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Robert Auerbach: The Seventeen-Year Lie

2009-11-30T10:04:20Z

The following is an exclusive adaptation from Deception and Abuse at the Fed: Henry B. Gonzalez Battles Alan Greenspan's Bank

The Senate Banking Committee has a unique opportunity on Thursday to get real answers from Federal Reserve Chairman Ben Bernanke. He'll be testifying for his job, after all. Here's one query that ought to come his way: When will the Fed stop shredding the unedited source transcripts of their policy making committee’s meetings they had sent to the National Archives and Records Administration?

Vice Chairman Donald Kohn informed me they had begun destroying these records in 1994 and planned to continue. My investigation of this particular travesty is one problem described in Chapter 6 shown here, “The 17-Year Lie,” of my book, “Deception and Abuse at the Fed.” I assisted former House Financial Services Committee Chairman/Ranking Member Henry Gonzalez in investigations of the Fed while the institution was lying, year in and year out, to Congress.

What would happen to unelected officials in a governmental bureaucracy with immense economic powers, which include controlling the country's money supply, regulating large parts of the financial system, and making loans to foreign countries, if they perpetuated a lie for seventeen years about the existence of records of their deliberations? What would happen if, when the lie was finally uncovered, they began destroying their source records? The press and the public would be outraged and would demand that these unelected officials, who have violated the public trust in a great democracy, be, at the very least, fired. They would demand an end to all these practices.

That did not happen at the Federal Open Market Committee (FOMC). When Gonzalez invited Fed officials to testify about their records in 1993, Greenspan and some Fed officials planned and participated in diversionary tactics, even if that meant misleading Congress about seventeen years' worth of secret Fed transcripts. In some cases, the statements that officials sent Congress for insertion in the hearing record were false, and they knew this before they testified.

When Gonzalez uncovered the seventeen-year lie, it drew a few press stories but no sustained coverage. The endless stream of superlatives for Greenspan continued. For seventeen years the Fed had lied, but its chairman remained deified.

Early Revelations of the Secret Transcripts

The Fed began preparing paraphrased transcripts of FOMC meetings in 1936 for internal use. Each was called a "Memorandum of Discussion" (MOD). Fed chairman William McChesney Martin threatened to end this practice in 1964. He threatened the wrong congressmen: two outspoken Democrats who would later become chairmen of the House Banking Committee. Wright Patman and Henry Reuss did not blink when confronted with this threat. The House Banking subcommittee chaired by Patman voted (6 yes, 1 no, and 1 present) to demand the verbatim transcripts for 1960, 1961, 1962, and 1963. The Fed sent Congress these records and began issuing paraphrased transcripts they called the MODs, with a five-year lag. Milton Friedman and his coauthor Anna J. Schwartz believed that the publication of their classic history of U.S. monetary policy in 1963, which was very critical of the Fed, along with the congressional requests for FOMC records, induced the Fed to begin publicly issuing the MODs in 1965.

Valuable information was obtained from these records, since all statements were attributed to specific individuals. An example is the questionable legality and propriety of beginning a so-called "swap" facility in 1962 by which the Fed gave itself the power to make loans to foreign governments without congressional authorization.

Fighting for Longer Delays and Less Sunshine

Fourteen years later, in 1976, two attacks on Fed secrecy created high anxiety at the Fed. First, David Merrill, a law student at Georgetown University, brought a legal action challenging the forty-five-day delay in releasing the "Directive" on monetary policy. It is a short report on policy actions authorized at an FOMC meeting.5 The federal district court agreed with Merrill. The Fed appealed up to the Supreme Court, which remanded it back to the district court. Lacking funds for further extensive adjudication, Merrill could not pursue the case. The Fed has more than all the money it needs--an "unlimited purse"--to hire private law firms and fight any legal action for a long time. Adjudication of charges of alleged racial discrimination at the Board of Governors (described in Chapter 8) had been in a federal court for a decade in 2007.

The second attack on the Fed's secrecy came from the Government in the Sunshine Act, which was signed into law September 13, 1976. According to the statute: "The agency shall make promptly available to the public, in a place easily accessible to the public, the transcript, electronic recording or minutes . . . of the discussion of any item on the agenda." (In this case, "agency" refers to any body in which most of the members are appointed by the president and confirmed by the Senate--like the Fed Board of Governors.) The Fed frantically tried to protect itself from such transparency and individual accountability. FOMC meeting transcripts from 1976 and other documents reveal that Fed officials devoted considerable time to preparing memoranda and discussing the dreaded timely release of their FOMC deliberations to the public. The staff reported on April 7, 1976, that they could be subject to a court order to produce part of the MODs: "Second, it is becoming increasingly evident that, so long as the memorandum of discussion exists, many of us will have to spend a large amount of time in the effort to comply with Court orders to make portions public."

The Mock Funeral

The seventeen-year lie began. Fed chairman Arthur Burns notified House Banking chairman Wright Patman in 1974 that he could not give Congress the FOMC transcripts because "they are routinely disposed of after the Committee has formally accepted the memorandum of discussion for the meeting in question," adding, "currently we are employing a combination of note-taking and tape recording. In any event, the materials are disposed of when they have served their purpose, as noted above." Three years later, in testimony before the House Banking Committee, Burns maintained the fabrication: "In the absence of express statutory protection against premature disclosure of the memorandum, we would feel compelled to object to a proposal of returning to the practice of keeping extensively detailed minutes of FOMC meetings."

The FOMC voted 10-1 to discontinue the MODs in 1976. That vote began the official seventeen-year lie. Among those voting to discontinue was the president of the New York Fed Bank, Paul Volcker, who would become Fed chairman. Philip Coldwell, president of the Dallas Fed Bank, was the only dissenting vote.

The Fed's announcement of the end of the MODs produced a firestorm at House Banking. Hearings were held. Laws were proposed to restart the MODs. The chairman of the Subcommittee on Domestic Monetary Policy, Stephen L. Neal (D-SC), contacted many distinguished academics and people from the financial community, requesting their opinion concerning how FOMC meetings should be documented and made public. A preponderance of seventy respondents wanted either the transcripts or the MODs restored, and many wanted timely publication. Milton Friedman, the Nobel laureate, wanted publication with only a few days' delay. "

A Devious Way to Get around the Law"

Burns outfoxed some people by announcing a substitute for the transcripts. Ninety days after the FOMC meetings, the public would get something called the "Minutes of the Federal Open Market Committee." These minutes would not contain statements for attribution to FOMC members. They would not even record a member's individual views except for a very brief description of any recorded nay votes. Since the Fed tries to make the publicly recorded vote unanimous, generally little or no individual responsibility can be divined from these remnants.

Burns told Congress that the minutes recorded the votes responsibly: "The new policy record does not attribute individual opinions to committee members by name; but the record always reports the votes of the members by name and their accountability is preserved." Each time the padded but anemic substitute was published, it was received with great gusto and given wide press coverage by the Fed-watchers industry. Entrails are better than a complete record for those employed to interpret them.

As Burns led the committee members to the funeral for the MODs, David Eastburn, president of the Philadelphia Fed Bank, warned, "It seemed to me that we incur certain costs in cutting out the memorandum of discussion in terms of implications to others on the outside that we're being more secretive if you want to put it that way, that this is a devious way to get around the law" (emphasis added). A page from the MOD containing Eastburn's remarks is shown in Figure 6-1. It is less tidy than the transcripts from future periods, when computers had replaced typewriters. Notice that Chairman Burns ("CB") replied by saying, "That depends how we present it. Now I would want to present this, I would want to make a virtue of this, and never mind how we arrived at it. We were not seeking virtue for the sake of virtue."

Burns was dismissive when doubts about the lack of a full record were raised at an FOMC meeting. He replied: "I think you credit individuals who follow the Federal Reserve with more knowledge than I think many of them really have. . . . those who feel that it merely repeats that which they already know will have no difficulty skipping paragraphs or pages." Denying for the record that the minutes should be padded, he ordered more pages: "We're describing this document as an expanded policy record. . . . Now on that basis of this concept the document should be longer, you see, must be longer, and this is a formal consideration that cannot be neglected, and we need some additional pages. I'm not going to tell you how to add additional pages, and I'm certainly not going to say that we should do anything that remotely resembles padded, but produce several additional pages" (emphasis added).

Secrecy and Videotapes

Sixteen years later, alarm bells went off at the Fed as Gonzalez began asking about the records of FOMC meetings. During 1992 and until October 1993, officials of the Greenspan Fed answered Gonzalez's inquiries with warnings about the harmful effects of openness at the nation's central bank. The videotaping of FOMC meetings, proposed in Gonzalez's legislation (HR 28), triggered extreme irritation in Fed officials. For many of them, and for other admirers of the Fed's "independence," it was an insolent intrusion that would lead to blatant transparency and individual accountability. Fed officials said the quality of their meetings would be severely impaired. As late as 1998, Greenspan was still warning the FOMC: "If we went to the fullest extent in that direction [more information], then Henry Gonzalez's approach of live transmission of this meeting obviously would be the most ethical and most directly available source of information to the market, but it also would be the most useless." He misrepresented Gonzalez's bill, which provided for a sixty-day delay before the release of the videotape of a session. The bill also prevented pulling the plug on the tape recorder when an FOMC quorum was present.

Behind the public rhetoric of disdain for the Gonzalez legislation, Greenspan and other Fed officials reached for additional political muscle. The chairman of this politically powerful governmental bureaucracy traveled to Little Rock, Arkansas, in 1992 to talk with the president-elect. Reporting to the FOMC about his meeting with Bill Clinton, Greenspan interpreted Clinton's "body language and peripheral comments" as "consistent" with Fed independence. (For further details, see Chapter 10.)

During the first year of his presidency, Clinton notified all governmental agencies to comply with the Freedom of Information Act in his "Memorandum for Heads of Departments and Agencies." The Justice Department would implement this new administration policy. Greenspan reacted by warning FOMC members: "The trouble, unfortunately is . . . the Department of Justice would not under the Freedom of Information Act be on our side in the court to protect these particular transcripts and prevent [their release]."

In pursuit of FOMC records, Gonzalez used the White House directive and comments from numerous scholars who had responded in 1976 to the request by Congressman Neal for their views. Many were opposed to the discontinuance of the MODs. John Kenneth Galbraith wrote: "The effort at secrecy has only one source: That is the long-standing effort of those having to do with banking and central banking to feel that they are above the procedures ordinarily required of other individuals and agencies. . . . There is no good reason why full minutes should not be published and why the obligation should not be fully on the Chairman to see that all discussion is on the record."

The Fed Can't Afford It

The statements issued by the FOMC in 1976 on why the MODs should be discontinued included the following transparently inapplicable rationale: "The decision to discontinue the memoranda [the MODs] reflected the Committee's judgment that the benefits derived from them did not justify their relatively high cost."

In an FOMC conference call on October 15, 1993, Chairman Greenspan made a similar suggestion to justify eliminating a verbatim record of FOMC meetings. It cost too much. In the Fed's wasteful, bloated bureaucracy, which has an operating budget exceeding $2 billion, this rationale is a meaningless excuse for secrecy.

Doodles and Rough Notes

Much to their assumed consternation, an impressive array of the nation's central-bank officials assembled behind a long, continuous row of tables in the Wright Patman Chambers of the House Banking Committee, with Greenspan in the middle. They looked up at Henry B. Gonzalez, House Banking chairman. Gonzalez had sent each of the twelve Fed Bank presidents and the seven members of the Board of Governors specific requests for information. The letter sent to Fed governor David W. Mullins, Jr., is shown in Figure 6-2. They were directed to submit statements for the record on "any notes or records that you have made in connection with FOMC meetings" or "others have made at any FOMC meetings and the location and disposition of any such material."

According to their prearranged plan, nearly all the witnesses deferred to Greenspan, who did not disclose the most important fact concerning the FOMC records, which had seemingly shocked some of them four days earlier: the existence of FOMC transcripts from many prior years. The committee did not know that most of the witnesses had decided not to change their formally submitted written statements even after being told, four days before the hearing, that prior transcripts existed. Thus, some of them let stand written statements that misled Congress on the areas about which they had been instructed to testify.

Robert McTeer, former president of the Dallas Fed Bank, testified: "I doodle during discussions and occasionally write down a word or phrase for reference when I speak. I don't write down decisions because they are simple and easy to remember, and normally come at the end of the meeting. My doodles and notes all mixed up would be of no use to traders or journalists. I destroy them after the meeting and rely only on official documents for future reference."

Did McTeer seriously think that when he was asked about FOMC records, Gonzalez would be satisfied to learn about his discarded doodles? What official documents was McTeer talking about? Greenspan testified that the FOMC kept "rough notes." These answers appeared evasive and misleading.

With artful sleight of hand, Greenspan, in his prepared statement, emphasized the temporary nature of FOMC records: "The meetings are recorded electronically by the FOMC secretariat. . . . the tapes are recorded over . . . In the process of putting together the minutes, an unedited transcript is prepared from the tapes, as are detailed notes on selected topics."

Gonzalez then inquired of all the witnesses: "In the questions that I had directed, I did ask and each of you responded, as to their notes or records that you are aware of. But today's testimony by Chairman Greenspan reveals to me, at least, that the FOMC meetings are tape-recorded. . . . What I am going to ask is if any of you knew or know about these recordings being made when you submitted your written testimony for today's hearing. . . . I will be glad to hear from any of you."

As previously planned, the Fed officials let Greenspan answer. He drew attention to tapes and notes rather than the existence of years of transcripts: "The FOMC staff, in the preparation of the minutes, takes a recording for purposes of getting a rough transcript, but the tapes are taped over." Greenspan then emphasized: "In other words we don't have the actual tapes themselves. We don't have electronic recordings of our meetings." Gonzalez said he was a "little bit confused here. In other words you have no tape recordings of the actual proceedings." Greenspan injected his own uncertainty about what his staff does: "We have them only--as far as I know, what the staff does is, in order to assist its presentation and preparation of the minutes, it takes recordings but then tapes over them so they are not available thereafter."

Congressman Maurice Hinchey (D-NY ) probed further: "And in the interim [before the minutes are issued], those tapes are taped over, so that no record exists in that way. Is that correct?" Greenspan replied: "There is no permanent electronic record, that is correct. We obviously have rough notes." The neatly typed FOMC transcripts I later viewed were not rough notes.

Jim McTague, then the Washington bureau chief for American Banker and now the Washington editor of Barron's, attended the hearing. He reported: "In a performance that would have made professor Irwin Corey weep with admiration Mr. Greenspan avoided drawing attention to the existence of transcripts during appearances before the House Banking Committee on Oct. 13 and Oct. 19 to discuss FOMC record keeping." Corey has famously performed as a double-talking comedian.

David Skidmore, an Associated Press reporter who was later employed at the Fed, wrote an article entitled "Greenspan Defends Secrecy Surrounding Key Central Bank Committee": "Federal Reserve Chairman Alan Greenspan warned lawmakers today that forcing central bank policy makers to operate with less secrecy would hurt the economy. . . . Disclosing the committee's directives, which are often conditioned on future economic events that may or may not happen, would cause changes in interest rates even when the panel intended no immediate change, he said."

The Lie Revealed

Skidmore also reported that Gonzalez said: "There appears to be conflicting statements, less than forthright responses, and possibly some jointly arranged understanding with regard to the testimony."

Gonzalez was not convinced that the nation's central monetary-policy committee destroyed the verbatim records of its meetings and maintained only rough notes of members' statements, as Greenspan had testified. Gonzalez ordered that letters be faxed immediately to all the witnesses, asking if they had been forthright in their testimony and demanding details of their knowledge of FOMC records.

The pressure from Gonzalez, a legislator who would not reach an "accommodation," did elicit a break in what Gonzalez called the "code of silence." In response to the post-hearing letters that Gonzalez sent to witnesses, the House Banking Committee received information regarding an FOMC conference call that had occurred four days before the hearing. David Wessel reported in the Wall Street Journal about this break in the Gonzalez investigation: "Fed Chairman Alan Greenspan saw this coming, according to the extraordinary notes of an hour-long Oct. 15 conference call among Fed officials: 'AG [Alan Greenspan] not as confident as previously that Fed is not at risk,' an official of the Cleveland Federal Reserve Bank recorded. 'Fed vulnerable if mishandle transcripts matter.' The notes were obtained and released by the House Banking Committee, which has demanded unedited copies of the transcripts as well as the public release of edited transcripts older than three years" (emphasis added). Pointing to the sudden change in the Fed's public stance, Wessel added: "As recently as last month, Mr. Greenspan testified that releasing a transcript of Fed deliberations 'would so seriously constrain the process of formulating policy as to render those meetings unproductive.'"

Seven days after the hearing, on October 26, the Fed liaison phoned a House Banking Committee staff member (me). He said that a courier would deliver a letter from Greenspan to Congress that would be made public in one hour. It is customary to allow the recipient member of Congress adequate time to read a letter from a governmental entity before making it public. Discourteous, preemptive disclosure may be used to jump ahead of the expected news coverage of the recipient's public reply, the news value of which would be diminished.

Greenspan's Memory Problems and Admission

As Greenspan admitted in this letter to Congress: "Unedited transcripts exist for each regular meeting of the FOMC held after the meeting of March 15-16, 1976." Greenspan explained that he had some memory problems: "I was aware from the beginning of my tenure that the meetings were being taped. Several years ago, staff informed me of the existence of transcripts. . . . I gave the matter of these procedures no further thought until recently. Indeed, until a staff member jogged my memory in the last few days, I had been under the impression I first learned about a year ago that transcripts were being retained."

The congressional publication The Federal Reserve's 17-Year Secret summarized Greenspan's responses to the committee in a column of a table labeled "Date of first knowledge of FOMC transcripts": "Knew in 1987, then forgot. Told FOMC members on October 15, 1993 that he remembered one year ago. Several days before he sent 10/26/93 letter staff had reminded him that he knew two years ago."

Anna Schwartz, a distinguished scholar and coauthor of books with Milton Friedman on the history of the Fed and monetary policy, was quoted in the Washington Post the day after Greenspan's letter was made public: "Whether there has been a deliberate attempt to pull the wool over people's eyes, I don't know. But obviously they have not been truthful all these years." The mock burial was now revealed. The transcripts were never discontinued. Transcripts did exist. The transcripts from the Burns Fed are part of the papers Arthur Burns bequeathed to the Gerald R. Ford Presidential Library. They have been lightly edited by archivists from the National Archives and Records Administration. In the 1980s, Fed Chairman Volcker reportedly prevented Fed staff from destroying FOMC transcripts that were being secretly maintained.

The Submission of Incorrect Testimony to Congress

Gonzalez drew attention to Fed responses that "clearly do not reveal the existence of tape recordings or transcripts." It was difficult to understand how Fed officials did not know or forgot that they were being taped or that FOMC transcripts were being maintained. Meanwhile, Gonzalez asked the same group of witnesses to send any material related to an FOMC conference call on October 15, 1993. Some of the nineteen Fed decision makers responded. Silas Keehn, president of the Chicago Fed Bank, admitted, "At the time of the October 15 conference call, I expressed concern about the possibility that my testimony as then drafted might be viewed as inaccurate," adding, "Others expressed similar views but I am unable to recall who did so or their comments in any detail."

It should be mandatory for officials of the nation's central bank to give accurate replies to Congress rather than to merely express their concerns to one another. A table from The Federal Reserve's 17-Year Secret, entitled "Responses of Presidents Who Refused to Submit Their Notes on the October 15, 1993 FOMC Conference Call," is shown in Figure 6-3. The report also tabulated an interesting summary of when the Fed officials admitted they knew about the transcripts. One indicated being aware of transcripts as far back as 1989. Most indicated they had not known until immediately before the hearings. "If We Keep Stonewalling, We're in Trouble".

Chairman Gonzalez demanded the transcripts of the FOMC conference call during which the Fed had planned its testimony. The Fed resisted. Gonzalez reluctantly agreed to an alternative procedure, in which congressional staff members would go to the Fed and listen to the tapes of that call.

On January 13, 1994, a group of Democratic and Republican staff members from the House Banking Committee, including me, went to the Board of Governors. We listened to a tape recording of the conference call. The room was crowded with Fed and congressional staffers. Over the objection of senior Fed staffers, I turned the tape recorder off after short intervals so that the congressional staffers could make a verbatim record of the conference call.

During this FOMC conference call, some FOMC members displayed an anxious tone: they had been informed that transcripts existed and that the secret might be uncovered at the hearing four days later. Robert McTeer appeared to know what they were doing when he said, "If we keep stonewalling, we're in trouble." A top staff person who would become Fed vice chairman, Donald Kohn, explained what Greenspan intended to do, a clear policy to mislead Congress about the written records of the FOMC, which had been specifically requested in writing: "The Chairman is not highlighting these transcripts . . . We're not waving red flags." Greenspan said he took some solace from his recent testimony experience, on October 13, before House Banking: "I would say Fed-1, House-0. We were on very safe ground earlier this year, and presumed threats to the Federal Reserve System were considerably far less six to nine months ago . . . We can become very vulnerable if this is not handled properly."

Virgil Mattingly, general counsel for the Fed, tried to soften the idea of possible public disclosure of the transcripts: "Well, I don't know what the Justice Department would say, but my suspicion is that they would probably say that we are fully able to put a disclaimer on those transcripts saying that they are rough and unedited and they may or may not reflect what the person actually said." Greenspan replied: "You know, that's like taking the National Enquirer and putting that on the front of it. [Laughter]" Governor Wayne Angell added: "And every newspaper that quoted it would run the full disclosure as the lead!"

A Fed Bank president inquired whether Gonzalez knew about the transcripts or leaks of information. A Fed congressional liaison replied: "I don't have any sense that they have any knowledge whatever of what we've been talking about."

A Fed Bank president stated that some Fed officials had submitted false written statements to Congress: "Some members of the FOMC who happen to be members of the Board of Governors knew about the transcripts. Other members who happen to be Reserve Bank Presidents didn't know and now have submitted to Washington statements saying that they didn't know. And that's going to come out on Tuesday [at the hearing] and that's awkward." Although "awkward" is a gross understatement for describing the submission of false written statements to Congress, Greenspan did not see a problem. His reply bypassed the whole issue of sending knowingly false written statements to Congress.

Edward Boehne, president of the Philadelphia Fed Bank, confirmed the Fed's seventeen-year lie:

Let me just [say], since I may be one of the few people who was around when the Memorandum [of Discussion] was still being done and when the change was made, that to the very best of my recollection I don't believe that Chairman Burns or his successors ever indicated to the Committee as a group that these written transcripts were being kept. What Chairman Burns did indicate at the time when the Memorandum was discontinued was that the meeting was being recorded and the recording was done for the purpose of preparing what we now call the minutes but that it would be recorded over at subsequent meetings. So there was never any indication that there would be a permanent, written record of a transcript nature. And I think that.

Virgil Mattingly added, "That accurately describes what Chairman Burns told the Congress."

"I Hope They Didn't Think That When the Green Light Went on It Meant Raise Interest Rates"

The congressional staff members examined the meeting room used for FOMC and Board meetings. The recording systems were extensive. A voice-activated green light before each member who sat at the large conference table was part of the recording system. An adjacent room contained recording equipment. During FOMC meetings, a cable extended from this adjacent room to a string of microphones that were placed along one wall to make a backup recording. A staff member seated at the head of the conference table next to Greenspan assisted in operating the recording system. Just around the corner of the L-shaped hallway passage from the offices of Greenspan and the other governors was an office with a secretary and a file cabinet containing the FOMC verbatim transcripts.

This array of recoding equipment raised questions. How could any of the nineteen decision makers who had attended many meetings in this meeting room fail to know they were being recorded? How could any of them, including Greenspan, fail to comprehend that the recordings were being carefully typed and stored in an office around the corner from the conference room? How could any of them in carrying out their extremely important decision making, which affected the economic welfare of the nation, fail to ask the Fed staff if the transcripts were being retained? At a later Banking Committee hearing, Chairman Gonzalez asked one FOMC member, William McDonough, these questions. He had submitted a statement that declared that he did not know he was being recorded at FOMC meetings. Gonzalez quipped: "I hope they didn't think that when the green light went on it meant raise interest rates."

Governor Wayne Angell testified at this later hearing about Greenspan's memory problems: "He said he [Greenspan] forgot about the transcripts. He never forgot about the recording. . . . And I want you to know that in my view, Chairman Greenspan is one of [the] world's most accurate people; and he would never, ever want someone to believe what wasn't the case." That did not seem to explain the memory problems Greenspan said he had, as described in the congressional report.

Shredding Fed Records and Turning Off the Tape Recorder

Obviously, Chairman Greenspan's memory of the unedited transcripts was acute when he orchestrated an unrecorded vote to shred them. When, as a result of the Gonzalez hearings and investigations, the transcripts of the FOMC meetings from 1995 were placed on the Fed's Web site in 2001, it was astounding to find that the Fed officials had voted to destroy the unedited transcripts. As a professor of public affairs at the University of Texas, I wrote to Chairman Greenspan on September 3, 2001, praising him for his admission that transparency had not impaired their deliberations. Greenspan had acknowledged at a 1995 FOMC meeting that any prior reluctance to publish the transcripts was ill founded: "I believe there was some strong support within this Committee a year or so ago, mainly on the grounds that we thought the taping inhibited the deliberative process . . . I think the conclusion, with perhaps a qualification [a subpoena for early release of the transcript] . . . is that there is very little evidence that the quality of our discussions have been reduced."

My letter also contained some specific questions. A timely reply was not expected, because the terrorist attacks of September 11, 2001, occurred eight days after the letter was sent. However, Greenspan's senior staff member, Donald Kohn, who became a Fed governor in 2002 and vice chairman in 2006, replied in a letter to me on November 1, 2001. He confirmed that the FOMC members had voted to destroy their unedited transcripts for 1994, 1995, and 1996.

FOMC members were told in 1995 that even though they were "not permitted" to discard "raw transcripts" of meetings before 1994, future unedited transcripts would be "thrown out," and only transcripts edited by the Fed would be retained. FOMC members were also told to move some discussions to the lunch period, when "the tape is not on."

The 1995 transcripts also revealed that FOMC members agreed to pull the plug on the taping system used at their meetings without agreeing on the subjects that should be "off the tape." The term "organizational subjects" was suggested for off-the-tape discussions, although there was little consensus on what that constituted. A subcommittee of the FOMC reported on its deliberations. The subcommittee chair, Governor Alan Blinder, characterized the discussion at the FOMC meeting: "I did not hear any consensus--maybe someone else heard a consensus. Maybe we should just have a vote on whether there should be an 'off the tape' portion. Do you agree?" Greenspan replied: "I agree." He later added: "I am not going to record these votes because we do not have to. There is no legal requirement." The vote was taken without recording members' names. Greenspan announced: "The 'Ayes' have it."

Greenspan's anonymous voting scheme removed the Fed officials' individual fingerprints from the vote to pull the plug on the recording of their meetings for undefined reasons--which means whenever they wanted to block the public or anyone else from finding out what they were saying.

"Unredacted" Does Not Mean "Unedited and Unredacted"

A final deceptive practice on shredding Fed records should be emphasized for the interpretation of Greenspan Fed records. Future Fed governor Kohn indicated in his 2001 letter to me that the Fed had notified Congress in 1995 that it would destroy the unedited FOMC transcripts, noting that the Fed "is not obligated to retain draft transcripts." He said that the minutes of the meeting held on January 31-February 1, 1995: reads as follows: "As permitted by the National records Act, the recordings and unedited transcripts will be discarded after all the participants at the meeting have reviewed and corrected, as necessary, the transcripts prepared by the Secretariat." In keeping with the National records Act and with the concurrence of officials at the National Archives, the FOMC is not obligated to retain draft transcripts or any meeting recordings used in their preparation. What must be retained are the edited transcripts, i.e., those that incorporate member corrections in both their redacted and unredacted versions. The redacted versions are released to the public after five years; the unredacted versions will be sent to the National Archives after 30 years.

Notice the word "incorporate," which is emphasized. The law, according to the letter, says "incorporate" not "shred." The corrected page from the FOMC MOD of April 20, 1976 (Figure 6-1), from the Burns Fed, was lightly edited by archivists at the National Archives. It is very different from the destruction of source FOMC transcripts, which the FOMC approved in a nonrecorded vote in 1995. Regardless of how the law cited above can be interpreted or twisted or even broken without consequence, Fed officials, who are unelected agents serving the public, should diligently preserve their source records for full accountability. That did not happen in the 1990s, and the practice may be continuing.

Kohn also said that Greenspan had sent a letter to six members of Congress in 1995 with this information. This congressional notification was in a class with the previously discussed 1962 Fed plan for using an obscure announcement that would not be fully perceived or properly understood to notify Congress about the new foreign-exchange operations it was undertaking.59 This was how the deception worked in 1995. A 1995 Greenspan letter looked as if it heralded the new procedures for openness at the Fed, but there was a terrible caveat: "I [Greenspan] am writing to bring to your attention recent decisions of the Federal Open Market Committee (FOMC) on disclosure of its policy and deliberations. As may be seen in the enclosed press release of February 2, 1995, the FOMC has formalized the procedures for greater openness in policy making that it has been using for the past year. We believe these procedures will make our policy intent as transparent as possible to market participants without losing our flexibility or undermining our deliberative process."

Greenspan announced the implementation of a formal practice that would require FOMC transcripts to be released after a five-year lag. This appeared to be the Fed's formal statement of its transparency rules. Then Greenspan used sleight of hand. With the shredding card up his sleeve, he held up the transparency card: "A complete, unredacted version of the transcripts of each FOMC meeting" would be retained, and then turned over to the National Archives after thirty years. Hail the rules for transparency: they will continue a policy of retaining the unedited transcripts!

No, that is wrong. On the second page of his letter, Greenspan states that unedited transcripts will be discarded: "As permitted by the National Records Act, the tapes [recordings of FOMC meetings] and unedited transcripts will be discarded when all the participants at the meeting have approved the lightly edited written transcript." So the Greenspan Fed is really shredding the unedited FOMC transcripts. A new distinction has been added to the vocabulary of deceptive record shredders: "unredacted" does not mean "unedited and unredacted."

Transparency, accountability, and trust are sharply curtailed by this practice, cleverly hidden by Greenspan, who publicly displayed his strong support for transparency and accountability: "It cannot be acceptable in a democratic society that a group of individuals are vested with important responsibilities, without being open to full public scrutiny and accountability."

Jim Jaffe: Congress Rocks

2009-11-19T16:17:39Z

Congress is moving at a pace that can fairly be characterized as astonishingly fast to slash the number of Americans who lack health insurance by more than half.

And while it is hardly surprising those who don't want change warn that our legislators aren't moving fast enough, it is difficult to understand critics from the other side who say progress is coming too slowly.

They apparently live in a world of instant gratification where major problems are resolved between breakfast and lunch, leaving a gap for the cable news networks that can only be filled by providing comprehensive coverage of runaway balloons.

Let's take a look at the schedule. If we can reform the health insurance system and respond to global warming while nursing the economy back to health and changing the rules to prevent a recurrence, the new Congress elected in 2010 should be able to coast or spend all its time debating major issues of endless interest ranging from campaign finance reform to same-sex marriage and abortion policy.

But why can't they do better?

The leadership is criticized for allowing the process to slip to a point where decisions anticipated by Independence Day aren't made until Labor Day (using holidays to measure Congressional progress is an old tradition) or worse. Analysts slip into hysteria as they hyperventilate about another failed Congress in response to reports that the job may not get done this year.

We may have to wait until the earlier months of 2010 before we have a bill, a delay that apparently impose a price too painful to imagine, let alone define.

The reality is that the folks on Capitol Hill, especially the Democrats, are doing a fine job as they respond responsively to a complex problem. That doesn't shield them from the criticism that comes with the job. Congress is an institution we love to feel superior to. The fact that they're about to expand health insurance to cover millions who could use it is hardly adequate to change that attitude.

Meredith Whitney: Banks 'Grossly Overvalued,' Wall St. Should Have Its Own Compass

2009-11-19T14:11:35Z

Wall Street analyst Meredith Whitney appeared on Bloomberg Radio this morning to respond to comments made by John Mack, the CEO of Morgan Stanley, that the government "has to step in to control Wall Street."

"That would never be something I would say. Your responsibility as a steward of shareholder capital is to abide by norms of business," Whitney said. "What's happened is the regulatory pendulum has swung from being complacent to now one of being hyper active in industry. We don't know what the world is going to look like, we don't know what the landscape is going to look like. That's so much uncertainty in terms of the ability of these businesses to make money. A lot's to be determined. I wouldn't surrender control...you should have your own compass."

Whitney also responded to comments that Mack and others have made, saying that pay limits tied to federal rescue funds have prompted employees at major firms to leave.

Whitney, who left Oppenheimer and Company in February to start her own eponymous firm, also cast doubt on the recent run-up in bank stocks. "The banks are still grossly overvalued," Whitney said. "People are expecting something great to happen in 2010 and I think they are going to be severely disappointed."

She added that, as the government has cracked down on compensation, Wall Street firms have seen an exodus of talent. Goldman Sachs, in particular, has lost several top-notch employees to the hedge fund industry, Whitney added.

"I think for me, [and] for others, it just became a scary prospect of having the government determine what you make," she said.

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John Mack, Morgan Stanley CEO: I Love Regulators! (VIDEO)

2009-11-19T13:48:37Z

Morgan Stanley CEO John Mack appears to have no problem financial regulators. In fact, Mack, speaking at a financial journalist panel held by Bloomberg last night, said that banks "cannot control ourselves." The government, Mack said, "has to step in and control Wall Street."

"We have probably 15 to 20 fed regulators in our building every day," said Mack. What does Mack think of that? "I love it," added. (Check out Bloomberg's full story here.)

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TARP Failures Keep Taxpayers On The Hook; 33 Companies Miss Payment

2009-11-15T19:35:03Z

According to The Washington Post, 33 companies that received a portion of TARP's $700 billion have not paid the federal government their most recent dividend payments. Those payments are required by the terms of the bailout and signal that the firms are strained for cash, according to the Post.

If those companies fail, US taxpayers stand to lose billions.

The Post profiles CIT's failure and bankruptcy despite $2.3 billion in investments from the federal government, money that US taxpayers will likely never see (though Goldman Sachs, another CIT investor, stands to make $1 billion from the company's failure). CIT's bankruptcy filings listed $71 billion in assets and $64.6 billion in debt.

The Fed deemed CIT to be a bank holding company in December 2008, allowing CIT to borrow from TARP. The Fed argued that allowing CIT to borrow TARP funds would help the public because the lender would be free to loan more--except that never happened.

In the fiscal year ending on Sept. 30, CIT made just 142 loans backed by the Small Business Administration totaling $105 million. One year before, CIT lent 1,589 SBA loans totaling $873 million.

In July, Reuters reported that CIT's troubles raise questions about the Fed's supervision. Just weeks after the Fed's decision that allowed CIT to borrow TARP funds, the FDIC turned down a request to guarantee CIT debt. The FDIC was worried about "CIT's higher risk lending, escalating bad loans, and limited capacity for new lending."

Alan S. Blinder, the former Fed vice chairman under President Clinton, argues that the decision to bailout CIT was the weakest. Washington Post:

"Of all the financial companies that were rescued or semi-rescued, CIT was always the thinnest case, the toughest to defend," he said. "My attitude was: Hold your nose and go for it. It's something that I would rather not have seen the government do. . . . But the Fed and the Treasury and the others were in the unenviable position of being like the Dutch boy with the finger in the dike. And we definitely didn't want the dike to burst."

On the day that news broke about CIT's bankruptcy filing, The New York Times' Gretchen Morgenson wondered if CitiGroup, another bailed out institution, could "carry its own weight." In just 80 years, the federal government has bailed out CitiGroup four times. Citigroup has ominously been called "the queen of the zombie dance," by Chris Whalen, editor of the Institutional Risk Analyst. There are doubts that CitiGroup can survive, even after its most recent $45 billion federal bailout. Whalen in the Times:

"They are hoping that a combination of bank assistance and maximizing revenue and buying time will let them survive," he said. "When I look at the whole picture, Citigroup is in the process of resolution. I continue to believe the equity is worth zero and that the company will have to go to bondholders for some kind of money to make the bank stable."

Thomas Frank: The Real Danger of "One Big Regulator"

2009-11-11T13:26:41Z

Financial regulation is the next item on the political horizon, and it doesn't have to be the deathly dull wonk-battle that it sounds like. In fact, if the Democrats do their job, it can just as easily become a platform for addressing the greatest issues of them all.

Our current way of regulating the financial system is dysfunctional. Oversight is dispersed among numerous confusing bodies that at times have seemed to be racing each other to the bottom. Setting up One Big Regulator would end that problem.

The Obama administration's plan is to have the Federal Reserve regulate banks that might pose a "systemic risk" if they were to fail. Critics suggest the Fed is too close to the banks that it would be charged with cracking down on. What's more, the Fed's main task is monetary policy, so regulating banks would never receive the attention it deserves.

Let me add another objection: What if some future administration were to install as the chairman of the Federal Reserve--or as chief of whatever agency is made into the One Big Regulator--a man who really doesn't believe in the regulatory mission? What if control of the systemic regulator is handed over to a person who considers 19th-century economic arrangements to be a sort of aspirational ideal? A man who turns out to be a dedicated fan of Ayn Rand, that Nietzsche of the boardroom? A man who blows off warning signs because, in his perfect theoretical universe of rational markets, the only really systemic problem is government itself?

I raise this potential problem because, from 1987 to 2006, that's pretty much the sort of man who headed the Federal Reserve. Had Alan Greenspan somehow been handed the One Big Regulator job back in those days, we might have had no real financial regulation in this country at all.

Consider the astonishing ideas about fraud that Mr. Greenspan once reportedly expressed. According to a Washington Post interview earlier this year with Brooksley Born, the former head of the Commodity Futures Trading Commission, in 1996 Mr. Greenspan "explained [to her] there wasn't a need for a law against fraud because if a floor broker was committing fraud, the customer would figure it out and stop doing business with him." Later on, Ms. Born proposed that the U.S. regulate certain financial derivatives; Mr. Greenspan was influential in stopping her.

Could a Fed chairman do otherwise? As economist James K. Galbraith has pointed out, they are usually chosen "from among people who are close to the banking industry and to the financial sector." They can hardly be expected to be enthusiastic regulators of the same.

As Fed chairman, Mr. Greenspan also worked to head off regulation of hedge funds. He waged war against the Glass-Steagall Act. A 2004 Wall Street Journal profile of Mr. Greenspan, subtitled "The Deregulator," described his Fed's fondness for bank mergers and then included this critical passage: "Critics say these mergers concentrate financial risk too heavily in a few institutions. Mr. Greenspan argues that deregulation also produced a more stable financial system."

Did the nation ever rise up to tell The Deregulator to get with the program? No. Our consensus opinion leaders virtually worshiped the man. In 1999, he made the cover of Time magazine as part of a "Committee to Save the World." His biography, a classic of Washington-style power-palaver, was written by Bob Woodward, who dubbed Greenspan the "Maestro."

Why rehash this embarrassing stuff? Because judgment day for this particular form of wrongness has never really come. Yes, Mr. Greenspan himself has changed his ways: He uttered a famous mea culpa in October 2008, at the very pit of the crisis; of late he has even seemed to call for some kind of breakup of the "too big to fail" institutions.

Out in the consensus world that made a god of Mr. Greenspan, though, the deregulatory faith has never really been challenged. And until it is--until the bad ideas themselves are confronted--the best-designed regulatory institution in the world will go awry. It will merely become a fat target for the next bunch of "market based" politicians to come down the pike.

Taking on the consensus ideas of the past few decades is not a task for a happy bipartisan administration. It is not something that can be done by triangulation. What's more, it will require Democrats to align themselves openly with government, a posture they are loath to strike in these cynical days.

On the other hand, President Barack Obama has often spoken about a politics that transcends the culture wars, and this issue might just be the way to start building a new coalition around economic issues. Besides, the Republican leadership has made it easy for him, betting everything on the absurd notion that more government automatically equals less freedom. With a little skill, the boring issue of financial regulation could become their Waterloo.

Read other OpinionJournal articles:
Janet Trautwein: Why We Need a Strong Individual Mandate
Morris Davis: Justice and Guantanamo Bay

WSJ: AIG CEO Robert Benmosche Ready To Quit Over Pay Constraints

2009-11-11T01:32:42Z

NEW YORK — After just three months as head of battered insurer American International Group, Robert Benmosche has threatened to leave his post as he struggles to deal with heavy government oversight and restrictions on what the bailed-out company wants to pay employees, according to a published report.

Citing unnamed people familiar with the matter, The Wall Street Journal reported online late Tuesday that Benmosche told AIG's board he was "done" with the job, although he reportedly is reconsidering his stance in the face of the board's dismay.

Proposals In House Would Curb 'Too Big To Fail' Banks, Firms

2009-11-09T23:26:17Z

Democrats are advancing proposals in Congress designed to limit the size and complexity of financial companies so that any collapse wouldn't damage the broader economy, a sign that lawmakers are responding to anti-Wall Street sentiment by toughening the administration's rewrite of finance rules.

David A. Love: Absolute Corruption Is the Rule in America

2009-11-09T13:41:21Z

Often,
people will look at a high-profile example of corruption, and conclude that the
egregious act is an exception to the rule.
In reality, it might be the tip of the iceberg.

On
October 29, 2009, the Supreme Court of Pennsylvania did a wonderful thing when
it expunged the
records of as many as 6,500 juveniles in Luzerne County.
That’s not a misprint.

Two
judges in that county were sent up the federal river for locking up thousands
of innocent children over five years, in exchange for $2.6 million in kickbacks
from private juvenile detention centers.
Judges Mark A. Ciavarella Jr. and Michael T. Conahan helped the developers
secure the county contracts to build the prisons. Moreover, they filled the detention centers
with warm bodies— many of whom were first-time offenders with minor infractions—
and illegally denied the teens access to an attorney.

In the
case of Luzerne, the “cash for kids” scheme was a coldblooded expression of
greed, and we should not downplay the seriousness of the crimes committed. Yet, what happened in this rural county in northeastern
Pennsylvania is a reflection of what America’s criminal justice system has
become— a for-profit, money-making enterprise.

Often,
our poorer children, disproportionately of color, are funneled into a
cradle-to-prison pipeline through adulthood.
With a criminally negligent public school system, and job opportunities
outsourced abroad, many children at the bottom of the socioeconomic ladder are
ensured a future of little else than street corners or prison bars. In fact, many urban schools are nothing more
than prison prep, complete with police and metal detectors.

Interestingly,
the children of Luzerne, a county which is nearly 97% white, did not resemble
the “usual suspects” in the criminal justice system. But that really is not the point— when
prisons are a capitalistic endeavor, warm bodies are needed as the raw
materials, and so they must come from somewhere. And consequently, justice takes a backseat to
dollars. From the foodservice industry and
the phone companies, to the Wall Street bankers and the investors, many people
have a vested interest in filling up those empty prison beds and maximizing
their cut. American capitalism made the
U.S. prison population the world’s largest at 2.5 million, with mass
incarceration for nonviolent drug offenses and victimless crimes.

And
American-style capitalism is problematic for the culture of corruption it has
enabled, in the absence of an effective regulatory framework. Much attention has been paid to Bernie
Madoff, that poster child of the Ponzi schemes, who defrauded investors out of $65
billion. The damage he created is
impressive, from the family savings that were forever lost, to the charities
that went under. But like the judges in
Luzerne County, Madoff was merely a cog in a wheel of corruption that enabled
greed.

Madoff himself
said he was surprised his
scheme lasted so long, and that the Securities
and Exchange Commission (SEC) investigators were so clueless about
his fraudulent activities over 16 years.
The fact is, some members of the SEC staff were inexperienced or just
idiots. Further, Madoff
had too much credibility with the SEC and was not properly investigated,
with red flags uncovered yet ignored.

With the
deregulation of the financial sector and the evisceration of the Glass-Steagall
Act came the financial crisis of 2008.
The system had become the Ponzi scheme.
The economy was built on paper shuffling and no tangible products. Consumers were preyed upon with sketchy,
deceptive and destructive subprime mortgages.
Banks gambled people’s money in high-risk, high-stakes poker games. And with a revolving
door between Wall Street and the Treasury department, the same people with
the gambling problem are running the casino, and “monitoring” it as well.

The banks
that ruined the country swore by the free market when it suited them. But now, they gladly accept their corporate
welfare bailout checks, and scoff at the rest of us. Wall Street has rebounded, business as usual,
and Gordon Gekko is smiling. Meanwhile,
America’s former middle class is joining the ranks of the poor, and the
foreclosed are filling the nation’s homeless shelters. Short of bold government action of
Rooseveltian proportions, there will be no economic recovery for everyday
people. After all, the unemployed, the
homeless, and the soon-to-be unemployed and homeless generally are not big
spenders.

The moneyed
interests also have corrupted the political process, and a prime example is the
behavior of Senator Joe Lieberman (I-CT) and the “Blue Dog” Democrats in the
health care reform debate. Lieberman has
earned a special place in the hearts and minds of progressives of late for
vowing to stand with Republicans, and filibuster any health care bill that
contains a public option. He has even
said he would
rather have no bill at all than a bill with a public option.

In
American political folklore, the Senate is presented as an august deliberative
body where cooler heads prevail, where genteel statesmen and stateswomen put
the brakes on rash and potentially harmful legislation, for the betterment of
all. In reality, the Senate is a place
where bold legislation for the public good is killed, because industries put a
contract out on democratic ideas. And
they instruct their employees, the senators, to stop these ideas in their
tracks. This is a bipartisan endeavor. The Blue Dog Democrats, who are the
self-proclaimed fiscal conservatives of their party, distinguish themselves
from other Democrats by their greed and hypocrisy. They receive the most corporate money, and
have rejected less costly health reform bills that would hurt their benefactors. Ask Sen. Max Baucus of Montana, chair of the
Senate Finance committee, and a key player in this year’s health reform
debate. Baucus received $3.4 million
from health and insurance industry interests between 2003 and 2008, more than
any other member of Congress. Judging
from the sad excuse for a health reform bill that came out of his committee,
the industry got its money’s worth.

And Lieberman,
the dirty dog that Democrats love to hate, is a fully-owned subsidiary of the
insurance industry. Over the course of
his career, he has received $2.6 million from the insurance companies. In addition, his wife is a health care
industry lobbyist. Despite the
overwhelming popular support in Connecticut for a public option, Lieberman has
decided to follow the money. The
Democrats must take Lieberman to the woodshed for his
double-crossing ways, and relieve him of his coveted chair in the
Homeland Security and Government Affairs committee. Not to be outdone, Sen. Evan Bayh (D-IN),
whose wife has made at least $2
million sitting on the board of a major health insurance company, hinted
that he would filibuster the public option as well. Apparently, faced with the prospect of the Democratic
leadership opening a big can of whup ass on him, he backed off.

The
problem here is not just Senators Lieberman, Baucus, Bayh and a few other
unscrupulous politicians. The fact is
the entire political game, the link between money and politics, is rancid and
is killing democracy. In the case of
health care reform, the corrupting influence of money is literally sucking the
country’s life blood.

As in the
days of old before the 1929 stock market crash and the New Deal, corporations
have far more influence in this society than they are entitled. Citibank gleefully proclaimed in a series of
reports in 2005 and 2006 that the
U.S. is a plutonomy— a system of wealth inequality in which the richest 1% hold
a disproportionately large share of wealth.
The rich are likely to get even wealthier, at the expense of labor. This rising inequality, Citibank predicts,
will lead to a political backlash.

And some
backlash is needed now. It is certain
that the outrageous displays of greed and corruption deserve our attention and
our outrage. But to dismiss them as
exceptions to the rule, rather than products of a systemic, vulturous culture
that must be attacked, is to choose a perilous path.

David A. Love is an Editorial Board member of BlackCommentator.com, and a contributor to the Progressive Media Project and theGrio. He is a writer and human rights advocate based in Philadelphia, and a graduate of Harvard College and the University of Pennsylvania Law School. His blog is davidalove.com.

Big Pharma's Crime Spree: Drug Makers Pushing Products For Unapproved Uses

2009-11-09T00:23:26Z

Pfizer and Lilly lead a parade of U.S. companies that have paid $7 billion in penalties after promoting drugs for uses not approved by the FDA. This unlawful behavior may not end until prosecutors force a drugmaker into bankruptcy.

Frank Rich: White House Doesn't Seem To Understand Public's Wall Street Rage

2009-11-07T21:26:33Z

The Obama administration does not seem to understand that this rage, left unaddressed, could consume it. It has pushed aside the entreaties of many -- including Paul Volcker, the chairman of the White House's own Economic Recovery Advisory Board -- to break up too-big-to-fail banks. Those behemoths, cushioned by the government's bailouts, low-interest loans and guarantees, are back making bets that put the entire system at risk.

Goldman Sachs CEO Lloyd Blankfein: "I'm Doing God's Work."

2009-11-07T16:29:54Z

Goldman's reputation is suddenly as toxic as the credit default swaps and other inexplicably exotic financial instruments it used to buy with glee. That's bad for the one thing it values more than anything else: business. Being the prime target for popular and political outrage could put Goldman first in line for draconian new regulation. So it has, reluctantly, decided that the time has come to speak out, to fight its corner. That's how, on one of those bright autumnal New York mornings when anything seems possible -- even an invitation to break bread with the masters of the universe -- I find myself walking past the security guard who held up Michael Moore and into the building with no name.

Sarbanes-Oxley Act: Amendment To Exempt Small Firms Passes House Committee

2009-11-04T16:37:29Z

An amendment that would permanently exempt small public companies from complying with a key provision of the Sarbanes-Oxley Act advanced in Congress today. Such a waiver demonstrates the bankruptcy of our approach to reform.

Lessons For US Economic Policy From The Fall Of The Berlin Wall

2009-11-03T09:46:03Z

The abrupt and miserable end of the socialist experiment--it all happened so fast, with East Germany getting absorbed into West Germany on Oct. 3, 1990, and the Soviet Union disappearing a year later, on Dec. 26, 1991--shifted the axis of the economic debate sharply rightward.

Norman I. Silber: News Flash: Lenders Prefer Fragmented Regulation of the Consumer Financial Marketplace

2009-11-02T12:23:40Z

Now that the House Financial Services Committee has passed the Consumer Financial Protection Agency, the American Bankers Association has stepped up its efforts to weaken the legislation or defeat it entirely. The Chamber of Commerce has also embarked on a multi-million dollar campaign with an "inside-the-beltway push" and a "grassroots mobilization" nationwide. And Congressional Republicans have joined in, complaining that the "sweeping authority" exercised by the dreaded CFPA will "impede innovation and kill jobs."

It can't surprise anyone that those who lend money to consumers do not care to be regulated by an agency focused solely on consumer protection. Nor does it shock us to learn that political opponents of the current administration want to protect their constituencies. And it is, of course, predictable that existing regulators at the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the FTC and other agencies are not eager to concede authority to a new agency. For that matter it does not come as news that most legitimate consumer advocacy organizations favor a proposal fashioned to elevate the priority that would be given to consumer protection.

But it is rather remarkable that Congress has also heard from a different set of experts about this legislation. More than eighty law professors who teach and write on consumer and banking law issues have urged Congress to create the CFPA. Why have these professors -- who have no economic stake in the outcome of this struggle -- weighed in?

Many of us are saddened by the lending debacle which has ravaged our country's economy and believe things could have been different. Regulators appear to have placed a higher value on protecting the interests of those who sell financial products than on protecting the interests of consumers in transparent, safe, and fair financial products. Our regulatory structure has contributed to that problem.

At present, the mission of protecting consumers on financial matters is divided among many agencies all of which have other responsibilities. Candidates with strong backgrounds on the consumer side hardly ever or in some cases, never, occupy the top posts at the Federal Reserve, the Comptroller of Currency, or the Office of Thrift Supervision. As a result, consumer protection efforts have too often gotten lost.

For example, the Federal Reserve Board waited fourteen years to use the power Congress gave it in 1994 to prohibit unfair and deceptive practices in mortgage lending. Had the Fed acted more swiftly, the economic crisis might have been far less severe. But at an agency whose primary mission is the critical subject of macroeconomics, consumer protection has been seen as a backwater.

The dangerous conditions in the lending marketplace have been aggravated by the ways federal regulators have prevented states from providing protection. For example, state efforts to regulate troublesome credit card practices have been blocked (through the law of preemption) by federal efforts. Similarly, when states began enacting anti-predatory lending statutes in 1999, federal regulators mobilized to bar application of those laws to federal lenders. The CFPA proposal would enable states to take a greater role in protecting their citizens, and also experiment with different solutions to relatively new problems, like those created by predatory lending.

The CFPA would also have the power to help consumers understand their financial obligations. Disclosures go only so far in helping consumers understand overly complex terms--terms that even law professors may struggle with. Disclosures may simply be inadequate in helping consumers deal with some unfair terms, or with products which may be suitable for one group but not the borrowers to whom they are marketed. For example, so-called "exploding ARMs"--mortgages with initial low monthly payments that may leap to far higher payments later--may be fine for those who reasonably expect a substantial rise in income by the time the payments increase, like medical residents, but are recipes for default for those whose incomes are more stable.

Perhaps those of us who have studied and taught consumer protection law are as much to blame as the banks and regulators for the mishaps of the recent past: we were too quiet while they made the mistakes that led to the economic crisis. We law professors have learned from our mistakes. We hope Congress has, too.

Norman I. Silber teaches consumer law at Hofstra University Law School. Jeff Sovern teaches consumer law at St. John's University Law School.

Linda R. Monk, J.D.: Let Us Now Praise Uppity Women

2009-11-02T08:04:46Z

On the day of the dead, Nov. 1, the news media reported the story of CIT's* impending bankruptcy. Cassandra, take a bow. This time, her name is Brooksley Born. She saw it all coming almost 20 years ago.

Born was the lone woman in a group of powerful men when she tried to persuade Congress to regulate the novel financial instruments known as over-the-counter derivatives during the 1990s. She served as head of the Commodities Futures Trading Commission, and legally had jurisdiction over the side bets that banks and insurance companies made with each other to hedge their risky investments. Except nobody was keeping score, and nobody was required to actually have money on hand to pay up. Born thought that should change, because too much of the American people's money was at risk.

She was defeated by the financial titans of Robert Rubin, Larry Summers, and Alan Greenspan -- at the time Secretary of the Treasury, assistant secretary, and chairman of the Federal Reserve. The triumvirate portrayed her as that worst of all possible beasts in Washington officialdom, a "difficult" woman.

Greenspan believed "The Market" would police itself of fraud because he was a devoted acolyte of Ayn Rand, the radical individualist and author of Atlas Shrugged. Not exactly an inspiring metaphor for a Fed Chairman during a global economic meltdown.

But as Born knew, fraud is the mortal enemy of any supposedly free market. Unless investors can be confident that their money is safe from fraud, capitalism cannot survive. A system rife with fraud is a death star, imploding upon itself. Derivatives, houses, tulips--the object of the exchange does not matter if the information it is based on is knowingly false. Such a system is based on patsies, not investors.

Let's not forget that fraud is, after all, a crime. Saying the government should not regulate fraud is like saying it should not regulate murder. Sure, private means can redress the grievance, but in the end the whole society suffers. That is, assuming that suffering matters. It didn't to Ayn Rand.

All the New Deal securities regulations boil down to preventing fraud. Insider trading, churning, margin requirements--the premise is that traders cannot hold themselves out to be something they are not if they are soliciting, in Louis Brandeis' immortal phrase, "other people's money."

Ever late to the scene of a catastrophe, Congress is now considering new regulations for the financial markets, in the wake of the Great Recession.

Brooksley Born recently gave the PBS series Frontline her latest warning:

I think we will have continuing danger from these markets, and that we will have repeats of the financial criss--it may differ in details, but there will be significant financial downturns and disasters attributed to this regulatory gap, over and over until we learn from experience.

Women have a long history of being whistleblowers in systems dominated by men. Perhaps this time Congress -- and the American people -- will listen.

*Correction note: This has been corrected from an original version that mistakenly said Citi rather than CIT.

The Secrets To Goldman Sachs' Success: Contrary Bets, Predatory Lending, Government Connections, Offshore Tax Havens

2009-11-01T00:12:27Z
WASHINGTON -- In 2006 and 2007, Goldman Sachs Group peddled more than $40 billion in securities backed by at least 200,000 risky home mortgages, but never told the buyers it was secretly betting that a sharp drop in U.S. housing prices would send the value of those securities plummeting.
Read more: Foreclosures, Paulson, Regulation, Recession, Obama, Reform, Lloyd Blankfein, Mortgage Related Swaps, Mortgages, Goldman Sachs, Aig, Mississippi, Bailout, Predatory Lending, Securities Act of 1933, Blankfein, Hank Paulson, Foreclosure, Housing Crisis, Goldman Sachs Mortgage, Real Estate, Wall Street, Tax Havens, Housing Market, Blue Chips, Calpers, Derivatives, Moody's, Offshore, Tim Geithner, High Yield Bonds, Hedges, Barack Obama, Nyse, Cayman Islands, Banks, Sec, Subprime Mortgage, Economy, Business News

Supreme Court To Hear Case About Excessive Pay; Parallels Seen In Executive Compensation

2009-10-31T22:11:03Z
The Supreme Court this week will hear a case that raises bedrock questions about the ability of the market to set "reasonable" corporate compensation, and experts say its outcome could hold important clues about the judiciary's view of extraordinary interventions in the economy by the executive branch and Congress.
Read more: John C. Bogle, Regulation, Reform, Obama, Investors, Mutual Funds, White House, Bailout, Sotomayor, Jones vs. Harris, Jones vs. Harris Associates, Wall Street, Excessive Pay, Vanguard Group, Kenneth Feinberg, Financial Reform, Compensation, Pay Czar, Nfl, Index Funds, Barack Obama, Corporations, Sonia Sotomayor, Supreme Court, Jones v. Harris Associates, Bonuses, Ken Feinberg, Apeals Court, Executive Pay, Business News

Joshua Rosner: Congress and TBTF: Bring in the Bomb Squad

2009-10-29T11:10:57Z
Joshua Rosner examines the House regulatory reform bill, which does not, in its current form, acknowledge that "Too Big to Fail" is too big to exist.

The House draft bill written by Rep. Barney Frank (D - MA) -- along with several former Fed attorneys and Treasury staff and consultants -- ignores fundamental reality: you don't employ a bomb squad to sit around and wait for a bomb to explode, you engage them to dismantle it as soon as they find one.

Unfortunately, this bill is one more act of sleight of hand by a Congress that, to the detriment of the public, fails to see that banks are there to serve the public good and can be regulated with such a goal. An honest bill would recognize that any institution that is "Too Big to Fail" should be given economic 'incentives' (through prohibitively high capital levels and insurance assessments) to shrink or sell off business units. The notion that we do not have the right to break up anti-competitive and oligo-polistic businesses flies in the face of antitrust laws and ignores the valuable lessons in growth demonstrated by Teddy Roosevelt's trust-busting. Those legislators who are truly seeking to protect the public interest and to be worthy of re-election, should demand that legislation spell out, in plain English, that the entire capital structure of a TBTF institution be wiped out, and its holding company held responsible as a source of strength, before taxpayers are exposed to a single dollar of loss. If leadership won't add such language, call your elected official and ask how much they actually receive when they agree to put on the kneepads.

Rather than require the break-up or shrinkage of those institutions, this bill suggests we leave the institution intact until it becomes 'troubled' and instead subject it to greater oversight by the same Fed that mismanaged prudential oversight of precisely the large financial holding companies at the center of the crisis. Keep in mind that even on the 1-5 (best to worst) secret rating scale regulators use to define 'troubled institutions', BofA was only a 3 and it has been speculated that Citi was only a 2 even as they were begging the government for support. Should we wait to act until an institution is even worse off than they were in the height of the crisis?

This Trojan horse of a bill will recognize and codify the view that we must accept and agree to live in a world where there are institutions that are TBTF. We have chosen to head in the opposite direction from the responsible approach suggested by both Bank of England Governor Mervyn King, who wants to break up TBTF institutions, and other European regulators who are likely to oversee the breakup of TBTF institutions, ING and Lloyds.

Each of the elements of this historic and flawed approach was carefully negotiated in close coordination with the most interested parties -- that is, the bankers and their friends. Mock hearings will be this week and the complete bill will be marked up mid-week next week. When the hearings begin, the public should demand to know how many of these "experts" have ever taken money as consultants or employees of the "Too Big To Fail" (TBTF) banks or the Federal Reserve System. You can play along with the game show at home by watching the testifying "experts" closely. Try to keep score of how many of them identified the collapse of our credit markets in 2006 or 2007. You can go on to the bonus round and score which of these "experts" expressed a view or highlighted the risk that the Fed's "emergency powers" would create a moral hazard and be used to bail out our banks. Importantly, Senator Chris Dodd put these powers into legislation in the dark of night in 1991 at the request of Goldman Sachs and other large beneficiaries of government support in this crisis.

Perhaps I expect too much of these policy experts, after all, in May 2007 even Tim Geithner and the intelligent and thoughtful Fed Vice Chairman Don Kohn didn't, in the face of over 100 mortgage lender failures and specific direct warnings, fully consider the risks that a crisis was already upon us.

As part of this Japanese-style kick-the-losses-down-the-road kabuki drama, Secretary Geithner desires that TBTF institutions write a "living will" so that when (not "if") they end up in trouble, there will be a road map for investors and regulators to follow. This is honorable, but far from requiring banks or their managements to submit to the still more honorable tradition of Hara-kiri.

The story of an "unlevel playing field"

Those who argue against a more proactive reduction in risk and size of TBTF institutions will, as always, revert to an argument that strikes a natural chord in every American's heart: 'Doing so would create an unleveled international playing field for our institutions relative to their international competitors.' Level playing fields are a worthy goal, but this is not a relevant argument. Instead, this tired bromide must be resoundingly dismissed on several counts:

* Those countries with the largest banks as a percentage of GDP (Iceland, Ireland, Switzerland) demonstrated that a concentration of banking power can cause significant sovereign risk and tilt global economic playing fields away from that country.
* The likely breakups of ING, Lloyds and KBC suggest that it is we who seek to support an unlevel playing field where we subsidize our TBTF banks while other nations recognize the policy failures of moral hazard. If we continue down this path we will likely be at risk of violating international fair trade regimes.
* When the "unlevel playing field" argument is cited, keep in mind this reasoning supports the disadvantaging of 8000+ community banks relative to our largest banks, all in the name of protecting big banks from government- subsidized international competition.
* There is no longer any evidence that, beyond a cost of capital advantage that comes with implied government support, there are sustainable and tangible economies of scale arising from being the largest. The financial supermarket concept has been proven a failure. The only ones who benefit are the high-level executives.
* We must demand that our legislators no longer allow unelected officials at the independent Federal Reserve to sign international accords created by the TBTF banks through supra-national bodies like the Basel Committee.
* Are we to believe that if we did not have such large and globally dominant firms, US borrowers might be paying more that the 29% interest that several of the TBTF firms are now charging on their card accounts? Perhaps we should think about what advantage our population has gained as a result of our financial institutions being such a large part of our economy or being globally dominant.
* Since when did we accept a national strategy of following rather than leading? When we do what is right, others follow. As example, consider the bank secrecy havens -- they made money for a bit. Now, even the Swiss and the Cayman authorities are coming around to our view.
* We are already at a disadvantage given that the largest foreign banks operate in the US without any tier one capital requirement and yet most large, foreign banks have not built a bricks and mortar presence here. Nobody screams about their undercapitalization nor has that undercapitalization caused deposits to migrate to foreign banks.

Having provided preemptive arguments against their notion I would point out that by getting out of the TBTF game, we will have a more robust and economically competitive economy where no players have a governmentally-conferred advantage or subsidy. Such a leveled playing field will begin the process of regaining credible markets and attracting stable foreign capital. Let other nations pursue misguided policies of protecting uneconomic and anti-competitive businesses. Such an approach will allow our taxpayers to avoid having to be part of the next banking bailout crisis.

New GSEs for you and me

The administration's preferred approach, which is politically cynical, re-creates a class of special public companies that, because of their ties to the government, receive the benefit of a GSE-like "implied government guarantee." For background, for the better part of the past 10-years market participants were increasingly convinced the GSEs (Fannie and Freddie) could become unstable. Even so, bondholders viewed the companies as low credit risks. It was assumed that if they into trouble they would be bailed out with taxpayer dollars and without significant losses being forced upon bondholders. As a result of this belief, the GSEs had a significantly lower cost of capital than their non-"special" and fully private competitors. No matter how much Treasury, the Fed, the White House or Congress said that the government did not stand behind the obligations of the GSEs the markets did not accept that view and, when push came to shove and the GSEs were taken over by the government last September it was the taxpayer that was place on the hook for up to $400 billion of GSE losses. GSE creditors walked away from the accident and even equity holders, who had always been paid to take the first loss, were not wiped out. So, are we expected to believe that these TBTF institutions will not be provided a lower cost of capital by the markets based on the understanding that the government will always stand ready to fund their losses? Moreover, from where in history can we draw comfort that when a macro crisis hits, regulators and policymakers will assess the cost of the losses on other TBTF institutions rather than arguing that that might lead to a contagion risk? As witnessed in this crisis, a withdrawal of liquidity from one systemically risky institution can lead to both a withdrawal of liquidity to its peers and also a contagious decline in asset values leaving all undercapitalized at the same time. If there is a positive to the GSE model and the "implied government guarantee" it is for the Washington political class. These companies will provide all legislators, regardless of their political affiliation, with a constant stream of lobbying dollars in return for help in stymieing regulators. The lobbying and campaign dollars the TBTF banks are spending to convince officials that their derivatives books were never at risk and their credit trends are stronger are welcome in Washington. In a testament to Washington's love affair with large financial firms Jamie Dimon has been repeatedly dubbed Obama's "favorite banker". Even so, there is still a massive lobbying dollar hole left by the withdrawal of the largess that disappeared with the predictable collapse of Fannie and Freddie.

Contingent capital is neither contingent nor capital

While it is not yet clear if the absurd notion of "contingent capital" will be referenced in final legislation or left to the regulatory hacks to codify in rulemaking, it is gaining support in the Fed as witnessed by recent comments from Governor Tarullo and NY Fed President Dudley. Rather than requiring banks to raise and hold significantly more (good, old' fashioned) equity capital, they want banks to use "contingent capital" or debt that converts to equity in cases of precipitously falling equity values.

Contingent capital is a deeply flawed notion proposed by academic economists who should either be locked away in institutions or sent off to a vast wilderness where they can no longer threaten the broader population. Equity is equity, there is no substitute. As long as the Federal Reserve retains the "13.3″ emergency powers one must expect that when a TBTF institution is imperiled or required to convert their contingent debt to contingent equity the TBTF institution will lobby hold legislators and regulators hostage to the notion that such a conversion would cause a market panic and lead to counterparties pulling secured lines and withdrawing liquidity ... hmmm, sound familiar?

Moreover, unless there are clear and specific prohibitions against banks investing in each other's "contingent capital notes", we will increase systemic risk by engendering precisely the entanglement and interconnectedness that defines systemic risk. We have witnessed the problem of interconnectedness in this crisis in at least two situations; banks and insurers investing in each other's trust preferred securities (TRUPS) and becoming exposed to not only declines in the equity value of their TRUPS but also to losses on their investments in other banks' TRUPS. We have also seen the damage caused by regional banks outsized exposure to GSE preferreds. Lastly, unless market participants saw through the contingent capital notion and considered it to carry an "implied government guarantee", the cost of issuance of the notes would be at a prohibitively high rates.

Salvaging regulatory reform for the good of our public

There remains some hope for those who would like to see real regulatory reform. The first chance for the public to force a more real reform on Washington will come as taxpayers awaken to the realization that, absent the government largess, bank credit trends demonstrate the economy is hardly stable and that unsustainable improvements in banks' results arise from their capital markets business, not traditional lending.

A second chance for meaningful reform might come if an unlikely bout of mass sanity takes over our legislators causing the government to abandon its reckless "a golden egg in every pot" approach to trying to pull forward future demand is stopped. A more destructive catalyst could ultimately come in the form of a U.S. variant of the "Soros v the Bank of England" incident if foreign investors abandon dollar assets until the government rejects the financial obligations of the private sector.

To be clear, passage of the House Financial Services Committee regulatory reform bills does not ensure that Senator Dodd (D - CT), who intends to introduce his bill in November, will have any luck moving it. In fact, sources suggest that Mitch McConnell (R - Kentucky) sees Senator Dodd as vulnerable in his re-election campaign and is encouraging Republicans not to support his bill. Senate Banking Committee Minority Leader Richard Shelby (R - ALA) continues to suggest he will not negotiate any regulatory reform legislation unless it meaningfully addresses GSE reform.

While it is unclear if this is a hard line or an opening position, he has also made it clear he will not entertain the Fed in the role of either "il capo di tutti capo" of prudential financial regulators nor will he accept Ben Bernanke wearing a pinky ring and playing systemic risk regulator. On the latter Dodd is seemingly in agreement. Democrat leadership appears to believe Shelby is merely posturing and that, even though the reform language on OTC derivatives, consumer protection, TBTF, and systemic risk are laughably weak, it will be impossible for Republicans to convince the public that they are holding up reform legislation for honest and political reasons, rather than merely political ones. Democrats expect that they will be able to shift the debate from a debate on what would constitute good public policy to one of "the Republicans are a party of 'No'". I will predict that passage of this legislation on a partisan vote would have more negative implications for Democrat re-elections than the passage of a healthcare reform bill on a party-line vote. Americans hate their healthcare insurers but like their pharmacists and doctors. Americans hate their banks and have grown to hate bankers and their bailouts far more.

Even so, populist acrimony should not be directed at "the" bankers, rather it should be focused on the "Too Big to Fail" bankers. Perhaps we will ultimately force them to wear scarlet letters. Maybe we will tie them to rocks and throw them in water to determine if they are witches. It is urgent for taxpayers to see that their greatest allies in pursuit of good public policy on most of these issues are institutional investors, who bet that market forces ultimately prevail and rebalance to equilibrium, and also those small community bankers who largely stuck to their knitting, made plain vanilla loans, didn't arbitrage regulatory capital rules, remained sufficiently well capitalized relative to their exposures. It is those two groups that suffer because the implied government backstop of the TBTF crowd is resulting in small banks being forced to compete for business at an economic disadvantage. It is institutional investors that now have to chase assets bid up by to those TBTF institutions that speculate and take on more risk as a result of their "implied government guarantee."

Make no mistake, the TBTF crowd is still controlling both Congress and most regulators as witnessed by all the focus on secondary reform items rather than resolution authority and an end to TBTF. If you are TBTF you are too big and must shrink or be broken up. If we achieve this these bankers will be better and more focused on risk management and we wouldn't have to even care as much about other secondary issues.

Over the next few days I will offer a section analysis and critique of the discussion draft.

Joshua Rosner is managing director of an independent financial services research firm.
Read more: Fed, Tbtf, Finance, Regulation, Treasury, Congress, Obama, Fannie and Freddie, Contingent Capital, Business News

Goldman Sachs Defends Trading Practices: Dark Pools, Flash Trading, Short Selling

2009-10-28T08:05:50Z
In a document handed to the US Securities and Exchange Commission (SEC), the investment bank asserts that such practices, some of which the SEC is looking to restrict, actually benefit investors by increasing competition and reducing costs.
Read more: Economy, Financial Reform, Dark Pools, Regulation, Bankers, Short Selling, Goldman, Investors, Goldman Sachs, Investing, Flash Trading, Wall Street, Finance, Trading Practices, Sec, Trading, Financial Regulation, Business News

Rep. Jackie Speier: A Reasonable Case For Regulation

2009-10-26T19:11:11Z
Before investing, you likely research the rating the financial product holds from one of the major credit rating agencies. But how would you feel if you discovered that a highly-rated bond received its grade, not because the company is strong, but because the rating agency:

assumed the government would bail the company out;

was most concerned with the "confidence sensitivity" of the market, so didn't tell investors that the company could soon collapse?

If you're like me, that would tick you off. Especially when you find out that those responsible for the shoddy analysis weren't disciplined but, instead, engaged in some "thoughtful soul-searching."

That is exactly what I was told, at a recent hearing of the House Financial Services Committee, by executives of the largest credit rating agencies - Moody's, Fitch and Standard & Poor's.

Credit-rating agencies were established in the 1920s as a safeguard for investors, who paid the agencies to evaluate bonds and provide unbiased ratings. In the 1970s, the Securities and Exchange Commission (SEC) turned the model on its head by requiring that bonds receive a rating prior to being sold. This meant corporations - not investors - were now paying the credit raters and turned the agencies' role from that of impartial consumer watchdogs into corporate marketing tools.

At a March hearing of the Oversight and Government Reform Committee, the agency executives asserted that consumers are still protected because the companies' reputations - and those of individual analysts - are on the line with each rating. So, having the opportunity to question them again, I asked Raymond McDaniel, Chairman and CEO of Moody's; Deven Sharma, President of Standard & Poor's; and Stephen Joynt, President and COO of Fitch; what repercussions befell those responsible for giving AIG and Lehman Brothers stellar ratings just days before they collapsed?

Here are some excerpts:

Me: After [AIG and Lehman failed] did you take any action against the analysts who had rated them? Did you fire them, suspend them? Did you take any action against those who had put that kind of remarkable grade on products that were junk?

McDaniel (Moody's): No, we did not fire any of the analysts involved in either AIG or Lehman.

Why?

McDaniel: An important part of our analysis was based on a review of governmental support that had been applied to Bear Stearns earlier in the year. Frankly, an important part of our analysis was that a line had been drawn under the number five firm in the market, and number four would likely be supported as well.

The same question was put to Mr. Sharma.

Sharma (Standard & Poor's): No, we did not fire anybody.

Me: No one got fired? No one got their hand slapped?

Sharma: Financial institutions are very confidence-sensitive. In Lehman's case, not only were they trying to raise capital, they were about to raise capital, and on the weekend they declared bankruptcy. And once there's a run on an institution, it's very hard to manage....

Then Mr. Joynt weighed in.

Joynt (Fitch): No, no analysts were fired. I would say that our lead analysts from those cases were disappointed, surprised, and went back and reflected on how [they reached their] conclusions. I think we've done a lot of thoughtful soul-searching...

State and local governments across the country lost billions of taxpayer dollars when their highly-rated Lehman Brothers bonds - part of safe and conservative investment strategies - became virtually worthless overnight. San Mateo County, California, lost more than $155 million to a fund that included school districts, cities and emergency services agencies. I doubt that the laid-off teachers and EMTs are overly impressed by Fitch's soul-searching.

So, who is to blame? The SEC has authority over credit rating agencies but, by all accounts, they've been asleep at the wheel. That is why, this week, the Financial Services Committee will consider legislation to restore confidence in our financial system and reassure American investors by strengthening and reforming the regulation of credit rating agencies. These reforms must:

prohibit credit rating agencies from advising the companies they are paid to rate;

require disclosure of all ratings a security receives so companies can't shop around for the highest grade;

require the SEC to review how ratings are devised;

require ratings agencies to disclose all information used in a rating, monitor its performance, and inform investors when a rating or assumption changes;

hold rating agencies liable when they knowingly or recklessly fail to reasonably investigate a rated security.

We think nothing of protecting consumers from faulty toasters or unsafe cars. Is it unreasonable to suggest that investors are entitled to information they can trust before investing their hard-earned money?

I don't think it's unreasonable at all.
Read more: Sec, Lehman Brothers, Financial Services Committee, Regulation, Rating Agencies, Moody's, Fitch, Standard & Poor, Financial Regulation, Jackie Speier, California, Politics News

Jonathan Tisch: A Panel of Pros

2009-10-26T10:17:08Z
Recently I was asked to moderate a panel for the Alternative Investment Management LLC annual partners meeting with some of the great legal, political and business minds in the country. There was Bill Daley, the head of J.P. Morgan Chase's Office of Corporate Responsibility and former Secretary of Commerce in the Clinton Administration, Marty Lipton, founding partner of Wachtell, Lipton, Rosen, & Katz and Penny Pritzker, chairwoman of the board of four companies: TransUnion, Classic Residence by Hyatt, The Parking Spot, and Pritzker Realty. There are important issues we're facing and this was a good forum to discuss them with some very knowledgeable people who are committed to the public discourse. Here's a look at what they had to say on issues ranging from regulation to free trade.

JONATHAN TISCH: President Obama, in one of his recent weekly Saturday addresses, said, "We cannot allow the thirst for reckless schemes that produce quick profits and fat executive bonuses to override the security of our entire financial system and leave taxpayers on the hook for cleaning up the mess." Where will we end up in a new regulated environment?

MARTY LIPTON: It's always been the case that following a financial crisis, you get new regulation. I would say that at the moment, it's not at all clear how the administration's regulatory proposals will fare in Congress. There will be additional regulation. The exact structure is not clear. But clearly, the financial world will receive not just new regulation but additional regulatory attention.

JONATHAN TISCH: Everybody knows that Penny was National Finance Chair for President Obama's campaign and is very involved in discussions in Washington that will hopefully lead us out of the down economy that we've seen. Penny, do you worry about too much regulation? Do you also worry that this administration is being viewed as anti-business?

PENNY PRITZKER: I agree with Marty. We're going to have regulation. I think one of the interesting things, and I'd love to hear maybe Bill's take on this is, is that it's a relatively small group of Congressmen and Senators who actually are steeped in the details enough to be able to actually make judgments about the various parts of the regulation. And so I think many of their brethren look to them, unlike health care where I think everybody has an opinion. I think when comes to financial regulation, it's far more complicated. It's far more nuanced. And so looking to the two leaders on either side, Barney Frank and Senator Dodd, you know, they're going to have a big say, I think, in what this regulatory environment looks like.

JONATHAN TISCH: Bill, you were a member of the Clinton Administration. And during those eight years, NAFTA and CAFTA were put in. Trade policy is another big flashpoint, currently. Many people feel that we should be looking more inward and take care of our own economy. What's your sense of, in general, trade policy and some of these programs like NAFTA and CAFTA in today's world?

BILL DALEY: I think NAFTA, which was in the first year of President Clinton's Administration and permanent normal trade for China were probably two of the most important things that happened in a very different period. I think the optimism about globalization, the newness of globalization added to people's desire to be more open to what's going on in the rest of the world.

I think the globalization, you know, those of us who believe in free trade, I think we all lost this, we very much lost this battle because we didn't acknowledge that even though the phrase was always, "Trade's a win-win situation," well my sense has always been that if you walk out of a negotiation and somebody says, "We both won," you probably lost.

JONATHAN TISCH: Penny, you look at a lot of different businesses, a lot of different industries, are you starting to see investments that make sense, that are starting to be attractive? Are we there yet in terms of using capital that you have access to maybe buy some new businesses, buy some new companies?

PENNY PRITZKER: It's getting closer. I think it's getting closer. I think the reality is we don't have leverage or we have very little leverage available to us. And the price or the cost of equity's pretty fixed. So it means pricing has fallen to, you know, 35-45 percent. Anybody who doesn't have to sell isn't selling. But what's starting to happen is some people are having to do something. And they're therefore looking either to bring in equity to help pay down their debt or do other things. And you're seeing it in the public markets. And I think it's getting closer. Do I think it's robust? Not at all.

JONATHAN TISCH: Let me ask one question that came in an email. And it's the question that you hear on a lot of panels, "What keeps you up at night, Marty? Are your concerns terrorism, health care, or the economy, climate change? What do you worry about?"

MARTY LIPTON: Basically, I worry about the economy. I think that the situation is still delicate. I think we're okay. But so many things can go wrong. Penny talked about both the residential and the commercial mortgage problems -- that's going to take a while to work through. If we don't get enough growth to start to reduce the unemployment rate I think, you know, we get up to 12 to 15 percent unemployment, we will have social unrest.

I think it's right that the country as a whole thinks that business, banks, and business generally have disappointed them, and have taken advantage of the country as a whole. And so I think the delicate economy as it relates to society as a whole is the big problem.

JONATHAN TISCH: Penny, what do you worry about?

PENNY PRITZKER: Just to further emphasize this question of social unrest, I think it's a global issue. It's not just an issue in the United States, which if you go to China and you spend time in China, that's what the government in China is concerned about. Their objective is to take people out of poverty. If they can't keep employing another ten, 15 plus million people a year because there isn't a global demand and we're the biggest consumer, and what they see is their big consumer not being able to consume anymore, this is an issue in many, many parts of the world. And I don't see that there's a fix to this in the sense that it's not like in just a few minutes we're going turn around and have this robust global growth in the United States for sure.

JONATHAN TISCH: Bill?

BILL DALEY: I would say it's the geopolitical dangers out there. I think we could survive albeit difficult, an economic collapse. Our parents, grandparents survived the Depression. And we would get through it. But the dangers in terrorism and the Middle East, I think are real. I think the possibilities of that are very real, very dangerous. And to me that trumps everything else.

Jonathan Tisch is Co-Chairman of the Board for Loews Corp., Chairman and CEO of Loews Hotels and host of television's "Beyond the Boardroom with Jonathan Tisch."
Read more: J.P. Morgan Chase, Penny Pritzker, Cafta, Marty Lipton, Bill Daley, Regulation, Free Trade, Economic Recovery, Nafta, Alternative Investment Management, Recession, New York News

Huff TV: Arianna Discusses Public's Bailout Anger On BBC's Newsnight

2009-10-25T16:41:20Z
Arianna recently appeared on BBC's Newsnight to discuss the economic crisis, the lack of reform, and the effects of the bailout on American society and politics.

Other Newsnight guests included economist Liaquat Ahmed, author Andrew Ross Sorkin, and historian Simon Schama. BBC's Kristy Wark hosted.

To explain the public's anger at bailed out banks, Arianna pointed to the lack of lending from institutions that were rescued with taxpayer money. "The bailout originally was defended by Henry Paulson on the grounds that it would allow the banks to lend, to jumpstart the real economy and the huge problem now is this disconnect between Wall Street and the real economy and there is nothing being done right now to change that, and that and that's where the anger is being unleashed... It's really about the bailout and the unfairness and the loss of faith. It's not really capitalism."

Click here to watch the clip.
Read more: JP Morgan Chase, White House, Hank Paulson, Economy, Chase, Regulation, Larry Summers, Obama, Reform, Barack Obama, Recession, Goldman Saks, Bailout, Henry Paulson, Glass-Steagall Act, Home News

Amitai Etzioni: Canary in the Coal Mine: Student Loans

2009-10-20T12:45:24Z
The Democrats are caught between the need to set up structures that will prevent future meltdowns and the pressures they face from well-heeled Wall Street-based interest groups. They are under cross-pressure to act in the public interest and to survive in the political system: those who displease groups with deep pockets face tough re-election campaigns, as their opponents will get the large amounts of funds needed these days to run for office. Hence, despite all the talk about new regulations, surprisingly little is happening.

Student loans serve as a sort of a canary in the dark recesses of Washington politics. If the Democrats cannot stand up to private sectors here, they are extremely unlikely to persevere elsewhere. The issue is very simple. If the Democrats cannot show the public that the existing arrangement constitutes an out-and-out raid of the public treasury by a few investment houses and banks -- and that anybody who opposes reform should be booed out of office -- do not expect them to be able to do so on the much more complicated issues of credit swap controls and regulations of derivatives.

Since 1965, the federal government has provided funds to private lenders through the federal Family Education Loan Program. The government gives loan money to private lenders and guarantees 97% of the loans, ensuring that the private lenders loan virtually without risk. Last year, these private lenders made $56 billion in loans to students. They pocketed huge profits without providing any service.

On February 26, President Obama proposed that instead of going through private lenders to borrow money, students should borrow money directly from the U.S. Department of Education, eliminating the role of the private lenders. By early July, the chairman of the House Education Committee had endorsed President Obama's plan, which, projects the Congressional Budget Office, would save up to $87 billion in the next ten years. On September 17, the House of Representatives voted 253 to 171 to put this plan into effect. It is eight months later but the Senate has not acted, while all the time it has been shedding tears about the mushrooming deficits.

As I said, if this bill cannot fly through a Democrat-controlled Congress, do not be surprised if little else opposed by large and well-endowed private interests will see the light of day. Even if the bill passes, it will be so diluted and further watered down after it is enacted that it will end up basically as a reform in name only. Watch the canary and see whether the toxic clouds are lifting or closing in.

Amitai Etzioni is a University Professor at The George Washington University and author of The Moral Dimension (Free Press, 1988). To contact him, write icps@gwu.edu.

http://www.gwu.edu/~ccps/securityfirst.html
Read more: Regulation, Wall Street, Student Loans, Barack Obama, Congressional Democrats, Lobbyists, Senate Democrats, Family Education Loan Program, Politics News

Sources: SEC Gearing Up For Insider-Trading Crackdown

2009-10-19T02:46:35Z
Federal investigators are gearing up to file charges against a wider array of insider-trading networks, some linked to the criminal case against billionaire hedge-fund manager Raj Rajaratnam that shook Wall Street last week, people familiar with the matter said.
Read more: Arlen Specter, Federal Investigations, Insider Trading, Investigations, Raj Rajaratnam, Bradley Bennett, Terrorism, Sri Lanka, Robert Khuzami, Regulation, Rajaratnam, Blackstone, Investigation, Blackstone Group, Wall Street, Hedge Funds, Arthur Samburg, Sec, Galleon Group, Preet Bharara, Baker Botts, Business News