Tremble, Banks, Tremble

The key to financial recovery: restoring the rule of law on Wall Street.

By James K. Galbraith
The New Republic

The financial crisis in America isn’t over. It’s ongoing, it remains unresolved, and it stands in the way of full economic recovery. The cause, at the deepest level, was a breakdown in the rule of law. And it follows that the first step toward prosperity is to restore the rule of law in the financial sector.

First, there was a stand-down of the financial police. The legal framework for this was laid with the repeal of Glass-Steagall in 1999 and the Commodities Futures Modernization Act of 2000. Meanwhile the Basel II process relaxed international bank supervision, especially permitting the use of proprietary models to value complex assets—an open invitation to biased valuations and accounting frauds.

Key acts of de-supervision came under Bush. After 9/11 500 FBI agents assigned to financial fraud were reassigned to counter–terrorism and (what is not understandable) they were never replaced. The Director of the Office of Thrift Supervision appeared at a press conference with a stack of copies of the Code of Federal Regulations and a chainsaw—the message was not subtle. The SEC relaxed limits on leverage for investment banks and abolished the uptick rule limiting short sales to moments following a rise in price. The new order was clear: anything goes.

Second, the response to desupervision was a criminal takeover of the home mortgage industry. Millions of subprime mortgages were made to borrowers with undocumented incomes and bad or non-existent credit records. Appraisers were selected who were willing to inflate the value of the home being sold. This last element was not incidental: surveys showed that practically all appraisers came under pressure to inflate valuations in order to make deals happen. There is no honest reason why a lender would deliberately seek to make an inflated loan.

Mortgages were made with a two-or three-year grace period, with a low, fixed interest rate called a “teaser.” These were not real mortgages; they were counterfeits, whose value would collapse when exposed. As with any counterfeit, the profits came early, when the bad paper was first sold. After the grace period, rates would reset, and the lenders knew that the borrowers, who were already stretched by their initial payments, would either refinance or default. If they refinanced, that would mean another mortgage origination fee. And if they defaulted, well … on to step three.

Third, the counterfeit mortgages were laundered so they would look to investors like the real thing. This was the role of the ratings agencies. The core competence of the raters lay in corporate debt, where they evaluate the record and prospects of large business firms. The value of mortgage bonds depended on the behavior of tens of thousands of individual borrowers, whose individual quality the ratings agencies could never check. So the agencies substituted statistical models for actual inquiry, and turned a blind eye to the fact that the loans were destined to go bad.

Fourth, the laundered goods were taken to market. The investment and commercial banks transformed the bad mortgages into bonds, obtained the AAA ratings, and sold the stinking mess to American pension funds, European banks and anyone else who took the phrase “investment grade” at face value. (Later chumps would include the Federal Reserve.) The European crisis now underway is a direct result, as their banks and investors, stung by losses on American mortgage bonds, are dumping their risky Greek public debt and seeking the safety of U.S. Treasury bills.

When the crisis went public in August 2007, Henry Paulson’s Treasury took every step to prevent the final collapse from happening before the 2008 elections, extracting billions from the Federal Housing Authority and from Fannie Mae and Freddie Mac to relieve the pressure on bank balance sheets. It worked until it didn’t. In September 2008 the collapse of Lehman triggered the collapse of American International Group (AIG) and the steps that led to the Troubled Assets Relief Program (TARP) and to the effective nationalization of the commercial paper market, meaning that the Federal Reserve has become the primary short-term funder of major American corporations.

Upon taking office, President Obama had a chance to change course and didn’t take it. By seizing the largest problem banks, the government could have achieved clean audits, replaced top management, cured destructive compensation practices, shrunk a bloated industry, and cut the banks’ lobbying power and therefore their capacity to obstruct financial reform. The way to write-downs of bad mortgage debt and therefore to financial recovery would have been opened.

None of this happened. Instead the Treasury administered fake “stress tests” and relaxed mark-to-market accounting rules for toxic assets which permitted the banks to defer losses and to continue to carry trash on their books at inflated values. This reassured the banks that they would not be permitted to fail—and so back to bonuses-as-usual they went. The banks survived, and the administration today claims this “proves” they didn’t need to be taken over. But to what end did they survive? The banks are bigger, more powerful, and moer obstructionist than ever—and largely uninterested in making new commercial, industrial, or residential loans.

Today the former middle class is largely ruined: upside down on its mortgages and unable to add to its debts. With housing prices low and falling, banks are delaying foreclosures because they don’t wish to recognize their losses; it is a sick fact that the cash homeowners conserve by non-payment is one source of the anemic recovery so far. But construction remains depressed, state and local budgets continue in a death-spiral of spending cuts and tax increases, the stimulus will soon end, and exports may soon fall victim to international austerity and the rapidly declining euro. Meanwhile the deficit hysterics seem determined to block unemployment insurance and aid to states today, and to cut Social Security and Medicare tomorrow.

In this way, the financial sector remains a fatal drag on the capacity for strong growth. And the financial reform bills about to clear Congress will not cure this. The bill in conference has some useful elements but it is neither sufficient nor necessary to clean up frauds, which have always been illegal. Nor will it clean up private balance sheets and permit lending to restart. Still less will it set a new direction for the financial economy going forward.

What to do? To restore the rule of law means first a rigorous audit of the banks and of the Federal Reserve. This means investigations—Representative Marcy Kaptur has proposed adding a thousand FBI agents to this task. It means criminal referrals from the Financial Crisis Inquiry Commission, from the regulators, from Congress, and from the new management of troubled banks as they clean house. It means indictments, prosecutions, convictions, and imprisonments. The model must be the clean-up of the Savings and Loans, less than 20 years ago, when a thousand industry insiders went to prison. Bankers must be made to feel the power of the law in their bones.

How will this help the economy? The first step toward health is realism. We must first stop pretending that bad assets can be made good, that bad loans will someday be repaid, and that bad people can run good banks. Debt crises are resolved when debts are written down and gotten rid of, when the institutions that peddled bad debts are restructured and reformed, and when the people who ran the great scams have been removed. Only then will private credit start to come back, but even then the result of bank reform is more prudent banks, by definition more conservative than what we’ve had.

So yesterday’s borrow-like-there’s-no-tomorrow America is done for in any event; there will not be another bank-sponsored private credit boom. The housing crisis (and therefore the middle-class insolvency) won’t go away soon. There is no cure for falling housing prices except time and patience; debt relief will at best stabilize the middle class. It follows that the private banks and dealers and borrowing by households are not going to be at the center of the next expansion.

We are in the post-financial-crash. We need to do what the U.S. did during the New Deal, and what France, Japan, Korea, and almost every other successful case of post-crash (or postwar) reconstruction did when necessary. That is, we need to create new, policy-focused financial institutions like the Reconstruction Finance Corporation to take over the role that the banks and capital markets have abandoned. Thus, as part of the reconstruction of the system, we need a national infrastructure bank, an energy-and-environment bank, a new Home Owners Loan Corporation, and a Gulf Coast Reconstruction Authority modeled on the Tennessee Valley Authority. To begin with.

A reconstructed financial system should finance the reconstruction of the country. Public infrastructure. Energy security. Prevention and mitigation of climate change, including the retrofitting of millions of buildings. The refinancing of mortgages or conversion to rentals with “right-to-rent” provisions so that people can stay in their homes at reasonable rates. The cleanup and economic renovation of the Gulf Coast. All of this by loans made at low interest rates and for long terms, and supervised appropriately by real bankers prepared to stay on the job for decades.

The entire host of neglected priorities of the past 30 years should be on the agenda now. That is the way—and the effective path—toward prosperity.

James K. Galbraith is author of The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too. He teaches at The University of Texas at Austin.

Source: The New Republic

Forty Top Economists Urge More Spending Not Less

The Daily Beast

Economists Manifesto

Fourteen million unemployed represents a gigantic waste of human capital, an irrecoverable loss of wealth and spending power, and an affront to the ideals of America. Some 6.8 million have been out of work for 27 weeks or more. Members of Congress went home to celebrate July 4 having failed to extend unemployment benefits.

We recognize the necessity of a program to cut the mid- and long-term federal deficit but the imperative requirement now, and the surest course to balance the budget over time, is to restore a full measure of economic activity. As in the 1930s, the economy is suffering a sharp decline in aggregate demand and loss of business confidence. Long experience shows that monetary policy may not be enough, particularly in deep slumps, as Keynes noted.

The urgent need is for government to replace the lost purchasing power of the unemployed and their families and to employ other tax-cut and spending programs to boost demand. Making deficit reduction the first target, without addressing the chronic underlying deficiency of demand, is exactly the error of the 1930s. It will prolong the great recession, harm the social cohesion of the country, and continue inflicting unnecessary hardship on millions of Americans.

The original signatories were:


Alan Blinder
Alan Blinder was vice chairman of the Federal Reserve and served on Bill Clinton’s Council of Economic Advisers; he’s the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University.

Daniel Kevles
Daniel Kevles is the former faculty chair at California Institute of Technology and serves as a professor of history at Yale University.

David Reynolds
David Reynolds is an international history professor and fellow at Christ’s College in Cambridge. His latest book is America, Empire of Liberty: A New History of the United States.

Derek Shearer
Derek Shearer served as the ambassador to Finland from 1994-1997. He is now a diplomacy and world affairs professor at Occidental College in Los Angeles.

Jim Hoge
Jim Hoge is editor of Foreign Affairs and the former editor of the Chicago Sun-Times, which won six Pulitzer Prizes under his tutelage. He is co-editor of How Did This Happen? Terrorism and the New War.

John Cassidy
A journalist and author of the book How Markets Fail: The Logic of Economic Calamities, John Cassidy has been a staff writer at The New Yorker since 1995, covering economics and business.

Joseph Stiglitz
Joseph Stiglitz is the former chief economist of the World Bank, and a recipient of the Nobel Prize and the John Bates Clark Medal; currently, he’s a professor at Columbia University. He is most recently the author of Freefall: America, Free Markets, and the Sinking of the World Economy and The Stiglitz Report: Reforming the International Monetary and Financial Systems in the Wake of the Global Crisis.

Laura Tyson
Laura Tyson served as the chair of Council of Economic Advisers and the director of the National Economic Council during the Clinton administration. She is a professor at the Haas School of Business at the University of California, Berkeley.

Lizabeth Cohen
Lizabeth Cohen is the Howard Mumford Jones Professor of American Studies in the History Department at Harvard University, and author of Making a New Deal: Industrial Workers in Chicago, 1919-1939.

Harold Evans
Sir Harold Evans is a journalist and former editor of The Sunday Times and the Times, who was knighted in 2004 for his services to journalism. His award-winning book, They Made America, chronicled the country’s most important innovators and inventors.

Nancy Folbre
Nancy Folbre won a MacArthur Genius Award, is a professor of economics at the University of Massachusetts-Amherst, and recently wrote the book Saving State U: Fixing Public Higher Education.

Richard Parker
Richard Parker, a former congressional consultant, is a public policy lecturer and senior fellow at the Shorenstein Center at Harvard’s Kennedy School of Government. He is the author of The Myth of the Middle Class, Mixed Signals: The Future of Global Television News, and John Kenneth Galbraith: His Life, His Politics, His Economics.

Robert Reich
A professor of public policy at the University of California at Berkeley, Robert Reich was the 22nd secretary of Labor under President Clinton. He is the author of 12 books, including his most recent Supercapitalism: The Transformation of Business, Democracy, and Everyday Life.

Sean Wilentz
Sean Wilentz is the Sidney and Ruth Lapidus Professor in the American Revolutionary Era at Princeton. His book, The Rise of American Democracy: From Jefferson to Lincoln, won the 2006 Bancroft Prize.

Sidney Blumenthal
Sidney Blumenthal is a former senior adviser to President Bill Clinton and advised Hillary Clinton during her 2008 presidential campaign. His books include The Clinton Wars and The Permanent Campaign.

Simon Schama
The author and host of the BBC documentary A History of Britain, Simon Schama is a historian who teaches at Columbia University.

The 16 additional signatories include:

– Marshall Auerback
Senior fellow ?at the Roosevelt Institute

– Clair Brown ?
Professor of economics, director of ?Center for Work, Technology, and Society, ?University of California, Berkeley

– Jim Campen
Professor of economics, Emeritus, University of Massachusetts-Boston

– Susan Feiner
Professor of women’s and gender studies and professor of economics, the University of Southern Maine

– Heidi Shierholz
Economist at Economic Policy Institute

– Michael D. Intriligator
Professor of economics, political science, and public policy, UCLA senior fellow, The Milken Institute, University of Western Sydney

– David I. Levine?
Eugene E. and Catherine M. Trefethen Professor, Haas School of Business, University of California, Berkeley

– Victor D. Lippit
Professor of economics, University of California, Riverside

– Robert Lynch?
Professor of economics, ?Washington College?, Chestertown, Maryland

– Arthur MacEwan?
Professor emeritus, Department of Economics?, senior fellow at the Center for Social Policy, University of Massachusetts-Boston

– Richard MacMinn?
Edmondson-Miller Chair?, College of Business at the ?Illinois State University

– Eric Maskin
Nobel laureate in Economics, A.O. Hirschman Professor of Social Science, Institute for Advanced Study, Princeton

– Daniel McFadden?
Recipient of the 2000 Nobel Prize for Economics and 1975 John Bates Clark Award, University of California, ?Berkeley

– Walter W. McMahon
Professor of Economics (Emeritus), University of Illinois

– Peter B. Meyer?
Professor emeritus of urban policy and economics?, director emeritus of the Center for Environmental Policy and Management, University of Louisville

– Michael Nuwer?
Professor of economics,? SUNY Potsdam

– Erik Olsen?
Assistant professor?, Department of Economics, ?University of Missouri

– Dimitri Papadimitriou?
President, The Levy Economics Institute

– Bruce Pietrykowski?
Professor of economics, University of Michigan-Dearborn

– Robert Pollin?
Professor of economics? and co-director of the Political Economy Research Institute at the University of Massachusetts-Amherst

– Malcolm B. Robinson
Professor of economics,? Thomas More College

– Mary Huff Stevenson?
Professor of economics, ?University of Massachusetts-Boston

– Peter Skott?
Professor, University of Massachusetts-Amherst

– Mark Zandi
Chief economist and co-founder, ?Moody’s

Comments of signatories:

Richard MacMinn, Edmondson-Miller Chair, Illinois State University:

If we have learned anything from Keynes then it is that it takes a massive investment to restart a floundering economy. Given the aging infrastructure and the underinvestment in education as well as so many other fields including energy, the potential for large returns from those investments and to the economy seems clear. It is also clear that inaction will yield large losses in economic activity. This is not the time to let fear of a deficit create inaction. Rather the opposite is called for.

David I. Levine, Trefethen Professor, Haas School of Business, University of California, Berkeley:

We all agree the United States has a serious deficit problem over the next generation. This medium-term problem is largely due to the rising expected cost of paying for health care for the elderly. It is crucial we learn how to deliver quality care without ever rising prices. At the same time, the serious problem of exploding health-care costs is no excuse to ignore the urgent short-run need to get Americans back to work.

• The Original Reboot America Manifesto We know how to fight unemployment: Support the purchasing power of the unemployed with extended unemployment insurance, give states more assistance so cities and states do not keep laying off teachers and firefighters, and so forth. My description of the root cause of our long-term problem suggests one particularly useful way to fight recession: Research into how to provide high quality health care at lower cost is a great investment in creating in jobs today, ensuring fiscal soundness for the next generation, and improving the lives of Americans.

Victor D. Lippit, Professor of Economics, University of California, Riverside:

There are only four sources of aggregate demand in the economy: consumption, private investment, government spending, and net exports. With high levels of unemployment characterizing the U.S. economy and household and retirement savings devastated by the fall in the stock market since 2008, the fall in house prices on which many households relied as their “store of savings,” and the sudden realization on the part of many that household debt must be repaid and savings levels rise, the U.S. is in for an extended period of subpar consumption increases. Business investment to produce consumer goods and services will, therefore, remain modest as well. And weak economies in Europe and Japan limit export demand.

For some time, then, government spending will be needed to provide stimulus to the economy and aid to the unemployed, who can scarcely be faulted when jobs are unavailable. Over the medium and long term, government deficits must be addressed, but the time to do that is after a more substantive recovery has taken place and jobs are again available. Those refusing to support an extension of unemployment insurance at this time without government cutbacks elsewhere betray a deep ignorance of the fundamentals of economics, creating serious injustice to those who have lost their jobs and deep harm to the economy as well.

Michael Nuwer, Professor of Economics,? SUNY Potsdam:

In early 2009, when the economic stimulus was being debated, many economists expected that the spending amounts under consideration where not enough to lift the economy out of the Great Recession. And sure enough, they were right. The unemployment rate remains unacceptably high, state and local government budgets are in crisis, and there are no signs of improvement in the economy. Now is the time for Congress to get the economy back on track and the American people back to work.

Source: The Daily Beast

Shadow Elite: Derivatives, A Horror Story

By Janine R. Wedel
Huffington Post

Strange as it sounds, my experience mapping under-the-radar power in Communist Poland, as a social anthropologist, helped me identify a new breed of modern-day power broker here in the U.S. Unaccountable operators are increasingly shaping public policy to suit their own interests, a disturbing trend I examine in my book Shadow Elite.

But perhaps not as strange as this sounds: Gillian Tett’s fieldwork studying marriage rituals in a mountain village in Tajikistan helped her, years later, understand how risky derivatives proliferated, and went unnoticed, until they helped detonate the global financial system. Tett is also a social anthropologist by training. Now she’s a top editor/journalist for the Financial Times, by trade, and she joins others with anthropological know-how offering crucial insights on derivatives and the “dark markets” that have been key areas of combat in the financial reform fight being waged on Capitol Hill.

Tett is the author of Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. Last fall in Anthropology News, she made this comparison:

…bankers (like Tajik villagers) operate as a tightly defined group, with specific cultural patterns and a quasi language (or jargon) of their own. Also like Tajik villagers, bankers are generally trained to think in rigid “silos” and, as a result, find it hard to see how their overall system operates, or to see the contradictions in their own rhet­oric and internal organizations.

From the outside and with hindsight, the contradictions now seem glaring. Inside this closed culture, the ideals of the free market are repeatedly espoused, but not upheld. Derivatives, the exotic financial contraptions that vastly enrich the banking business, have flourished in the shadows, not in the open marketplace.

As I discuss in Shadow Elite, bankers capitalized on this aura of unmatched complexity, ever-changing technologies, and unstoppable financial “innovation”, all during an era when deregulation had become the norm. They used jargon, as Tett points out, and also a stranglehold on information as weapons to obscure, making effective oversight very difficult. She elaborated in the FT on the warring Wall Street “tribes” within a single firm, and how the derivatives tribe came to dominate.

Groups such as Citi or Merrill appear to have developed a more hierarchical pattern, in which the different business lines have existed like warring tribes, answerable only to the chief. Moreover, the most profitable tribe has invariably wielded the most power – and thus was untouchable and inscrutable to everyone else. Hence the fact that, in this tribal culture, nobody reined in the excesses….

No one reined them in within the firm, the ratings agencies, or Washington. Anthropologist of finance Bill Maurer explained to me the ‘complexity’ narrative.

[It is one] that empowers the [bankers and their lobbyists] who can say, ‘listen Congress, listen policymakers, we’re the ones who know what’s going on. So just back off. There’s no way you can understand unless you have a degree in advanced math or advanced physics.’

Damning evidence of this kind of hubris can be seen in a statement to Congress in 1998 – when the derivatives timebomb might have been defused – from then-deputy Treasury Secretary Lawrence Summers. He clearly internalized the idea that the Wall Street pros knew best.

….the parties to these kinds of contract are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies.

Who else was backing off? Gillian Tett takes a hard look at her own adopted field, journalism. After sketching out how the financial banking “village” operated, she then tried to understand, as both a reporter and anthropologist, why the media largely disregarded derivatives, even as their significance and threat was growing bigger minute by minute, trade by trade. While working at the Financial Times, she began to see a similar narrative taking hold in newsrooms: that derivatives were too hard to report on, and too boring to read about.
She says this:

…in the debt and derivatives world …. bankers generally loathed publicity and would rarely give “on the record” quotes. Moreover, it was difficult to get price or trading data since deals were typically made in private, not on public exchanges, and discrete events seemed few and far between. The debt and derivatives markets did not create “stories”–or not as defined by the Western press.

Shadow Elite column editor Linda Keenan, who worked in TV financial news in the earlier days of derivatives, seconds this assessment, pointing out that in television, there’s the added barrier of needing visuals: how do you put a picture to a derivative?

With journalists stumped, could anyone in the Washington power “village” stand in the way of runaway derivatives, and the banks that wanted to keep them unregulated? Ironically, there were few policymakers more capable of understanding derivatives or their real world impact than Clinton Treasury Secretary Robert Rubin and his deputy Lawrence Summers. And both were there when derivatives could have been at least partially reined in before they became, to quote Warren Buffett, “financial weapons of mass destruction.” Instead they did exactly the opposite, blocking key regulation at pivotal moments, as we saw in Summers’ remarks above, with Rubin going on to benefit from this deregulated Wild West when he left Washington and returned to Wall Street as a top executive.

Here again, taking an anthropological view can be instructive. Consider the elite conclaves both came from, and the biases and potential conflicts attached to them. Rubin originally came to Washington after decades at Goldman Sachs, a firm renown for its culture of invincibility. Summers came from a somewhat similar culture – Harvard – with ample faith in both himself and the efficacy of the free market.

Their boss, President Clinton, was intent on being the pro-business “New” Democrat. In the last two months, all three have tried to distance themselves from their roles in letting derivatives go unchecked. (And in true shadow elite fashion, none of them have faced the consequences of their actions. In fact, the only ones to really suffer from the failure of the elite are the non-elite, millions of regular people who’ve lost their jobs, houses or savings.)

And derivatives remain unchecked. Just because the economy cratered doesn’t mean that all these money-printing machines have disappeared. According to calculations by Bernstein Research, Goldman Sachs could lose 41 percent of its profits if the new derivatives regulations pass. Banks generally don’t break down their figures on this part of their business (surprised?), but it seems fair to estimate the percentage of the bank revenue that comes from derivatives is solidly in the double-digits (at some it could be more than 50%) To put this in perspective, imagine a food company that gets half its revenue from selling products that go totally unregulated by the FDA, and whose practices are hidden from both regulators and journalists.

Tett notes sociologist, philosopher and anthropologist Pierre Bourdieu as arguing,

…elites …. invariably try to hang onto power–not so much by controlling the physical means of production, but by also dominating the cognitive map, or social discourse. What really matters …is not what is publicly discussed, but what is not discussed. Social silences, in other words, are crucial.

Her message: when the people in power insist a little too hard that there’s no story to be found, start digging in. Tett says this should be a wake-up call for journalists and anthropologists, to question the people drawing that cognitive map. One reviewer dismissed this as “preachy” advice. It might be, if she wasn’t dead right.

Linda Keenan edits the Shadow Elite column.

Source: Huffington Post

Why financial reform might not work as intended

The Senate passed financial reform Thursday, and President Obama will sign it, but many of the tough decisions will be made by federal regulators. How they interpret the bill will be key.

By Gail Russell Chaddock
Christian Science Monitor

Even before the Senate passed sweeping finance reform Thursday, House Republicans – now within range of taking back the majority in fall midterm elections – called for its repeal.

It’s the latest sign of how election-year politics dominated the debate over financial regulation – and how tough it could be to sustain reform over the years it will take for all elements of the law to take effect.
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The law, which passed the Senate today by a vote of 60 to 39:

• Sets up an advance warning system for banks deemed too big to fail.

• Ends taxpayer-funded bailouts.

• Imposes new transparency and rules on a $600 trillion unregulated derivatives market.

• Sets new limits on speculation by banks.

• Launches a consumer protection agency with broad powers.

“Because of this reform, the American people will never again be asked to foot the bill for Wall Street’s mistakes. There will be no more taxpayer-funded bailouts, period,” said President Obama in remarks at the White House after the Senate vote.

Commenting on House GOP threats to repeal the bill, he added: “I would suggest that American can’t afford to go backwards. And I think that’s how most Americans feel as well. We can’t afford another financial crisis just as we’re digging out from the last one.”

Wall Street reform is the second leg of an ambitious three-point legislative agenda that Democrats are rushing to complete by midterm elections. The president signed health-care reform into law March 23. House Democrats passed a climate-change bill in June 2009, but it has since languished in the Senate. Senate majority leader Harry Reid (D) of Nevada is drafting a scaled-down energy bill that he hopes to bring to the floor as early as next week.

Unlike health-care reform, Wall Street reform is broadly popular with American voters. But Republican leaders oppose it as a potential job killer. At the 11th hour, Republican Sens. Susan Collins and Olympia Snowe of Maine and Scott Brown of Massachusetts came to terms with Democrats over “fixes” to the bill, allowing Democrats to break a GOP filibuster today. “This bill would not have happened without them,” said Senator Reid, after the vote.

But the 2,300 page overhaul also requires drafting some 200 regulations, as well as studies and extended timelines before many features of the law take effect. The fight to ensure that the intent of Congress is reflected in regulations could be as protracted as the two-year battle to pass reform.

Responding to charges that Congress had punted all the important decisions to regulators, Sen. Christopher Dodd (D) of Connecticut, who chairs the Senate Banking, Housing, and Urban Affairs Committee, said: “Those are things you cannot legislate: getting good people, committed people, who then in turn hire good people, attract good people to come into these regulatory bodies to do the job.

“I’ll plan on having oversight hearings as early as September to bring in the regulatory bodies to ask them exactly what their plans are on how they intend to move forward with the regulatory obligations bill that this bill has imposed,” he added.

Senator Snowe, who agreed to back the bill after concessions for small and seasonal businesses, says that she is considering proposals to ensure that the rules produced by the Treasury Department and agencies to implement the law are in line with such agreements. “The next phase is a regulatory one, and Congress must be sure that that is truly reflective of the legislative intent,” she says.

Public interest groups – a key partner in drafting the finance reform bill – praised the finance reform legislation as providing a strong framework for regulators. “But Congress is going to have to do a better job of oversight than it did over the last eight years [of the Bush Administration], when the regulators aided and abetted [those abusing the system] and Congress let them,” says Ed Mierzwinski, director of consumer advocacy for the National Association of State Public Interest Research Groups (PIRG).

For example, the bid to regulate a highly riskly $600 trillion derivatives market depends critically on how the rules are written and enforced, experts say.

“Dodd-Frank sets the contours that have the potential of converting that entire market into a fully transparent and fully capitalized environment. But, dozens of rulemakings, studies, and reports stand in the way,” says Michael Greenberger, a professor at the University of Maryland School of Law.

If “well-funded Wall Street advocacy” wins out in the regulatory process, the bid to clamp down on an unregulated derivatives market could fall short, he adds.

The lobbying for the future of financial reform doesn’t end when Mr. Obama signs the law. In fact, it could be just beginning, as regulators and congressional overseers get down to the business of writing the high-stakes rules.

“This bill represents the most significant overhaul of the financial system since the 1930s. But serious work remains: the proof of the bill’s worth will come not from what is written in the bill, but how the regulators interpret the bill, write the rules and then enforce them,” says John Taylor, president and CEO of the National Community Reinvestment Coalition. “Based on the job they did for the past decade, I will believe reform is here when I see it.”

“By delegating so much to the regulators, Congress is inviting everyone interested in the outcome to make more campaign contributions, as they intervene in the regulatory process to influence the regulators,” says Thomas Ferguson, a professor of political science at the University of Massachusetts, Boston. “Nothing is settled. It’s a gold mine for members of Congress.”

Source: Christian Science Monitor

Citi and Bank of America Show Better than Expected Earnings, but . . .

Bank Of America, Citi Results Show Hurdles Ahead


CHARLOTTE, N.C./NEW YORK (Reuters) – Bank of America and Citigroup posted better-than-expected quarterly earnings on lower credit losses, but their shares fell as the banks highlighted the challenge of boosting revenue in a stagnant economy.

Revenue is down from a year earlier and the banks, like their rivals, are grappling with how their business will be affected by the landmark financial reform bill passed by Congress on Thursday.

Executives at Bank of America Corp and Citigroup Inc said the impact of the bill is uncertain. Like JPMorgan Chase & Co on Thursday, they were unable to quantify the possible costs for their business.

Banks will have to eke out revenue and cut costs wherever they can and try to make up elsewhere any revenue losses from financial reform, said Nancy Bush, analyst at NAB Research.

“It’s going to be this way for the next several years,” she said. “It’s an extremely tough environment.”

The prospects for banks to lend more look bleak as U.S. unemployment hovers around 10 percent and a report on Friday showed consumer sentiment has slipped from a near 2-1/2 year high.

As with JPMorgan, which reported quarterly results on Thursday, Bank of America and Citi said investment banking profits were down, a bleak sign for Goldman Sachs Group Inc and Morgan Stanley, whose results are due next week.

Shares of Bank of America, the biggest U.S. bank by assets, fell 8 percent to $14.15 in midday trading on the New York Stock Exchange. Citigroup, which is No. 3 behind JPMorgan, slumped 4 percent to $3.99. Shares of No. 4 Wells Fargo & Co, which reports results next Wednesday, fell 4.8 percent to $26.48. The KBW Banks Index was down 4.5 percent.


Bank of America and Citigroup said credit costs broadly eased in the second quarter, allowing them to put less money aside against future losses.

“Both reports reflect a significant improvement in credit quality but little in the way of identifying how they’re going to go from that to revenue growth,” said Marshall Front, chairman of Front Barnett Associates.

Loans at Bank of America and Citi were down compared with a year earlier, and analysts and investors expressed concern about bank executives’ comments that credit demand is still weak.

“Everyone’s sitting on the sidelines,” said Citigroup Chief Financial Officer John Gerspach, commenting on loan demand on a call with reporters. “I don’t see a great deal of demand in the near term, at least until this uncertainty is removed.”

To boost earnings without relying on reducing loss reserves, banks are likely to increase cost-cutting, Bush said.

Bank of America Chief Executive Brian Moynihan told analysts on a conference call, “Over the next several years, costs are going to be an issue for our industry, especially on the consumer side.”

Costs related to delinquent loans and foreclosures have been rising, he said.


In recent quarters, banks have depended on their investment banking units to perform well, while their consumer business was hit by rising losses. Now, as consumer loan losses are less of a worry, trading revenue has suffered as stock markets were hit by a “flash crash” in the United States and sovereign debt worries in Europe.

Revenue at Bank of America’s investment bank slumped to $6 billion in the second quarter from $9.8 billion in the first quarter. Citigroup also said its securities and banking revenue fell, down 26 percent from the first quarter to $6 billion.

These units were also hurt by a tax the banks paid on UK bankers’ bonuses. The tax looks set to cost the five major U.S. banks with businesses in London about $2.5 billion in all.

Bank of America reported net income of $3.1 billion, or 27 cents a share, down from $3.2 billion, or 33 cents a share, a year earlier. Analysts had expected 22 cents a share, according to Thomson Reuters I/B/E/S.

Citigroup reported its second consecutive profitable quarter, posting net income of $2.7 billion, or 9 cents a share, down from $4.3 billion, or 49 cents per share, a year earlier. Analysts had expected 5 cents a share, according to Thomson Reuters I/B/E/S.

JPMorgan on Thursday reported a higher-than-expected second-quarter profit of $4.8 billion, up 76 percent from a year earlier.

Reporting by Joe Rauch and Maria Aspan; additional reporting by Elinor Comlay and Dan Wilchins; editing by John Wallace

Source: Reuters

5 places to look for the next financial crisis

By Ezra Klein
Washington Post

Financial reform has passed. The sprawling legislation is meant to be an air bag protecting us from the next major crash, which of course raises the question: Will it work?

“We would have loved to have something like this for Lehman Brothers,” said Hank Paulson, who served as Treasury secretary when the financial system melted down in 2008. “There’s no doubt about it.”

And he’s right: The next time there’s a financial crisis, regulators will say a quick prayer of thanks to Barney Frank and Chris Dodd for giving them the power and information to quickly figure out what’s happened and how to respond.

The legislation ushers derivatives out of the darkness and onto exchanges and clearinghouses, gives regulators the power to oversee shadow banks and dismantle failing firms, convenes a council of super-regulators to watch the mega-firms that pose a risk to the financial system, and much more.

That’s not the same, however, as averting crises in the first place. It might make them less likely, but think of the difference between public health and medicine: The bill is medicine — it’s primarily about helping the doctors who figure out when you’re sick and how to make you better. It doesn’t dramatically change the conditions that made you sick in the first place.

Many of the weaknesses and imbalances that led to the financial crisis escaped this regulatory response. The most glaring omission: Fannie Mae, Freddie Mac and the crazed housing market that led to the crash. That issue is slated to come before Congress next year, but here are five that aren’t:

— “The global glut of savings.” “One of the leading indicators of a financial crisis is when you have a sustained surge in money flowing into the country, which makes borrowing cheaper and easier,” says Harvard economist Kenneth Rogoff. This crisis was no different: Between 1987 and 1999, our current account deficit, the measure of how much money is coming in vs. how much is going out, fluctuated between 1 and 2 percent of the gross domestic product. By 2006, it hit 6 percent.

Ben Bernanke — a man not known for his vivid turns of phrase — called the hundreds of billions of dollars that emerging economies were plowing into our financial system every year “the global glut of savings.” It was driven by emerging economies with lots of growth and few investment opportunities — think China — funneling their money to developed economies with less growth and lots of investment opportunities. Think, well, us. The result was cheap money and fast growth that made our economy seem healthy when it really wasn’t.

But we’ve gotten out of the crisis without fixing it. China is still roaring forward, accelerating exports and pouring money into the U.S. economy. And we’re happily taking it. With our economy weak and our deficits high, we need it. So after falling to 3 percent after the crisis, our current account deficit is back to 4 percent and rising.

Rogoff thinks that’s a problem.

“One or 2 percent would be more sustainable,” he says.

— The indebted American. The fact that money is available to borrow doesn’t explain why Americans borrowed so damn much of it. Household debt (mortgages, credit card balances, etc.) as a percentage of GDP soared from a bit less than 60 percent in the early 1990s to a bit less than 100 percent in 2006.

“This is where I come to income inequality,” says Raghuram Rajan, an economist at the University of Chicago. “A large part of the population saw relatively stagnant incomes over the ’80s and ’90s. Credit was so welcome because it kept people who were falling behind reasonably happy. You were keeping up, even if your income wasn’t.”

Incomes, of course, are even more stagnant now that unemployment is bumping up against 10 percent (and underemployment is nearer to 15 percent). And that pain isn’t being shared equally. Inequality has actually grown since before the recession — joblessness is proving sticky among the poor, but recovery has been swift for the rich. Household borrowing is still above 90 percent of GDP, and the conditions that drove it up there are, if anything, worse.

— The shadow banking market. The Great Depression was visually arresting: long lines of desperate families trying to get their money in hand before the bank collapsed. The financial crisis started out similarly severe, but aside from some despondent-looking traders, there was little to look at. That’s because this bank run wasn’t started by families. It was started by banks.

Regular folks didn’t pull their money out of the banks, because our deposits are insured. But large investors — pension funds, banks, corporations and others — aren’t insured. They use the “repo market,” a short-term lending market in which they park their money with other big institutions in exchange for collateral, such as mortgage-backed securities. This is the “shadow banking system” — it’s a real banking system, but it’s young, and until now largely unregulated. As such, it’s been vulnerable to the sort of problems we ironed out of the traditional banking system decades ago.

When institutional investors hear that their deposits are endangered, they run to get their money back. And when everyone panics at once, it’s like an old-fashioned bank run: The banks can’t pay off everyone immediately, so they unload all their assets to get capital. The assets become worthless because everyone is trying to sell them at the same time, and the banks collapse.

“This is an inherent problem of privately created money,” says Gary Gorton, an economist at Princeton University. “It is vulnerable to these kinds of runs. It took us from 1857, which was the first panic really about deposits, to 1934 to come up with deposit insurance.”

This year, we’re bringing this shadow banking system under the control of regulators and giving them all sorts of information on it and power over it, but we’re not creating anything like deposit insurance, where we simply made the deposits safe so that runs became a thing of the past.

— The “It’s so little money!” problem. In the 1980s, the financial sector’s share of total corporate profit ranged from 10 to 20 percent. By 2004, it was about 35 percent. That’s a lot of money in a few hands.

Simon Johnson, an economist at MIT, recalls a conversation he had with a hedge fund manager. “The guy said to me, ‘Simon, it’s so little money! You can sway senators for $10 million?’ ” Johnson laughs ruefully. “These guys don’t even think in millions. They think in billions.”

This financial crisis will stick in our minds for a while, but not forever. When it fades, the finance guys will begin nudging. They’ll hold fundraisers for politicians, make friends, explain how the regulations they’re under are onerous and unfair. And slowly, surely, those regulations will come undone.

And they’ll have plenty of money with which to do it. After briefly dropping to less than 15 percent of corporate profits, the financial sector has rebounded to more than 30 percent.

— Can regulation fix, well, regulation? The most troubling prospect is the chance that this bill, if it had passed in 2000, would not have prevented this financial crisis. That’s not to undersell it: It would’ve given regulators more information with which to predict the crisis. It would have created a consumer financial protection agency that might have intercepted the subprime boom. But plenty of regulators had enough information, and they did not act.

Bubbles always fool the regulators with the powers to pop them; otherwise they would have been popped.

In 2005, with housing prices running far, far ahead of the historical trend, Bernanke said a housing bubble was “a pretty unlikely possibility.” In 2007, he said Fed officials “do not expect significant spillovers from the subprime market to the rest of the economy.”

Alan Greenspan, looking back at the financial crisis, admitted that regulators “have had a woeful record of chronic failure. History tells us they cannot identify the timing of a crisis, or anticipate exactly where it will be located or how large the losses and spillovers will be.”

But this bill leans heavily on regulators: According to the U.S. Chamber of Commerce, the bill includes 533 rules and calls for 60 studies and 94 reports. Regulators will be in charge of all of them.

Greenspan, in that same speech, expressed a preference for rules that “kick in automatically, without relying on the ability of a fallible human regulator to predict a coming crisis.” The bill contains precious few of those, at least for now.

“In history,” Princeton’s Gorton says, “it always takes us a long time to get financial regulation right, and I expect it will this time, too. Maybe we’re done for this year, or the next couple. But we can’t possibly be done.”

Source: Washington Post

Presenting The Wall Of Worry: The 50 Ugliest Facts About The US eCONomy

By Tyler Durden
Zero Hedge

As we close on another week replete with ugly economic data and the usual bizarro counterintuitive market, here is a summary of the 50 most underreported facts about the state of the US economy, courtesy of the Coto report [1]. After reading these it almost makes sense that the market has become completely desensitized to the sad reality now pervasive in this country. Readers are encouraged to add their own observations to this list. Surely if the list is doubled, the market will go up to 72,000 instead of just 36,000.

#50) In 2010 the U.S. government is projected to issue almost as much new debt as the rest of the governments of the world combined [2].

#49) It is being projected that the U.S. government will have a budget deficit of approximately 1.6 trillion dollars [3] in 2010.

#48) If you went out and spent one dollar every single second, it would take you more than 31,000 years [4] to spend a trillion dollars.

#47) In fact, if you spent one million dollars every single day since the birth of Christ, you still would not have spent one trillion dollars [3] by now.

#46) Total U.S. government debt is now up to 90 percent [5] of gross domestic product.

#45) Total credit market debt in the United States, including government, corporate and personal debt, has reached 360 percent of GDP [6].

#44) U.S. corporate income tax receipts were down 55% [2] (to $138 billion) for the year ending September 30th, 2009.

#43) There are now 8 counties in the state of California that have unemployment rates of over 20 percent [7].

#42) In the area around Sacramento, California there is one closed business for every six that are still open [8].

#41) In February, there were 5.5 unemployed Americans for every job opening [9].

#40) According to a Pew Research Center study [10], approximately 37% of all Americans between the ages of 18 and 29 have either been unemployed or underemployed at some point during the recession.

#39) More than 40% [11] of those employed in the United States are now working in low-wage service jobs.

#38) According to one new survey, 24% of American workers say that they have postponed their planned retirement age [12] in the past year.

#37) Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008 [13]. Not only that, more Americans filed for bankruptcy in March 2010 [14] than during any month since U.S. bankruptcy law was tightened in October 2005.

#36) Mortgage purchase applications in the United States are down nearly 40 percent [15] from a month ago to their lowest level since April of 1997.

#35) RealtyTrac has announced that foreclosure filings in the U.S. established an all time record for the second consecutive year [16] in 2009.

#34) According to RealtyTrac, foreclosure filings were reported on 367,056 properties in March 2010 [17], an increase of nearly 19 percent from February, an increase of nearly 8 percent from March 2009 and the highest monthly total since RealtyTrac began issuing its report in January 2005.

#33) In Pinellas and Pasco counties, which include St. Petersburg, Florida and the suburbs to the north, there are 34,000 open foreclosure cases [18]. Ten years ago, there were only about 4,000.

#32) In California’s Central Valley, 1 out of every 16 homes is in some phase of foreclosure [19].

#31) The Mortgage Bankers Association recently announced that more than 10 percent of all U.S. homeowners with a mortgage had missed at least one payment during the January to March time period. That was a record high [20] and up from 9.1 percent a year ago.

#30) U.S. banks repossessed nearly 258,000 homes nationwide [21] in the first quarter of 2010, a 35 percent jump from the first quarter of 2009.

#29) For the first time in U.S. history, banks own a greater share of residential housing net worth in the United States [22] than all individual Americans put together.

#28) More than 24% of all homes with mortgages in the United States were underwater as of the end of 2009 [23].

#27) U.S. commercial property values are down approximately 40 percent [24] since 2007 and currently 18 percent of all office space in the United States is sitting vacant.

#26) Defaults on apartment building mortgages held by U.S. banks climbed to a record 4.6 percent [25] in the first quarter of 2010. That was almost twice the level of a year earlier.

#25) In 2009, U.S. banks posted their sharpest decline in private lending since 1942 [26].

#24) New York state has delayed paying bills totalling $2.5 billion [27] as a short-term way of staying solvent but officials are warning that its cash crunch could soon get even worse.

#23) To make up for a projected 2010 budget shortfall of $280 million, Detroit issued $250 million of 20-year municipal notes in March. The bond issuance followed on the heels of a warning from Detroit officials that if its financial state didn’t improve, it could be forced to declare bankruptcy [28].

#22) The National League of Cities says that municipal governments will probably come up between $56 billion and $83 billion short [28] between now and 2012.

#21) Half a dozen cash-poor U.S. states have announced that they are delaying their tax refund checks [29].

#20) Two university professors recently calculated that the combined unfunded pension liability for all 50 U.S. states is 3.2 trillion dollars [30].

#19) According to, 32 U.S. states have already run out of funds to make unemployment benefit payments [31] and so the federal government has been supplying these states with funds so that they can make their payments to the unemployed.

#18) This most recession has erased 8 million private sector jobs [32] in the United States.

#17) Paychecks from private business shrank to their smallest share of personal income in U.S. history [32] during the first quarter of 2010.

#16) U.S. government-provided benefits (including Social Security, unemployment insurance, food stamps and other programs) rose to a record high [32] during the first three months of 2010.

#15) 39.68 million Americans [33] are now on food stamps, which represents a new all-time record. But things look like they are going to get even worse. The U.S. Department of Agriculture is forecasting that enrollment in the food stamp program will exceed 43 million Americans in 2011.

#14) Phoenix, Arizona features an astounding annual car theft rate of 57,000 vehicles [34] and has become the new “Car Theft Capital of the World”.

#13) U.S. law enforcement authorities claim that there are now over 1 million members of criminal gangs inside the country. These 1 million gang members are responsible for up to 80% of the crimes committed [35] in the United States each year.

#12) The U.S. health care system was already facing a shortage of approximately 150,000 doctors in the next decade or so, but thanks to the health care “reform” bill passed by Congress, that number could swell by several hundred thousand more [36].

#11) According to an analysis by the Congressional Joint Committee on Taxation [37] the health care “reform” bill will generate $409.2 billion in additional taxes on the American people by 2019.

#10) The Dow Jones Industrial Average just experienced the worst May [38] it has seen since 1940.

#9) In 1950, the ratio of the average executive’s paycheck to the average worker’s paycheck was about 30 to 1. Since the year 2000, that ratio has exploded to between 300 to 500 to one [39].

#8) Approximately 40% of all retail spending [11] currently comes from the 20% of American households that have the highest incomes.

#7) According to economists Thomas Piketty and Emmanuel Saez, two-thirds of income increases in the U.S. between 2002 and 2007 went to the wealthiest 1% of all Americans [40].

#6) The bottom 40 percent of income earners in the United States now collectively own less than 1 percent [41] of the nation’s wealth.

#5) If you only make the minimum payment each and every time, a $6,000 credit card bill can end up costing you over $30,000 [22] (depending on the interest rate).

#4) According to a new report based on U.S. Census Bureau data, only 26 percent of American teens between the ages of 16 and 19 had jobs in late 2009 which represents a record low [42] since statistics began to be kept back in 1948.

#3) According to a National Foundation for Credit Counseling survey, only 58% of those in “Generation Y” pay their monthly bills on time [10].

#2) During the first quarter of 2010, the total number of loans that are at least three months past due in the United States increased for the 16th consecutive quarter [43].

#1) According to the Tax Foundation’s Microsimulation Model [44], to erase the 2010 U.S. budget deficit, the U.S. Congress would have to multiply each tax rate by 2.4. Thus, the 10 percent rate would be 24 percent, the 15 percent rate would be 36 percent, and the 35 percent rate would have to be 85 percent.

Source: Zero Hedge

The Missing Words at the G-20 – or an absurd plan for the global economic crisis

Does the G-20 Show the Shape of things to Come — austerity and extreme police actions?

By Paul Jay
Real News Network

With all the public attention during G20 on the 1000 arrests and such, something critical was overlooked. That’s the paradox the assembled heads of governments created for ending the global economic crisis.

The G20 leaders recognize that “demand” needs to grow. That means people must have the means to buy stuff. Do a search in the G20 Toronto Summit Declaration and fourteen times you’ll find a reference to boosting or increasing “demand”.

Yet they want to halve their deficits by 2013. How are they going to cut government spending and increase demand at the same time?

They acknowledge that some stimulus spending may still be necessary to stop the world from sinking deeper into recession. But by 2013 they want government deficits to plummet. How will they pull it off? It’s already in the works; cut social-safety-net programs with a focus on social security and public pensions.

So the G20 wants to increase “private demand” and cut the deficit. Ok, there must be ways to do this without simply adding more government stimulus money.

Now do a search in the Declaration for the word “wages”. You’ll find it once. The document says “Reforms could support the broadly-shared expansion of demand if wages grow in line with productivity.”

Wow! An admission that over the last four decades productivity has skyrocketed while wages have remained stagnant? A recognition that the greatest transfer of wealth from working people to the rich in modern history might have led to a lack of real demand and is a root cause of the crisis?

Are we about to see a G20 agreement on promoting anti-strike breaking laws, or eliminating legislation that makes it difficult to impossible to organize unions in many places around the world, including the US and Canada?

Sorry. That one sentence is all there is. Not one recommendation or agreement on how wages will rise in line with increases in productivity. One wonders why they bothered to put the sentence in the document.

Let’s backtrack. If productivity is up, why can’t we afford social programs now that we could in the past? Higher productivity means more wealth, not less, right? Let’s just say the top five percent of income earners in the world have never had it so good.

So if the economic pie is bigger, there must be ways to lower deficits without cutting social spending, right?

Now do a search in the G20 Declaration for the word taxes. You will find zero. Not a single reference to taxing the riches the very few accumulated over the last decades of growth.

That says it all. If you don’t like it, we always have a nice detention cell ready for you.

Paul Jay is the CEO and Senior Editor of The Real News Network. He is an award-winning filmmaker, founder of Hot Docs! International Film Festival and was for ten years the Executive Producer of the CBC Newsworld show counterSpin.

Click here to see video

Source: Real News Network