A New Way Forward – Restore the Economy in the Public's Interest

Bubble, Bubble

Gillain Tett has a must read piece (tx yves) in the FT regarding the heart of the past financial bubble. It’s based on a good IMF paper, good information can indeed come from bad sources. The piece is much easier to understand if you replace the term “rehypothecation” with Ponzi. Here’s the nut:

Second, as the IMF paper shows, this rehypothecation (Ponzi) activity can be so frenetic it can significantly affect the overall volume of leverage in the system. The IMF paper calculates that, by 2007, the seven largest US brokers were getting about $4,500bn of funding from rehypothecation activity, most of which was not recorded in their accounts or the US government’s flow of fund data.

That’s $4.5 trillion, one third of the entire US economy and here dear reader, you see why all the blowing in the world by Mr. Bernanke and every other central banker is not going to reflate the bubble. We have a choice, we can clear the books and get rid of all the bad debt, or we can all spend the next twenty years working a crippled economy paying off a bunch of debt that was at its foundation fraudulent.

Toil

The financial press has been a gush this morning with the news that German economy grew, wait for it, a whole 2.2%. That’s the largest growth rate in the German economy in twenty years. The FT describes it as “stellar”. Phew! Talk about you’re new normal. Just think if the Euro goes down to fifty-cents, or the neo-Deutsche Mark is released at 75 cents, the Germans might reach 3%.

And Trouble

A liberal education — Barbara Ehrenreich has a piece in The Nation in which she

states, “the federal government, avatar of liberal hope for at least a century, has become hopelessly undemocratic, poisoned by corruption and structurally snarled by partisan divisions.” It even gets better, though there’s a gratuitous slam at the Tea Partiers at the end. The final step of a liberal education will be the over, and too often badly educated left understanding it does indeed have some common ground with “angry white-boy America”, that would be trouble indeed.

Liberals of the United States run from DC, you have nothing to lose but your chains.

Cross-posted from Archein:

Bubble, Bubble, Toil, and Trouble

At the heart of the issue with the financial crisis is the loss of wealth as a result of the crisis itself, but also the extreme transfer of wealth before the crisis to the financial elite. Today, The Hill reports the following:

Financial crisis cost households $17 trillion, Treasury official says

Treasury Department chief economist Alan Krueger on Monday said that household net wealth fell by approximately $17 trillion between 2007 and 2009 because of the financial crisis. Tumbling home and stock prices contributed mightily to the fall, but things are improving.

Let’s see then, what, where, when about the big banks:

SIZE:

According to the Federal Reserve, here are the top 15 banks:

GDP:

BANK OF AMERICA CORPORATION: Assets equal to 7% of GDP
JPMORGAN CHASE & CO. (1039502): Assets equal to 7% of GDP
CITIGROUP INC. (1951350): Assets equal to 6% of GDP
WELLS FARGO & COMPANY (1120754): Assets equal to 3% of GDP
GOLDMAN SACHS GROUP, INC., THE (2380443): Assets equal to 5% of GDP
MORGAN STANLEY (2162966): Assets equal to 5% of GDP

Macroview:

The financial industry takes in 40% of all corporate profits.

Top 6 banks have assets equal to 63% of GDP, up from 17% in 1995.

Top 4 bank own 95% of the derivatives.

According to Rusty Cloutier, a former chairman of the Independent Community Bankers of America, “the four largest banking companies control more than 40% of the nation’s deposits and more than 50% of the assets held by U.S. banks.”[1] “the four largest bank holding companies each have more than $1 trillion of assets, which accounts for about half of the banking industry’s assets.”[2] Similarly, as of the end of the first quarter of 2009, the nineteen largest American BHCs accounted for $8.2 trillion in assets, or approximately 60% of all assets currently held by depository institutions.  This is up from the year end of 2003, when “total assets of the 20 largest BHCs amounted to $5.6 trillion, equivalent to 64 percent of the aggregate for all BHCs or about 50 percent of GDP.”[3]

• In 1995, the top five banks had 11 percent of the country’s deposit share.
• That grew to 29 percent by 2005 and today, the five institutions have nearly 40 percent of deposits.[4]
• The top five US banks’ deposit share grew from 11% of total deposits to 37% of deposits in 13 years!
• Where the largest bank in the US in 1995 had 2.7% of deposits, we now find three banks have over 10% of deposits. [5]
• the number of banks with under $100 million in assets dropped by 5,410 from 1992 to 2008.[6]

For scale: Goldman Sachs bonus pool in 2009 exceeds Haiti’s national GDP, compare $14 billion to $8 billion.

BAILOUT:
The federal government has disbursed $4.7 trillion or $33,000 per taxpayer to the largest financial institutions to prop up these banks after the fallout from the financial crisis. We’re still $2 trillion outstanding.

The Financial Crisis Tracker gives a monthly snapshot of housing foreclosures, unemployment rates and the total cost of the Wall Street bailout. The Tracker is presented in the form of a widget that can be downloaded to your webpage.

From Sourcewatch:

Included in our tally is the Troubled Asset Relief Program (TARP) of the U.S. Treasury as well as the flow of funds under dozens of different Federal Reserve programs, and supports to federal housing institutions like Fannie Mae and Freddie Mac that primarily assist banks. Unlike other bailout tallies, we do not include economic stimulus funds, unemployment insurance, student loan aid, the auto bailout, “Cash for Clunkers” or other efforts to create jobs or assist the citizenry.

Learn more about the 35 programs included in our tally by visiting our Total Wall Street Bailout Cost Table which contains links to pages on each program with details about the program funds disbursed and outstanding.

UNCOMPETITIVE BEHAVIOR:
In 2009, top 4 banks raised fees an average of 8%, small banks lowered their fees by 12%.

From NewRules: Small and medium banks do most of the lending in our communities, big banks do very little. “Although small and mid-sized banks ($10 billion or less in assets) control only 22 percent of all bank assets, they account for 54 percent of small business lending. Big banks, meanwhile, allocate relatively little of their resources to small businesses. The largest 20 banks, which now command 57 percent of all bank assets, devote only 18 percent of their commercial loan portfolios to small business.” (See our graphs for more detail.)”

There’s much more. Big banks have higher fees than small banks.

Bank Consolidation, Internationalization, and Conglomeration: Trends and Implications for Financial Risk”

“Until 1978, about half of the states in the country had usury laws on the books capping credit card interest rates. While these state usury laws remain on the books in several states, they were effectively eradicated by a 1978 Supreme Court decision (Marquette National Bank vs. First of Omaha Service Corp) which concluded that national banks could charge whatever interest rate they wanted if they moved to a state without a usury law. The amendment applies the same statutory interest rate cap on credit cards that Congress imposed on credit unions in 1980 as a result of an amendment to the Federal Credit Union Act that capped interest rates on credit union loans, including credit cards, at 15 percent, ” Sanders’ site.

IMPORTANT BIG BANK REGULATORY EXEMPTIONS/REGULATORY CAPTURE:

From AFR:

“While the Riegle-Neal Banking of Act of 1994, which established a 10% cap nationally on any particular bank’s share of federally-insured deposits, should have been a barrier for at least some of these mergers, holes in the law and regulatory forbearance permitted them to go through anyway. For example, the deposits of an acquired thrift do not count towards the cap, a loophole that allowed Bank of America to acquire Countrywide even though the overall deposits of the combined institutions far exceeded the cap. The law also allows banks to exceed the cap through organic growth and provides great flexibility to regulators to find ways around the limit. By establishing a hard 10% cap on the overall holding company, this legislation would close the loopholes and obviate regulatory forbearance.”

CNN outlines Citi and BoA exemption to allow their banks to lend to their brokerage affiliates.

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage affiliates. The exemption, which is temporary, means, for example, that Citigroup’s Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.
..

The regulations in question effectively limit a bank’s funding exposure to an affiliate to 10% of the bank’s capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, “that represents about 30% of Citibank’s total regulatory capital, which is no small exemption,” says Charlie Peabody, banks analyst at Portales Partners.

The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in “the most rapid and cost-effective manner possible.”

So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.

UPDATE from Johnson/Kwak in American Prospect:

From the Garn St.-Germain Act of 1982 (substantially deregulating savings and loan institutions) to the Gramm-Leach-Bliley Act of 1999 (allowing combined commercial and investment baking) and the Commodity Futures Modernization Act of 2000 (permitting largely unrestricted trading in derivatives), Congress relaxed the regulatory constraints that had housebroken the financial industry since the 1930s, while failing to establish effective oversight of custom derivatives. The Federal Reserve spent the 1990s relaxing constraints on commercial banks and the 2000s neglecting to enforce consumer-protection laws against predatory mortgage lenders. In 2004, the Securities and Exchange Commission relaxed capital requirements for major investment banks in exchange for the power to oversee them through the Consolidated Supervised Entity program — a program that failed spectacularly with both Bear Stearns and Lehman Brothers.

CORRUPTION:

In some cases, we’re talking a new definition of corruption, it defines a new kind that is more widespread and harder to break away from — campaign contributions and the resulting positive thinking that comes from it.

UPDATE: Those voting against the SAFE Banking Amendment got nearly twice as much in campaign contributions from the finance sector — Big Banks Bought the SAFE vote.

Looking at finance/insurance/real estate sector campaign contribution data from OpenSecrets.org, I found that senators who voted against the Brown-Kaufman SAFE Banking amendment have received nearly twice as much money from the big banks at the senators who voted in favor of it. Specifically, the average senator voting against the amendment has received $3,536,187 from the financial sector over the course of their careers, while the average senator voting in favor has received only $1,846,292. It’s very close to double for those opposed. And when we are talking about millions of dollars, double is a whole lot of money and a whole lot of influence.

Big banks were not allowed to fail, there is a government guarantee of a bailout. The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) allowed the federal government to rescue uninsured depositors of large banks if not doing so posed a systemic risk, eliminating the possiblity for bankruptcy by the largest banks.  Banks that became too-big-to-fail over the years have earned themselves this government guarantee on losses. In addition, by dominating the market and having systemically important market power, the greatest lobbying powers, and the political-economic safety net of the FDICIA, the largest banking institutions became truly so politically powerful that they could not fail.

Tax subsidies, hidden handouts, discount window for big banks only. Dean Baker outlines:

First on the list of taxpayer handouts to Citi would be the “too big to fail” (TBTF) subsidy. This subsidy is the result of the fact that investors know that the government will not allow Citi to fail because it would create too much disruption in the economy. In effect, taxpayers are implicitly guaranteeing Citi’s loans. This allows Citi to borrow at much lower cost than if it had to compete in the market like other businesses. In a paper I co-authored with Travis McArthur last year, we calculated that Citi’s TBTF subsidy could be as much as $4.4 billion a year.

UPDATE from Johnson/Kwak in American Prospect:

The collapse of Lehman Brothers and the near failures of Morgan Stanley and Goldman Sachs — chronicled in detail in Andrew Ross Sorkin’s Too Big to Fail — should have shaken this belief. The recent report by Anton Valukas, the examiner in the Lehman bankruptcy, revealing a history of (at best) misleading accounting and lax government oversight, should have obliterated its remains. But although Washington is more willing to regulate now than in years past, one thing has emphatically not changed: the power of the banking industry to fight back. All of the techniques honed over the past few decades have been evident in full force over the past year…..

Journalists Ryan Grim and Arthur Delaney have documented how Democrats have placed new, relatively conservative members of Congress from Republican-leaning districts on the House Financial Services Committee, because it increases their ability to raise money. Unfortunately, the effect was to create an influential bloc of banking-friendly Democrats on the committee, who allied with Republicans on certain issues to weaken financial-reform legislation, against the wishes of committee Chair Barney Frank.

Matt Taibbi points out the issue of lobbying dollars, and policies that were passed in big banks’ names.

“Wall Street is so worried about the prospect of real reform that for over a year now, it’s handily spent $1.4 million daily in lobbying and campaign contributions, attempting to buy out policy-makers and prevent substantive financial reform from passing.”

The Democrats here are going to suffer, deservedly so, for having taken so much money in the past from Goldman and banks like Goldman. That fact now allows transparent bullshitters like Palin — who incidentally supported the bank bailouts — to credibly argue that this Regulatory Reform bill is an industry creation. It doesn’t hurt that the Democrats’ last major piece of legislation, the Health Care bill, actually was a monstrous giveaway to industry that allowed campaign contributors to appropriate the power of the state to extract profits from ordinary people.

This Regulatory Reform bill is not that, but if you’re a Tea Partier, what about the past history of the Democrats would lead you to believe otherwise? Thus Carl Levin can get up there and roar all he wants at Lloyd Blankfein today, but the way this is going to play to a good 30% of the electorate is that the Democrats and big Lloyd are putting on a dog-and-pony show in order to smooth the way for the next chapter in their world domination plan. Hell, even writing that right now, I’m starting to believe it myself.

The reality, of course, is that this is a make-or-break moment for Goldman, Sachs. It just may be that the Democrats, after years of intimate partnership with this firm, have finally decided to “go in a different direction” and cut Goldman loose, purely for political reasons. A close friend of mine from Russia points out that there are parallels here to Putin’s ascension to power, when a rookie president pushed into his seat by a gang of oligarchs decided upon election to whack the most obviously odious of the bunch — Bank Menatep’s Mikhail Khodorkovsky — in order to firm up his “reform” credentials and, politically speaking, put himself on the other side the obscene corruption of the Yeltsin era.

Zero Hedge points out a senator who currently is pushing for reform who was swayed by the big banks then.

Yet in order to keep a fair and balanced perspective on things, it may behoove those watching Carl Levin’s sanctimonious monologues to realize that the November 4, 1999 vote on S. 900, better known as the Gramm-Leach-Bliley Act, received Senator Levin’s full endorsement. If Goldman is the pure, unadulterated evil it is today, it is so only because of idiotic Senators who were corrupt, or stupid enough, or both, to let GLB pass when it did, and usher in the era of unbridled prop trading/hedge funding by banks with full access to the discount window and taxpayer bailouts…
From Govtrack.us (funny, when it should really be dot com)

Between 1998 and 2006, the average increase in lobbying spending to Congress from the Finance, Insurance and Real Estate industry (FIRE) increased by 25%, compared to an average 10% increase of other industries. The FIRE sector is the largest contributor at $3,567,970,558 from 1998 to 2009.  The Securities Ind & Financial Markets Assn (SIFMA) made $5,585,0000 in contributions in 2008 on behalf of FIRE. Sunlight Foundation has this great graph.

Looking at the largest contributors within FIRE, we can compare how political contribution levels before (1990-1996) and after (1998-2008) firms engaged in megamergers and the political contributions during the period when Gramm-leach-Bliley was most heavily lobbied for (1996-1998). Political contributions show a correlation to the passing of policies that allow firms to become too-big-to-fail and enter a state of infalliability in the market across all metrics — competition, lobbying, securities and depository assets.

CAUSES OF THE CRISIS:

Kevin Drum: “It’s true that a lot of reasons for the crisis have been offered up. Here are the ones that occur to me just off the top of my head:

1. Housing bubble (i.e., the pure mania aspect of the thing).
2. Massive increase in leverage throughout the financial system.
3. Global savings glut/persistent current account deficits.
4. Shadow banking system as main wholesale funder for banking system/Run on the repo market.
5. Fed kept interest rates low for too long.
6. De facto repeal of Glass-Steagall in 90s (and de jure repeal in 1999) allowed banks to get too big.
7. Commoditization of old-school banking drove increasing reliance on complex OTC securities as the only way to earn fat fees
8. Mortgage broker fraud.
9. Explosive growth of credit derivatives magnified and hid risk.
10. Overreliance on risk models (VaR, CAPM) that understate tail risk.
11. Wall Street compensation models that reward destructive short-term risk taking.
12. Originate and distribute model for mortgage loans.
13. Three decades of deregulation/political economy of lobbyists.
14. Endemic mispricing of risk throughout market.
15. Ratings agency conflict of interest.
16. Investment bank change from partnerships to public companies.
17. Government policies that recklessly encouraged homeownership.”

REVOLVING DOOR:

Obama White House Counsel, Greg Craig, left his keep post and is now working as counsel for Goldman Sachs.

Past Goldman Executives
A total of 30 ex-Congressmembers and aides are now registered as Goldman Sachs lobbyists, for example Rick Gephardt (D, MO)

Henry Paulson, was CEO of Goldman Sachs, then becameTreasury Secretary under George W. Bush

Larry Summers, was Goldman executive, now head of National Economic Council

Neel Kashkari, VP of Goldman, oversaw TARP under Bush

Goldman Sachs was the top contributor to Obama’s presidential campaign at $980,000

Geithner-related:
Mark Patterson, Top Advisor to Geithner, previously GS lobbyist
Gene Sperling, Geithner Aide, previously GS lobbyist
Allen Stanford, Geithner Aide, previously GS lobbyist
Lee Sachs, Geithner Aide, previously GS lobbyist

Citi-related:
Robert Rubin, Treasury Secretary under Clinton, now Citi executive

Sources: Sott.net and Bloomberg

NECESSARY REFORMS:

Structural change, go directly at the power and ability to corrupt and capture. Regulatory capture must be addressed in order to actually enforce TBTF regulation.

REFORM IN CONGRESS:

The Most Important Amendment: SAFE Banking Act nips too-big-to-fail in the bud before it happens. Show your support with our petition.
-2% GDP cap for non-deposit liabilities for all banks, break up any bank that is bigger than $280 billion, which will affect the 9 largest banks.
-3% GDP cap of all liabilities for non-banks
-statutory limit level 16.67:1

A very important amendment: End usury, state pre-emption laws. “The amendment applies the same statutory interest rate cap on credit cards that Congress imposed on credit unions in 1980 as a result of an amendment to the Federal Credit Union Act that capped interest rates on credit union loans, including credit cards, at 15 percent.  The reasonable interest rate cap that Congress imposed on credit unions has protected consumers from being charged usurious interest rates; it has not harmed the safety and soundness of these institutions; and it has not negatively impacted the access to credit of credit union members. Credit union members with good credit scores are still able to receive credit cards and loans that they need at reasonable interest rates. Unlike banks, credit unions have not received hundreds of billions of dollars from the Troubled Asset Relief Program.”

A very important amendment: Audit the Fed: “While the Treasury Department is posting TARP bailout recipients and amounts on their web page, the Fed is quietly spending much more, as much as $2 trillion, but is not telling us who is getting the money or why. Sanders’ bill parallels the Ron Paul-Alan Grayson language from the House bill.” Rally your senators with Bankster here.

A very important amendment: Glass-Stegall Revival: Zero-Hedge sums up creating a firewall between greedy investor risk and people’s deposits:

Any attempt at fixing Goldman must begin with reinstating Glass-Steagal – period. Anything and everything else is smoke and mirrors. Yes it will be painful (for the banks), and yes it will cost massive equity losses due to forced spin offs (for bank shareholders), but it will prevent the next scapegoating circus after the fact. How about we preempt these things from happening for once? That said, we applaud the 8 out of 100 senators who had the foresight to not sell their country’s future to the banking cabal.

From Rortybomb:

We do need an audit of the Federal Reserve.

CMD UPDATES WALL STREET BAILOUT TOTAL, FOCUS ON HOUSING $1.6 Trillion Disbursed to Prop Up Mortgage Market, Yet 367,056 Properties Foreclosed in March, the Worst Month Since 2005Today, the Real Economy Project of the Center for Media and Democracy (CMD) released an update on CMD’s Wall Street Bailout accounting that unlike other bailout assessments, includes Federal Reserve loans. CMD finds that the Federal Reserve, the U.S. Treasury and FDIC combined have disbursed a total of $4.7 trillion on the bailout of which $2 trillion is still outstanding.

CMD’s assessment also shows that the Federal Reserve and the U.S. Treasury have disbursed $1.6 trillion in an effort to prop up the mortgage investment market through purchases of mortgage-backed securities and Fannie Mae and Freddie Mac debt. The majority of this money was from the Federal Reserve and was not subject to Congressional debate or approval.

At the same time, the U.S. Treasury Department has spent a small fraction of this amount, $90 million, on the Home Affordable Modification Program (HAMP). HAMP is the only Congressionally-authorized program that is actively spending money and designed to prevent foreclosures. Yet, foreclosure filings were at historic highs in March — 367,056 — an increase of nearly 19 percent from the previous month, and the highest monthly total since 2005, according to RealtyTrac.