Monday Reads

Good Morning!

SuperPacs are going to play a central role in this coming year’s elections. The Supreme Court has basically opened free speech to the point that political free speech will go to the highest, unaccountable bidder. Rick Santorum is the only current presidential contender without one.  Here’s some background from ABC.

Super PACs, or “independent-expenditure only committees,” as they are officially known, are a relatively new kind of political action committee (PAC) that can raise unlimited amounts of money for a candidate or cause from corporations, unions, individuals, etc. The rise of the super PAC started in the most recent midterm cycle, after the Supreme Court’s ruling in the Citizens United case lifted federal and state campaign spending regulations dating back to the 1970s.

Super PACs have since become ubiquitous. Seven of the eight leading GOP candidates have at least one that is raising money in their behalf; a couple of the candidates have more than one. Earlier this month, a group calling itself “Texas Aggies for Rick Perry” filed papers with the Federal Election Commission. The name refers to Perry’s alma mater, Texas A&M University, and the group is the second super PAC operating in Perry’s behalf, in addition to his “Make Us Great Again” PAC, which formed in July.

The candidates are prohibited from having any connection to the super PACs, meaning they can also distance themselves from any negative campaign ads against their opponents that are funded by the super PACs. The groups can also pay for polling, mailing materials, social media efforts and research, among other things.

There are already legal questions on Perry’s use of SuperPacs according to Politico.

The Perry campaign’s borrowing of three clips from a SuperPAC ad for use in a campaign video was a novel foray into the gray area of campaign finance law, and so I asked the experts on Rick Hasen’s excellent and disputatious election law listserv for their views on it. They were not unanimous on the question, but Perry is clearly treading in some uncharted legal waters.

“With virtually all fundraising limits and prohibitions hanging on the necessity of independence between the super PAC and the Perry campaign, using super PAC footage for a campaign ad pushes the concept of independence to new boundaries,” emailed Ken Gross, an election lawyer at Skadden Arps.

David Mason, vice president at the political data firm Aristotle International, wrote that “whatever is going on in terms of the Perry campaign using Super PAC footage, it is simply not addressed by the coordination regulation.”

“That is not to say there are no FECA implications to a candidate using Super PAC footage. If a campaign is given footage for no charge, the footage could be an in-kind contribution to the campaign. A campaign could pay for the footage (raw footage typically costs way less than the cost of finishing and broadcasting), or, in this case, according to the spokesman you quote, gotten it from a public source,” he wrote.

Since the GOP couldn’t force its agenda on the Supercommittee, it will try to change the rules according to The Hill. They are trying to change the configuration of the automatic cuts to favor defense and their spending priorities.

Supercommittee member Sen. Pat Toomey (R-Pa.) said Sunday that Republicans will seek to “change the configuration” of the automatic spending cuts triggered by the committee’s failure to present a deficit-reduction deal.

“I think it’s important that we change the configuration [of the cuts]. I think there’s a broad consensus that too much of the cuts are weighted on [our national defense],” Toomey said on ABC’s “This Week With Christiane Amanpour.”

Toomey said he is “terribly disappointed” the committee failed to reach a deal but called the automatic cuts built into the committee’s mandate a “silver lining.”

The failure of the supercommittee to reach an agreement last week triggered $1.2 trillion in automatic cuts set to hit the Defense department and other programs in 2013.

Due to FOIA requests and the perseverance of some in congress, we are beginning to see the kinds of loans the Fed gave to banks that have not been disclosed before. There were $13 billion dollars of such loans.

The Fed didn’t tell anyone which banks were in trouble so deep they required a combined $1.2 trillion on Dec. 5, 2008, their single neediest day. Bankers didn’t mention that they took tens of billions of dollars in emergency loans at the same time they were assuring investors their firms were healthy. And no one calculated until now that banks reaped an estimated $13 billion of income by taking advantage of the Fed’s below-market rates, Bloomberg Markets magazine reports in its January issue.

Saved by the bailout, bankers lobbied against government regulations, a job made easier by the Fed, which never disclosed the details of the rescue to lawmakers even as Congress doled out more money and debated new rules aimed at preventing the next collapse.

A fresh narrative of the financial crisis of 2007 to 2009 emerges from 29,000 pages of Fed documents obtained under the Freedom of Information Act and central bank records of more than 21,000 transactions. While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger.

UN Secretary General Ban Ki Moon has called for “Zero tolerance’ for violence against women as the UN celebrated November 25th as the International Day for the Elimination of Violence against Women.

According to the UN, 70% of women experience violence in their lifetime, and one in five women will become a victim of rape or attempted rape in her lifetime. A number of global surveys have shown that half of all women murder victims are killed by current or former husbands or partners.

November 25 is designated as the International Day for the Elimination of Violence against Women and in South Africa kicks of 16 days of activism, which ends on Human Rights Day.

In a statement to mark the occasion, Ban said young men and boys must be encouraged to become advocates for the elimination of violence against women. “We need to promote healthy models of masculinity. Too many young men still grow up surrounded by outmoded male stereotypes,” he said. “By talking to friends and peers about violence against women and girls, and by taking action to end it, they can help break the ingrained behaviour of generations.”

The wife of a charismatic christian youth minister and dentist who was found to be guilty of horrific crimes involving pedophilia tells her tale and speculates that Dorothy Sandusky may be as in the dark as she was.  Her story is at the Daily Beast.

Just shy of seven years ago, my life and the lives of my two children were turned upside down. The man I had been married to for more than a decade had been arrested as a part of an FBI sting to bring down NAMBLA, the North American Man-Boy Love Association, an advocacy group for pedophiles that supports an “end to the extreme oppression of men and boys in mutually consensual relationships.” I was a well-educated, philanthropic, 39-year-old mother who, until recently, was living a charmed Dallas life, married to a well-liked dentist who had been living a lie for our entire relationship.

A former youth-ministry volunteer at a local church, an energetic volunteer at our kids’ elementary school, and a favorite at their Y-Guides outings, my ex-husband, Todd, turned out to be a criminal who brought tremendous harm, both physically and emotionally, to prepubescent boys. He was an “inner circle” member of NAMBLA—a member of its board of directors—wanted by the feds. Throughout our marriage, which ended in a confusing divorce shortly before the FBI swept in, I believed him when he said he was traveling to dental conventions—when in fact, he was attending pedophile conferences. He kept a secret mailbox at the local post office, where he received his pedophilia newsletters and other suspicious mail. We never found any proof of illegal Internet activities—his hard drive had been cleaned—except for a printed-out receipt for a porn video of young boys. Often, as I eventually learned, these predators are masters of deceit, creating a façade of the “ideal family” to protect their image, or perhaps convince themselves that they’re not a deviant to society, all the while acting on their sick desire to engage in sexual acts with kids.

OOh, baby, it’s a wild world.So, what’s on your reading and blogging list this morning?


Left Behind

The Great Recession of 2007-2008 took out some one in every sector of the economy.  Worst hit, however, was the housing sector where the financial contagion was hatched by folks betting on the forever upward trend in real estate prices.  Prices and sales of homes have plummeted. However, the government focused clearly on reviving the same group of people that were most responsible for the damage.  Both the Bush and Obama administrations have raptured Wall Street while leaving US families behind.  Granted, many homeowners jumped into loans they could not afford and bought houses at price levels that should’ve sent them clear warning symbols.  But remember, even the most sophisticated investors–like AIG and Lehman Brothers–got sucked into the mortgage and housing madness.  You can’t exactly expect every home owner to read through the fine print and look for trends in underlying home values using the Case-Shiller Index. Buying a home is an emotional process.  Investing is supposed to be the cautious practice.

So, what’s really different between this housing crisis and the two previous, similar crises that happened during the Great Depression and Savings & Loan crisis is that there is no vehicle to redress homeowners’ wiped-out balance sheets and foreclosure problems.  There has been largess all over the place for banks and other financial institutions.  During the 2008 elections, then-candidate Hillary Clinton emphasized the important role of the HOLC during the Great Depression and argued that something akin to it should be considered today.  The purpose of the HOLC was to renegotiate mortgages so that people could stay in their homes.  The HOLC was dismantled in 1951 when the last of its assets–dating from as late as 1935–were liquidated.

There were some efforts by the Obama administration that accompanied the Bush 43 TARP program to try to get private financial institutions to renegotiate loans in lieu of foreclosure, but those programs have failed miserably.  At least the SEC is beginning to look into possible criminality leading to the financial crisis like the role of rater Standard & Poor’s in overrating toxic mortgage-backed securities. Still, the victims of these practices have had little to no relief.  The NYT reminds us today that many homeowners need help. We should be further reminded that the overall economy will not improve until the housing market stabilizes.

Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans.

Instead of pushing the banks to do what is needed, the Obama administration has basically urged them to do their best to help, mainly by reducing interest rates for troubled borrowers. The banks haven’t done nearly enough. In many instances, they can make more from fees and charges on defaulted loans than on modifications.

The administration needs better ideas. It can start by working with Fannie Mae and Freddie Mac, the government-run mortgage companies, to aggressively reduce the principal balances on underwater loans and to make refinancing easier for underwater borrowers. If the president championed aggressive action, and Fannie and Freddie, which back most new mortgages, also made it clear to banks that they expect principal reductions, the banks would feel considerable pressure to go along.

The housing numbers are chilling. Sales of existing homes fell in July by 3.5 percent, while prices were down 4.4 percent in July from a year earlier. In all, prices have declined 33 percent since the peak of the market five years ago, for a total loss of home equity of $6.6 trillion.

There’s no letup in sight. Currently, 14.6 million homeowners owe more on their mortgages than their homes are worth, and nearly half of them are underwater by more than 30 percent. At present, 3.5 million homes are in some stage of foreclosure. Nearly six million borrowers have already lost their homes in the bust.

There are 10 states where basically no one is buying a house. That’s a pretty good indicator of a still sick market. What’s most appalling is that on top of these statistics comes the story about how much money the creators of both the housing bubble and the housing crash were bailed out by both the FED and the Federal Government.  The FED’s main purpose is to stabilize the financial system and thet basically did what they had to do under the charter they were given, but the numbers are beyond astounding.   None of these institutions were punished for their bad decisions or fined.  The SEC and the FED seem toothless in the face of such perfidy.

Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits.

By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret.

Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.

“These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.”

The FED is mandated with stabilizing the financial system.  It’s sole connection to borrowers is to ensure truth in lending laws are applied which still leaves borrowers stuck reading the fine print.  The  Federal Government, however, has a completely different mandate.  There’s a lot of fuzziness surrounding the idea of  promoting the general welfare.  I’m pretty sure that letting business put a market on steroids then helping them recover while letting home owners swing in the wind isn’t promoting any one’s general welfare.   However, the government has chosen to stabilize mortgage investors while still leaving the actual market for houses in a declining state.  Then, they wonder why the economy is so bad.  Folks with declining incomes and wealth do not go on spending sprees.  They retreat.

There is so much unfinished business left over from the 2007-2008 financial crisis it’s hard to know where to start the complaints.   It’s one of the major reasons for budget shortfalls all over the country.  But, you wouldn’t know that if you listen to political rhetoric.  Again, undoing the damage that caused the problems from the start would be a lot more judicious than creating additional ones. We don’t need deficit commissions.  We need to deal with the root causes of the current deficit.  That would be too many wars, too many tax cuts, and way too many people who don’t have jobs and homes because Wall Street broke the economy.


Did Bush and Obama make a secret deal in 2008?

Around the time George W. Bush’s memoir was released, Alex Barker posted this bizarre anecdote at the Financial Times’s Westminster Blog.

George W. Bush’s bombastic return to the world stage has reminded me of my favourite Bush anecdote, which for various reasons we couldn’t publish at the time. Some of the witnesses still dine out on it.

The venue was the Oval Office. A group of British dignitaries, including Gordon Brown, were paying a visit. It was at the height of the 2008 presidential election campaign, not long after Bush publicly endorsed John McCain as his successor.

Naturally the election came up in conversation. Trying to be even-handed and polite, the Brits said something diplomatic about McCain’s campaign, expecting Bush to express some warm words of support for the Republican candidate.

Not a chance. “I probably won’t even vote for the guy,” Bush told the group, according to two people present.“I had to endorse him. But I’d have endorsed Obama if they’d asked me.”

Time Magazine later quoted a Bush “spokesman,” who said Barker’s anecdote was “ridiculous and untrue.”

“President Bush proudly supported John McCain in the election and voted for him,” said Bush spokesman David Sherzer to Politico.

Nevertheless, President Obama has gone to great lengths to protect members of the Bush administration from any accountability for the crimes they committed while in office. The Justice Department defended John Yoo, author of the torture memo. Justice also went to court to defend the Bush administration’s use “state secrets privilege” to excuse NSA domestic spying. They defended Donald Rumsfeld against charges related to torture.

Recently it was learned from formerly secret cables released by Wikileaks that the Obama administration pressured Spain to drop criminal charges against six Bush officials. David Corn writes:

In its first months in office, the Obama administration sought to protect Bush administration officials facing criminal investigation overseas for their involvement in establishing policies the that governed interrogations of detained terrorist suspects. A “confidential” April 17, 2009, cable sent from the US embassy in Madrid to the State Department—one of the 251,287 cables obtained by WikiLeaks—details how the Obama administration, working with Republicans, leaned on Spain to derail this potential prosecution.

The Bush officials were charged with

“creating a legal framework that allegedly permitted torture.” The six were former Attorney General Alberto Gonzales; David Addington, former chief of staff and legal adviser to Vice President Dick Cheney; William Haynes, the Pentagon’s former general counsel; Douglas Feith, former undersecretary of defense for policy; Jay Bybee, former head of the Justice Department’s Office of Legal Counsel; and John Yoo, a former official in the Office of Legal Counsel.

The Republicans who helped Obama pressure Spain were Sen. Judd Gregg (R-N.H.) and Sen. Mel Martinez (R-Fla.). Corn again:

Back when it seemed that this case could become a major international issue, during an April 14, 2009, White House briefing, I asked press secretary Robert Gibbs if the Obama administration would cooperate with any request from the Spaniards for information and documents related to the Bush Six. He said, “I don’t want to get involved in hypotheticals.” What he didn’t disclose was that the Obama administration, working with Republicans, was actively pressuring the Spaniards to drop the investigation.

In general, as anyone with half a brain has noticed, the Obama administration has carried on Bush’s policies and sometimes has taken them even further–for example with Obama’s claiming the power to unilaterally order the assassination of American citizens.

Why would Obama defend Bush administration policies so assiduously? Is it just because Obama wants to hold onto the “enhanced” executive powers that Bush claimed during his tenure as president? Or are these two supposed political opponents actually engaged in a collaborative effort to expand the powers of the presidency?

Let’s look back at the 2008 general election campaign. In late September, Barack Obama and John McCain were preparing for the first presidential debate, to be held at the University of Mississippi on September 26, shortly after news of the financial meltdown broke. Treasury Secretary Henry Paulson had proposed the Troubled Asset Relief Program (TARP) to Congress on September 20. Read the rest of this entry »


Oodles and oodles of data… now what?

So, Bernie Sanders, Ron Paul, and Alan Grayson finally got the FED to drop some documents that show all the things it was up to during the financial crisis that dated to around 2007.  I actually have no problem with that.  That kind of information is useful and I think it’s good to have it after the fact.

If you’d like to know how much data and what it’s about,  FT Alphaville has a pretty good site up that explains the types of data that have shown up. It’s an amazing amount of detail on $ 3.3 trillion worth of bailout funding.  What’s really interesting is the list of collateral.  The actual names of organizations running to the window during the time period is there, but really not all that surprising.  You can find the details on that at another post on FT Alphaville.  As was expected, BOA is most definitely the top hog.

If you read the link to the WSJ above, you can see what both Bernie Sanders and the FED think about all of this.

“After years of stonewalling by the Fed, the American people are finally learning the incredible and jaw-dropping details of the Fed’s multitrillion-dollar bailout of Wall Street and corporate America,” Mr. Sanders said in a statement Wednesday afternoon. “As a result of this disclosure, other members of Congress and I will be taking a very extensive look at all aspects of how the Federal Reserve functions.”

The Fed has kept key deliberations closely guarded. It has taken steps to boost transparency, but has kept certain details secret, such as the names of banks that borrow at its discount window. Federal Reserve Chairman Ben Bernanke strongly objected to efforts to subject monetary-policy decisions to audits, saying it would “seriously threaten monetary-policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation.”

Matt Stoller (Policy Adviser to the now gone-pecan Congressman Grayson) has an incredibly long winded, hyperbole-ridden, populist rant against the FED that’s been published by Yves at Naked Capitalism and by New Deal 2.0.  He must’ve just popped out of cartoon bunny land because there’s a lot of cyber ink over there “full of sound and fury, signifying nothing”. It’s attracting the usual attention of economic dilettantes and Paultards.  It also has a bunch of paragraphs somewhat deferential to the P woman to whom he  just about throws the title of  “The Great Commoner”.  (Isn’t that a somewhat surprising action for some one who advises a Democratic Congressman?)  The bases of Matt Stoller’s arguments are not economics, data or theory because he dismisses all of that as being captured by the FED.  Instead, he holds up a pop culture book on the subject.

In 1989, Bill Greider published a remarkable book called “The Secrets of the Temple: How the Federal Reserve Runs the Country” in which he described how Fed officials were the real decision makers in the American political order. Shielded by the argument of ‘political independence’, most politicians wouldn’t and still won’t dare interfere with the workings of our economic structure, even though the Constitution clearly mandates that the monetary system is the province of Congress. The dramatic and overt coordination of this ‘independent’ central bank with the executive branch and the banking sector, and its flouting of Congressional and public scrutiny, have removed its institutional legitimacy.

To dismiss academic research in area is simply self-serving.  Every economist of every flavor comes up with data from all over the world that demonstrates a chaotic economy results from a central bank that is overtly influenced by politics and not independent.

The FED is simply a central bank which is the bank of bankers. It’s not supposed to be some arm of the political parties.   It doesn’t clear as many checks as it used to, but it’s FED WIRE is still the major financial transaction wire system for banks.  It gets coin and currency from the Treasury and it fills orders for them from banks.  It also ensures that banks meet the regulatory obligations.  It’s part of the trade off of getting insured by the FDIC.  They have capital requirements, they have requirements on their organizational structure and investments, and they do truth-in-lending.  Most of what the FED does outside of this is audit banks.

It’s really not some mysterious fraternity that they can’t get into.  My work with the FED was very mundane.  My staff gathered up orders for Treasury bills and bonds each Tuesday and sent them and tax payments where they would be applied.  My other staff paid the electric bills and watched to make certain our branch budget was in line with other branches.    I have never worked for a bunch of stuffier people than when I worked for the FED.  I was even told to wear nude hosiery, short heels, and a suited skirt.  Granted, I was not in NY where all the action is, but really, even bank visitations and teaching bankers how to watch their reserve accounts and use FED WIRE is not a glamor profession.  It also pays diddly.

Monetary Policy is done by the Open Market Committee and carried out by the NY FED.  No one any place else knows remotely what is done.  That’s because if any one in the market or near the market knew, it would be like the ultimate insider trading.  Would you really want YOUR congressman or Senator trusted with the ultimate INSIDER trading?  When the FED buys and sells bonds and bills, it does it through a number of brokers who get the job through a bidding process. None of them can see the bigger picture.  None of them can discern patterns any more than I could by transmitting bond and bill sales of the public every Tuesday.  It’s that way because you don’t want any one making big time money knowing which way the market moves.

So, almost every country has designed their central bank to look like our FED; that includes the Europeans.  Independence is valued above just about everything because as I’ve said, all the research shows that if you have a politically managed FED, you get a really bad economy.  Here’s an example from South Africa today of worries about central bank independence.

“During the year there has been a focus on issues relating to monetary policy independence in response to the letter from the Minister of Finance clarifying the mandate of the Bank, as well as the recent New Growth Path document, in which reference was made to a looser monetary policy stance,” Gill Marcus said.

There were perceptions that these documents had undermined the independence of the SARB, and there had been a tendency to over-interpret monetary policy actions in terms of these discussions.

“For example, when the repo rate was reduced at the previous meeting, some analysts argued that because there was no economic rationale for this move, it therefore must have been politically inspired.

“A few days later, when the disappointing growth figures were announced, these analysts conceded that our decision was vindicated on economic grounds,” Marcus said.

There is plenty of information about the FED should you want to delve into it. It produces a lot of research and a lot of information.  It just doesn’t share its immediate monetary policy targets, goals and actions with any one because that’s basically enabling insider trading.  It also doesn’t let congress tell it how to run things, but it follows the laws set forth by Congress to achieve the goals it was given. That would be:

Monetary policy has two basic goals: to promote “maximum” sustainable output and employment and to promote “stable” prices. These goals are prescribed in a 1977 amendment to the Federal Reserve Act.

The FED has no role in the stock markets and could not do anything to prevent or cause bubbles there. So, any one that tries to say the FED caused any stock market bubble is out there in la la land.  The FED can provide liquidity to credit markets through its open market activities and its activities to influence the FED FUNDS rate.  It only directly controls the rate at which it lends to financial institutions; the discount rate.  The FED FUNDS rate is a market established rate and reflects the price of loans between financial institutions. In some cases, it is a substitute for loans from the FED.

Even if the Fed suspected that a bubble had developed, it’s not clear how monetary policy should respond. Raising the funds rate by a quarter, a half, or even a full percentage point probably wouldn’t make people slow down their investments in the stock market when individual stock prices are doubling or tripling and even broad stock market indexes are going up by 20% or 30% a year. It’s likely that raising the funds rate enough to burst the bubble would do significant harm to the economy. For instance, some have argued that the Fed may have worsened he Great Depression by trying to deflate the stock market bubble of the late 1920s.

I’m beginning to think I should do more pieces on what the FED is and what the FED is not because of the disturbingly ignorant comments on that thread at Naked Capitalism.  Part of the Fed’s problem is that it puts out a lot of information but it really doesn’t do much in terms of prime time explanations.  Well,  unless you watch the twice a year briefing by the Chair on CSPAN, then you may get an idea of it.   However, that speech almost puts me to sleep and the stupid Congress questions just make me made.

So, any way, I just wanted to give you some information on this drop of data and let you know that most of the economists who know things are still pouring over it.  I’m going to be pouring over it too, so I’ll try to keep you informed.  All these discussions that are early to the media don’t appear to be coming from Financial Economists.  They appear to be all politically motivated.  Wait until some one who knows speaks up before you start forming any opinions.


Label me ‘Not Surprised’

I should’ve stuck to my research agenda, but no, I just had to go look at business headlines. There’s a debate on at The Economist over Who benefits from financial innovation?” Nobel Prize winning Economist Joseph Stiglitz is arguing that financial innovation hasn’t been boosting economic growth but his position (which is mine) is currently in the minority.

The right kind of innovation obviously would help the financial sector fulfil its core functions; and if the financial sector fulfilled those functions better, and at lower cost, almost surely it would contribute to growth and societal well-being. But, for the most part, that is not the kind of innovation we have had.

In terms of that big question up there, the answer is found today on Bloomberg.com. If you answered “what is the vampire squid”,you’re absolutely right. The more relevant question appears to be what did that cost us? For that, I can only answer a lot and there’s more to come. Here’s the headline: Secret AIG Document Shows Goldman Sachs Minted Most Toxic CDOs.

Well, there’s your financial innovation for you.

So, the fun thing about the story is that the unlikely hero is Darrold Issa (Republican) member of the House Committee on Oversight and Government Reform who “placed into the hearing record a five-page document itemizing the mortgage securities on which banks such as Goldman Sachs Group Inc. and Societe Generale SA had bought $62.1 billion in credit-default swaps from AIG.” Oddly enough,it appears that Issa may have not really known exactly what he had just disclosed. It didn’t really attract any attention at the time. Luckily, some one who knew something eventually looked at it. This was essentially a list of the deals that made AIG insolvent. These were also the deals that the government basically bought when it rescued AIG.

The document Issa made public cuts to the heart of the controversy over the September 2008 AIG rescue by identifying specific securities, known as collateralized-debt obligations, that had been insured with the company. The banks holding the credit-default swaps, a type of derivative, collected collateral as the insurer was downgraded and the CDOs tumbled in value.

The public can now see for the first time how poorly the securities performed, with losses exceeding 75 percent of their notional value in some cases. Compounding this, the document and Bloomberg data demonstrate that the banks that bought the swaps from AIG are mostly the same firms that underwrote the CDOs in the first place.

Here’s an even more interesting analysis from a legal standpoint. I know the deal was shady, I just have never known exactly if shady=unethical=illegal. The devil is truly in the details placed into public record by Issa.

The identification of securities in the document, known as Schedule A, and data compiled by Bloomberg show that Goldman Sachs underwrote $17.2 billion of the $62.1 billion in CDOs that AIG insured — more than any other investment bank. Merrill Lynch & Co., now part of Bank of America Corp., created $13.2 billion of the CDOs, and Deutsche Bank AG underwrote $9.5 billion.

These tallies suggest a possible reason why the New York Fed kept so much under wraps, Professor James Cox of Duke University School of Law says: “They may have been trying to shield Goldman — for Goldman’s sake or out of macro concerns that another investment bank would be at risk.”

Okay, so we know who we’re speaking of when Cox says the New York Fed, right? That would be Treasury Secretary Timmy-really-in-the-well-this-time Geithner. Bloomberg is going as far as to label his actions a cover-up. I frankly think that looks like a mild charge. Interestingly enough, an earlier version of the information was released by AIG but the counterparty names were redacted at the time. Chris Dodd’s committee had requested the information. Without the names–or more truthfully the frequency of ONE name in particular–you can’t really see much of a conspiracy.

What this detailed list shows–because the names are now out there along with the deals–is that the very same folks that underwrote the original toxic securities were the same folks that went to AIG to bet against them. It doesn’t look like they were hedging or placing insurance on their risk which would be natural and understandable transactions. It appears they fully knew the securities were bad and were preparing to make money by placing offsetting bets. This activity could only be determined if you saw the names of the counterparties next to the deals themselves. So, the appropriate document to list the information on would be a Schedule A. AIG released a schedule A for several years during the crisis, but without some of the most relevant details. We know now that this was at the request of the NY Fed (aka Tim–I’ve got GS on speed dial–Geithner).

In late November 2008, the insurer was planning to include Schedule A in a regulatory filing — until a lawyer for the Fed said it wasn’t necessary, according to the e-mails. The document was an attachment to the agreement between AIG and Maiden Lane III, the fund that the Fed established in November 2008 to hold the CDOs after the swap contracts were settled.

AIG paid its counter­parties — the banks — the full value of the contracts, after accounting for any collateral that had been posted, and took the devalued CDOs in exchange. As requested by the New York Fed, AIG kept the bank names out of the Dec. 24 filing and edited out a sentence that said they got full payment.

The New York Fed’s January 2010 statement said the sentence was deleted because AIG technically paid slightly less than 100 cents on the dollar.

Before the New York Fed ordered AIG to pay the banks in full, the company was trying to negotiate to pay off the credit- default swaps at a discount or “haircut.”

Read that date. We’re talking November 2008. If you read further into the Bloomberg article you’ll see that the names were withheld also during 2009. Issa put the names out because he wanted to show U.S. taxpayers where their money went. It’s unclear to me if he understood then or maybe even now that by putting out the details of the deals, he’s basically provided information that let’s us know how deeply Goldman Sachs was in on the financial innovations that blew up the economy. Not only that, it appears they knowingly may have been loading some of those innovations with assets they knew would explode and that they were actively placing bets on that outcome at AIG. As of the end of January, 2010 meeting, Geithner and the NY Fed still didn’t want the details released. No fucking wonder!

Janet Tavakoli, founder of Tavakoli Structured Finance Inc., a Chicago-based consulting firm, says the New York Fed’s secrecy has helped hide who’s responsible for the worst of the disaster. “The suppression of the details in the list of counterparties was part of the coverup,” she says.

E-mails between Fed and AIG officials that Issa released in January show that the efforts to keep Schedule A under wraps came from the New York Fed. Revelation of the messages contributed to the heated atmosphere at the House hearing.

Tavakoli also says that the poor performance of the underlying securities (which are actually specific slices or tranches of CDOs) shows they were toxic in the first place and were probably replenished with bundles of mortgages that were particularly troubled. Managers who oversee CDOs after they are created have discretion in choosing the mortgage bonds used to replenish them.

“The original CDO deals were bad enough,” Tavakoli says. “For some that allow reinvesting or substitution, any reasonable professional would ask why these assets were being traded into the portfolio. The Schedule A shows that we should be investigating these deals.”

So, check this out.

Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, who delivered a report on the AIG bailout in November, says he’s not finished. He has begun a probe of why his office wasn’t provided all of the 250,000 pages of documents, including e-mails and phone logs, that Issa’s committee received from the New York Fed.

Okay, now, follow closely as I connect the dots to this one: U.S. Treasury loan plan may exclude TARP watchdog.

If you were Timothy Geithner, would you want Neil Barofsky poking around any more programs? Wouldn’t you be highly interested in controlling TARP oversight? No wonder Treasury officials and others have been after Barofsky for some time. (Here’s an outline of their actions and attempts to remove independency by Glenn Greenwald at Salon from last summer. )

Bottom line:

Geithner basically knew the vampire squid was a huge contributor to the fall of AIG. It looks like he may have actively encouraged covering-up that information. It also looks like GS actively securitized mortgages it knew would fail eventually and made huge counterbets based on that information using AIG as its personal bookie. Then, when AIG couldn’t cover the bets, GS refused to negotiate any deals (they must’ve known something like a bail out was forthcoming). Then knew exactly what was in those securities so they knew their real value. Geithner made AIG pay GS 100% of the value when it appears they were worth around 35%. When AIG tried to report the counterparties, the NY FED told them to withhold the information. (Yet, post Timmy, the NY FED appears to have released everything to Issa’s committee. During Timmy’s time, remember, everything was heavily edited and Barofsky appears not to have gotten the same information.) They also were told not to provide details on the mark downs. Timmy must’ve known that Goldman was betting against the toxic assets they had created. Not only that, it looks like Goldman was actually shorting themselves! AND these guys were Obama’s major contributors. Giethner must’ve been part of the packaged deal.

I got one thing to say now. A lot of folks should be doing a perp walk on this one. This looks like fraud. If this is the kind’ve financial innovation these folks voting on The Economist poll want, then they should just as well turn their life savings over to Bernie Madoff right now. I just wish they’d stop giving the likes of him mine too.

(I hope I’ve explained this adequately, cause this sure is one fucking twisted tale.)


And now, a Game of Concentration

When I saw this NYT Headline, “As Big Banks Repay Bailout Money, U.S. Sees a Profit”, it really did not send me to a

Expecting Customer service?  Fat Chance!

Expecting customer service? Fat Chance!

happy place. You’re probably going to raise a Spock-like eyebrow and ask me to explain. Why, Kat, you’re probably saying, isn’t a 15% return on our “money” a good deal in this market? Remember finance 101, rates are relative to risk so let me tell you why I’m a concern troll on this. First, here’s what the author thought was the punch line to this story.

But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.

As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”

So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.

What the author really missed was that information also comes on the back of this information last week that shows that the government has created incredible high concentration ratios in the banking market. I discussed it here in a piece where I called it a big ol’ game of monopoly. This is an ongoing policy disaster and many folks appear to be missing it.

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

There are so many headlines buried in that NYT piece that you’d think it was written by ostriches. This is one alone should’ve grabbed a banner headline.

But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.

Well, isn’t that nice, the best borrowers paid back first. Some one over there ever take any finance classes? I doubt it. Of course, that’s going to happen you twit!! It’s the implication of what that means that scares the pants off me. The fact they’ve borrowed funds allows us to regulate their actions. Now, the big ones are paying them back so they’re out of the reach of tighter TARP regulation! They like their old loosey goosey nonsense regulations especially now that they’re all set up as a de facto cartel with government blessing. They’re ready to price discriminate, restrict services, and create extraordinary profits all they want with FEW RESTRICTIONS. Just wait until we get to witness the new and improved, unregulated CEO pay schemes!

It’s similar to handing all of our energy needs and policy over to OPEC.

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Yesterday, Teabagging, Today Sandbagging

nancy-pI can’t tell you how disappointed I am that America’s first woman Speaker of the House has turned into a player for all seasons.  First, we find out exactly how much she knew about the torture methods of the Bush Administration and when she knew about it.  Then she tells a big lie about it.  Rumors still abound that she was wanted Obama as POTUS because she could be the Queen Bee of Capitol Hill.  His lack of knowledge and experience was certain to put her in a position of power.  Too bad she is more of a demagogue than a democrat because if there was ever a chance to be the Queen of the Hill, it would’ve been with reform of the financial system.

Instead, we’re seeing her go after yet another woman who has tried to champion the voters/taxpayers over big party money.  A head line from Yves Smith at Naked Capitalism says it all for you: “On Pelosi’s Duplicity and Apparent Sandbagging of Elizabeth Warren, watch dog of the TARP”.  It’s a typical Capitol Hill soap opera if there ever was pelosiboarding01-copyone.  As appears customary with everything economic coming out of the democratic wing of our congressional whores,  Pelosi is siding with the financial services industry over the voters/taxpayers. Yves first reminds us of the strange dance surrounding the birth of TARP.  Remember, life was supposed to be different once the Democrats retook the Congress.

Recall how instrumental Pelosi was in getting the TARP passed. The widely mentioned gambit of Paulson getting on bended knee to plead for her support was a nice bit of theater to cover how readily she fell into line. The other justification for the Democratic leadership support was the claim that Treasury had given a closed door briefing to Senate and House leadership telling them the world would end if the TARP was not passed yesterday.

Some have suggested that Treasury provided data on the potentially disastrous money market fund withdrawals around the time of the Lehman failure (recall the death of Lehman led Reserve to break the buck). but that problem had already been addressed in September in part via the Fed providing non-recourse loans to purchase asset backed commercial paper, and more fully in October via yet another Fed facility. In other words, if the money market fund panic was indeed the scare tactic, the TARP was not the remedy.

But even if we give the devil its due, the performance of the Democratic leadership was pathetic. The most heinous aspect of the bill, putting the Treasury secretary outside the reach of law, was never cut back. The first draft, a doodle on a napkin, was offensive to democratic processes, the second draft added a lot more words but was still way too thin on basics, like objectives, criteria, procedures, and the final draft loaded tons of pork in to assure passage. And the ironies kept multiplying. The bill was wildly unpopular even with the media falling into line (and in the later stages, a clearly orchestrated campaign to have financial services industry employees contact legislators to counter the groundswell of opposition). And it was Senate Republicans who were the last holdouts.

Here’s the soap opera, errr, money line.

So why are we pointing a finger at Pelosi in particular? The next chapter is her appointment of one Richard Nieman to the Congressional Oversight Panel. Under the TARP rules, the House Majority leader selects one of the oversight panel members, so this choice was completely under her control.

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