to be guided by public pressure, rather than striving to see that investors get the most relevant and reliable information.
Who is responsible for this? "[C]ongressional pressure" just doesn't do it for me.
#3 Posted by James, CJR on Fri 28 Jan 2011 at 10:58 PM
A couple of pieces that are essential watching for understanding the Clinton side of culpability:
(Unfortunately frontline doesn't have the video, but it has a page and youtube has the playlist)
http://www.pbs.org/wgbh/pages/frontline/shows/crash/
http://www.youtube.com/view_play_list?p=195B1248104007D6
This is essential watching because it shows who was involved, what has been their thinking, and how their thinking has had effects in the economies they interfered in (basically, rehearsals for the economic crisis that hit 10 years later).
And it's important to now this because these are the same people, from the same culture, who advise Obama. Nothing has changed.
The second in a second.
#4 Posted by Thimbles, CJR on Sat 29 Jan 2011 at 09:18 AM
I remember an argument I had with a U.S. Trade Representative in the Clinton Administration back about 1993. Can't remember her name...she was from Connecticut though, and I was on the radio with her, for some reason. We were talking NAFTA and I was all fired up about the jobs to be lost, how it would have to be a net loss for U.S. workers and a huge gain for the bigwigs. And she just wouldn't admit it. There was no way to convince her that 4-2=2, ya know?
She treated me like the rube I was. That I was right--and she wrong--about the effects of NAFTA hardly mattered, then or now.
Before that interview, I was already a bit cynical about power and government and the very rich and their determination to protect what they regard as their own interests. It was years before I could wrap my head around the idea that neoliberal economic theory, and its market fundamentalist bookend, were two sides of the same plugged coin, and that the folks who bought into (and evangelized for) these could live their entire lives swaddled in a fantastic financial and intellectual cocoon.
They just don't know anyone who works for a living. Or if they do, they blame that unfortunate person for not keeping up--not getting the right training for the "new economy."
They really envision a world where, somehow, everyone is a manager, policy expert (or "entrepreneur") like them. Because that is the world they live in.
Obama, alas, is one of them. Not to say Harvard ruined him, but his personality has been influenced for so long by that high-IQ, economic-theory-driven subculture that he can not recognize the value of a practical person. And even if he could, I think he knows that he would not be taken seriously if he talked about implementing the thoughts of someone outside that bubble.
I'm not even thinking about letting labor representatives (Robert Reich, say) into the ranks of advisors. Even Krugman is out. Germany's corporate governance system--in which labor represents half of the corporate boards and wages are set on an industry-wide basis--is as unthinkable here as a rational health insurance system.
And never mind that it actually works better than what we have....
#5 Posted by edward ericson jr., CJR on Sat 29 Jan 2011 at 10:31 AM
James-- Back in 2001 or so I tried to get folks at the Financial Accounting Standards Board to explain to me how they operated, what "mark-to-market" really meant, etc. We set up a visit and it got postponed, then i called and tried to get interviews and people were busy, and it just never got done.
It might help you to know that private industry runs the FASB. It is not a government agency, not subject to FOIA and not subject to "public pressure"--at least not in the way "public" is usually defined.
http://www.fasb.org/facts/
When it comes to U.S. accounting standards, the fox is not so much guarding the hen house as owning it. They work diligently to husband and maintain their flock to the most efficient and sustainable benefit of all the other foxes....
#6 Posted by edward ericson jr., CJR on Sat 29 Jan 2011 at 10:41 AM
Okay, it was more than a second.
http://www.pbs.org/wgbh/pages/frontline/warning/view/
This shows the same cast of gents and how they overwhelmed Brooksley Born when she tried desperately to regulate derivatives.
This is important because, again, nothing has changed and these jerks will be fighting Elizabeth Warren's new agency tooth and nail as she attempts to protect consumers from these wall street predators.
And Obama is on their side. This gets to a bigger issue, it's not about people. If it were, you could get new people in and produce change, accountability, and stability going forth into the future.
But new people won't solve the problem because those people have to work within the confines of a deeply corrupt and intellectually entrenched system, and if they don't work within, they will have the coffers and influence of the wealthiest people in America opened up to oppose them in every way possible.
They will become another notch on the post like Eliot Spitzer, Ed Gray (vs the savings & loans), Brooksley Born, and eventually Elizabeth Warren.
The system is the problem that needs attacking and the roots of the system go back to the 1970s.
Until you attack the system, the bad apples (people who fail in the performance of their duties) will continue to appear because they are placed in bad barrels (situations in which the pressures to fail one's duties are high) which have been made by bad barrel makers (people who are operating under assumptions which result in the situations where people fail).
http://www.scientificamerican.com/article.cfm?id=bad-apples-and-bad-barrels
If you want, I can create an analysis of those assumptions and situations that came out of the 1970s and have shaped the world view of the so-called liberals and the so-called conservatives we have today.
Or, if you want, we can point at some more bad apples. JP Morgan should be on that list for inventing a mechanism to abstract risk away from transactions by buying default insurance, government should be on that list for allowing default insurance (a derivative- see the above doc) to be secret, unregulated, and easily converted to gambling bets (people could buy default insurance on transactions they had no part of, which incentivizes people to want transaction failures), and Joe Cassano should be on that list for being the market's sucker as Wall Street started making risker loans (since they could buy protection from risk) and then betting on the market's failure while booking fees on the values of overinflated transactions (that's that whole mark to market thing. Book the bonuses based on the market value of the mortgage made now, and not on the value 6 months from now when the owner defaults and the asset value collapses).
It was a game in which dangerous transactions piled up because the originators insured against the risk and often sold the transaction off to some pension who believed the rating agency's triple A rating.
When AIG stopped insuring, Lehman Brothers, Merril Lynch and others started selling eachother's risks to keep the machine, and the bonuses, flowing.
All this pile of dangerous transactions needed to blow up was a trigger, some rate resets on enough teaser loans, an increase in federal interest rates, a oil bubble that sent energy costs upward of $100 a barrel, anything that would push enough people over the default line to turn the market toxic.
And the federal reserve, the securities exchange commission, and all the banking regulatory agencies watched them do this and said nothing. The operations at Countrywide were no secret, but the federal government didn't care to know anything about it. They bragged about increasing home ownership.
#7 Posted by Thimbles, CJR on Sat 29 Jan 2011 at 10:49 AM
Thanks for that additional information and insight. Although I don't entirely disagree, I don't think it is all that constructive to declare that the whole system is corrupt. It isn't exactly what I was getting at.
1) The banking and financial system are working in their own interests. The FASB, part and parcel of that system, works on their behalf. They are not accountable to the public or to the government, to my knowledge. (Correct me if I'm wrong.) If some of the players broke the law, I hope they go to jail; but it's my understanding that most of the stuff they did was legal. Blaming the fox for raiding the henhouse isn't getting us anywhere.
2) The Republican Party is fundamentally and profoundly corrupt. Funded in part by #1 above, their power derives from all of the lies and distortions and secrecy necessary to bamboozle the voters into voting for the interests of the players above, and against their own interests. In some ways one can blame the voters themselves for their ignorance, but it was the Republican Party who is responsible for the entirely predictable financial blowup. One cannot expect a political party that is fundamentally corrupt to take any actions against the players who keep them in power.
3) The Democratic Party, charged with cleaning up the mess, is not, in my estimation, fundamentally corrupt. They were elected by the voters with the expectation that they were going to fix what went wrong. They have thus far been unable to do that. Why? Who is responsible? Who was responsible for forming this commission? It's not helpful to say that these people don't know anyone who works for a living. While it may or may not be true, there is no action to be taken by stating that.
To wit: Remember the healthcare for 911 first responders "Zadroga Bill"? How that came to be passed? A comedian brought those people on his show to highlight the very real difficulties they faced. But that wasn't enough. Shep Smith, Fox News, took up the fight. He asked "Who's going to hold these people's feet to the fire?" Then he realized that no one would. So he did. Smith started naming names of the Republicans who were blocking this bill. Shep Smith Shames Republicans On 9/11 First Responders Bill (VIDEO) In short order, that bill passed on voice vote.
Reporters didn't do their jobs with the Zadroga Bill. And they aren't doing their job with the financial mess. It isn't enough to say "the bill is blocked in Congress" or "Administration officials blah blah blah" or "regulators didn't blah blah blah." Who exactly is responsible for the lack of progress on fundamental reform? Obama, Geithner, Bernake? Barney Frank, Christopher Dodd? Is Obama listening to the wrong people? Who should he be listening to? Are Barney Frank and Chistopher Dodd too close to the banking industry? Should they have been removed from their chairmanships? Should Geithner be replaced by someone with a background outside the banking industry?
When are business and financial reporters going to start doing their job? When are they going to stop letting the responsible people off the hook by blaming the problem on generic metonymic entities? That's what I want to see and am waiting to see.
#8 Posted by James, CJR on Sat 29 Jan 2011 at 04:43 PM
But that's the thing James, why are the reporters not doing their jobs? Why have historic measures by the opposition, to obstruct anything the government attempts to do to help the american people in the midst of the historic crisis they are responsible for, been unreported? Why was the press uncritical in their reporting on Bush initiatives and agonizingly slow to correct the record? Why do bad ideas that don't work keep resurfacing as solutions to new problems? Why aren't people learning from their history?
It's because America has a perverted system in place. Therefore, when Enron collapsed and we held the Enron executives to account for fraud, deceptive accounting, market manipulation and then took the rating agency (Arthur Andersen) that was supposed to be accounting and reporting on their operational integrity and ripped them apart because they didn't do their jobs and then others started collapsing because they were all doing the same things so laws were written that were supposed to protect from a financial collapse like that ever again, it only took 5 years for an even bigger bubble to inflate and collapse AGAIN.
There's very little difference in the barrels in each case.
http://www.youtube.com/user/RebelNews#g/c/33AFC1FD48536056
You're only changing the apples.
Who is responsible for the barrels?
Go back to the 1970's and you see we had recovered from the Great Depression and a new generation, born in the liberalism that was active through the Depression and had reacted to the realities of brutal fascism, was coming of age. This new generation confronted the realities of race, environmental degradation, and nationally sponsored violence abroad and they did not do so submissively. The mechanisms of social control were breaking down as people refused to believe their discredited government and demanded policies which served the people's ends, not the business and political elites.
Things like this happened:
http://www.pbs.org/wgbh/pages/frontline/poisonedwaters/view/
#9 Posted by Thimbles, CJR on Sat 29 Jan 2011 at 06:50 PM
James, "business and financial reporters" depend for their livelihood on access to and good relations with the folks who caused this mess. Most have adopted the world view of the finance industry types, which is anti-regulatory and anti-government. As journalists, they are also trained to see problems as bad apples, or bad examples--as discrete actions or crimes--rather than as systemic. They also are forced by journalistic convention to ignore obvious problems until they become crises. Predictive journalism is not done because there is no percentage in it; my 1999 story about how financial deregulation and unchecked OTC derivatives inevitably would lead to a huge collapse not only failed to advance my career but continues to be ignored. So that's all there is to that.
(Well, almost. When I recently mentioned to one of the economists at the Richmond Fed that I had predicted the collapse 10 years before it happened he raised an eyebrow and asked "then why didn't you trade on that?" as if getting rich off the panic and misery--as John Paulson so skillfully did--was the only creditable response to that knowledge. You see the mentality we're up against?)
As for who is responsible for this latest commission, my friend Bill Black has a pretty good (though apparently un-proofread) bit on that here:
http://neweconomicperspectives.blogspot.com/2011/01/how-can-architects-of-crisis.html
He says: "Each of the Republican commissioners was in the impossible position of having to investigate and judge their own culpability for the crisis. The Republican politicians who selected them for appointment to the Commission knew that they were placing them in an impossible position and ensuring that the Commission would either give deregulation a pass or split along partisan lines and lose some of its credibility."
To get an idea of what's about to happen now, and why, note that California Republican (and probable arsonist) Darrell Issa is in charge of the House Oversight and Government Reform Committee, and he's ramping up an investigation into "partisanship" in the commission. Black:
"Issa is a deeply committed anti-regulator. He will not be investigating the allegations of partisanship and conflicts of interest by the Republican commissioners who have exemplified partisanship and who are in the impossible position of having to examine their own culpability for the crisis. He will seek to discredit any report and any expert who explains why financial deregulation and desupervision are criminogenic."
So you may add Issa to the list of villains, prospectively. But don't expect to read about it in the "business press."
Finally, to your question, which is simple. The names of the people who appointed the commission's members are as follows:
http://lawprofessors.typepad.com/banking/2009/07/financial-crisis-inquiry-commission.html
House and Senate Democrats selected 6 members and Republicans named four members. They are:
1. Phil Angelides, California State Treasurer - Chairman of the Commission (named by the Democrats - House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid)
2. Bill Thomas, Former U.S. House Ways and Means Committee Chairman to serve as Vice Chairman of the Commission (named by the Republicans - House Minority Leader John Boehner and Senate Minority Leader Mitch McConnell)
3. Brooksley Born - former CFTC Chairman (Pelosi appointment)
4. John W. Thompson - Chairman of Symantec Corp. (Pelosi Appointment)
5. Peter Wallison - Co-Director for Financial Policy Studies at American Enterprise Institute (Boehner Appointment).
6. Doug Holtz-Eakin - former Director of the Congressional Budget Office (M
#10 Posted by edward ericson jr, CJR on Sat 29 Jan 2011 at 06:51 PM
It was in this context (started in my post above) that Lewis Powell wrote a memo to the Chamber of Commerce that called for the business community, for the enterprise system to fight for itself and beat back the "revolutionaries"..."from the college campus, the pulpit, the media, the intellectual and literary journals, the arts and sciences, and from politicians. In most of these groups the movement against the system is participated in only by minorities. Yet, these often are the most articulate, the most vocal, the most prolific in their writing and speaking."
http://www.reclaimdemocracy.org/corporate_accountability/powell_memo_lewis.html
People like Martin Luther King, Chomsky, and especially Ralph Nader are the enemy. They threaten the enterprise system, they threaten the elites, by advocating for the public. The elites need to marshal the enterprise system they control to beat back this "democracy".
Because the world was having "A Crisis of Democracy":
http://www.scribd.com/doc/8317647/The-Crisis-of-Democracy-Michel-Crozier-Samuel-Huntington-Joji-Watanuki
And Samuel Huntington section (highly recommended reading) details the so-called liberal attitude to this democracy. They lamented that the democratic surge was causing changes such as "in 1960 defense spending was about 4 and a half times as much as for social security; in 1972, it was less than twice as much...Across the board, the tendency was for massive increases in governmental expenditures to provide cash and benefits for particular individuals and groups within society rather than in expenditures designed to serve national purposes vis-a-vis the external environment." pg 70
The wistfully recalled that, "Truman had been able to govern the country with the cooperation of a relatively small number of Wall Street lawyers and bankers." pg 98
They postulated that the media was too oppositional and that they were whipping up the public on so-called issues like Vietnam and Watergate and that the a successful democracy demands a level of apathy from the populace because otherwise they cease to respect government authority and expect government activity on their behalf.
So for about 40 years, there has been a counter revolution, sponsored by the enterprise system, supported by the political system, to push back the democratic surge and "punch the hippies."
This has involved promoting the works of Ayn Rand and Milton Freidman - despite their many failures, delegitimizing the unions and social movements - such as the environmental and and the anti-globalization movements, and taming the media with industry funded watchdogs and think tanks.
The enterprise system now has centralized and controlled the discourse. We can't even talk about objective science such as global warming without industry steamrolling the debate and the politics to its own ends. Government itself has been subverted as the doctrines of the enterprise system have become more entrenched as they have also become more detached from the goals of national interest.
Government is the problem, regulations and regulators are the problem, taxes are the problem, saying mean things about banksters is the problem.
We have a problem. America was on a course to become like another egalitarian social-democracy like those in Europe until the enterprise system fought back. It now owns our politics, many economic academics, and it exports the American model to other countries who desire membership in the Washington Consensus.
The state serves enterprise against its own interests and those of its democratic constituents. America is fundamentally unbalanced, and unless there is a democratic surge, on that takes
#11 Posted by Thimbles, CJR on Sat 29 Jan 2011 at 08:23 PM
Well, I don't want to generalize about the motivations of journalists; it's probably true that some of them are captured by the sector on whom they report. You certainly can't claim that about David Cay Johnston or Ryan Chittum or David Leonhardt. My objection is the tendency of business and political journos to blame "Congress" or "regulators" in a non-specific way. I don't know if they do that to avoid criticism, or if it is just lazy shorthand, or if they are writing for their colleagues who know exactly who in "Congress" is responsible and leaving the ordinary reader in the dark. Probably all of the above.
If they wrote "Pelosi and Reid appointed their out-of-work political friends, and Boehner and McConnell ensured a dysfunctional commission by putting ideologues and obstructionists in place" then that would give the reader some real information, and possibly embarrass the perps into some better behavior. Instead of talking about "regulators" if they said "Bush-appointed Christopher Cox at the Securities and Exchange Commission; and John Reich at the Office of Thrift Supervision" or "Clinton appointee Robert Rubin" then that would give the reader some idea of accountability. These vague generalities just engender inchoate anger at institutions and allows the rogues and scoundrels to avoid accountability.
Thanks for that information and the links, Mr. Erickson. (I hope that you are gainfully employed in the field of business journalism.) Now I'm getting somewhere. It seems that the composition of the commission was preordained by the law requiring it -- its purpose was not *investigation* of financial fraud, but an examination of systemic problems. Pelosi appointed her pal Angelides -- an honest man of good will, but weak and lacking leadership skills. The thing was probably doomed to come to nothing, from the start. No "commission" is going to be very effective when you get mainly politicians to sit on it.
And where is Holder in all this? Shouldn't he be prosecuting some of these rogues? Is that a plausible eventuality? Holder doesn't need a commission to be looking at criminal wrongdoing on Wall Street. Is the Department of Justice still so infested with bushies that these guys will get off the hook? Are the AGs afraid of getting the Spitzer treatment if they go forward with criminal investigations?
#12 Posted by James, CJR on Sun 30 Jan 2011 at 04:50 AM
"Well, I don't want to generalize about the motivations of journalists; it's probably true that some of them are captured by the sector on whom they report. You certainly can't claim that about David Cay Johnston or Ryan Chittum or David Leonhardt. "
But you can about most of them, which was why Bethany McClean, a fresh journalist at the time, broke the Enron story instead of the other thousands that were on the beat.
And even those who have integrity and on the beat often don't realize that they've internalized the perspectives of the banks they report on as they adopt the language of bankers in order to report on them.
Which results in journalists' surprise when the whole house comes crashing down. They believed that these smart guys had the angles covered, even the ones who try to report on the realities of the business and not the ones who work for CNBC just blow smoke up some ceo's butt for access.
You really have to be on the outside, and yet have the inside information, in order to sound the warning bell and risk a call against the industry.
Which is why the financial blogs were well ahead of the journalists in making those calls.
I mean look at Erin Burnett.
http://www.cnbc.com/id/15840232?play=1&video=996607929
She has been okay occasionally and I believe she is trying to portray an accurate picture for her viewers, but she is so absorbed into the bank world's assumptions. This results in segments titled "Bullying the Banks" while she talks about how banks were forced to take taxpayer money with a Heritage Foundation guy and, now, the mean old government wants to set conditions.
These are the same banks who are not doing the mortgage modifications they were asked to do by the Obama Admin (in order to keep families in their homes instead of throwing them out) and pursuing foreclosure options simultaneously one the ones they have done.
To Erin Burnett, one of the better tv business reporters, the taxpayers are unfair to the banks.
It's not as bad as the set of a Rick Santelli freakout
http://trueslant.com/matttaibbi/2010/03/03/santelli-on-predatory-lending-you-cant-cheat-an-honest-man
But it's loads worse than is what's needed.
#13 Posted by Thimbles, CJR on Sun 30 Jan 2011 at 09:41 AM
"Now I'm getting somewhere. It seems that the composition of the commission was preordained by the law requiring it -- its purpose was not *investigation* of financial fraud, but an examination of systemic problems."
From the democratic side, it was to tell the story of failure without alienating too many donors (DLC democrats, have this mindset) and limit scope of embarrassment for the government.
From the republican side, it was to misdirect the blame onto the government. and credit regulations which protect minorities.
Pelosi's pick of Brooksley Born messed much of those plans up I imagine, thank god, but it was silly to think that government would productively investigate itself.
"And where is Holder in all this? Shouldn't he be prosecuting some of these rogues? Is that a plausible eventuality? Holder doesn't need a commission to be looking at criminal wrongdoing on Wall Street. Is the Department of Justice still so infested with bushies that these guys will get off the hook? Are the AGs afraid of getting the Spitzer treatment if they go forward with criminal investigations?"
They are afraid the Democratic Party will get the Spitzer treatment. Wall Street and the businesses under the sway of the Chamber of Commerce already threw support behind the republicans, and Obama has set himself the task of wooing them back. They cried bloody murder over bonus limits while the institutions that employed them were on the government dole.
You think the enterprise system is going to lay back while "Enterprise gets Criminalized!"
In every area of modern life, be it mining, oil, air transportation, for profit universities, biotechnology, on and on and on... the enterprise system subverts, converts, and attacks what impedes it. They are convinced that their profits are worth your risk.
All things are justified under the banners of efficiency and competitiveness. Unless we attack these ideas of efficient business; which serve only the shareholders and the executives to the exclusion of customers, workers, and the environment; the system will always win and we will always lose our houses, our health, and our jobs.
What happened in 2008 was a travesty, and it's essential that we establish what happened and who's responsible, but it was not an isolated one nor will it be the last one.
The system is always hungry. The system needs taming. That is the task of the public in a democracy.
http://www.slate.com/id/2266025/entry/2266026/
"This was the era in which the accumulated wealth of America's richest families—the Rockefellers, the Vanderbilts, the Carnegies—helped prompt creation of the modern income tax, lest disparities in wealth turn the United States into a European-style aristocracy. The socialist movement was at its historic peak, a wave of anarchist bombings was terrorizing the nation's industrialists, and President Woodrow Wilson's attorney general, Alexander Palmer, would soon stage brutal raids on radicals of every stripe. In American history, there has never been a time when class warfare seemed more imminent.
That was when the richest 1 percent accounted for 18 percent of the nation's income. Today, the richest 1 percent account for 24 percent of the nation's income. What caused this to happen?"
Where is the public today?
#14 Posted by Thimbles, CJR on Sun 30 Jan 2011 at 10:37 AM
You can single out good journos and bad journos on any beat; you can give prizes to the best of them and browbeat the worst of them. (And Erin Burnett is, in my opinion, one of the worst, but her bosses don't think so.)
But it really isn't helpful to generalize in broad statements about nefarious motives of journalists or anyone else and it just isn't true. I'd rather talk about the faulty standards of journalism, both written and unwritten, acknowledged and unspoken, that causes the exact average journo on the beat to fail to get this story and fail to report this story in ways that might have some real impact on public opinion and public policy.
One of those unspoken standards, in my opinion, is the tendency to use metonymic generalizations (Congress) when actual names (Pelosi) and precise job descriptions (Director of Office of Thrift Supervision) are called for.
#15 Posted by James, CJR on Sun 30 Jan 2011 at 11:50 AM
"And Erin Burnett is, in my opinion, one of the worst, but her bosses don't think so."
Being called a relatively good fish in a pond of Rick Santelli's isn't a compliment.
"But it really isn't helpful to generalize in broad statements about nefarious motives of journalists or anyone else and it just isn't true. "
In order to diagnose a problem you need to describe its symptoms. What Edward said about the industry is true:
""business and financial reporters" depend for their livelihood on access to and good relations with the folks who caused this mess. Most have adopted the world view of the finance industry types, which is anti-regulatory and anti-government. As journalists, they are also trained to see problems as bad apples, or bad examples--as discrete actions or crimes--rather than as systemic. They also are forced by journalistic convention to ignore obvious problems until they become crises. Predictive journalism is not done because there is no percentage in it"
And it reflects what Dean Starkman has written in the past about it:
http://www.theinvestigativefund.org/investigations/economiccrisis/1198/power_problem:_the_business_press_did_everything_but_take_on_the_institutions_that_brought_down_the_financial_system/?page=entire
"This isn't about identifying which journalist or economist was "prescient," the business-press parlor game du jour. What's important is that forthright press coverage and uncompromised regulation combined to create a virtuous cycle of reform.
Citigroup, remember, was forced to sign a $240 million settlement with the Federal Trade Commission covering two million customers. This is marketing deception on a mass scale, revealed and policed. A coalition of states forced an even bigger settlement, for $484 million, on Household. This was in 2002. It wasn't perfect, but it was working.
Alas, any fair reading of the record will show the business press subsequently lost its taste for predatory-lending investigations and developed a case of collective amnesia about Wall Street's connection to subprime, rediscovering it only after the fact.
There are a number of explanations (though no excuses) for this. First and foremost, was the abdication of regulatory responsibility at the federal level. Uncompromised regulation and great journalism go hand-in-hand. But when such regulation disappears, journalistic responsibilities only increase. What is important to understand first is that this press failure did occur...
No reader, not even one really applying herself, would have found adequate warnings about the Wall Street/subprime nexus. She would instead have found plenty of coverage focused on the earnings horserace ("Putting the Muscle Back in the Bull; Stan O'Neal may be the toughest — some say the most ruthless — ceo in America. Merrill Lynch couldn't be luckier to have him," Fortune, 4/5/04), personalities ("Rewiring Chuck Prince; Citi's chief hasn't just stepped out of Sandy Weill's shadow — he's stepped out of his own as he strives to make himself into a leader with vision," BW, 2/20/06), and situated comfortably within frames set by the industry itself ("Joining the Club — Inside Goldman's Secret Rite: The Race to Become Partner," WSJ, 10/13/06)...
First, the public should be aware — warned, so to be speak — that its interests and those of the business press may not be in perfect alignment. The business press exists within the Wall Street and corporate subculture and understandably must adopt its idioms and customs, the better to translate them for the rest of us..."
(Here's an old story about how the language of nuclear strategy dulls speakers to the horror of nuclear holocaust, and a s
#16 Posted by Thimbles, CJR on Sun 30 Jan 2011 at 07:40 PM
Every time a market goes south, the masses seek someone (else) to blame, egged on by the "professional journalists" like those represented here.
And the under and overeducated among these masses unfailingly seek shelter in government regulation.
Clearly, government regulation is arguably the biggest cause of the problem. The masses have come to expect that the SCC, the FTC, the FDIC, etc, can somehow regulate away all risk in the financial markets, leaving only an ever-growing bubble of perpetual reward.
So when Joe "Dumbass" Blow goes out and signs a 1-year adjustable interest-only ARM on a $700,000 townhouse he knows he'll flip for a million in year... It's not Joe's fault when the shit hits the fan... Can't be... It's the lender's fault... Or Bush's fault... Or Congress' fault.. Or Wall Street's fault...
The press needs to explore and expose corporate and governmental malfeasance, no doubt. However, it also needs to wean the masses from the government teat and hammer away in reporting the sheer magnitude of the culture of ignorance and dependence that is driving this country into the ground.
#17 Posted by padikiller, CJR on Sun 30 Jan 2011 at 09:04 PM
Did you just step off of a Rick Santelli set?
Joe "Dumass" Blow was a relative rarity who rarely got suck with his house merchandise until the market blew up in 2007/8.
The rest of the people were often young families trying to move to better school districts than the ones they left, signing documents which we now know were not maintained correctly and were filled in with faulty information by corrupt brokers.
We know the non-bank, unregulated, mortgage originators threw out all underwriting standards and preyed upon vulnerable borrowers with fees and conditions that were not explained nor agreed to:
http://www.nhi.org/online/issues/109/bradley.html
just as wallstreet preyed upon vulnerable lenders who believed in the safe ratings from Standard's and Poor and Moody's:
http://www.moneyweek.com/investments/stock-markets/the-great-credit-rating-scandal.aspx
This systemic crash resulted from actors outside the purview of regulation.
Joe Blow Dumass did not blow up the economy, criminals did. Criminal tendencies can result from an individual's unique makeup, but the majority of people are not criminals and do not actively seek to cheat each other. When criminality is epidemic, there is a environmental reason for that. A criminal culture has developed, usually due to a lack of policing.
The more a social contract is violated without penalty, the less it is respected and adhered to. The big banks were supposed to provide a service to the economy and they have chosen more and more over the years to act like a parasite. That is because the penalty for bad behavior is minimal, the rules that define bad behavior are constantly being rewritten in favor of the banks, and the rewards for bad behavior are enormous.
Therefore, I think the only answer to this is ... less regulation.
*insert yahoo noises here*
#18 Posted by Thimbles, CJR on Sun 30 Jan 2011 at 10:55 PM
The Financial Crisis Inquiry Commission has released their report.
http://c0182732.cdn1.cloudfiles.rackspacecloud.com/fcic_final_report_full.pdf
I haven't finished it yet, but so far it has been surprisingly good. On par with some of Elizabeth Warren's COP reports:
http://cop.senate.gov/reports/
#19 Posted by Thimbles, CJR on Mon 31 Jan 2011 at 04:22 AM
Some of the interesting tidbits so far:
"When the Federal Reserve cut interest rates early in the new century and mortgage rates fell, home reinancing surged, climbing from 460 billion in 2000 to 2.8
trillion in 2003, allowing people to withdraw equity built up over previous decades
and to consume more, despite stagnant wages...
Business boomed for Christopher Cruise, a Maryland-based corporate educator who trained loan oicers for companies that were expanding mortgage originations. He crisscrossed the nation, coaching about 10,000 loan originators a year in auditoriums and classrooms.
His clients included many of the largest lenders—Countrywide, Ameriquest, and
Ditech among them. Most of their new hires were young, with no mortgage experience, fresh out of school and with previous jobs “lipping burgers,” he told the FCIC. Given the right training, however, the best of them could “easily” earn millions.
“I was a sales and marketing trainer in terms of helping people to know how to
sell these products to, in some cases, frankly unsophisticated and unsuspecting borrowers,” he said. He taught them the new playbook: “You had no incentive whatsoever to be concerned about the quality of the loan, whether it was suitable for the borrower or whether the loan performed. In fact, you were in a way encouraged not to worry about those macro issues.” He added, “I knew that the risk was being shunted off. I knew that we could be writing crap. But in the end it was like a game of musical chairs. Volume might go down but we were not going to be hurt.”
On Wall Street, where many of these loans were packaged into securities and sold to investors around the globe, a new term was coined: IBGYBG, “I’ll be gone, you’ll be gone.” It referred to deals that brought in big fees up front while risking much larger losses in the future. And, for a long time, IBGYBG worked at every level...
Ralph Cioffi spent several years creating CDOs for Bear Stearns and a couple of more years on the repurchase or “repo” desk, which was responsible for borrowing money every night to inance Bear Stearns’s broader securities portfolio. In September, Cioffi created a hedge fund within Bear Stearns with a minimum investment of 1 million...
Cioffi’s investors and others like them wanted high-yielding mortgage securities. That, in turn, required high-yielding mortgages. An advertising barrage bombarded potential borrowers, urging them to buy or reinance homes. Direct-mail solicitations looded people’s mailboxes. Dancing figures, depicting happy homeowners, boogied on computer monitors. Telephones began ringing off the hook with calls from loan officers offering the latest loan products: One percent loan! (But only for the first year.) No money down! (Leaving no equity if home prices fell.) No income documentation needed! (Mortgages soon dubbed “liar loans” by the industry itself.) Borrowers answered the call, many believing that with ever-rising prices, housing was the investment that couldn’t lose...
In Washington, four intermingled issues came into play that made it diicult to acknowledge the looming threats. First, efforts to boost homeownership had broad political support—from Presidents Bill Clinton and George W. Bush and successive Congresses—even though in reality the homeownership rate had peaked in the spring of 2004. Second, the real estate boom was generating a lot of cash on Wall Street and creating a lot of jobs in the housing industry at a time when performance in other sectors of the economy was dreary. Third, many top oicials and regulators were reluctant to challenge the proitable and powerful inancial industry. And inally, policy makers believed that even if the housing market tanked, the broader financial system and economy would hold up.
As the mortgage market began its transformation in the late 1990s, consumer advocates and front-line local government oicials
#20 Posted by Thimbles, CJR on Mon 31 Jan 2011 at 10:01 PM
PS. It appears google chrome's native pdf support eats 'f's. I tried to catch them all, but it appears I missed a couple.
#21 Posted by Thimbles, CJR on Mon 31 Jan 2011 at 10:05 PM
This report is good for names and making one angry at them:
"At the Department of Housing and Urban Development, “we began to get rumors” that other firms were “running wild, taking applications over the Internet, not verifying peoples’ income or their ability to have a job,” recalled Alphonso Jackson, the HUD secretary from 2004 to 2008, in an interview with the Commission. “Everybody was making a great deal of money . . . and there wasn’t a great deal of oversight going on.” Although he was the nation’s top housing official at the time, he placed much of the blame on Congress.
Cox, the former Minnesota prosecutor, and Madigan, the Illinois attorney general, told the Commission that one of the single biggest obstacles to effective state regulation of unfair lending came from the federal government, particularly the Office of the Comptroller of the Currency (OCC), which regulated nationally chartered banks—including Bank of America, Citibank, and Wachovia—and the OTS, which regulated nationally chartered thrifts. The OCC and OTS issued rules preempting states from enforcing rules against national banks and thrifts. Cox recalled that in 2001, Julie Williams, the chief counsel of the OCC, had delivered what he called a “lecture” to the states’ attorneys general, in a meeting in Washington, warning them that the OCC would “quash” them if they persisted in attempting to control the consumer practices of nationally regulated institutions.
Two former OCC comptrollers, John Hawke and John Dugan, told the Commis-
sion that they were defending the agency’s constitutional obligation to block state efforts to impinge on federally created entities... However, Madigan told the Commission that national banks funded 21 of the 25 largest subprime loan issuers operating with state charters, and that those banks were the end market for abusive loans originated by the state chartered firms. She noted that the OCC was “particularly zealous in its efforts to thwart state authority over national lenders, and lax in its efforts to protect consumers from the coming crisis.”... Cox criticized the federal government: “Not only were they negligent, they were aggressive players attempting to stop any enforcement action[s]. . . . Those guys should have been on our side.”"
"More than 200,000 new mortgage brokers began their jobs during the boom, and some were less than honorable in their dealings with borrowers. According to an investigative news report published in 2008, between 2000 and 2007, at least 10,500 people with criminal records entered the field in Florida, for example, including 4,065 who had previously been convicted of such crimes as fraud, bank robbery, racketeering, and extortion."
"At the Washington, D.C., headquarters of the FBI, Chris Swecker, an assistant director, was also trying to get people to pay attention to mortgage fraud. “It has the potential to be an epidemic,” he said at a news conference in Washington in 2004. “We think we can prevent a problem that could have as much impact as the S&L crisis.”
Swecker called another news conference in December 2005 to say the same thing, this time adding that mortgage fraud was a “pervasive problem” that was “on the rise.” He was joined by officials from HUD, the U.S. Postal Service, and the Internal Revenue Service. The officials told reporters that real estate and banking executives were not doing enough to root out mortgage fraud and that lenders needed to do more to “police their own organizations.”
Meanwhile, the number of cases of reported mortgage fraud continued to swell. Suspicious activity reports, also known as SARs, are reports filed by banks to the Financial Crimes Enforcement Network (FinCEN), a bureau within the Treasury Department. In November 2006, the network published an analysis that found a 20-fold increase in mortgage fraud reports between 1996 and 2005. According to FinCEN, the figures likely represent
#22 Posted by Thimbles, CJR on Thu 3 Feb 2011 at 09:55 AM
An old article I came across today in Mother Jones (which Mr. Starkman said I should read once in a while)
http://motherjones.com/politics/2010/01/wall-street-big-finance-lobbyists
"In April 2004 the SEC held a hearing. It was sparsely attended and quickly forgotten, but in 2008 Stephen Labaton of the New York Times got hold of an audio recording of the session and wrote an account of what happened.
The issue at hand was something called the net capital rule. Originally put in place in 1975, it set limits on how much leverage investment banks were allowed to carry on their books—limits that all five of Wall Street's biggest investment banks wanted loosened. Goldman Sachs CEO Hank Paulson, later to become George W. Bush's treasury secretary, had begun pressing for higher limits in 2000. Now, the SEC was considering doing just that.
The SEC meeting took place almost six years after the collapse of LTCM had dramatically demonstrated the systemic danger of unrestricted leverage. It came four years after a Fed staffer wrote a journal article clearly pointing out that banks were hiding more and more leverage. It came two years after the FDIC had passed a rule allowing banks to use complex hedges to effectively increase their leverage even more. It came at a time when the housing bubble was already heating up, the credit derivative market was exploding, and the Fed's easy money policy was in its third consecutive year.
What's remarkable, when you listen to that recording, is not that the banks got everything they wanted—of course they did. It's that the new policy passed virtually without question. There was a single written dissent from an unknown risk management expert in Indiana, a couple of routine queries from one commissioner, and reassurances from staffers that the new rule posed no problems because the banks would police themselves. After less than an hour of desultory discussion, the new rule was in place.
In other words, very little lobbying was even required. After three decades of deregulatory fervor, it had simply become unnecessary. The SEC, like so many other government watchdogs, was by 2004 a thoroughgoing victim of regulatory capture, its appointees mostly Wall Street insiders with more sympathy for banks than for the public they were supposed to protect.
But the problem was bigger than just that. Unlike most industries, which everyone recognizes are merely lobbying in their own self-interest, the finance industry successfully convinced everyone that deregulating finance was not only safe, but self-evidently good for the entire economy, Wall Street and Main Street alike. It's what Simon Johnson, an MIT economics professor and former chief economist for the IMF, calls "intellectual capture." Considering what's happened over the past couple of years, we might better call it Stockholm syndrome."
#23 Posted by Thimbles, CJR on Thu 3 Feb 2011 at 07:17 PM