Blog on the Run: Reloaded

Thursday, May 15, 2014 12:18 pm

Stressing the country out; or, Tim Geithner should have been fired about umpty-’leven years ago

Tim Geithner, the guy President Obama inexplicably put in charge of the bank bailouts, has a new book out called “Stress Test.” (The term derives from the laughably phony “tests” endangered large banks were put through to see whether they had so many crap assets on their books that they needed to be liquidated; the fix was in, so not one large bank was broken apart of liquidated. Instead, we gave them bazillions of taxpayers’ dollars which they spent on bonuses for themselves instead of lending money to businesses to create jobs.)

The consensus seems to be — unsurprisingly, to me — that it sucks. Particularly, it’s incoherent where it’s not downright dishonest. The Washington Center for Equitable Growth rounds up some of the responses:

Glenn Hubbard:

About housing… I must say I split my side in laughter because Tim Geithner personally and actively opposed mortgage refinancing…. And now he’s claiming this would be a great idea…

David Dayen:

The guy who handed hundreds of billions of dollars over to banks with basically no strings attached [was] suddenly worried about fairness when homeowners get a break on their mortgage payments…. Even as he says in the book “I wish we had expanded our housing programs earlier,” he completely contradicts that to Andrew Ross Sorkin, saying [that his own] statement is “unicorny”…

Amir Sufi and Atif Mian:

Multiplying $700 billion by 0.18 gives us a spending boost to the economy in 2009 of $126 billion, which is 1.3% of PCE, 10 times larger than the estimate Secretary Geithner asserted in his book. So Mr. Geithner is off by an order of magnitude…

Economist Brad DeLong concludes:

In the “real world” Geithner did have full control over the GSEs and the FHA–because Paulson nationalized them in the summer of 2008.

In the “real world” Geithner submits his recommendation that Glenn Hubbard be nominated as head of the FHFA to President Obama on January 21, 2009, it is approved by the senate in February 2009, and thereafter there are no constraints on technocratic use of FHFA and the GSEs to rebalance the housing sector and aggregate demand.

Geithner should not say “I wanted the FHFA to act but I did not have the authority to get the FHFA to act” and at the same time say “having the FHFA act would have made no difference”; Geithner should to say “you cannot blame me because of the constraints” when we know that it was his own actions and inactions made those constraints.

Look: Tim Geithner did much better as a 2009-2010 finance minister than any of his peers. Look: the stress tests worked, and worked very well. (I disagree — Lex.) Look: Christina Romer and company say that if you need a bank rescued in 48 hours, Tim Geithner is your man. But the purpose of Stress Test is to explain to us what Tim Geithner thought and why he thought it, and thus why he did what he did.

And in Stress Test, on housing policy, he doesn’t.

Wednesday, March 12, 2014 8:27 pm

Was EVERYBODY to blame for the 2008 crash? Not just no, but, hell, no.

Dean Starkman at The New Republic, writing long and worth every word and minute:

With Wall Street’s demand for mortgages unending and some loan producers managing to book up to 70 loans per day, the system didn’t just crash. It was brought down.

But we’ve also been made to understand that subprime lenders and their Wall Street funders didn’t act alone. Instead, they were aided by the avarice of the American people, who were not victims of the crash so much as accomplices in it. Respondents to aRasmussen poll done during the throes of the crisis overwhelmingly blamed “individuals who borrowed more than they could afford” (54 percent) over Wall Street (25 percent). To this day, the view is widespread and bipartisan: Main Street was an essential cause of the meltdown. The enemy was us.

“It all goes back to the increase in the tolerance for debt,” David Brooks wrote a couple of years ago. …

One of so many instances in which Brooks has been flat wrong on the facts without professional consequence. But I digress.

Is that not the truth?

Actually: No, it’s not. The notion that American consumers share the blame for the mortgage crisis is a lie. And it is one of the most pernicious out there.

Everyone-Is-To-Blame (or EITB, for brevity’s sake) has done much to mute the public outcry essential for sweeping efforts to respond to the financial catastrophe. To the extent that Dodd-Frank fell short of the root-and-branch reform that followed the last great crash in 1929, EITB is to blame. The fact that banks too big to fail before the crisis have been allowed to grow to twice their pre-bubble sizes can be traced to a nagging sense that they didn’t act alone. And if you wonder why, six years after the fact, no significant Wall Street figure has been criminally prosecuted, I would suggest that EITB has muddied perceptions just enough to allow the administration to sidestep the necessary legal mobilization. If everyone is to blame, then criminal indictments of individual executives can be framed as exercises in scapegoating.

Everyone-is-to-blame did its worst damage to the Home Affordable Modification Program, or HAMP, an effort rolled out in the immediate aftermath of the crisis to reduce borrowers’ monthly payments through refinancing or principal write-downs. It was the mere idea of HAMP that set off Rick Santelli on his 2009 rant about “losers’ mortgages” and their “extra bathroom,” sparking the Tea Party revolt. The prospect of helping delinquent borrowers, while others paid theirs on time, unleashed a flood ofressentiment that filled the Congressional Record with denunciations of “irresponsible” actors who “lied” only to wind up in line for “gift equity,” and “tax-payer subsidized windfall.” Wisconsin Representative Jim Sensenbrenner introduced the concept of “happy-go-lucky borrowers” and “cagey borrowers.” Jim Bunning, then Kentucky’s junior senator, felt compelled to warn against helping homeowners “who made bad decisions.” The outpouring tapped into a sentiment powerful enough to silence even some liberals and turned hamp into a political disaster for the Obama administration. Left adrift, the program went from a potential lifeline for borrowers to a fee-machine for servicers and a Kafkaesque nightmare for those it was supposed to help.

As an agent of obfuscation, EITB is a gift that keeps on giving. In October, The Washington Post’s editorial board objected to a $13 billion mortgage-era civil settlement with J.P. Morgan largely because it unfairly singled out the bank, when, in fact, “everyone, from Wall Street to Main Street to Washington, acted on widely held economic beliefs that turned out not to be true.” A forthcoming book by Bob Ivry, a Polk Award–winning investigative reporter for Bloomberg News (and, full disclosure, a friend), eloquently inveighs against big banks and their Washington lackeys, but also includes this assertion: “In the years leading up to the Great Bubble-Burst of 2008, everybody got a chance to cash in. … If you wanted to buy a place to live, you could get more house than you ever dreamed. You could use your rising home equity for the Disney vacation, the power boat, the fourth bedroom or the college education.” …

True. But that’s not the same thing as mortgage fraud, which, though not trivial, was an incredibly small part of the total problem:

In 2010, an FBI report drawing on figures from the consultancy Corelogic put total fraudulent mortgages during the peak boom year of 2006 at more than $25 billion. Twenty-five billion dollars is obviously not nothing. But here again, teasing those mortgages out of that year’s crisis-related write-downs of $2.7 trillion from U.S.-originated assets leaves our infamous “cagey” borrowers to blame for only a tiny share of the damage, especially since not all of the fraudulent mortgages were their fault. The ratio looks roughly something like this:

Yes, some of our cab drivers, shoeshine boys, and other fellow citizens tricked a lender into helping them take a flyer on the housing market. But the combined share of the blame for bad mortgages that can be placed on the public sits—and I’m really rounding up here—in the high single digits, and not the much larger, fuzzier numbers in our heads.

The fact is that defrauding a bank that actually cares about the quality of a loan is actually rather difficult, no matter how aggressive or deceitful the borrower. Lenders, on the other hand, can lie with relative ease about all sorts of things, and mountains of evidence show they did so on a widespread basis. For starters, it’s lenders who establish the loan-to-value ratio for a property: how much money the buyer is borrowing versus the house’s estimated worth. Banks didn’t used to let you take out a mortgage too close to the home’s total cost. But play with those numbers and, voilà, a rejected loan application turns into an accepted one. Leading up to the crash, some banks’ representations about loan-to-value ratios were off by as much as 40 percentage points.

Then there was the apparent rampant corruption of appraisals, which also have nothing whatsoever to do with borrowers. Before the bubble popped, appraisers’ groups collected 11,000 signatures on a petition decrying pressure by banks to arrive at “dishonest” or inflated valuations.

And that’s to say nothing of lenders misleading borrowers directly—a practice that the Financial Crisis Inquiry Commission, the Levin-Coburn report, and lawsuits by attorneys general around the country have all found was very much systemic. Mortgage brokers forged borrowers’ signatures and altered documents; Ameriquest (those guys again!) had its own “art department,” as it was known internally, for precisely that function. Oh, and remember those 137,000 instances of “suspicious activity” about possible borrower misdeeds? For the sake of perspective, Citigroup settled a Federal Trade Commission case alleging sales deception that involved two million clients in a single year. That’s what we call wholesale, and it was happening before the mortgage era even really got started.

Today, there’s a big and growing body of documentation about what happened as the financial system became incentivized to sell as many loans as possible on the most burdensome possible terms: Millions—and millions—of borrowers were sold subprime despite qualifying for better.

Perhaps the most astonishing and unappreciated finding comes from The Wall Street Journal, which back in December 2007 published a study of more than $2.5 trillion in subprime loans dating to 2000 (that is to say, most of the subprime loans of the era). The story, by my former colleagues Rick Brooks* and Ruth Simon, painted the picture of a world gone upside-down: During the worst years of the frenzy, more than half the subprime loans issued went to borrowers who had credit scores “high enough to often qualify for conventional loans with far better terms.” In 2006, the figure hit 61 percent. Along with its article, the Journal illustrated the alarming trend line with a version of the following graphic:

It goes without saying that no one would voluntarily eschew a prime loan for subprime—subprime is called that for a reason, carrying higher, often escalating rates; pre-payment penalties that “shut the backdoor” by precluding refinancing; and other burdens tacked on for good measure. The Journal concluded that its analysis “raises pointed questions about the practices of major mortgage lenders.” That’s putting it mildly!

He goes on to suggest some reasons why Everybody Is To Blame is such a popular world view. But what he keeps coming back to, what we must keep coming back to, is that it is wrong. If you actually look at the numbers — you know, like bankers are supposed to do — you consistently find that the overwhelming majority of the financial damage was caused by the banks, often through unethical and sometimes even illegal means.

Even so, today, we refuse to punish those responsible. If there’s Blame to be laid at the feet of Everybody, this is it. Charlie Pierce is fond of saying that for all Occupy Wall Street’s many foibles, gaffes and mistakes, it at least got people shouting at the right buildings — i.e., corporations rather than government, and the big banks in particular. Unfortunately, some of the country’s top journalists and pundits still get it wrong, and they and the lawmakers on the take form a daisy chain that keeps anything substantive from happening, not only to punish those who were responsible last time but also to do what it takes keep something like this from happening again.

It’s not Everybody’s fault. Everybody is NOT to Blame. The banks and their executives and boards are to blame. And part of citizenship in a constitutional republic is to hold them to account.

*Disclosure: Rick Brooks worked with me at the N&R in the early 1990s.

Monday, October 14, 2013 7:56 pm

JPMorgan Chase just posted its first quarterly loss in a decade.

Yes, the nation’s largest bank lost $388 million. Alex Pareene of Salon explains why that matters:

… in one important sense, this loss doesn’t really “count.” The loss didn’t happen because the things JPMorgan does to make money stopped making money, the loss happened because JPMorgan has spent a fortune — a truly staggering amount of money — defending itself against legal inquiries and paying fines for bad behavior. This quarterly loss is the result of the bank needing a couple billion dollars to spend on lawyers and fines and fees, with a few billion set aside this quarter as “part of a $23 billion pot the bank has set aside to cover mounting legal costs.” Take away those costs, and you have a bank that is making almost as much money as usual. “Excluding litigation expense and reserve release,” according to Reuters, “the company posted a profit of $5.82 billion, or $1.42 per share.”

As Felix Salmon has said, a fantastically profitable bank is a bank that is extracting rents from the economy. A bank that would be fantastically profitable if it weren’t for the expense of dealing with myriad investigations into its corrupt and criminal activities is a bank that would seem to have reached the limits of its rent-extraction strategy.

So crime is baked into JPMorgan Chase’s business model. The nation’s largest bank apparently is little more than a continuing criminal enterprise, as defined under the RICO act, if it has to put billions, with a “B,” aside in just one quarter for legal defense. But nothing bad will ever happen to JPMorgan Chase because Barack Obama’s Justice Department can’t be bothered to investigate world-historical swindles, and nothing will happen to CEO Jamie Dimon because CEOs aren’t responsible for the crimes of the corporations they are so handsomely rewarded to run. Ever.

Thursday, July 26, 2012 8:29 pm

Sorry, but, yes, the 2008 bank bailouts really were as much of a reaming of the American taxpayer as we thought at the time

Another crappy “both-sides-do-it” column: Betsey Stevenson and Justin Wolfers write at Bloomberg that our current political debate on the economy is a “sham” because leading economists unanimously agree that  the bailouts helped the unemployment situation. But economist Dean Baker provides the missing context: While that claim might be technically true, the bailouts could have been structured far more constructively than they were, both to address then-current problems and to help prevent the recurrence of similar problems:

The Wall Street banks were on life support in the fall of 2008. Without trillions of dollars of government loans and guarantees (much more came from the Fed than the TARP money that went through the Treasury), they would be dead, deceased, pushing up daisies, out of business. The boys and girls getting those huge paychecks on Wall Street were at Uncle Sam’s doorstep pleading for help. There was no one else to save them from destitution.

In this context there were three main choices. One was to drag out Mitt Romney and give them a lecture about the free market and tell them the government is not about giving people stuff. In this case the banks go under leading to a full-fledged financial melt-down. In this story, the economy certainly takes a bigger immediate hit, but the advantage is that we have a Wall Street free world. Goldman Sachs, Citigroup, Morgan Stanley, J.P. Morgan and the rest would be history. They are in receivership, waiting to broken up and sold off. This parasitic sector that has led to so much waste, corruption and inequality is no longer a drag on the economy. Consider this short-term pain for long-term gain. (Just kidding about the Romney part, he supported the bailout.)

The second choice is hand over the money, which is the route we took. Oh yeah, Congress did put conditions on the money, but we know that was just for show. One of the most disgusting things I’ve seen in my years in Washington were the excellent stories on how executive compensation was treated in the TARP that the Washington Post and Wall Street Journal ran after the TARP passed.

Both articles featured comments from compensation expert Graeff Crystal who explained that the government could have changed compensation patterns on Wall Street forever (the Wall Street boys needed the money), but Congress instead took a pass. It would have been great if Crystal’s views were part of the public debate before the bill was passed.

This brings up option number 3, hand the money over but with real conditions. Congress could have said that banks that got TARP money, funds through the Fed’s special lending facilities, or benefited from the various Treasury and FDIC insurance commitments had to:

a) strictly limit all pay in all forms for the next five years;

b) set up a clear, legally enforceable plan for writing down underwater mortgages on their books;

c) agree to a breakup schedule that would get them below “too big to fail” size by a set date.

To my mind, option #3 was clearly the best route since it would fix the financial industry and avoid the crash that would result from going cold turkey in option #1. But let’s say that the choice is just the full crash in option #1 or the handout in option #2. In order to seriously decide between these we need some basis for assessing the size of the downturn. Saying that the short-term impact would have been worse in option #2 doesn’t tell us anything about the proper policy choice. We pay short-term costs for long-term benefits all the time. We need the terms of the trade-off.

In ths respect, the commonly claimed “second Great Depression”scenario is, to use a technical economic term, “crap.”  The first Great Depression, by which I mean a decade of double-digit unemployment was not locked in stone by the mistakes made at its onset. There was nothing that would have prevented the government from having the sort of massive stimulus spending that eventually got us back to full employment (a.k.a. World War II) in 1931 instead of 1941 and without the war. The fact that we remained in a depression for more than a decade was due to inadequate policy response.

In this respect, to claim that if we let the banks collapse we would have been destined to suffer a decade of double digit unemployment is absurd. That would only be the result if we continued to have bad policy, not just in 2008, but in 2010, in 2012, right through to 2018.

The serious question is how bad could we reasonably expect the downturn to have been if we had gone the cold turkey route. The place to look for insight on this question is Argentina, which went the financial collapse route in December of 2001. This was the real deal. Banks shut, no access to ATMs, no one knowing when they could get their money out of their bank, if they ever could.

This collapse led to a plunge in GDP for three months, followed by three months in which the economy stabilized and then six years of robust growth. It took the country a year and a half to make up the output lost following the crisis.

While there is no guarantee that the Bernanke-Geithner team would be as competent as Argentina’s crew [indeed, subsequent events have shown that they are not -- Lex], if we assume for the moment they are, then the relevant question would be if it is worth this sort of downturn to clean up the financial sector once and for all. I’m inclined to say yes, but I certainly could understand that others may view the situation differently.

Anyhow, this is the debate that we should have had the time and at least be acknowledging in retrospect.

We had the bastards down in the fall of 2008, and we didn’t hit them with the chair. A century from now that failure will be considered the key turning point in the transition of the U.S. from a democratic republic to a full-on oligarchy.

Thursday, March 1, 2012 2:30 am

The vampire squid and the hurricane

Matt Taibbi, who normally writes for Rolling Stone, daytripped over to the new fthebanks.org site today to announce:

There are two things every American needs to know about Bank of America.

The first is that it’s corrupt. This bank has systematically defrauded almost everyone with whom it has a significant business relationship, cheating investors, insurers, homeowners, shareholders, depositors, and the state. It is a giant, raging hurricane of theft and fraud, spinning its way through America and leaving a massive trail of wiped-out retirees and foreclosed-upon families in its wake.

The second is that all of us, as taxpayers, are keeping that hurricane raging. Bank of America is not just a private company that systematically steals from American citizens: it’s a de facto ward of the state that depends heavily upon public support to stay in business. In fact, without the continued generosity of us taxpayers, and the extraordinary indulgence of our regulators and elected officials, this company long ago would have been swallowed up by scandal, mismanagement, prosecution and litigation, and gone out of business. It would have been liquidated and its component parts sold off, perhaps into a series of smaller regional businesses that would have more respect for the law, and be more responsive to their customers.

But Bank of America hasn’t gone out of business, for the simple reason that our government has decided to make it the poster child for the “Too Big To Fail” concept. Because it is considered a “systemically important institution” whose collapse would have a major, Lehman-Brothers-style impact on the economy, two consecutive presidential administrations have taken extraordinary measures to keep Bank of America in business, despite a staggering recent legacy of corruption schemes, many of which were simply overlooked by regulators.

This is why the question of whether or not Bank of America should remain on public life support is so critical to all Americans, and not just those millions who have the misfortune to be customers of the bank, or own shares in the firm, or hold mortgages serviced by the company. This gigantic financial institution is the ultimate symbol of a new kind of corruption at the highest levels of American society: a tendency to marry the near-limitless power of the federal government with increasingly concentrated, increasingly unaccountable private financial interests.

The inevitable result of that new form of corruption is this bank, whose continued, state-supported existence should naturally outrage all Americans, be they conservative or progressive.

My position on this is to kill ‘em all and let God the FDIC sort ‘em out, because by any honest accounting standard not a damn one of our big banks, with the possible exception of JPM, is solvent and they’re all a clear and present danger to the country’s economic well-being. And BAC is a serial felon besides. Lord, if we’ve got to have a death penalty, let’s start using it on TBTF banks.

(h/t: Jill)

The crux of the biscuit …

… and the quote of the new day, from low-tech cyclist at Cogitamus:

You know, when liberating the free market makes “the United States” richer, it doesn’t do a damned bit of good for most of us unless some of that extra richness finds its way into our pockets.  But when the median household in 2010 is only 7% richer than the median household in 1973, despite the fact that we’re clearly way, WAY richer as a nation, that means our economy has failed in a very essential way.

Why, yes. Yes, it has.

Tuesday, December 6, 2011 8:01 pm

How to end Occupy Wall Street

Filed under: We're so screwed — Lex @ 8:01 pm
Tags: , , ,

Sir Richard Branson, founder of Virgin Airways, has an idea, but the IGMFY crowd won’t like it:

There is a fundamental problem with capitalism. And that is that it’s the only system that works, but it does bring extreme wealth to a few individuals. Therefore, if you’re lucky enough to be one of those few individuals, you have to make sure you use that responsibility extremely well, and that you use that wealth to create more jobs and to try to sort out some of the intractable problems of the world. As a business leader, I’m no more successful than a doctor or a nurse or a journalist, but I have that wealth, and with wealth—as they say—comes responsibility.

In short, you need to know when enough is enough, and you need to stop screwing less fortunate people just because you can — two things sociopaths are fundamentally incapable of doing.

Oh, well.

Tuesday, November 29, 2011 8:25 pm

Theft baked in

Fraud and conspiracy were written into the computer code that handled mortgage foreclosures, reports Matt Stoller at New Deal 2.0 (h/t Fec):

The same banks that ran the corrupt home mortgage securitization chain are now committing rampant fraud in the foreclosure crisis. Here’s New Orleans Bankruptcy Judge Elizabeth Magner discussing problems at Lender Processing Services, the company that handles 80 percent of foreclosures on behalf of large banks (emphasis added):

In Jones v. Wells Fargo, this Court discovered that a highly automated software package owned by LPS and identified as MSP administered loans for servicers and note holders but was programed to apply payments contrary to the terms of the notes and mortgages.

The bad behavior is so rampant that banks think nothing of a contractor programming fraud into the software. This is shocking behavior and has led to untold numbers of foreclosures, as well as the theft of huge sums of money from mortgage-backed securities investors.

Here’s how the fraud works: Mortgage loan notes are very clear on the schedule of how payments are to be applied. First, the money goes to interest, then principal, then all other fees. That means that investors get paid first and servicers, who collect late fees for themselves, get paid either when they collect the late fee from the debtor or from the liquidation of the foreclosure. And fees are supposed to be capitalized into the overall mortgage amount. If you are late one month, it isn’t supposed to push you into being late on all subsequent months.

The software, however, prioritizes servicer fees above the contractually required interest and principal to investors. This isn’t a one-off; it’s programmed. It’s the very definition of a conspiracy! Who knows how many people paid late and then were pushed into a spiral of fees that led into a foreclosure? It’s the perfect crime, and many of the victims had paid every single mortgage payment.

(That would be the same Wells Fargo that just took over all the branches of Wachovia, which had been a venerable institution in this state for decades.)

A prediction: No one will go to prison for this. That’s because a federal bankruptcy judge is waving a red flag, banging on a fire alarm and yelling, “Fraud! Fraud!” and the Justice Department is doing exactly jack squat. IANAL, but I could run the Justice Department better than Eric Holder. In fact, my kitchen table could run the Justice Department better than Eric Holder.

Wednesday, October 19, 2011 10:14 pm

Why anti-government conservatives should be parachuted into more business-friendly environments

Apparently, Senate candidate Elizabeth Warren has said some things that have hurt the fee-fees of our Galtian overlords. Fred sent me the following, which he says he saw on some board dedicated to Stanford football. (Uh, OK, whatever.) The writer purports to be responding to this video of Elizabeth Warren as he wahrgarblz:

“You built a factory out there? Good for you,” – “Built a factory” is a summary for a lot of work. Put up equity, designed a business, took risk to buy land, get permits, pay property taxes and use taxes and permit fees. Then, bought a bunch of equipment and had it installed …and paid sales taxes. Hired some employees and paid them a bunch of money and paid payroll taxes on top of that. Bought a bunch of raw materials from companies that paid a bunch of salaries and a bunch of taxes. Building a factory is a huge private investment that pays the public a lot of taxes for the right to be built.

“But I want to be clear: you moved your goods to market on the roads the rest of us paid for.” – Between fuel taxes, license fees, tolls and various taxes on transportation related activities, the roads budget is smaller than the total tax take.

“You hired workers the rest of us paid to educate.” No, you did not educate them. You babysat them for 12 years. Then I hired them, taught them how to be responsible and show up for work, taught them how to communicate in clear sentences, taught them that there are rights and wrongs and (unlike with your schools) wrongs have consequences in the workplace. Then paid for extended education for my employees so they could continue to improve themselves and better add value to what we do around here.

“You were safe in your factory because of police forces and fire forces that the rest of us paid for.” Funny, my factory has 24/7 security guards because the last time it was broken into, the police did not even bother to take a report, they just said “call your insurance company”. As for fire? The closest fire department is 10 miles away. My insurance company requires that I have a full wet sprinkler system to qualify for insurance because there is no local fire protection.

“You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.” Well, that is not exactly true. When the AFL-CIO tried to unionize my workforce, they staged three days of noisy protests outside my factory. The police forces just stood around and watched as the protesters intimidated my workers, vandalized their cars and destroyed my property.

You say “we” like the government and society are the same. They aren’t. My company and my community and you politicians are not “we”.

One could use many adjectives to describe this outlook. “Rational” is not one of them. “Contextual” is not one of them. “American” is not one of them. Given the likelihood, in this day and age of video cameras in every phone, that AFL-CIO protesters destroyed your property in plain view while uniformed police officers stood by and watched, I’m pretty sure “factual” isn’t even one of them.

Indeed, one could I’M SORRY I CAN’T HEAR YOU MY BULLSHIT DETECTOR IS GOING OFF TOO LOUDLY.

Wait. You know what? I’m over being civil to idiots.

Memo to this shit-for-brains Galtian overlord:

You’re so talented? You’re so smart? You’re so independent of everything your fellow Americans have worked and sweated for that you’ll be just fine without it?

OK. Let’s test that hypothesis.

This’ll be the best “Dude, What Would Happen?” episode ever. (My 10-year-old loves that show. Sorry.)

Here’s what we’re going to do.

We’re going to parachute your ass into the wilds of north-central Alaska or a free-fire zone in Uganda or a raft off the coast of Somalia. Just to be fair, we’ll parachute your money in, too, all in gold, of course, since U.S. currency would be too declassé.

We’ll let you keep all the education and experience you’ve ever gotten. And all the friends and contacts you’ve ever made.

We’ll let you keep the lowest corporate tax rate in 60 years. Hell, we’ll set the tax rate to zero. And we’ll let your corporation keep its share of the $2 trillion in cash U.S. corporations are sitting on when unemployment is better than 9%. Because, after all, what’s yours is yours, right?

All we ask in return is one thing:

Create some jobs.

That’s all.

Granted, for the entire 10-year period from 2001 through 2010 that was too goddamn much for you to be bothered with. But I’m going to assume that, oh, I don’t know, maybe you just weren’t trying. Maybe it was all that uncertainty about the horrific cost of government regulations or something. Whatever; we’ll give you a mulligan on that. And, as I said, we’ll let you keep all your stuff.

But here’s what we won’t let you keep.

The U.S. military, which keeps you reliably supplied with cheap energy.

The subsidies for whatever it is you do — and, honestly, it doesn’t matter what you do because at the moment, federal, state and local governments are subsidizing everything from ethanol to NFL franchises.

The Internet, which was built by the taxpayers when I was 9, belonged to them until I was in my late 30s and should never have been put in private hands at all.

The roads, including the Interstate Highway System, that are paid for by people whose gasoline tax payments constitute one HELL of a lot bigger share of their income than yours, not to mention, in many cases, bonds that drivers and non-drivers alike pay for. (Fun fact: Pedestrians and private 4-wheel vehicles a disproportionately high share of the costs connected with road maintenance; 18-wheelers, many of which routinely travel over weight limits, pay a disproportionately LOW share of the costs.)

Or the government mechanisms that make the insurance companies whose cost you complain about so much possible in the first place.

Or the water lines that make your pretty sprinklers work.

Or the police departments that might or might not have allowed AFL-CIO thugs to damage your workers’ cars and destroy your property — I think you’re pulling this one out of your ass, although we’ll let that go — but which damn well do keep the very walls of your plant from being carted off and sold for scrap and the women who work for you from being raped and mutilated right there on the assembly line by the Lord’s Resistance Army or whatever the hell terrorist group Rush Limbaugh thinks he can suck up to conservative Christian listeners by fellating on the air this week.

Or the current state of education of the work force. Because if you like this, you’ll love a work force consisting mainly of 9-year-olds pointing AK-47s at your head. (And just so you know, teaching people how to communicate in clear sentences, which, on the basis of 35 years in the business world, I can confidently conclude you have not done because the sheer incidence of such effective education in the business world is vanishingly small, means that you also have to teach them the difference between reality and fantasy. Keep that in mind next time. Moreover, given how much personal offense you have taken at Warren’s remarks, you probably should Google “synecdoche,” although because I’m repaying you in kind, I’ll let it go. That said, the period goes inside the close-quotation marks.)

That’s the deal. It’s what you asked for, so you pretty much have to take it, now, don’t you?

Strap on the chute and get on the plane, big guy. I’ll be happy to be the jumpmaster who puts a boot up your ass as you and your bullion exit over the drop zone.

And then?

Start creating jobs.

Go on.

We’ll wait.

I’m old enough to remember when they wanted to be the best bank in the neighborhood

Filed under: Evil,I want my money back. — Lex @ 8:36 pm
Tags: ,

Now, they just want to crap all over everything. Bank of America, getting ready to screw you again, even harder:

Bank of America, hit by a credit downgrade last month, has moved derivatives from its Merrill Lynch unit to a subsidiary flush with insured deposits, according to people with direct knowledge of the situation.

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

Yeah, we should, but bankster politicians of both parties (Mel Watt, I’m lookin’ at you) have put the kibosh on that.

So, how bad is this? Yves Smith at Naked Capitalism offers some perspective:

The reason that commentators like Chris Whalen were relatively sanguine about Bank of America likely becoming insolvent as a result of eventual mortgage and other litigation losses is that it would be a holding company bankruptcy. The operating units, most importantly, the banks, would not be affected and could be spun out to a new entity or sold. Shareholders would be wiped out and holding company creditors (most important, bondholders) would take a hit by having their debt haircut and partly converted to equity.

This changes the picture completely. This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.

I invented the #LWS (LiquidateWallStreet) hashtag on Twitter yesterday as a goof. Less than 24 hours later, we’ve officially arrived at the point at which an American taxpayer could burn down a Bank of America facility and plausibly claim self-defense.

(h/t: Fec)

Wednesday, August 24, 2011 8:17 pm

What happens when you don’t let too-big-to-fail banks fail

Filed under: I want my money back. — Lex @ 8:17 pm
Tags: ,

Barry Ritholtz explains:

Consider what was actually done in 2008-09, and you will understand why none of the underlying problems have been repaired:

• Bank holdings: Remain stuffed with declining assets, primarily in Housing and Derivative holdings. Another leg down in Housing could be nearly fatal.

• Transparency: Balance sheets are unnecessarily Opaque; Eliminating Fair value accounting via FASB 157 did not fix balance sheet problems, but instead allowed banks to hide them.

• Capitalization:  Remains too thin; leverage should be mandated back to the pre-2005 rule change of no more than 12 to 1; As we have learned, management does not keep adequate capital unless mandated to do so (sufficient capital reserves cuts into profits);

• Misaligned Incentives: Compensation and bonus schemes were not significantly changed after bailouts, except during loan repayments. Thus, management and traders still have the same upside to roll the dice, but do not have the downside risks, which remains on shareholders and taxpayers.

Ritholtz believes there’s good reason to think that the only way some of our biggest banks — Citi and Bank of America, particularly — will survive another housing downtown is with another government bailout. (And the news has not been good lately on the housing front.)

Whoopee. May I see the hands of everyone in the room who cares what the hell happens to Bank of America and Citi?

*crickets*

OK, then. What should we do? Well, Ritholtz helpfully imagines what things might look like today if we had done the right thing a couple of years ago:

Let’s use a counter-factual, a simple thought experiment of what would have been had we gone Swedish on banks like Citi and B of A, placing them into a prepackaged reorganization (that’s a polite phrase for “bankruptcy”).

The easy stuff: Senior management all gets fired. More than just the CEO — nearly the entire top floor at the bank, including the Board of Directors, gets canned. Equity shareholders get wiped out. Whatever is left over after all is said and done goes to the bondholders, typically, at about 25-50 cents on the dollar. (Note that in Sweden, bondholders got 100 cents on the Kroner, but that currency was significantly devalued — so the bondholders were not made whole, they lost between 50-75%).

Temporary nationalization is the play: Uncle Sam provides debtor-in-possession financing to keep operating. All of the bad holdings, mortgages, derivatives and other liabilities are pulled out, and auctioned off. This includes the REOs, the CDS/CDO book, defaulted mortgage obligations. Remember, there is no such thing as toxic assets, only toxic prices. At some valuation, these are worthwhile investments — just not 100 cents on the dollar. Let healthy buyers pay 15-30 cents.And anything that is worthless is written down to zero.

We recapitalize the parent bank, and spin off each division: IPO Merrill Lynch for $20 billion, spin out a clean  Countrywide at $8 billion, sell of all of the non depository bank pieces. What you have left over is a well capitalized bank, owned by Taxpayers, with well capitalized former divisions as stand-alone companies. All of the above have transparent balance sheets (No FASB 157 required to hide the garbage investments). Eventually, everything is spun out back to the public markets. Uncle Sam is repaid, and what is left over goes to the bondholders.

This would have created a transparent, unleveraged, adequately capitalized banking system that would be contributing to, rather than detracting from, the US economy.

But all that was a missed opportunity — for W and O alike. What we have today instead is an over concentrated set of banking behemoths, barely off life support. Many of these remain mortally wounded by the holdings — holdings that they would have to shed through a healthy reorg.

The recent downturn in the banking sector? I suspect it amounts to nothing more than a credible bet that these banks are not in any condition to withstand the next recession. (No, it was not Henry Blodget’s Fault). A rise in unemployment and another next leg down in Housing could very well be fatal.

If the banks come crawling back to Uncle Sam for another bailout, it will be proof that “rescuing” failing financial institutions that blow themselves up is the exact wrong strategy.

Real Capitalists know failure is part of the process. I suspect we may have another chance at a banking reorg. Let’s hope we do it correctly this time . . .

I have friends at Bank of America. I do not wish the company as a whole ill, although I choose not to do business with it because of the behavior of its officers and directors. That said, the bank is insolvent and needs to be treated as such. Regulatory capture so far has prevented the government from doing what needs to be done. How much more pain will taxpayers, bank employees outside the C-suite and the American economy in general have to suffer before the right people finally do the right thing?

Quite a lot, I suspect.

Thursday, August 18, 2011 8:50 pm

Standard & Poor’s. Again.

Filed under: I want my money back. — Lex @ 8:50 pm
Tags: ,

I suggested last week that Yves Smith might be onto something in suggesting that Standard & Poor’s downgrade of U.S. debt might have been more political payback than anything having to do with the actual ability, or even the willingness, of the government to pay interest on its debt. As hypotheses go its only mildly conspiratorial by today’s standards, and it also comports with the behavior of the markets in the aftermath of the rating downgrade: People bought more Treasuries, driving the interest rate on them down.

Turns out that once again, we were, if anything, not paranoid enough:

The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.

The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

My guess now? S&P knew word of this investigation was going to get out and so downgraded U.S. debt to try to make this news look like payback for the downgrade. Heck, if I worked for S&P I might well be able to put some insinuations about “Chicago-style machine politics” to good use.

Wednesday, August 17, 2011 10:43 pm

Postlegal America; or, This isn’t just regulatory capture, it’s regulatory summary execution

Filed under: We're so screwed — Lex @ 10:43 pm
Tags: ,

Matt Taibbi at Rolling Stone:

For the past two decades, according to a whistle-blower at the SEC who recently came forward to Congress, the agency has been systematically destroying records of its preliminary investigations once they are closed. By whitewashing the files of some of the nation’s worst financial criminals, the SEC has kept an entire generation of federal investigators in the dark about past inquiries into insider trading, fraud and market manipulation against companies like Goldman Sachs, Deutsche Bank and AIG. With a few strokes of the keyboard, the evidence gathered during thousands of investigations – “18,000 … including Madoff,” as one high-ranking SEC official put it during a panicked meeting about the destruction – has apparently disappeared forever into the wormhole of history.

Under a deal the SEC worked out with the National Archives and Records Administration, all of the agency’s records – “including case files relating to preliminary investigations” – are supposed to be maintained for at least 25 years. But the SEC, using history-altering practices that for once actually deserve the overused and usually hysterical term “Orwellian,” devised an elaborate and possibly illegal system under which staffers were directed to dispose of the documents from any preliminary inquiry that did not receive approval from senior staff to become a full-blown, formal investigation. Amazingly, the wholesale destruction of the cases – known as MUIs, or “Matters Under Inquiry” – was not something done on the sly, in secret. The enforcement division of the SEC even spelled out the procedure in writing, on the commission’s internal website. “After you have closed a MUI that has not become an investigation,” the site advised staffers, “you should dispose of any documents obtained in connection with the MUI.”

Many of the destroyed files involved companies and individuals who would later play prominent roles in the economic meltdown of 2008. Two MUIs involving con artist Bernie Madoff vanished. So did a 2002 inquiry into financial fraud at Lehman Brothers, as well as a 2005 case of insider trading at the same soon-to-be-bankrupt bank. A 2009 preliminary investigation of insider trading by Goldman Sachs was deleted, along with records for at least three cases involving the infamous hedge fund SAC Capital.

The widespread destruction of records was brought to the attention of Congress in July, when an SEC attorney named Darcy Flynn decided to blow the whistle. According to Flynn, who was responsible for helping to manage the commission’s records, the SEC has been destroying records of preliminary investigations since at least 1993. After he alerted NARA to the problem, Flynn reports, senior staff at the SEC scrambled to hide the commission’s improprieties.

That’s right: To add farce to this tragedy, they’re trying to cover up a cover-up.

It’s a good thing Rick Perry is running for president on a platform of less regulation, or we’d be really screwed.

 

Tuesday, July 12, 2011 7:20 pm

Blood-sucking bank

Filed under: Fun — Lex @ 7:20 pm
Tags:

Who, Bank of America? Citi? Goldman Sachs?

No …

(Courtesy of Fred)

Friday, July 8, 2011 8:40 pm

Something to remember about tort reform

Filed under: Evil — Lex @ 8:40 pm
Tags: ,

If conservatives get their way, guys who get screwed as badly as this guy did will get bupkus:

Ikenna, a 28-year old construction worker, went to deposit a $8,463.21 Chase cashier’s check at his local Chase branch, only for the teller to decide that neither he nor his check looked right and he got tossed in jail for forgery, KING5 reports. The next day, a Friday the bank realized its mistake and left a message with the detective. But it was her day off, so he spent the entire weekend in jail.

By the time he got out, he had been fired from his job for not showing up to work. His car had been towed as well. It ended up getting sold off at auction because he couldn’t afford to get it out of the pound. He had been relying on that cashier’s check for his money but it was taken as evidence and by the time he got it back it was auctioned off.

All this while the cashier’s check had been issued by the very bank he was trying to cash it at.

Chase didn’t even apologize, not even after a year. A lawyer volunteered to help write a strongly-worded letter requesting damages. After trying hard to get a response, they sent KING 5 a two-sentence reply: “We received the letter and are reviewing the situation. We’ll be reaching out to the customer.”

I’ll just bet they will. With both middle fingers extended, no doubt.

This is the behavior of a company run by people who are convinced, despite all odds, that nothing bad will ever happen to them AND that it doesn’t matter whether they worry whether bad things might happen to others. Sociopaths, in other words.

 

 

Wednesday, July 6, 2011 8:00 pm

BAC: Dead bank walking, feeding on the brains of the living

Filed under: I want my money back. — Lex @ 8:00 pm
Tags: , ,

I don’t know who Abigail Field is other than a “contributor” (which I presume means freelancer) for Fortune.com, but, boy howdy, did she find out something interesting about Bank of America’s Countrywide holdings:

Last November, a decision in a New Jersey bankruptcy case brought to light the testimony of Linda DeMartini, operational team leader for the litigation management department for Bank of America, which intended to prove the bank had the right to foreclose on a debtor’s mortgage. Instead, her testimony was key to the judge’s ruling that Bank of America (BAC) couldn’t foreclose, and along the way DeMartini made two statements that called into question the securitization of Countrywide loans. She testified that Countrywide didn’t deliver the notes to the securitization trustee, and that Countrywide notes weren’t endorsed except on a case-by-case basis generally long after securitization ostensibly occurred. Both steps are required, in one form or another, under all securitization contracts. …

To check DeMartini’s testimony, Fortune examined the foreclosures filed in two New York counties (Westchester and the Bronx) between 2006 and 2010. There were 130 cases where the Bank of New York (BK) was foreclosing on behalf of a Countrywide mortgage-backed security. In 104 of those cases, the loan was originally made by Countrywide; the other 26 were made by other banks and sold to Countrywide for securitization.

None of the 104 Countrywide loans were endorsed by Countrywide – they included only the original borrower’s signature. Two-thirds of the loans made by other banks also lacked bank endorsements. The other third were endorsed either directly on the note or on an allonge, or a rider, accompanying the note.

The lack of Countrywide endorsements, combined with the bank’s representation to the court that these documents are accurate copies of the original notes, calls into question the securitization of these loans, as well as Bank of New York’s right, as trustee, to foreclose on them. These notes ostensibly belong to over 100 different Countrywide securities and worse, they were originally made as long ago as 2002. If the lack of endorsement on these notes is typical — and 104 out of 104 suggests it is — the problem occurs across Countrywide securities and for loans that pre-date the peak-bubble mortgage frenzy.

The lack of Countrywide endorsements also corroborates DeMartini, who said that in her 10 years at Countrywide she had never seen a note with an endorsement, and that as foreclosures had been increasingly litigated, she had been handling the original notes, not just the copies scanned into the bank’s database.

Bank of America has argued that, really, everything was just fine. Only now comes word that it will be taking a settlement … and quite a nifty one at that:

BofA will pay $8.5 billion to a group of institutional investors to settle claims that the bank violated the representations and warranties when they sold the RMBS [residential mortgage-backed securities -- Lex]. They will additionally, according to their press release, “record an additional $5.5 billion provision to its representations and warranties liability for both Government-Sponsored Enterprises (GSE) and non-GSE exposures in the second quarter of 2011.” So that’s a total of $14 billion.

What’s most interesting here is that Bank of America makes this settlement with the trustee for the trusts, the Bank of New York Mellon. And they’re claiming that this will resolve almost all of their Countrywide-issued RMBS, which had an original unpaid principal balance of $424 billion. …

If this holds, and all $424 billion is settled, that would represent 2-3 cents on the dollar. It would be a pretty raw deal for the investors, considering that Countrywide has been accused of not following procedures of conveying assets to the trusts, creating “non-mortgage backed securities.” Yves Smith has argued that these cases are incredibly hard to prove in court, but even she expected a settlement avoiding trial to cost in the range of 10-15 cents on the dollar. It seems like the bank is trying to sucker the public into believing that they are making a major concession with a giant settlement, when they would be wrapping up a lot of their legacy exposure relatively cheaply.

The aforementioned Yves Smith, who has covered this story as closely as anyone, says this sucks:

The so-called Bank of America settlement, in which the Charlotte bank is set to pay $8.5 billion (plus some additional expenses) to settle representation and warranty liability on 530 mortgage trusts representing $424 billion of par value, is being hailed as a possible template for other mortgage issuers and servicers.

I sure hope not, because some of the things I see in this deal look plenty troubling. …

The investors had to overcome procedural issues even to be able to litigate. And MBIA, which is suing over similar issues but didn’t have the procedural impediments, is three years into litigation with Countrywide and is not very far along. This sort of case is a war of attrition and as a result, as we have indicated, even if the facts are lousy, there is reason to think that an eventual settlement would not be all that large even relative to the value of loans being disputed (the investors need to prove not only that the reps and warranties occurred, but that they led to losses. A lot of defaults, particularly post the subprime resets, are due to job losses and reductions in income. They can’t be blamed on failing to live up to the reps and warranties).

So with all these considerations arguing for fighting a few more rounds, and BofA in the past taking a very aggressive posture on disputing these cases, why would it settle? …

Put it simply: BofA can judge what its risks are VASTLY better than the investors. There are a lot of reasons why it would make sense for BofA not to settle now. Yet it was all over this like a cheap suit. That says it must regard this settlement as a real bargain.

I understand that when all the legal, definitional and procedural nuances are threaded, BAC’s actual liability on the Countrywide acquisition would not have been $424 billion. But it still would have been a helluva lot — keep in mind that title chain was flawed in 104 out of 104 randomly selected cases of securitized mortgages examined by Fortune. It’s not impossible that the liability would dwarf the company’s market capitalization (a shade under $110B as I write), which would mean, in a world where the rule of law obtained, the death of the company.

That is not, of course, the world we live in.

Friday, June 17, 2011 7:00 pm

Numbers don’t lie, but the numbers guys do

Filed under: I want my money back. — Lex @ 7:00 pm
Tags: , ,

Back in the early 1990s, when I was first applying database analysis to newspaper reporting (I mean when I was starting to do it; lots of other people did it before me), I attempted to tackle the question of whether bids for milk contracts between dairies and N.C. public school systems were being rigged, as we were hearing. I gathered contract data from as many years as I could from as many school systems as I could — at least three and sometimes seven or eight years’ worth of data for almost every system in the state, in fact — and looked at what the numbers showed.

To my untrained eye, they appeared to show home-town favoritism, exclusive long-term relationships and a number of other things that you wouldn’t expect in a competitive market. Moreover, although transportation costs were the second biggest factor in the price of milk after the cost of the raw milk itself, contract prices tended to go up a lot more quickly and down a lot more slowly than did fuel costs.

But, having only an untrained eye, I sent my data to an agricultural economist at a large research university in another state and then called (this was in the immediate pre-email era for most Americans) and asked him whether what I thought I was seeing was actually what I was seeing. I pretty much expected him to say that there were, in fact, logical explanations for what I was seeing in the data, significant drivers of milk prices that I had overlooked,  subtleties of the school-milk marketplace that contract numbers didn’t account for, and so on and so forth.

Instead, what he said was, “Oh, yeah. If I was a DA, I could have a lot of fun with this.”

As it happens, the United States government has the equivalent of a DA for investment bankers, the United States Attorney for the Southern District of New York, in Manhattan, where most American investment banks are based. That individual could have a lot of fun with this:

Mark Abrahamson, Tim Jenkinson, and Howard Jones, of Oxford University, have an utterly compelling paper out proving that there’s collusion among investment banks in the US — it doesn’t matter whether they’re European or American banks — to keep IPO proceeds set at 7%. Using a very high-quality new dataset, they compare US and European IPOs, and get the following result:

ipo.tiff

This chart just shows IPO fees for deals between $25 million and $100 million (in 2007 dollars). But the pattern is universal:

Between 1998 and 2007, 95.4% of U.S. IPOs between $25m and $100m had gross spreads of exactly 7%. The comparable figure between 1989 and 199… While Chen and Ritter showed virtually no IPOs over $150m with a 7% gross spread, we find that 77% of all offerings between $100 and $250m charge exactly 7%. (Note from Lex: The visual fooled me at first. That solid black line at 7% isn’t just an illustrative line. It’s that solid and that black because THOSE ARE ALL THE DATA POINTS.)

European IPO fees do not cluster, and only 1% of offerings raising $25m or more experience gross spreads as high as 7%. Within the $25m-$100m range, fees for European IPOs average just over 4%. Indeed, European IPOs are always cheaper: we find that there is a “3% wedge” between European and U.S. IPOs after controlling for size, issue characteristics, syndicate structure and time or country effects. Fourth, whilst gross spreads are lower for the larger offerings in both regions, our multivariate analysis indicates that fees for the larger U.S. IPOs have tended to increase in our sample period, while European IPOs have been getting cheaper.

The paper runs down a list of possible reasons why US IPOs might be so much more expensive than their European counterparts, and finds none of them convincing; their conclusion — the correct conclusion, I think — is that there’s an implicit cartel in the US, devoted to keeping IPO fees artificially high. (The term of art is “strategic pricing”: although it might be in any bank’s short-term interest to compete on price for any given deal, it’s in all of their long-term interest not to ever do so.)

The cost to issuers of this collusion is huge:

Our best estimates suggest that had these IPOs been conducted at European fee levels the savings to U.S. issuers over the period would have totaled $11.4 billion – or over $1 billion per year.

The moral of the story, first told to me when I worked in PR for investment banks in New York in the early 1980s, is that no one makes money on IPOs except investment banks. (That’s why I didn’t try to get in on the Netscape IPO even though, unlike most Americans, I’d actually tried the product at the time and KNEW it would be popular.) What’s different about this is that now we know why. What’s not different is that they’re going to keep getting away with it just as they have with everything else.

UPDATE: Hedge-fund manager John Thomas reminds us that because the seller of any security likely knows a lot more about it than you do, any explanation regarding why a company is going public usually translates to, “The insiders are getting out at the top.”

Tuesday, June 7, 2011 7:47 pm

This is not difficult

Goldman Sachs CEO Lloyd Blankfein has broken the law and should go to prison for five years.

I don’t mean in terms of conspiring to commit fraud or other complicated areas, although I personally believe he has broken the law there, too. I mean he has done the same simple, stupid thing that got former baseball star Roger Clemens indicted: He lied to Congress.

Matt Taibbi helpfully explains:

Though many legal experts agree there is a powerful argument that the Levin report [a report stemming from an investigation led by Sen. Carl Levin -- Lex] supports a criminal charge of fraud, this stuff can keep the lawyers tied up for years. So let’s move on to something much simpler. In the spring of 2010, about a year into his investigation, Sen. Levin hauled all of the principals from these rotten Goldman deals to Washington, made them put their hands on the Bible and take oaths just like normal people, and demanded that they explain themselves. The legal definition of financial fraud may be murky and complex, but everybody knows you can’t lie to Congress.

“Article 18 of the United States Code, Section 1001,” says Loyola University law professor Michael Kaufman. “There are statutes that prohibit perjury and obstruction of justice, but this is the federal statute that explicitly prohibits lying to Congress.”

The law is simple: You’re guilty if you “knowingly and willfully” make a “materially false, fictitious or fraudulent statement or representation.” The punishment is up to five years in federal prison.

When Roger Clemens went to Washington and denied taking a shot of steroids in his ass, the feds indicted him — relying not on a year’s worth of graphically self-incriminating e-mails, but chiefly on the testimony of a single individual who had been given a deal by the government. Yet the Justice Department has shown no such prosecutorial zeal since April 27th of last year, when the Goldman executives who oversaw the Timberwolf, Hudson and Abacus deals arrived on the Hill and one by one — each seemingly wearing the same mask of faint boredom and irritated condescension — sat before Levin’s committee and dodged volleys of questions. …

Lloyd Blankfein went to Washington and testified under oath that Goldman Sachs didn’t make a massive short bet and didn’t bet against its clients. The Levin report proves that Goldman spent the whole summer of 2007 riding a “big short” and took a multibillion-dollar bet against its clients, a bet that incidentally made them enormous profits. Are we all missing something? Is there some different and higher standard of triple- and quadruple-lying that applies to bank CEOs but not to baseball players?

In fairness to both Taibbi and Sen. Levin and his investigators, there appears to be ample proof on the record that Goldman as a corporation and its individual officers committed a multitude of crimes — enough that any sane state would give Goldman the death penalty and lock the officers up for the rest of their natural lives. But those are, to a greater or lesser degree, complicated charges, challenging to prove. Lying to Congress? No-brainer.

They got Al Capone not for murder but for tax evasion. Lloyd Blankfein doing five years for lying to Congress wouldn’t be justice, but it would be a start.

One other question, perhaps more difficult: Why is it that you, I, Carl Levin and some scruffy reporter for Rolling Stone can see this but the Attorney General of the United States cannot? Are we just smarter, or what?

UPDATE: Apparently we’re smarter than the Attorney General on the John Ensign case, too.

Friday, June 3, 2011 11:46 am

But deficits are shiny!

Your liberal media:

Major U.S. newspapers have increasingly shifted their attention away from coverage of unemployment in recent months while greatly intensifying their focus on the deficit, a National Journal analysis shows.

The analysis — based on a measure of how often the words “unemployment” and “deficit” appear in major publications — portrays a dramatically shifting landscape of coverage over the past two years, as the debate over how to fix the federal deficit has risen to prominence and the question of how to handle still-high unemployment has faded from the media’s consciousness.

Yes, large deficits are a serious problem. But they’re a serious problem in the longer-term. Yes, they could cause inflation. But the interest rate on 10-year Treasuries has fallen a full half a point recently, indicating that the markets see no evidence of inflation coming anytime soon.

Meanwhile, tens of millions of Americans are out of work or badly underemployed. They’re experiencing real human misery right now, today. And the Serious Journalists, economically illiterate and morally bankrupt, couldn’t give less of a damn.

One last thing: This isn’t a failure of reporters. Failures this big require the complicity, if not the direction, of editors and publishers.

UPDATE: Wells Fargo thinks Americans just need to get used to 9% unemployment. I think it’s about time Americans told Wells Fargo to get used to doing business without FDIC insurance. Bitches.

Sunday, March 27, 2011 12:21 pm

Fishing for guppies with dynamite while the great white sharks swim free

Filed under: Evil — Lex @ 12:21 pm
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If you’re local, then you may know that the News & Record has written a great deal in recent years about Charlie Engle, the drug-addict-turned-marathoner who went to prison recently for submitting false information to obtain two mortgages. (Most of the more recent N&R articles are hidden inside the online paper’s Google-Proof Vault, as Ed Cone calls it.)

Now, unlike Nocera, I have no particular sympathy for Engle strictly within the context of his own case. If Engle did the crime, he should do the time. However, there’s some fairly serious question as to whether Engle actually did do the crime — any crime.

And then there’s the bigger picture, which is what really gets on my last nerve. Even if you assume for the purposes of discussion that Charlie Engle did everything the government accused him of (and even the jury tossed one count), what he did was a tiny, tiny portion of a vast criminal scheme in which many other people did far worse things for far more benefit, causing far more financial loss and human suffering, and, so far, have escaped meaningful consequences. Joseph Nocera lays it out in an excellent column for the New York Times:

Mr. Engle’s is a tale worth telling for a number of reasons, not the least of which is its punch line. Was Mr. Engle convicted of running a crooked subprime company? Was he a mortgage broker who trafficked in predatory loans? A Wall Street huckster who sold toxic assets?

No. Charlie Engle wasn’t a seller of bad mortgages. He was a borrower. And the “mortgage fraud” for which he was prosecuted was something that literally millions of Americans did during the subprime bubble. Supposedly, he lied on two liar loans.

“The Department of Justice has made prosecuting financial crimes, including mortgage fraud, a high priority,” said Neil H. MacBride, the United States attorney for the Eastern District of Virginia, in a statement. (Mr. MacBride, whose office prosecuted Mr. Engle, declined to be interviewed.)

Apparently, though, it’s only a high priority if the target is a borrower. Mr. Mozilo’s company made billions in profit, some of it on liar loans that he acknowledged at the time were likely to be fraudulent and which did untold damage to the economy. And he personally was paid hundreds of millions of dollars.  Though he agreed last year to a $67.5 million fine to settle fraud charges brought by the Securities and Exchange Commission, it was a small fraction of what he earned.  Otherwise, he walked.  Thus does the Justice Department display its priorities in the aftermath of the crisis.

It’s not just that Mr. Engle is the smallest of small fry that is bothersome about his prosecution. It is also the way the government went about building its case.

This is not only unfair in and of itself. It also is wrong because unless the perps of this world-historical swindle face serious consequences, theft like this will happen again. And next time, it’ll be worse.

(h/t: Fred)

UPDATE, 3/28: The print edition of the N&R ran Nocera’s piece on page A5 today, labeled “commentary.” Good for them for bypassing the obvious excuse that the thing was too long to run on the op-ed page and giving it the audience it deserves.

Wednesday, February 16, 2011 9:45 pm

Omnibus education bill

Filed under: America. It was a really good idea — Lex @ 9:45 pm
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Jim Quinn of The Burning Platform (via ZH), in one lengthy, entertaining, sobering, frightening, instructive post, elegantly drapes post-1900 U.S. history, current affairs, economics, politics and a criminal investigation over the skeleton of John Steinbeck’s 1937 masterpiece, The Grapes of Wrath.

It’ll probably take you an hour to read and absorb this piece. My advice? Go prepare your favorite adult beverage and do it. It’ll be one of the most worthwhile hours you spend all year.

Why am I not surprised?

My junior senator, Kay Hagan, appears hell-bent on topping predecessor Elizabeth Dole’s world land speed record for pissing away credibility.

You’ll recall that apparently she has some issues with investigating and prosecuting war crimes (and more about that later). Now, she’s apparently decided to join the criminals by becoming a co-chair of Third Way, a bogus corporate “think tank” that recently advanced the novel idea that banks ought to be able to foreclose on property to which they do not, in fact, have clear title.

Geez, Kay, why not just legalize cocaine trafficking and money laundering and call it Miller Time.

Friday, February 11, 2011 8:10 pm

Priorities

Filed under: I want my money back. — Lex @ 8:10 pm
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We’re doin’ it wrong.

Residential lenders, real estate agents, appraisers, mortgage brokers, investment bankers and bond ratings agency committed massive amounts of criminal fraud, destroyed trillions in wealth, rendered millions of Americans jobless (many of them likely for the rest of their lives), fleeced the taxpayers to keep their own companies alive and their individual bonuses intact, and the government is doing absolutely nothing about it.

Keep that fact in mind the next time someone accuses this administration, or any other, of being “anti-business.”

Tuesday, February 8, 2011 9:00 pm

So, all that really bad banking stuff that happened a coupla years ago?

Filed under: We're so screwed — Lex @ 9:00 pm
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It’s a lot more likely to be back than Schwarzenegger at this point:

Regulations are put in place to see that the system runs smoothly and to protect the public from fraud. But banking without rules is more profitable, so industry leaders and lobbyists have tried to block the efforts at reform.  And, they have largely succeeded.  Dodd-Frank – the financial reform act — is riddled with loopholes and doesn’t really resolve the central issues of loan quality, additional capital, or risk retention. Banks are still free to issue bogus mortgages to unemployed applicants with bad credit, just as they were before the meltdown. And, they can still produce securitized debt instruments without retaining even a meager 5 per cent of the loan’s value. (This issue is still being contested) Also, government agencies cannot force financial institutions to increase their capital even though a slight downturn in the market could wipe them out and cause severe damage to the rest of the system. Wall Street has prevailed on all counts and now the window for re-regulating the system has passed.

President Barack Obama understands the basic problem, but he also knows that he won’t be reelected without Wall Street’s help.  That’s why he promised to further reduce “burdensome” regulations in the Wall Street Journal just two weeks ago. His op-ed was intended to preempt the release of the Financial Crisis Inquiry Commission’s (FCIC) report, which was expected to make recommendations for strengthening existing regulations. Obama torpedoed that effort by coming down on the side of big finance. Now, it’s only a matter of time before another crash.

Yeah, well, so the banks crash again, you think. Why should I care?

Because, sonny, when the banks crash, they and their owners don’t pay. You do. Through the nose (and other, even less toothsome, orifices):

So, between $4 to $7 trillion vanished in a flash after Lehman Brothers blew up. How many millions of jobs were lost because of inadequate regulation?  How much was trimmed from output, productivity, and GDP? How many people are now on food stamps or living in homeless shelters or struggling through foreclosure because unregulated financial institutions were allowed to carry out credit intermediation without government supervision or oversight?

The answers to the second question depend on the variable, but the answers to the first and third questions are easy: millions, maybe tens of millions. And here, friends, is why we are well and truly screwed:

Ironically, the New York Fed doesn’t even try to deny the source of the problem; deregulation. Here’s what they say in the report: “Regulatory arbitrage was the root motivation for many shadow banks to exist.”

What does that mean? It means that Wall Street knows that it’s easier to make money by eliminating the rules….the very rules that protect the public from the predation of avaricious speculators.

The only way to fix the system is to regulate all financial institutions that act like banks.  No exceptions.

Which, of course, is exactly the plank upon which so many of our newest congresscritters campaigned. Right?

Want to see something you won’t see on a big bank’s balance sheet?

Filed under: We're so screwed — Lex @ 8:14 pm
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Voila! A housing market even worse than in the Depression:

Along with the snow and cold, November brought continued declines in home values. In fact, the Zillow Home Value Index has now fallen 26% since its peak in June 2006. That’s more than the 25.9% decline in the Depression-era years between 1928 and 1933.

November marked the 53rd consecutive month of home value declines, with the Zillow Home Value Index (ZHVI) falling 0.8% from October to November, and falling 5.1% year-over-year.

But wait! Some good news!

Foreclosures, however, took a tumble in November, with fewer than one out of every 1,000 homes being foreclosed.

Awesome! That’s way down!

Unfortunately, that is an effect of the bank moratoriums that took place after the robo-signing issues came to light. Foreclosures are expected to rise again once that effect wears off.

Oh.

Crud.

Now, you might think that a housing market this bad would mean that a lot of mortgages that are listed as “assets” on various balance sheets are only assets if, by “assets,” we mean, “instruments worth half or less of what we say they’re worth.” And you would be correct. However, the banksters got to Congress and so Congress got to the FAAB and so now banks and their accountants are allowed to lie about how big their assets are and stay in business, rather than being liquidated in orderly fashion with their executives, stockholders and bondholders made to take the haircut.

In the financial Super Bowl, the refs are all being paid off. And you, mon ami, are not a ref.

Thursday, January 27, 2011 8:04 pm

Accessories before and after the fact

Filed under: I want my money back. — Lex @ 8:04 pm
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I’ve had a lot to say here, none of it good, about the banksters and their fraud, which is the primary reason why our economy is in the toilet and not getting out any time soon. But the banksters didn’t do this on their own; indeed, they couldn’t have. They needed inside help.

And they got it, in the form of “anti-regulation.” That is the term preferred, if not coined, by Bill Black, a former savings-and-loan regulator and former executive director of the Institute for Fraud Prevention, a nonprofit that works to prevent fraud and corruption in business and government and to educate people on how to recognize and prevent fraud. Black now is an associate professor of economics and law at the University of Missouri at Kansas City. I’ll get back to him in a minute, but first, some background. 

For a long time, Republicans and conservative Democrats have claimed to oppose “excessive” regulation for a number of reasons. Excessive regulation is antithetical to the very concepts of a free society and free enterprise. Excessive regulation hurts profits. Excessive regulation slows or prevents job creation. And, indeed, there is some truth to all of these claims. Some.

Of course, politicians, being politicians, have never defined “excessive,” let alone consistently imposed regulation rationally based on a balance between societal goods (e.g., worker safety, balance of information between seller and buyer, etc.) and the desire of capital to seek as high a return as possible.

But they did find their way to a balance of sorts in some areas, notably financial regulation. As a result, we went from the Depression to the S&L crisis — about half a century – without any major systemic problems in the banking  industry.

But the conservative opposition to government regulation, aided by political contributions to politicians of both parties, picked up speed when the GOP took over the executive branch and Senate in the early 1980s. The savings-and-loan industry, which couldn’t compete with banks that were offering much higher interest rates during the days of 11% inflation, sought and won deregulation. (I would be remiss if I didn’t point out the role of Democrat Rep. Fernand St. Germain of Rhode Island, whose annual bar/restaurant tab, paid by the S&L industry, approached median U.S. household income at the time, in getting the bill through the House.)

And within a few years, whaddaya know, we’ve got a crisis on our hands — a crisis driven almost entirely by fraud and the most expensive banking screwup in U.S. history. Indeed, it was made far worse for taxpayers than it needed to be when Congress defeated a measure by Rep. Guy LaFalce of New York that would have dealt with the whole bloody business at once for about $40 billion — an astronomical figure, at the time, to be sure — rather than dragging it out for years and making it more expensive in the process. Howard Coble, then and now my congressman, voted against the LaFalce amendment, then told me years later he wished he could have that vote back.

The biggest difference between then and now was that then, people went to prison. Not everyone who needed to, of course — no major government officials, mainly some small-town bankers — but a lot of people did. (One who didn’t was Neil Bush, son of George H.W. and brother of George W., who helped run a Colorado S&L into the ground.)

Rather than learn from that experience, however –

Wait. I was about to write something there based on the presumtion that everyone involved has the public good at heart, “public good” being defined as running a secure banking system at minimal cost to taxpayers. However, as I have observed before, not only is there little basis for any such presumption about the primacy of the public good in the hearts of our government officials anymore, there is considerable evidence that the opposite is the case. Certain people in government decided that if a little deregulation could help their friends and political supporters steal a lot, then a LOT of deregulation could help their friends and political supporters steal a monumental amount. And that, my friends, is where we find ourselves today.

And you know what? They’re not done. Conservatives and pro-corporate Democrats used to say they opposed excessive regulation. Now, in the face of all that has been stolen in the past 30 years, they’re saying they oppose regulation, period, and they’re claiming it kills jobs. This is where Bill Black comes (back) in: He says, in so many words, that the anti-regulators are the job-killers, that they’re killing jobs by the millions. And whaddaya know, he’s right:

The Great Recession (which officially began in the third quarter of 2007) shows why the anti-regulators are the premier job killers in America. Annual private sector gross job losses rose from roughly 12.5 to a peak of 16 million and gross private sector job gains fell from approximately 13 to 10 million. As late as March 2010, after the official end of the Great Recession, the annualized net job loss in the private sector was approximately three million (that job loss has now turned around, but the increases are far too small).

Again, we need net gains of roughly 1.5 million jobs to accommodate new workers, so the total net job losses plus the loss of essential job growth was well over 10 million during the Great Recession. These numbers, again, do not include the large job losses of state and local government workers, the dramatic rise in underemployment, the sharp rise in far longer-term unemployment, and the salary/wage (and job satisfaction) losses that many workers had to take to find a new, typically inferior, job after they lost their job. It also ignores the rise in poverty, particularly the scandalous increase in children living in poverty.

The Great Recession was triggered by the collapse of the real estate bubble epidemic of mortgage fraud by lenders that hyper-inflated that bubble. That epidemic could not have happened without the appointment of anti-regulators to key leadership positions. The epidemic of mortgage fraud was centered on loans that the lending industry (behind closed doors) referred to as “liar’s” loans — so any regulatory leader who was not an anti-regulatory ideologue would (as we did in the early 1990s during the first wave of liar’s loans in California) have ordered banks not to make these pervasively fraudulent loans.

One of the problems was the existence of a “regulatory black hole” — most of the nonprime loans were made by lenders not regulated by the federal government. That black hole, however, conceals two broader federal anti-regulatory problems. The federal regulators actively made the black hole more severe by preempting state efforts to protect the public from predatory and fraudulent loans. Greenspan and Bernanke are particularly culpable. In addition to joining the jihad state regulation, the Fed had unique federal regulatory authority under HOEPA (enacted in 1994) to fill the black hole and regulate any housing lender (authority that Bernanke finally used, after liar’s loans had ended, in response to Congressional criticism). The Fed also had direct evidence of the frauds and abuses in nonprime lending because Congress mandated that the Fed hold hearings on predatory lending.

The S&L debacle, the Enron era frauds, and the current crisis were all driven by accounting control fraud. The three “des” [which he defines earlier in the piece as deregulation, desupervision, and de facto decriminalization -- Lex] are critical factors in creating the criminogenic environments that drive these epidemics of accounting control fraud. The regulators are the “cops on the beat” when it comes to stopping accounting control fraud. If they are made ineffective by the three “des” then cheaters gain a competitive advantage over honest firms. This makes markets perverse and causes recurrent crises.

A rational politics and a rational culture would try to move us back in the direction of balance between governmental constraints on banking and the desire of bank holders of capital to make a profit. Instead, even as we remain mired in unemployment levels that would have gotten Gerald Ford impeached, everyone sort of acts as if there’s no crisis going on, no criminals among us who need punishing and, worst of all, reason to consider even more deregulation of the finance industry.

No. We have amassed far too much evidence during the past 30 years for any politician now to be allowed to claim ignorance of the deleterious effects on the economy of unbridled deregulation. By now, any politician who isn’t arguing that the finance industry needs to be brutally re-regulated can logically be assumed to be an accessory to the crime. That’s you, Barack Obama. That’s you, Richard Burr and Kay Hagan. That’s you, Howard Coble and Virginia Fox and Mel Watt. (Among our area congresscritters, only Brad Miller seems to be making any effort, and I’m far from convinced that he’s doing all he could and should.)

They’ve come after our 401Ks. They’ve come after our home equity. And now they’re coming after our Social Security and Medicare. And I don’t see a soul on the horizon with the will and means to stop them.

James Kunstler has an interesting hypothesis about why:

The larger riddle of life-in-our-time surrounds the absence of the rule of law in money matters. To say that people are actually running things out there doesn’t mean that are running them effectively or optimally. The US Department of Justice, for example, appears to be led by a zombie, Attorney-General Eric Holder, somebody of this world but no longer quite in it, who is pioneering a new method of Zen law enforcement based on a maximum of doing and saying of nothing. Of course, my ongoing theory since the national election of 2008 is that Barack Obama has been warned repeatedly by many credible figures that any move to disturb the operations of banking would bring down such a wrathful ruin on this nation that he had no choice but to keep his hands off the levers of enforcement. In fact, it’s the only theory that explains adequately the yawning gap between reality and the representation of it by those assumed to hold authority.

The criminals behind our current mess are hiding in plain sight. It’s not, as Kunstler observes, some shadowy bunch of Freemasons or what-have-you. It’s people you see on the news every night.

Now it’s possible that Obama and Holder aren’t prosecuting this mess because they’re in on it — that is to say, not as accessories but as direct beneficiaries. I think that likely will become true of each man as soon as he leaves office, but I do not believe it to be true currently because I see no evidence of that.

But I also believe we may be approaching the situation best described by Arthur Conan Doyle: “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.”

Wednesday, January 26, 2011 8:30 pm

Another card-carrying liberal heard from

John Cole at Balloon Juice on the banksters who drove this country into a ditch and got bigger mansions for their trouble, and their witless enablers in the mainstream media (**cough** JOKE LYIN’ **cough**) who think we need to “shame” them:

You can’t shame the shameless. You just can’t. How do you shame people who write [expletive] like this? How do you shame people who have their salaries tripled during a depression and whine about not getting a Christmas bonus? How do you shame Rick Santelli, who a week after the markets are showered with hundreds of billions pitched a fit about a few billion to help homeowners? How do you shame Jim Cramer, who is absolutely destroyed by Jon Stewart but still engages in the same [expletive] every day on his show?

Shaming these people is impossible. You want them to change their behavior, you start putting the [vulgar plural reference to male genitalia] in jail, seizing their assets, fining them, and then making sure they never work in finance again. [And, just because I'm a vengeful SOB, bar them from ever getting health insurance for themselves again -- Lex]

That’s right, folks. We’re in the economic mess that we’re in for a number of reasons, some controllable and others not, but the single biggest reason things are as bad as they are right now is fraud. Banksters broke the law, thousands of times a day, for years, and nothing, NOTHING, is being done about it by either major party.

I’ve said it before and I’ll keep saying it ’til it happens. It’s the 21st century, and it’s well past time to stop coddling these criminals.

Friday, January 14, 2011 8:09 pm

Third Way: The rule of law is great, except when we get caught breaking it, and then it’s not

The bogus corporate think tank Third Way, which just spawned the new White House Chief of Staff, all of a sudden has decided that maybe requiring banks to actually have the legal right to foreclose on properties they’re trying to foreclose on might be a little excessive.

Look, we’re in the mess we’re in because banks committed nontrivial amounts of fraud. They sold stuff they didn’t own, pure and simple. If I try that with a hubcap or a stereo, I go to prison. You can’t put a bank in prison, more’s the pity, but you can make them eat the cost of stuff they claim to own but actually don’t. And if that bankrupts them, well, that’s what we have a Federal Deposit Insurance Corporation for. So the CEOs and stockholders and bondholders take it in the teeth? No reason they should be any different from the rest of us.

Thursday, January 13, 2011 8:58 pm

Capitalism ain’t what it used to be

Filed under: Evil,I want my money back.,We're so screwed — Lex @ 8:58 pm
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Certainly not in the finance sector, where, as Yves Smith of Naked Capitalism observes, when the external costs of the banking system’s crises are added up honestly, they significantly outpace global banks’ total assets. In other words, although no one’s saying as much (well, besides maybe Smith and me), taxpayers are keeping our largest banks alive artificially. The zombies bank among us:

So a banking industry that creates global crises is negative value added from a societal standpoint. It is purely extractive.

The reality is that banks can no longer meaningfully be called private enterprises, yet no one in the media will challenge this fiction. And pointing out in a more direct manner that banks should not be considered capitalist ventures would also penetrate the dubious defenses of their need for lavish pay. Why should government-backed businesses run hedge funds or engage in high risk trading, or for that matter, be permitted to offer lucrative products that are valuable because they allow customers to engage in questionable activities, like regulatory arbitrage or tax evasion? The sort of markets that serve a public purpose should be reasonably efficient and transparent, which implies low margins for intermediaries.

By any honest accounting, most if not all large global banks are insolvent and should be liquidated. Instead, your taxes are going to keep them on life support and keep their CEOs pampered.

This is where a principled opposition to eliminationist rhetoric, although always necessary, becomes a tad burdensome.

 

Consider the source

Filed under: I want my money back. — Lex @ 8:50 pm
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S&P and Moody’s: Reduce U.S. debt or we’ll reduce your bond ratings.

Oh, I have no doubt they’ll do it. I just don’t understand why anyone would care what they think, inasmuch as they told us that huge piles of liar loans were AAA investments.

I also don’t understand why everyone who works for them above the rank of office manager isn’t in prison, but that’s a whole ‘nother subject.

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