Still No End to 'Too Big to Fail'

Thursday, February 16, 2012 by The Nation
by William Greider

When Congress passed the Dodd-Frank financial reform bill in the summer of 2010, the Obama administration made happy talk about putting an end to “too big to fail” banks. Hold the champagne. The Federal Reserve Board has just created the fifth-largest bank in the country, despite a flood of warnings from community advocates and smaller banks.

Skeptics in financial markets are entitled to their skepticism. Capital One has been rapidly assembling this new behemoth, acquiring local deposits and credit card operations in a series of mergers. Federal Reserve governors reviewed the complaints and rejected them. In banking regulation, the “new normal” so far looks a lot like the “old normal.”

Of course, it is impossible to say this marks an end to reform. But it’s a real downer for the reform advocates. They have pleaded for a different perspective from the Fed regulators—weighing the “public benefits” of bank consolidations against the “adverse effects,” as Dodd-Frank requires. But the Fed made this calculation on very narrow grounds.The governors concluded that one more very large bank will not by itself bring down the system. True enough. But each decision the Fed makes now on applying the new rules sets a precedent for its future decisions. How big is too big? The Capital One decision seems to say size is not an issue.

Reform groups like the National Community Reinvestment Coalition argued that the new, enlarged Capital One is a bad bet on its own terms because its business model is grounded in credit card debt, with a heavy portion of so-called “subprime” credit card holders—borrowers much like the “subprime” mortgage holders now lined up for foreclosure and bankruptcy. When the credit card bubble bursts, these critics say, the government will stick with the same bad choice—bailing out the creditors when the debtors fail.

Financial market cynics have assumed all along that Dodd-Frank did not end “too big to fail” but instead created a charmed circle of protected banks labeled “systemically important” that will not be allowed to fail, no matter how badly they behave.

The Fed and other regulators were given the impossible job of changing the behavior of these megabanks without messing with their awesome size and financial power.

Good luck to the Fed. The new regulatory rules are still being written, and the banking industry has flooded Washington with comments, questions and fine-print objections. Some say the bank lobbyists are in a purposeful stall, hoping to delay the final regulations until they get a more banker-friendly president. I suspect the stalling tactics are designed to outwait the public anger.

How the Right Wing Hijacked Rage Over the Economic Collapse and Swindled America

One of the most important political developments of the Obama presidency:
how the crash of 2008 served to strengthen the political right.

By Jefferson Morley, Salon
Posted on December 28, 2011

In his new book, Pity the Billionaire, Tom Frank turns his mordant eye on the unlikeliest political development of the Obama presidency: how the crash of 2008 served to strengthen the political right. The deregulation of Wall Street, championed for 30 years by right-wing leaders, had led to an economic catastrophe so frightening that the country elected a liberal Democrat to the presidency. Yet two years later, the most radically conservative and manufactured faction of the Republican Party, the Tea Party, had taken effective control of the House of Representatives, the regulation of Wall Street had stalled, and the champions of economic deregulation in Washington had emerged stronger than ever.

Frank, author of the bestselling book What’s the Matter With Kansas? provides a pithy and nuanced explanation of what he calls the “hard-times swindle.” He spoke with Salon from his father’s home in Kansas City, Mo.

Early in the book, you describe the moment in the spring of 2009 when free-market economics had been so thoroughly discredited that Newsweek could run a cover story proclaiming, “We’re all socialists now.” What happened? Why did that moment dissipate?
I saw that cover so many times [at Tea Party events]. For these people, that rang the alarm bell. I think the AIG moment [when the bailed-out insurance behemoth used taxpayer relief to dole out huge bonuses to its executives] was in some ways the high point of the crisis, when [the politics] could have gone either way. There was this amazing public outrage, and that for me was the turning point. Newsweek had another cover, “Thinking Man’s Guide to Populism,” and I remember this feeling around the country, that people were just furious. Somehow the right captured the sense of anger. They completely captured it. You could say they had no right to it, but they did. And one of the reasons they were able to do it was because the liberals were not interested in that anger.

I’m speaking here of the liberal culture in Washington, D.C. There was no Occupy Wall Street movement [at that time] and there was only people like me on the fringes talking about it. The liberals had their leader in Barack Obama … they had their various people in Congress. But these people are completely unfamiliar with populist anger. It’s an alien thing to them. They don’t trust it, and they have trouble speaking to it. I like Barack Obama, but at the end of the day he’s a very professorial kind of guy. The liberals totally missed the opportunity, and the right was able to grab it.

Looking back on it, I feel like people like myself were part of the problem. We sort of assumed with the Democrats in power, the system would correct itself.
One of the problems with liberalism in this country is that it’s headquartered in Washington and its leaders are a very comfortable class of people. Washington is one of the richest cities in the country, maybe the richest. It’s not a place that feels the crisis, that feels the economic downturn. By and large, the real estate market stayed OK. The city continued to boom. The contracts continued to flow. What we’re talking about here is the failure of modern liberalism. At one time it was a movement of working-class people. The idea that liberals wouldn’t feel economic pain was ridiculous. That’s who liberals were. No more.

You write that after Obama took office, “market populism was the only utopian scheme available to disgruntled Americans.” There was no liberal utopian scheme that said, “Here’s how we get out of this.”
There wasn’t even a Rooseveltian scheme, which was not utopian but very practical. Just to talk about Roosevelt would have been fantastic. One of the research points in the book that I thought was really interesting … was the history of the bailouts in 1932 and 1933 — when the Hoover administration did a lot of bailouts. We don’t remember that. [These bailouts] were massively unpopular for the same reason they were unpopular this time around: really blatant cronyism. We don’t remember that a big part of Franklin Roosevelt’s campaign [in 1932] was to be against these bailouts. There were maybe five newspaper articles in 2008 that mentioned this pre-history of the bailouts. It just never came up.

It was like the party’s muscle memory of the New Deal was lost. With Obama the muscle memory of the Democratic Party is the Clintonian technocracy of the 1990s.
That’s exactly right. Their message was: The technocratic way is going to solve our problems. Just leave it up to the experts who are going to figure a way out. [Obama and the Democrats]  seemed to think they didn’t need to dirty their hands by making a populist appeal. They did a lot of good things — the stimulus package of 2008 was good thing — but they didn’t realize you have to sell something like that. They were like, “We know what the answer is: Keynesian stimulus. So let’s just do it.” They didn’t understand that this nation only adopted Keynesian stimulus spending back in the 1930s amidst this terrible wrenching experience, the Depression, and an enormous campaign [by FDR] to tell the nation why this was necessary.

If you don’t sell it — if you just do this spending — well, people have a lot of suspicion of government handouts. Government debt bothers people for very obvious reasons. [Obama] didn’t make any effort to make the argument. It was just “listen to the experts.” I have a quote from [Obama economic advisor] Christy Roemer where she says, “Things would be better if we listened to the experts.” And she’s one of the good guys, one of the best people in the Obama administration. That’s their view.

You have an interesting discussion about how the Tea Party movement mimics what was once the left-wing style. This seems to be the dominant mode: The right is saying, “We’re the revolutionaries. We’re taking on the powers that be.”
At first I thought it was a peculiarity of Glenn Beck, and then I noticed it across the board. They picked up this 1930s style and language, complete with utopianism, with this intense faith in an economic system that will solve all your problems and that represents you perfectly, this miraculous economic system … So [the right] is constantly talking about this infernal elite that controls  government, controls corporations, and controls the academy, and that we have to wrench ourselves free.

So maybe it is true that the Obama technocracy is the infernal elite. Maybe not in the hellish way it is portrayed on the right, but in the sense that these are the defenders of bailouts, the defenders of the system.
I wouldn’t go too far with that, because I don’t think that is a way of understanding our modern world that can bear a lot of the weight. It is true that the Democrats completely imagine themselves as being the party of the professional class, and that is an elite. It’s not the elite, but it is an elite. The Democrats very definitely identify with academia. That’s the home of the professions, where they come from.

Still, I think that the conservative idea of revolting against the ruling class by holding up the market as an ideal is completely backwards. There is a ruling class in this country. But the notion that the free market is an act of rebellion against it seems pretty fanciful.  I can say it stronger than that. It is absolutely preposterous.

At one point you talk about “a cognitive withdrawal from the shared world.” It seems like the modern digital communication revolution encourages this. “A cognitive withdrawal from the shared world” — that sounds like a description of the Internet.
This is where we’re going. You can now believe things that are demonstrably false and never be challenged, directly or indirectly. You can withdraw. That’s the end that the Internet is constantly pushing us toward. That’s what modern marketing is all about.

So it’s a technological phenomenon, but it’s also an ideological phenomenon, a product of the times we’re in. You saw this in the ’30s, especially on the left. People would be so committed to this economic utopia [communism]. They believed in it, and their faith in it was so great … It is a product of economic collapse. People are desperate. They think their entire way of life is crumbling around them, and they reach for … a utopian system where everything is explained.

This is the genius of Fox News. It is fun to watch, and if you agree with them, it’s very gratifying to watch — and on a level deeper than most TV entertainment. The message is “You’ve worked really hard. You played by the rules and now they’re disrespecting you. They won’t let you say the word ‘Christmas.’”

You finished this book around the time Occupy Wall Street started. Were you surprised by the emergence of the movement?
I was surprised. I thought the left’s moment had passed. That was almost exactly three years after the crash of September 2008, and it seemed like the expiration date had come and gone. I’m very pleased, but in a lot of ways the horse has already left the barn.

Is it possible for the Occupy movement to reverse the gains of the right?
I hope so, but I honestly don’t know. At the end of the day I doubt it. My liberal friends have been doubting the right for decades. They’re always saying, “There’s no way these guys can recover now after this screw-up. People will never come back to them after this.” But they keep coming back.

The right does seems to be a little bit on the defensive at the moment. The dominant narrative of last summer — government spending is the problem — has been lost. Occupy Wall Street has injected a change in discourse. People aren’t defensive when they talk about inequality.
Tell me about it. When I started writing about inequality 10 years ago, it … was not something for NPR Book Talk. It was not quite within the bounds of the acceptable. Now it is. And that’s a huge change.

The main thing that has to change is that Democrats and liberals have to be able to speak to the outrage, and that requires a complete change in the way they look at the world. The problem is that they’ve been going the other direction for 30 years. Ever since the right-wing backlash began, liberals have been making their own move to professionalism. [To voice outrage] would require them to reverse course. I would like to see that happen, but I don’t know how it’s going to happen.

I think one thing has happened: Middle-class or upper-middle-class liberals in Washington, all of a sudden we realize we are insecure. The system is not just screwed up for people out there who we sympathize with. It’s screwed up for us. Economic insecurity is now pervasive even in the professional class.
Professionals are feeling the heat. They’re not insulated from market forces, like the way the professions are supposed to be. The system is not working like that anymore. Maybe that is where the change will come from.

Another thing that I think changed things was the debt-ceiling debacle last summer. That scared everybody, and it was so patently the doing of the Tea Party Republicans in the House. That was a huge turning point.

The hostage taking?
They were holding a gun to the head of the nation’s economy. They did ruin the nation’s bond rating. And you could have had an unthinkable catastrophe if they had done what they were threatening to do. Things like that should be off the table in our politics. That was an outrage in its own way as great as the bailouts. It was a shocking moment.

Yet at the end of the book, you contemplate the right wing in power, and you suggest they might do exactly that — take actions they know would ruin the economy.
They might. They see the financial crisis as something we deserve, that we’ve spent beyond our means, and now we have to pay. In their minds, we need a recession to get back on track. They think we’re due for something like the 1930s, so why not make it happen?

You conclude by saying say that the problems that editorialists fret about — inequality, global warming and financial bubbles — will endure, but so will this utopian market populism, which you describe as chasing “the dream more vivid than life itself.” You have shown how entrenched those impulses are in American politics. Maybe part of the American pursuit of happiness is to “chase the dream more vivid than life itself.“
The right has discovered the magic against relativism. They have long inveighed against relativism, but now they’ve discovered they can say anything. They can endlessly withdraw into this world of utopian fiction and everything can be explained away. It’s like some kid discovering a new video game. It’s so awesome.

So what gives you hope?
I was out in Wisconsin earlier this year, when you had thousands of people surrounding the capitol every day. There were big days when they had a hundred thousand people, and then there were the off days where you had “only” a couple of thousand — and this went for day after day. That was really a hopeful moment for me. It was the predecessor to the Occupy movement. Let’s see if they can make a comeback when it gets warm again. I would love to see it happen.

What Bank Regulation?

A new report finds that federal prosecutions for bank fraud have plummeted almost 30 per cent in the last five years despite the well-documented abuses that have fired up Occupy sites around the country. This chart says it all.

The Tea Party vs. Occupy Wall Street

Tuesday, October 25, 2011 by On the Commons

Finally, a truly populist uprising

by David Morris

 

 

Host David Gregory complained about Occupy Wall Street protestors “demonizing banks” and wondered, “Is this not a reverse tea party tactic?”

Gregory is right. In many respects Occupy Wall Street (OWS) is indeed a mirror image of the Tea Party. To the Tea Party government is the enemy. To OWS the huge corporation is the enemy. OWS wants to raise taxes on billionaires. The Tea Party wants to considerably reduce them. OWS wants to rebuild and strengthen the safety net. The Tea Party wants to weaken it.Which stands up for the majority of Americans? 

Both OWS and the Tea Party are mass movements but their attitude toward the masses couldn’t be more different. OWS and the other #Occupy protests lack leaders and a formal platform, but their demands clearly emerge from the thousands of individual grievances expressed in homemade signs and letters. Mike Konczal at Rortybomb.org did a statistical analysis of 1000 personal statements posted at We are the 99% TUMBLR and found them far less ideological than practical. Their demands effectively boil down to these. “(F)ree us from the bondage of our debts and give us a basic ability to survive.”

From his analysis, Konczal sees the outlines of a program, “Upon reflection, it is very obvious where the problems are. There’s no universal health care to handle the randomness of poor health. There’s no free higher education to allow people to develop their skills outside the logic and relations of indentured servitude. Our bankruptcy code has been rewritten by the top 1% when instead, it needs to be a defense against their need to shove inequality-driven debt at populations. And finally, there’s no basic income guaranteed to each citizen to keep poverty and poor circumstances at bay.”

As one would expect, given its longevity and political impact, the Tea Party does have leaders and a relatively clear program. Probably the best expression of that program occurred when Houston-based attorney Ryan Hecker created a website and invited people to propose ideas for a platform patterned on the Contract for America the Republicans effectively used in 1994 to gain control of the House of Representatives. Some 1,000 ideas were submitted. Ultimately 450,000 people voted online for the final 10 that became the Contract from America.

All parts of this new Contract are intended to shrink government. “Identify the constitutionality of every new law.” “Audit federal agencies for constitutionality.” Demand a federal balanced budget amendment. Reduce taxes.

Starkly absent is any mention of the dangers associated with concentrated private wealth and power.

Faux Populism vs. True Populism
Both OWS and the Tea Party might be described as populist but their definitions of populism wildly diverge. That divergence has been clear from their founding. Occupy Wall Street began on September 7, 2011 with hundreds converging on Wall Street. The Tea Party began on February 19, 2009 with a rant from the floor of the Chicago Mercantile Exchange.

CNBC Business News editor Rick Santelli loudly condemned the government’s plan to help people stay in their homes. “(D)o we really want to subsidize the losers’ mortgages”? he asked. Santelli suggested holding a tea party for traders to dump derivatives into the Chicago River. Floor traders around him cheered his proposal. The video went viral after the Drudge Report publicized it. Within days, Fox News was discussing the appearance of a new “Tea Party”. A week later coordinated protests under the Tea Party banner took place in over 40 cities.

Santelli’s insistence that those who lose their homes are “losers” who have only themselves to blame is a sentiment widely shared among Tea Party Republicans and most recently expressed by Republican Presidential candidate front runner Herman Cain. When asked about Wall Street protestors Cain, former CEO of Godfather’s Pizza declared, “Don’t blame Wall Street. Don’t blame the big banks. If you don’t have a job and you’re not rich, blame yourself.”

During a recent CNN televised Republican presidential debate held in front of a Tea Party audience, the moderator asked Representative Ron Paul what he would do if a healthy 30 year old man decided not to buy health insurance and then had an injury or disease that required hospitalization and surgery. Who would pay for that? Ron Paul said the man was responsible for his actions. He had taken a risk and would have to suffer the consequences. The moderator asked, “Should society just let him die?”. While the Congressman pondered the question, audience members vocally expressed their approval.

This lack of empathy for what OWS would call the 99% is palpable wherever Tea Party Republicans come to power,

In Michigan conservative Republicans gained control last November. The state is home to nearly 2 million people, about 20 percent of the state’s population, who depend on food stamps. Until last month, eligibility was based on income. But this year, even while the state remains mired in the worst recession since the 1930s the Republicans made it much more difficult to qualify for food assistance. Eligibility is now based on assets. Those with assets of more than $5,000 in the bank or who own a vehicle worth more than $15,000 will no longer be eligible.

For Michigan Republicans it is not enough to be poor and needy to qualify for food assistance. You must be destitute. 

In the Tea Party era, policy makers in three dozen states have proposed drug testing for people receiving benefits like welfare, unemployment assistance, job training and food stamps.

In 2011, Florida succeeded in passing legislation requiring the drug testing of welfare applicants at the urging of its Governor Rick Scott, who rode to office on a wave of Tea Party support. The roughly 113,000 Florida welfare recipients must pay for their own drug test. People who fail the test become ineligible for a year. A second failed test makes them ineligible for three years. The Economist magazine’s headlines conveyed the elation Tea Party members must have felt with their legislative victory. Drug testing in Florida: their tea-cup runneth over.

Despite Governor Scott’s rhetoric, the poor are not drug addicts. Only about 2 percent of Florida’s welfare applicants are failing the test, according to Florida’s Department of Children and Families. After adding up the savings derived from not paying welfare to this 2 percent and subtracting the cost of testing 100 percent of the applicants the Tampa Tribune concluded that Florida may save “up to $40,800 to $60,000 for a program that state analysts have predicted will cost $178 million this fiscal year.

But in Florida or Michigan or a dozen other states, it’s not about saving money. It’s about punishing those who teeter on the economic edge. It’s about making clear that we are not our brothers’ keeper.

OWS does demonize powerful banks. The Tea Party demonizes the poorest and weakest of us all.

For OWS unfairness means taxing billionaires at half the rate their secretaries pay and allowing the top 1% of the population to “earn” as much, collectively, as the bottom 60 percent. For Tea Party Republicans taxes themselves are unfair and inequality is desirable. Indeed, they want to give the 1% even a greater share of the nation’s wealth.

All Republican presidential candidates promise to lower taxes on the rich. Herman Cain has captured the popular conservative imagination with his 9-9-9 plan, a flat tax of 9 percent on the rich and corporations and the imposition of a 9 percent national sales tax on everyone. This would result in a 50-75 percent cut in taxes paid by the richest 1% while imposing a hefty new tax on the 99%. The Citizens for Tax Justice estimates that under Cain’s plan, the bottom 60 percent of taxpayers will pay about $2,000 more in taxes while the richest 1% will pay about $210,000 less.

The Tea Party vision of a future America may have been best expressed by the budget introduced last spring by Tea Party darling Representative Paul Ryan (R-WI) last spring and passed enthusiastically by the Republican House. “This is not a budget,” Ryan declared at the time. “This is a cause.”

Indeed it was, and is. Ryan’s plan would cut about $4.3 trillion from programs that primarily benefit the 99% while cutting taxes by about and equal amount, $4.2 trillion, cuts that would overwhelmingly benefit the 1%. According to Robert Greenstein of the Center on Budget and Policy Priorities Ryan’s plan “would produce the largest redistribution of income from the bottom to the top in modern U.S. history, while increasing poverty and inequality more than any measure in recent times and possibly in the nation’s history.”

Even when they agree that federal spending is profligate, OWS and the Tea Party violently disagree on what should be cut. Signs and speeches at #Occupy events often target the exorbitant military spending and foreign wars. But despite the fact that the Pentagon is the poster child for government waste and incompetence, not to mention corruption, it is also the only part of the government the Tea Party considers all but off limits.

As soon as Republicans took over the House of Representatives in November 2010, they changed the rules so that military spending does not have to be offset by reduced spending somewhere else, unlike any other kind of government spending. It is the only activity of government Republicans believe does not have to be paid for. The Tea Party’s ascendance has only strengthened the Republicans’ resolve that the Pentagon’s budget is untouchable. An analysis by the Heritage Foundation of Republican votes on defense spending found that Tea Party freshmen were even more likely than their Republican elders to vote against cutting any part of the military budget.

The Use and Abuse of Government
The Tea Party hates the very idea of government, embracing Ronald Reagan’s famous dictum, “Government is the problem.” OWS also sees government as an enemy when democracy has been corrupted by money and government has been captured by corporations. The Declaration of Principles adopted by the general assembly of Occupy Wall Street in its first days makes this clear, “…no true democracy is attainable when the process is determined by economic power. We come to you at a time when corporations, which place profit over people, self-interest over justice, and oppression over equality, run our governments.”

As Nobel laureate economist Joseph Stiglitz observes government increasingly is the 1%.

Virtually all U.S. senators, and most of the representatives in the House, are members of the top 1 percent when they arrive, are kept in office by money from the top 1 percent, and know that if they serve the top 1 percent well they will be rewarded by the top 1 percent when they leave office….When pharmaceutical companies receive a trillion-dollar gift—through legislation prohibiting the government, the largest buyer of drugs, from bargaining over price—it should not come as cause for wonder. It should not make jaws drop that a tax bill cannot emerge from Congress unless big tax cuts are put in place for the wealthy. Given the power of the top 1 percent, this is the way you would expect the system to work.

But OWS also knows that government is the only vehicle through which the majority can fashion rules that increase personal security and restrain unbridled greed and private power. If we give up on government we give up on our ability to collectively influence our future.

Which is why high on the list of demands by OWS protestors is to minimize the impact of money on politics and increase the number of people voting.

Tea Partiers again take the opposite position. They defend the right of global corporations to spend unlimited amounts of money to influence elections and they advocate policies that suppress voter turnout.

“Since Republicans won control of many statehouses last November, more than a dozen states have passed laws requiring voters to show photo identification at polls, cutting back early voting periods or imposing new restrictions on voter registration drives,” the New York Times reported a few weeks back.

A recent study by the Brennan Center for Justice at New York University School of Law analyzed 19 laws that passed and 2 executive orders that were issued in 14 states this year. The report concludes that these policy changes “could make it significantly harder for more than five million eligible voters to cast ballots in 2012.”

Today the Tea Party has the upper hand. With the backing of some of the world’s richest men and most powerful corporations, it has successfully converted the justifiable anger at Wall Street and government inaction into an unprecedented and ahistorical form of populism: a mass uprising against the masses. The Occupy Wall Street movement proposes a populism more compatible with other mass protests, one that doesn’t turn its back on neighbors, one that fights against massive inequality and concentrated private power, and that urges reforms that can once again allow us to have a government of the people, by the people and for the people.

Too Big to Fail Redux?

Neil Barofsky on TARP, SIGTAP, IGS and Elizabeth Warren

By RUSSELL MOKHIBER

We spent $700 billion to bail out the too big to fail banks on Wall Street.

And yet, we might have to do it again.

Why?

Because the big banks are still too big to fail.

And next time, we might have to spend $5 trillion.

It ain't a pretty picture.

As Neil Barofsky knows better than most.

He was the Special Inspector General for the Troubled Asset Relief Program.

Known in Washington as SIGTARP.

He's now a adjunct professor at New York University Law School.

"The largest banks are now 20 percent larger today than they were going into the crisis," Barofsky told Corporate Crime Reporter in an interview last week. "They are systemically more significant, they are bigger, they are more important. And we just haven't seen the political or regulatory will to take on the fundamental problems that are presented by these institutions."

"Standard and Poors recently put the U.S. government's credit rating on watch. And one of the things they talked about was the contingent liability to support our financial institutions. And they estimated that the up front costs of another bailout could be up to $5 trillion."

"And when you think about the focus on our budget issues, our deficit and our debt – what happens with the next crisis and we have to come up with another $5 trillion to bail out our system once again?"

"It's a terrifying concept. One of TARP's biggest legacies is that it emphasized to the market that the government would not let these largest banks fail. And we haven't done anything to address this problem. So, we are going to be right back where we were in late 2008 – if not in a worse position."

During the debate over financial reform, the Senate voted on the Brown-Kaufman amendment, which would have limited the size of big banks – making them no longer too big to fail.

The measure was voted down, with only 33 Senators voting for it.

Barofsky says that it would have passed had the Obama administration gotten behind it.

Instead, Treasury Secretary Timothy Geithner lobbied against the bill.

"The reason it didn't pass was because the Treasury Secretary lobbied individual Senators to convince them to vote against this bill," Barofsky said.

And what was Geithner's argument against the amendment?

"As it was explained to me, it was – this was too blunt of an instrument to accomplish this. It would be better to give the regulators the power to treat the problem with a scalpel."

And your response to that?

"The regulators have failed spectacularly in the run up to the financial crisis," Barofsky said. "They have demonstrated that they are human beings. They are fallible as human beings. They, like the rest of the market, have repeatedly proven to be unable to see bubbles as they are being formed, and to comprehend the consequences of the concentration of risk and size."

"The reality of financial systems is such that there is no omniscient person who can understand and see around corners. Having a system that tries to see things before they happen and tries to deal with crises before they happen is doomed for failure."

"The FDIC's Sheila Bair has been very forceful about advocating for the use of Dodd Frank tools to address the size and significance of institutions, requiring them to spin off business, become less complex, have more capital. That is the one path that is out there. She is putting forth a path that has a chance at success. 

Unfortunately, she is stepping down in a few weeks."

Barofsky pushes back at the suggestion that there have been no major criminal prosecutions to come out of the 2008 financial crisis.

"I always like to take issue with the claim that there haven't been any big prosecutions," he says.

"At SIGTARP, we uncovered a multi-billion fraud that was being run by Lee Farkas, the chair of Taylor Bean & Whitaker – one of the country's largest non-depository mortgage companies," he says.

"It was an historic fraud. It's not that often that you run across multi-billion dollar criminal accounting frauds. Our agents uncovered that fraud. It had been going on for six or seven years. We already had seven convictions, including that of Farkas after trial."

"We got involved after they tried to steal $550 million of TARP funds through Colonial Bank, which was closely related to Taylor Bean & Whitaker."

"But the question you are referring to is this thirst for accountability for the largest Wall Street financial institutions."

"These cases and these investigations were really outside of our jurisdiction. Our jurisdiction started after the crisis ended. It started with the passage of the TARP funds in October 2008."

"So I was never privy to the evidence being gathered in those investigations."

"I'm always a little reluctant to make a judgment on whether the prosecutors looking at those cases are making the right or wrong judgment."

"Although there is a lot of smoke in these investigations – and there's Senator Levin's subcommittee's report – to really know whether there is fire underneath that smoke, you have to look at what the evidence is, what the defenses are, what the mitigating factors are, what the arguments are."

"We are talking about an extremely complex accounting fraud at a level that is far more complex than in past financial crises."

"The underlying representations and valuations of incredibly complex structured products are neither simple nor straightforward."

"And it's very difficult for me, without knowing the details of the evidence and the responses, to say they are doing a good job, a bad job, that there has been criminal activity, there hasn't been criminal activity."

"I do think there is something to the argument that much of this behavior, which seems strikingly unethical and inappropriate, may at the end of the day fall short of provable criminal liability."

"We created a regulatory system that blessed in many ways or gave tacit approval to activities that appear to be just downright wrong. But all of this activity has to be looked through that prism of the absence of regulatory activity and to some extent regulatory knowledge of what was going on."

"It may be a little bit too early to write the final story on this. There are ongoing investigations. These investigations by their nature take time. As the parallel civil cases make their way through the courts, there is going to be a lot of eyes taking a look at the same set of evidence, more evidence is going to be uncovered, and it's not impossible or improbable that we are going to see additional prosecutions."

"Whether the country is going to get what it wants – to get a CEO of a major bank – I don't think that is going to happen."

"This is far different from the savings and loan crisis. In that crisis, you had relatively straightforward fleecing of banks by senior executives.

This is a little bit more complex and difficult to prove."

Barofsky concedes that out of the more than 60 Inspectors General across the federal government, only a handful aggressively pursue criminal wrongdoing against the agencies they were set up to protect.

"It's unfortunate that we don't read or hear more from Inspectors General. So much is entrusted with these IGs in the oversight of these federal agencies. And they come in all different shapes and sizes, all different types of experiences," Barofsky said.

"You can have a relatively small shop, like the one run by David Kotz at the SEC. He is quite aggressive. And he gets a lot of information out there to Congress and to the American people. And then you have other agencies whose Inspectors General offices could be five or six or nine times the size of the SEC IG – and yet you never hear anything."

"It can't be that those agencies are just so perfectly run that there isn't a need or important value for those offices to fulfill in exposing misconduct, waste, fraud and abuse."

Barofsky believes TARP would have been better off with someone like Elizabeth Warren on the inside – instead on the outside looking in.

"It is striking how overwhelmingly the key decision makers in the TARP program came from Wall Street."

"When you look back on it, it shouldn't be that surprising that TARP, a program that was designed to help both Wall Street and Main Street, has done a phenomenal job in helping Wall Street and a terrible job in fulfilling its Main Street goals."

"This is not because the people who came from Wall Street were corrupt. It's not because they were out to screw the little guy. It's because of the lack of diversity. They did what they knew best and what they thought was best."

"But you had this uniform group of people from Wall Street – Hank Paulson from Goldman Sachs, the people who were running TARP who came from Merrill Lynch and Goldman Sachs, the investment officers came from a series of Wall Street banks, right down to the housing person who came from Bank of America."

"So, it's not that surprising that your policies reflect Wall Street's priorities."

"Think about how much different this program would have been had Elizabeth Warren – instead of being appointed to provide oversight of TARP – was instead put inside the bubble and was part of the decision making process in designing TARP's response."

"You'd see a much different and a much better program."

And Barofsky is critical of the Obama administration for not appointing Warren to head the Consumer Financial Protection Bureau.

"If the President made the decision that Elizabeth Warren was the right person to stand up this agency, which he essentially did in appointing her as an advisor, then he should have nominated her for the position," Barofsky said. "This was her idea. I got to know and work with Elizabeth when she was chair of the Congressional oversight panel, which also provided TARP oversight. She is doing a terrific job in her more limited role right now.

And she would be a terrific nominee and a terrific director for that agency. By not getting 100 percent behind her early on, they put themselves in a very difficult position. Now, it's going to be difficult to even have a recess appointment – whether it is Professor Warren or whether it is somebody else."

Attacked at Hearing: Why Elizabeth Warren Scares the Hell Out of GOP

Many Republicans have stopped pretending their actions are motivated by anything except a desire to serve Wall Street and other large corporate interests.
By RJ Eskow, Blog for Our Future
Posted on May 25, 2011

Editor's note: During an unusually contentious hearing on the Hill Tuesday, Rep. Patrick McHenry, R-North Carolina, lashed out at Elizabeth Warren, the fierce consumer advocate tapped to head the Financial Consumer Protection Bureau, browbeating her and falsely accusing her of "lying." Three of the top five industries to contribute to McHenry's campaign are commercial banks, insurers and accounting firms, so his opposition should come as little surprise, but the unusually aggressive grilling caught observers by surprise. The New York Times called it a "rare collapse of the decorum that usually pervades discussions among even the most fervent opponents on Capitol Hill." What is it about Warren that has Republicans so hot?

"Money doesn't talk," sang Bob Dylan, "it swears." Rep. Patrick McHenry gave the week's most famous 70-year-old a dark birthday gift on Tuesday by proving that those lyrics still ring true after nearly half a century.

McHenry's savage attack on Elizabeth Warren and the Consumer Financial Protection Bureau was an obscenity by any definition except the FCC's, an assault on human decency proving once again that Wall Street's Capitol Hill goon squad is prepared to discard decency at a moment's notice to serve its masters.

One of the best ways to understand events like today's hearing is by looking at the actors involved. Today's case study is Patrick McHenry, Republican from North Carolina. He may have disgraced himself before the voters today, but look on the bright side: Rep. McHenry is now Wall Street's "Employee of the Month."

McHenry, like other Republicans before him, is just the latest symbol of a party that's stopped pretending its actions are motivated by anything except a desire to serve Wall Street and other large corporate interests.

Meet Rep. McHenry

I'll say this for Patrick McHenry: he knows who pays his bills. His top campaign contributor in the last election was Wells Fargo Bank, which paid a large settlement after it was found to have repeatedly laundered money for the drug cartels that have killed more than 35,000 people in Mexico.

Other top contributors include Bank of America, the American Bankers Association, and PriceWaterhouseCoopers, the morally compromised accounting firm that overlooked financial misdeeds at AIG and Goldman Sachs, among others. (It also looked the other way as Goldman shafted AIG -- while both companies were clients.)

The top industries contributing to McHenry's reelection include real estate, insurance, commercial banking, and accounting. Fifty-four percent of his campaign contributions came from PACs, and 40 percent came from large individual donors. A man of the people, he ain't.

Lies and the lying liars who lie about lies

It was ironic that McHenry chose to attack Warren's integrity by claiming she was lying, of all things, since the attack on CFPB has been nothing but a series of lies. McHenry's statement on Tuesday promoted the GOP's biggest Big Lie, that CFPB has unrestrained and excessive executive power. Actually the opposite is true: GOP cynics and complicit Wall Street Democrats worked to weaken the agency so much that it now has the bare minimum authority it needs to function, and it should be strengthened in years to come.

Tuesday McHenry and other members of the GOP Goon Squad claimed that Warren lied about the advice she gave to Treasury Secretary Tim Geithner and state attorneys general regarding the widespread foreclosure fraud conducted by McHenry's paymasters. A quick review of the record reveals she did no such thing. It also shows that the Goon Squad was just as thuggish in March as it is now. Back then they suggested it was somehow improper for Warren to advise the president, his Cabinet, and anyone else they directed her to advise. As special assistant to the president, that was her job.

McHenry also displayed the seemingly infinite wellspring of pettiness that corporate political hacks seem to always have on hand. His other accusation of lying arose from his indignation that Warren wouldn't spend her day waiting for Congressional Republicans, who were planning to leave the hearing for other business and then return later in the afternoon.

Rather than apologize and reschedule, McHenry accused Professor Warren of lying about the schedule established between Warren and his staff, saying, "We had no agreement. You're making this up." Logic tells us McHenry couldn't possibly know what his staff may have said to Warren or her staff members, since he didn't participate in those conversations. This was just petty crudeness.

The Superpowerful CFPB demands one million dollars or it will blow up the planet ...

Those are the small lies, however. The Big Lie is the suggestion that the Consumer Financial Protection Bureau is somehow "too powerful." To hear Republicans talk, you'd think CFPB is an evil empire in a giant underground lair -- one that could soon feature super-villain Elizabeth Warren, sitting at a giant console and laughing menacingly as she sends her forces out to torment America's innocent bankers.

But here in the real world, the organization was downgraded from an independent agency to a bureau in last year's Dodd/Frank deliberations. That was done to gain Republican votes that somehow, at the last minute, never materialized. (Duplicity is another Goon Squad trademark, although corporatist Dems benefited from this charade, too.)

That same (non)deal placed CFPB inside the Federal Reserve, and gave it a dotted-line relationship to the Treasury Department. (Those institutions aren't known for their consumer-friendly attitude toward bank regulation.) What's more, CFPB was given the additional hurdle of being forced to have its rules approved or denied by an inter-agency council. That's a pretty severe dilution of power for an evil super-agency.

These weakening actions were taken against the advice of 18 former members of the Federal Reserve's Consumer Advisory Council, and despite the fact that Republican Treasury Secretary and ex-Goldman Sachs CEO Hank Paulson said the country needs a strong and independent agency.

The banks' minions

The bureau can still do fine work, but it's anything but super-powerful. When hacks like Patrick McHenry hold hearings called, "Who's Watching the Watchmen?" or describe CFPB as "a super class of administrative elites," they're just doing the dirty work for their Wall Street paymasters.

That's also why Republicans introduced a flurry of bills designed to strip the bureau of a director and replace her with a committee, further weaken its authority, and weaken longstanding presidential authority over appointments. Those bills were shepherded by Finance Committee Chairman Spencer Bacchus, who famously said, "In Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks."

Mission accomplished, Rep. Bachus.

What's more frightening to a banker than a super-villain?

It's important to remember what Elizabeth Warren has done that's frightened the banks so much. So far she's merely tried to offer suggestions on how to rectify widespread bank criminality in the forging of documents and other illegal foreclosure actions. She's begun building a consumer-friendly organization. And she's tried to design a simpler mortgage loan application, so that borrowers actually understand the contract they're signing. Amusingly, banks have suggested a readable mortgage contract would "stifle innovation" -- which is true only when the word "innovation" is used as it often is in financial circles: as a synonym for "deception" or "predation."

Warren tells the truth, talks straight and fights for the middle class, and that makes her dangerous to the people who call the shots for "leaders" like Patrick McHenry and Spencer Bachus. Those "leaders" are serving the interests of Wall Street firms that fear Warren and CFPB because they'll interfere with some of their core business practices: Unreadable mortgage documents that contain secret traps for unwary consumers; credit card ripoffs and deceptions; and dishonest underwriting practices that threaten borrowers, investors and the entire economy.

For America's top banks, deception and trickery are part of the business model. That's why CFPB and Elizabeth Warren are a threat.

America's Most Defrauded

The banks have deceived and exploited millions of people. But perhaps no group of Americans has been more suckered than Tea Partiers. In what may be the biggest sales fraud case in history, this heavily anti-Wall Street movement elected a crowd that lives and breathes to serve bankers. They should be listening to one of Mr. Dylan's best and angriest songs: "You've got a lot of nerve to say you are my friend ...."

As for Warren, Rep. Elijah Cummings tried to cheer her on by asking her to "keep on the battlefield." He might just as well have quoted an old gospel song, "Keep On the Firing Line." Because anyone who stands up for consumers and against Wall Street is going to be targeted by goon squads, just like Elizabeth Warren was targeted today.

McHenry's name sounds a lot like that of American patriot Patrick Henry, who famously said "Give me liberty or give me death." The representative from North Carolina isn't likely to make that kind of sacrifice. He won't even sacrifice a campaign check or a meal at the club with his banker pals. To protect those perks, Patrick McHenry's willing to attack a good public servant like Elizabeth Warren -- and the consumers she's trying to protect.

Stop Wall Street's Con Game

Wednesday, May 25, 2011 by YES! Magazine

by David Korten

 

Wikipedia defines a “confidence trick” as “an attempt to defraud a person or group by gaining their confidence. The victim is known as the mark, the trickster is called a confidence man, con man, confidence trickster, or con artist, and any accomplices are known as shills. Confidence men exploit human characteristics such as greed and dishonesty.”

Ever hear a business reporter on the evening business news say, “Today, investors drive up the price of commodities to create a hundred billion in new value,” or some such? Sounds great, almost implying we should offer thanks to these champions of the public good who are risking their fortunes to expand the pool of wealth to enrich us all. The reporter is manipulating the language to set us up as marks in the Wall Street con.

A more honest report might have said, “Today, hedge fund traders speculating with other people’s money walked away with multimillion dollar commissions for inflating the commodities bubble by a hundred billion dollars.” In a more honest world, the report would clearly distinguish between real investors creating real wealth through real investments and speculators creating phantom wealth with financial games. People who bet on the price of pieces of paper would be called “gamblers.” Those who hold the bets and distribute the winnings would be called “bookies.”

Boil it down to the basics and you see that Wall Street is in the business of operating four sophisticated, large-scale confidence games.

• Counterfeiting: Through financial bubbles and loan pyramids, it creates facsimiles of official money for private gain unrelated to anything of real value.

• Securities fraud: Selling shares in asset bubbles that are maintained solely by the constant inflow of new money is, in effect, a Ponzi scheme.

• Reverse insurance fraud: Insurance fraud, by common definition, occurs when the insured deceives the insurer. In reverse insurance fraud, the insurer deceives the insured. In Wall Street practice this involves collecting premiums to cover risks the insurer lacks adequate reserves to cover and then refusing to pay legitimate claims.

• Predatory lending: Using a combination of extortion, fraud, deceptive promises, and usury, predatory lenders lure the desperate into perpetual debt at exorbitant interest rates.
  

Because of Wall Street’s hold on lawmakers, these may all be perfectly legal, but phantom wealth is still phantom wealth, and these are all forms of theft. In three-card monte the dealer shuffles the cards so fast you can’t follow them, while talking even faster. Complex derivatives are a fast shuffle that makes it virtually impossible to follow the connection to any real value.

What makes the Wall Street con so much better for the dealers than a typical street con is that Wall Street dealers bet on their own game using other people’s money and then manipulate the market outcome in their own favor, rewarding themselves with huge bonuses when they win and taking billions in taxpayer bailouts when they lose.

Real financial reform would render unproductive speculation either illegal or unprofitable. Here are a few suggestions:

1. Prohibit selling, insuring, or borrowing against an asset not actually owned by the seller, and issuing any security not backed by a real asset—all common Wall Street practices.
2. Place strict limits on how much a financial institution can borrow in order to buy a property, and establish conservative reserve and capital requirements for institutions in the business of selling insurance of any kind.
3. Regulate bond-rating agencies and impose strict penalties for fraudulent ratings.
4. Impose a small financial-speculation tax of a penny on every $4 spent on the purchase and sale of financial instruments such as stocks, bonds, foreign currencies, and derivatives. This would have no consequential impact on real investors making long-term investments in real businesses and assets. But it would discourage short-term speculation and arbitraging.
5. End the obscure tax loophole that allows hedge fund managers to report their billion-dollar compensation packages as capital gains, taxed at only 15 percent.
6. Assess a 100 percent capital gains surcharge on profit from the sale of assets held less than an hour, 80 percent if held less than a week, and perhaps falling to 50 percent on assets held more than a week but less than six months. This would render most forms of speculation unprofitable, stabilize financial markets, and lengthen the investment horizon without penalizing real investors.
7. Eliminate debt slavery by raising the wages of working people and the taxes of the moneylenders.

Opponents will claim that such regulation and taxes will stifle financial innovation. Good. That is the intention. Wall Street’s financial innovations are mostly ever more sophisticated and deceptive forms of theft. They should be discouraged. Keep the casinos in Vegas. The need to rebuild financial institutions that meet our needs for basic financial services will be the subject of next week’s blog.

Why Is the Treasury Not Releasing Data on Who’s Getting Loans?

Friday, January 21, 2011 by New American Media
by Ngoc Nguyen

At the end of this month, for the first time ever, the US Treasury plans to release to the public a treasure trove of demographic information on people who have received loan modifications. That is, if the government releases the information as promised – information that has a critical impact on policies that prevent home foreclosures.

So far, the Treasury has stalled on making this key information available, despite requests by housing and consumer advocacy groups and media organizations, including New America Media, under the federal Freedom of Information Act (FOIA). Loan modifications are changes made to the terms of a home loan and could include such things as being granted a different interest rate, a principal reduction, or a decrease in how often the loan must be paid off.

Housing advocates say they have been waiting for the Treasury to the release the information for more than a year.

National Consumer Law Center attorney Geoffry Walsh, whose organization filed a FOIA at the end of 2009, says the Treasury still hasn’t provided the information. Walsh says his group requested data detailing why borrowers were denied loan modifications.

“There were promises from the FOIA people that they would be sending [the data]…and that just went on and on for months,” he said. “They sent a few relevant things, but nothing substantial pertaining to what we asked for.”

New America Media first asked the Treasury for race and ethnicity data of those who received loan modifications under President Obama’s Home Affordability Modification Program (HAMP) last September. A Treasury spokesperson said the information would be released at the end of October. The release date was then pushed back to November. New America Media submitted a FOIA request last November, and is still waiting for the requested data. The Treasury now promises to release the data by the end of the month.

“Any delay in publishing the file is to ensure all proper precautions have been taken to protect homeowner privacy - our utmost concern,” Treasury spokesperson Andrea Risotto, said in an emailed reply to New America Media.

For housing advocates, the delay means not having access to critical data that could shed light on who’s getting loan modifications, which has been the key policy for preventing foreclosures, according to Kevin Stein, associate director of the San Francisco-based California Reinvestment Coalition.

The number of foreclosures nationally continues to rise and Stein believes they could reach 12 million by 2013.

“Many people will still need help,” Stein says, “and [loan modifications are] still the main way people will get help.” But, there’s little public information about who is getting the loan modifications and the terms of the deal, “except [what is] in the hands of the banks.”

According to Stein, in much the same way that demographic information on lending has revealed racial disparities, the HAMP data could be used to ensure fair housing laws are not being violated. The HAMP data has limitations though, as 80 percent of loan medications occur outside of the program, Stein said, citing figures by bank regulators.

Walsh of the National Consumer Law Center says his organization was denied a request for information about a calculator that loan servicers use to determine who qualifies for a loan modification. The calculator, referred to as a net present value (NPV) calculator, takes inputs such as the borrower’s income, property value, length of time behind on payments, credit score, and modification amount and “shows if the investor would do better under the loan modification or by foreclosing,” Walsh said.

The request was denied on the grounds that it was proprietary information. “Basically, they said it belongs to Fannie Mae and private businesses,” Walsh said. “We don’t agree with that.” The group appealed the decision, but the appeal was also denied. “Under HAMP rules, if the NPV test shows that the loan modification is the better option, the servicer has to do the loan modification, they can’t foreclose,” he added.

Homeowners have expressed frustration with the lack of transparency on the part of the bank, while trying to modify home loans with their lenders. Walsh says at least two changes set to begin next month will offer homeowners more transparency about their loan modification process.

As a part of the Wall Street Reform Act of 2010, banks will be required to list the figures that they used in the NPV calculator in denial letters to homeowners. In addition, Walsh says, the Treasury has said it will make the calculators available in the spring. That too, remains to be seen.

House Republicans Warn SEC Against Implementing Financial Reform Regulations

By Pat Garofalo on Nov 15th, 2010

Yesterday, the American Bankers Association (ABA) explained that it is eagerly anticipating working with the incoming Republican House of Representatives to slow down regulation affecting the financial services industry. “We had been disappointed with a number of legislative outcomes with the past Congress, and so we look forward to better outcomes with this Congress,” said Peter Garuccio, a spokesman for the ABA.

To that end, Republicans on the House Financial Services Committee have been warning regulators implementing the Dodd-Frank financial reform law that the GOP is in no mood to see regulations that actually rein in the predatory and risky practices of the banks. And Reps. Spencer Bachus (R-AL) and “Young Gun” Kevin McCarthy (R-CA) have now fired a shot across the bow of the Securities and Exchange Commission, telling SEC Chairwoman Mary Schapiro to tread lightly when it comes to implementing Dodd-Frank:

Despite its sweeping scope, the Dodd-Frank Act does little to spur the type of capital formation that is essential for any real and lasting economic recovery to take hold. Without access to capital, business slows, and without regulatory certainty, capital disappears…In the 112th Congress, promoting capital formation that leads to the creation of jobs will be at the forefront of our agenda for economic growth. We look forward to your prompt response on the actions the Commission plans to take to implement these important recommendations.

Before Congress left for its pre-election recess, the federal bank regulators — including the SEC — requested funding to begin implementing Dodd-Frank, but Republicans balked and blocked it. And it’s becoming clearer that they intend to deny the agencies funding if the rule-making process isn’t to their liking.

Under Dodd-Frank, the SEC is responsible for laying out new rules of the road when it comes to derivatives trading, credit-rating agencies, and corporate governance — all key areas where regulatory failure contributed to 2008′s financial meltdown. The SEC is also tasked with setting up new offices, like the Office of Women and Minority Inclusion, which will be charged with ensuring fair access to markets.

During the regulatory reform debate, Republicans consistently claimed that any profitable activity that a bank undertakes — even if the profits come via ripping off consumers — is not to be restricted. As Sen. Richard Shelby (R-AL) put it, “[Bank] safety and soundness trumps everything. It trumps the consumer finance whatever.” And the incoming Republicans in the House are taking that sentiment to its logical conclusion, telling the regulators tasked with policing the financial marketplace to ease up or face the consequences.

Is Geithner Planning a Stealth Attack on the Wall Street Reform Bill?

by Mary Bottari - Thursday, October 7, 2010 by BanksterUSA

Champions of financial reform who fought hard for a strong Wall Street reform bill this year know they cannot let down their guard. They are tracking and countering the moves of the big banks as they try to weaken the Dodd-Frank law during the implementation phase. They are bracing for a battle with Republicans who are threatening to repeal key parts of the law. What they were not expecting was a rear-guard attack on the recently passed measure from the Obama administration.

Rumors are rampant in Washington D.C. that Tim Geithner's first act as the new head of the Financial Stability Oversight Council, the high-level body created to bring stability to the financial system, will be to blow a hole in the Dodd-Frank law. Evidently, Geithner is interested in exempting the $24 trillion – that is trillion with a “t” – foreign exchange (or forex) market from the clearing and transparency requirements of the act.

Derivatives Chapter Was a Victory for Reformers

The $600 trillion off-book derivatives market was critical in turning the collapse of a domestic housing bubble into a global international catastrophe. In the United States taxpayers found out that they were on the hook for the big bank's reckless bets in the derivatives market and $4.7 trillion in taxpayer funds was disbursed to stabilize the system.

One of the great victories of reformers was the strong derivatives chapter of the Dodd-Frank law which will bring the vast majority of all derivatives trades out of the shadows onto an open exchange with capital requirements to mitigate risk and real-time information about pricing and volume. No longer will Goldman Sachs be able to hire one client behind closed doors to design a toxic product, then turn around and peddle that same product to another client in a secretive, bilateral fashion.

During the debate in Congress, the House passed a version of the derivatives chapter riddled with dangerous loopholes covering only 60 percent of derivatives trades. Reformers, working under the umbrella of Americans for Financial Reform, succeeded in closing those loopholes in the final version of the bill and covering almost all derivatives trades -- over 90 percent of the market -- with a very narrow exception for legitimate end-users.

This triumph over the big banks that want to keep these trades in the shadows may now be in jeopardy.

Financial Instability Council?

One of the Obama administration's much touted reforms in the Dodd-Frank law was the creation of the Financial Stability Oversight Council made up of top state and federal regulators including the Federal Reserve Board Chair, the heads of the FDIC, SEC, CFTC and the new Consumer Protection Bureau. According to the Treasury Department, the Council will provide “comprehensive oversight over the stability of our nation's financial system.”

The first meeting of the stability council took place this week. Treasury Secretary Tim Geithner is the chair. Ironically, It looks like Geithner is considering exploiting language in the law that allows him to exempt the $24 trillion forex market from the clearing and transparency requirements, throwing these trades back into the shadows. The forex market is a worldwide over-the-counter market for the trading of currencies. Forex traders argue that the market performed well during the financial crisis, but the risk is that without transparency in this enormous, interconnected market, the failure of a major dealer could contribute to another crisis which could cascade through the entire financial system.

"I have no idea what the current thinking is about an exemption for foreign exchange swaps and trading, but the first thing that a chairman of the FSOC should focus on is ensuring that everything is cleared. Clearing is just another word for transparency and accountability in the system. If we don’t get that aspect of things right, taxpayers will be on the hook again," says Dennis Kelleher, former staffer for Senator Byron Dorgan and current President and CEO of Better Markets, an independent nonprofit watchdog organization.

The derivatives portion of the forex market represents only a small portion, about four percent, of the total derivatives market worldwide. What is the harm in exempting four percent of the market? Because it won’t remain four percent, says Michael Greenberger, former Director of Trading and Markets at the CFTC. "If you exempt part of the market, Wall Street will try to use that loophole to mask other transactions," says Greenberger. In other words, the $24 trillion dollar loophole could rapidly grow to an even larger loophole bringing an even greater degree of risk to the system.

Given the risk, how can one rationally make the argument that forex derivatives should be treated differently? “Explaining why they should be treated differently will take some work,” Joe Palumbo of Ernst and Young told the Financial Times. Yet the bill only requires Geithner to write a letter to Congress justifying his position on the matter.

"At the very least, before you create any loophole to the clearing requirements there should be extensive study and consultation with all the parties and the public. So far this has not taken place,” says Kelleher.

As the Financial Stability Oversight Council begins its work, perhaps its first task to engender public confidence should be to scrutinize closely the plans by any member of the council to introduce risk into the system.

Count on Sequels to TARP

By GRETCHEN MORGENSON - NY Times - October 2, 2010

THE government is pulling a sheet over TARP, the Troubled Asset Relief Program created during the panic of 2008 to bail out the nation’s financial institutions. With the program’s expiration on Sunday, we can expect to hear lots of claims from the folks at the Treasury that it was a great success.

Such assertions would be no surprise from a political class justifiably concerned about possible taxpayer unhappiness, the continuing economic turmoil and the midterm elections. But if we have learned anything during this crisis, it is that the proclamations emanating from the Washington spin machine must be taken with an extra-hefty grain of salt.

Consider the claims made last summer that the Dodd-Frank financial reform act reduces the threats that large, interconnected banks pose to taxpayers and the economy when the banks are deemed too big to fail. Indeed, as regulators hammer out the rules governing derivatives transactions, it’s evident that the law has created a new set of institutions that will almost certainly be deemed too important to fail if they ever get into trouble. And that means there won’t really be an effective way to keep those firms from taking big, profitable, short-term risks that are dumped on the taxpayers when the bets fail.

Our roster of bailout candidates includes the clearinghouses, created under Dodd-Frank, that are meant to increase the oversight of derivatives trading. Because most derivatives transactions are expected to go through these clearinghouses, they will be “systemically important” under the law. As such, Dodd-Frank specifically provides that “in unusual or exigent circumstances,” the Federal Reserve may provide such entities with a financial backstop, including borrowing privileges.

Remember this: Financial backstop is just another term for a taxpayer bailout. And the major banks and brokerage firms are the members of the clearinghouses, so a backstop would essentially be for them.

According to the Bank for International Settlements, the entire derivatives market had a gross credit exposure of $3.5 trillion at the end of 2009. Obviously, even a small fraction of that amount could represent a sizable call on the taxpayers if a clearinghouse hit the skids.

So much for eradicating too-big-to-fail.

That’s not to say there aren’t upsides to clearinghouses. First and foremost, they will improve transparency in this huge market, requiring participants to disclose how much they have at stake financially. Regulators didn’t have such reports in the recent crisis and were severely hampered by the fact that derivatives trading existed largely in a black box.

In times of trouble, clearinghouses also allow hobbled firms to unwind and quickly reassign their positions to other, healthier players. Another good thing.

But clearinghouses sometimes collapse, as Craig Pirrong, professor of finance at the University of Houston, points out.

“Clearinghouses are intimately connected with the financial system and overall banking system, so the idea that clearinghouses reduce the interconnectedness of the financial system is incorrect,” he said. “They are big, interconnected and they can fail when we have big market shocks.”

In the Gold Panic of 1869, which caused New York markets to seize up, the clearinghouse for the gold exchange failed. And in the 1987 stock market crash, members of theChicago Mercantile Exchange, the Chicago Board of Trade and the Options Clearing Corporation received emergency infusions, Mr. Pirrong said.

“It’s a dilemma,” he added. “On the one hand, it is very important that clearinghouses have the ability to get liquidity support in the time of a crisis. But if a clearinghouse is convinced that 'Ben is at my back,' they might not be as prudent or cautious as they might otherwise be” — referring to Ben S. Bernanke, the Fed chief.

Walker F. Todd, a lawyer and economic consultant in Chagrin Falls, Ohio, was assistant general counsel and research officer at the Federal Reserve Bank of Cleveland from 1985 to 1994. He’s also an expert on the widening financial safety net — a net that offers taxpayer backstops for the institutions that got us into this mess and will most likely, alas, get us into the next one.

He says he is disturbed by the explicit backing of derivatives clearinghouses provided in Dodd-Frank. “There is no reason whatsoever for exposing taxpayers and ordinary citizens to paying for the gaming losses incurred through over-the-counter derivatives,” Mr. Todd said.

But with the backstop now firmly in place for clearinghouses, the Fed will be able to pay off derivatives players directly, rather than indirectly as it did in the disastrous rescue of the American International Group.

Given the multiple bailouts of 2008, it is to be expected that the line of institutions clamoring to join the cannot-fail party will grow longer. That’s the definition of moral hazard — if you rescue one group, others are sure to want the same treatment and behave in a way that ensures they’ll get it. The losses that taxpayers may endure in the next debacle, meanwhile, mount higher.

“THE crisis is about loss redistribution,” said Edward J. Kane, professor of finance at Boston College and an authority on regulatory failures. “In a crisis, these institutions have much more power with the government than taxpayers do and they will make it seem in the interests of responsible officials to rescue them, whether that’s Congress, the Treasury or the Federal Reserve. But the notion that you can always throw these losses on the taxpayer in the long run is very, very dangerous. There will come a time when the taxpayers will come close to revolt.”