Timothy Geithner on The Huffington Post

Gretchen Morgenson: Why The Treasury Needs A Plan B For Mortgages

2009-12-06T02:51:38Z

A stalled loan modification plan might not be worrisome if the foreclosure crisis were abating. Yet at the end of September, a record 14.4 percent of borrowers were either in foreclosure or delinquent on their mortgages, the Mortgage Bankers Association reported.

It's time for the government to acknowledge the flaws in its program and create one that might actually succeed.

Geithner Interviewed By Bloomberg: Says Goldman Would Have Failed, Dismisses Tobin Tax (VIDEO)

2009-12-05T17:05:15Z

During an interview this week on Bloomberg's Political Capital with Al Hunt, Treasury Secretary Timothy Geithner disputed claims made by Goldman Sachs's CEO Lloyd Blankfein in Vanity Fair, proclaiming that the company would have survived without the government's $12.9 billion in bailout money. Geithner disagreed:

HUNT: You were the head of the New York Fed, right in the middle of the crisis a little over a year ago. Some Goldman Sachs executives have recently said their firm would have been okay without the Federal assistance and the Federal Reserve and others last year. Is that your view?

GEITHNER: My view is this.

HUNT: Did Goldman Sachs need the Federal government fourteen months ago?

GEITHNER: The entire U.S. financial system and all the major firms in the country and even small banks across the country were at that moment at the middle of a classic run - a classic bank run.

HUNT: So they would have been at risk (inaudible)?

GEITHNER: I think the system was at risk and the big institutions were not - none of them would have survived a situation in which we had let that fire try to burn itself out.

During the interview, Geithner also stated that unused TARP money could be used to invest in "job creation" and "our long term fiscal challenges." Geithner declined to say how much money of the more than $200 billion left over from the program he wanted to be put towards either of those goals:

HUNT: Let me ask one more. The White House did say today that Gibbs - Robert Gibbs said that you wanted to use some TARP funds for specific job creation. How much money and how many jobs are you talking about?

GEITHNER: We're going to lay out in some more detail in the next couple days a range of important things about the TARP. We're going to explain that we're going to have substantial savings, that we're going to have very substantial resources we can make available to support not just the immediate priorities the country faces in spurring investment in job creation, but also to meet our long term fiscal -

HUNT: Right.

GEITHNER: - challenges. Those resources are going to be very, very substantial because we have been very successful in helping to stabilize the financial system, bring the cost of credit down, open up these markets at much, much lower cost than anybody anticipated.

When Geithner was asked about the Tobin tax, a tax that would be levied on financial transactions, he dismissed it (though Hunt notes comments by Nancy Pelosi earlier this week that the Treasury Secretary was now open to the idea). Bloomberg noted that Geithner was "echoing some of the banking industry's reasons for opposing a Tobin tax" when he cited the possible effects that the tax would have on smaller investors.

Watch Geithner's Interview On Political Capital:

Part 1

Part 2

Quarter Of Borrowers In Anti-Foreclosure Program Are Late Paying New Mortgage Bill

2009-12-05T03:58:17Z

So far, more than 650,000 borrowers have been enrolled into the initial, or "trial," phase of the program and have seen their payments lowered by an average of $640 a month, or 40 percent. But a recent survey of large mortgage servicers published by the Treasury Department found that that more than 25 percent of borrowers in the program were not current on their trial payments.

Goldman Sachs' Flubs Shielding JPMorgan From Public Vitriol: David Reilly

2009-12-04T13:56:51Z

JPMorgan Chase & Co. lists lots of assets, ranging from loans to securities to cash, on its $2 trillion balance sheet. Not to be found is one that might be its most valuable -- Goldman Sachs Group Inc.

For JPMorgan, No. 1 in the too-big-to-fail bank club, Goldman has become the perfect lightning rod for populist outrage that might otherwise be directed at it.

William K. Black: Geithner as Martyr to an Ungrateful Nation: Bo Cutter's Tragicomic Portrayal of Tim as a "Man for all Seasons" (Part 2)

2009-12-04T12:29:40Z

This is the second installment in my comments on Bo Cutter's essay defending Treasury Secretary Geithner.

Bo views Geithner as a martyr subjected to unfounded, ungrateful attacks for his actions that prevented the Second Great Depression. Bo doesn't have much use for Americans that are upset with the senior managers of the finance industry. (This is a bit weird because Bo denounces these senior managers as universally incompetent, cowardly, and unethical.)

"[L]iberals hate [Geithner] because he did not take over or dismember the banks, and publicly execute their senior managements."

This passage tells us nothing about liberals, but much about Bo and his peers' fears of the public. The finance leaders know they are guilty of destroying much of the global economy -- while growing extraordinarily wealthy in the process. They know that their primary means of destruction was accounting "control fraud." They cannot understand why the public has not turned on the finance industry and demanded that the fraudulent financial leaders be prosecuted and their immense gains from fraud recovered. They also cannot understand why we allow the continued existence of systemically dangerous institutions (SDIs). Geithner, Paulson, and Bernanke have warned that the failure of any SDI could cause a global crisis. Under their logic, SDIs are ticking time bombs that will cause recurrent global crises. Geithner, like Paulson, is making the SDIs much larger and much more dangerous by using them to acquire other large, failed financial institutions. This policy is insane. Virtually no one (that isn't on their payroll) supports the continued existence of SDIs and no one publicly argues they should be made even larger -- but that is our policy. Bo is the authentic voice of giant finance: the idea of shrinking the giant banks to this community is so painful, so personal that it is equivalent to "dismemberment." (It also shows that the giant finance is predisposed to view itself and its allies as tragic martyrs.)

Bo is only getting started with Geithner's martyrdom and the ingratitude of the murderous mob to this modern martyr.

"And no one thinks he is tall enough. If you read the accounts of Secretary Geithner's hearings last week, you know this is all classic Washington behavior. If there is one thing at which the glibocracy in DC excels, it is coming out of the hills after the battle is over and shooting the wounded. This is Washington today, a system in total gridlock, in which counting coup is the central activity."

So, Geithner is picked on by nearly everyone, not given any respect because he is short, and now that he is wounded the D.C. denizens are out to shoot him. Despite our scorn, Geithner continues to step into the breach on our behalf. Bo was a senior federal official in crises and found his peers to be cowards: "the crowd of people willing to join you in taking responsibility gets smaller by the second."

This is why he is so impressed by Geithner:

Then, beginning with his assumption of the Treasury job in November -- long before he was confirmed, so he was clearly going to be beaten up on every action he took, but he went ahead and took them -- he was at the lead of every major decision made in the recovery effort. (During this presidential transition period, it would have been easy to keep away from the decisions by saying that power was still in the hands of President Bush. But the Bush administration by that point was completely spent. Someone had to step up and Tim Geithner did.)

Unlike Bo's cowardly heroes, Geithner is a hero -- repeatedly taking the lead in responding to the crises even when he knew that if he did so "he was clearly going to be beaten up on every action he took." Geithner was abused for using stress tests.

His use of stress tests, which was roundly laughed at by everyone, worked, helping enormously to make much more transparent and less scary the situations all of the major banks were in.

The purported stress tests [see here, here, and here] did make banking seem "less scary" because they were not real and were part of the Geithner/Summers/Bernanke coverup strategy. The SDIs demanded that the accounting rules on loss recognition be junked -- and the trio acceded to that travesty. Bo tells us why the SDIs demanded that they be able to hide their massive losses when he explains why he supports the Bush/Obama administration bailouts of AIG's counterparties: "most of the banks had either insufficient or no capital." To put it more bluntly, most of them were insolvent and the remainder had so little capital that they posed intense, global systemic risk. The Bush and Obama administration have followed a three-part strategy towards these insolvent and crippled SDIs: (1) cover up the losses through (legalized) accounting fraud, (2) launch an "everything is great" propaganda campaign (the faux stress tests were key to this tactic), and (3) provide a host of secret taxpayer subsidies to the SDIs. This strategy is the opposite of making banks "much more transparent." The strategy is not shaped by finance, but by politics. Both administrations have sought to keep the American people from knowing about these cover-ups and secret subsidies because they know that we would not tolerate either policy. The cover-ups and secret subsidies are not simply awful financial policies; they are also a betrayal of democracy. When Bernanke writes that the sky will fall if the Fed is subject to audit it is precisely because he knows that the Fed's policies cannot withstand scrutiny by anyone serving the interests of the citizens (as opposed to the interests of the SDIs). (John 3:20 "For every one that doeth evil hateth the light.")

Bernanke may believe that when he acts in the interests of the SDIs he is acting in our interests. Charlie Wilson (GM President and President Eisenhower's nominee as Secretary of Defense): "I thought that what was good for our country was good for GM, and vice versa." But that's the point; the Fed and so many of its senior officials such as Bernanke and Geithner are dangerous because the institution identifies too completely with the SDIs. Like Bo, they also see us as murderous populists that cannot be trusted to make democratic decisions about SDIs. Calling Geithner's and Bernanke's cover-ups and secret subsidies "transparency" is Orwellian. The best one can say is that Paulson, Geithner, and Bernanke decided (undemocratically) that it had become necessary to destroy capitalism and democracy in order to save them.

Bo's final claim in support of his martyrdom motif is:

Tim Geithner acted. He acted at the moment action was required ... with the fullknowledge that he would face exactly what he is now facing.

Get off his back.

Luckily, I like Star Trek so I have experience puzzling through time paradoxes similar to the one Bo presents here. Geithner had "full knowledge ... that he would face exactly what he is now facing." What he's facing is calls for him to resign his position as Treasury Secretary. He became Treasury Secretary in 2009. Bo, however, emphasizes:

Starting from late 2007, as the crisis began to unfold, Geithner was at the spear point of every issue and, along with Bernanke, was a creative policy maker who clearly saw the immense dangers we faced and stretched all of the powers of the Federal Reserve Board to find solutions no one else could.

So, Geithner acted "from late 2007″ with "full knowledge" that his actions would be so unpopular that it would destroy his career and that he "would face exactly what he is now facing" (calls for him to resign as Treasury Secretary). Geithner's career went ballistic after "late 2007." In 2009, President Obama appointed him Treasury Secretary and has moved to reappoint Bernanke as Fed Chairman. Those are the two most prestigious financial positions in the world. Exactly which aspect of being promoted to his dream job made Geithner a martyr? Where can we sign up for similar martyrdom? Tevye's response to Perchik's claim that "money is the world's curse" applies to Bo's claim that Bernanke's promotion makes him a martyr.

May the Lord smite me with it. And may I never recover. [Fiddler on the Roof.]

All time paradoxes are, of course, paradoxical and Bo's doesn't disappoint. How exactly did Geithner know in "late 2007″ that (1) Obama would be elected President, (2) would appoint Geithner as his Treasury Secretary, and (3) that he would face calls in 2009 to resign as Treasury Secretary?

Why Praise Faux Martyrs When Ed Gray is Available?

If Bo wants to praise a real regulatory martyr -- one who got the finance and regulatory issues correct early enough to prevent an economic crisis, reregulated successfully in the face of virulent, powerful opposition, and who did so despite knowing that it would destroy his career at a point where he was in financial distress the obvious candidate is Ed Gray. As Paul Volcker wrote about Ed Gray in a post-publication blurb for my book, The Best Way to Rob a Bank is to Own One:

Bill Black has detailed an alarming story about financial and political corruption....the lessons are as fresh as the morning newspaper. One of those lessons really sticks out: one brave man with a conscience could stand up for us all.

Paul Volcker was Ed Gray's only pillar of support for his reregulation of the S&L industry. When Gray became Federal Home Loan Bank Board Chairman in 1983 the S&L industry was coming out of the first (interest rate risk) phase of the debacle but descending into an even more severe second phase of accounting control fraud. The National Commission on Financial Institution Reform, Recovery and Enforcement's 1993 report on the causes of the debacle explained the characteristic failure pattern:

"The typical large failure was a stockholder-owned, state-chartered institution in Texas or California where regulation and supervision were most lax.... [It] had grown at an extremely rapid rate, achieving high concentrations of assets in risky ventures.... [E]very accounting trick available was used to make the institution look profitable, safe, and solvent. Evidence of fraud was invariably present as was the ability of the operators to "milk" the organization through high dividends and salaries, bonuses, perks and other means (NCFIRRE 1993: 3-4)."

In 1983, the S&L accounting control frauds grew at an average rate of 50%. The Texas state S&L Commissioner was sleeping with prostitutes provided by the second worst control fraud in the nation -- Vernon Savings (known as "Vermin" to its federal regulators). The California state commissioner, according to the documents, was secretly in business with the worst control fraud in the nation -- Charles Keating's Lincoln Savings. Texas and California approved over 300 new S&L charters. Most of them were troubled real estate developers with severe conflicts of interest. Many of them were control frauds. The rate of applications for new charters was expanding.

Gray's predecessor, Richard Pratt (a theoclassical finance professor) led the deregulation of the industry at a time of mass insolvency. He also largely desupervised the industry. He gimmicked the accounting rules to cover up losses and create fictional income. He cut the number of examiners. There were no criminal referrals or prosecutions of senior S&L officials. The industry was completely out of control. A regional bubble in commercial real estate was already growing in 1983.

Gray reregulated and re-supervised the industry. He ended most regulatory accounting abuses. He doubled the number of examiners and supervisors (over the vigorous objection of OPM and OMB). We began targeting the worst control frauds for closure while they were still reporting record profits and minimal losses. We adopted a rule restricting growth aimed at the Achilles' heel of every Ponzi scheme -- the need to grow massively. Gray brought in experienced regulators with a track record of vigor, courage, and professionalism and put them in place in the Dallas (Joe Selby) and San Francisco (Mike Patriarca) because they were the two worst regions. We deliberately burst the Southwest's commercial real estate bubble.

Gray put in place a system of criminal referrals and made supporting criminal prosecutions a top priority. The agency (and here great credit must also be given to OTS Director Ryan and the Department of Justice and FBI) effort was so successful that over 1000 "priority" felony convictions of senior S&Ls insiders were obtained -- the most successful effort in history against elite white-collar criminals.

We almost always resolved serious failures in a manner that wiped out entirely "risk capital" (shareholders and subordinated debt holders). Gray blocked Texas' and California's land rush style grants of hundreds of new charters by refusing to approve FSLIC insurance for any new S&Ls in those states. Gray did all this with the certain knowledge (which he often stated to us) that it would end his career. He was in his 50s and he was in financial distress, so he knew the sacrifice he would make would be severe.

Gray took on, simultaneously, the Reagan administration (particularly Don Regan and the OMB), a majority of the members of the House (who co-sponsored a resolution calling on us not to reregulate), House Speaker Jim Wright, five U.S. Senators (the "Keating Five"), the S&L trade association (which some political scientists rated the third most powerful in the U.S., his two fellow Bank Board members, much of the agency (including two of our economists that met secretly with Keating's lawyers), and most of the media (which sometimes referred to him as "Mr. Ed" -- from the TV program about the talking horse). Charles Keating sued him in his personal capacity for $400 million. The administration threatened to prosecute him for closing too many insolvent S&Ls (under the Anti-Deficiency Act). The administration tried to appoint two members chosen by Charles Keating (the most notorious S&L control fraud) to the agency (which would have given them majority control of the three-person Bank Board). (Pause for two minutes and consider how catastrophic it would have been if the administration had succeeded in giving control of the agency to that decade's most notorious control fraud.) He served as a "mole" for Keating and proposed to amend the direct investment rule (which Lincoln Savings had violated by more than $600 million) that would have had the effect of exempting it from enforcement. Lincoln's lawyers drafted the amendment (which, of course, never mentioned Lincoln). I blew the whistle on Keating's mole, which eventually led him to resign. After I blew the whistle (but before he resigned), the administration nominated him for a full term. The day after he resigned four U.S. Senators (the "Keating Five" minus Senator Riegle) met with Gray to pressure him not to take enforcement action against Lincoln's massive violation of the direct investment rule.

Don Regan tried very hard to force Gray to resign. He refused, so Treasury Secretary Baker met secretly with Speaker Wright (who, at the behest of Texas control frauds, was holding our proposed bill to recapitalize the FSLIC insurance fund hostage in order to prevent us from securing the funds to close more of the control frauds). Baker and Wright reached a cynical deal: the administration would not reappoint Gray to a new term and would not oppose Wright's demands for "regulatory forbearance" (which included debasing -- again -- the accounting rules and adopting other measures drafted by attorneys for the control frauds designed to make it far harder to close insolvent S&Ls. Wright agreed that he would support a $15 billion FSLIC recapitalization bill (instead of the $5 billion bill that the industry and control frauds supported. Wright got the better of the deal because his allies spread the word that the Speaker didn't really support the $15 billion bill and the House voted for the $5 billion bill.

Gray remains unemployed and unemployable today. But he doesn't have to avoid mirrors.

Unlike Geithner, Paulson, and Bernanke, Gray acted before the epidemic of accounting control fraud produced a bubble so large that it produced a general economic crisis. Consider what would have happened had Gray not reregulated and resupervised the industry beginning in November 1983. The roughly 300 control frauds in 1984 would have grown at 50% annually and scores of new Texas and California frauds would have entered each year. The result would have been a commercial real estate bubble of epic proportions. Such a bubble would have taken down not only the S&L industry, but also the banking industry (which had massive commercial real estate exposure) and would have severely damaged the insurance industry (which provides much of the permanent/takeout financing for commercial real estate). We cannot yet demonstrate when a bubble will collapse, but we know that accounting control fraud epidemics are capable of extending the life of financial bubbles and hyper-inflating them for several years. The direct losses among S&Ls, absent Gray's reregulation, would have been over a trillion dollars within five years. The losses to banks and insurance companies would have exceeded the S&L losses. Losses of that magnitude would have caused a severe recession.

It also needs to be stressed that subprime and alt-a loans, qualifying loans based on teaser rates, bonuses to loan officers based on volume (not loan quality), inflated appraisals, and accounting control fraud are not new. They always end badly. Mike Patriarca lead the supervisory effort in 1990-92 that prevented a nonprime lending crisis by forbidding lending practices that we have long known end in disaster. He then left federal service and went into business.

You might think that the first two calls Geithner, Paulson, Summers, Rubin, and Bernanke would have made once they finally realized there was a crisis would have been to Ed Gray and Mike Patriarca to see how successful reregulation is accomplished and how one successfully prosecutes the accounting control frauds that drove the current crisis. But, if you think that you probably also think that the one regulator that stood openly in support of Gray's reregulation of the industry -- Paul Volcker -- would be President Obama's primary economic advisor. Instead, Summers, Geithner, and Bernanke have marginalized Volcker. The Bush and Clinton anti-regulatory Wrecking Crews remain in power in the Obama administration despite a dismal record. They are never held accountable. Bo wants them left in power. He wants us to stop criticizing their failures, to apologize to them for our ingratitude, and to honor them for the terrible career sacrifices they have (mythically) made to protect us from harm.

I disagree. I urge us to learn the lessons not simply of regulatory failures but regulatory and prosecutorial successes (the Gray and Ryan years). Mike Patriarca is in his prime. Put him in charge of a major regulatory agency immediately. Paul Volcker is a national treasure that petty, power-hungry failures (yes, I mean Summers) are wasting.

Oh, and Jim Baker, Jim Wright, and John McCain should show some class and apologize for the shoddy treatment they handed out. Let me be clear on this last point -- they shouldn't apologize for the shoddy treatment of Ed Gray the man -- they should apologize for the damage they caused our nation when they took their policy advice from major political contributors (that were leading control frauds) and impeded Gray's substantive reforms that were essential to protecting our citizens.

Sandy Weill, Former Citigroup Chairman, Praises Geithner, Tells NY Magazine: 'I'm Not Really Wanting of Objects'

2009-12-04T10:26:20Z

Last night at the opening-night gala for Alvin Ailey American Dance Theater, New York reporter Jada Yuan came face to leathery face with Sandy Weill, the former Citigroup chairman who built the company into a struggling monster now supported by the U.S. government and then walked away with a billion-plus dollars and an absurdly generous package of perks he only recently gave up.

Les Leopold: Jobs and Justice: Tie Wall Street Profits and Bonuses to the Unemployment Rate

2009-12-04T06:12:49Z

"I want to be clear: While I believe the government has a critical role in creating the conditions for economic growth, ultimately true economic recovery is only going to come from the private sector." President Barak Obama, White House Jobs Summit

Well, Mr. President, I've got a proposal for you and it won't cost the government a dime. In fact, it will raise money for jobs programs like "Cash for Caulkers."

But first we've got to face up to our jobloss recovery. Unemployment now is 10.0 percent with an overall jobless rate of 17.2 percent (BLS U6). At this pace we may not see full employment again for an entire decade.

President Obama's belief that a "true economic recovery is only going to come from the private sector" doesn't mean much to the 30 million Americans without jobs or the one in four children who are on food stamps. Any job is a "true" job if you can't feed your kids.

But the Administration has boxed itself in by refusing to create jobs directly and by falling in line with the screeching deficit hawks who now control the debate.

To break through, the Administration must focus the nation's growing anger on Wall Street's unwarranted welfare. Obama, Summers and Geithner must back away from their confining strategy of building "investor confidence" first, foremost and always. Instead, of worrying about "true" jobs, President Obama should give voice to the great injustice staring us in the face:

We live in a divided and fractured economy. Wall Street will make record profits and pay out record bonuses as unemployment and hunger hit record highs in the richest country on Earth. This is our new billionaire bailout society with a hollowed out middle class.

Now is the time for a policy that directly connects the well-being of Wall Street to Main Street. Congress and the Administration should call for a steep windfall tax on all Wall Street profits and bonuses, directly tying the tax to the unemployment rate. The justification is simple: When the economy crashed, we put the entire financial sector on welfare with bailouts valued somewhere between one and thirteen trillion dollars (depending how you count the various liquidity programs and asset guarantees.) Welfare recipients are not entitled to windfall profits.

We should start with a windfall profits/bonus tax of 90 percent as long as the yearly average unemployment rate is higher than 10 percent. Then it could drop as follows:

75 percent until the yearly unemployment rate drops below 9 percent;

60 percent until it drops to 8 percent;

45 percent until it drops below 7 percent;

30 percent until it clears 6 percent and;

15 percent until it crosses 5 percent.

Full-employment (below 5 percent) would automatically end the windfall tax.

Would the American public back such a tax on Wall Street? I believe there would be overwhelming support because everyone realizes that the financial sector caused the crash and the unemployment in the first place. And as Ben Bernanke recently pointed out, Wall Street is causing unemployment to rise right now by its failure to make loans to jobs-producing businesses.

This proposal, if enacted, also would provide enormous incentive for Wall Street's best and brightest to figure out ways to put our people back to work. But don't count on it. Instead, they will do all they can to prevent this policy from seeing the light of day. The business of Wall Street is to make money, not jobs.

But a windfall profits/bonus tax, even if not passed, would change the debate dramatically. The Obama administration and the Democrats would be attacking welfare for the wealthy while also trying to bridge the divide between Wall Street and Main Street. Because the windfall tax would raise revenues, it would force right wing ideologues either to support the proposal or defend Wall Street's obscene profits and bonuses. The deficit hawks would have their feathers plucked.

But most importantly, by tying profits to overall unemployment we would be exposing the rot of our new billionaire bailout society. We would be saying loud and clear that those who crashed the system must be held accountable for the damage done, and should not be permitted to profit from taxpayer support.

The proposal also would serve as a constant reality check. It would remind us that top bankers profited wildly through their reckless financial gambling until our economic system collapsed under the weight of their fantasy finance scams. Then the taxpayers were forced to cover their bad bets with trillion dollar bailouts. And now the bankers are pretending none of it really happened as they happily walk off with record profits and bonuses again while 30 million are jobless and 49 million go hungry.

For just one moment let's imagine this windfall profits tax actually passed. Wouldn't it be something to see the powerful bank lobby swarm all over Capitol Hill, pushing measures that would create jobs as fast as possible?

Now, that's my kind of fantasy finance.

Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.

William K. Black: Fraud and Failure: Bo Cutter's Indictment of the Finance Industry (Part 1)

2009-12-03T15:48:15Z

Bo Cutter has presented the best possible defense of Treasury Secretary Geithner.

It is a remarkable defense because it is premised on a scathing indictment of Wall Street, theoclassical economics, modern finance, and the sycophants that the financial community installed as anti-regulators. Indeed, Bo's account is sometimes particularly credible because it is a confession. Bo was a managing partner of Warburg Pincus, a major global private equity firm, and led President Obama's Office of Management and Budget (OMB) transition team. His defense of Geithner provides so rich a vein of ore that I will mine it in three installments: (1) Bo's indictment of the finance industry, Greenspan, Geithner, Paulson and Bernanke, (2) the martyrdom of Geithner, and (3) Geithner as Bo's Last Action Hero.

Bo's explanation of Geithner's unique virtues begins the indictment.

It comes down to this: the combination of brains, guts, calmness, and a willingness to act are virtually non-existent in Washington in any era, but particularly in this one. When you find the combination in a significant cabinet level job, you should value it.

[T]his crisis was long in coming and it was a totally integrated failure of intellectual traditions, global macro-economic imbalances, government policy making, regulatory supervision, financial sector greed, incomprehensible boards of directors, absences without leave, and breath-taking management short-sightedness. No one and no institution put together an understanding of the set of factors that triggered this particular debacle. Tim [Geithner] is included in this "no one", but so is everyone else.

I think the last two years have revealed the single largest failure of senior management in the financial sector, and of the board system in American history. I think I am correct in saying that there was not a single independent director in America who stood up on this issue. I do not understand why every board of every institution that failed was not asked to resign immediately.

Bo's indictment is compelling, but his logic proves a deeper failure. There is no reason to restrict his indictment to "the last two years." The senior managers' and directors' failure did not begin with the recession. They failed throughout the expansion of the bubble, the backdating of stock options, after-hours trading, the collapse of the auction rate securities market, the "epidemic" of mortgage fraud by lenders, the massive scandals of the Enron and Worldcom era, and the savings and loan debacle. The financial sector has been in recurrent, intensifying scandals for decades.

Bo's arguments require us to focus on at least the last four years (even if he continues to ignore the FBI's 1984 warning that the mortgage fraud "epidemic" would cause a crisis).

In fact, by 2006 and early 2007 everyone thought we were headed to a cliff, but no one knew when or what the triggering mechanism would be. The capital market experts I was listening to all thought the banks were going crazy, and that the terms of major loans being offered by the banks were nuttiness of epic proportions.

By early 2006 -- roughly four years ago -- "everyone" agreed "we were headed to a cliff" and that the banks' "major loans" were "nuttiness of epic proportions." An industry whose claimed expertise is the sophisticated evaluation of risk and value universally failed to come remotely close to valuing either. As Bo emphasizes, these were massive errors. These managers got immensely wealthy because -- not despite -- their willingness to make hundreds of thousands of loans that were certain to crash and burn as soon as the bubble ceased to inflate (which it did in 2006). Bo knows them, and Bo says that every independent (sic) director betrayed their fiduciary duties to shareholders. Every senior officer at the major banks failed. Bo portrays them as incompetents, cowards, and moral failures.

Bo's indictment of his finance peers is even more severe than his portrayal. White-collar criminologists have shown that the lending pattern he describes ("nuttiness of epic proportions" when "everyone" agrees "we were headed to a cliff") demonstrates that the lenders are frauds that have produced an epidemic of accounting "control fraud" (where the persons controlling a seemingly legitimate organization use it as a "weapon"). The FBI began publicly warning of an "epidemic" of mortgage fraud in September 2004, with 80% of the losses occurring when lender personnel were involved in the fraud. The number of criminal referrals for mortgage fraud indicates an annual rate of mortgage fraud in the many hundreds of thousands. The recipe for a lender optimizing accounting control fraud is: (A) grow extremely rapidly, (B) make extremely bad loans, (C) have extreme leverage, and (D) provide minimal loss reserves. (The first two ingredients are related. In a mature product like home mortgages, the optimal way to grow extremely rapidly while increasing yield is to make loans to individuals that cannot repay the loans. The rapidly expanding bubble allows fraudulent lenders to postpone loss recognition by refinancing the bad loans.) Nonprime specialty lenders followed this recipe. The pattern produces guaranteed record accounting profits in the short-term. Because a significant number of lenders follow the same strategy, the result was a hyper-inflated financial bubble followed by an economic crisis.

The accounting fraud optimization pattern that a lender follows, however, creates two weaknesses that we exploited as S&L regulators during the debacle. The lender must gut its loan underwriting standards and suborn its internal controls. Secured lenders must encourage inflated appraisals. Officers must be disciplined for rejecting bad loans and given bonuses for making bad loans. No honest lender would follow such suicidal practices. Bank examiners can easily, quickly, and precisely identify these perversions of honest, normal underwriting practices. We made closing such lenders our top priority -- while they were still reporting record profits and minimal losses (See: The Best Way to Rob a Bank is to Own One). The economists and lawyers thought that this proved we were insane because they were clueless about accounting fraud. The second weakness is that optimizing accounting fraud requires extremely rapid growth. This provided a quick screening device for identifying likely frauds and a means to force their rapid collapse -- by restricting their growth. Regulators could have targeted these same weaknesses and contained the ongoing crisis. Instead, despite the FBI's early warnings about the fraud epidemic, they functioned as anti-regulators. The FBI has put the matter starkly: it is "irresponsible" to purport to explain the crisis without discussing fraud.

This post originally appeared on New Deal 2.0 and New Economic Perspectives.

PolitiFact : Glenn Beck Wrong On Claim About Obama Cabinet

2009-12-02T20:10:00Z

Fox News talk show host Glenn Beck has seized on a claim circulating on the Internet to argue that the Obama administration has little understanding of American business and is too focused on expanding government.

Geithner: $700B Bailout Program Will End Soon, Derivatives Allowed Banks To 'Write Their Own Rules' (VIDEO)

2009-12-02T11:11:17Z

WASHINGTON (MARCY GORDON - AP) -- Treasury Secretary Timothy Geithner is affirming the administration's intent to soon end the $700 billion financial bailout program.

Geithner did not provide details, but says the government is close to the point at which "we can wind down this program" and end it.

"Nothing would make me happier," he told the Senate Agriculture Committee.

Some lawmakers have been agitating for an exit from the politically unpopular bailout program that was put in at the height of the financial crisis last year.

Geithner also says legislation to bring transparency to the global, unregulated $600 trillion derivatives market was needed soon to restore confidence in the U.S. financial system.

Geithner also said Wednesday that legislation to bring transparency to the global, unregulated $600 trillion derivatives market is needed to restore confidence in the U.S. financial system.

(Watch an excerpt of Geithner's testimony below:)

A major sticking point in Congress involves companies that use derivatives to hedge against risk. Some lawmakers want to exempt the so-called "end users" from new requirements in the overhaul legislation.

But Geithner said he's pleased by "the convergence on good policy" that has occurred in crafting legislation to impose new oversight on complex instruments blamed for hastening the financial crisis.

"There is a growing strong consensus about the nature and scope of reforms necessary to make our derivatives markets more transparent, more efficient, more fair and more stable," he said in testimony prepared for the Senate Agriculture Committee. "This is an enormously complex project. It is important that we get it right. And it is critical that we finish the job."

The value of derivatives hinges on an underlying investment or commodity -- such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

Credit default swaps, a form of insurance against loan defaults, account for an estimated $60 trillion of the worldwide derivatives market. The collapse of the swaps brought the downfall of Wall Street banking house Lehman Brothers Holdings Inc. and nearly toppled American International Group Inc. last year at the height of the crisis, spurring the government to support the insurance conglomerate with about $180 billion in aid.

The Obama administration's proposal is close to legislation in the House, requiring most derivatives trades to go through clearinghouses to bring transparency, and subjecting financial firms dealing in the instruments to new capital requirements.

Geithner said that regulating derivatives would reduce risk to the financial system and help companies that rely on the instruments save money.

All derivatives contracts that are "liquid and standardized" -- backed with cash and not designed for specific users in a transaction -- should go through well regulated clearinghouses, he said. There should be a presumption that a contract accepted for clearing by one of the houses and approved by the Commodity Futures Trading Commission or the Securities and Exchange Commission must be centrally cleared.

A potent coalition of about 170 end user companies -- including Boeing Co., Caterpillar Inc., Ford Motor Co., General Electric Co. and Shell Oil Co. -- has been lobbying Congress with the message that regulation of derivatives without exceptions could severely increase costs for corporate America. That could mean higher costs passed on to consumers and imperiled jobs, they contend.

Several senators on the Agriculture Committee have expressed support for that view. But CFTC Chairman Gary Gensler has said that if Congress decides to exempt some end-user transactions, the exception should be "explicit and narrow."

Denise Dennis: Obama-nation: From Hope to Cynicism

2009-11-30T17:28:05Z

"Is it not time to awaken from the deceitful dream of a golden age, and to adopt as a practical maxim for our political conduct that we, as well as other inhabitants of the globe, are yet remote from the happy empire of perfect wisdom and perfect virtue?" --Alexander Hamilton, Federalist Papers, No. 6

In the past two months, I have spoken with Obama supporters across the spectrum of gender, race, class, geography and age who supported, worked for and still believe in President Obama. While they applaud his courage in pushing for health care legislation, all are, if not disappointed, puzzled by some of his decisions and choices.

The President of the United States is neither a dictator nor Santa Claus; he cannot dictate what he wants and have Congress automatically fall in line, nor can he open a bag and miraculously grant our wishes. The President is our leader, though, and we count on him to lead and fight for what he believes in.

As Hamilton pointed out, we are not a nation of perfect wisdom and virtue. Our government operates on a system of checks and balances. Even that system, however, does not always work. For example, George W. Bush had eight long years to embroil the United States in two wars and wreck the economy; and Congress--Republicans and Democrats alike with a few exceptions--did nothing to stop him. It will require more than eleven months or even eight years to undo the damage inflicted on the United States by Bush/Cheney.

Americans who voted for Obama to clean up the mess left by Mr. Bush, believed he could work wonders in his first year--and since he has not--are now turning from hope to cynicism. Even his most ardent supporters are now asking themselves whether, instead of following in the footsteps of such transformative Presidents as Lincoln and FDR, President Obama is following Buchanan and Hoover, the timid men who preceded them.

Some of the people I spoke with blame the President's staff, particularly Rahm Emmanuel, for giving him bad advice; some blame the media for their predilection for controversy and their dismal failure to question the absurdities spread by those who would like to see Obama fail; still others believe the President is relying too heavily on the recommendations of his economic and military advisors who are unwilling to think out of the box; and one sixty-two year old woman wondered whether the President she worked so hard to elect is simply another calculating politician who said what he had to say in order to get elected.

The areas of concern to the President's supporters I spoke with are the economy: specifically, his selection of Timothy Geither, former head of the Federal Reserve Bank of New York, to be his Treasury Secretary; and his selection of advisor Larry Summers, a holdover from the Clinton Administration, who with Robert Rubin shares responsibility for repealing the Glass-Steagall Act.

The fact that irresponsible financial institutions like Goldman Sachs received bailout money--without conditions--but failed to extend loans to needy mid-and small businesses that support jobs, as they were supposed to have done, is particularly disappointing. Geithner might have saved the country from complete financial collapse, but he is also the regulator who for years failed to regulate Wall Street, thereby contributing to its near-collapse.

The perception in Middle America is that by relying on Mr. Geithner, the President is not acting on behalf of Americans who've lost their pensions and savings, their homes and businesses. With so many people suffering, Geithner's argument that, if the so-called wizards of finance were not allowed to keep their obscene bonuses, they would leave their jobs--is lame. Imposing conditions on the bailout money would have called their bluff and, if they threatened to leave--the President and Congress should have let them go. Standing up to Wall Street would have spoken volumes.

The people I spoke with supported the stimulus because they thought it would benefit Main Street by stimulating the economy. They blame Geithner for protecting his peers on Wall Street rather than helping Americans who are victims of their in-your-face excesses. From the perspective of average Americans, the distribution of stimulus money appears to be a variation on the GOP's "trickle-down" economics--taking care of the wealthiest Americans, in the hope that crumbs will trickle down to the middle and lower classes.

FDR understood that putting Americans back to work was an economic--and psychological--necessity. He knew that working--even with meager pay--has a positive psychological effect on human beings. It isn't enough to extend unemployment benefits--Americans want to work! The New Deal didn't end the Depression, but through creative programs like the CCC, WPA, and TVA, Americans were on the move again; they were earning wages, there was activity afoot and with it the sense that all would turn out well. Also, when one program didn't work, Mr. Roosevelt discarded it and tried another--he kept trying.

Job creation--not bailouts for billionaires--will get the country rolling again.
Another major area of concern and dismay are the costly wars in Iraq and Afghanistan. Candidate Obama never promised to end the war in Afghanistan. During the primary and general elections, he repeatedly stated that while he would end the war in Iraq, he believed the real war was in Afghanistan and that he would prosecute it.

Now, however, Afghanistan is morphing into a monstrous Vietnam look-alike, where we sacrifice thousands of American lives and vast resources to a losing cause. Our military is already stretched beyond its limits, men and women are being deployed over and over again without regard to their physical and mental health, and we cannot afford the financial cost of the war--one million dollars per soldier.

The Afghan government has proven to be corrupt and unreliable, their election was questionable, and we have no guarantees that their military will be able to assume control after we leave. Americans are losing confidence.

Rather than being remembered for his historic achievements like passing the Voting Rights Act and Medicare, President Lyndon Johnson is remembered more for the disaster that was Vietnam. President Obama's supporters fear he is headed in the same direction as LBJ and that Afghanistan, not health care reform, will be his Waterloo.

Everyone I listened to still believes--or wants to believe--in President Obama, but is concerned that if he doesn't act and invest stimulus money in jobs for middle class Americans (after having saved Wall Street); if health care reform does not include low-cost, government-run insurance and legislation to regulate the insurance industry; and if Americans keep returning from Afghanistan in flag-draped coffins--the change they voted for will be merely a "deceitful dream," as Hamilton wrote. Hope is turning to doubt and cynicism--and it could easily turn to despair.

Neither Lincoln nor FDR resolved the enormous challenges that faced the United States during their first months or even years of their administrations, yet they went on to become two of our greatest Presidents. The whole story of Obama's Presidency has yet to be written.

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Robert Reich: The Housing Crisis And Wall Street Shame (Or Lack Thereof)

2009-11-29T14:42:02Z

One out of four homeowners is now under water, owing more on their homes than the homes are worth. Why? The biggest single factor behind the housing crisis is rising unemployment. According to the latest ABC-Washington Post poll, one out of every three Americans has either lost their job or lives in a household with someone who has lost a job. Today it takes two and sometimes three incomes to buy the groceries and pay the mortgage or the rent. So if one of those incomes is gone, a homeowner can't make the payment.

The scourge of unemployment is splitting America into three groups: (1) the third just mentioned, whose households are in danger of losing their homes and whose kids are surviving on food stamps (that's up to one in four children in America today); (2) the vast majority of Americans who are managing but worried about keeping their jobs and homes; and (3) a small number who are taking home even more winnings than they did in the boom year 2007.

Prominent among category (3) are Wall Street bankers, many of whom are now concluding their most profitable year ever. Goldman Sachs is so flush it's preparing to give out bonuses in a few weeks totaling $17 billion. That will mean eight-figure compensation packages for lots of Goldman executives and traders. JPMorgan Chase is rumored to have a bonus pool of around $5 billion. The three other major Wall Street banks are ratcheting up their compensation packages so their "talent" won't be poached by Goldman or JPMorgan.

Wall Street is booming again in large part because the rest of America -- categories (1) and (2), above -- bailed it out to the tune of $700 billion last year. The Street has repaid some of that but, according to the bailout program's inspector general, much of it is gone forever. For example, the taxpayer money that bailed out giant insurer AIG went directly through AIG to its "counterparties" like Goldman Sachs -- to whom Tim Geithner, according to the inspector general, gave away the store. As Goldman Sachs prepares to dole out some $17 billion to its executives and traders, it's worth noting that Goldman received $13 billion a year ago from the rest of us via AIG and Geithner, no strings attached.

Which brings us back to homeowners who are falling further behind. The $75 billion federal program designed to bribe banks to modify mortgages has been a bust. No one knows the exact number of mortgages that have been modified (that will be reported next month) but housing experts I've talked with say it's a tiny fraction of the number of homeowners in trouble. Seems that the big banks can't be bothered. "Some of the firms ought to be embarrassed," Michael Barr, the assistant Treasury secretary for financial institutions told the New York Times. Barr says the government will try to use shame as a corrective, publicly naming institutions that have moved too slowly.

Shame? If we've learned anything over the last year, it's that Wall Street has none. Eight months ago Wall Street lobbyist beat back a proposal to give bankruptcy judges the right to amend mortgages in order to pressure lenders to reduce principle owed, just like Wall Street lobbyists are now beating back tough regulations to prevent the Street from causing another meltdown. Goldman Sachs, attempting to preempt a firestorm of public outrage when it dispenses its $17 billion of bonuses, is setting up a crudely conceived $500 million PR program to help Main Street.

Shame won't work. Only political muscle and courage will. Congress and the Obama administration should give homeowners the right to go to a bankruptcy judge and have their mortgages modified.

And while they're at it, resurrect the Glass-Steagall Act that used to separate investment from commercial banking, so Wall Street can't continue to use other people's money to gamble.

Finally, before Goldman hands out $17 billion in bonuses, claw back the $13 billion Goldman took from AIG and the rest of us and add it to the pool of money going for mortgage relief.

Cross-posted from Robert Reich's Blog.

Steven Pearlstein: Is Obama's On Wall Street's Side -- Or Main Street's?

2009-11-25T09:08:31Z

Fairly or unfairly, the official who has come to personify this let-them-eat-stuffing attitude is Treasury Secretary Tim Geithner, who can't seem to decide whose side of the buffet table he's really on. It was Geithner who, at the height of the financial crisis last year, was able to best articulate the unpleasant truth that we could save the financial system or we could punish the banks but we couldn't do both at the same time. But now that the system has been saved, he seems to have lost his appetite for retribution.

Robert Scheer: Still Doing God's Work On Wall Street

2009-11-25T04:11:17Z

Jail, anyone? Perhaps that's too harsh, and at any rate premature, but is anyone ever going to be held accountable for the behind-the-scenes sweetheart deals that passed tens of billions of taxpayer dollars through the AIG shell game to the very banks that caused the financial meltdown? Or for the many other acts of double-dealing that left one out of three American homeowners owing much more than their houses were worth while the folks who swindled them were rewarded with hundreds of billions in public money?

Undoubtedly not, since the same folks who are most culpable wrote the laws that made this, and the other scams at the heart of the banking collapse, perfectly legal. And guess what? They're back at work in the government, writing the new laws that will, they claim, prevent us from being had once again. As a telling example of that process at work, check the official response of the Department of Treasury to the devastating report by the special inspector general for the Troubled Asset Relief Program (TARP), Neil M. Barofsky, titled "Factors Affecting Efforts to Limit Payments to AIG Counterparties." The main factor was that Timothy Geithner followed the lead of Goldman Sachs CEO Lloyd "I'm Doing God's Work" Blankfein in crowding the lifeboats with bankers.

Geithner, now treasury secretary, was previously the president of the Federal Reserve Bank of New York (FRBNY), where he negotiated the deal to pay Goldman Sachs and the other top banks in full to cover their bad bets on securitized mortgages. Barofsky's report concluded that Geithner's scheme represented a "backdoor bailout" for the financial hustlers at the center of the market fiasco. Noting that Geithner denies that was his intention, the report states, "Irrespective of their stated intent, however, there is no question that the effect of FRBNY's decisions -- indeed, the very design of the federal assistance to AIG -- was that tens of billions of dollars of Government money was funneled inexorably and directly to AIG's counterparties."

Not surprisingly, the Treasury Department that Geithner now heads defended his actions in not forcing "haircuts" on the full dollar-for-dollar payoff by AIG to the banks while he was at the New York Fed: "The government could not unilaterally impose haircuts on creditors, and it would not have been appropriate for the government to pressure counterparties to accept haircuts by threatening to retaliate in some way through its regulatory power."

Nonsense, argues Eliot Spitzer, who as New York attorney general was way ahead of the curve in challenging Wall Street arrogance. Writing in Slate on Monday, Spitzer points out: "Pressuring Goldman and the other counterparties to offer concessions would have forced them to absorb the consequences of making suspect deals with an insurance company that was essentially a Ponzi scheme."

The Ponzi scheme was based on the collateralized debt obligations (CDOs) in which the bankers traded and which AIG had insured with the credit default swaps (CDSs) that they sold but failed to back with adequate funding. Now Geithner's Treasury concedes that AIG "should never have been allowed to escape tough, consolidated supervision." But none of AIG's scams were regulated, nor were any of the others at the center of the larger financial debacle, because of laws pushed through Congress by Geithner's boss, Lawrence Summers, when they both were in the Clinton administration. Specifically, they prevented regulation of those opaque CDOs and CDSs that would come to derail the world's economy.

As the inspector general's report stated: "In 2000, the [Clinton administration-backed] Commodity Futures Modernization Act (CFMA) ... barred the regulation of credit default swaps and other derivatives." Why did the financial geniuses of the Clinton administration seek to prevent that obviously needed regulation? Because the Clintonistas believed the Wall Street guys knew what they were doing and that what was good for them was good for us lesser folk. As Summers, who is the top economic adviser in the Obama White House, put it in congressional testimony back then: "The parties to these kinds of contracts are largely sophisticated financial institutions that would appear to be eminently capable of protecting themselves from fraud and counterparty insolvencies."

Sounds nonsensical today: The inspector general's report notes that AIG, because of the deregulatory law that Summers and Geithner pushed through, was "able to sell swaps on $72 billion worth of CDOs to counterparties without holding reserves that a regulated insurance company would be required to maintain." But why, then, is Summers once again running the show with Geithner when both have made careers of exhibiting total contempt for the public interest? Because there is no accountability for the high rollers of finance, no matter who happens to be president.

"Glimmers Of Hope": Geithner Goes Gospel To Make Us Feel Better About The Economy (VIDEO)

2009-11-24T15:48:43Z

With Barney Frank laying down the beat and a gospel chorus singing backup, Harry Shearer has taken over the body of Secretary of the Treasury Timothy Geithner for the music video, "Glimmers of Hope."

Singing the inspirational lyrics "A vision that shimmers/Business that simmers/As lively as a couch full of David Schwimmers," Shearer gives us all hope for the latest economic buzzwords.

WATCH:

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Janet Tavakoli: Goldman Sachs Responds To The New York Times

2009-11-24T10:06:38Z

Pulitzer Prize-winner Gretchen Morgenson of the New York Times wrote a must read article ("Revisiting a Fed Waltz with AIG," November 21, 2009) on Sunday in which she recaps salient points from the November 17, 2009 report of the Office of the Special Inspector General (Neil Barofsky) for the Troubled Asset Relief Programs, "Factors Affecting Efforts to Limit Payments to AIG Counterparties," and wrote:

On the question of whether this payout was what the report describes as a "backdoor bailout" of A.I.G.'s counterparties, Mr. Barofsky concluded: "The very design of the federal assistance to A.I.G. was that tens of billions of dollars of government money was funneled inexorably and directly to A.I.G.'s counterparties." [T]his was money the banks might not otherwise have received had A.I.G. gone belly-up.

Timothy Geithner's interaction with the New York Times, first in his role as President of the FRBNY and later as Treasury Secretary, seems to be that of a bailout enabler and a PR spin doctor for Goldman Sachs. Based on the Sunday article's revelations, I would not characterize his behavior as that of "a good man in a storm;" he seems a mere water-boy:

According to an e-mail message that Goldman sent to the New York Fed at the time
[September of '08], Mr. Geithner talked about the article with Mr. Viniar, Goldman's chief financial officer, before calling me. When Mr. Geithner called, he said that Goldman had no exposure to an A.I.G. collapse and that the article had left an incorrect impression about that. When I asked Mr. Geithner if he, as head of the regulatory agency overseeing Goldman, had closely examined the firm's hedges, he said he had not. Mr. Geithner told me on Friday that he spoke with Mr. Viniar that day to ensure that Goldman's hedges were adequate. And, notwithstanding the inspector general's findings, he said he still believes Goldman was hedged."

Prior to the article's publication, Goldman Sachs responded to Ms. Morgenson's questions about the Barofsky report via an email from its spokesman Lucas van Praag. The entire exchange can be found here "Goldman's Response to Questions About A.I.G.," November 22, 2009.

Did Goldman Sachs dissemble and equivocate in its responses to the New York Times?

Based on these responses answer is yes. Treasury Secretary Geithner may wish to keep that in mind the next time he looks to Goldman Sachs for his answers.

Mr. van Praag states "Starting in the mid-90s, we bought credit default swaps from AIG to protect our firm from the risk of a decline in the value of risk we had assumed on behalf some of our clients, (i.e. assets to which we had exposure)." Near the end of his email he again mentions "CDOs from our clients" (emphasis added).

His email never once mentions that the problematic CDOs requiring collateral calls from A.I.G. that precipitated its liquidity problems, the one's referenced in the report, seem to be chiefly 2004/5/6 vintage CDOs. Goldman underwrote the Abacus CDOs on its own list, and Goldman also underwrote CDOs that featured prominently and in large portion on the lists of French Banks SocGen and Calyon as well as Bank of Montreal and Wachovia that also hedged this risk using CDSs with AIG.

When responding about whether or not Goldman would have trouble collecting on its hedges in the event of an A.I.G. collapse as Barofsky's report indicates, Mr. van Praag wrote that Barofsky's report stated a collapse "'might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased' (emphasis added by Mr. van Praag) -- however, it might not, and it is our belief that it ultimately would not have done so."

For a firm that trumpets its risk management, Goldman seemed to present only one scenario on September 16, 2008. Lehman had just gone bankrupt, Bank of America had just agreed to takeover Merrill Lynch, and banks were starved for liquidity just like A.I.G. The banks' TARP bailout had not yet occurred. I suggest that Goldman may be self-deluding with its claim to be stellar risk managers here: "I Retract My Apology and Call for More Regulation of Goldman Sachs."

Mr. van Praag notes that Barofsky's report said had AIG not been rescued, Goldman would have had to bear the risk of further declines in the CDOs that it transferred to Maiden Lane III. He retorts "This is accurate in concept; however, Goldman Sachs has significant experience in adeptly managing this form of market risk."

I previously noted how "adeptly" Goldman Sachs manages its risk: "Goldman's Undisclosed Role in AIG's Distress". How did that work out for the global markets? Fed Chairman Ben Bernanke told Congress on March 24, 2009: "Conceivably, [AIG's] failure could have resulted in a 1930's-style global financial and economic meltdown, with catastrophic implications.

Mr. van Praag also wrote: "It is worth noting that we participated in the transfer of assets to the Maiden Lane III vehicle at the request of the New York Federal Reserve." I agree this is especially worth noting given that Stephen Friedman, a sitting board member of Goldman Sachs (and former Chairman and CEO) owned shares of Goldman Sachs and was Chairman of the FRBNY (he resigned in May 2009 after his ties were questioned), and given the degree of capture Timothy Geithner, then President of the FRBNY demonstrated in his seeming lack of curiosity about Goldman's hedges as mentioned above.

Ms. Morgenson also asked for some perspective about Goldman CEO Lloyd Blankfein's apology for Goldman's practices and its contribution to the credit crisis. She asked why Blankfein said Goldman "participated in things that were clearly wrong and have reason to regret."

Mr. van Praag responded:

Lloyd has expressed regret in various different forums, including a speech to the Council of Institutional Investors in April and one at the Handelsblatt Conference in September. He has stated that the financial services industry collectively neglected to raise enough questions about whether some of the trends and practices that became commonplace really served the public's long-term interests. In particular, the industry let the growth and complexity in some new instruments outstrip their economic and social utility as well as the operational capacity to manage them.

Of special note is Goldman's admission that these products have outstripped "their economic and social utility and operational capacity to manage them." (emphasis added) That statement is apt for many subsequent trading activities as well. But as risk managers, Goldman is dodging its responsibility in its representation that these products merely outstripped management "operational capacity."

Goldman's risk management ability was not up to the task, and its ability is not up to the task of managing the systemic risk of its now gigantic CDS operations in the wake of the demise and hobbling of many of its competitors. Operational capacity is one part of the problem. The other problem is that in Goldman's responses to the New York Times, a bunch of operators tried to gaslight the press.

Spitzer: "Geithner's Disgrace"

2009-11-24T07:54:36Z

The issue has been festering for months: Why were AIG's counterparties -- including Goldman Sachs, JPMorgan Chase, and UBS -- paid 100 cents on the dollar when the feds rescued the insurance giant, helping raising the cost of the bailout to nearly $200 billion? A new report issued by Special Inspector General Neil Barofsky now reveals that government officials, notably then-New York Fed President and current Treasury Secretary Timothy Geithner, grievously damaged the nation and capitulated to the very banks they should have been supervising.

Systemic Risk Panel Would Lack Independence; Treasury Secretary Would Call The Shots

2009-11-23T20:24:45Z

If the White House and congressional leaders get their way, the vaunted new oversight council charged with overseeing systemic risk in the financial markets will actually be a house organ of the Treasury Department, lacking the independence required to challenge decisions by government regulators, among others.

Rep. Keith Ellison (D-Minn.) last week tried to fix that, by offering an amendment in the House Financial Services Committee that would give the council an independent staff and independent source of funding. But he was forced to withdraw the amendment after it became clear that he wouldn't get Chairman Barney Frank's approval, said a source familiar with the committee's deliberations.

The committee was crafting a bill that would create a Financial Services Oversight Council, a collection of federal regulators who would oversee the kinds of risks that escaped government attention prior to the financial crisis. Such risks included interconnected Wall Street firms that borrowed $30 for every $1 they kept in reserves, and the insurance that AIG provided to firms for their derivatives contracts without actually keeping any money in case it had to pay up.

As proposed by the Obama administration, the House bill calls for the council to be headed by the Treasury Secretary, who would pick his own staff from within the Treasury Department.

But not only is the council supposed to keep watch over firms and activities that pose a risk, it's also supposed to oversee the work of other regulators in mitigating threats and supervise financial regulation as a whole, according to the bill's language. In short, it has a mandate to watch over everything that could possibly endanger the financial system - including inaction and incompetence by regulators.

The independence of the council is in question, experts say, because it will be overseen by someone whose actions it is supposed to examine and question -- the Treasury Secretary -- who will also be able to handpick the staff that is supposed to act as independent watchdogs.

The current secretary, Timothy Geithner, has been the target of a barrage of criticisms from Democrats, Republicans, and government watchdogs for his handling of the crisis and bailout last fall when he was a Federal Reserve official, and his overall handling of the economy since becoming Treasury Secretary.

Ellison's amendment, according to a copy obtained by the Huffington Post, called for an independent permanent staff -- rather than Treasury employees. In addition, it called for those firms especially subject to the council's heightened regulation to pay, through monthly assessments, the watchdogs' salaries.

Frank spokesman Steven Adamske disputed the source's explanation for why Ellison withdrew his amendment, telling the Huffington Post that "all members are allowed to offer amendments so I don't agree with this characterization."

He added: "As to the council staff, the council is directed by Congress to look out for potential pitfalls in the financial system -- not oversee the agencies."

But as Barbara Roper, director of investor protection at the Consumer Federation of America, explains: "The whole point of the systemic risk regulator is that it was supposed to stand outside the existing regulatory agencies and provide an independent view. It's supposed to point out the regulators' failings. But Treasury is arguably the most political agency you could put it in, and [the council is] most likely to be imbued with the regulatory philosophy of the sitting administration. It's really disturbing."

The Congressional Oversight Panel reviewing the financial markets called for an independent systemic risk regulator. "Systemic risk is caused by institutions that are not currently covered or adequately covered by the financial services regulatory system," the panel wrote in a January report.

So whose idea is it to make this panel subservient to the Treasury Department? Surprise. "It's really Treasury's baby," said the source familiar with the committee's deliberations. Ellison's amendment "was a problem because Treasury, in effect, would be losing power."

The aide said Ellison's amendment would have "almost certainly" passed had the committee had a chance to vote on it.

A spokesman for Ellison did not respond to a request for comment.

Frank has scheduled a Dec. 1 vote on the bill in its current form. No further amendments will be added until the bill reaches the House floor.

As outlined in the current bill, the chances that the council could serve a useful function and point out gaps, including regulatory failings, "is vanishingly small," Roper said. "I'm not at all confident that the regular day-to-day regulating is going to be done appropriately or rigorously."

Don McNay: Washington: Totally Disconnected From Main Street

2009-11-23T19:30:25Z

Can you hear me calling you?

-Mike and The
Mechanics

Mark Twain said that when he died he wanted to be in Kentucky because everything happens 20 years later in Kentucky than in the
rest of the world.

I live in Kentucky but I
want to die in Washington. It might be the ticket to immorality. The people running Washington seem to exist in an alternate
universe.

Sunday’s Huffington Post headline read “Sherrod Brown: Obama
Focused on Main Street
but not all his advisers are.”

How long did it take you to figure that one out, Sherrod?

What was the first clue? Double-digit unemployment? Huge
Wall Street bonuses? The fact that no one on Obama’s economic team
has ever worked on Main Street
in his or her entire life?

Operating a business on Main Street is a lot different than lecturing
at the Harvard Economic Club. The team
President Obama surrounded himself with has spent way more time in a faculty
lounge than in the corner barber shop.

In the alternative universe of Washington,
the idea that Senator Brown, a progressive Democrat from Ohio, would criticize Obama’s advisers, is
considered earth-shattering.

Partisanship rules in Washington.
And Democrats and Republicans never
deviate from their talking points.

No one is supposed to think for himself. Even just a little bit, like Brown did.

In the alternative universe of Washington, they don’t really understand that
people on Main Street
are hurting. Not only are they hurting,
they are angry.

Charlie Rose recently hosted Warren Buffett on his show. Buffett is one of the richest guys in the
world, but he thinks he, and other rich people like him, should pay a higher
percentage in taxes.

Buffett noted that “K Street lobbyists” had developed too
much influence in Washington
and the average American was not being heard.

Buffett was a big Obama supporter. But he is also a realistic businessman. He understands that our economic future
depends far more on Main Street
than on Wall Street.

Part of the reason Washington
can be an alternative universe is that it’s a city that tends to be immune to
recessions and depressions.

I was in Washington
recently and a friend told me of his dilemma of trying to buy an affordable home. Washington
has one of the most expensive housing markets in the country. The federal government has not had any
significant layoffs or cutbacks in many years.
They keep on printing money.
There are many others who work for agencies or firms that deal directly
with the government. They are not
feeling the recession, either. It seems
the business of government is always booming.

People in Washington
are not feeling our pain. Or the extreme
pain that their counterparts in state and local governments are about to
feel.

My business is somewhat recession-proof, but I operate just
off Main Street
in Richmond, Kentucky.
Economic despair is all around me.
I have friends, and friends of friends, come to me daily looking for a
job. Not a high-paying career with
possibilities for advancement, benefits and a pension. Just a job.
A paycheck.

I don’t know what to do for them. I don’t have jobs to give them.

We advertised for an entry level position earlier
this year. We were flooded with
applications, including people with advanced degrees and boatloads of experience.

As Sherrod Brown so astutely noted, some of President
Obama’s advisers don’t “get it.”

Those of us on Main
Street knew from Day One they wouldn’t “get it.” Nothing in their background, education or
life experiences prepared them to understand the economic crisis from a Main Street
perspective.

I don’t blame the people Obama appointed. I blame the guy who appointed them.

We don’t get to vote for Secretary of the Treasury or
Chairman of the Federal Reserve Board.

We do get to elect a president. A president I voted for. One who campaigned on “change we can believe
in.

We have not had change on the economic front because Obama
chose his advisers from the same bunch of Wall Street and Washington insiders
that George W. Bush chose from.

Tell me how Timothy Geithner,
Dr. Lawrence Summers and Ben Bernanke are different from Henry Paulson, Alan
Greenspan and the people Bush had around him?

Imagine how different economic policy would be if someone
who understood Main Street
was calling the shots.

We would have the kind of change we really could believe in.
And was promised.

Don McNay,
CLU, ChFC, MSFS, CSSC is one of the world's leading authorities in helping
people deal with “Big Money” issues.McNay is an award
winning, syndicated financial columnist
and Huffington Post Contributor. You can read more
about Don at www.donmcnay.com
McNay founded McNay Settlement
Group, a structured settlement and financial consulting firm, in 1983 and Kentucky Guardianship
Administrators LLC in 2000. You can read more about both at www.mcnay.com
McNay has Master's
Degrees from Vanderbilt and the American
College and is in the
Eastern Kentucky University Hall of Distinguished Alumni.

McNay has written two
books. Most recent is Son of a Son of a Gambler: Winners, Losers
and What to Do When You Win The LotteryMcNay is a lifetime
member of the Million Dollar Round Table and has four professional designations
in the financial services field.

Jamie Dimon, Treasury Secretary? Evaluating The Rumors

2009-11-23T16:27:14Z

The New York Post reported this morning that lawmakers are discussing JPMorgan Chase CEO Jamie Dimon as a potential replacement for current Treasury Secretary Timothy Geithner.

Leaving aside concerns that appointing a Wall Street CEO to the Treasury's top position would draw heavy criticism over Wall Street's coziness with Washington, it's not clear that Dimon would be a natural fit in the Obama administration. According to the Wall Street Journal, Dimon departs from White House policy on a handful of key issues.

For one, President Obama has pushed establishment of a consumer-protection agency that would keep watch over credit card and mortgage companies, but Dimon opposes the agency on grounds that it will drive up costs. JPMorgan says recent legislation regulating credit cards could cost the bank up to $750 million a year, a burden that may be passed along to consumers.

And while the White House's position on how to handle too-big-to-fail banks is still evolving, Dimon has staunchly defended big banks' right to exist -- and to fail. In a Washington Post op-ed this month, Dimon wrote:

"...ending the era of "too big to fail" does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense. The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk."

Anonymous sources told the NY Post that Dimon "would love to serve his country," but is demurring. He has no plans, he says, to leave JPMorgan for the next "six or seven years."

For now, Geithner is still contending with critics in Congress. He was attacked last week during an appearance before Congress's Joint Economic Committee. "Mr. Secretary, the public has lost all confidence in your ability to do your job," Rep. Kevin Brady (R-Texas) told him.

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Wall Street Journal Supports Break-Up Of Big Banks

2009-11-23T15:48:41Z

Add the Wall Street Journal editorial board -- of all people -- to the growing ranks of those calling for a restoration of barriers between commercial and investment banking.

In an editorial today, the Journal's anti-regulation free marketeers threw their weight -- albeit in a back-handed way -- behind government limits on "risk-taking" by commercial banks.

The editorial was mostly an assault on Democratic proposals described as offering "unlimited taxpayer funds" to bail out "just about anyone... engaging in finance of one kind or another" in a way that "would entrench moral hazard (and cheaper funding costs for the likes of Goldman Sachs) even deeper into the financial system."

But the editorial concluded: "The other way to reduce moral hazard is to limit certain kinds of risk-taking by institutions that hold taxpayer-insured deposits, as suggested by former Federal Reserve Chairman Paul Volcker and Bank of England Chairman Mervyn King."

That was a reference to Volcker and King's idea to restore the separation between Wall Street investment banks and Main Street commercial banks. "This has its own problems. But unlike the emerging plans in Washington, it is credible and would give capitalism a fighting chance to survive regulatory reform."

Volcker, King, former Citigroup CEO John S. Reed, and Nobel laureate economist Joseph E. Stiglitz are four financial and economic luminaries advocating for at least a partial return to Glass-Steagall, a Depression-era law that banned commercial banks from underwriting stocks and bonds. It was repealed in 1999 at the urging of, among others, Larry Summers, President Barack Obama's chief economic adviser.

While progressive economists such as James K. Galbraith and Dean Baker support a return to at least some tenets of Glass-Steagall -- on the premise that banks with taxpayer-guaranteed deposits shouldn't be engaged in risky trading -- the Obama administration does not. The White House wants to regulate the behavior of these banks, rather than break them up.

For the Journal's editorial page to be taking a more pro-regulatory position on any issue than the Obama White House says a lot about our times.

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William K. Black: Why is Obama Championing Bush's Financial Wrecking Crew?

2009-11-23T10:43:20Z

Tom Frank's book, The Wrecking Crew explains how the Bush administration destroyed effective government and damaged our social fabric and our economy. The Obama administration has chosen to reward two of the worst leaders of Bush's crew -- Geithner and Bernanke -- with promotion and reappointment. Embracing the Wrecking Crew's most destructive members has further damaged the economy and caused increasing political and moral injury to the administration.

Last week was a bad one for Geithner and Bernanke. Senator Dodd said that Bernanke's confirmation was no longer a done deal. The House Financial Services Committee revolted against the administration, the Fed, and Chairman Barney Frank. It voted for a strong bill to audit the Fed. Senate Banking Chairman Schumer went to a conference at Columbia University -- where a generation of students salivated at the prospects of Wall Street wealth -- and was overwhelmed by an audience denouncing the continuing stranglehold of the finance industry over successive administrations and the Congress. Neither Barney's blarney nor Schumer's schmooze was any avail before an outraged public.

The administration promptly secured a column in the Washington Post claiming that the effort to fire Geithner "buoy[ed]" him because, as the subtitle to the article explained: "Even ex-Bush aides sympathetic, sources say." The article didn't note that Geithner is an "ex-Bush" senior official who, with his fellow "ex-Bush aides" (particularly Bernanke and Paulson) produced a chain of disasters: the bubble, an "epidemic of mortgage fraud" by lenders, the Great Recession, and the scandalous TARP and AIG bailouts. Of course they're "sympathetic" to a fellow member of the Wrecking Crew that destroyed effective regulation and turned the nation over to Wall Street. The craziest part of the story is that the anonymous Obama administration flack that spread this anecdote believes that we should support Geithner because his fellow members of the Bush Wrecking Crew empathize with him because they, too, have been criticized for wrecking the economy.

The Washington Post article then offers a metaphor that serves as an apology for the Bush Wrecking Crew. The metaphor is driving over a cliff: "'Secretary Geithner has helped steer the American economy back from the brink, and is now leading the effort on financial reform,' White House spokeswoman Jen Psaki said." Geithner pushed back against Republicans who questioned his performance, telling them, "you gave this president an economy falling off the cliff."

You? How about we? Bush's financial Wrecking Crew "gave this president an economy falling off the cliff." Geithner was President of the Federal Reserve Bank of New York from October 23, 2003 until President Obama chose him as his Treasury Secretary. He was supposed to be the lead regulator of many of the largest bank holding companies. His failures as a regulator were a major cause of the "economy falling off the cliff." Bernanke held prominent positions in the Bush administration from 2002 to the end of the administration and failed as a regulator an economist. Geithner and Bernanke failed to regulate even after the FBI publicly warned in September 2004 that (1) there was an "epidemic" of mortgage fraud and (2) it would lead to a financial crisis if it were not contained. Their refusal to take responsibility for the harm they inflicted on our nation as leaders of Bush's financial Wrecking Crew adds to their unsuitability. Rewarding their perennial failures with a promotion and reappointment represents a dereliction of duty by the Obama administration.

The administration apologists praise Geithner and Bernanke for "steer[ing] the American economy back from the brink." Greenspan, Paulson, Bernanke, and Geithner were the leaders of Bush's financial Wrecking Crew. They were the guys blinded by their pro-Wall Street ideology that drove the car 120 mph down an icy mountain road and lost control of it. They took us to the "brink" of running "off the cliff" and creating the Second Great Depression. The bizarre claim is that we should praise them because they, and Wall Street, only wrecked the economy -- they haven't (yet) utterly destroyed it. Under their metaphor, we're supposed to cheer Geithner and Bernanke because once they finally figured out that they were careening toward the cliff, they decided to sideswipe a row of trees in order to avoid going over the edge. They wrecked the car but they walked away from the crash without a scratch. If your teenager gets drunk, speeds, crashes into a school bus (injuring dozens of kids), and flips the Ford Focus -- but walks away from the crash -- you don't praise him, give him the keys to the family minivan, and have him drive the soccer team to practices. You take all the keys away from him and ground him.

The Obama administration promoted Bush's architects of the financial disaster and demands that we hail them as heroes. President Bush was ridiculed for saying: "Brownie, you're doing a heck of a job." FEMA administrator Michael Brown stood by while Hurricane Katrina reduced a single large city to ruin. Geithner and Bernanke stood by while scores of large cities were devastated.

I suggest that we will build on the momentum we've achieved on the Fed audit by making the following issues our near term financial priorities:

Can the Wrecking Crew. Fire the senior leaders of Bush's and Clinton's financial Wrecking Crews and stopping treating them as financial experts. President Obama should not reappoint Bernanke as Fed Chairman. He should dismiss Geithner and Summers and cease to take any advise from Rubin. Replace them with the Reconstruction Crew -- people with a track record of getting things right and being effective economists, regulators, and prosecutors. Members of Bush's financial Wrecking Crew run far too many regulatory agencies, often as "Actings." They can, and should, be replaced promptly.

End "too big to fail." These banks are "systemically dangerous institutions" (SDIs). They should not be allowed to grow. They should be shrunk to the point that they no longer pose systemic risk, and they should be subject to vigorous regulation while shrinking. They are too big to manage and too big to regulate. They are ticking time bombs that will cause recurrent global crises as long as they are SDIs.

More white-collar watchdogs. Adopt Representative Kaptur's proposal to provide the FBI with at least 1000 additional white-collar specialists. Senator Durbin and (then) Senator Obama made a similar proposal several years ago.

No more executive compensation looting. End the perverse executive compensation systems that reward failure and fraud. The private sector has made compensation worse since the crisis. Modern executive compensation creates a virtually perfect crime -- "accounting control fraud" (looting a company for personal profit). Until we fix the perverse incentives of executive compensation we will have recurrent epidemics of fraud and global financial crises.

Kill TARP and PPIP. Use the funds to help honest homeowners that would otherwise lose their homes because of predatory loan terms.

Make the Federal Reserve System public. It is a largely private structure that creates intense conflicts of interest and ensures that it is controlled by the systemically dangerous institutions. We have already decided that such a structure is inherently improper. The Federal Home Loan Bank System was set up along the same institutional lines and suffered from the same conflicts of interest. Congress ordered an end to these conflicts in the 1989 FIRREA legislation. It should end private control of the Fed.

Defeat any proposal to make the Fed the "Uberregulator." The Fed, for inherent institutional reasons, is unsuited to be the "systemic risk regulator." The Fed has never cared about regulation. The Fed cares about monetary policy and (theoclassical) economic theory and research. Regulation is, at best, a tertiary concern. Its economists wrote frequently about systemic risk -- but missed the obvious, massive systemic risk of the financial bubble and the epidemic of accounting control fraud. Its policies intensified rather than restricting systemic risk. Theoclassical economists have no effective theories (or policies) to deal with bubbles or epidemics of accounting control fraud. Greenspan, Bernanke, and Geithner epitomize the Fed's inability to recognize or reduce systemic risk. Their policies consistently increased systemic risk. Greenspan didn't believe that the Fed should act against fraud. Geithner testified before Congress that he had never been a regulator (a true statement - but one that should have gotten him fired rather than promoted). Bernanke praised the subprime loans that caused the crisis and were so often fraudulent.

Ensure a robust CFPA. Sever the Consumer Financial Product Agency portion from the broader (and deeply flawed) regulatory reform bills in the House and Senate and adopt it into law. Revise the broader bill to strip out its many anti-reform provisions.

End the waste of long-term unemployment. Anyone able and willing to work should be employed by the government as an employer of last resort and should help repair our crumbling infrastructure. Paying people to do nothing or allowing them to become homeless (the status quo) is an insane system.

Adopt a250 billion revenue sharing program. American state and local governments are in economic crisis. They are slashing spending at the worst possible time when their services are most vital and when cutting spending is pro-cyclical and will delay our recovery from the Great Recession. Revenue sharing was a Republican initiative. Republicans and "Blue Dog" Democrats killed the revenue sharing provisions of the administration's proposed Stimulus bill. That was an enormous mistake. The federal government is not like a state government (or a household). It is a sovereign government with its own currency and a central bank. It can - and should - run large deficits during deep recessions, but the states and local governments cannot. Revenue sharing is the ideal answer to the crisis and it is an answer with an impeccable conservative pedigree. State and local governments should come together and demand a program to offset the state and local cutbacks - roughly250 billion. (The Obama administration's claim that reducing the deficit should be a priority - at a time when unemployment has reached tragic levels - is economically illiterate. It repeats the error that FDR made when he listened to conservative economic advisors and slashed the budget deficit during the Great Depression - causing a surge in unemployment and the extension of the depression. The large federal deficits of World War II reversed the policies of his conservative economic advisors and ended the Great Depression

This piece originally appeared on New Deal 2.0.

Huff Radio: Left, Right & Center: Obama-Geithner Revolt, Sarah Palin, Health Care Update

2009-11-20T22:06:23Z

There's a strong feeling that Congress is bucking Obama and isn't being called to task for it. For the first time, Obama's approval ratings are below 50 percent (Gallup poll says) and calls for Treasury Secretary Timothy Geithner's resignation are growing louder.

Sarah Palin's managed to suck up a good deal of media oxygen. Bob calls her a "tarbaby for the Republican party, a monster they created," while Tony says he's pro-Palin and thinks people clamor for her because she speaks her mind and breaks through. He says her honesty is her virtue while Bob and Arianna fear that she is dangerous, stirring up scapegoats at a time when people need someone to blame.

And the health care debate - or vote about whether or not to bring it to debate - is where we stand this week. Should Obama punish the democrats who aren't toeing his line? Or is this just Congress acting institutionally and asserting its rights, party politics be damned?

Paul Krugman: Government Squandered Our Trust In Wall St. Bailout

2009-11-20T11:24:28Z

Earlier this week, the inspector general for the Troubled Asset Relief Program, a k a, the bank bailout fund, released his report on the 2008 rescue of the American International Group, the insurer. The gist of the report is that government officials made no serious attempt to extract concessions from bankers, even though these bankers received huge benefits from the rescue. And more than money was lost. By making what was in effect a multibillion-dollar gift to Wall Street, policy makers undermined their own credibility -- and put the broader economy at risk.

Raymond J. Learsy: The Key Question No One Asked About Goldman's Role In The AIG Bailout

2009-11-20T09:37:48Z

A key and fundamental question was not broached during the fierce interrogation of Treasury Secretary Geithner during Thursday's hearings before Congress's Joint Economic Committee. The contentious subject at hand was the Fed and Treasury's role on the issue of the American International Group's multi-billion dollar bailout. The key question neither asked
nor answered was:

What was the nature of the myriad discussions at the height of the crisis in September 2008 between Treasury Secretary and former Goldman Sachs Chairman Hank Paulson and Goldman Sachs Chairman Lloyd Blankfein?

It is hard to imagine that the issue of AIG was not broached, and information exchanged. Most tellingly, Geithners's testimony yesterday reiterated the fact that the Fed and Treasury viewed the prospect of AIG's failure as posing a highly significant risk to the economy, and after Lehman, AIG's failure was not going to be permitted to happen. That morsel of information, had it been made available to Goldman Sachs in September of 2008, would have been worth tens of billions of dollars to them.

Goldman Sachs was AIG's largest counterparty and its holdings, directly or indirectly, through Credit Default Obligations and Credit Default Swaps, made up one third of the $62 billion counterparty trades on AIG's books. Given Goldman's know-how and connections it would seem probable that they also played a leading role as enabler in what Fed Chairman Ben Bernanke described to a Congressional Committee in March of this year as the following:
"AIG exploited a huge gap in the regulatory system; there was no oversight of the financial products division. This was a hedge fund basically attached to a large and stable insurance company, made huge numbers of irresponsible bets, took huge losses."

During the subsequent rescue of AIG, a game of high stakes poker evolved, perhaps with a touch of outright extortion. The New York Fed, which Geithner headed at the time, was charged with negotiating with AIG's trading partners to try to modify their counterparty contracts with AIG to levels more closely approaching their real time value, at the time hugely less than their face amounts. Discussions had taken place at one stage between the trading partners and AIG toward writing down the AIG obligations to some 40 cents on the dollar without success, as Goldman et al refused to budge.

And here the crunch, and key to the question: Did Goldman and the other banks know for certain that the bankruptcy of AIG was no longer a risk for them? That the Fed and Treasury were now irrevocably committed to saving AIG? With that foreknowledge all along that Goldman and the other banks were empowered to take, risk free, the inflexible position that "it would be improper and perhaps even criminal to force AIG's partners to bear losses outside of bankruptcy court." Thus Goldman, et al would have been playing poker with a clear view of the Fed's hand.

It raises the serious question of what Goldman knew and when did it know it and whether Goldman played the AIG derivatives card with "inside information" about the Fed's intentions. And, if so, what might be the legal ramifications?

As pointed out here, knowing Mr. Paulson conveyed a penchant for being showered with gold dust. Pimco pocketed $1.7 billion (Pimco's single largest payday was the proud boast) in taking positions in underwater Fannie Mae and Freddie Mac paper that were then surprisingly redeemed at full value piggybacking on the taxpayers $100 billion plus bailout of those institutions.

And when the big guys were in trouble because of the public's perception of greed and funny games, there was Hank Paulson telling us while flying on his way to Saudi Arabia, with oil on its way to $147 a barrel, that it was all about "supply and demand," thereby making us all feel better paying $4.00+/gallon at the pump and watching our economy go down the pipeline.