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A Perfect Storm Could Shed Light On Secretive Energy Markets

2009-06-23T17:26:03Z

When Olav Refvik wanted to boost the price of heating oil to make a lucrative energy deal even more lucrative, the Morgan Stanley trader locked up several storage tanks the bank owned near New York Harbor to squeeze supply. Far from being illegal, the maneuver -- which earned him millions and the moniker "King of New York Harbor" -- is business as usual in the "regulated" commodities market.

The rough-and-tumble Chicago-based commodities market is an unusual beast on Wall Street, where practices that would be frowned upon at the flashier New York stock exchange, are considered quite acceptable.

While less glamorous than its East Coast cousin, the commodities markets are critical to most Americans. That's because its traders are integral in establishing the price we pay for oil at the pump each day. When Morgan Stanley, Citigroup and Royal Dutch Shell squirreled away 80 million barrels of crude oil -- nearly enough to supply the entire world for a day -- in supertankers off the Gulf of Mexico last January, they too profited as the price at the pump rose.

But now, as a comprehensive climate bill wends its way through the House of Representatives, some of these aggressive commodities practices have come under scrutiny. New legislation proposed by Rep. Waxman (D-Calif.) and Rep. Markey (D-Mass.) would create a system of carbon allowance permits that the government would sell to companies that want to circumvent new emissions requirements. These permits would end up spurring as much as $2 trillion in new carbon-based "derivatives." In this case, these new derivatives, so-called because they derive their value from something else, would be traded on the commodities markets, and without proper regulation, critics worry their prices could be manipulated much in the way that traders influence the price of oil.

With the combination of the upcoming climate bill that that could create a major new commodity derivatives market, in addition to a new focus from the Obama administration on derivatives, experts are hoping that regulation will be strengthened. Experts and legislators say these two forces have created a perfect storm, and that the opportunity is ripe to take a broader look at the overall commodities market rather than be limited to reforming only derivatives.

President Obama last week called for the overhaul Wall Street, and as part of his proposal, he zeroed in on regulating over-the-counter (OTC) derivatives, or those instruments that are bought and sold via verbal contracts. Because they are not traded on an exchange, OTC derivatives leave no paper trail and lack transparency. At this time, it seems probable that the pollution derivatives would be traded over the counter.

"On the road to reform we shouldn't be leaving any loopholes," Warren Gunnels, a senior policy advisor to Sen. Bernie Sanders (I-Vt.), told the Huffington Post. "It's important that we not just look at OTC derivatives, but also see how this whole commodities market can be more transparent."

Sanders is one of a five legislators who has proposed legislation in recent weeks that would change the freewheeling Chicago market by strengthening regulations and, in some cases, bolstering the oversight powers of the Commodities Futures Trading Commission (CFTC). Sanders is hoping to compel the CFTC to invoke its emergency powers to stop traders from participating in excessive oil speculation.

Other legislation related to reforming the commodities markets includes an amendment in the climate bill sponsored by Rep. Bart Stupak (D-Mich.) to close several commodity market loopholes; a proposal by Sen. Tom Harkin (D-Iowa) to put all commodities trades on transparent exchanges, and a bill by Rep. Collin Peters (D-Minn.) that originally called for expansive changes for commodities but that was substantially weakened after going through committee.

One of the most pressing issues addressed by much of this new legislation is the role of large bank holding companies like Goldman Sachs and Morgan Stanley. The firms earn billions of dollars in revenue by buying and selling commodities that they trade for proprietary accounts. At the same time, they own thousands of miles of oil and gas pipelines and vast warehouses, and use this infrastructure to gather non-public information to help them develop strategies to maximize profits. While they are not supposed to use this inside information to manipulate prices, they often do, say the experts.

"There is much in the energy market that would be considered insider trading on Wall Street, but is completely acceptable in the commodities market," said Tyson Slocum, the director of the energy program at Public Citizen. Goldman Sachs, Slocum says, should be considered "an energy company" and has been increasingly buying up pipeline and storage facilities. "Then say they are only using the acquisitions to hedge positions on their infrastructure. What they are really doing is getting an insider peek into information that gives them a significant edge," Slocum said.

When asked to comment on how they use this proprietary information, Goldman Sachs declined to comment and Morgan Stanley didn't return calls.

Central to the practices in Chicago is that the CFTC has historically been a weak regulator. Congress stripped the CFTC of much of its power in the 1990s and 2000 as a result of lobbying from Enron and a sympathetic administration. Its powers have yet to be reinstated, which means there is little in the way of limits on how many commodity contracts traders can buy and sell, and there are only minimal capital requirements.

This means that, much like with the housing bust, banks can borrow continuously to fund their speculation without having to hold much capital, or so-called 'skin in the game.' The same is true with hedge funds, which do not have to register with the CFTC. This is worrisome, according to the experts, because if the big traders over-leverage themselves as a result of the lax capital requirements, they will be unable to pay out their contracts should the value of commodities suddenly drop. That could lead to a market collapse much like the one that has taken place with real estate.

Another issue is the electronic trading platforms. While many commodity derivatives are traded over the counter, with no oversight, commodities of all kinds are also traded on two other types of platforms: There is the traditional NYMEX, which is the most heavily regulated of the commodities markets and operates like the stock exchange, and another, only lightly regulated electronic market, the most popular of which is IntercontinentalExchange, or ICE.

London-based ICE, which counts among its founding members Goldman Sachs, BP and Shell, was under no regulatory oversight until last year, when the Republican-led CFTC entered into a voluntary agreement. Under the terms, ICE was to send the agency data on its trades, and the CFTC also gained the right to regulate individual commodity contracts if it could prove it could be related to anti-competitive behavior.

The agreement with ICE hasn't had much of an effect, however. That's because ICE's computer software isn't compatible with the CFTC's system, and what data the regulator can read is often "months old and useless," said Slocum, citing conversations with frustrated CFTC enforcement officials.

A CFTC spokesman told the Huffington Post that it receives data daily from ICE and that they are able to glean useful information from the reports. The spokesman, David Gary, added that the agency had asked the Obama administration for technological upgrades to its computer systems as part of a proposal for additional funding.

"The ability of federal regulators to investigate market manipulation allegations even on the lightly-regulated exchanges like NYMEX is difficult," Slocum testified earlier this year at a hearing of the House Committee on Agriculture. He cited a case in which the Department of Justice took four years to investigate allegations of a single day's worth of price fixing. "If it takes the DOJ four years to investigate a single day's worth of market manipulation, clearly energy traders intent on price-gouging the public don't have much to fear," Slocum said.

While numbers are hard to come by, Morgan Stanley said in its November 2008 SEC filing, that it held $18.7 billion in commodity futures, options and swaps. In its annual report, the company said that commodity revenues had jumped 62 percent. The bank also reported to the SEC that it had committed $452 million solely to lease petroleum storage facilities in 2009.

As for Goldman, 17 percent of if its $22 billion in revenue in 2008 came from fixed income, currency and commodities, which includes all of its energy trading business. Meanwhile, Citigroup's trading division, Phibro, reported the total value of its commodity derivatives increased to $214.5 billion in 2008, a 384 percent increase from 2004. Bank of America held $58.6 billion in these derivatives as of September 2008.

Overall, energy experts said they would be watching to see how the legislation proceeds. "In my opinion, we haven't served the problem of excessive speculation, and whether these reforms will at that is questionable," said Mark Cooper, the research director of the Consumer Federation of America. "We would like to see all of the loopholes closed since it really is the ordinary American consumer who is paying the price in the form of higher prices."

Battle Brewing On Capitol Hill Over Obama's Proposed Consumer Protection Agency

2009-06-18T00:31:58Z

Consumer groups welcomed President Barack Obama's proposal to create a Consumer Financial Protection Agency as part of his sweeping overhaul of financial regulations on Wednesday. But they worried that the victory could be short lived as the powerful Wall Street lobbies prepare to go to battle to protect their own.

"The financial industry is sharpening its knives, and the question is, will Congress be able to withstand a sustained assault?" asked Travis Plunkett, the legislative director of the Consumer Federation of America.

In anticipation of the confrontation, a coalition of 200 consumer groups announced a day earlier the creation of Americans for Financial Reform, which will fortify their allies in Congress and will work to protect the president's proposal for the new consumer agency.

"The new coalition is what the broad public interest community needs to work together and win," said Ed Mierzwinski, consumer program director of US Public Interest Research Groups.

Consumer groups are applauding the proposed agency, which has been dubbed the CFPA, for strengthening consumer protections. "It is a game changer," said Mierzwinski, "It's the biggest thing since deposit insurance."

Supporters pointed out three key elements in the proposal that will protect consumers -- the stronger role of states in enforcing consumer protection laws, which banks have tended to disregard; the new oversight authority across all types of Wall Street financial products; and the elimination of the long-standing conflict between the needs of financial firms and consumers.

"This proposal provides strong federal oversight, but it also restores the ability of states to enforce strong consumer protection laws," said Kathleen Day, a spokeswoman for the Center for Responsible Lending. States have long been sidelined in the fight for consumer protections because many banks that sell financial products to consumers are federally chartered, and so are only subject to federal oversight.

"What happens currently is that regulators passed rules that said they were the only ones with regulatory oversight over certain banks, and so state laws were preempted," said Ira Rheingold, the executive director of the National Association of Consumer Advocates. "But now, the way we read this, the new consumer agency can declare a floor of basic consumer protection, but the states to take that even further if they choose."

The funding mechanism for the new consumer protection agency is being widely applauded also. Most regulatory bodies are funded from fees paid by the financial institutions they oversee, creating the possibility of a conflict of interest. This can mean that regulatory agencies hungry for funds may offer less oversight in an effort to convince companies to join their charters. Under Obama's plan, this race to the bottom could be eliminated because firms across Wall Street will have to pay fees to the CFPA.

"Companies would often change their charter to be regulated by a more lenient agency, but under Obama's plan, from what we gather, everyone has to pay across the board, eliminating companies from going regulator shopping," Day said.

Supporters of the CFPA also say it will eliminate conflicts of interest among regulators who now wear two hats: regulating for consumer protection, while also overseeing the safety and soundness of the financial firms.

While consumer groups rejoice at what Plunkett calls "an extremely strong proposal," the financial industry has, not surprisingly, been vocal in its opposition.

The American Bankers Association issued a statement that it was "strongly opposed" to the new agency, noting that "banks would be subject to conflicting regulation between safety and soundness and consumer regulation in many instances." It added that the new agency represents "an unprecedented grant of power to mandate business practices" because it can require that certain financial products be made available to consumers while others be barred from consumer consumption.

The US Chamber of Commerce held a press conference earlier this week, denouncing the CFPA in advance of Obama's speech. The Chamber's statement charged that the new consumer agency "cannibalizes regulatory expertise and adds yet another regulatory layer."

Despite this apparent opposition, sources at some banking groups say there are so many aspects of the Obama plan to tackle, they aren't convinced that all of their guns will target the CFPA. Opposing a consumer protection agency, said one official wryly, "sounds really terrible, no matter how you try to spin it."

That said, consumer groups aren't taking any chances at losing the CFPA.

"We have quite a battle on our hands," said Rheingold. "What the consumer agency will end up looking like, and how we isolate the proposal from political influences, will be key."

Why Is The FDIC Ignoring Problem Banks?

2009-06-16T22:09:14Z

USA Today had a story Tuesday that pointed out how regulators were regularly absent as the banks they were supposed to be overseeing failed under mounting debt.

Bert Ely, a longtime banking consultant, has identified a data point that highlights how far behind the regulators have actually fallen.

During the savings and loans crisis and its aftermath, banks that failed had a loss ratio--or a bank's total losses divided by its total deposits--of just around 13%.

Since the current recession began, that same ratio for failed banks surged to more than 37%, or nearly triple S&L crisis levels.

This means that the regulator responsible for seizing failed banks, the FDIC, is waiting much longer before taking over these doomed banks, allowing their losses to mount.

As a bank's loss ratio increases, it becomes costlier for the bank, and they pass the additional expenses onto their customers. Therefore, the FDIC inaction has resulted in rising costs for regular Americans, Ely said.

"The big question is why is the FDIC moving so slowly? It is very evident from these numbers that there is serious ineptitude among the regulators," Ely said. "Their incompetency is costing the banking industry, but they are passing this cost on to depositors and borrows, so we end up suffering."

As for their part, the FDIC told the Huffington Post last week that the FDIC doesn't make the decision when to seize a bank. The agency said that it merely carries out the seizure, but other regulators are responsible for determining when a bank has failed. A patchwork of agencies currently make this decision.

Hopefully this type of confusion can be streamlined, spurring a quicker response time among regulators, when Obama reveals to Congress tomorrow his plan to overhaul regulatory oversight of Wall Street.

The FDIC To Start Dumping Toxic Assets, Banks Could Feel The Pain

2009-06-11T13:57:34Z

Contrary to popular belief, the Public-Private Investment Program, a centerpiece of the government's strategy to rescue the nation's banks, is not dead.

The PPIP may be in critical condition, but the FDIC is planning what it hopes will be a miracle cure--a new pilot program it will launch in July to unload toxic assets under the supervision of new advisers who will structure and oversee the sale to qualified investors, the agency told the Huffington Post.

The new pilot is similar to the original PPIP that failed so spectacularly earlier this month, when banks resoundingly refused to sell any toxic--or err, um, "legacy"--assets to private investors. But this time around, rather than the banks unloading toxic debt from their balance sheets, it will be the FDIC that sells its own hard-to-price assets, which it acquired when it seized failing banks.

The program could establish a price floor for illiquid toxic assets, which have so far been nearly impossible to value. This could have an impact on those banks that have till now avoided pricing these assets for fear the transparency will force further write-downs, rendering some of them insolvent.

"We want to test the funding mechanism that we were contemplating for banks with PPIP, to get a structure in place so that if the program is needed down the road, we are prepared," Joseph Jiampetro, a senior FDIC advisor, told the Huffington Post. He added that the agency is currently hiring several advisers to structure the deal, find qualified investors and oversee the sale.

The original PPIP, or Public-Private Investment Program, was launched in March to enable banks to rid themselves of risky, valueless debt. Under the program, banks could unload subprime mortgages and other loans that have lost value in the recession to private investors.

To entice these investors to buy the risky debt, the FDIC agreed to offer them cheap financing to fund the purchases--an amazing 6-to-1 deal. Still, the program collapsed recently when banks refused to lower the prices of these assets sufficiently to interest the investors. Or perhaps, some say, it was the fear of pricing transparency that could have led to hits on their balance sheets.

There was also concern that Treasury Secretary Tim Geithner, who was key overseer of the program, would impose limitations on those who participated in PPIP. Since calling for restrictions on banks that accessed TARP funds, Geithner has had a chilly relationship with the private sector. This time around, however, oversight of the pilot program will shift to FDIC Chair Sheila Bair, a Republican who is admired by Wall Street.

"The private sector is a lot more comfortable with Sheila Bair and the FDIC than they are with Tim Geithner and the Treasury," said Dan Greenhaus, an analyst at Miller Tabak & Co. "There is less worry that if they participate in the plan with the FDIC it will suddenly require pay caps or other limitations."

Another key difference in the pilot plan is that rather than the banks selling their assets, the FDIC will sell its own risky loans--which it has acquired through bank seizures--while simultaneously providing funding to these buyers.

Critics say that while the basic principle is the same, it misses the original purpose of the PPIP by failing to help banks rid themselves of bad loans.

"The purpose of this new program is to save face, to postpone the PPIP funeral," says Bert Ely, a banking consultant and principal of Ely & Company. "Cosmetics are very important in politics, and not just on the face of candidates."

Market observers also say that the FDIC has seized relatively few banks during this recession--just 62 in the past two years compared to more than 700 during the S&L crisis--so the FDIC has very little in the way of toxic assets to necessitate this program.

For its part, the agency says it has 59,000 assets worth $27.7 billion as of March 31, which it needs to unload. But the more pressing issue is to find out whether the program could help establish a price floor for the many millions of dollars in toxic assets that plague the market.

The FDIC also says that while there have been relatively few takeovers of failed banks during this recession, it is possible that many more could come down the pike.

This is because in this downturn, the residential real estate market collapsed first. The large banks were the ones that mostly gobbled up this stuff, including subprime loans and mortgage-backed securities. And these institutions have largely staved off failures thanks to TARP.

Smaller, regional banks, however, invested far more heavily in commercial real estate. This market is only now beginning to show weakness, and so these smaller banks could potentially fail in increasing numbers as the down cycle progresses. With TARP less likely to be applied to these banks, the FDIC may become much more active, making this program more critical.

Still, while there is some hope this PPIP pilot has more chance of succeeding than its predecessor, skepticism remains.

"There were hundreds of banks every year being taken over by the FDIC during the S&L crisis, but so far in this cycle, it has only taken over a handful," said Richard Bove, an analyst at Rochdale Securities. "Whatever they say, something is wrong with this picture. And I don't see how this latest program will do anything to fix it."

Stress Tests: It Might Have Been Different If Fed Had Restricted Bank Dividends

2009-05-07T13:24:16Z

Citigroup needs another $5 billion in capital according to stress test results leaked this week. But it might not have needed that money if it hadn't shelled out $7 billion in dividends to its shareholders last year.

According to a new study, Bank Dividends In The Crisis: A Failure Of Government, by finance professors at NYU's Stern School of Business, Princeton University and the London Business School, the largest US bailed out banks issued more than $50 billion in dividends even as their very existence remained in the balance. That total would have gone a long way in eliminating the $65 billion the banks now need in fresh capital as a result of the bank stress tests.

Dividend payments are important not just because they deplete capital, which the banks so desperately now need, but also because they can be a major source of compensation for company executives, as well as a boon for regular shareholders. Most bank executives are given a base salary, which is often relatively low, and stocks and bonuses. The dividend payments that come with the stocks--they are usually some set amount of money dolled out per share--can often boost overall compensation significantly.

From the end of 2007--when the Fed began injecting money into the banking system--through the fourth quarter of 2008 when the Fed instituted TARP, some of the largest banks continued to issue dividend payments to shareholders.

Once the Federal Reserve opened its balance sheets to the banks at the end of 2007, it was clear that there was an unprecedented banking crisis at hand, so regulators should have required the banks cut their dividend payments, the paper argues.

"The Federal Reserve should have made it a requirement that as soon as it became clear that the banks were in trouble, they stopped paying dividends," says Viral Acharya, a professor at NYU and an author of the study. While it might have spooked the market should individual banks have been signaled out by the Fed to cut their dividends, "an across the board rule for all the banks to cut these payments would have been totally acceptable."

At the end of 2007, Citi was paying shareholders a dividend of $0.54 cents per share, or $3 billion in total. During that same fourth quarter, the bank posted a 26% year-over-year decline in income.

During the first three quarters of 2008, as the Federal Reserve began rolling out more programs to provide cheap debts to the banks to ease credit and bolster lending, Citi paid out $0.32 per share, or a total of $6 billion in dividends.

In the fourth quarter of last year, when Citi partook of TARP funds, it halved its dividend payment to $0.16, or $1 billion, bringing its total dividend payout in 2008 to $7 billion.

It wasn't until the first quarter of this year that Citi finally cut the payment to a negligible $0.01 per share.

Bank of America reportedly needs $34 billion in fresh capital as a result of the government stress tests. At the end of 2007, BofA actually increased its dividend payments by more than 14% to $0.64, or about $3 billion. It continued paying that through the first three quarters of 2008, spending a total of roughly $15 billion on dividends from the third quarter of 2007 through the third quarter of last year.

In the fourth quarter of 2008, when BofA first received TARP funds, it cut the dividend payments in half, to $1.5 billion.

It wasn't until the first quarter of this year that the bank finally came close to eliminating its dividends, bringing it to $0.1 per share.

Some banks are emerging from the government stress tests without needing additional capital, such as Goldman Sachs and JP Morgan. While some of these banks, like Goldman, say they were forced to take bailout funds and would have been fine without the additional capital, it is hard to know the veracity of those statements because of the opacity of the banks' balance sheets.

In the case of Goldman Sachs, it has paid a dividend of $0.35 per share since 2006. It continues to make the payment despite the fact it has accessed TARP funds and issued millions of dollars in government-backed long-term debt.

JP Morgan, meanwhile, paid $0.38 per share, or roughly $1.35 billion every quarter throughout the crisis, and didn't cut its payments until the second quarter of this year.

It is also worth noting that the banks that have since collapsed were busy paying--and even increasing--their dividends up until the moment they failed.

Merrill Lynch increased its dividends by 91% in the last four months before it was swallowed up by Bank of America: In the fourth quarter of 2007 it paid out $381 million, but by the third quarter of 2008 that surged to $729 million.

Lehman Brothers, meanwhile, increased their dividend by nearly 100% before going bankrupt in September 2008. It paid out dividends totaling $103 million in the third quarter of 2007 and increased it to $204 million in the third quarter of 2008, weeks before going under. It also spent $100 million on a share repurchasing program.

Economist: America Is Just Like An Emerging Market, Wall Street Oligarchs And All

2009-04-23T20:03:58Z

America may be more like an emerging market than we realize.

That is the analysis by an increasingly vocal and influential professor at MIT, Simon Johnson. In an interview with the Huffington Post, Simon Johnson, the former chief economist at the International Monetary Fund, said that just like the emerging markets he has spent his life studying, the U.S. has created a system whereby Wall Street "oligarchs" have monopolized and cannibalized the economy. At the same time, Washington regulators have been rendered ineffective, seduced by their aura of wealth and power.

Johnson's solution is, in part, to use anti-trust laws to break up these too-big-to-fail institutions, and for regulators to intensify their oversight of the smaller banks that result.

"In the last decade, the attitude took hold in the U.S. that what was good for Big Finance on Wall Street was good for the United States," Johnson testified before the Joint Economic Committee earlier this week. According to this "belief system," Wall Street "benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were critical to America's position in the world."

Demonizing Wall Street is the nation's latest obsession, and Johnson's stance seems to fit right in with the zeitgeist. But the idea of deconstructing the system that has created these Wall Street oligarchs, such as we haven't seen since the days of J.P. Morgan (the man), is not a perspective from the far-left fringe. On the contrary, it is gaining support both among well-respected economists and Washington insiders.

Columbia professor and Nobel Laureate, Joseph Stiglitz, agrees with Johnson's views: As the former chief economist of the World Bank, "if I had come and visited the United States, we would have cut off all aid to the United States. It wouldn't have passed muster," he testified at the Joint Economic Committee hearing.

He added, "we've seen in the midst of crises in so many developing countries massive redistributions from the ordinary taxpayers to the financial sector. What we are seeing in the United States is a pattern that happens over and over again."

Even the president of the Federal Reserve of Kansas City, Thomas Hoenig, concurred that the banking system must be fundamentally re-thought.

"No one did a particularly stellar job in supervising these institutions," Hoenig testified at the same hearing, referring to Wall Street. "We had an environment where deregulation was the watchword and you went forward with that. You had these very large institutions. And we, in a sense, allowed ourselves to think that sophisticated methods of financial transactions was a substitute for fundamental principles."

Johnson argues his views straddle the line between right and left: While it's understandable that liberals would embrace dismantling Wall Street power brokers, some on the right are also supporters. That's because they oppose corporate welfare, which has resulted from the bank bailout. "They don't like corporate welfare because it leads to higher taxes," Johnson told the Huffington Post. "So I am getting feedback from those perceived as more conservative that they agree with me."

Johnson, who earned his PhD in economics from MIT and his BA from the University of Oxford, spent about 18 months as the chief economist at the IMF before becoming a professor of entrepreneurship at MIT.

"I have spent all my time studying these other economies and it's clear that the U.S. is following a similar path," Johnson says.

The path to economic ruin begins with fear. In the case of an emerging markets crisis, it is the fear that a country cannot pay back its debt. Investors balk at lending to the country, and it becomes a self-fulfilling prophecy, as the country can no longer borrow money to pay its debt.

It is the same scenario that played out with Lehman Brothers last September, Johnson argues. Investors grew fearful and pulled out of the bank, which then became unable to cover its debt. When it failed, investors grew fearful that the whole banking industry was insolvent and pulled back. Nearly overnight credit dried up and the Federal Reserve was forced to step in and provide funding.

It was this succession of events that gave Johnson his "Aha! moment, when I realized I had seen this all happen before," he says.

While the U.S. economy has always suffered booms and busts, this time was different because of the sheer size of the financial services industry. In 1986, for example, Wall Street's profits made up just 19% of total domestic corporate profits. During this decade, that number reached as high as 41%.

Wall Street had grown so large because of deregulation during the Reagan era, the decision to not regulate derivatives during the Clinton administration and Greenspan's low interest rates, according to Johnson.

At the same time, the size and wealth of Wall Street translated into political heft. Financiers and Washington players became more interchangeable, furthering the creation of an oligarchy. Two prominent examples include Robert Rubin, co-chair of Goldman Sachs and former Treasury Secretary under Clinton, who later joined the executive committee of Citigroup and Henry Paulson, who ran Goldman Sachs during the boom years, and later became Treasury Secretary under President George W. Bush.

"The emergence of a financial oligarchy during a long boom is typical of emerging markets," Johnson notes.

The solution to solving the current financial crisis is for the government to take over failed banks and deal with them through a receivership much like the Resolution Trust Corporation, which helped solve the Savings and Loans debacle in the 1980s.

The other step is to break up the oligarchy. This entails selling off the banks piecemeal to private equity firms and imposing restrictions on size so the new, smaller banks cannot grow to the size of the current mega-banks.

"Anything that is 'too big to fail' is now 'too big to exist,'" Johnson says, adding, "the Obama Administration's fiscal stimulus invokes FDR, but we need at least equal weight on Teddy Roosevelt-style trust-busting."

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Sean Hannity: Allen Stanford Fan, Recommends Companies On Radio Show (AUDIO)

2009-02-18T21:14:34Z

***SCROLL DOWN FOR AUDIO***

Mention 'Sean Hannity' to Stanford Coins & Bullion and get a free guidebook.

Yup, that's Stanford as in Stanford Financial Group, or Allen Stanford, the Texas billionaire who is apparently on the lam after being charged Tuesday in connection with a multi-billion-dollar fraud.

"Stanford Coins & Bullion, a member of the Stanford Financial Group, their name as good as gold," Hannity intones on advertisements that regularly run on his radio show.

"I couldn't believe it when I heard the advertisement," said Michael Levine, a regular Hannity listener from Westchester County, New York.

He called the radio station on Tuesday to inform them Stanford had been implicated in what the SEC termed "massive, ongoing" fraud. "They told me they had no idea what I was talking about," Levine told the Huffington Post.

Hannity spokesman Hosea Belcher did not return a call for comment.

Stanford Coin & Bullion "is just a telemarketer boiler room-type of company that calls during dinner and tries to fleece you," said Jon Nadler, a senior analyst at gold firm Kitco.com.

The SEC charged Stanford, who is the first American to be knighted by the government of Antigua, for fraud Tuesday. The Texas native has spent millions in the Caribbean island, erecting sports facilities and other community facilities. He is charged with allegedly trying to bilk 50,000 clients out of $8 billion through a scheme involving high-interest-rate CDs.

The cricket fanatic--he founded the Stanford Super Series where Caribbean teams compete against the British for a $20 million purse--has allegedly been perpetrating the fraud for at least 13 years.

Stanford has also donated millions of dollars to politicians, and counts as friends several powerful Washington, D.C. powerbrokers, including Tom DeLay, Chris Dodd and Colin Powell. He also has an endorsement deal with golf superstar Vijay Singh.

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