Technology & Finance

Monday, July 27, 2009

Time for Obama to Lead

Whoever would have thought that people would be looking back to George Bush and his self-appointed label as “The Decider” and asking when Obama will show his ability to move beyond speeches.

Great first step – he has outlined the problems facing the nation and done a huge amount to improve the American image around the world.

However, I have to agree with Clive Crook in the Financial Times who asked why the Democrats are having such problems with health care legislation when they have veto-proof majorities.

“But the question remains, why under these uniquely favourable circumstances has the process run into such trouble? In my view it is not because the US rejects the case for comprehensive health reform. The fault lies with the president, and his strange failure to lead.”

I have written extensively about the timid proposals to reform the financial industry. The administration has people who were part of the problem – Timothy Geithner and Larry Summers, who were part of the creation of the crisis.

Serious change would divide up the big banks into deposit taking institutions with FDIC insurance, risk-taking firms that could trade away, and if you really wanted to improve the economy and cut conflicts of interest, merger and acquisition advice would be limited to fee-for-advice firms that had no stake in the outcome.

Instead, too-big-to fail has become way-too-big-to-fail. Breaking up the banks would reduce the degree of regulation needed, although I haven’t seen any Republicans calling for such a solution either.

Wasn’t it Bill Clinton who suggested Obama gave nice speeches but lacked substance? I do hope he won’t be proved correct.

But as Clive Crook added, “If health reform does go down to defeat, it will not be because of Republican opposition, but because of dissenting conservative Democrats and disaffected moderates in the country at large. In disappointing these people, Mr Obama has badly miscalculated. His political power depends on them. He must take the lead in devising a health reform capable of appealing to the centre. For his own good and the country’s, he needs to be the president the US thought it was electing.”

So take a look at this suggestion from commondreams.org – the writer asks everyone concerned to send him a birthday card asking him to do something. August 4.

Sounds like a good idea.

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Monday, July 13, 2009

Vanity Fair and Rolling Stone -- Required Reading for the Financial Crisis

Better add Vanity Fair and yes, Rolling Stone, to your reading list if you want to understand the financial crisis. No longer are Banking Technology, the Economist and the FT enough.

In the current issue, Michael Lewis of “Liar’s Poke” fame, delves into the role played by AIG Financial Products.

“Here is an amazing fact,” writes Lewis. “Nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that without the intervention of government would have led to the bankruptcy of every major American financial institution plus a lot of foreign ones too, A.I.G.’s losses and that trades that led to them still haven’t been properly explained.”

The U.S. government apparently made its bailout decisions without ever investigating who had done what. When Ed Liddy, the retired Allstate executive who was brought in as CEO, testified before Congress, he didn’t know the names of the people who had caused the problems. As a congressman asked, how can you clean up the place if you don’t know who the people are?

Using A.I.G.’s AAA credit rating, the group provided guarantees for subprime mortgages which came to make up 95 percent of its portfolio, although the guy in charge didn’t know it. Everyone in the business assumed house prices would never fall so the risks were minimal. Of course, they did fall and A.I.G. couldn’t make the payoff to counterparties like Goldman Sachs and Merrill Lynch until Hank Paulson, former CEO of Goldman, stepped in as Treasury Secretary and made good the full payments. That’s risk management for you – put your boss in charge of the U.S. government checkbook so if you face losses, he can make the payment from the Treasury.

“How could the U.S. government simply hand over $54 billion in taxpayer dollars to Goldman Sachs and Merrill Lynch and all the rest to make good on subprime insurance A.I.G. F.P. had sold to them – especially after Goldman Sachs was coming out and saying that it had hedged itself by betting against A.I.G.?”

For the answer to that, turn to Rolling Stone and Matt Taibbi’s excellent article on Goldman Sachs “The Great American Bubble Machine.”

He cites the Goldman connections, including Ed LIddy who was a Goldman director…”There’s John Thain, the asshole chief of Merrill Lynch who bought at $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multi-billion handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden parachute payments as his bank was self-destructing…”

Taibbi is an amusing writer who has done some great research, shows how Goldman contributed to the Internet bubble by lowering its underwriting standards and using laddering to create momentum in new issues, and spinning – which Taibbi says were bribes to newly public company executives in return for future business.

In an echo of Philip Augar’s book “The Greed Merchants,” Taibbi says “Such practices conspired to turn the Internet bubble into one of the greatest financial disaster in world history. Some $5 trillion of wealth was wiped out on NASDAQ along, but the real problem wasn’t the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market.”

Goldman has proved expert at using Washington to further its business.

When the CFTC wanted to regulate derivatives trading and maintain capital cushions, Robert Rubin pushed Congress to strip the agency of its regulatory authority, which occurred with a bill inserted in an 11,000 page spending bill passed on the last day of the session.

At the same time Goldman was packaging subprime to sell to institutional investors like hedge funds, it was shorting the market for its own positions, and bragging about it. Taitti describes a $494 million issues where many of the mortgages were second mortgage borrowers, average equity in their houses was .71` percent, and 58 percent had little or no documentation. Yet Moody’s and Standard and Poor’s rated 93 percent of the issue as investment grade.

And the hike in gas prices last year? In large part a result of Goldman’s driving speculation in oil markets, where the amount of speculative money grew from $13 billion in 2003 to $317 billion in 2008. The average barrel of oil traded 27 times even while demand was dipping. A Depression era regulation to limit the number of speculators in order to protect farmers, was modified by the CFTC in response to a request from J. Aron, the commodities trading arm of Goldman, in 1991.

Amazingly, the letters to Goldman and 14 other exemptions, were made secretly, without the head of the CFTC knowing, and came to light only by accident with a Congressional staffer talking to CFTC. When the staffer asked to see the letter, the CFTC said they would have to clear it with Goldman Sachs – a letter that had been issued 17 years before.

Coming next? Making a fortune off carbon trading. Instead of the government simply raising taxes on carbon, and collecting the money, the cap and trade bill would turn the tax over to Wall Street firms, like Goldman Sachs. The bank paid out $4.7 billion in bonuses and compensation in the first three months of this year; its 2008 federal tax bill was $14 million, an effective tax rate of one percent.

Where will it go from here? The head of the New York Fed is a former Goldman banker, the treasury chief of staff is a former Goldman lobbyist, the bank gave the Democratic party $4.4 million in the last election.

His conclusion –“It’s a gangster economy running on gangster economics.”

These are two ground breaking articles with information that hasn’t appeared before.

Banking Regulation - It Would be Good for Consumers

Could American consumers come out of this crisis with a little help from Washington? The Obama administration is pushing a new consumer protection agency to regulate the bankers, and the bankers are going to do their best to kill it.

This agency would focus solely on the consumer and the proposed legislation would give it the power to set standards for traditional mortgages and could prohibit mortgage products with hidden fees and prepayment penalties.
The banking industry, whose idea of innovation often revolves around highly profitable products that are dangerous for consumers and get them deeper in debt, sees the danger.

In the Wall Street Journal, a law professor, Todd Zywicki, argues that borrowers should be treated like adults and banks should be free to provide innovative products.  Adjustable rate mortgages have been common in Europe and the 30-year fixed should not be the only choice, he says.  True enough, but there is plenty of room for choice without offering mortgages like some recent products with a 2.5 percent teaser rate that then jumps to 10 percent. That has no advantage to borrowers and is just a tool for fast-talking salesmen to make big commissions while endangering borrowers.

“A new agency premised on the erroneous belief what consumers need is to be protected from themselves is likely to do more harm than good,” he concludes.
Wrong. They need to be protected from banks and mortgage brokers.  I am waiting for some economist skilled at dreaming up wild statistics to estimate how much it costs for individuals to run their own retirement programs – research, investing, commissions, hidden marketing fees, opportunity costs, not to mention the huge costs of a financial services industry – compared to a pension provided by a company or government.

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