By
In Toxic Bloom of Lies, I looked in particular at the technical sounding notion of Risk Weighted Assets. A bank’s Risk Weighted Assets are just the amount the bank expects to make back on the loans it has given out, multiplied by some estimate of the risk that some or all of the income from the loan might not be paid back. Not that complicated really but essential if you want to really know how solid a bank is. Of course the obvious question is who gets to set the risk factor?
And the answer is, part of Europe’s Basel II banking regulations called the Internal Ratings Based System (IRB), allows the banks themselves, subject to ‘approval’ of course, to decide how risky their assets are and how much they think they might be in danger of losing on them. In Toxic Bloom of Lies I wrote and then quoted from the legislation,
They decide their own risk according to their own model… but subject to approval.
All institutions using the IRB approach will be allowed to determine the borrowers’ probabilities of default while those using the advanced IRB approach will also be permitted to rely on own estimates of loss given default and exposure at default on an exposure-by-exposure basis.
Advanced IRB as well! Of course the models being used are proprietary and therefore NOT open to scrutiny by any outside experts. What do you think, if the bank’s experts came up with two possible models one of which gave a lower over-all risk weighted total which do you think the bank would go for? And if another bank came up with a model that shaved just a little bit more off the risk weighting do you think there would be a subtle pressure to match the undoubted brilliance of their competitor’s model? I leave you to decide
When I wrote that I did so as just another disgruntled pleb. Today the FT reported,
Fears rise over banks’ capital tinkering
Concern is growing that banks in Europe and elsewhere are moving to meet new tougher capital requirements by tinkering with their internal models to make their holdings appear less risky.
The article went on to explain,
So many of them are instead trying to reach the required ratios through … what they call “risk-weighted asset optimisation”. In some cases, that means selling or running down risky assets, but in others, it means changing the way risk weights are calculated to cut the amount of capital that will be required.
The same article reports that in 2010 Lloyds bank reduced its risk weighting on various overseas assets and suddenly found it needed to hold £16 B less capital against them. Convenient. Turns out Santander is doing the same, as is Commerzbank after its merger with Dresdener Bank and even Spain’s second largest Bank BBVA finds that the present turmoil in Spain is no barrier to reducing the risk weighting of it assets as well.
All the banks have to do is create their own proprietary computer model with which to model their assets and their risk and like some bought and paid for oracle it tells the world the bank is more solvent and its assets less risky than anyone had suspected. Of course I am being terribly one sided in my description. I have not said a word about the fact that these risk models and the results they hand the banks will be overseen not only by national regulators but by the European Banking Association (EBA) as well.
As the article concludes,
Supervisors in the UK and elsewhere also said they will be looking carefully at bank plans to reach their new capital requirements and intend to come down hard to anything they see as cheating.
Of course we might reflect that it was the EBA with national regulatory authorities which only last year ran a second bank stress test on 90 of Europe’s banks about which the EBA said in its final report,
The 2011 EU wide stress test contains an unprecedented level of transparency on banks’ exposures and capital composition to allow investors, analysts and other market participants to develop an informed view on the resilience of the EU banking sector. (P.3)
‘Unprecedented transparency’. We are not worthy! But wait there’s more,
The results were scrutinised and challenged by home country supervisors before a peer review and quality assurance process was conducted by EBA staff with a team of experts from national supervisory authorities, the European Central Bank (ECB) and the European Systemic Risk Board (ESRB). (P.2)
‘Scrutinized’, ‘challenged’ and peer reviewed by ‘teams of experts’ from places mere mortals have never even heard of. Let us raise a hymn to them! ….And yet…
However, the EBA has relied on the quality review work of national authorities and on the internal processes of the banks to assess such areas as earnings trends, asset quality, model outcomes and the magnitude of the impact on assets and liabilities. (P.2)
The ‘internal processes of the banks’ were relied upon for assessing ‘such areas’ – as if these were just a few peripheral details – ‘asset quality’, ‘model outcomes’ and ‘the magnitude of impact on assets and liabilities’. In other words the banks were ‘relied upon’ for everything of substance. The banks tested themselves and the only things scrutinized by all those experts from the EBA and elsewhere was the lunch menu.
Or am I being unfair? Let me see. What did all those experts conclude? Oh I know. Not one Spanish Bank was thought to require any additional capital beyond what was already planned. They were all fine. Not just fine as they were then, but fine even under the test’s most adverse scenario. Bankia was one of those all the experts looked at and declared fit as a fiddle. Now look at it. First it was fine. It even declared a profit. Then suddenly it was bust and needed the tax payers to give it €3B. That figure doubled. Then it doubled again. Now no one is sure.
What happened to all that risk weighting? A little out were we? A few assumptions short of reality? Bankia is the ugly reality that heaves to the surface when all the expert computer modelling and pompous assurances of risk weighting are done and over. It won’t be the last. Why should anyone have faith that the EBA’s oversight of other banks, their models and their risk weighted lies was better than it was for Bankia?
There was no transparency. There was no honesty. No integrity. No honour. What we have is an aristocracy who lie and connive together to shower us with the shit of their wastrel live
Wednesday, May 30, 2012
"Big Idea Solution": Radically Lower The Cost Basis Of The Entire Economy
byCharles Hugh Smith from Of Two Minds
Our choice is simple: either continue on the State-cartel path of complexity and rising costs that leads to a death spiral, or re-energize the forces of the market and community.
We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." (What If We're Beyond Mere Policy Tweaks? February 6, 2012)
The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity.
Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple.
Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).
We can understand surplus by way of simple examples. If it costs two barrels of oil to extract one barrel of oil from a well, there is no surplus at all to this activity; rather, it is a losing proposition. If it costs $100 to plow, plant, nurture and harvest $50 of crops, there is no surplus generated by this economic activity.
Anyone pursuing these kinds of zero-surplus activity will soon go broke and be eliminated from the financial "gene pool" of investors.
Central States and cartels by definition face no market forces on their cost basis. Central States (governments) have no competition and so there are no market pressures to contain costs. As a result, governments are intrinsically incapable of radically reducing the cost basis of their activity.
Cartels (the sickcare industry, the defense industry, etc.) by definition profit by fixing prices, not by adapting to competition, and so rising costs are simply shifted to consumers, with the aid of an over-regulating, moat-building "complex" Central State.
I cover this dynamic in depth in my books Survival+: Structuring Prosperity for Yourself and the Nation and Resistance, Revolution, Liberation: A Model for Positive Change.
Unproductive layers of activity are essentially friction within the economy ( How Much of Our Economy Is Essentially Friction? September 20, 2011), and as with a machine, when the friction consumes all the surplus, the machine freezes up. Greece is an excellent example of this dynamic.
As I explain in Resistance, Revolution, Liberation, there are three fundamental forces in society: the State, the market and community (i.e. the non-market social order).
As friction from the State and its crony-capitalist partners, the various cartels, inevitably rises, the surplus left to distribute via entitlements or invest shrinks.
The State has two mechanisms to counter this decline in surplus: it raises taxes on the productive enterprises and people, and redistributes that money to less productive dependents of the State via entitlements. Secondly, it prints money and redistributes the new cash.
Both are short-term expediencies that inevitably lead to collapse. Once taxes skim the economy's surplus for consumption, there is not enough left over to invest in productive assets that increase productivity. This triggers a death-spiral (positive feedback loop): as productivity stagnates, so does the surplus generated by economic activity. This leads to lower tax revenues, so the State raises taxes on the remaining productive elements, further bleeding the economy of funds that could be invested in future productivity gains.
Printing money debases the purchasing power of the existing currency, and over time this destroys the value of the currency and the wealth of those holding the currency. As people retreat to gold and land, the liquid capital necessary to invest in new ventures dries up, adding to the death-spiral described above.
In essence, the State and its cartels raise the cost basis of getting by from $10,000 to $40,000 by letting unproductive friction absorb all the economy's surplus. Layers of bureaucracy, paperwork and outright fraud consume roughly half of the funds spent on healthcare in the U.S.--not coincidentally, this aligns with the fact that the U.S. spends twice as much per person on sickcare compared to our developed-world competititors.(The "Impossible" Healthcare Solution: Go Back to Cash July 29, 2009)
The State overcomes this by raising taxes on the productive and printing money. The State's "solution" isn't to reduce its own fiefdoms' spending or dismantle the high-friction cartels: it's to tax or print $30,000 and send this money to those making $10,000, so they can consume as much as those earning $40,000.
As noted above, consuming the nation's surplus in consumption and friction starves the nation of market-driven productive investment, which then leads to the death spirals of lower productivity and rising unproductive friction.
The only way to lower the actual cost basis of the economy is to reduce the role and power of the Central State, dismantle its favored cartels and re-empower community and the market forces of innovation and competition. The Central State and its cartels are incapable of innovation or reducing costs because they dominate the market and the community.
Community must play a central role in lowering the cost basis. The market cannot address all problems, though its ideological boosters wear blinders that demand allegiance to nothing but the market.
Community gardens are non-market social orders that enliven and empower communities and neighborhoods, yet their "market value" is negative: on a strictly cost basis, the food produced by agribusiness is cheaper on a kilocalorie/dollar basis than the food raised by community members in their garden. But this calculation is akin to reducing a human to a handful of ash and valuing that person at the market value of the calcium and other minerals in the ash.
Much of value in human life is beyond the market. Agribusiness would rather the State send money to people so they can sit at home "consuming" TV and media and then go out and buy highly profitable packaged food that sickens their bodies and spirits. That is the end result of an economy dominated by the State and cartels: a deeply and perniciously pathological society and economy.
Market forces in housing see the "solution" as wealthy Elites and corporations buying up all the housing and then renting it to recipients of State aid for high rents. Co-ops, co-housing and a host of other community housing solutions that radically lower the cost-basis of housing are rejected because they don't generate large profits. Their purpose is to lower the cost of housing while greatly enhancing its liveability and non-market value--"assets" that the market simply doesn't recognize unless they can be exploited for high profit margins.
This is why both the non-market forces of community and the market forces of efficiency and profit must share the economy if the cost basis is to be radically lowered. If people only make $10,000 in the market economy, the State's solution is to redistribute or print $30,000 so their consumption can equal that of people earning $40,000.
The solution I suggest is to radically lower the cost basis of the economy so those earning $10,000 can live simply and well on what they earn.
This solution does not compute for the Central State and its protected cartels, as they would lose their dominance over the economy. They have chosen the death-spiral for our future, and that's what we'll get until we restore some equilibrium between the State, the market and the non-market commmunity.
Our choice is simple: either continue on the State-cartel path of complexity and rising costs that leads to a death spiral, or re-energize the forces of the market and community.
We are constantly told all our problems are too complex to be addressed with simple "big idea" solutions. Complex problems require complex solutions, we are assured, and so the "solutions" conjured by the Central State/Cartel Status Quo are so convoluted and complex (for example, the 2,319-page Dodd-Frank Wall Street Reform and Consumer Protection Act or the 2,074-page Obamacare bill) that legislators say they must "pass the bill to see what's in it." (What If We're Beyond Mere Policy Tweaks? February 6, 2012)
The real "solution" is to see that complexity itself is the roadblock to radical reformation of failed systems. Complexity is the subterfuge the Status Quo uses to erect simulacra "reforms" while further consolidating their power behind the artificial moat of complexity.
Over the next three days, I will present three "big idea" solutions that cut through the self-serving thicket of complexity. Nature is complex, but it operates according to a set of relatively simple rules. The interactions can be complex but the guiding principles can be, and indeed, must be, simple.
Big Idea One: Radically lower the cost basis of the entire U.S. economy. The cost basis of any activity is self-evident: what are the total costs of the production of a good or service? The surplus produced is the net profit which can be spent on consumption or invested in productive assets (or squandered in mal-investments).
We can understand surplus by way of simple examples. If it costs two barrels of oil to extract one barrel of oil from a well, there is no surplus at all to this activity; rather, it is a losing proposition. If it costs $100 to plow, plant, nurture and harvest $50 of crops, there is no surplus generated by this economic activity.
Anyone pursuing these kinds of zero-surplus activity will soon go broke and be eliminated from the financial "gene pool" of investors.
Central States and cartels by definition face no market forces on their cost basis. Central States (governments) have no competition and so there are no market pressures to contain costs. As a result, governments are intrinsically incapable of radically reducing the cost basis of their activity.
Cartels (the sickcare industry, the defense industry, etc.) by definition profit by fixing prices, not by adapting to competition, and so rising costs are simply shifted to consumers, with the aid of an over-regulating, moat-building "complex" Central State.
I cover this dynamic in depth in my books Survival+: Structuring Prosperity for Yourself and the Nation and Resistance, Revolution, Liberation: A Model for Positive Change.
Unproductive layers of activity are essentially friction within the economy ( How Much of Our Economy Is Essentially Friction? September 20, 2011), and as with a machine, when the friction consumes all the surplus, the machine freezes up. Greece is an excellent example of this dynamic.
As I explain in Resistance, Revolution, Liberation, there are three fundamental forces in society: the State, the market and community (i.e. the non-market social order).
As friction from the State and its crony-capitalist partners, the various cartels, inevitably rises, the surplus left to distribute via entitlements or invest shrinks.
The State has two mechanisms to counter this decline in surplus: it raises taxes on the productive enterprises and people, and redistributes that money to less productive dependents of the State via entitlements. Secondly, it prints money and redistributes the new cash.
Both are short-term expediencies that inevitably lead to collapse. Once taxes skim the economy's surplus for consumption, there is not enough left over to invest in productive assets that increase productivity. This triggers a death-spiral (positive feedback loop): as productivity stagnates, so does the surplus generated by economic activity. This leads to lower tax revenues, so the State raises taxes on the remaining productive elements, further bleeding the economy of funds that could be invested in future productivity gains.
Printing money debases the purchasing power of the existing currency, and over time this destroys the value of the currency and the wealth of those holding the currency. As people retreat to gold and land, the liquid capital necessary to invest in new ventures dries up, adding to the death-spiral described above.
In essence, the State and its cartels raise the cost basis of getting by from $10,000 to $40,000 by letting unproductive friction absorb all the economy's surplus. Layers of bureaucracy, paperwork and outright fraud consume roughly half of the funds spent on healthcare in the U.S.--not coincidentally, this aligns with the fact that the U.S. spends twice as much per person on sickcare compared to our developed-world competititors.(The "Impossible" Healthcare Solution: Go Back to Cash July 29, 2009)
The State overcomes this by raising taxes on the productive and printing money. The State's "solution" isn't to reduce its own fiefdoms' spending or dismantle the high-friction cartels: it's to tax or print $30,000 and send this money to those making $10,000, so they can consume as much as those earning $40,000.
As noted above, consuming the nation's surplus in consumption and friction starves the nation of market-driven productive investment, which then leads to the death spirals of lower productivity and rising unproductive friction.
The only way to lower the actual cost basis of the economy is to reduce the role and power of the Central State, dismantle its favored cartels and re-empower community and the market forces of innovation and competition. The Central State and its cartels are incapable of innovation or reducing costs because they dominate the market and the community.
Community must play a central role in lowering the cost basis. The market cannot address all problems, though its ideological boosters wear blinders that demand allegiance to nothing but the market.
Community gardens are non-market social orders that enliven and empower communities and neighborhoods, yet their "market value" is negative: on a strictly cost basis, the food produced by agribusiness is cheaper on a kilocalorie/dollar basis than the food raised by community members in their garden. But this calculation is akin to reducing a human to a handful of ash and valuing that person at the market value of the calcium and other minerals in the ash.
Much of value in human life is beyond the market. Agribusiness would rather the State send money to people so they can sit at home "consuming" TV and media and then go out and buy highly profitable packaged food that sickens their bodies and spirits. That is the end result of an economy dominated by the State and cartels: a deeply and perniciously pathological society and economy.
Market forces in housing see the "solution" as wealthy Elites and corporations buying up all the housing and then renting it to recipients of State aid for high rents. Co-ops, co-housing and a host of other community housing solutions that radically lower the cost-basis of housing are rejected because they don't generate large profits. Their purpose is to lower the cost of housing while greatly enhancing its liveability and non-market value--"assets" that the market simply doesn't recognize unless they can be exploited for high profit margins.
This is why both the non-market forces of community and the market forces of efficiency and profit must share the economy if the cost basis is to be radically lowered. If people only make $10,000 in the market economy, the State's solution is to redistribute or print $30,000 so their consumption can equal that of people earning $40,000.
The solution I suggest is to radically lower the cost basis of the economy so those earning $10,000 can live simply and well on what they earn.
This solution does not compute for the Central State and its protected cartels, as they would lose their dominance over the economy. They have chosen the death-spiral for our future, and that's what we'll get until we restore some equilibrium between the State, the market and the non-market commmunity.
The Dishonest Media And The Debt Ceiling
by Karl Denninger
market-ticker.org
Watch the spin machine ramp up into high gear!
Europe is crumbling. China is slowing. The Federal Reserve is dithering. Yet the biggest threat to the emerging U.S. economic recovery may be Congress.
John Boehner, the leader of the House Republicans, has promised yet another fight with the White House over the debt ceiling -- the limit Congress has placed on the amount the federal government can borrow.
If this sounds familiar, it’s because we suffered through an identical performance last summer. Our analysis of that episode leads to a troubling conclusion: It almost derailed the recovery, and this time could be a lot worse.
Recovery? What recovery?
The US Government has debased your purchasing power by 10% a year for four years running -- that is, it has emitted new credit money into the system equal to approximately 10% of the economy for the last four years. If you have a job you've managed to gain 7% over the last three years in your wage.
If you don't see something wrong with this picture you're not very bright. You've lost 33% (compounded) in purchasing power due to monetary debasement by the government over three years' time but you got 7% back. Unless you went to a different school than I did you're down 26%, more or less, or one quarter of your purchasing power, over the last three years (and another 8% or so in the 4th!)
Now of course some people have done better, and some worse. But this is the what the average American has seen over the last three years.
Yet Bloomberg publishes OpEds from "Professors" such as Betsey Stevenson who argue that "Republicans are taking the government's creditworthiness hostage when they threaten not to increase the debt ceiling."
There is no such thing as the government's creditworthiness. It's your money that is being pledged, not theirs -- there is no "theirs"!
But refusing to raise the limit wouldn’t free the government of its existing spending obligations. Rather, it would leave the government with no choice but to default on its debts.
The government has no spending "obligations." Debts are obligations. Entitlements are not. Social, military and other spending is not an "obligation." Those are political promises and a choice.
Only debt, contractually entered into, is an obligation.
Of course the convenient lie that we have "obligations" is trotted out on this point whenever the debate arises. What's not talked about is how raising the ceiling is in fact naked shorting the currency and thereby destroying the purchasing power and wealth of every American. It is monetary inflation, and that inflation must show up somewhere.
If there are 10,000 units of production and 10,000 units of currency and credit in the system, and you emit another 1,000 units, every one of the existing 10,000 units is devalued by 10%!
That's theft and it's an outrageous fraud to state that this is somehow "good" for the American public or the economy. It most certainly is not.
This is nothing other than a massive tax increase in terms of its impact on the average America. It's impact is huge -- for the average American who pays somewhere around a 20-25% blended Federal Tax rate (including FICA, Medicare and income tax) their effective tax burden has literally doubled over the last three years as a result of deficit spending!
Tax cuts? There have been no tax cuts! There have in fact been massive tax increases imposed on everyone. You, I, everyone. We've all had our wealth and income stolen and given to the banksters who gambled in Europe and the United States on bets that soured, and rather than force them to take their losses and perform supervisory functions as required by law so that depositors are not at risk the government regulators refused to act as required by law and now they're screwing you blind to the tune of more than a trillion dollars a year to prop up these *******s -- over $3,000 per person, per year for the last three years has been siphoned off through these policies and given to the likes of Goldman Sachs, Bank of America, Citibank and JP Morgan never mind foreign institutions like Deutsche Bank and Credit Suisse!
There is no solution to this problem to be found down this path; dilution of the consumer's purchasing power cannot work because the entire premise is that you can "restart" consumer borrowing growth to get leverage expanding again -- the precise scam that was in the 1980-2007 timeframe.
How is the consumer going to increase borrowing when you've stolen 25% of his purchasing power and intend to steal another 7-10% a year going forward?
He won't because he can't. This is the flaw in the scheme and it is exactly the same scheme that was run in Europe and blew up in the face of Greece and now threatens to blow up Spain.
What's worse is that we're still playing this game here with pension funds -- funds that assume and proclaim the ability to earn 8% in safe forward returns in a world where the ten year risk-free rate (so says the market) is 1.65%. That's an outrageous and intentional scam; did you notice, incidentally, that the 25% you've lost in purchasing power is about the three-year run rate on the difference between the assumed pension return and the actual risk-free return? Guess what -- if you have a pension you think you're going to receive in 5, 10 or 20 years your fund is short the same 25% as you are or it's exposed to the risk of even greater losses and in fact you're rather likely to get zero!
The so-called "university professors" and "policy people" who argue a policy path of "more borrowing and continued deficit spending" are traitorous jackasses who deserve to be run out of town on a rail. The firms that employ these people may as well be Bernie Madoff prototypes as their alleged "paths" will end in exactly the same way his "securities deals" did. Universities who hire so-called "professors" that spew this garbage on OpEd pages and allow this sort of mendacious crap to be taught to kids are issuing "degrees" that have the precise value of used toilet paper.
If you bring these people and firms into your life or business you deserve what you get.
We have options in the US today but we won't have them for long. Right now we are benefiting from people running away from Europe which is about to go prompt critical and into our Treasuries, which leads us to believe we can borrow unlimited amounts of money for 10 years at 1.65%.
That's a nice thought -- but how are you going to pay it back ten years hence? If you're not, and intend to keep rolling it over, what happens if and when the rollover price is 5% instead of 1.65% -- and you can't make the interest payments at 5%?
This is how Greece went down the drain and it's what's facing Spain.
And it is what we will face here if we allow people like Betsey Stevenson to keep putting forward policy pronouncements that fail the fundamentals of 3rd grade arithmetic.
market-ticker.org
Watch the spin machine ramp up into high gear!
Europe is crumbling. China is slowing. The Federal Reserve is dithering. Yet the biggest threat to the emerging U.S. economic recovery may be Congress.
John Boehner, the leader of the House Republicans, has promised yet another fight with the White House over the debt ceiling -- the limit Congress has placed on the amount the federal government can borrow.
If this sounds familiar, it’s because we suffered through an identical performance last summer. Our analysis of that episode leads to a troubling conclusion: It almost derailed the recovery, and this time could be a lot worse.
Recovery? What recovery?
The US Government has debased your purchasing power by 10% a year for four years running -- that is, it has emitted new credit money into the system equal to approximately 10% of the economy for the last four years. If you have a job you've managed to gain 7% over the last three years in your wage.
If you don't see something wrong with this picture you're not very bright. You've lost 33% (compounded) in purchasing power due to monetary debasement by the government over three years' time but you got 7% back. Unless you went to a different school than I did you're down 26%, more or less, or one quarter of your purchasing power, over the last three years (and another 8% or so in the 4th!)
Now of course some people have done better, and some worse. But this is the what the average American has seen over the last three years.
Yet Bloomberg publishes OpEds from "Professors" such as Betsey Stevenson who argue that "Republicans are taking the government's creditworthiness hostage when they threaten not to increase the debt ceiling."
There is no such thing as the government's creditworthiness. It's your money that is being pledged, not theirs -- there is no "theirs"!
But refusing to raise the limit wouldn’t free the government of its existing spending obligations. Rather, it would leave the government with no choice but to default on its debts.
The government has no spending "obligations." Debts are obligations. Entitlements are not. Social, military and other spending is not an "obligation." Those are political promises and a choice.
Only debt, contractually entered into, is an obligation.
Of course the convenient lie that we have "obligations" is trotted out on this point whenever the debate arises. What's not talked about is how raising the ceiling is in fact naked shorting the currency and thereby destroying the purchasing power and wealth of every American. It is monetary inflation, and that inflation must show up somewhere.
If there are 10,000 units of production and 10,000 units of currency and credit in the system, and you emit another 1,000 units, every one of the existing 10,000 units is devalued by 10%!
That's theft and it's an outrageous fraud to state that this is somehow "good" for the American public or the economy. It most certainly is not.
This is nothing other than a massive tax increase in terms of its impact on the average America. It's impact is huge -- for the average American who pays somewhere around a 20-25% blended Federal Tax rate (including FICA, Medicare and income tax) their effective tax burden has literally doubled over the last three years as a result of deficit spending!
Tax cuts? There have been no tax cuts! There have in fact been massive tax increases imposed on everyone. You, I, everyone. We've all had our wealth and income stolen and given to the banksters who gambled in Europe and the United States on bets that soured, and rather than force them to take their losses and perform supervisory functions as required by law so that depositors are not at risk the government regulators refused to act as required by law and now they're screwing you blind to the tune of more than a trillion dollars a year to prop up these *******s -- over $3,000 per person, per year for the last three years has been siphoned off through these policies and given to the likes of Goldman Sachs, Bank of America, Citibank and JP Morgan never mind foreign institutions like Deutsche Bank and Credit Suisse!
There is no solution to this problem to be found down this path; dilution of the consumer's purchasing power cannot work because the entire premise is that you can "restart" consumer borrowing growth to get leverage expanding again -- the precise scam that was in the 1980-2007 timeframe.
How is the consumer going to increase borrowing when you've stolen 25% of his purchasing power and intend to steal another 7-10% a year going forward?
He won't because he can't. This is the flaw in the scheme and it is exactly the same scheme that was run in Europe and blew up in the face of Greece and now threatens to blow up Spain.
What's worse is that we're still playing this game here with pension funds -- funds that assume and proclaim the ability to earn 8% in safe forward returns in a world where the ten year risk-free rate (so says the market) is 1.65%. That's an outrageous and intentional scam; did you notice, incidentally, that the 25% you've lost in purchasing power is about the three-year run rate on the difference between the assumed pension return and the actual risk-free return? Guess what -- if you have a pension you think you're going to receive in 5, 10 or 20 years your fund is short the same 25% as you are or it's exposed to the risk of even greater losses and in fact you're rather likely to get zero!
The so-called "university professors" and "policy people" who argue a policy path of "more borrowing and continued deficit spending" are traitorous jackasses who deserve to be run out of town on a rail. The firms that employ these people may as well be Bernie Madoff prototypes as their alleged "paths" will end in exactly the same way his "securities deals" did. Universities who hire so-called "professors" that spew this garbage on OpEd pages and allow this sort of mendacious crap to be taught to kids are issuing "degrees" that have the precise value of used toilet paper.
If you bring these people and firms into your life or business you deserve what you get.
We have options in the US today but we won't have them for long. Right now we are benefiting from people running away from Europe which is about to go prompt critical and into our Treasuries, which leads us to believe we can borrow unlimited amounts of money for 10 years at 1.65%.
That's a nice thought -- but how are you going to pay it back ten years hence? If you're not, and intend to keep rolling it over, what happens if and when the rollover price is 5% instead of 1.65% -- and you can't make the interest payments at 5%?
This is how Greece went down the drain and it's what's facing Spain.
And it is what we will face here if we allow people like Betsey Stevenson to keep putting forward policy pronouncements that fail the fundamentals of 3rd grade arithmetic.
■SEC: Taking on Big Firms is ‘Tempting,’ But We Prefer Whaling on Little Guys
By Matt Taibbi
If you want to see a perfect example of how completely broken our regulatory system is, look no further than a speech that Daniel Gallagher, one of the S.E.C.’s commissioners, recently gave in Denver, Colorado.
It’s a speech whose full lunacy is hard to grasp without some background.
It’s by now been well-established that the S.E.C.’s performance in policing Wall Street before, after, and during the crash has been comically inept. It would be putting it generously to say that the top cop on the financial services beat has demonstrated particular incompetence with regard to investigations of high-profile targets at powerhouse banks and financial companies. A less generous interpretation would be that the agency is simply too afraid, too unwilling, or too corrupt to take on the really dangerous animals in this particular jungle.
The S.E.C.’s failure to make even one case against a high-ranking executive involved in the mass frauds leading to the 2008 crash – compare this to the comparatively much smaller and less serious S&L crisis twenty years earlier, when the government made 1,100 criminal cases and sent 800 bank officials to jail – became so conspicuous that by the end of last year, the “No prosecutions of top figures” idea became an accepted meme in mainstream news media coverage of the economic crisis.
The S.E.C. in recent years has failed in almost every possible way a regulator can fail to police powerful criminals. Failure #1 was that it repeatedly fell down on the job even when alerted to problems at big companies well ahead of time by insiders. Six months before Lehman Brothers collapsed, setting off a chain reaction of losses that crippled the world economy, one of Lehman’s attorneys, Oliver Budde, contacted the S.E.C. to warn them that the firm had understated CEO Dick Fuld's income by more than $200 million; the agency blew him off. There were similar brush-offs of insiders with compelling information in cases involving Moody’s, Chase, and both of the major Ponzi scheme scandals, i.e. the Bernie Madoff and Allen Stanford cases.
The S.E.C.’s attitude toward whistleblowers at powerhouse companies has not just been aloof or indifferent, it’s been downright hostile at times. Whistleblowers commonly report being treated as though they're the criminal. The most notorious example probably involved Peter Sivere, a compliance officer at Chase who years ago went to the S.E.C. to complain that Chase was withholding an incriminating email from the agency, which was investigating an illegal trading practice. When Sivere contacted the S.E.C. with the documents, he asked if he would be eligible for an award; they told him no, and he gave them the documents anyway. Subsequently, Sivere was fired by Chase because, in the words of Chase’s attorneys, Sivere had "sought payment from the SEC to provide documents and information to them.”
Sivere had to scratch his head and wonder how his bosses knew about the award request , until it dawned on him: the S.E.C. had ratted him out to Chase! It subsequently came out that the S.E.C. official who’d narked on Sivere was George Demos, who more recently was seen running for Congress in New York.
Since the S.E.C. couldn’t make cases even when insiders handed them to them, it followed that the agency fared even worse when asked to deduce problems by mere analysis and review, which brings us to failure #2: the agency was spectacularly inept at detecting marketplace problems that should have been obvious to anyone with access to a federal regulator’s investigatory tools. It came out after the crash, for instance, that the SEC repeatedly ignored warnings of excessive risk-taking at companies like Bear Stearns; they even censored an IG report to conceal, among other things, their history of non-action.
More notoriously, the SEC stood by and did nothing even after the FBI publicly warned that the incidence of so-called “liar’s loans” – mortgage applications in which income levels and other information were not verified – was “epidemic” and could cause an “economic crisis.” The SEC could have walked into any major mortgage lender’s office anytime in the five years prior to the 2008 crash and in one afternoon’s worth of interviews learned that fraud in the mortgage markets was out of control, but instead they allowed companies like Countrywide and Long Beach to proliferate and pump the economy full of millions of bad loans, nearly destroying the economy.
Failure #3 is that even after the fact, they have so far failed to make cases against even the most obvious targets, from the Deutsche Bank executives who knowingly sold billions in risky mortgages they knew were “pigs,” to the Lehman bankers who hid liabilities and cooked the books in the infamous “Repo 105” case, to the creeps at Barclays who, in what one Wall Street attorney I spoke to described as “the biggest bank robbery in the history of the world,” siphoned off billions of dollars from the rotting hulk of Lehman Brothers just before that company’s collapse. In that deal, executives at Lehman and Barclays essentially sold Lehman assets and operations to Barclays at fractions of their real cost – and some of the Lehman executives involved went to work for Barclays right after Lehman collapsed. Lehman’s creditors want Barclays to pay back over $11 billion.
Failure #4: one company after another was allowed to settle serious criminal charges without having to admit wrongdoing. Failure #5: in those settlements, the S.E.C.continually allowed companies to avoid having to disclose the exact nature of their crimes, which not only shielded those firms from litigation, but kept the general public, which might otherwise have been warned away from doing business with those firms, in the dark about crucial information. “Truth is confined to secretive, fearful whispers,” federal judge Jed Rakoff complained, talking about the settlements. Failure #6: companies have been allowed to settle cheap on the promise that they would never commit the same crimes again, only to do exactly that – and be allowed by the S.E.C. to get off with the same promise! The Times made a list of firms that got the “Just promise you’ll never do it again, again” treatment:
They read like a Wall Street who’s who: American International Group, Ameriprise, Bank of America, Bear Stearns, Columbia Management, Deutsche Asset Management, Credit Suisse, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Putnam Investments, Raymond James, RBC Dain Rauscher, UBS and Wells Fargo/Wachovia.
All of this is important background for the speech given in Denver on April 13 by S.E.C. commissioner Gallagher. The commissioner was trying to explain the S.E.C.’s thought process in how it decides to allocate its relatively meager resources. The key thing, Gallagher explained, was to make sure that when you send Enforcement staff on a case, you should make sure there’s actually crime there to fight:
It is critically important that our enforcement program be extremely efficient… Recognizing that it is unrealistic to imagine we will ever achieve a one-to-one correspondence between incidents of misfeasance and SEC Enforcement staff, we’d better plan to do everything we can to increase our hit-rate per investigation opened, and should commit our staff resources carefully, which is to say, consciously.
Sounds reasonable, although this does also sound a little odd; how is securing a good "hit rate" in finding crime a problem in an era where even an $11 billion robbery isn’t high enough in the in-box to warrant a criminal investigation? For most of the last ten years, you could walk into any major bank in America and find whole departments committed to the practice of writing false, robosigned affidavits. We’re not talking about crime that is hidden in a line item, or has to be deduced by checking and re-checking the numbers of dozens of accounts: we’re talking about groups of flesh-and-blood human beings, sitting there in plain view with huge stacks of folders on their desks, openly committing fraud and perjury. Walk in any direction in lower Manhattan with a badge, you're going to hit a fraud case whether you want to or not.
But fine, Gallagher’s point is taken: when you commit resources, you want to make sure you get hits. So what’s the solution? He goes on, cheerfully employing a jockish metaphor:
Experience teaches us, for example, that fraud tends to proliferate in smaller entities that may lack highly developed compliance programs. It also means thinking carefully about what we might, borrowing again from the world of sports, call “shot selection.” It can be tempting to tangle with prominent institutions. But chasing headlines and solving problems are two different things. The question is what will do most good – where our focus should be. And the record seems to suggest that we can do most to protect smaller, unsophisticated investors by focusing more attention on smaller entities...
Just so we’re clear about what we’re talking about here: the S.E.C., rather than go after serial violators like Bank of America and Chase, proposes that the best place to find crime is in small-cap companies, because that’s where fraud “proliferates.”
In the last year or so I’ve heard from several attorneys who represent smaller clients who tell me they’re flabbergasted, watching the S.E.C. give the Chases, Goldmans, and Citigroups free ride after free ride while their pockmarked little clients at fledgling public companies get served the whole regulatory meal for minor disclosure violations – even cases that simply involve bad paperwork, where money isn’t even stolen. If you’re a little tech startup and there’s a $100,000 problem in your books, you can expect the full Princess Bride torture machine treatment, with multiple agents assigned to your case, serious criminal penalties, asset seizures, etc.
Want an example of the S.E.C.’s idea of “shot selection”? Every year, a parade of itty-bitty failed public companies lets their paperwork lapse. Dead little companies sitting in the bureaucratic atmosphere doing nothing at all are a major threat to national security, of course, so the S.E.C. flies in to the rescue and feverishly revokes their registrations.
These actions are called “12(j) registration revocations,” and the beauty of them, from the S.E.C.’s point of view, is that it can list each one of those revocations as a separate enforcement action, when it goes before Congress at the end of every year to brag about all the good work it’s done.
Therefore toward the end of every calendar year, you’ll see a rush of these 12(j) revocations. In 2011, about one out of every six S.E.C. enforcement actions – 121 out of 735 – involved these delinquent filings. In the stats they submit to Congress, they list these cases right next to things like market manipulation, insider trading, and financial fraud. “The S.E.C. Enforcement staff takes 10 minutes and shoots a zombie company in the head and then has the guts to call it enforcement,” is how one attorney put it to me.
Just days after 60 Minutes ran its piece last year about the epidemic of unprosecuted fraud on Wall Street, the S.E.C. charged into action. Take a look at the dates on these two documents. While Chase’s "London Whale" was preparing to play billion-dollar faro with federally-insured money and MF Global was still struggling to find its "misplaced" $1.6 billion in customer money, the S.E.C. was gallantly taking on the likes of A.J. Ross Logistics, Inc., Status Game Corp., and Fightersoft Multimedia Corporation. And bragging to Congress about its conquests. It's as clear a case of juking the stats as you'll ever see
Apparently, this is a better use of the S.E.C.’s time than giving in to the "temptation" of taking on prominent institutions. Anyway, if you want insight into why nothing’s been done to clean up Wall Street, look no further. Why tangle with Goldman and Chase, when you can take on a dead video game startup?
If you want to see a perfect example of how completely broken our regulatory system is, look no further than a speech that Daniel Gallagher, one of the S.E.C.’s commissioners, recently gave in Denver, Colorado.
It’s a speech whose full lunacy is hard to grasp without some background.
It’s by now been well-established that the S.E.C.’s performance in policing Wall Street before, after, and during the crash has been comically inept. It would be putting it generously to say that the top cop on the financial services beat has demonstrated particular incompetence with regard to investigations of high-profile targets at powerhouse banks and financial companies. A less generous interpretation would be that the agency is simply too afraid, too unwilling, or too corrupt to take on the really dangerous animals in this particular jungle.
The S.E.C.’s failure to make even one case against a high-ranking executive involved in the mass frauds leading to the 2008 crash – compare this to the comparatively much smaller and less serious S&L crisis twenty years earlier, when the government made 1,100 criminal cases and sent 800 bank officials to jail – became so conspicuous that by the end of last year, the “No prosecutions of top figures” idea became an accepted meme in mainstream news media coverage of the economic crisis.
The S.E.C. in recent years has failed in almost every possible way a regulator can fail to police powerful criminals. Failure #1 was that it repeatedly fell down on the job even when alerted to problems at big companies well ahead of time by insiders. Six months before Lehman Brothers collapsed, setting off a chain reaction of losses that crippled the world economy, one of Lehman’s attorneys, Oliver Budde, contacted the S.E.C. to warn them that the firm had understated CEO Dick Fuld's income by more than $200 million; the agency blew him off. There were similar brush-offs of insiders with compelling information in cases involving Moody’s, Chase, and both of the major Ponzi scheme scandals, i.e. the Bernie Madoff and Allen Stanford cases.
The S.E.C.’s attitude toward whistleblowers at powerhouse companies has not just been aloof or indifferent, it’s been downright hostile at times. Whistleblowers commonly report being treated as though they're the criminal. The most notorious example probably involved Peter Sivere, a compliance officer at Chase who years ago went to the S.E.C. to complain that Chase was withholding an incriminating email from the agency, which was investigating an illegal trading practice. When Sivere contacted the S.E.C. with the documents, he asked if he would be eligible for an award; they told him no, and he gave them the documents anyway. Subsequently, Sivere was fired by Chase because, in the words of Chase’s attorneys, Sivere had "sought payment from the SEC to provide documents and information to them.”
Sivere had to scratch his head and wonder how his bosses knew about the award request , until it dawned on him: the S.E.C. had ratted him out to Chase! It subsequently came out that the S.E.C. official who’d narked on Sivere was George Demos, who more recently was seen running for Congress in New York.
Since the S.E.C. couldn’t make cases even when insiders handed them to them, it followed that the agency fared even worse when asked to deduce problems by mere analysis and review, which brings us to failure #2: the agency was spectacularly inept at detecting marketplace problems that should have been obvious to anyone with access to a federal regulator’s investigatory tools. It came out after the crash, for instance, that the SEC repeatedly ignored warnings of excessive risk-taking at companies like Bear Stearns; they even censored an IG report to conceal, among other things, their history of non-action.
More notoriously, the SEC stood by and did nothing even after the FBI publicly warned that the incidence of so-called “liar’s loans” – mortgage applications in which income levels and other information were not verified – was “epidemic” and could cause an “economic crisis.” The SEC could have walked into any major mortgage lender’s office anytime in the five years prior to the 2008 crash and in one afternoon’s worth of interviews learned that fraud in the mortgage markets was out of control, but instead they allowed companies like Countrywide and Long Beach to proliferate and pump the economy full of millions of bad loans, nearly destroying the economy.
Failure #3 is that even after the fact, they have so far failed to make cases against even the most obvious targets, from the Deutsche Bank executives who knowingly sold billions in risky mortgages they knew were “pigs,” to the Lehman bankers who hid liabilities and cooked the books in the infamous “Repo 105” case, to the creeps at Barclays who, in what one Wall Street attorney I spoke to described as “the biggest bank robbery in the history of the world,” siphoned off billions of dollars from the rotting hulk of Lehman Brothers just before that company’s collapse. In that deal, executives at Lehman and Barclays essentially sold Lehman assets and operations to Barclays at fractions of their real cost – and some of the Lehman executives involved went to work for Barclays right after Lehman collapsed. Lehman’s creditors want Barclays to pay back over $11 billion.
Failure #4: one company after another was allowed to settle serious criminal charges without having to admit wrongdoing. Failure #5: in those settlements, the S.E.C.continually allowed companies to avoid having to disclose the exact nature of their crimes, which not only shielded those firms from litigation, but kept the general public, which might otherwise have been warned away from doing business with those firms, in the dark about crucial information. “Truth is confined to secretive, fearful whispers,” federal judge Jed Rakoff complained, talking about the settlements. Failure #6: companies have been allowed to settle cheap on the promise that they would never commit the same crimes again, only to do exactly that – and be allowed by the S.E.C. to get off with the same promise! The Times made a list of firms that got the “Just promise you’ll never do it again, again” treatment:
They read like a Wall Street who’s who: American International Group, Ameriprise, Bank of America, Bear Stearns, Columbia Management, Deutsche Asset Management, Credit Suisse, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley, Putnam Investments, Raymond James, RBC Dain Rauscher, UBS and Wells Fargo/Wachovia.
All of this is important background for the speech given in Denver on April 13 by S.E.C. commissioner Gallagher. The commissioner was trying to explain the S.E.C.’s thought process in how it decides to allocate its relatively meager resources. The key thing, Gallagher explained, was to make sure that when you send Enforcement staff on a case, you should make sure there’s actually crime there to fight:
It is critically important that our enforcement program be extremely efficient… Recognizing that it is unrealistic to imagine we will ever achieve a one-to-one correspondence between incidents of misfeasance and SEC Enforcement staff, we’d better plan to do everything we can to increase our hit-rate per investigation opened, and should commit our staff resources carefully, which is to say, consciously.
Sounds reasonable, although this does also sound a little odd; how is securing a good "hit rate" in finding crime a problem in an era where even an $11 billion robbery isn’t high enough in the in-box to warrant a criminal investigation? For most of the last ten years, you could walk into any major bank in America and find whole departments committed to the practice of writing false, robosigned affidavits. We’re not talking about crime that is hidden in a line item, or has to be deduced by checking and re-checking the numbers of dozens of accounts: we’re talking about groups of flesh-and-blood human beings, sitting there in plain view with huge stacks of folders on their desks, openly committing fraud and perjury. Walk in any direction in lower Manhattan with a badge, you're going to hit a fraud case whether you want to or not.
But fine, Gallagher’s point is taken: when you commit resources, you want to make sure you get hits. So what’s the solution? He goes on, cheerfully employing a jockish metaphor:
Experience teaches us, for example, that fraud tends to proliferate in smaller entities that may lack highly developed compliance programs. It also means thinking carefully about what we might, borrowing again from the world of sports, call “shot selection.” It can be tempting to tangle with prominent institutions. But chasing headlines and solving problems are two different things. The question is what will do most good – where our focus should be. And the record seems to suggest that we can do most to protect smaller, unsophisticated investors by focusing more attention on smaller entities...
Just so we’re clear about what we’re talking about here: the S.E.C., rather than go after serial violators like Bank of America and Chase, proposes that the best place to find crime is in small-cap companies, because that’s where fraud “proliferates.”
In the last year or so I’ve heard from several attorneys who represent smaller clients who tell me they’re flabbergasted, watching the S.E.C. give the Chases, Goldmans, and Citigroups free ride after free ride while their pockmarked little clients at fledgling public companies get served the whole regulatory meal for minor disclosure violations – even cases that simply involve bad paperwork, where money isn’t even stolen. If you’re a little tech startup and there’s a $100,000 problem in your books, you can expect the full Princess Bride torture machine treatment, with multiple agents assigned to your case, serious criminal penalties, asset seizures, etc.
Want an example of the S.E.C.’s idea of “shot selection”? Every year, a parade of itty-bitty failed public companies lets their paperwork lapse. Dead little companies sitting in the bureaucratic atmosphere doing nothing at all are a major threat to national security, of course, so the S.E.C. flies in to the rescue and feverishly revokes their registrations.
These actions are called “12(j) registration revocations,” and the beauty of them, from the S.E.C.’s point of view, is that it can list each one of those revocations as a separate enforcement action, when it goes before Congress at the end of every year to brag about all the good work it’s done.
Therefore toward the end of every calendar year, you’ll see a rush of these 12(j) revocations. In 2011, about one out of every six S.E.C. enforcement actions – 121 out of 735 – involved these delinquent filings. In the stats they submit to Congress, they list these cases right next to things like market manipulation, insider trading, and financial fraud. “The S.E.C. Enforcement staff takes 10 minutes and shoots a zombie company in the head and then has the guts to call it enforcement,” is how one attorney put it to me.
Just days after 60 Minutes ran its piece last year about the epidemic of unprosecuted fraud on Wall Street, the S.E.C. charged into action. Take a look at the dates on these two documents. While Chase’s "London Whale" was preparing to play billion-dollar faro with federally-insured money and MF Global was still struggling to find its "misplaced" $1.6 billion in customer money, the S.E.C. was gallantly taking on the likes of A.J. Ross Logistics, Inc., Status Game Corp., and Fightersoft Multimedia Corporation. And bragging to Congress about its conquests. It's as clear a case of juking the stats as you'll ever see
Apparently, this is a better use of the S.E.C.’s time than giving in to the "temptation" of taking on prominent institutions. Anyway, if you want insight into why nothing’s been done to clean up Wall Street, look no further. Why tangle with Goldman and Chase, when you can take on a dead video game startup?
We Must Not Speak Uncomfortable Truths to Power: Why I Won’t be Briefing Congress about Derivatives
By William K. Black
When I was the Deputy Director of FSLIC, House Banking Committee Chairman St Germain was helping Speaker Wright hold the FSLIC recapitalization bill hostage to extort favors for Texas control frauds, including Don Dixon’s Vernon Savings (which was providing prostitutes to the State of Texas’ top S&L regulator and was building towards having 96% of its ADC loans in default – which is why we referred to it as “Vermin”). The attack on our agency was that we were mad dogs biased against Texas S&Ls and causing the Texas crisis by closing too many insolvent but well-run Texas S&Ls. Our response had many elements, but one of our principal points was that the Texas S&Ls we were closing were typically control frauds. At this juncture, St Germain’s staffers made a mistake. They requested that we testify on a host of issues, but the invite letter had a zinger, premised on an article saying that the Feds were slow to prosecute frauds in the Southwest. The invite specifically called for us to respond and discuss the role of fraud in the Southwest. We used the opportunity to explain the extensive role of fraud in Texas S&L failures.
The day of the hearing, I walked toward the witness table, but was called over by St Germain’s chief of staff. He proceeded to disinvite us from testifying on the grounds that we had filed non-responsive testimony. (We had, of course, responded to every inquiry they made. They simply hated the response because we documented the enormous role that control fraud was playing in causing Texas S&Ls to fail.)
Today, I received definitive word that I had been disinvited from a bipartisan briefing of members of Congress on the subject of financial derivatives. I have deleted the name of the staffer because he is not the issue. The relevant email thread is below.
The member of Congress putting the event together is one of the strongest advocates of the need for banking reform. I have assisted the Member’s staff in the past in such efforts. The Member’s chief of staff called me today. His position is that I was never invited to participate and that it was unfortunate that I booked the flights and put UMKC on the hook for the non-refundable fares and hotel before informing his office that I was accepting their inquiry about participation (as opposed to invitation). He explains that it is impossible physically to have me participate and that the decision not to have me participate has nothing to do with concerns about “balance” or “bank bashing.” I emphasize also that, unlike St Germain’s disinvitation the email thread states an interest in inviting me to speak at future briefings. I hope that such invitations will be made. The Member and the Member’s staff were polite while St Germain’s chief of staff was deliberately rude.
Nevertheless, I think that the Chief of Staff’s phone call to me explaining their view that I was never invited makes my point. We all know that is simple to add a panelist. What is really going on is that things are so toxic in Congress now, and the largest banks are so sensitive to any criticism, that the progressives fear that any criticism of bank practices that will cause the next financial crisis will be considered “bank bashing” and will cause Republicans to be unwilling to participate. The fact that I have a 30 year record of non-partisan service to the nation on banking matters, including service as a banker with the Federal Home Loan Bank of San Francisco, does not count in such a world. We must not speak uncomfortable truths to power. You will see that it is his staff that informed me that the concerns that prevented me from joining the panel were maintaining a “consensus” about the panel’s “balance” and avoiding “bank bashing.”
I remain supportive, of course, of members of Congress reaching out and getting facts about our financial system, so I hope that the Member’s efforts to create a series of bipartisan briefings succeed. Self-censorship, however, is most debilitating form of censorship. A “consensus” that seeks to minimize any criticism of the “too big to fail” banks on the grounds that criticism equates to “bank bashing” is a consensus to play ostrich.
Excerpts from the e mail thread:
From:
Sent: Wednesday, May 23, 2012 5:34 PM
To: Black, William
Subject: Re: Financial Services Panel Series: Derivatives
Mr. Black,
It was nice speaking with you earlier and I thank you for your consideration. Currently, the panel information is as follows:
Financial Services Panel Series: Derivatives Thursday, May 31
2:00 p.m. to 4:00 p.m.
Rayburn 2226
Moderator: – CNBC or Bloomberg
Panelists:
-Wallace Turbeville – Senior Fellow, Demos (Formerly of Goldman Sachs) -John Parsons – Senior Lecturer in Finance, MIT -Nela Richardson – Senior Economic Analyst, Bloomberg Government (formerly of Freddie Mac and the Commodities Futures Trading Commission) -Marcus Stanley – Policy Director, Americans for Financial Reform (AFR) -Chris Young – International Swaps and Derivatives Association (ISDA) -Mark Calabria – Dir. Of Financial Regulation Studies, CATO Institute
Please let me know if you have any questions or suggestions.
From: Black, William [mailto:blackw@umkc.edu]
Sent: Thursday, May 24, 2012 10:28 PM
To:
Subject: RE: Financial Services Panel Series: Derivatives
I am pleased to accept your invitation to participate on the panel. My cell is [redacted]. I’ll be flying in from California. Please send me information on logistics/venue etc. as soon as you have more details.
Best,
Bill
Best regards,
May 25, 2012 10:36 a.m.
I want to sincerely thank you for your willingness to participate and contribute to the discussion. Unfortunately, we cannot add any additional participants to the panel. In efforts to proceed in a bipartisan manner, we have achieved a nice balance of individuals who will accommodate various points of views on derivatives regulations. Accordingly, adding another participant at this time would disrupt that balance and will spark concerns with our Republican colleagues.
I apologize for any inconvenience this may have caused, but I do hope you will consider joining us for the next panel we are convening to discuss the Volcker Rule. Next week’s panel is intended to be the first in a series and I intend to reach out to you again and Mr. Greenberg.
Thanks again for your assistance and the resources you provided earlier in the week. And I hope you enjoy the Memorial Day weekend.
Best regards,
———————-
Sent using BlackBerry
> From: Black, William [mailto:blackw@umkc.edu]
> Sent: Friday, May 25, 2012 02:17 PM
> To:
> Subject: Re: Financial Services Panel Series: Derivatives
>
> We have already booked the flights and hotel in response to your invitation. Please reconsider.
>
> This will cause our school a serious loss and me considerable embarrassment after I called in favors to be able to accept.
From: Black, William [mailto:blackw@umkc.edu]
Sent: Friday, May 25, 2012 02:33 PM
To:
Subject: Re: Financial Services Panel Series: Derivatives
FYI, I have testified to Congress five times about this crisis and two of those appearances (once in each chamber) were as the Republican designated witness so I won’t throw off any bipartisan balance — quite the opposite.
Best,
Bill
Sent: Sun 5/27/2012 11:16 AM
In case you did not receive my voice message I wanted to once again apologize for any incovenience you may have incurred and thank you for your willingness to participate. As I mentioned before, in the time between my initial call to your office and when we spoke last week, I had confirmed the participation of several others who agreed to do so under the understanding that the panel would be bipartisan and non confrontational. Quite frankly, many of the trade associations were hesitant to speak in public because of what they thought would be a public ‘bank bashing.’ So for this initial panel, we have tread carefully because we want Republican participation and we want to keep these forums ongoing. It is my hope that your colleagues and university will understand that we tried to accomodate another participant, but we just could not make it work without disrupting consensus. I will be in touch with you regarding the next panel we are organizing to discuss the Volcker Rule.
Tuesday 5/29/12 10:41 a.m.
Unfortunately, we cannot accommodate an additional participant. I understand and appreciate your experience, but the factors I outlined in the previous email still exist and this change would compromise the consensus we have achieved. I do wish you would have confirmed your availability with me before making arrangements. When we last spoke, it was my understanding that you had to check your schedule first. So I was a little surprised that you were so quickly able to clear your schedule and make flight arrangements before we had a follow-up conversation. In any event, your previous work as a regulator during the S&L crisis is highly noted and I do think your primary knowledge and insight is helpful as Congress and the agencies grapple with the 21st century financial regulation. To that end, I do hope you will consider participation in the follow up panel, and I sincerely apologize for any inconvenience you have incurred.
Best,
Bill Black
When I was the Deputy Director of FSLIC, House Banking Committee Chairman St Germain was helping Speaker Wright hold the FSLIC recapitalization bill hostage to extort favors for Texas control frauds, including Don Dixon’s Vernon Savings (which was providing prostitutes to the State of Texas’ top S&L regulator and was building towards having 96% of its ADC loans in default – which is why we referred to it as “Vermin”). The attack on our agency was that we were mad dogs biased against Texas S&Ls and causing the Texas crisis by closing too many insolvent but well-run Texas S&Ls. Our response had many elements, but one of our principal points was that the Texas S&Ls we were closing were typically control frauds. At this juncture, St Germain’s staffers made a mistake. They requested that we testify on a host of issues, but the invite letter had a zinger, premised on an article saying that the Feds were slow to prosecute frauds in the Southwest. The invite specifically called for us to respond and discuss the role of fraud in the Southwest. We used the opportunity to explain the extensive role of fraud in Texas S&L failures.
The day of the hearing, I walked toward the witness table, but was called over by St Germain’s chief of staff. He proceeded to disinvite us from testifying on the grounds that we had filed non-responsive testimony. (We had, of course, responded to every inquiry they made. They simply hated the response because we documented the enormous role that control fraud was playing in causing Texas S&Ls to fail.)
Today, I received definitive word that I had been disinvited from a bipartisan briefing of members of Congress on the subject of financial derivatives. I have deleted the name of the staffer because he is not the issue. The relevant email thread is below.
The member of Congress putting the event together is one of the strongest advocates of the need for banking reform. I have assisted the Member’s staff in the past in such efforts. The Member’s chief of staff called me today. His position is that I was never invited to participate and that it was unfortunate that I booked the flights and put UMKC on the hook for the non-refundable fares and hotel before informing his office that I was accepting their inquiry about participation (as opposed to invitation). He explains that it is impossible physically to have me participate and that the decision not to have me participate has nothing to do with concerns about “balance” or “bank bashing.” I emphasize also that, unlike St Germain’s disinvitation the email thread states an interest in inviting me to speak at future briefings. I hope that such invitations will be made. The Member and the Member’s staff were polite while St Germain’s chief of staff was deliberately rude.
Nevertheless, I think that the Chief of Staff’s phone call to me explaining their view that I was never invited makes my point. We all know that is simple to add a panelist. What is really going on is that things are so toxic in Congress now, and the largest banks are so sensitive to any criticism, that the progressives fear that any criticism of bank practices that will cause the next financial crisis will be considered “bank bashing” and will cause Republicans to be unwilling to participate. The fact that I have a 30 year record of non-partisan service to the nation on banking matters, including service as a banker with the Federal Home Loan Bank of San Francisco, does not count in such a world. We must not speak uncomfortable truths to power. You will see that it is his staff that informed me that the concerns that prevented me from joining the panel were maintaining a “consensus” about the panel’s “balance” and avoiding “bank bashing.”
I remain supportive, of course, of members of Congress reaching out and getting facts about our financial system, so I hope that the Member’s efforts to create a series of bipartisan briefings succeed. Self-censorship, however, is most debilitating form of censorship. A “consensus” that seeks to minimize any criticism of the “too big to fail” banks on the grounds that criticism equates to “bank bashing” is a consensus to play ostrich.
Excerpts from the e mail thread:
From:
Sent: Wednesday, May 23, 2012 5:34 PM
To: Black, William
Subject: Re: Financial Services Panel Series: Derivatives
Mr. Black,
It was nice speaking with you earlier and I thank you for your consideration. Currently, the panel information is as follows:
Financial Services Panel Series: Derivatives Thursday, May 31
2:00 p.m. to 4:00 p.m.
Rayburn 2226
Moderator: – CNBC or Bloomberg
Panelists:
-Wallace Turbeville – Senior Fellow, Demos (Formerly of Goldman Sachs) -John Parsons – Senior Lecturer in Finance, MIT -Nela Richardson – Senior Economic Analyst, Bloomberg Government (formerly of Freddie Mac and the Commodities Futures Trading Commission) -Marcus Stanley – Policy Director, Americans for Financial Reform (AFR) -Chris Young – International Swaps and Derivatives Association (ISDA) -Mark Calabria – Dir. Of Financial Regulation Studies, CATO Institute
Please let me know if you have any questions or suggestions.
From: Black, William [mailto:blackw@umkc.edu]
Sent: Thursday, May 24, 2012 10:28 PM
To:
Subject: RE: Financial Services Panel Series: Derivatives
I am pleased to accept your invitation to participate on the panel. My cell is [redacted]. I’ll be flying in from California. Please send me information on logistics/venue etc. as soon as you have more details.
Best,
Bill
Best regards,
May 25, 2012 10:36 a.m.
I want to sincerely thank you for your willingness to participate and contribute to the discussion. Unfortunately, we cannot add any additional participants to the panel. In efforts to proceed in a bipartisan manner, we have achieved a nice balance of individuals who will accommodate various points of views on derivatives regulations. Accordingly, adding another participant at this time would disrupt that balance and will spark concerns with our Republican colleagues.
I apologize for any inconvenience this may have caused, but I do hope you will consider joining us for the next panel we are convening to discuss the Volcker Rule. Next week’s panel is intended to be the first in a series and I intend to reach out to you again and Mr. Greenberg.
Thanks again for your assistance and the resources you provided earlier in the week. And I hope you enjoy the Memorial Day weekend.
Best regards,
———————-
Sent using BlackBerry
> From: Black, William [mailto:blackw@umkc.edu]
> Sent: Friday, May 25, 2012 02:17 PM
> To:
> Subject: Re: Financial Services Panel Series: Derivatives
>
> We have already booked the flights and hotel in response to your invitation. Please reconsider.
>
> This will cause our school a serious loss and me considerable embarrassment after I called in favors to be able to accept.
From: Black, William [mailto:blackw@umkc.edu]
Sent: Friday, May 25, 2012 02:33 PM
To:
Subject: Re: Financial Services Panel Series: Derivatives
FYI, I have testified to Congress five times about this crisis and two of those appearances (once in each chamber) were as the Republican designated witness so I won’t throw off any bipartisan balance — quite the opposite.
Best,
Bill
Sent: Sun 5/27/2012 11:16 AM
In case you did not receive my voice message I wanted to once again apologize for any incovenience you may have incurred and thank you for your willingness to participate. As I mentioned before, in the time between my initial call to your office and when we spoke last week, I had confirmed the participation of several others who agreed to do so under the understanding that the panel would be bipartisan and non confrontational. Quite frankly, many of the trade associations were hesitant to speak in public because of what they thought would be a public ‘bank bashing.’ So for this initial panel, we have tread carefully because we want Republican participation and we want to keep these forums ongoing. It is my hope that your colleagues and university will understand that we tried to accomodate another participant, but we just could not make it work without disrupting consensus. I will be in touch with you regarding the next panel we are organizing to discuss the Volcker Rule.
Tuesday 5/29/12 10:41 a.m.
Unfortunately, we cannot accommodate an additional participant. I understand and appreciate your experience, but the factors I outlined in the previous email still exist and this change would compromise the consensus we have achieved. I do wish you would have confirmed your availability with me before making arrangements. When we last spoke, it was my understanding that you had to check your schedule first. So I was a little surprised that you were so quickly able to clear your schedule and make flight arrangements before we had a follow-up conversation. In any event, your previous work as a regulator during the S&L crisis is highly noted and I do think your primary knowledge and insight is helpful as Congress and the agencies grapple with the 21st century financial regulation. To that end, I do hope you will consider participation in the follow up panel, and I sincerely apologize for any inconvenience you have incurred.
Best,
Bill Black
Barney Frank: Obama Rejected Bush Administration Concession to Write Down Mortgages
By Matt Stoller is a fellow at the Roosevelt Institute.
Here’s Barney Frank, in an exit interview recently in New York Magazine, revealing unwittingly that Obama during the transition rejected a Bush administration concession to write down mortgages. Here’s what Barney said.
The mortgage crisis was worsened this past time because critical decisions were made during the transition between Bush and Obama. We voted the TARP out. The TARP was basically being administered by Hank Paulson as the last man home in a lame duck, and I was disappointed. I tried to get them to use the TARP to put some leverage on the banks to do more about mortgages, and Paulson at first resisted that, he just wanted to get the money out. And after he got the first chunk of money out, he would have had to ask for a second chunk, he said, all right, I’ll tell you what, I’ll ask for that second chunk and I’ll use some of that as leverage on mortgages, but I’m not going to do that unless Obama asks for it. This is now December, so we tried to get the Obama people to ask him and they wouldn’t do it.
This is consistent with other accounts. There were policy debates within Obama’s economic team about what to do about the mortgage crisis. The choices were to create some sort of legal entity to write down mortgage debt or to allow the write-down of mortgage debt through a massive wave of foreclosures over the next four to six years. He choice the latter. That choice was part of what led to roughly $7 trillion of middle class wealth gone, with financial assets for the elites re-inflated.
Since I pointed out that the growth of income inequality under Obama is worse than that under Bush, many people have responded by saying that somehow this is not Obama’s responsibility, that it was an inherited crisis and structural problems that caused a widening of inequality. They simply do not want to accept that policy matters, or, if it does, that Obama had any choice in the policy choices he made.
In fact, crisis response is the single most significant policymaking time imaginable, because all structural barriers are swept away. Think about it – this was literally a deal offered by Hank Paulson – one guy – to Barack Obama, with a multi-trillion dollar impact. No 60 votes in the Senate. No hearings. No confirmations. Just a handshake, basically. In other words, policy does matter, and Obama had a variety of choices and leverage, and he did what he thought was best. He did not want to write down mortgages, even though he was offered that choice by the Bush administration and Barney Frank. So he didn’t.
So yes, Barack Obama is worse than George Bush on economic inequality. While Paulson didn’t want to write down mortgages, the single biggest factor in determining whether the American middle class has any stored wealth, Paulson was willing to do so in response to pressure. Barack Obama was not.
Here’s Barney Frank, in an exit interview recently in New York Magazine, revealing unwittingly that Obama during the transition rejected a Bush administration concession to write down mortgages. Here’s what Barney said.
The mortgage crisis was worsened this past time because critical decisions were made during the transition between Bush and Obama. We voted the TARP out. The TARP was basically being administered by Hank Paulson as the last man home in a lame duck, and I was disappointed. I tried to get them to use the TARP to put some leverage on the banks to do more about mortgages, and Paulson at first resisted that, he just wanted to get the money out. And after he got the first chunk of money out, he would have had to ask for a second chunk, he said, all right, I’ll tell you what, I’ll ask for that second chunk and I’ll use some of that as leverage on mortgages, but I’m not going to do that unless Obama asks for it. This is now December, so we tried to get the Obama people to ask him and they wouldn’t do it.
This is consistent with other accounts. There were policy debates within Obama’s economic team about what to do about the mortgage crisis. The choices were to create some sort of legal entity to write down mortgage debt or to allow the write-down of mortgage debt through a massive wave of foreclosures over the next four to six years. He choice the latter. That choice was part of what led to roughly $7 trillion of middle class wealth gone, with financial assets for the elites re-inflated.
Since I pointed out that the growth of income inequality under Obama is worse than that under Bush, many people have responded by saying that somehow this is not Obama’s responsibility, that it was an inherited crisis and structural problems that caused a widening of inequality. They simply do not want to accept that policy matters, or, if it does, that Obama had any choice in the policy choices he made.
In fact, crisis response is the single most significant policymaking time imaginable, because all structural barriers are swept away. Think about it – this was literally a deal offered by Hank Paulson – one guy – to Barack Obama, with a multi-trillion dollar impact. No 60 votes in the Senate. No hearings. No confirmations. Just a handshake, basically. In other words, policy does matter, and Obama had a variety of choices and leverage, and he did what he thought was best. He did not want to write down mortgages, even though he was offered that choice by the Bush administration and Barney Frank. So he didn’t.
So yes, Barack Obama is worse than George Bush on economic inequality. While Paulson didn’t want to write down mortgages, the single biggest factor in determining whether the American middle class has any stored wealth, Paulson was willing to do so in response to pressure. Barack Obama was not.
Tuesday, May 29, 2012
Bank of America whistleblower receives $14.5 million in mortgage case
By Rick Rothacker
Reuters
A former home appraiser will receive $14.5 million as part of a whistleblower lawsuit that accused subprime lender Countrywide Financial of inflating appraisals on government-insured loans, his attorneys said Tuesday.
Kyle Lagow's lawsuit sparked an investigation that culminated in a $1 billion settlement announced in February between Bank of America Corp (BAC.N) and the U.S. Justice Department over allegations of mortgage fraud at Countrywide, his attorneys said in a news release. Bank of America bought Countrywide in 2008.
Lagow's suit was one of five whistleblower complaints that were folded into the $25 billion national mortgage settlement that state and federal officials reached with Bank of America and four other lenders this year. His suit was unsealed in February, but the amount of his settlement had not been disclosed.
Gregory Mackler, a whistleblower who challenged Bank of America's handling of the government's HAMP mortgage modification program, has also finalized a settlement, said Shayne Stevenson, an attorney with the Hagens Berman law firm, which represented both whistleblowers. Stevenson declined to comment on Mackler's settlement amount.
The complaints were brought under a whistleblower provision in the U.S. False Claims Act, which allows private individuals with knowledge of wrongdoing to bring suits on behalf of the government and share in the proceeds of any settlement.
Both Lagow and Mackler lost their jobs after raising concerns about practices at their companies and faced difficult times awaiting settlements, Stevenson said. Lagow, who worked in a Countrywide appraisal unit, filed his suit in 2009; Mackler, who worked at a firm called Urban Lending Solutions, brought his case in 2011.
"These guys are inspirational," Stevenson said. "They both did the right thing. They should inspire other people to come forward."
Bank of America declined to comment. A spokesman for the U.S. Attorney's Office in the Eastern District of New York, which handled the Bank of America settlement, also declined to comment.
Reuters
A former home appraiser will receive $14.5 million as part of a whistleblower lawsuit that accused subprime lender Countrywide Financial of inflating appraisals on government-insured loans, his attorneys said Tuesday.
Kyle Lagow's lawsuit sparked an investigation that culminated in a $1 billion settlement announced in February between Bank of America Corp (BAC.N) and the U.S. Justice Department over allegations of mortgage fraud at Countrywide, his attorneys said in a news release. Bank of America bought Countrywide in 2008.
Lagow's suit was one of five whistleblower complaints that were folded into the $25 billion national mortgage settlement that state and federal officials reached with Bank of America and four other lenders this year. His suit was unsealed in February, but the amount of his settlement had not been disclosed.
Gregory Mackler, a whistleblower who challenged Bank of America's handling of the government's HAMP mortgage modification program, has also finalized a settlement, said Shayne Stevenson, an attorney with the Hagens Berman law firm, which represented both whistleblowers. Stevenson declined to comment on Mackler's settlement amount.
The complaints were brought under a whistleblower provision in the U.S. False Claims Act, which allows private individuals with knowledge of wrongdoing to bring suits on behalf of the government and share in the proceeds of any settlement.
Both Lagow and Mackler lost their jobs after raising concerns about practices at their companies and faced difficult times awaiting settlements, Stevenson said. Lagow, who worked in a Countrywide appraisal unit, filed his suit in 2009; Mackler, who worked at a firm called Urban Lending Solutions, brought his case in 2011.
"These guys are inspirational," Stevenson said. "They both did the right thing. They should inspire other people to come forward."
Bank of America declined to comment. A spokesman for the U.S. Attorney's Office in the Eastern District of New York, which handled the Bank of America settlement, also declined to comment.
Oh Citibank? What's The Price?
by Karl Denninger
market-ticker.org
Is that laced with lead, arsenic, cyanide or polonium?
Citigroup Inc. (C), the biggest U.S. bank to have regulators reject its capital plan this year, dismantled a board committee created during the credit crisis to police the disposal of toxic and unwanted assets.
About $200 billion of such assets remained when directors broke up the Citi Holdings oversight panel last month under new Chairman Michael O’Neill. Shannon Bell, a spokeswoman for New York-based Citigroup, confirmed the move.
$200 billion eh? What are those things worth? How about an example or two?
Pandit’s ability to sell assets also will slow from the past three years, the bank said in February. Citi Holdings contains about $39 billion of home-equity loans, and there’s no market for such loans after they sour, according to the bank. Nor is he the only CEO looking to unload assets; banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about 775 billion euros ($972 billion).
No, really? That might be because an underwater home equity loan behind a first is typically worth nothing, as it is behind any first in recovery. If the first is underwater the second is literally a zero.
So let's assume for a moment that these things are perhaps worth 10 cents on the dollar. That would mean there's $180 billion worth of loss in that box. To put this in perspective that's well over twice the firm's market capitalization and roughly three times the firm's annual revenue!
The amusing part of the book-cooking is that the firm has a roughly $2 trillion balance sheet but allegedly can only generate $50 billion in operating cash flow (that is, nearly four years worth of it in losses are embedded in this trash!) and only $10 billion in annual net income exists (or 20 years worth of "workout.")
This bank is a Zombie -- still -- and yet we continue to pretend it is a going concern.
Yeah, right.
More than four years on into the financial mess we have solved exactly nothing.
market-ticker.org
Is that laced with lead, arsenic, cyanide or polonium?
Citigroup Inc. (C), the biggest U.S. bank to have regulators reject its capital plan this year, dismantled a board committee created during the credit crisis to police the disposal of toxic and unwanted assets.
About $200 billion of such assets remained when directors broke up the Citi Holdings oversight panel last month under new Chairman Michael O’Neill. Shannon Bell, a spokeswoman for New York-based Citigroup, confirmed the move.
$200 billion eh? What are those things worth? How about an example or two?
Pandit’s ability to sell assets also will slow from the past three years, the bank said in February. Citi Holdings contains about $39 billion of home-equity loans, and there’s no market for such loans after they sour, according to the bank. Nor is he the only CEO looking to unload assets; banks in France, the U.K., Ireland, Germany and Spain have announced plans to shrink by about 775 billion euros ($972 billion).
No, really? That might be because an underwater home equity loan behind a first is typically worth nothing, as it is behind any first in recovery. If the first is underwater the second is literally a zero.
So let's assume for a moment that these things are perhaps worth 10 cents on the dollar. That would mean there's $180 billion worth of loss in that box. To put this in perspective that's well over twice the firm's market capitalization and roughly three times the firm's annual revenue!
The amusing part of the book-cooking is that the firm has a roughly $2 trillion balance sheet but allegedly can only generate $50 billion in operating cash flow (that is, nearly four years worth of it in losses are embedded in this trash!) and only $10 billion in annual net income exists (or 20 years worth of "workout.")
This bank is a Zombie -- still -- and yet we continue to pretend it is a going concern.
Yeah, right.
More than four years on into the financial mess we have solved exactly nothing.
Bankia’s unusual bailout
cityam.com
Q and A
Q How will this bailout work?
A It is not entirely clear, but Madrid is considering a plan where, instead of buying a 90 per cent stake in Bankia for cash, the Spanish government will hand over billions of its bonds instead.
Q How will that help when Bankia needs cash?
A That’s where the European Central Bank comes in. The ECB will accept government bonds as high quality collateral in return for giving out cash. So Bankia will go straight to the ECB, post Madrid’s debt as collateral and get a big cash injection.
Q As the rest of Europe’s banks did earlier this year?
A Not quite, because the ECB is no longer offering three-year cash – though many analysts think it will do so again. Instead, Bankia will tap its monthly lending facility.
Q What is the advantage of doing the bailout this way?
A It means that Spain will not have to tap private markets for the billions required to bail out its banks. That is vital because bond investors are now demanding a punitive 6.5 per cent interest rate to lend to Madrid on a ten-year basis.
Q What makes this unusual?
A It is not that unusual to bail out a bank via a debt-for-equity swap. What is unprecedented is the role of the ECB. The key part that could make this plan work is that the ECB is prepared to treat Spanish bonds differently from how markets treat them. Rather than classing them as an increasingly risky asset, the ECB still classes Spanish debt as high quality collateral. So this is, in effect, another kind of sovereign bailout by Frankfurt, only it is taking place via the ECB’s collateral specifications rather than through direct bond purchases.
Q and A
Q How will this bailout work?
A It is not entirely clear, but Madrid is considering a plan where, instead of buying a 90 per cent stake in Bankia for cash, the Spanish government will hand over billions of its bonds instead.
Q How will that help when Bankia needs cash?
A That’s where the European Central Bank comes in. The ECB will accept government bonds as high quality collateral in return for giving out cash. So Bankia will go straight to the ECB, post Madrid’s debt as collateral and get a big cash injection.
Q As the rest of Europe’s banks did earlier this year?
A Not quite, because the ECB is no longer offering three-year cash – though many analysts think it will do so again. Instead, Bankia will tap its monthly lending facility.
Q What is the advantage of doing the bailout this way?
A It means that Spain will not have to tap private markets for the billions required to bail out its banks. That is vital because bond investors are now demanding a punitive 6.5 per cent interest rate to lend to Madrid on a ten-year basis.
Q What makes this unusual?
A It is not that unusual to bail out a bank via a debt-for-equity swap. What is unprecedented is the role of the ECB. The key part that could make this plan work is that the ECB is prepared to treat Spanish bonds differently from how markets treat them. Rather than classing them as an increasingly risky asset, the ECB still classes Spanish debt as high quality collateral. So this is, in effect, another kind of sovereign bailout by Frankfurt, only it is taking place via the ECB’s collateral specifications rather than through direct bond purchases.
Monday, May 28, 2012
CA CAFR shows $600 billion tax surplus, 1% criminals cover-up, demand ‘austerity’
by Carl Herman
Clint Richardson details California’s Comprehensive Annual Financial Report (CAFR) to reveal $577 billion in Californian taxpayers’ investments. This public evidence makes Governor Brown’s claim of a ~$16 billion budget deficit with no option than “austerity” a criminal lie of omission. This is similar if the governor claimed the public checking account didn’t have enough money for our children’s schools while he covered-up a savings account with over 30 times the claimed shortage.
Clint notes on page 107 of California’s CAFR that the $6 billion annual interest cost and $164 billion in state debt are also cover-ups when contrasted with taxpayers’ investments. The criminal economic fraud of the 1% expands with cover-ups of the policy options to issue its own credit and money to directly pay for public goods and services.
These facts at the state level in California are repeated by the two main political parties’ “leadership” in all states (explore here). They also reveal the US national debt as similar criminal fraud. Here are three simple points to explain:
1.The US does not have a money supply; we have its Orwellian opposite as a debt supply. This is because the US leading banks won legal right through passage of the 1913 Federal Reserve Act to have private banks and the Fed create debt for what we use as money, and then charge the 99% for its use.
2.The policy choice of a debt supply compounded with interest causes ever-increasing aggregate debt that can never be repaid. It can’t be repaid because this is what we use for money. The US national debt now pushing $16 trillion has a gross annual interest payment over $400 billion a year; ~$4,000 per US family of $50,000 annual income (if your household earns $100,000, then your gross annual interest payment is ~$8,000 every year).
3.Monetary reform creates debt-free money that extinguishes the debt (details here), and allows government to become employer of last resort for infrastructure investment (hard and soft). This creates full-employment, optimal infrastructure, and falling prices because infrastructure historically creates more value to the economy than cost. Credit reform allows for public loans (interest directly pays for public goods/services) as another monetary tool for stable money supply (credit reform details here).
I understand that most Americans find these facts difficult to embrace. My personal experience working with both parties’ “leadership” for 18 years and two UN Summits where they rejected ending poverty, even when it produces a profit with Microcredit, revealed the 1%’s character.
The solution to the 99%’s looted trillions is as old as law and justice itself: arrest the criminals, disclose the comprehensive facts, rebuild in good faith for policy in the public good.
Until the 99% demand arrests and justice, the 1% will continue to loot, lie, and demand we accept austerity on our knees.
It’s our assets. What will you think, say, and do to reclaim them? Until we collectively act, the 1% psychopathically rules us to kiss our own assets goodbye.
http://www.washingtonsblog.com/2012/05/ca-cafr-shows-600-billion-tax-surplus-1-criminals-cover-up-demand-austerity.html
Clint Richardson details California’s Comprehensive Annual Financial Report (CAFR) to reveal $577 billion in Californian taxpayers’ investments. This public evidence makes Governor Brown’s claim of a ~$16 billion budget deficit with no option than “austerity” a criminal lie of omission. This is similar if the governor claimed the public checking account didn’t have enough money for our children’s schools while he covered-up a savings account with over 30 times the claimed shortage.
Clint notes on page 107 of California’s CAFR that the $6 billion annual interest cost and $164 billion in state debt are also cover-ups when contrasted with taxpayers’ investments. The criminal economic fraud of the 1% expands with cover-ups of the policy options to issue its own credit and money to directly pay for public goods and services.
These facts at the state level in California are repeated by the two main political parties’ “leadership” in all states (explore here). They also reveal the US national debt as similar criminal fraud. Here are three simple points to explain:
1.The US does not have a money supply; we have its Orwellian opposite as a debt supply. This is because the US leading banks won legal right through passage of the 1913 Federal Reserve Act to have private banks and the Fed create debt for what we use as money, and then charge the 99% for its use.
2.The policy choice of a debt supply compounded with interest causes ever-increasing aggregate debt that can never be repaid. It can’t be repaid because this is what we use for money. The US national debt now pushing $16 trillion has a gross annual interest payment over $400 billion a year; ~$4,000 per US family of $50,000 annual income (if your household earns $100,000, then your gross annual interest payment is ~$8,000 every year).
3.Monetary reform creates debt-free money that extinguishes the debt (details here), and allows government to become employer of last resort for infrastructure investment (hard and soft). This creates full-employment, optimal infrastructure, and falling prices because infrastructure historically creates more value to the economy than cost. Credit reform allows for public loans (interest directly pays for public goods/services) as another monetary tool for stable money supply (credit reform details here).
I understand that most Americans find these facts difficult to embrace. My personal experience working with both parties’ “leadership” for 18 years and two UN Summits where they rejected ending poverty, even when it produces a profit with Microcredit, revealed the 1%’s character.
The solution to the 99%’s looted trillions is as old as law and justice itself: arrest the criminals, disclose the comprehensive facts, rebuild in good faith for policy in the public good.
Until the 99% demand arrests and justice, the 1% will continue to loot, lie, and demand we accept austerity on our knees.
It’s our assets. What will you think, say, and do to reclaim them? Until we collectively act, the 1% psychopathically rules us to kiss our own assets goodbye.
http://www.washingtonsblog.com/2012/05/ca-cafr-shows-600-billion-tax-surplus-1-criminals-cover-up-demand-austerity.html
U.S.A. 2012: Is This What We've Become?
By Charles Hugh Smith
oftwominds.com
Incentivize victimhood, fraudulent accounting of income/collateral and gaming the system, and guess what you get? A nation of liars and thieves.
Memorial Day is traditionally a day to speak of sacrifices made in combat. Like much of the rest of life in America, it has largely become artificial, a hurried "celebration" of frenzied Memorial Day marketing that is quickly forgotten the next day.
Instead of participating in this rote (and thus insincere) "thank you for your sacrifice" pantomime, perhaps we should ask what else has been sacrificed in America without our acknowledgement. Perhaps we should look at the sacrifices that need to be made but which are cast aside in our mad rush to secure "what we deserve."
The unvarnished reality is that most Americans have no idea what service members experienced in Iraq and Afghanistan, and they don't want to know. When 4,488 white crosses were erected on a hillside to remind us of all those who made the ultimate sacrifice in Iraq, people didn't like it, labeling it "unpatriotic."
That is not the real reason, of course; what is more patriotic than keeping those who served and sacrificed fresh in our awareness? One reason those 4,000 crosses make us uncomfortable is that they remind us of being conned by our civilian leadership into "wars of choice."
Another is that the reality of war and its long aftermath are not sufficiently "uplifting" for a brittle nation that prefers the distractions of "reality" TV to an acknowledgement of our problems and the sacrifices made and yet to be made.
Longtime readers know that one of my embedded concerns is the disconnect between the civilian populace and the U.S. Armed Forces. This disconnect starts with raw numbers: THANK YOU TO THE 0.45% of the population who served in the Global War on Terror (2001 to present).
Personnel are costly, not just in civilian life but in the Armed Forces, too, and so the Pentagon has "downsized" the Armed Forces to a smaller but more professional force. This reflects not just budgetary realities but the evolution of modern warfare.
But it's not just that fewer serve because fewer are needed; the number of civilians who want to know and want to acknowledge the experience of those who serve is dwindling everywhere, from Congress to the media to the living rooms of the nation.
The Pentagon has reinforced this disconnect by controlling media access and coverage of its wars, and the media has complied to "control costs" and "give the public what it wants." Survey the media "consumers" and you find few want more coverage of the war or its consequences. So the five dominant media corporations offer up more of what people say they want: faked circus-like "entertainment" in which carefully selected competititors vie for the highest "prize" in modern America, a moment in the media spotlight. The appetite for "news" that trumps up trivialities and senseless, sensationalist crimes is equally insatiable.
Propaganda and marketing are the dominant forces in America, along with a willingness to suspend reality to avoid whatever is complex, knotty, difficult or painful.
Is this what we've become, a nation so fearful of the truth that we shun it, avoid it, or paper it over at every turn? It would seem so.
To take but one Memorial-Day example, we now "outsource" war just as we outsource manufacturing, and we ignore the sacrifices of those who replaced enlisted Armed Forces--even when many are ex-service members: Contractor Deaths Exceed Military Ones in Iraq and Afghanistan (2010). At the peak of the Iraq War, 150,000 "contractors" were in-theater so our civilian "leadership" could claim to have reduced the "headcount" of military personnnel serving in Iraq.
As with everything else in America, the artifice was swallowed whole because the truth was too ugly and difficult for us to bear. The sacrifices of our contractors in Iraq have been ignored by everyone: the Pentagon, the politicians and the public. Nobody wants to acknowledge the losses of those we hired to replace "official" soldiers, even though many of those contractors were ex-U.S. Armed Forces service members.
In Welfare State America, exaggerating victimhood and negating family, community and integrity are all heavily rewarded: that's how you get the gamed disability and a host of other entitlements.
Since credentials and grades are trumpeted as the foundation of financial security, then cheating on schoolwork and exaggerating accomplishments have become accepted norms.
Incentivize victimhood, fraudulent accounting of income/collateral and gaming the system, and guess what you get? A nation of liars and thieves.
All of whom claim "I had no other choice."
That is a sickness that cannot be cured with a pill.
The excuses are legion and varied. Everybody else is cheating, too. Look at the crooks at the top. If I told the truth, I wouldn't get the job/mortgage/entitlement/degree etc.
Everyone is to blame except ourselves, of course; we are powerless. Yet we continue to elect politicians who tell us what we want to hear, lies that sooth our insecurities and fears, politicians who have doubled the national debt in a few years and indentured future generations so our precious share of the pie remains untouched.
Living within our means is now either "impossible" or a sin re-branded "austerity." So we borrow staggering sums every year to maintain the artifice that the contraption of lies, leverage and debt is sustainable, because we have become so brittle and diminished that we cannot bear the truth or our responsibility for the fetid trash-heap that is the national psyche.
We don't care if the nation spends the lifetime Medicare taxes of ten workers ($30,000 lifetime taxes paid, $300,000-$500,000 spent on each beneficiary) in the last few months or years of each elderly beneficiary's life, because 1) it's profitable for those at the trough and 2) we're powerless to change it.
But that's just another lie, stacked on the immense mountain of lies we have piled up in the past decade: we just want our ten lifetime-taxes paid because "we paid our share."
So never mind that we're borrowing the equivalent of the entire GDP of Germany every two years-- ($3 trillion)--and that's just Federal borrowing. Of course the true extent of Federal borrowing is cloaked and obfuscated with tricks such as "supplemental appropriations," so the "headline number" is just another untruth passed off as fact--just like the unemployment rate and the GDP itself.
Add in private debt and local-government bond issuance (often for projects that were once paid for out of general fund tax revenues) and we're borrowing more like the GDP of Germany and France every two years, with no other future in sight.
The word "sacrifice" has been sacrificed on the altar of expediency. The politicians we elect (those who dare speak the truth of our impoverishment and complicity don't get elected--we abhor and fear the truth) have ground the word "sacrifice" into meaningless with overuse; it now means nothing but yet another clarion-call to swallow lies and artifice to protect our share of the loot.
The government can't be the problem, because the government issues me a nice check every month.
And so we cling to easy falsehoods. If only the 1% paid their fair share, all our problems would be solved.
The 1% should pay their fair share, but that isn't the problem; the top 1% already pay a significant share of income taxes collected; doubling that amount changes nothing about the long-term insolvency of our entitlements and crony-capitalist Empire.
The problem is our consumerist, Central-State dominated society/economy that depends on ever-rising debt and and leverage is unsustainable, and placating ourselves with expedient simplicities that shift the accountability and responsibility from ourselves to someone or something else solves nothing.
This reliance on excuses, denial and expediency is the hallmark of adolescence; in adulthood, these are the hallmarks of failure and pathology.
Is this what we've become, brittle, simulacra "grown-ups" who are incapable of acknowledging the truth of our situation? If we cannot dare acknowledging reality, then how can we solve our problems? If we cannot bear an awareness of our systemic rot and unsustainability, then how can we move past denial and expediency?
If we have lost the ability to live within our means and to acknowledge difficult facts, then we have lost everything: our national integrity, our ability to problem-solve, our vigor and our future.
Bankia Parent Revises 2011 "Profit" Of €41 Million to €3.3 Billion Loss
by Tyler Durden
ZeroHedge
It is rather amazing what one finds when a company which previously had allegedly posted a profit of €41 million, somehow becomes insolvent, needs a nationalization to avoid a full out liquidation, and gets bailed out by the state. One of the first things one finds is that the profit pitched to that particular class of gullible idiots, known as shareholders, was an outright lie. And yes, on that one very rare occasion when an auditor refuses to sign off on a bank's financials, in this case Deloitte, run far, and run fast. Instead what one finds is a massive loss. From Reuters: "BFA, the parent group of nationalized Spanish bank Bankia said on Monday it had restated its 2011 results to reflect a 3.3 billion euro loss, rather than a 41 million euro profit, following a bailout from the state. In a statement to the stock exchange regulator, BFA said the restated loss reflected a review of its loan portfolios and capital needs after a new audit and as part of the clean-up plan implemented by the government." Well, duh, something "new" better be reflected, or else the general public may just get the impression that banks are merely pulling numbers out of their glutes, that the entire balance sheet, income and cash flow statements are just a jumble of utter BS, and that keeping one's deposits in a system predicated on lies and fraud may not be the smartest thing. But no: that would imply one is inciting a bank run, and that is frowned upon by the very same government which does everything in its power to facilitate just the data manipulation that magically results in a profitable bank being on the verge of liquidation.
But that's not all. According to Spain's Expansion, the total loss could be far worse, more than double the just reported, to a total of €7 billion. Google translated:
Following a meeting of more than four hours, the board of directors of the entity on Monday approved the restated financial statements. Bankia matrix provided only consolidated data for the year 2011, yielding a loss of 3.318 million euros. However, individual losses would amount to 7,000 million BFA, according to financial sources.
The consolidated balance sheet losses gave the fruit of Bankia own numbers, which on Friday announced that it obtained a negative result of 2.979 million in 2011. In previous accounts, unaudited, BFA had lost 439 million in individual accounts, while recognized in consolidated profit of 41 million.
The red numbers are mainly due to the development of fair value of the share itself has BFA Bankia (52% in December 2011).
Indicatively, the move from a profit to a €7 billion loss, in a US context, is roughly the same as if US bank holding company X were to go from being profitable to posting a nearly $100 billion loss. Overnight. But only after the FDIC was invited to backstop the firm's suddenly underwater hundreds of billions in deposits.
Oops.
Luckily, there is always only one cockroach (ahem JP Morgan prop desk), and we are absolutely confident the €7 billion total loss, when officially announced will be the final one. Just as the final bailout bill of €19 billion will not be topped. Or was that €25 billion?
And nobody will need a European bailout. Ever.
ZeroHedge
It is rather amazing what one finds when a company which previously had allegedly posted a profit of €41 million, somehow becomes insolvent, needs a nationalization to avoid a full out liquidation, and gets bailed out by the state. One of the first things one finds is that the profit pitched to that particular class of gullible idiots, known as shareholders, was an outright lie. And yes, on that one very rare occasion when an auditor refuses to sign off on a bank's financials, in this case Deloitte, run far, and run fast. Instead what one finds is a massive loss. From Reuters: "BFA, the parent group of nationalized Spanish bank Bankia said on Monday it had restated its 2011 results to reflect a 3.3 billion euro loss, rather than a 41 million euro profit, following a bailout from the state. In a statement to the stock exchange regulator, BFA said the restated loss reflected a review of its loan portfolios and capital needs after a new audit and as part of the clean-up plan implemented by the government." Well, duh, something "new" better be reflected, or else the general public may just get the impression that banks are merely pulling numbers out of their glutes, that the entire balance sheet, income and cash flow statements are just a jumble of utter BS, and that keeping one's deposits in a system predicated on lies and fraud may not be the smartest thing. But no: that would imply one is inciting a bank run, and that is frowned upon by the very same government which does everything in its power to facilitate just the data manipulation that magically results in a profitable bank being on the verge of liquidation.
But that's not all. According to Spain's Expansion, the total loss could be far worse, more than double the just reported, to a total of €7 billion. Google translated:
Following a meeting of more than four hours, the board of directors of the entity on Monday approved the restated financial statements. Bankia matrix provided only consolidated data for the year 2011, yielding a loss of 3.318 million euros. However, individual losses would amount to 7,000 million BFA, according to financial sources.
The consolidated balance sheet losses gave the fruit of Bankia own numbers, which on Friday announced that it obtained a negative result of 2.979 million in 2011. In previous accounts, unaudited, BFA had lost 439 million in individual accounts, while recognized in consolidated profit of 41 million.
The red numbers are mainly due to the development of fair value of the share itself has BFA Bankia (52% in December 2011).
Indicatively, the move from a profit to a €7 billion loss, in a US context, is roughly the same as if US bank holding company X were to go from being profitable to posting a nearly $100 billion loss. Overnight. But only after the FDIC was invited to backstop the firm's suddenly underwater hundreds of billions in deposits.
Oops.
Luckily, there is always only one cockroach (ahem JP Morgan prop desk), and we are absolutely confident the €7 billion total loss, when officially announced will be the final one. Just as the final bailout bill of €19 billion will not be topped. Or was that €25 billion?
And nobody will need a European bailout. Ever.
The Tea Party F*ed You. Fire Them
by Karl Denninger
market-ticker.org
Seriously folks.
The 15 freshmen Republican representatives in the House Tea Party Caucus each ran in 2010 on a populist anti-Wall Street message, highlighting their opposition to bank bailouts like the 2008 Troubled Asset Relief Program (TARP) and criticizing Washington for enabling the banking sector as it became “Too Big to Fail.” After winning, all fifteen received significant PAC contributions from the banking industry — and have become a reliable vote and mouthpiece for the financial industry, a ThinkProgress analysis of campaign contributions, voting records and public statements reveals.
It would be nice if they just took money. They did worse.
11 of the 15 co-sponsored this piece of trash; is there any doubt they were bought and paid for?
‘(a) In General- In the examination of financial institutions--
‘(1) a commercial loan shall not be placed in non-accrual status solely because the collateral for such loan has deteriorated in value;
‘(2) a modified or restructured commercial loan shall be removed from non-accrual status if the borrower demonstrates the ability to perform on such loan over a maximum period of 6 months, except that with respect to loans on a quarterly, semiannual, or longer repayment schedule such period shall be a maximum of 3 consecutive repayment periods;
‘(3) a new appraisal on a performing commercial loan shall not be required unless an advance of new funds is involved;
Got it? The fact that the collateral, which was the predicate for the loan in the first place, no longer supports the loan as originally agreed, cannot be used as the reason to place the loan in "non-accrual" (that is, at risk of not performing) status.
But the predicate for the loan being made in the first place was the provision of the collateral; but for that collateral's actual value the loan would have never been made in the first place!
This is what the so-called "Tea Party" that claimed to be against bank bailouts has supported -- literally changing the qualifications on a loan after it is made so that in effect there is no collateral required at all!
This is an attempt to literally approve by legislation the effective counterfeiting of the nation's currency and you are the victims as your purchasing power will be further destroyed by this bill should it become law.
11 of 15 "Tea Partiers" are co-sponsors.
Fire them all; they're traitors and mendacious bags of pus.
market-ticker.org
Seriously folks.
The 15 freshmen Republican representatives in the House Tea Party Caucus each ran in 2010 on a populist anti-Wall Street message, highlighting their opposition to bank bailouts like the 2008 Troubled Asset Relief Program (TARP) and criticizing Washington for enabling the banking sector as it became “Too Big to Fail.” After winning, all fifteen received significant PAC contributions from the banking industry — and have become a reliable vote and mouthpiece for the financial industry, a ThinkProgress analysis of campaign contributions, voting records and public statements reveals.
It would be nice if they just took money. They did worse.
11 of the 15 co-sponsored this piece of trash; is there any doubt they were bought and paid for?
‘(a) In General- In the examination of financial institutions--
‘(1) a commercial loan shall not be placed in non-accrual status solely because the collateral for such loan has deteriorated in value;
‘(2) a modified or restructured commercial loan shall be removed from non-accrual status if the borrower demonstrates the ability to perform on such loan over a maximum period of 6 months, except that with respect to loans on a quarterly, semiannual, or longer repayment schedule such period shall be a maximum of 3 consecutive repayment periods;
‘(3) a new appraisal on a performing commercial loan shall not be required unless an advance of new funds is involved;
Got it? The fact that the collateral, which was the predicate for the loan in the first place, no longer supports the loan as originally agreed, cannot be used as the reason to place the loan in "non-accrual" (that is, at risk of not performing) status.
But the predicate for the loan being made in the first place was the provision of the collateral; but for that collateral's actual value the loan would have never been made in the first place!
This is what the so-called "Tea Party" that claimed to be against bank bailouts has supported -- literally changing the qualifications on a loan after it is made so that in effect there is no collateral required at all!
This is an attempt to literally approve by legislation the effective counterfeiting of the nation's currency and you are the victims as your purchasing power will be further destroyed by this bill should it become law.
11 of 15 "Tea Partiers" are co-sponsors.
Fire them all; they're traitors and mendacious bags of pus.
FOIA release names "spy" printers
miami.typepad.com
You might want to think twice before you send an anonymous letter criticizing the government or its policies. It can be traced right back to you.
For years, machine identification code technology has been used by printer manufacturers to burn a printer’s serial number – using microscopic yellow dots -- on each printed page. Though some printing companies have shared this information with the government, names have never been released -- until recently.
The government, pursuant to a Freedom of Information Act request by freelance journalist Theo Karantsalis, has released the names of 10 printer manufacturers that have “fulfilled or agreed to fulfill document identification requests submitted by the Secret Service.”
The companies listed on the release include: Canon, Brother, Casio, Sharp, HP, Konica-Minolta, Mita, Ricoh, and Xerox.
“Our privacy rights are eroding more and more each day,” said Karantsalis, whose original 2010 request was denied.
But the Secret Service relented after he filed an administrative appeal and threatened legal action. For years, Karantsalis studied the mysterious dots using a blue LED light he got from the San Francisco-based Electronic Frontier Foundation, which published a tracking dot “decoding guide.”
But the EFF thinks that Karantsalis’ release has inadvertently shed light on a potentially greater privacy breach.
“The same yellow dots were instrumental in a recent DARPA ‘reverse shredding’ challenge that let one team reveal what was cross shredded,” said Seth Schoen, a Senior Staff Technologist at the EFF. DARPA stands for Defense Advanced Research Projects Agency.
“Just because you shred something, that doesn’t mean it has been destroyed," said Schoen, who feels this should be a “wake-up call” for the government and others who handle sensitive information. “They all need to review their shredding policies.”
Read more here: http://www.miamiherald.com/2012/05/24/2815426/foia-release-names-spy-printers.html
FOIA release names "spy" printers
FOIA release names "spy" printers
You might want to think twice before you send an anonymous letter criticizing the government or its policies. It can be traced right back to you.
For years, machine identification code technology has been used by printer manufacturers to burn a printer’s serial number – using microscopic yellow dots -- on each printed page. Though some printing companies have shared this information with the government, names have never been released -- until recently.
The government, pursuant to a Freedom of Information Act request by freelance journalist Theo Karantsalis, has released the names of 10 printer manufacturers that have “fulfilled or agreed to fulfill document identification requests submitted by the Secret Service.”
The companies listed on the release include: Canon, Brother, Casio, Sharp, HP, Konica-Minolta, Mita, Ricoh, and Xerox.
“Our privacy rights are eroding more and more each day,” said Karantsalis, whose original 2010 request was denied.
But the Secret Service relented after he filed an administrative appeal and threatened legal action. For years, Karantsalis studied the mysterious dots using a blue LED light he got from the San Francisco-based Electronic Frontier Foundation, which published a tracking dot “decoding guide.”
But the EFF thinks that Karantsalis’ release has inadvertently shed light on a potentially greater privacy breach.
“The same yellow dots were instrumental in a recent DARPA ‘reverse shredding’ challenge that let one team reveal what was cross shredded,” said Seth Schoen, a Senior Staff Technologist at the EFF. DARPA stands for Defense Advanced Research Projects Agency.
“Just because you shred something, that doesn’t mean it has been destroyed," said Schoen, who feels this should be a “wake-up call” for the government and others who handle sensitive information. “They all need to review their shredding policies.”
Read more here: http://www.miamiherald.com/2012/05/24/2815426/foia-release-names-spy-printers.html
FOIA release names "spy" printers
FOIA release names "spy" printers
Bill Black: Embedded Examiners always married the Natives, but now their Bosses Do Hook Ups
Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City.
Jessica Silver-Greenberg and Ben Protess have written an extraordinarily important column for the New York Times about embedded examiners at JPMorgan.
Embedded examiners’ are federal regulators whose normal work station is a desk at the bank. We only embed examiners for systemically dangerous institutions (SDIs) – banks so large that they pose a systemic risk to global economy.
Embedded examiners do not work. They get too close to the bank officers and employees. In the regulatory ranks we called this “marrying the natives.” Nothing works with SDIs – they are too big to manage, too big to fail, and too big to regulate. A conventional bank examination, scaled up to size to fit an SDI the size of JPMorgan would have 500 examiners and take 18 months to “complete.” (Obviously, when it takes that long to complete an examination it is impossible to “complete” an examination in any meaningful sense – by the time you’ve spent 18 months examining an SDI it can be a radically different bank.) One cannot conduct an effective conventional bank examination of even a medium-sized bank on a “real time” basis because of the amount of new information pouring in every minute. Conventional examinations examine a bank’s records and operations “as of” some date (typically the last quarter-end for which reports have been filed). Embedding examiners is an effort at achieving an “early warning” system. It has one virtue – it indicates that some senior regulator(s) recognized that they cannot rely on the bank’s own reports to determine whether it is steering toward trouble.
In fairness, twenty-five years ago the proponents of embedding recognize the severity of the “marrying the natives” problem. They simply viewed embedding as the least bad manner of attempting the impossible – effectively regulating SDIs. Here is the key passage of the NYT column.
Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency are embedded in the nation’s largest bank. They are typically assigned to the departments undertaking the greatest risks, like the structured products trading desk. Even as the chief investment office swelled in size and made increasingly large bets, regulators did not put any examiners in the unit’s offices in London or New York, according to current and former regulators who spoke only on condition of anonymity.
Senior JPMorgan executives assured the bank’s watchdogs after the financial crisis that the chief investment office, with hundreds of billions in investments, was not taking risks that would be a cause for concern, people briefed on the matter said. Just weeks before the trading losses became public, bank officials also dismissed the worry of a senior New York Fed examiner about the mounting size of the bets, according to current Fed officials.
The authors of the article frame the issue as whether Jamie Dimon’s role as Director of the Federal Reserve Bank of New York poses a conflict of interest and could have led to the regulatory failure to place any examiners in the chief investment office (CIO). The CIO appears to be the largest de facto hedge fund in the world. (Note: “hedge fund” is a deliberately misleading term. Entities called hedge funds typically speculate rather than hedge. When I call the CIO a “hedge fund” I mean that it largely speculates and disingenuously calls its bets “hedges.”)
I have often expressed my view that Congress answered the policy question about such conflicts of interest with the passage of FIRREA in 1989 – which decided that the analogous conflicts of interest in the structure of the Federal Home Loan Bank System were intolerable and mandated that the governmental functions of examination and supervision be conducted by federal officials. The regional Federal Reserve banks should be stripped of any involvement in examination and supervision. That conflict, however, is not my focus in this column. The point I emphasize is that even at the OCC where that conflict of interest did not exist the “marry the natives” syndrome posed an inherent problem. Embedded examination did not work even in an era a quarter-century ago when examiners were considerably more willing to say “no” to banks.
I also write to explain why the remainder of the NYT article illustrates how embedded examiners come to see bank propaganda as fact. I focus on the CIO’s propaganda that it “hedges” and does not gamble. (The examiners and supervisors also come to believe the SDIs’ proprietary models and to pore over the output of those models rather than the perverse incentive structures that cause the models to err so disastrously and the core, false, assumption that there is some exogenous distribution of financial risk that can be modeled using statistical techniques that require an exogenous distribution. Example, if we create a criminogenic environment encouraging massive amounts of fraudulent “liar’s” loans then the probability of catastrophic failure becomes 1.0. Models are not my focus here, though I note that models that assume that bets are “hedges” must produce disaster.)
Let us start with one of the essential attributes of successful bank examination and supervision – professional skepticism. Our job is to kick the tires. Our job is to figure out when banks and their officers have perverse incentives, typically arising from compensation. Our most important task is to detect accounting control fraud – the “weapon of choice” in finance. We have long known that hedge accounting abuses are a fertile area for fraud. Fannie and Freddie were the most infamous SDIs to have recently abused hedge accounting – causing the SEC to take action against what it explicitly charged was an effort by Fannie’s senior managers to maximize their bonuses by manipulating supposed hedges. If JPMorgan’s senior officers were using the CIO to gamble instead of hedge, then they were violation the purpose of the Volcker rule and posing a grave threat to the nation. Phony hedges designed to hide doubling-down on losing bets are such a common problem that skeptical examiners and supervisors would have made examining the CIO a high priority. When you’ve married the natives, however, skepticism is the first and primary regulatory casualty.
Here’s how the NYT reporters (inconsistently) describe the CIO.
“Regulators are not typically stationed at divisions like JPMorgan’s chief investment office, which are known as Treasury units. The units hedge risk and invest extra money on hand, and tend to make short-term investments. But JPMorgan’s office, with a portfolio of nearly $400 billion, had become a profit center that made large bets and recorded $5 billion in profit over the three years through 2011.”
It is not clear that the reporters understand that the paragraph contradicts itself. It states, as if it were an indisputable fact, that the CIO is a “Treasury unit” and such “units hedge risk and invest extra money on hand.” The next sentence contradicts the first. It admits that the CIO actually made “large bets” and “recorded $5 billion in profit.” It gambled on derivatives rather than hedged. It may have won these bets in the first three years.
Skepticism about the “$5 billion in profit” is essential. It is easy to abuse investments in financial derivatives in a manner that creates fictional income and hides real losses in the early years. AIG’s sale of credit default swaps (CDS) protection provide a classic example – book the income now, pay the bonuses now, create no reserves to pay for the massive liability taken on by AIG, and make the officers wealthy while destroying AIG. By selling CDS protection, AIG was agreeing to guarantee other entities against loss for their investments in “green slime,” e.g., the toxic collateralized debt obligations (CDOs) “backed” largely by endemically fraudulent “liar’s” loans. It is apparent that the OCC and NY Fed have not examined the CIO sufficiently vigorously to draw any conclusion as to whether the CIO actually made $5 billion in “profit” on its “large bets” in the early years. The fact that the CIO “recorded” $5 billion in “profit” does suffice to show that they were making bets, not hedges.
Unfortunately, the anonymous regulators quoted by the reporters display even weaker analytics on this point. JPMorgan has followed an aggressive strategy to keep the regulators on their (round) heels. When the examiners married Jamie Dimon they married a shrill harpy convinced of his innate superiority over the examiners. He also has trust issues. Dimon views examiners who are skeptical and kick the tires as disloyal. The president of the United States, after Dimon got it very badly wrong, sang his praises. Obama will stand by his man (donor). Dimon responds badly to anything less than unreserved praise. He is a traditional type, he wants the regulator he marries to be a submissive help mate.
“Long before the recent trading blunder, JPMorgan had a pattern of pushing back on regulators, according to more than a dozen current and former regulators interviewed for this article. That resistance increased after Mr. Dimon steered JPMorgan through the financial crisis in better shape than virtually all its rivals.
‘JPMorgan has been screaming bloody murder about not needing regulators hovering, especially in their London office,” said a former examiner embedded at the bank, adding, in reference to Mr. Dimon, “But he was trusted because he had done so well through the turmoil.’”
There are two ways an agency leadership can respond to such a prima donna. They can be professional but skeptical. Whenever Dimon “screams bloody murder” they can demonstrate their support for the troops asking the tough questions. Alternatively, they can send the message that they do not want to upset Dimon. This will undercut the professional examiners who have resisted marrying the natives. Over time, the best examiners will tend to leave or wangle transfers to other assignments. The OCC and New York Fed have historically followed the second management approach. The reporters cite a specific example involving access to JPMorgan’s capital plan that the examiner believed represented a deliberate effort by JPMorgan management to undercut the examiner.
But here is a vital point – even at their weakest the regulators who marry the natives are better than the natives when it comes to evaluating risk. The most recent President Bush (in sharp distinction to his father) chose as his regulatory leaders the some of the nation’s leading opponents of regulation. These regulatory leaders were exceptionally anti-regulatory and pro-industry, but they still were years ahead of most of the industry (and virtually every SDI – including JPMorgan) in warning about liar’s loans, CDOs, and over concentration in commercial real estate. The NYT authors make the point that the NY Fed examiners want the CIO gamble on a derivative of derivatives unwound “yesterday” while the CIO has continued the gamble.
The tendency of embedded examiners to “marrying the natives” at the SDIs is a serious problem, but the most severe weaknesses in regulation are at the senior levels. The examiners remain the strongest part of the regulatory chain at the Office of the Comptroller of the Currency (OCC) and the Federal Reserve System. The reporters provide an excellent example of the this point in their discussion of the OCC’s role at JPMorgan.
“At JPMorgan, when media reports surfaced that the bank was making aggressive bets on credit derivatives, comptroller officials began taking a closer look, people briefed on the matter said. After thumbing through the bank’s own projections for the related risks in early April, the people said, the examiners pushed for more answers but saw no immediate need to change course. The agency notes that it does not bless specific trades.
In a briefing on Capitol Hill last week, two comptroller officials told a room of Congressional staff members that it was ‘common’ and ‘appropriate’ for banks in general to hedge their exposure to various risks, according to people who attended.
‘I know in college they teach you everything is black and white,’ one official said in response to hypothetical questions about creating the perfect hedge. ‘But it’s not that way in the real world.’”
This brief passage shows why regulators who lack professional skepticism are abject failures. First, one cannot evaluate adequately a purported hedge by “thumbing through the bank’s own projections for the related risks….” By the time the OCC was looking, those projections had been shown to have relationship to reality. Second, of course, the agency does not “bless specific trades.” No one said it did. The OCC leaders created a straw man to deflect criticism. Third, yes it is “common” and “appropriate” to hedge risks, but that is another straw man. One of the few common elements to the four contradictory major stories that JPMorgan’s press flacks have put out is that their own descriptions of the specifics of the transactions demonstrates that they were bets, not hedges.
Fourth, no, they don’t teach in college that hedging is simple or has no gray areas. Fifth, the relevant issue has nothing to do with “the perfect hedge.” A perfect hedge exhibits a negative correlation of -1.0. JPMorgan engaged in “hedginess” – it made subsequent bets in the same direction as the original bets (positive correlation) – it “doubled down” and lost the gamble. It delayed informing investors and regulators that it had lost and falsely stated that nothing meaningful had gone wrong. Dimon then declared his earlier declarations about CIO losses inoperable.
The OCC officials, however, gave Congress the opposite impression that JPMorgan was engaged in “appropriate” “hedging” and should, if anything, be applauded for doing so. OCC is a bureau within the Treasury Department. Treasury Secretary Geithner is a virulent opponent of the Volcker rule. The current draft of the regulation that will eventually implement the Volcker rule was, at the behest of Dimon, crafted by Treasury and the Federal Reserve (another fierce opponent of the Volcker rule) to embrace “hedginess.” If an SDI claims that a bet on financial derivatives is a hedge (and with portfolios the size of the SDIs one can always claim that “X” is a hedge to “Y”), then Geithner and Bernanke want them to be able to evade the Volcker rule. This will, of course, destroy the rule. It was SDIs’ investments in “green slime” financial derivatives that drove much of the ongoing financial crisis and caused eight SDIs to fail. There is no evidence that the SDIs or their regulators have learned this core lesson. That is understandable because SDIs inherently have perverse incentives.
As always, I urge that conservatives, libertarians, and progressives join to end the SDIs. SDIs that are banks receive an explicit federal subsidy through deposit insurance and a far larger implicit subsidy because of the “too big to fail” doctrine. Congress has never approved this implicit subsidy. The SDIs are, as they proved during the ongoing crisis, capable of causing global systemic damage. A nation cannot, therefore, credibly claim that it will not bail out the SDIs’ general creditors. SDIs are, implicitly, government sponsored enterprises (GSEs) most akin to Fannie and Freddie.
(For those readers who think Fannie and Freddie failed due to government-imposed “affordable housing goals,” please see my articles on their failure. The short version is that no entity ever required Fannie and Freddie to purchase “liar’s” loans – which did not count towards their affordable housing goals. Consider why they both, eventually, purchased massive amounts of fraudulent liar’s loans. The truth is that Fannie and Freddie eventually emulated the (then) investment banks’ massive purchases of liar’s loans and the creation of CDOs for the same reason that the investment banks did – it created guaranteed, massive (albeit fictional) “income” in the near term and made the officers wealthy. Remember also that Fannie and Freddie did not have any explicit federal guarantee and that their bonds explicitly stated on their face that they were not federally guaranteed.)
The implicit subsidy of FDIC paying the SDIs’ creditors in full even if there is a receivership means that the SDIs can borrow money more cheaply than smaller competitors. SDIs, therefore, make a mockery of “free markets.” They are so large that they also make a mockery of democracy. SDIs are the face of American crony capitalism.
SDIs are not simply dangerous, they are also inefficient. Shrinking the SDIs to the point where they no longer posed a systemic risk would also increase their efficiency, make them small enough to regulate, and help recover our democracy.
SDIs that function as banks pose intolerable risks to the global economy. SDIs that function as (thinly disguised) hedge funds should be far beyond the pale. Conservative and libertarian philosophy rightly condemn providing enormous federal subsidies to a private entity whose senior officers claim any wins and socialize any severe losses.
Jessica Silver-Greenberg and Ben Protess have written an extraordinarily important column for the New York Times about embedded examiners at JPMorgan.
Embedded examiners’ are federal regulators whose normal work station is a desk at the bank. We only embed examiners for systemically dangerous institutions (SDIs) – banks so large that they pose a systemic risk to global economy.
Embedded examiners do not work. They get too close to the bank officers and employees. In the regulatory ranks we called this “marrying the natives.” Nothing works with SDIs – they are too big to manage, too big to fail, and too big to regulate. A conventional bank examination, scaled up to size to fit an SDI the size of JPMorgan would have 500 examiners and take 18 months to “complete.” (Obviously, when it takes that long to complete an examination it is impossible to “complete” an examination in any meaningful sense – by the time you’ve spent 18 months examining an SDI it can be a radically different bank.) One cannot conduct an effective conventional bank examination of even a medium-sized bank on a “real time” basis because of the amount of new information pouring in every minute. Conventional examinations examine a bank’s records and operations “as of” some date (typically the last quarter-end for which reports have been filed). Embedding examiners is an effort at achieving an “early warning” system. It has one virtue – it indicates that some senior regulator(s) recognized that they cannot rely on the bank’s own reports to determine whether it is steering toward trouble.
In fairness, twenty-five years ago the proponents of embedding recognize the severity of the “marrying the natives” problem. They simply viewed embedding as the least bad manner of attempting the impossible – effectively regulating SDIs. Here is the key passage of the NYT column.
Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency are embedded in the nation’s largest bank. They are typically assigned to the departments undertaking the greatest risks, like the structured products trading desk. Even as the chief investment office swelled in size and made increasingly large bets, regulators did not put any examiners in the unit’s offices in London or New York, according to current and former regulators who spoke only on condition of anonymity.
Senior JPMorgan executives assured the bank’s watchdogs after the financial crisis that the chief investment office, with hundreds of billions in investments, was not taking risks that would be a cause for concern, people briefed on the matter said. Just weeks before the trading losses became public, bank officials also dismissed the worry of a senior New York Fed examiner about the mounting size of the bets, according to current Fed officials.
The authors of the article frame the issue as whether Jamie Dimon’s role as Director of the Federal Reserve Bank of New York poses a conflict of interest and could have led to the regulatory failure to place any examiners in the chief investment office (CIO). The CIO appears to be the largest de facto hedge fund in the world. (Note: “hedge fund” is a deliberately misleading term. Entities called hedge funds typically speculate rather than hedge. When I call the CIO a “hedge fund” I mean that it largely speculates and disingenuously calls its bets “hedges.”)
I have often expressed my view that Congress answered the policy question about such conflicts of interest with the passage of FIRREA in 1989 – which decided that the analogous conflicts of interest in the structure of the Federal Home Loan Bank System were intolerable and mandated that the governmental functions of examination and supervision be conducted by federal officials. The regional Federal Reserve banks should be stripped of any involvement in examination and supervision. That conflict, however, is not my focus in this column. The point I emphasize is that even at the OCC where that conflict of interest did not exist the “marry the natives” syndrome posed an inherent problem. Embedded examination did not work even in an era a quarter-century ago when examiners were considerably more willing to say “no” to banks.
I also write to explain why the remainder of the NYT article illustrates how embedded examiners come to see bank propaganda as fact. I focus on the CIO’s propaganda that it “hedges” and does not gamble. (The examiners and supervisors also come to believe the SDIs’ proprietary models and to pore over the output of those models rather than the perverse incentive structures that cause the models to err so disastrously and the core, false, assumption that there is some exogenous distribution of financial risk that can be modeled using statistical techniques that require an exogenous distribution. Example, if we create a criminogenic environment encouraging massive amounts of fraudulent “liar’s” loans then the probability of catastrophic failure becomes 1.0. Models are not my focus here, though I note that models that assume that bets are “hedges” must produce disaster.)
Let us start with one of the essential attributes of successful bank examination and supervision – professional skepticism. Our job is to kick the tires. Our job is to figure out when banks and their officers have perverse incentives, typically arising from compensation. Our most important task is to detect accounting control fraud – the “weapon of choice” in finance. We have long known that hedge accounting abuses are a fertile area for fraud. Fannie and Freddie were the most infamous SDIs to have recently abused hedge accounting – causing the SEC to take action against what it explicitly charged was an effort by Fannie’s senior managers to maximize their bonuses by manipulating supposed hedges. If JPMorgan’s senior officers were using the CIO to gamble instead of hedge, then they were violation the purpose of the Volcker rule and posing a grave threat to the nation. Phony hedges designed to hide doubling-down on losing bets are such a common problem that skeptical examiners and supervisors would have made examining the CIO a high priority. When you’ve married the natives, however, skepticism is the first and primary regulatory casualty.
Here’s how the NYT reporters (inconsistently) describe the CIO.
“Regulators are not typically stationed at divisions like JPMorgan’s chief investment office, which are known as Treasury units. The units hedge risk and invest extra money on hand, and tend to make short-term investments. But JPMorgan’s office, with a portfolio of nearly $400 billion, had become a profit center that made large bets and recorded $5 billion in profit over the three years through 2011.”
It is not clear that the reporters understand that the paragraph contradicts itself. It states, as if it were an indisputable fact, that the CIO is a “Treasury unit” and such “units hedge risk and invest extra money on hand.” The next sentence contradicts the first. It admits that the CIO actually made “large bets” and “recorded $5 billion in profit.” It gambled on derivatives rather than hedged. It may have won these bets in the first three years.
Skepticism about the “$5 billion in profit” is essential. It is easy to abuse investments in financial derivatives in a manner that creates fictional income and hides real losses in the early years. AIG’s sale of credit default swaps (CDS) protection provide a classic example – book the income now, pay the bonuses now, create no reserves to pay for the massive liability taken on by AIG, and make the officers wealthy while destroying AIG. By selling CDS protection, AIG was agreeing to guarantee other entities against loss for their investments in “green slime,” e.g., the toxic collateralized debt obligations (CDOs) “backed” largely by endemically fraudulent “liar’s” loans. It is apparent that the OCC and NY Fed have not examined the CIO sufficiently vigorously to draw any conclusion as to whether the CIO actually made $5 billion in “profit” on its “large bets” in the early years. The fact that the CIO “recorded” $5 billion in “profit” does suffice to show that they were making bets, not hedges.
Unfortunately, the anonymous regulators quoted by the reporters display even weaker analytics on this point. JPMorgan has followed an aggressive strategy to keep the regulators on their (round) heels. When the examiners married Jamie Dimon they married a shrill harpy convinced of his innate superiority over the examiners. He also has trust issues. Dimon views examiners who are skeptical and kick the tires as disloyal. The president of the United States, after Dimon got it very badly wrong, sang his praises. Obama will stand by his man (donor). Dimon responds badly to anything less than unreserved praise. He is a traditional type, he wants the regulator he marries to be a submissive help mate.
“Long before the recent trading blunder, JPMorgan had a pattern of pushing back on regulators, according to more than a dozen current and former regulators interviewed for this article. That resistance increased after Mr. Dimon steered JPMorgan through the financial crisis in better shape than virtually all its rivals.
‘JPMorgan has been screaming bloody murder about not needing regulators hovering, especially in their London office,” said a former examiner embedded at the bank, adding, in reference to Mr. Dimon, “But he was trusted because he had done so well through the turmoil.’”
There are two ways an agency leadership can respond to such a prima donna. They can be professional but skeptical. Whenever Dimon “screams bloody murder” they can demonstrate their support for the troops asking the tough questions. Alternatively, they can send the message that they do not want to upset Dimon. This will undercut the professional examiners who have resisted marrying the natives. Over time, the best examiners will tend to leave or wangle transfers to other assignments. The OCC and New York Fed have historically followed the second management approach. The reporters cite a specific example involving access to JPMorgan’s capital plan that the examiner believed represented a deliberate effort by JPMorgan management to undercut the examiner.
But here is a vital point – even at their weakest the regulators who marry the natives are better than the natives when it comes to evaluating risk. The most recent President Bush (in sharp distinction to his father) chose as his regulatory leaders the some of the nation’s leading opponents of regulation. These regulatory leaders were exceptionally anti-regulatory and pro-industry, but they still were years ahead of most of the industry (and virtually every SDI – including JPMorgan) in warning about liar’s loans, CDOs, and over concentration in commercial real estate. The NYT authors make the point that the NY Fed examiners want the CIO gamble on a derivative of derivatives unwound “yesterday” while the CIO has continued the gamble.
The tendency of embedded examiners to “marrying the natives” at the SDIs is a serious problem, but the most severe weaknesses in regulation are at the senior levels. The examiners remain the strongest part of the regulatory chain at the Office of the Comptroller of the Currency (OCC) and the Federal Reserve System. The reporters provide an excellent example of the this point in their discussion of the OCC’s role at JPMorgan.
“At JPMorgan, when media reports surfaced that the bank was making aggressive bets on credit derivatives, comptroller officials began taking a closer look, people briefed on the matter said. After thumbing through the bank’s own projections for the related risks in early April, the people said, the examiners pushed for more answers but saw no immediate need to change course. The agency notes that it does not bless specific trades.
In a briefing on Capitol Hill last week, two comptroller officials told a room of Congressional staff members that it was ‘common’ and ‘appropriate’ for banks in general to hedge their exposure to various risks, according to people who attended.
‘I know in college they teach you everything is black and white,’ one official said in response to hypothetical questions about creating the perfect hedge. ‘But it’s not that way in the real world.’”
This brief passage shows why regulators who lack professional skepticism are abject failures. First, one cannot evaluate adequately a purported hedge by “thumbing through the bank’s own projections for the related risks….” By the time the OCC was looking, those projections had been shown to have relationship to reality. Second, of course, the agency does not “bless specific trades.” No one said it did. The OCC leaders created a straw man to deflect criticism. Third, yes it is “common” and “appropriate” to hedge risks, but that is another straw man. One of the few common elements to the four contradictory major stories that JPMorgan’s press flacks have put out is that their own descriptions of the specifics of the transactions demonstrates that they were bets, not hedges.
Fourth, no, they don’t teach in college that hedging is simple or has no gray areas. Fifth, the relevant issue has nothing to do with “the perfect hedge.” A perfect hedge exhibits a negative correlation of -1.0. JPMorgan engaged in “hedginess” – it made subsequent bets in the same direction as the original bets (positive correlation) – it “doubled down” and lost the gamble. It delayed informing investors and regulators that it had lost and falsely stated that nothing meaningful had gone wrong. Dimon then declared his earlier declarations about CIO losses inoperable.
The OCC officials, however, gave Congress the opposite impression that JPMorgan was engaged in “appropriate” “hedging” and should, if anything, be applauded for doing so. OCC is a bureau within the Treasury Department. Treasury Secretary Geithner is a virulent opponent of the Volcker rule. The current draft of the regulation that will eventually implement the Volcker rule was, at the behest of Dimon, crafted by Treasury and the Federal Reserve (another fierce opponent of the Volcker rule) to embrace “hedginess.” If an SDI claims that a bet on financial derivatives is a hedge (and with portfolios the size of the SDIs one can always claim that “X” is a hedge to “Y”), then Geithner and Bernanke want them to be able to evade the Volcker rule. This will, of course, destroy the rule. It was SDIs’ investments in “green slime” financial derivatives that drove much of the ongoing financial crisis and caused eight SDIs to fail. There is no evidence that the SDIs or their regulators have learned this core lesson. That is understandable because SDIs inherently have perverse incentives.
As always, I urge that conservatives, libertarians, and progressives join to end the SDIs. SDIs that are banks receive an explicit federal subsidy through deposit insurance and a far larger implicit subsidy because of the “too big to fail” doctrine. Congress has never approved this implicit subsidy. The SDIs are, as they proved during the ongoing crisis, capable of causing global systemic damage. A nation cannot, therefore, credibly claim that it will not bail out the SDIs’ general creditors. SDIs are, implicitly, government sponsored enterprises (GSEs) most akin to Fannie and Freddie.
(For those readers who think Fannie and Freddie failed due to government-imposed “affordable housing goals,” please see my articles on their failure. The short version is that no entity ever required Fannie and Freddie to purchase “liar’s” loans – which did not count towards their affordable housing goals. Consider why they both, eventually, purchased massive amounts of fraudulent liar’s loans. The truth is that Fannie and Freddie eventually emulated the (then) investment banks’ massive purchases of liar’s loans and the creation of CDOs for the same reason that the investment banks did – it created guaranteed, massive (albeit fictional) “income” in the near term and made the officers wealthy. Remember also that Fannie and Freddie did not have any explicit federal guarantee and that their bonds explicitly stated on their face that they were not federally guaranteed.)
The implicit subsidy of FDIC paying the SDIs’ creditors in full even if there is a receivership means that the SDIs can borrow money more cheaply than smaller competitors. SDIs, therefore, make a mockery of “free markets.” They are so large that they also make a mockery of democracy. SDIs are the face of American crony capitalism.
SDIs are not simply dangerous, they are also inefficient. Shrinking the SDIs to the point where they no longer posed a systemic risk would also increase their efficiency, make them small enough to regulate, and help recover our democracy.
SDIs that function as banks pose intolerable risks to the global economy. SDIs that function as (thinly disguised) hedge funds should be far beyond the pale. Conservative and libertarian philosophy rightly condemn providing enormous federal subsidies to a private entity whose senior officers claim any wins and socialize any severe losses.
Saturday, May 26, 2012
"Run!"
From Mark Grant, author of Out Of The Box
Recently I sat and mused with the Chairman of the Board of one of the major international banks. One of the subjects under discussion was the oversight of risk by the Board. This included investment risk, counterparty risk and the general exposure of the bank to what various parts of management were engaged in with their businesses. He assured me that they had multiple reports that were filtered up to the Board and I asked the question about who was designing the reports and were they accurate not in terms of information but in terms of their structure. Banks, insurance companies and other managers of money typically have respected members of the business community on their Board but often lack investment professionals to help provide some guidance and oversight for their dealer operations and for their trust operations so that the oversight by the Board is, frankly, insufficient. The complexities of any large dealer operation, in particular, are far past what the CEO of some main street corporation on the Board has any real knowledge of and the consequences of not having the appropriate people providing guidance can be catastrophic.
This schematic was clearly demonstrated recently at J.P. Morgan. The Directors of the Risk Committee had virtually no Wall Street experience and, consequently, had no real knowledge of the exposure of the bank except the data that they were given but then I doubt if they knew how to make any real sense of the numbers in front of them and certainly they did not have enough experience to judge if those figures were all that they needed to make informed decisions. Now JPM is facing investigations by half a dozen Federal Agencies including the Department of Justice and this was caused, in my opinion, by not having the appropriate people in oversight positions on the Board. Smart people always learn from their mistakes but really smart people learn from the mistakes of others. Therefore I suggest to those of you in senior positions to stop and evaluate who is on your Board, who is on the Risk Committee and who is minding the store because it is the Board, in the final analysis, that is ultimately responsible for the business of your institution and while you may have great faith in your management it is the Board, not those in executive positions, that are held accountable for the risks your firm has undertaken.
When the Defendants are also the Judge and Jury
“All within the state, nothing outside the state, nothing against the state. “
-Benito Mussolini
Here is a prescription for disaster. Here is an opiate that, once seen, should be avoided at any and all costs because the hand is a losing one far past any combination of cards on the Blackjack table. Yet, this is exactly what Europe is proscribing for owners of unsecured bank debt on the Continent. The importance of Friday’s announcement was not that unsecured bank debt owners were to take losses if some bank foundered but just who would be deciding what losses were to be taken. Yes, it is true, investors for the last three years had been assured and re-assured that the sovereign nation where the bank was domiciled would be back-stopping any bank bonds or that the European Union itself would ring fence all bond holders so that the announcement was in direct contention to what we had all been told to get us to support European bank debt. Europe had claimed responsibility and now they have withdrawn it and this reason alone is enough to push yields for European bank bonds far wider than where they are currently as the charade of one more contingent liability has been officially ended. I assert, just for this reversal in position, that the yields of all unsecured bank bonds on the Continent will gap out from their current levels as what we were told is not what we are to get any longer. The new EU bank plan normalizes the losses to put them on the same plain with the American banks but the second part of the story is where disaster lies and I mean unmitigated disaster.
In America we have a formalized process for insolvency, bankruptcy that is overseen by the Rule of Law and the decisions are made by our courts. We have a functioning judicial system and all manner of statutes and regulations so that claims on assets are a matter of well-established Laws that govern this process. This also used to be the way of it in Europe but now we are being told that the legal system on the Continent is going to be irrelevant which will include, by the way, all of the nations in Europe including Great Britain. What the European Union has tossed on our plate is some sort of gruel that no one should eat for it is full of deadly poison; of that I have absolutely no doubt. The new EU bank plan states clearly and without remorse that the decisions for any bank insolvency will be made by Regulators. This would be people appointed by European politicians, this would be bureaucrats, this would be employees of the State as Europe returns to the governance of the old Soviet Union where the Rule of Law was subordinated to the designs of the nation. Let me make this clearer; unsecured bank debt owners will have no rights, no due process and no appeal. The State will decide who is to get what, how much they will get and your rights as a bond holder will be about equivalent to Russia under Stalin where the legal system operated under the thumb of the man in charge. Further the regulators can, once again, exempt the EU, the ECB, the EIB, the IMF or whomever they like from any call on assets so that the bond owner can be subordinated to whomever the Regulators so desire. Then if they will impose this system of State dominance on unsecured bond holders today who is to say that they will not impose it on other classes of assets tomorrow. When the Rule of Law is replaced by the Rule of the State then I will proclaim, unconditionally and without qualification, that the system has been rigged for the benefit of the nations and to the detriment of any private citizens. Therefore there is only one rational conclusion that can be reached which is that no one should own any European unsecured bank debt, NONE, of any bank on the Continent as the Regulators in Europe can now decide the fate of the bondholders for any political reason that they deem relevant and expedient.
If you cannot read the writing on the wall then allow me to read it for you. The European Union has abrogated the Rule of Law for the good of the State. This is the second such abrogation with the first being the exemption of certain European institutions and the IMF from the Private Sector Involvement of Greece. Greece may be a one-off exemption as they claim but we now have a second instance where jurisprudence has been overturned for the good of the nations of Europe. This is not Socialism or Capitalism but rather some sort of Fascist governance which I publically decry as the echo of the jackboots sounds across the Continent once again. The precedents have now been set and the future is clearly marked by a return to the totalitarianism of a politically controlled State. My advice is therefore succinct:
RUN!
Recently I sat and mused with the Chairman of the Board of one of the major international banks. One of the subjects under discussion was the oversight of risk by the Board. This included investment risk, counterparty risk and the general exposure of the bank to what various parts of management were engaged in with their businesses. He assured me that they had multiple reports that were filtered up to the Board and I asked the question about who was designing the reports and were they accurate not in terms of information but in terms of their structure. Banks, insurance companies and other managers of money typically have respected members of the business community on their Board but often lack investment professionals to help provide some guidance and oversight for their dealer operations and for their trust operations so that the oversight by the Board is, frankly, insufficient. The complexities of any large dealer operation, in particular, are far past what the CEO of some main street corporation on the Board has any real knowledge of and the consequences of not having the appropriate people providing guidance can be catastrophic.
This schematic was clearly demonstrated recently at J.P. Morgan. The Directors of the Risk Committee had virtually no Wall Street experience and, consequently, had no real knowledge of the exposure of the bank except the data that they were given but then I doubt if they knew how to make any real sense of the numbers in front of them and certainly they did not have enough experience to judge if those figures were all that they needed to make informed decisions. Now JPM is facing investigations by half a dozen Federal Agencies including the Department of Justice and this was caused, in my opinion, by not having the appropriate people in oversight positions on the Board. Smart people always learn from their mistakes but really smart people learn from the mistakes of others. Therefore I suggest to those of you in senior positions to stop and evaluate who is on your Board, who is on the Risk Committee and who is minding the store because it is the Board, in the final analysis, that is ultimately responsible for the business of your institution and while you may have great faith in your management it is the Board, not those in executive positions, that are held accountable for the risks your firm has undertaken.
When the Defendants are also the Judge and Jury
“All within the state, nothing outside the state, nothing against the state. “
-Benito Mussolini
Here is a prescription for disaster. Here is an opiate that, once seen, should be avoided at any and all costs because the hand is a losing one far past any combination of cards on the Blackjack table. Yet, this is exactly what Europe is proscribing for owners of unsecured bank debt on the Continent. The importance of Friday’s announcement was not that unsecured bank debt owners were to take losses if some bank foundered but just who would be deciding what losses were to be taken. Yes, it is true, investors for the last three years had been assured and re-assured that the sovereign nation where the bank was domiciled would be back-stopping any bank bonds or that the European Union itself would ring fence all bond holders so that the announcement was in direct contention to what we had all been told to get us to support European bank debt. Europe had claimed responsibility and now they have withdrawn it and this reason alone is enough to push yields for European bank bonds far wider than where they are currently as the charade of one more contingent liability has been officially ended. I assert, just for this reversal in position, that the yields of all unsecured bank bonds on the Continent will gap out from their current levels as what we were told is not what we are to get any longer. The new EU bank plan normalizes the losses to put them on the same plain with the American banks but the second part of the story is where disaster lies and I mean unmitigated disaster.
In America we have a formalized process for insolvency, bankruptcy that is overseen by the Rule of Law and the decisions are made by our courts. We have a functioning judicial system and all manner of statutes and regulations so that claims on assets are a matter of well-established Laws that govern this process. This also used to be the way of it in Europe but now we are being told that the legal system on the Continent is going to be irrelevant which will include, by the way, all of the nations in Europe including Great Britain. What the European Union has tossed on our plate is some sort of gruel that no one should eat for it is full of deadly poison; of that I have absolutely no doubt. The new EU bank plan states clearly and without remorse that the decisions for any bank insolvency will be made by Regulators. This would be people appointed by European politicians, this would be bureaucrats, this would be employees of the State as Europe returns to the governance of the old Soviet Union where the Rule of Law was subordinated to the designs of the nation. Let me make this clearer; unsecured bank debt owners will have no rights, no due process and no appeal. The State will decide who is to get what, how much they will get and your rights as a bond holder will be about equivalent to Russia under Stalin where the legal system operated under the thumb of the man in charge. Further the regulators can, once again, exempt the EU, the ECB, the EIB, the IMF or whomever they like from any call on assets so that the bond owner can be subordinated to whomever the Regulators so desire. Then if they will impose this system of State dominance on unsecured bond holders today who is to say that they will not impose it on other classes of assets tomorrow. When the Rule of Law is replaced by the Rule of the State then I will proclaim, unconditionally and without qualification, that the system has been rigged for the benefit of the nations and to the detriment of any private citizens. Therefore there is only one rational conclusion that can be reached which is that no one should own any European unsecured bank debt, NONE, of any bank on the Continent as the Regulators in Europe can now decide the fate of the bondholders for any political reason that they deem relevant and expedient.
If you cannot read the writing on the wall then allow me to read it for you. The European Union has abrogated the Rule of Law for the good of the State. This is the second such abrogation with the first being the exemption of certain European institutions and the IMF from the Private Sector Involvement of Greece. Greece may be a one-off exemption as they claim but we now have a second instance where jurisprudence has been overturned for the good of the nations of Europe. This is not Socialism or Capitalism but rather some sort of Fascist governance which I publically decry as the echo of the jackboots sounds across the Continent once again. The precedents have now been set and the future is clearly marked by a return to the totalitarianism of a politically controlled State. My advice is therefore succinct:
RUN!
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