The Reasoned Review

(Via Felix Salmon)

I’ve written negatively about Senator Blanche Lincoln in the past for her vote in favor of the Iraq War, her frightening views on indefinite detention and torture, her support of warrentless surveillance, and a host of other sins, but I think she deserves major credit for introducing a bill earlier this week that would ban over the counter derivatives:

“Speculators will not be exempted and all trades will be reported to regulators and the public,” Mrs. Lincoln wrote. In addition, any agency that is used for the trading of swaps contracts, including those dealing with energy commodities, will be required to register with the C.F.T.C.

This is exactly the kind of transparency and oversight that could have prevented the crisis, or at least made it softer. I want to stress that the layers upon layers of new regulation that Timothy Geithner intends to add (and which I discussed in the post immediately before this one), will not do anything for public transparency.

Blanche, you’ve voted for some pretty bad things in the past, but this is a bill I can get behind.

The Independent has a good rundown of some recently released documents pertaining to the Lehman Bros. debacle in September ’08:

The failed investment bank [Lehman Bros.] approached a London law firm over plans to use a controversial accounting trick – known internally as “Repo 105″ – to temporarily conceal the liabilities.

…

The bank used the Repo 105 tactic in the run-up to the end of its three-month financial reporting periods to help cushion the blow of huge losses in the first half of 2008 and suggest its financial health was far more robust than it was.

Linklaters – which drafted a document which stated that the technique was legal under UK law – was only approached after Lehman was unable to find an American law firm to say that the Repo 105 transactions could be carried out in the US.

…

The bank had become so addicted to using the technique that when executive Bart McDade, who went on to become Lehman’s chief operating officer, was asked if he was aware of the device the report cited he wrote in an April 2008 e-mail: “I am very aware … it is another drug we r [sic] on.”

I don’t know how many of these scandals have to emerge before we realize that financial institutions (and, likely, corporations in general) are not scrupulous organizations, and they are willing to dispense with any ethical norm a) so long a they’re allowed to, and b) so long as it’s profitable.

It’s astounding that we haven’t done a single thing to prevent our banks’ future malfeasance. Their size hasn’t been restricted (indeed, they’ve grown since the crisis), OTC derivatives are still legal, most of the same executives are in place – its a ticking time bomb.

The Dark Bernanke has already been reconfirmed in his role as wealth-distributor-in-chief, so I guess this post is somewhat moot, but I really wanted to draw attention to this cheerleading article by Tom Friedman last week, wherein he vigorously – in fact, insultingly – agitates for Bernanke’s reconfirmation as Fed Chief.

The article is entitled, absurdly, “Adults Only, Please“, and I guess his premise is that only petulant, whining children could possibly oppose the bailout king. Mature, thoughtful adults apparently reward and worship abject failure.

He starts with a bizarre doctor analogy:

We’re like a patient that just got out of intensive care and is sitting up in bed for the first time when, suddenly, all the doctors and nurses at bedside start bickering. One of them throws a stethoscope across the room; someone else threatens to unplug all the monitors unless the hospital bills are paid by noon; and all the while the patient is thinking: “Are you people crazy? I am just starting to recover. Do you realize how easily I could relapse? Aren’t there any adults here?”

See? The economy is the patient, and the bickering doctors are all those feckless politicians. And..uh.. I guess the “adult” would be  Bernanke, as he says later in the article. But I think this analogy is missing something. It would be far more accurate if you had Bernanke there as a doctor, but willfully refusing to interpret your symptoms (hemorrhages, coughing up blood, etc.) as anything but signs of the utmost health.

Does anyone remember in 2005 when Bernanke declared “There is no housing bubble!“? Or what about in 2007 when he casually remarked that the “Subprime mess has been contained? Or in early 2008 when he said, “I don’t anticipate any serious problems… the danger seems to have waned…”? The stock market crashed three months after he said this. So which is it, Friedman? Is Bernanke a liar or an idiot? At any rate, if he were a real doctor, and the economy his patient, then we can be sure Mr. Bernanke would have been sued for gross negligence and malpractice.

As Friedman says:

And, finally, don’t forget both the Democratic and Republican senators who have decided to get a quick populist boost by turning one of the few adults we have left — Federal Reserve Chairman Ben Bernanke — into a piñata. No, Mr. Bernanke is not blameless for the 2008 crisis. But since then he has helped steer the country back from the brink and kept us out of a depression. He absolutely deserves reappointment.

It’s so easy to slide over Bernanke’s role in all of this by casually remarking, “Well he’s not blameless, but…” This line of reasoning completely misses the point. As Fed Chief, it’s Bernake’s job to study data, identify perturbations, and warn against upcoming bubbles. What, was his head in the sand the entire time? He failed miserably in his primary role! It’s also his job to secure full employment, something which he certainly hasn’t done. 25% underemployment is not full employment, but considering that Bernanke apparently lives in some kind of Bizzaro-universe, I suppose he’s convinced himself it is.

As Dean Baker says, real adults hold each other accountable for miserable job performance. Children write one-sided op-eds bereft of research or perspective, clearly designed to promote a corporate-centric worldview. Remember, Goldman didn’t exactly object to Bernanke’s confirmation.

The Daily Beast has an excellent report on our banking sector’s new financial practices, which – surprise! – are inscrutable to the inquiring journalist. That the late financial crisis bears remarkable resemblance to the Enron scandal 9 years ago has apparently occurred to few, though it should be obvious. Nomi Prins traces the same shadow accounting in three major banks that brought Enron down.

As she says:

While Washington ponders what to do, or not do, about reforming Wall Street, the nation’s biggest banks, plumped up on government capital and risk-infused trading profits, have been moving stuff around their balance sheets like a multi-billion dollar musical chairs game.I was trying to answer the simple question that you’d think regulators should want to know: how much of each bank’s revenue is derived from trading (taking risk) vs. other businesses? And how can you compare it across the industry—so you can contain all that systemic risk? Only, there’s no uniformity across books. And, given the complexity of these mega-merged firms, those questions aren’t easy to answer.

While we continue to argue over whether or not our banks deserve regulation, their accounting practices are transforming beyond all recognition. Whoever we hire to audit our banks – if, indeed, we ever do so – will face an impenetrable morass.

I know I’m somewhat late to this party, but I wanted to point out to all who are still unaware that the ‘too big to fail’ banks which caused our late crisis are even bigger.

JP Morgan, AIG, Citigroup, Goldman, and Bank of America were the winners of Geithner-Paulson’s free money giveaway (with Lehman a bad loser), and together they have swallowed the hundreds of small and medium banks that have failed since. They now present an even bigger and more systemic risk, should they choose to gamble away their money once again.

Despite repeated calls from almost every respected economist (notably Joseph Stiglitz) that these banks are a menace, Lords Geithner and Bernanke have done nothing to restrict their size – indeed, they have made them impossibly more dangerous and lucrative.

Furthermore, none of the incentives which led to such reckless gambling (ludicrous bonus packages, easy credit, low intrest, short-term rewards) have been addressed, and instead have been reinforced.

The next bailout will have to be 700 trillion instead of a mere 700 billion.

I missed the last three failed bank Fridays, so here are all seventeen that failed in the past three weeks in a row. As always, from the FDIC:

The Times reports on a recently released audit which concludes, beyond the shadow of a doubt, that Timothy Geithner (now Treasury Secretary, then President of the New York Fed) voluntarily gave up vast negotiating powers when choosing to shower AIG with billions upon billions of dollars.

The article is written in standard Times-ese, which is to say that it seeks to relate truly scandalous information in such a way as to cause as little uproar as possible, but although it must be translated into standard English, some truly damning testimony emerges:

Just two days before the New York Fed paid A.I.G.’s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut — but it never got the chance.

UBS, of Switzerland, alone offered to give a break to the New York Fed in the negotiations last November over how to keep A.I.G. from toppling and taking other banks down with it. It would have accepted 98 cents on the dollar.

The Fed “refused to use its considerable leverage,” Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report to be officially released on Tuesday, examining the much-criticized decision to make A.I.G.’s trading partners whole when people and businesses were taking painful losses in the financial markets.

So this means: The New York Fed decided to print 100% of the value of AIG’s investors’ bad loans in order to get them to divest from AIG, and (hopefully) save the money-laundering giant. Realize, now, that the Fed was under no obligation whatsoever to guarantee these loans with taxpayer dollars, and certainly not guarantee them at full value. Given that these CDS loans were later revealed to be totally fraudulent, this decision makes even less sense.

If I convinced you to give me real dollars for Monopoly Money, and then you complained to the government that the Monopoly Money you received was actually worthless, would you expect them to just print 100% of the value and give it to you, no questions asked? Or would you expect them to give you nothing and tell you, in effect, to be smarter next time?

What’s truly astounding about this episode is that some of the banks offered to take less than 100% of the value of their worthless investments, but Geithner refused! He said to them, essentially, that “oh well, it doesn’t matter – it’s taxpayer dollars anyway! Go ahead, take the full value!”

This is the man who is now our Treasury Secretary.

Show me the money!

Three this week, including one from my home state. Who says the recession is over?

Via the FDIC:

As I mentioned in an earlier post the FDIC has seen its reserves dwindle under the weight of this year’s bank failures. Well, the day of reckoning has come, according to The New York Times, who reports that the Federal Deposit Insurance Corporation will fall into deficit this week.

The speed with which the FDIC has eaten through its $50 Billion slush fund should alarm, but after three successive Trillion-dollar bailouts, mere billions fail to awe. Rank-and-file depositors probably have no reason to worry, however – the missing cash will most likely be “borrowed” (at no interest) from the Treasury or from our bailout-bloated mega-banks, in a maneuver only one step removed from simply printing more cash.

Our federal balance sheet has already loosed from any anchor to reality it may have once had, so, the argument goes, what’s a few billion more? But take this as an indication that the glut of bank failures, far from slowing amid last year’s bailouts, has continued at a steady clip.

From the FDIC:

From the FDIC:

Banks are still failing at a rate of 4-10 per week, even if the mainstream press tries to pretend it’s not happening.

ProPublica has an excellent graph showing the FDIC’s wiped-out reserves, which I alluded to in a previous post. Here is the graph, re-posted with due respect:

Disappearing FDIC Reserves

Can anyone say, “Bailout”?

A dark patch in our media’s otherwise cheery coverage of the economy. After three weeks of exultation over Bernake’s re-appointment (even from administration critic Paul Krugman!), endless blather over so-called “green shoots”, and an outright declaration from the Dallas Fed Chief that “The Recession is Over”, our Federal Deposit Insurance Corporation announced it is down to its last $10 Billion. 20% of their funds were reportedly wiped out this quarter alone, bringing them back to early ’90s levels.

The wave of small and mid-level bank failures has not yet abated, though it receives far less coverage than it once did. Here is the FDIC list of failed banks in its stewardship. You will notice a majority failed this year.

If this trend does not reverse quickly, the FDIC will the likely require a government cash infusion. Our wheel of bailouts has come full circle.

In particular, this development throws new light on President Obama’s re-appointment of Ben Bernanke for Fed Chief. The administration would have us believe Bernanke acted “boldly” to “rescue the economy from another Great Depression”, but actual signs of recovery are hard to see. Unemployment still skyrockets (though not with such horrifying swiftness as it did earlier this year), and the banking crisis has clearly not been solved.

Bernanke was also in a leadership position all throughout the run-up to the crisis. He did nothing to stop it, and even tried to convince us not to worry. He repeatedly claimed the subprime issue would not threaten housing in general -  and certainly not the economy as a whole. How quaint such comments seem after all this devastation!

Bernanke may have a very dubious record of public governance, but he has an excellent record of corporate “partnership”. The net effect of his actions since the crisis has been to secure the fortunes of a very few at the expense of our public coffers. It is then not surprising that the corporate world viewed his nomination with great jubilation. Google the words “Bernanke” and “Reassure” together to get a picture of how true this is.

And if there is one thing we can say of President Obama, it is that he has the financial sector’s interests in mind.