Tag Archives: occupy wall street

Did Dodd-Frank Act End “Too Big To Fail”?

By Robert E. Prasch

Since the triumphal passage of the Dodd-Frank Wall Street Regulation and Consumer Protection Act on 21st of July 2010, we have been told repeatedly that the United States would “never again” be confronted with a “choice” between bailing out a large insolvent financial institution “or else.” If so, this means that one of the most pernicious and damaging features of capitalism has been forever solved. Were we convinced that the 111th Congress and the Obama Administration had actually achieved this, all right-minded persons would surely exclaim, “What a gift to the country, what a gift to humanity!” Yet, it is evident that few of us are doing that. Is the problem in ourselves? Are American voters hopeless ingrates? Or, is it that our suspicions are well-grounded?

With the emergence of Occupy Wall Street only a year before the 2012 elections, the prospects and promise of the Dodd-Frank Act is – as it should be — pivotal to our assessment of the record of this Congress and Administration. As such, let us take a moment to contemplate the specifics of the much-vaunted process that – we are told – will ensure the most important promise of Dodd-Frank – the anticipation and prevention of another fantastically costly bailout. The recent and very public troubles of Bank of America suggest that a test may be coming soon. If Dodd-Frank works as advertised, BofA’s pending failure should not cost the public a cent – and that certainly is good news, is it not? 

To assess this core claim of Dodd-Frank, let us contemplate the specifics of the process that will — we have been told — successfully identify, take over, and resolve large systemically important financial institutions before they fail. To reiterate, we have been told that firms fitting this description can and will be taken over before they are insolvent, and especially before the problem becomes a charge on the public purse. As this process is best understood by an example, let us begin by supposing that one of the nation’s largest systemically important bank holding companies (BHC) is in trouble (although it could be any financial institution designated previously as systemically important). Let us further suppose that this BHC – as so many do — relies upon short-term borrowing in the markets to support a highly-leveraged portfolio of speculative, risky, and now-troubled assets. To keep it real, let us suppose that few of these assets can be traded and thereby “priced” in open or competitive markets. It is, of course, unnecessary to point out that when traders and senior managers put together these deals they greatly enriched themselves. But, they have long since cashed their bonus checks, so the problem now belongs to the bank – and potentially the public.

Today, the BHC’s stock price is falling, credit default swap premiums on its assets and the debt it issues are rising, and counter-parties are demanding ever-greater collateral to provide short-term financing. Many money-managers who have had long-standing lending relationships with this bank are refusing to provide further financing at any price, and large clients are beginning to withdraw their funds and move their accounts. Stated bluntly, the future of this firm is bleak and the situation is worsening at an accelerating pace.

What happens now? The bank’s first defense is — as always — a flat-out denial that they are in trouble. But such protests are unlikely to convince its peers, big-time money managers, or other savvy counter-parties or players. In the nineteenth century, it used to be said that if a lady had to publically defend her reputation, it was too late. Times may have changed in these matters, but for financial institutions this old adage remains true. A need to publically proclaim its solvency can — and should — be taken as prima facie evidence that a bank either is, or is about to be, insolvent. Let us, then, suppose that the situation continues to worsen for our hypothetical firm.

The bank’s second step is to highlight its internal audit, along with the clean bill of health it has received from its highly reputable outside accountants and lawyers. Wall Street will not be convinced. Why? Because they know that these audits are readily and routinely rigged through “creative accounting.” To illustrate this point, I have my classes guess how many quarterly earnings statements showed losses at New Century Financial before its massive collapse in March 2007. The answer, dear reader, is zero. The process by which one goes from being a high-flying and highly-profitable darling of financial innovation to catastrophic bankruptcy without ever passing through an unprofitable quarter is, I will submit, “complicated.” Indeed, the SEC also thought that it was “complicated” and brought a suit. Unfortunately, this suit was settled for essentially a pittance – a “lesson” not lost on other Wall Street players and those who are obliged to interact with them. Least this case be considered a singular event, I remind them that S&P gave Lehman Brothers an “A” rating until weeks before its collapse. Similar examples abound throughout this and earlier crises.

Third, an upsurge of campaign “donations” from the troubled BHC will ensure that at a substantial portion – if not a majority — of Congresspersons will avidly assent to the firm’s own assessment of its condition and prospects (Let us note that if it is indeed insolvent, these donations and other lobbying and public relations expenses are de facto additions to the federal debt). Although the reasoning and arguments then presented to the public by these august tribunes of the people might be embarrassingly shallow, we can be sure that they will lean on the political appointees heading the regulatory agencies to take “a broad interpretation” of the situation. Simultaneously, the bank’s senior compliance and legal advisors, who in all likelihood are former senior staff at the regulatory agencies to which it answers, will contact their old colleagues to argue and reargue the bank’s version of its financial condition. They will emphasize its singularly sunny prospects for future success.

Let me digress by observing that it will not escape the attention of those who staff the government’s regulatory agencies that their former colleagues have moved into substantially higher tax brackets and much tonier neighborhoods. To that end, perhaps we should allow our regulators to indulge in a moment of wistfulness. After all, in the aftermath of such reunions it is only human to feel somewhat conscious of one’s own comparably modest socio-economic status. If our public servants are at all like most people, they might pause to consider a career move… But such ruminations are beside the point. Or are they?

Let us suppose that our regulators remain stalwart, undaunted, resolute, and unmoved by such considerations. They are good people, professionals who readily eschew fantastic opportunities to remain faithful public servants. Nevertheless, as a consequence of the bank’s previous moves, Congress is in an uproar, the White House is worried, and Wall Street has closed ranks behind the bank (the latter are sufficiently intertwined with its fortunes that they stand to take large losses). Outside of the halls of power, think-tank “experts,” television “opinion leaders,” newspaper reporters, and editorialists are running unfavorable stories about the supposed “anti-market” bias of regulators, etc. Meanwhile, the regulators, if they are doing their job properly, are not conducting interviews or discussing the story with the media. Consequently, their side of the story – and only they have access to the bank’s balance sheet – is underrepresented in the press. Moreover, those few newspapers running stories that suggest that the bank’s problems may be real will be accused of being irresponsible or anti-business. They may even have been – quietly — threatened with lawsuits claiming libel. We should recall that even spurious lawsuits can be expensive for most daily or weekly newspapers.

As the disinformation campaign moves into high gear, the regulators must get the Board of Directors of the FDIC to vote that this bank is on the brink of collapse and for that reason should be taken over quickly, before it becomes insolvent and thereby a public charge. This Board, let us recollect, is made up of three permanent members serving six year terms in addition to the head of the Office of the Comptroller of the Currency and the head of the Office of Thrift Supervision, who both serve in ex officio status. All of them are appointed by the President with Senate approval and no more than three of the five of them may be from the same political party. Stated simply, the Board may represent a variety of views, but we can be confident that the largest financial institutions have had an opportunity to carefully vet all of the participants in the discussion. After all, few administrations or senators have the stomach to fight the nation’s most powerful industry over what — to the public — may appear to be relatively obscure bureaucratic appointments. However, to give credit where it is due, over the last five years the FDIC is one of the few agencies to have shown some life in regulatory matters. One reason may be the personalities involved. Another may be that it is their funds that are used to cover depositors’ accounts and, for that reason, they are the agency left “holding the bag” in the event of a catastrophic failure.

Supposing that the FDIC has decided that this bank must be resolved, the next to vote is the Federal Stability Oversight Council (FSOC). This group is Chaired by the Secretary of the Treasury and its nine other voting members include the Chairman of the Federal Reserve Board, the Chair of the Commodity Futures Trading Corporation, the Comptroller of the Currency, the Chair of the Securities and Exchange Commission, etc. Each and every one of these individuals took their positions only after a Presidential appointment and a Senate hearing. Once again, banker views were fully present and accounted for. In short, these are people known in Wall Street/D.C. circles for their “sound views” — that is to say long-standing sympathy toward politically prominent banks, bankers, and related financial institutions. In many if not most instances, they were themselves formerly bankers or worked in law or accounting firms catering to the financial sector. This characterization also describes the bulk of their deputies. The final step is to formerly notify and advise the President of the FSOC’s decision. While lawyers and others who have examined Frank-Dodd have not agreed as to whether the President has the authority to override a vote of the FSOC, it is difficult to imagine that these several senior appointees would have allowed the process to advance this far without White House approval.

Now, let us recall that all of the above will occur as the large financial institution in question is in the throes of a rapid and accelerating downward spiral – yet it is supposed to be completed even as the firm remains – if just barely – solvent. While the Feds might try to keep their deliberations a secret, it is hard to imagine that financial markets will long remain in the dark about them. For that reason, the bank in question will find that it must post ever-greater collateral to retain the short-term financing it requires to operate. Credit Default Swaps will soar, ratings agencies might decide to (belatedly) issue a downgrade on the firm’s debt, and the bank will struggle to place its commercial paper or otherwise raise funds. Consequently, it will become increasingly dependent upon the Fed’s Discount Lending facility, which means that that latter institution stands to be even more embarrassed by the pending failure, and for that reason inclined to postpone the resolution of this bank.

Since the passage of Dodd-Frank a year ago, I have attended multiple conferences in a variety of locations in the United States and Canada. At each of them, I have informally polled a range of colleagues studying monetary and financial economics to find out if they believed that the above process has any chance of working as described. I specifically ask them if they believe that the FDIC and FSOC could (1) identify a pending failure some time before it becomes insolvent, and then (2) organize the regulatory and political will to take over a massive, interconnected, and politically powerful institution, and (3) navigate the process of arriving at a decision in a time frame sufficiently short to avoid a massive run on the institution, a run that could readily spread to similar institutions and to those firms dependent upon them. Let us recall that the prevention of just such a run is the primary task of financial regulation. To date, I have not found a single individual who believes that it will work.

For myself, I will continue to accept the view of Vermont Senator Bernie Sanders (I-VT), that “If an institution is too big to fail, it is too big to exist.” Despite what we were told, alternatives to Frank-Dodd do, and did, exist. For example, on November 6th 2009, Senator Sanders introduced legislation that would give the Secretary of the Treasury 90 days to report to the Senate with a list of commercial banks, investment banks, hedge funds, insurance companies, and other financial institutions that were “Too Big To Fail” (TBTF). The Secretary would then be granted a year from the date of that report to break them up. Sanders’ bill was not taken up.

Later, Senators Sharrod Brown (D-OH) and Ted Kaufman (D-DE) actually got a bill called the SAFE Banking Act of 2010 to the Senate floor. It would have imposed binding leverage and liability limits on bank holding companies and financial institutions, thereby effectively breaking up the largest of them. This bill was opposed by most Republicans and leading Senate Democrats (including Senators C. Dodd (CT), D. Feinstein (CA), J. Kerry, and both Senators from New York and New Jersey). The White House and the Treasury Department were also opposed. Unsurprisingly, it failed by a vote of 61-33 on June 17th, 2010 despite attracting the support of three Republicans. Senator Judd Gregg (R-NH), whose “centrist” views had once moved the Obama Administration to nominate him for Secretary of Commerce, summarized the sentiments of those voting against this act, “I don’t understand this Brown-Kaufman Amendment. Basically, what it says is if you’re successful … you’re going to break them up? I mean, where does this stop?”

Alternatives to Frank-Dodd’s cumbersome resolution authority clearly exist, and continue to exist. The key is prevention – do not allow individual banks to become so large or so leveraged as to threaten the system (while the system itself can be a source of risk, that is a separate issue). The problem was and remains a lack of political will on the part of both political parties. On the matter of Too Big To Fail, Occupy Wall Street and the broader American public are themselves asking, “Where does this stop?” Good question, maybe the Senator from New Hampshire, one of his colleagues from the Democratic Party, or someone from the Treasury or the White House will deign to let us know. 

Robert E. Prasch is Professor of Economics at Middlebury College where he teaches courses on Monetary Theory and Policy, Macroeconomics, the History of Economic Thought, and American Economic History. His latest book is How Markets Work: Supply, Demand and the ‘Real World’ (Edward Elgar, 2008).

How I tracked down The Market

By Dr. Gal Noir*
I have been working as an undercover investigator of hijackedeconomic truths for many years. It doesn’t pay much, I work long hours, but Isleep well at night. It is the nagging questions that help me get up in themorning and do what I do. What is the economy for? Where has the middle classgone? Why have manufacturing jobs fled the US? Why is CEO-to-worker pay ratio471:1 in the US, while it is only 20:1 in Canada?  Why haven’t we wiped out unemployment once andfor all? No, really. Permanently! Why do we have child hunger, mass poverty,and stunning income inequality in the richest country in the world? Andeverywhere I turn, I keep getting the same answers: “Because The Market said so! Because this is how The Market works. Because these are thelaws of The Market.”

An Open Letter to California Attorney General Harris

By William K. Black

First, let me join with New York Attorney General Schneiderman in congratulating you for your decision to withdraw from the mortgage foreclosure settlement. Two of the states with the largest number of victims have decided that the proposed settlement is inadequate and dangerous because of the scope of the releases. Your explanation for your decision in your letter to Attorney General Miller was concise, polite, and persuasive. Attorney General Miller deserves credit for his efforts – four years ago – to warn the Federal Reserve about endemic mortgage fraud by nonprime lenders. I quote key passages from his warnings below.

Continue reading

Don’t Let Him Get Away With It

The Politics of Deception

By Michael Hudson
(Cross-posted from Counterpunch)

The seeds for President Obama’s demagogic press conference on Thursday were planted last summer when he assigned his right-wing Committee of 13 the role of resolving the obvious and inevitable Congressional budget standoff by forging an anti-labor policy that cuts Social Security, Medicare and Medicaid, and uses the savings to bail out banks from even more loans that will go bad as a result of the IMF-style austerity program that Democrats and Republicans alike have agreed to back.

The problem facing Mr. Obama is obvious enough: How can he hold the support of moderates and independents (or as Fox News calls them, socialists and anti-capitalists), students and labor, minorities and others who campaigned so heavily for him in 2008? He has double-crossed them – smoothly, with a gentle smile and patronizing patter talk, but with an iron determination to hand federal monetary and tax policy over to his largest campaign contributors: Wall Street and assorted special interests’ cash. The Democratic Party’s Rubinomics and Clintonomics core operators, plus smooth Bush Administration holdovers such as Tim Geithner, not to mention quasi-Cheney factotums in the Justice Department.

President Obama’s solution has been to do what any political demagogue does: Come out with loud populist campaign speeches that have no chance of becoming the law of the land, while more quietly giving his campaign contributors what they’ve paid him for: giveaways to Wall Street, tax cuts for the wealthy (euphemized as tax “exemptions” and mark-to-model accounting, plus an agreement to count “income” as “capital gains” taxed at a much lower rate).

So here’s the deal the Democratic leadership has made with the Republicans. The Republicans will run someone from their present gamut of guaranteed losers, enabling Mr. Obama to run as the “voice of reason,” as if this somehow is Middle America. This will throw the 2012 election his way for a second term if he adopts their program – a set of rules paid for by the leading campaign contributors to both parties.

President Obama’s policies have not been the voice of reason. They are even further to the right than George W. Bush could have achieved. At least a Republican president would have confronted a Democratic Congress blocking the kind of program that Mr. Obama has rammed through. But the Democrats seem stymied when it comes to standing up to a president who ran as a Democrat rather than the Tea Partier he seems to be so close to in his ideology.

So here’s where the Committee of 13 comes into play. Given (1) the agreement that if the Republicans and Democrats do NOT agree on Mr. Obama’s dead-on-arrival “job-creation” ploy, and (2) Republican House Leader Boehner’s statement that his party will reject the populist rhetoric that President Obama is voicing these days, then (3) the Committee will wield its ax to cut federal social spending in keeping with its professed ideology.

President Obama signaled this long in advance, at the outset of his administration when he appointed his Deficit Reduction Commission headed by former Republican Sen. Simpson and Rubinomics advisor to the Clinton administration Bowles to recommend how to cut federal social spending while giving even more money away to Wall Street. He confirmed suspicions of a sellout by reappointing bank lobbyist Tim Geithner to the Treasury, and tunnel-visioned Ben Bernanke as head of the Federal Reserve Board.

Yet on Wednesday, October 4, the president tried to represent the OccupyWallStreet movement as support for his efforts. He pretended to endorse a pro-consumer regulator to limit bank fraud, as if he had not dumped Elizabeth Warren on the advice of Mr. Geithner – who seems to be settling into the role of bagman for campaign contributors from Wall Street.

Can President Obama get away with it? Can he jump in front of the parade and represent himself as a friend of labor and consumers while his appointees support Wall Street and his Committee of 13 is waiting in the wings to perform its designated function of guillotining Social Security?

When I visited the OccupyWallStreet site on Wednesday, it was clear that the disgust with the political system went so deep that there is no single set of demands that can fix a system so fundamentally broken and dysfunctional. One can’t paste-up a regime that is impoverishing the economy, accelerating foreclosures, pushing state and city budgets further into deficit and forcing cuts in social spending.

The situation is much like that from Iceland to Greece: Governments no longer represent the people. They represent predatory financial interests that are impoverishing the economy. This is not democracy. It is financial oligarchy. And oligarchies do not give their victims a voice.

So the great question is, where do we go from here? There’s no solvable path within the way that the economy and the political system is structured these days. Any attempt to come up with a neat “fix-it” plan can only be suggesting bandages for what looks like a fatal political-economic wound.

The Democrats are as much a part of the septic disease as the Republicans. Other countries face a similar problem. The Social Democratic regime in Iceland is acting as the party of bankers, and its government’s approval rating has fallen to 12 percent. But they refuse to step down. So earlier last week, voters brought steel oil drums to their own Occupation outside the Althing and banged when the Prime Minister started to speak, to drown out her advocacy of the bankers (and foreign vulture bankers at that!).

Likewise in Greece, the demonstrators are showing foreign bank interests that any agreement the European Central Bank makes to bail out French and German bondholders at the cost of increasing taxes on Greek labor (but not Greek property and wealth) cannot be viewed as democratically entered into. Hence, any debts that are claimed, and any real estate or public enterprises given sold off to the creditor powers under distress conditions, can be reversed once voters are given a democratic voice in whether to impose a decade of poverty on the country and force emigration.

That is the spirit of civil disobedience that is growing in this country. It is a quandary – that is, a problem with no solution. All that one can do under such conditions is to describe the disease and its symptoms. The cure will follow logically from the diagnosis. The role of OccupyWallStreet is to diagnose the financial polarization and corruption of the political process that extends right into the Supreme Court, the Presidency, and Mr. Obama’s soon-to-be notorious Committee of 13 once the happy-smoke settles from his present pretensions.

Say W-h-a-a-a-t?

Below are some of the wildest, boldest, and most surprising stories we ran across this week. Thanks to all who shared their favorites. Keep them coming! This is a weekly series, so we’ll be back with more next Friday.

We’ve seen quite a fewvideos featuring Occupy Wall Street protestors but none this good.

The Wall Street Journal reports that the European Union (EU) finance ministers are discussing whether governments with the strongest public finances can provide some budget stimulus to help support flagging economic growth in the 27-nation bloc.

Could it signal a small reversal of a policy adopted by ministers in October 2009 that calls on all EU countries to start cutting their deficits in 2011? We sure hope so.

Watch this one if you’ve got 47 seconds and you want to spend them smiling.

Last weekend, Denmark became the first country to adopt a “fat tax” (story here). The tax hits all foods with a saturated fat content above 2.3 percent. And while there is scant evidence that a tax of this sort will lead to changed behaviors and improved health outcomes, researchers are worried that a the tax would be quite regressive, hitting lower-income families much harder than higher earners.

The New York Times reports that “Britain is beginning to taste the bitter medicine David Cameron warned was necessary to fix its wounded economy . . . Figures released last month showed growth in Britain had slowed to 0.2 percent in the second quarter, diminishing hopes that the country’s businesses can generate new jobs to replace public sector posts being lost under the austerity plan. In the last year about 250,000 public sector workers have been laid off, and the country’s jobless rate was 7.9 percent in the period between May and July. It’s left some wondering: Is the remedy worse than the symptoms?” What a shame. Britain had the good sense to stay out of the Euro, but it’s behaving like a member of the cash-strapped system. If the Brits understood their monetary system, they’d realize that their wounded economy could be fixed with a few good keystrokes.

New York City Mayor Michael Bloomberg can’t understand why protestors are so upset about the divide between the haves and the have-nots. After all, he says, Wall Street salaries are only about $40 to $50,0000 a year. Except that they’re not. Sure there are some average folks working in the back-offices, answering phones and filing paperwork, but this isn’t what’s got people napping against barricades in NYC. So what do Wall Street workers really make? (Story here) “In 2010, the average cash bonus in New York City’s securities industry was $128,530 per person, according to the state comptroller’s office. That figure doesn’t include salaries, pay tied to stock options and some kinds of deferred compensation. At the Envy of Wall Street, Goldman Sachs, the firm in the second quarter set aside $90,140 per employee for compensation and benefits.”

Mocking the Occupy Wall Street protestors, some Chicago traders hung signs in their office windows, declaring themselves the 1%.