Financial market reform takes center stage

Given that the health care bill is about to be signed into law, the long hard slogging now all but done, attention turns to the financial reform legislation that, based on this exchange between Senators Bob Corker (R-TN) and Evan Bayh (D-IN), should be a whole lot friendlier.

Of course, the word "friendlier" in Washington is very much a relative term and the fact that, last week, Senator Chris Dodd (D-CN) broke off talks with the other side to submit his own bill and that his party no longer has a filibuster-proof majority creates a very different situation than what was seen over the weekend. Somehow, it seems that the two sides will find more than enough things to disagree on.

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How to profit from financial market reform

After all the commotion over the health care bill winds down, the financial market reform bill will probably take center stage next in Washington and this seems to be a pretty good summary of where things now stand.
From the Tom Toles collection at the Washington Post.

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Jon Stewart on financial market reform

This seems to be showing up everywhere and, if you haven't already seen it, it's well worth ten minutes of your time if you're in need of a good chuckle.


Quite a contrast with that last item... Is there a way to invest in Jonco International?

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Cracking down on bank bonuses (in China)

Well, it's about time they started reining in those banking bonuses in China and it couldn't come at a better time after more than a trillion dollars in new lending last year and recent concerns that credit markets have become overheated.

An AP report in the Miami Herald details just how out-of-control the situation had become and what drastic steps are being taken by the Chinese government.

China has tightened controls on pay for its top bankers, joining global efforts to try to limit financial risks by linking longer-term performance more closely to compensation.
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China's top bankers are paid modestly by Western standards but receive many times the salary of the average Chinese worker, which has fueled public anger. Top banking and insurance executives are appointed by the ruling Communist Party.

The chairman of China's biggest commercial lender, Industrial & Commercial Bank of China Ltd. was paid 1.6 million yuan ($235,000) in 2008, while Citigroup CEO Vikram Pandit received $38.2 million that year.

The Wall Street Journal also ran a story($) on this today in which, for the print edition, they had the pictures of the six top banking CEOs atop each of their names, titles, and 2008 pay.

With compensation ranging from $220,761 for Xiao Gang, Chairman of the Bank of China, to $235,849 for Jiang Jianging, Chairman of ICBC as noted above, for a second there, I thought I was reading The Onion.

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Reforming the financial reform process

Maybe before elected officials actually try to undertake reform of financial markets they should have a look at their own process for instituting reform and make a few changes there because, at this point, they seem to have more problems than Wall Street.

In the latest development in the ongoing saga of how to prevent the events of 2008 from happening once again, Bloomberg reports that talks have broken down between Senate Banking Committee Chairman Christopher Dodd (D-CN) and Bob Corker (R-TN) with Dodd now planning to go forward with his own bill.

Corker agreed to work with Dodd after talks broke down in February between Dodd and Senator Richard Shelby, the top Republican on the committee, over consumer protection issues. The bill is aimed at strengthening Wall Street rules to prevent a future financial crisis and a repeat of taxpayer bailouts of firms like American International Group Inc. and Citigroup Inc.

Dodd will release a “substitute” of legislative language he offered in November, which called for creating a stand-alone Consumer Financial Protection Agency and a national bank regulator in the merger of four agencies.

The new Dodd bill will include some elements negotiated with Corker. For example, it won’t propose the stand-alone agency, which Corker opposed, and will probably put the consumer unit in the Federal Reserve with an independent budget, a director appointed by the president and some enforcement powers, according to a person with direct knowledge of the plan.

The last paragraph notes that, tomorrow, the Federal Reserve's Consumer Advisory Council is expected to announce their opposition to leaving the consumer protection function within the central bank where it has been for many years (with little protection provided).

So, the Fed does not want to be the fox that watches the hen house?

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Tavakoli on "financial meth labs"

Skip to about the eight minute mark to hear Janet Tavakoli, author of Dear Mr. Buffet and head of Tavakoli Structured Finance, talk about credit derivatives, also known as "financial weapons of mass destruction" or the more contemporary "products of financial meth labs".

This story at the Huffington Post, where the video above was spotted, just keeps popping up everywhere - something about a surge in the gold price due to CDS holders demanding payment in gold? Jesse has some thoughts on the subject as well.

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Three looks at the rise in consumer credit

Jake at EconPicData looks at last week's consumer credit report (a data release from the Federal Reserve that, for some unknown reason, comes at 3PM EST on Fridays) and wonders if the American consumer is once again in a spending mood.
Total consumer credit expanded by $5.0 billion in January, the first increase in 11 months and only the third gain in almost a year-and-half in what has otherwise been a decades-long credit and spending binge.

The longer term view of consumer credit relative to disposable income is updated in the graphic below from this follow-up item that adds some perspective, the big caveat here being that these figures do not include housing related debt such as home equity loans that reached a peak a few years ago and have been falling sharply.
Lastly, from data at the St. Louis Fed, you can easily see how life in America has changed over the last 70 years, that is, credit-wise, as the last year or so has seen a dramatic departure from the predominant trend since the Reagan administration.
Yes, the chart above looks much less menacing when a log scale is used so, that alternative view of things is provided below.

What is still significant, however, is that the recent contraction is the swiftest ever seen.
By the way, if you live in the Bay Area and know of any job openings, Jake has a favor to ask.

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Financial market regulation gets harder

From the Tom Toles collection at the Washington Post comes yet another way to look at the relationship between big banks on Wall Street and elected officials in Washington.
This was from early last week, that is, before the Volcker rule seemed to again be in favor at the White House but prior to the rumors and subsequent uproar in Congress about the consumer protection agency being consolidated at the Federal Reserve.

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The presidents discuss consumer protection

In case you haven't already seen this video from Funny or Die that reunites all past Saturday Night Live cast members impersonating presidents, here it is.

Funny or Die's Presidential Reunion from Will Ferrell

If you didn't recognize Dan Aykroyd at first as Jimmy Carter, don't feel bad - I didn't know it was him until it this fine piece (directed by Ron Howard) was almost over.

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Fox to continue watching hen house?

If you're a big bank, it makes perfectly good sense that the head of the U.S. banking cartel would continue in its role as the agency charged with watching out for the interests of the little guy. On the other hand, if you're the little guy, maybe it doesn't make sense for the Federal Reserve to be charged with protecting your interests, particularly since they hjaven't done such a good job in recent years.

This Bloomberg report has all the details on the latest developments on the "reform" of the banking system and how consumers are to be "protected":

For consumer advocates, housing a new agency to protect Americans from financial-product abuse within the Federal Reserve would be a defeat after lobbying for an independent body. For banks, it would represent a victory.

Barney Frank, Chairman of the House Financial Services Committee, called a Senate plan to house the proposed Consumer Financial Protection Agency at the Fed “a joke.” Shielding consumers from harmful financial products is “the most conspicuous failure by the Fed,” Frank said in an interview yesterday.

Banks say placing the agency with the Fed alleviates their concern that an independent entity would ignore the health of the financial system. Consumer advocates say it’s a mistake because the Fed didn’t succeed in curbing abuses during the subprime lending boom that contributed to the worst financial crisis since the Great Depression.
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The Obama administration’s proposal for a consumer protection agency is part of the biggest overhaul of financial regulation since the 1930s. Putting it inside the Fed, instead of creating a standalone bureau, was a compromise proposed by Senator Bob Corker, a Tennessee Republican, and Banking Committee Chairman Christopher Dodd, a Connecticut Democrat.

Don't be surprised if the banks win - they always seem to.

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It's a big club, and you ain't in it

This 2008 George Carlin clip has been popping up all over the place in recent weeks - it must have crossed my computer screen three or four times in just the last few days.

It was posted here at this blog almost two years ago and, with the many bank bailouts and growing dissatisfaction with elected officials since that time, it seems to have become even more relevant which probably explains its resurgent popularity.

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Elizabeth Warren talks with Bill Maher

Elizabeth Warren was on Real Time with Bill Maher last Friday offering hope to the millions of Americans who continue to be confounded by soaring profits and lavish bonuses on Wall Street that go hand-in-hand with the lack of meaningful financial market reform after the worst financial market meltdown since the Great Depression.

Clearly, Maher isn't that well informed on these topics, however, it's nice that he had Warren on to help spread the word about the influence of bank lobbying on elected officials and the well funded effort to preserve the status quo that, left unchecked, will no doubt lead us all down a similar path to the next financial crisis.

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"Playing up to the edge of the line"

Yves Smith of Naked Capitalism was on Fox Business News the other day talking about everybody's favorite investment bank - Goldman Sachs. For some reason, the video is not embeddable, so you'll have to go here to watch it.
The best part of the interview is excerpted below and, in my view, it goes a long way in explaining why the company has been so successful at what they do.

Goldman has long had a culture of understanding where the rules were and playing up to the edge of the line and you know Wall Street has made a practice of doing that for years. The difference is that, over the decades - it really started in the 80s and got worse in the 90s - they were slowly chipping down the regulations. So, what was clearly illegal before is now permitted - though it's not kosher - and this is what is very disturbing to the public. This all doesn't look right - it doesn't make sense to them.

It doesn't make sense to me either.

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More polish on the Goldman shine - Part 63

In tonight's PBS NewsHour, Paul Solman looks at the inner workings of everyone's favorite investment bank - Goldman Sachs - and how, maybe, they don't really do God's work.

With only one-tenth of its revenues coming from investment banking last year, it's hard to argue that they are anything other than a "hedge fund masquerading as a bank". "God's work" or the "Financial God's work" - what's the difference, really?

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More polish on the Goldman shine

Spiegel Online reports that everybody's favorite investment bank - Goldman Sachs - had a hand in the ongoing Greek debt crisis that has been roiling financial markets for weeks. Of course, no laws were broken and Goldman's customers were quite pleased with how they had been assisted by the Wall Street firm, that is, for a few years, until everything fell apart.

Goldman Sachs Helped Greece Mask its True Debt
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The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

Such transactions are part of normal government refinancing. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.

Somehow this isn't all that surprising and, when you think about the various financial reforms wending their way through the system, pinning hopes on regulation to prevent similar things from happening in the future seems almost childlike in its naivete as long as there are smart (and highly motivated) people at places like Goldman Sachs around who are more than willing to help governments and other institutions hide debt, boost returns, and undertake all sorts of dangerous - but entirely legal - shenanigans.

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The government's "$6.3 trillion scam"

Jonathan Weil must have had little wisps of steam coming out of his ears as he read the email response to his queries from the White House Office of Management and Budget and affixed a title to yesterday's commentary at Bloomberg.

Obama’s $6.3 Trillion Scam Is America’s Shame
Look through President Barack Obama’s proposed 2011 budget, and you’ll see a line calling for a $235 million increase in the Justice Department’s funding to fight financial fraud. Lucky for them, the people who wrote the budget can’t be prosecuted for cooking the government’s books.

Whether on Wall Street or in Washington, the biggest frauds often are the perfectly legal ones hidden in broad daylight. And in terms of dollars, it would be hard to top the accounting scam that Obama’s budget wonks are trying to pull off now.

The ploy here is simple. They are keeping Fannie Mae and Freddie Mac off the government’s balance sheet and out of the federal budget, along with their $1.6 trillion of corporate debt and $4.7 trillion of mortgage obligations.

Never mind that the White House budget director, Peter Orszag, in September 2008 said Fannie and Freddie should be included.

It quickly progresses to calling the U.S. housing market a giant Ponzi scheme that sucks in America's newlyweds via the homebuyer tax credit and ends with a lame excuse from the OMB about why they won't include Fannie and Freddie in the government's official budget - it would be "too disruptive to change how they are accounted for".

Maybe the world should stop looking at Greece and start looking at the U.S.

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Bank failures during the Great Depression

A few important details about the banking system during the Great Depression are revealed in Murry Rothbard's The Great Depression and depicted in the graphic below. Recall that this topic was discussed here in some detail a couple weeks ago, today's entry being one of the many tidbits that seemed worthy of a separate post with more to come in the weeks ahead.

During the early years of the Great Depression, not only were bank failures just two or three times the rate of failure in the 1920s - far less than what is commonly believed - but they didn't reach a crescendo until after Roosevelt took office in 1933, more than four years after the depression began.
According to Rothbard, bank failures averaged about 700 per year throughout the 1920s. Since the "Roaring Twenties" weren't all that good for farmers, the primary customers for lenders at the time, about three percent of banks failed every year, this total doubling in 1930 during the first full year of the Great Depression.

But, interestingly, bank failures didn't peak until three years later and not for the reasons that you might think. It was the uncertainty about the devaluation of the dollar - as Hoover was on his way out and Roosevelt was on this way in - that caused a series of panics and "hoarding" of gold, all of which resulted in FDR ordering the confiscation of gold in April of 1933 as about 4,000 banks were getting ready to fail during his first year in office despite the many "bank holidays".

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Daniel Gross on Davos

Daniel Gross of Slate/Newsweek looks at the underbelly of the World Economic Forum in Davos, Switzerland last week (spotted over at Wall Street Cheat Sheet).

There were apparently quite a few prominent bears at the gathering including Joseph Stiglitz, Nouriel Roubini, and one camera-shy fellow in full costume.

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If Jefferson were in Washington today...

As the congressional hearings on the role of the Federal Reserve and the Treasury Department in the late-2008 bailout of AIG proceed (live blogging here at the WSJ if you want the short version), perhaps now is a good time to recall the words of Thomas Jefferson:

I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
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The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution. I am an Enemy to all banks discounting bills or notes for anything but Coin. If the American People allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their Property until their Children will wake up homeless on the continent their Fathers conquered.
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That paper money has some advantages is admitted. But that its abuses also are inevitable and, by breaking up the measure of value, makes a lottery of all private property, cannot be denied.
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Everything predicted by the enemies of banks, in the beginning, is now coming to pass. We are to be ruined now by the deluge of bank paper. It is cruel that such revolutions in private fortunes should be at the mercy of avaricious adventurers, who, instead of employing their capital, if any they have, in manufactures, commerce, and other useful pursuits, make it an instrument to burden all the interchanges of property with their swindling profits, profits which are the price of no useful industry of theirs.

He left out the part about how, for a half decade or so once every few generations, the People will feel as though they've struck it rich - that the combination of stock market wealth and housing market wealth would briefly appear to provide an everlasting bounty.

But, other than that, it's still pretty good after more than 200 years.

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A "Pragmatic Independent"

As the nation awaits Congressional testimony from the Treasury Department about the AIG bailout and while President Obama rehearses his State of the Union speech to be delivered tonight, Barry Ritholtz writes about his political affiliations (or, in this case, the lack thereof).

Whenever people ask me what my party affiliation is, I respond “Pragmatic Independent.”

The question usually comes up in response to something I wrote. I’ve been contacted by Republicans, who want me to join or advise their committees. I usually tell them that I find much of their ideology intellectually indefensible, and their marriage to the religious right offensive.

When I get the same question from Democrats, my response is they seem to not understand how the economy works, are too spineless to get anything done, and are way too politically correct for my tastes.
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Today, I have to search far and wide to find congress critters who are uncorrupted, understand how business works, and have the balls to call it like it is. Alan Grayson of Florida is the closest thing I have seen to what a modern Congressman should be like.

We have a Congress that is a Parliament of Whores of who sold themselves to the highest corporate bidder. Why do I want to have any affiliation with either group? And I am not sure if a 3rd party can break the death grip on America the parties have.

In my view, there is little to quibble with in this assessment of the body politic with the possible exception of an adverb that could be inserted between "a Parliament of" and the word "Whores". The word "cheap" comes immediately to mind, particularly after recalling this commentary by Bill Gross a few weeks back where he notes that "combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return".

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