Frank Rich has an interesting column, headlined "Obama, Lehman and `The Dragon Tattoo'," in this Sunday's NY Times, where he tells us about the "pivot to financial reform," and the reality that the administration's sending mixed messages on the financial regulatory reform bill now in its final legislative phase before Connecticut Senator Chris Dodd's Banking, Housing and Urban Affairs Committee.

IMHO, Rich is spot-on. (But, roll with me on this for a bit, please...)


On Friday evening, we learned that no less than 399 amendments have been offered to the bill, and Dodd's committee will start addressing those amendments as of Monday. (Also see: "Dodd Weighs Changes to Overhaul of Financial Rules.")

(Diarist's note: I've been looking for a list of these amendments, along with supporting information about them, but it's been only 36 hours since Dodd's committee deadline passed, as it related to the submission of those amendments for consideration by that group in their upcoming schedule. Hopefully, a list will be accessible by Monday, if it's not online already, and I just missed it.)

Over the weekend, FDIC Chair Sheila Bair has (already) been quite vocal in her attempts to "tweak" loopholes in the bill which "...allow the potential for backdoor bailouts."

Bair Says Senate Bill Must Be Tweaked
Published: March 19, 2010
Filed at 4:09 p.m. ET

WASHINGTON (AP) -- The head of the Federal Deposit Insurance Corp. said Friday loopholes need to be filled in new Senate legislation to ensure an end to the disastrous ''too-big-to-fail'' approach that brought the government rushing in to bail out big banks in the financial crisis.

FDIC Chairman Sheila Bair said her agency has concerns about parts of the Senate bill unveiled this week, which ''seem to allow the potential for backdoor bailouts'' through the powers of the Federal Reserve.

The bill would create a powerful Financial Stability Oversight Council to monitor the health of the financial sector and push for the breakup of large complex firms to prevent them from becoming ''too big to fail.'' The nine-member council, which would include the FDIC, the Treasury Department, the Fed and other agencies, could place big, interconnected financial institutions under the Fed's supervision.

The legislation would give the Fed new powers to oversee nonbank financial firms so big and interconnected that their failure could threaten the economy.

''We will work closely with the Senate to make sure there are no loopholes around the carefully crafted resolution procedures,''

Regrettably, one of those "backdoor bailouts" is a $4 trillion "gift" (actually, it's a government guarantee and/or backstop) for Wall Street placed in the Manager's Memo of the House version of the bill by none other than House Financial Services Committee Chair Barney Frank.

At over 1,300 pages, this thing's twisted from jump street. Add 399 more "amendment considerations" to this sausage-making exercise and whaddaya' got?

Barney Frank, just 10 days ago, prior to Senator Dodd's most recent re-draft of the bill and after more than two months of bipartisan bickering in the Senate, referred to this legislation as "a joke."

So, Dodd's back for round two and...drumroll...more "bipartisan" screaming...

(Why do I keep thinking: Einstein's definition of insanity would be appropriate at this juncture?)


While it should be noted that President Obama has made some of his most noble statements, to date, about Wall Street reform in the past 48 hours, such as THIS, the reality is his Treasury Secretary and reappointed Fed Chair have been legitimately criticized--if not outright skewered in public--of late for at least being negligent, and (in some instances, perhaps) even complicit in Wall Street's seemingly never-ending efforts to both obfuscate and perpetuate the banksters' fraudulent behaviors, with this past week's Lehman revelations just being the next-to-the-latest in a lengthening series of these types of events, most of which support my observations (herein).


In the previous paragraph, I reference the Lehman fiasco as being the "next-to-the-latest outrage," because Gretchen Morgenson sheds some initial light in today's NY Times on yet another clusterfrak, wherein the Federal Home Loan Bank of San Francisco is suing nine Wall Street firms--including: Deutsche Bank; Bear Stearns; Countrywide Securities, a division of Countrywide Financial; Credit Suisse Securities; and Merrill Lynch, among others--for $5.4 billion and greater financial damages for failing to accurately disclose the level of risk involved in their respective residential mortgage-backed securities ("RMBS," and/or, "MBS," and/or bundles of mortgages) investment products.

"Pools That Need Some Sun"
New York Times
March 21, 2010

...The case also provides interesting details on what the Federal Home Loan Bank said were misrepresentations made by those companies about the loans underlying the securities it bought.


The defendants in the Federal Home Loan Bank case were among the biggest sellers of mortgage-backed securities back in the day; among those named are Deutsche Bank; Bear Stearns; Countrywide Securities, a division of Countrywide Financial; Credit Suisse Securities; and Merrill Lynch. The securities at the heart of the lawsuit were sold from mid-2004 into 2008 -- a period that certainly encompasses those giddy, anything-goes years in the home loan business.


In the complaint, the Federal Home Loan Bank recites a list of what it calls untrue or misleading statements about the mortgages in 33 securitization trusts it bought. The alleged inaccuracies involve disclosures of the mortgages' loan-to-value ratios (a measure of a loan's size compared with the underlying property's value), as well as the occupancy status of the properties securing the loans. Mortgages are considered less risky if they are written against primary residences; loans on second homes or investment properties are deemed to be more of a gamble.

Finally, the complaint said, the sellers of the securities made inaccurate claims about how closely the loan originators adhered to their underwriting guidelines. For example, the Federal Home Loan Bank asserts that the companies selling these securities failed to disclose that the originators made frequent exceptions to their own lending standards...

(Hint: Look in the mirror.)

I'm sure we'll hear more about this latest "hit" in coming days. But, without really going much farther, the reality here is this is as much about the entire mortgage meltdown--let alone the massive spark that ignited the entire meltdown of our economy--as it is about just $5.8 billion in one set of transactions relating to the San Francisco branch of the Federal Home Loan Bank.

The real takeaway here, IMHO, is that it is this very type of disclosure failure--wherein Wall Street firms sell something to clients which the seller is claiming is one thing but which, in fact, is something quite different--which is at the heart of a slew of cases similar to it, many of which we've only heard about, with any detail, since the economy imploded in September 2008. Going down just a partial list of the proverbial outrages, whether it was AIG, Bear Stears, Lehman Brothers, Goldman Sachs, Deutsche Bank, JPMorgan or UBS, one way or the other, it all boiled (boils) down to the same thing...


Kossack NBBooks posted a diary, 11 days ago, which cited a reality that tells us Wall Street has--already--paid out somewhere in the neighborhood of $75 billion in legal claims, primarily relating to fraud, since September 2008, alone. (And, obviously, that's only with regard to what's been filed and settled, to date; so, it's not a stretch to say that this number will, most likely, jump much higher in coming months. In fact, just based upon instances referenced in this diary, it's quite likely that an equal or greater number of claims will arise and be settled in coming months which will virtually multiply that dollar amount.)


This past week, Senator Ted Kaufman (D-DE), IMHO, delivered one of the most important speeches made on the floor of the U.S. Senate in my lifetime. (If you don't have the time to read the speech, linked in this paragraph, here are some of Kaufman's more salient points.)

...fraud and potential criminal conduct were at the heart of the financial crisis....

Mr. President, the SEC and Justice Department should pursue a thorough investigation, both civil and criminal, to identify every last person who had knowledge that Lehman was misleading the public about its troubled balance sheet - and that means everyone from the Lehman executives, to its board of directors, to its accounting firm, Ernst & Young.  Moreover, if the foreign bank counterparties who purchased the now infamous "Repo 105s" were complicit in the scheme, they should be held accountable as well....

Mr. President, it is high time that we return the rule of law to Wall Street, which has been seriously eroded by the deregulatory mindset that captured our regulatory agencies over the past 30 years, a process I described at length in my speech on the floor last Thursday.  We became enamored of the view that self-regulation was adequate, that "rational" self-interest would motivate counterparties to undertake stronger and better forms of due diligence than any regulator could perform, and that market fundamentalism would lead to the best outcomes for the most people.   Transparency and vigorous oversight by outside accountants were supposed to keep our financial system credible and sound.

The allure of deregulation, instead, led to the biggest financial crisis since 1929.  And now we're learning, not surprisingly, that fraud and lawlessness were key ingredients in the collapse as well.  Since the fall of 2008, Congress, the Federal Reserve and the American taxpayer have had to step into the breach - at a direct cost of more than $2.5 trillion - because, as so many experts have said:  "We had to save the system."

But what exactly did we save?

First, a system of overwhelming and concentrated financial power that has become dangerous. It caused the crisis of 2008-2009 and threatens to cause another major crisis if we do not enact fundamental reforms.  Only six U.S. banks control assets equal to 63 percent of the nation's gross domestic product, while oversight is splintered among various regulators who are often overmatched in assessing weaknesses at these firms.

Second, a system in which the rule of law has broken yet again.  Big banks can get away with extraordinarily bad behavior - conduct that would not be tolerated in the rest of society, such as the blatant gimmicks used by Lehman, despite the massive cost to the rest of us....

Many have said we should not seek to "punish" anyone, as all of Wall Street was in a delirium of profit-making and almost no one foresaw the sub-prime crisis caused by the dramatic decline in housing values.  But this is not about retribution.  This is about addressing the continuum of behavior that took place - some of it fraudulent and illegal -- and in the process addressing what Wall Street and the legal and regulatory system underlying its behavior have become.

As part of that effort, we must ensure that the legal system tackles financial crimes with the same gravity as other crimes. When crimes happened in the past (as in the case of Enron, when aided and abetted by, among others, Merrill Lynch, and not prevented by the supposed gatekeepers at Arthur Andersen), there were criminal convictions.  If individuals and entities broke the law in the lead up to the 2008 financial crisis (such as at Lehman Brothers, which allegedly deceived everyone, including the New York Fed and the SEC), there should be civil and criminal cases that hold them accountable...

Mr. President, I'm concerned that the revelations about Lehman Brothers are just the tip of the iceberg.  We have no reason to believe that the conduct detailed last week is somehow isolated or unique. Indeed, this sort of behavior is hardly novel.  Enron engaged in similar deceit with some of its assets.  And while we don't have the benefit of an examiner's report for other firms with a business model like Lehman's, law enforcement authorities should be well on their way in conducting investigations of whether others used similar "accounting gimmicks" to hide dangerous risk from investors and the public....

In Greece, the main transactions in question were called cross-currency swaps that exchange cash flows denominated in one currency for cash flows denominated in another.  In Greece's case, these swaps were priced "off-market," meaning that they didn't use prevailing market exchange rates.  Instead, these highly unorthodox transactions provided Greece with a large upfront payment (and an apparent reduction in debt), which they then paid off through periodic interest payments and finally a large "balloon" payment at the contract's maturity.  In other words, Goldman Sachs allegedly provided Greece with a loan by another name.

The story, however, does not end there.  Following these transactions, Goldman Sachs and other investment banks underwrote billions of Euros in bonds for Greece.  The questions being raised include whether some of these bond offering documents disclosed the true nature of these swaps to investors, and, if not, whether the failure to do so was material....

Who's to blame for this state of affairs, where major Wall Street firms conclude that hiding the truth is okay?  Well, there's plenty of blame to go around.  As I said previously, both Congress and the regulators came to believe that self-interest was regulation enough.  In the now-immortal words of Alan Greenspan, "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief."  The time has come to get over the shock and get on with the work.

What about the professions?  Accountants and lawyers are supposed to help insure that their clients obey the law.  Indeed, they often claim that simply by giving good advice to their clients, they're responsible for far more compliance with the law than are government investigators.  That claim rings hollow, however, when these professionals now seem too often focused on helping their clients get around the law....

The accountants and lawyers weren't the only gatekeepers. If Lehman was hiding balance sheet risks from investors, it was also hiding them from rating agencies and regulators, thereby allowing it to delay possible ratings downgrades that would increase its capital requirements. The Repo 105 transactions allowed Lehman to lower its reported net leverage ratio from 17.3 to 15.4 for the first quarter of 2008, according to the examiner's report. It was bad enough that the SEC focused on a misguided metric like net leverage when Lehman's gross leverage ratio was much higher and more indicative of its risks. The SEC's failure to uncover such aggressive and possibly fraudulent accounting, as was employed on the Repo 105 transactions, provides a clear indication of the lack of rigor of its supervision of Lehman and other investment banks.

The SEC in years past allowed the investment banks to increase their leverage ratios by permitting them to determine their own risk level.  When that approach was taken, it should have been coupled with absolute transparency on the level of risk.  What the Lehman example shows is that increased leverage without the accountants and regulators and credit rating agencies insisting on transparency is yet another recipe for disaster....

Mr. President, last week's revelations about Lehman Brothers reinforce what I've been saying for some time.  The folly of radical deregulation has given us financial institutions that are too big to fail, too big to manage, and too big to regulate.  If we have any hope of returning the rule of law to Wall Street, we need regulatory reform that addresses this central reality.

As I said more than a year ago:  "At the end of the day, this is a test of whether we have one justice system in this country or two. If we don't treat a Wall Street firm that defrauded investors of millions of dollars the same way we treat someone who stole 500 dollars from a cash register, then how can we expect our citizens to have faith in the rule of law? For our economy to work for all Americans, investors must have confidence in the honest and open functioning of our financial markets. Our markets can only flourish when Americans again trust that they are fair, transparent, and accountable to the laws."

The American people deserve no less.


Literally hours after Kaufman's speech, we read of Senator Dodd's letter to Attorney General Holder seeking a DOJ investigation into the entire Lehman affair: "Chris Dodd Asks Department Of Justice To Probe Lehman's Repo 105 And Other Firms' Shady Accounting Practices."

(But, but...Bernanke and Geithner aren't Democrats.)

Today, Frank Rich tells us of a much-needed "...pivot to financial reform." But, concurrently, he points to the actions of our current Treasury Secretary, all but saying that Mr. Geithner's delivering the wrong message to the wrong audience(s)...

"Obama, Lehman and `The Dragon Tattoo'"
By Frank Rich
New York Times
March 21, 2010

...President Obama sends mixed messages on these issues. He says a stand-alone consumer protection agency is a priority. A key appointee, Gary Gensler, the chairman of the Commodity Futures Trading Commission, says he is determined to fight for serious regulation of derivatives. But the Treasury secretary, Timothy Geithner, still seems more inclined to preserve, not overhaul, the system that failed during his tenure as chairman of the New York Fed.

Geithner's major calling lately has been a public-relations tour, with full-dress profiles in The New Yorker, The Atlantic and even Vogue, which filled us in on his humble "off-the-rack" Brooks Brothers suits. Last week he also contributed a video testimonial to the on-air fifth anniversary celebration of Jim Cramer's "Mad Money." Like the heedless casino culture it exemplified, that CNBC program has long been back to speculative business-as-usual, pumping stocks as if the crash were just a small, inconvenient bump on the road to larger profits and bonuses. The particular "Mad Money" episode to which the Treasury secretary lent his imprimatur included such choice Cramer bits as a reference to Nancy Pelosi as "Politburo president" and a prediction that the passage of "Obamacare" could cause the stock market to tank.

Let the G.O.P. be the party of "Mad Money." Once the protracted health care soap opera at last becomes history, the pivot to financial reform could be a great opportunity for the president, a decisive bid for his party to repossess that anti-establishment truck from Scott Brown. The Republicans will once again squeal that it's political suicide for Obama to try to "ram through" a bill, and once again decry his "socialism." But while the voters were often genuinely divided about health care, they are not about Wall Street reform: polls have consistently shown for a year that a 60 percent majority favors it...


Now, today, we see Ben Bernanke talking tough--about 550 days late and $2.5 trillion short (according to Senator Kaufman's calculations).

Bernanke Says Large Bank Bailouts `Unconscionable,' Must End
By Steve Matthews and Phil Mattingly

March 21 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke said government bailouts of big financial companies are "unconscionable" and must be ended as part of a regulatory overhaul following the worst financial crisis since the 1930s.

"It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms," Bernanke said yesterday in a speech in Orlando, Florida. "If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation."

Congress is considering a resolution mechanism for financial firms that are so large or interconnected to other institutions that their failure could damage the financial system. A plan by Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, would allow the Federal Deposit Insurance Corp. to liquidate a large firm after a panel of bankruptcy judges determines the company is insolvent and with approval of the Fed, FDIC and Treasury Department.

The Fed chairman has faced criticism from Congress for bailouts that he said were intended to prevent a possible depression. Lawmakers including Dodd have criticized the Fed's purchase of $29 billion of securities in March 2008 to facilitate the merger of Bear Stearns Cos. with JPMorgan Chase & Co., and loans to keep American International Group Inc. from default.

You might want to checkout this story on the same meeting: "Obama's US Top Cop for Banks Wants Less Regulation, Echoes Republican Wall St. Pals." It paints a very different picture than the one Bloomberg portrays of Ben's appearance there.

And, then there's this...


Fed Told to Hand Over Friedman Documents
Wall Street Journal
MARCH 20, 2010

Lawmakers demanded documents from the Federal Reserve relating to the purchases of Goldman Sachs Group Inc. stock by Stephen Friedman, the former Goldman executive who stepped down as chairman of the Federal Reserve Bank of New York last year because of a controversy over those purchases.

Mr. Friedman's Goldman stock purchases, which occurred in December 2008 and January 2009, raised "serious questions about the integrity of the Fed's operations," Edolphus Towns, chairman of the House Committee on Oversight and Government ...

...and this...

Federal Reserve Must Disclose Bank Bailout Records (Update5)
By David Glovin and Bob Van Voris

March 19 (Bloomberg) -- The Federal Reserve Board must disclose documents identifying financial firms that might have collapsed without the largest U.S. government bailout ever, a federal appeals court said.

The U.S. Court of Appeals in Manhattan ruled today that the Fed must release records of the unprecedented $2 trillion U.S. loan program launched primarily after the 2008 collapse of Lehman Brothers Holdings Inc. The ruling upholds a decision of a lower-court judge, who in August ordered that the information be released.

The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them "severe and irreparable competitive injury," discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision...

...on which I also posted a diary on Friday: Appeals Ct Demands Fed Docs; Grayson, Smith Nail 'Em, Too!

So, with healthcare behind us...for now...but more to come...what's it going to be folks?

Pivot or spin?

#            #            #

P.S.: Going into Sunday, which is turning out to be the first really nice weekend of the year here in the metro NYC area (I'm about an hour from midtown Manhattan), Bonnie and I caught Green Zone last night. I thought it was quite good. But, before the movie, we saw a trailer for Oliver Stone's sequel to "Wall Street." In it, Michael Douglas states: "So, greed is good...again. Looks like everyone's drinking the same Kool-Aid."

Originally posted to http://www.dailykos.com/user/bobswern on Sun Mar 21, 2010 at 04:24 AM PDT.

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