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I knew this was coming.  As the public outrage over the great Heist of 2008 is finally sinking in and upwards of 7.5 million out of work Americans are wondering how they are going to live in their cars without freezing this joyous Christmas season, while Wall Street is making godzillions of bonus dollars off the TARP money (still working the credit derivative markets for all they can get) Ben Bernanke, Chairman of the Secret Shadow Banking Industry is blaming his fellow Bankers.

What a typical shark feeding frenzy this is going to be.  Anyone need some extra popcorn?  

Let's take a look at what 'Helicopter Ben' (our own modern day Pontius Pilate) begins 'washing his hands' of his responsibility as the number one regulator of our nation's financial system.  

Federal Reserve Chairman Ben Bernanke on Monday blamed banks for slowing the recovery and keeping unemployment high.  Despite hundreds of billions in dollars in taxpayer bailouts, the nation's banks have dramatically reduced their lending this year.

"Banks' reluctance to lend will limit the ability of some businesses to expand and hire," Bernanke said. "Because smaller businesses account for a significant portion of net employment gains during recoveries, limited credit could hinder job growth."  Bernanke predicted that the unemployment rate will get worse before it gets better. "The best thing we can say about the labor market right now is that it may be getting worse more slowly," Bernanke told several hundred people in suits crowded into a midtown Manhattan hotel ballroom.  "Access to credit remains strained for borrowers who are particularly dependent on banks," Bernanke said. "Bank lending has contracted sharply this year...[and] banks continue to tighten the terms on which they extend credit for most kinds of loans."

Bernanke also touched on "too big to fail." While some, like Rep. Paul Kanjorski (D-Penn.) and Bank of England Governor Mervyn King, have said that big banks should be broken up, Bernanke said in response to a question, that "making banks smaller isn't going to do it."  Former Fed chairman Paul Volcker and former Citigroup chairman and co-CEO John Reed, among others, have advocated for some sort of restoration of the Glass-Steagall act -- the Depression-era law that kept commercial banks and investment banks separate. That, too, would result in the breakup of the biggest banks. But Bernanke said that such a move "would not be constructive."

Yes, now that things are getting 'really really desperate out there' in America, Ben Bernanke does not want anyone to look behind the 'curtain' and remember such 'facts' as these:


They began to present research in 1999 showing that large banking companies including Wells Fargo and Citigroup had created subprime businesses wholly focused on making loans at high interest rates, largely in the black and Hispanic neighborhoods to the south and west of downtown Chicago.  The evidence eventually led Illinois to file suit against Wells Fargo in July for discrimination and other abuses.

   But during the years of the housing boom, the pleas failed to move the Fed, the sole federal regulator with authority over the businesses. Under a policy quietly formalized in 1998, the Fed refused to police lenders' compliance with federal laws protecting borrowers, despite repeated urging by consumer advocates across the country and even by other government agencies.  The hands-off policy, which the Fed reversed earlier this month, created a double standard. Banks and their subprime affiliates made loans under the same laws, but only the banks faced regular federal scrutiny. Under the policy, the Fed did not even investigate consumer complaints against the affiliates.

   "In the prime market, where we need supervision less, we have lots of it. In the subprime market, where we badly need supervision, a majority of loans are made with very little supervision," former Fed Governor Edward M. Gramlich, a critic of the hands-off policy, wrote in 2007. "It is like a city with a murder law, but no cops on the beat."

Or perhaps Mr. Bernanke doesn't think we know exactly where he was looking (the other way) when all of this took place as noted by Matt Tabbi:


Waking up to discover the mortgage market was a giant criminal enterprise

      A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose – on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound.

      via Landmark Decision: Massive Relief for Homeowners and Trouble for the Banks.

   This is a potentially gigantic story. It seems that a court has ruled that about half of the mortgage market has been run as a criminal enterprise for years, which would invalidate any potential forelosure proceedings for about, oh, 60 million mortgages. The court ruled that the electronic transfer system used by the private company MERS — a clearing system for mortgages, similar to a depository, that is used for about half the mortgage market — is fundamentally unreliable, and any mortgage sold and/or transferred through MERS can’t be foreclosed upon, at least not in Kansas.

   Coincidentally I’d been working on something related to this all day yesterday. All over the country, lawyers are contesting foreclosures because of similar chain-of-custody issues. I have some material about this coming out in my next Rolling Stone story, so I can’t get into this too much, but suffice to say the lenders and the banks were extremely sloppy about their paperwork (at best — there is a fraud angle as well) and jammed up the system with missing and/or mismarked mortgage notes. Since a sale isn’t legal unless there’s full transfer of the physical note, a lot of the sales of mortgage-backed securities were not entirely legal, since the actual notes were often not transferred.

Let's remember what the 'job' that the Federal Reserve is charged with is all about....The Federal Reserve is best known as an economic shepherd, responsible for adjusting interest rates to keep prices steady and unemployment low. But since its creation, the Fed has held a second job as a banking regulator, one of four federal agencies responsible for keeping banks healthy and protecting their customers. Congress also authorized the Fed to write consumer protection rules enforced by all the agencies.

During the boom, however, the Fed left those powers largely unused. It imposed few new constraints on mortgage lending and pulled back from enforcing rules that did exist.  In other words - it completely and utterly failed in it's mission because it is not an independent organization, it is simply an enabler and parter of Wall Street and the Banks.

This is exactly why Former Fed chairman Paul Volcker and former Citigroup chairman and co-CEO John Reed, among others, have advocated for some sort of restoration of the Glass-Steagall act -- the Depression-era law that kept commercial banks and investment banks separate. That, too, would result in the breakup of the biggest banks.

The real question is why is Bernanke saying that such a move "would not be constructive?"

Let's go over the list of the controlled fraud to date so we know exactly who did what, and the kinds of criminal activities that Ben Bernanke does not want anyone to look at, while he 'washes his hands' of any responsibility for the greatest financial meltdown in the history of our nation, and pretends he had nothing to do with this disaster.  

   The White-Collar Prison Gang

   Even though felons like Enron's Jeffrey Skilling, Worldcom's Bernie Ebbers, and Tyco's Dennis Kozlowski are in prison, corporate America's criminal class is thriving, untouched, and mindful that very few of their kind get caught.

   So far during the current economic crisis, not only are most banksters unscathed, but they've been rewarded with trillions of taxpayer dollars, interest-free Federal Reserve money, and an open-ended checkbook for as much more as they want. Who said crime doesn't pay?

   The Crimes of Wall Street

   Schechter names many, including:

      -- "Fraud and control frauds;  

      -- Insider trading;    

      -- Theft and conspiracy;    

      -- Misrepresentation;    

      -- Ponzi schemes;    

      -- False accounting;    

      -- Embezzling;    

      -- Diverting funds into obscenely high salaries and obscene bonuses.  

      -- Bilking investors, customers and homeowners;    

      -- Conflicts of interest;    

      -- Mesmerizing regulators;    

      -- Manipulating markets;    

      -- Tax frauds;    

      -- Making loans and then arranging that they fail;    

      -- Engineering phony financial products; (and)    

      -- Misleading the public."

   Add to these:

      -- buying a controlling stake in Washington;    

      -- assuring their own officials run the Treasury, Fed, and all functions related to the economy and finance, including the regulatory bodies; and    

      -- writing laws and regulations that govern their industry and activities.

The above is just a 'partial' list of the criminal activities that Mr. Bernanke is now pretending he didn't know about and blaming his fellow bankers on.  I must agree with William K. Black on his assessment of the matter:

As Mr. Black so pointedly acknowledges on what has been absolutely 'allowed, without any pretension on the part of our regulators (including the Federal Reserve and the SEC) to protect the American people:


"Now we know what happens when you destroy regulation," Black said. "You get the biggest financial calamity for anybody under the age of 80."

   What's more, the government ignored warnings and existing legislation to stop it before the current crisis got worse.

   "They didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the savings and loan crisis," Black said. "Even while the institutions were reporting they were the most profitable savings and loans in America, we knew they were frauds. And we were moving to close them down."

   There was advance warning of the current collapse. Black says that the FBI blew the whistle; in September 2004, "there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle."

What has now occurred in our government and in most of our financial markets can only be called the biggest cover-up and/or "The Biggest Crime In The World."

Just think about that for a minute.  We aren't talking 'Watergate/Nixon burglars here, or White Water/Vince Foster crap, or even the Savings and Loan Scandal or Enron.  What our current 'cover-up' is all about makes these other incidents pale in comparison, and if we do not stop it now, we will without a doubt be heading towards what may be the final and absolute crash of the entire United States of America's economic system, that will likely never recover. I'm not hand wringing here, just read anywhere what financial experts are saying about what is being allowed to continue in our country, the world over. This is exactly the reason China, Russia, the Middle East and Europeans are looking to 'dump' the dollar.  America has rightly earned the reputation of a country that can no longer be 'trusted' with our own financial markets.  

So as Ben Bernanke blames his fellow bankers and refuses to even consider the advice of 'sane individuals' who have been there, done that, such Paul Volcker let's remember that Mr. Bernanke isn't fooling anyone:


That's what former Wall Street banker Nomi Prins told Schechter when he interviewed her last December. "You're talking double-digit trillions of dollars - minimum - already in the beginning of 2009, and we are nowhere near done with finding out how much loss there really is."

   One estimate was $197.4 trillion, including "monies lost, value depreciated, and money spent to try to stabilize the system....and that (figure) may be low," yet it's incomprehensible. And getting to the bottom of it through a modern-day Pecora Commission may duplicate the 9/11 whitewash. According to economist Dean Baker:

   "Instead of striving to uncover the truth, (an investigation) may seek to conceal it" and tell banksters they're free to steal again.

   According to Schechter: "We need investigations by insiders who know where the bodies are buried, and in many cases, not yet" interred. We need more State Attorneys like Eliot Spitzer and enough honest politicians to embrace them. We need proof of who's on the take followed by "a jailout, not (another) bailout. We need to remember Balzac's insight (that) 'Behind every great fortune lies a great crime,' " in a culture where the only one is getting caught.

It is way past time for an independent investigation of Wall Street and the Federal Reserve.  They have led this nation down the path of destruction, and instead of showing any sense of duty to our nation, they continue 'with business as usual' and are in fact rubbing our faces in their avarice and greed, while giving us the ultimate 'middle finger' essentially saying:  FUCK YOU AMERICANS - WE ARE THE CROOKS AND LIARS AND WE ARE GETTING AWAY WITH IT, SO FUCK YOU.  

I would like to nominate William K. Black as the only decent financial expert capable of going after these bastards as an Independent Investigator.  God knows that Attorney General Eric Holder is not about to 'do his job' and reign in the SEC, the NYSE, or any of the other hideous corrupt Wall Street 'Goldman Sachs' gang. President Obama continues to ignore the blatant criminal activities on Wall Street, and it is long past due that we demand with a grass roots movement to stop the current gutting of 'regulation reform' that is now taking place under Chris Dodd and Barney Frank.  

For god's sake, what part of restore the Glass-Steagall Act don't they get?  Or, they get it, but they just won't due it, because they are such Whores to Wall Street and the Banks.  

I for one believe that William K. Black is probably the absolute best and most knowledgeable individual in the United States to take up the specter of an Independent Investigator for a complete investigation with all legal powers to adjudicate, investigate and proceed with criminal actions to prosecute those individuals who have perpetuated the biggest cover up and crime that our country has ever been subject to in our nation's history.

I welcome your serious comments and suggestions to forward to Congressman Grayson.  I will forward this diary to his office, because he is on the Financial Services Oversight Committee, and I will ask him to respond to this diary and your comments.

Thank you for your help in this endeavor.

Originally posted to Badabing on Mon Nov 16, 2009 at 02:34 PM PST.

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Comment Preferences

  •  Tip Jar (28+ / 0-)

    America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

    by Badabing on Mon Nov 16, 2009 at 02:34:32 PM PST

  •  basically Bernanke has admitted defeat -- he (13+ / 0-)

    has no answer other than public whining for terrible unemployment problems that will undermine the alleged recovery (being touted by the Washington globalization party).

    •  Understanding the Role of the Fed (1+ / 0-)
      Recommended by:
      burrow owl

      Our central bank (the Federal Reserve) is in charge of monetary policy; things such as interest rates and money supply.  Bernanke has no role whatsoever in fiscal policy; things such as taxation, stimulus and other legislative acts.  To that end Bernanke has kept interest rates as low as possible and M1 at unprecedented high levels.  He is continuing these policies at a time when right-wing economists are literally screaming about the need to raise interest rates to support the dollar which is on a precipitous decline and to withdraw liquidity from the system and lower M1.  

      What more exactly would you want him to do?  He does monetary policy; not fiscal policy.

      Criticizing Bernanke for high unemployment is unwarranted.  

      •  Read the full article and get back to me.. (1+ / 0-)
        Recommended by:

        I know exactly what the Federal Reserve is responsible for and the Federal Reserve is charged with BOTH monetary and fiscal regulation and oversight of the Banking Industry - their mission statement is to work towards full employment.  They failed miserably and are nothing more than a working partner with Wall Street and the Banks:

        America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

        by Badabing on Mon Nov 16, 2009 at 05:22:17 PM PST

        [ Parent ]

  •  Why the LMAO? (8+ / 0-)

    Actually he's right on!!

    Banks aren't loaning, even to their better developer customers as well as companies, but with tight restrictions, or not at all!

    And that trickle down you hear, that isn't Any private capital, you know them millions or billions, you got a leak at your faucet!!!!

    At AFL/CIO Convention:"We've been fighting for reform for so long that if health reform was a person, it would be eligible for Medicare!"

    by jimstaro on Mon Nov 16, 2009 at 02:41:58 PM PST

    •  Did you read the diary? Do you know how much (9+ / 0-)

      money Ben Bernanke has 'loaned' out to his pals on Wall Street and the Banks?  Do you know that the Federal Reserve was responsible for overseeing that the regulations were adhered to prior to the financial meltdown?  Do you know how the great Heist of 2008 took place?  Do you know how much in toxic debt is being held off the 'Banks balance sheets' so that everyone can 'pretend' America is still solvent? The train wreck that we are currently 'living' is a direct result of the way the Federal Reserve controls the nations interest rates and allowed the Banks to 'put out millions of liar loans' and let Wall Street bet on those liar loans.  Have you done any research at all?

      America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

      by Badabing on Mon Nov 16, 2009 at 02:57:10 PM PST

      [ Parent ]

      •  Probably More (0+ / 0-)

        Than you know!!!

        No I'll expand, Actually more Than You!!!

        At AFL/CIO Convention:"We've been fighting for reform for so long that if health reform was a person, it would be eligible for Medicare!"

        by jimstaro on Mon Nov 16, 2009 at 04:11:43 PM PST

        [ Parent ]

      •  Bernanke is basically admitting that the FED (5+ / 0-)
        Recommended by:
        xaxado, Badabing, pickandshovel, Johnny Q, CMYK

        no longer controls the banks.  He can't make these guys do a thing.  It's time to nationalize them and start from scratch.

      •  Not exactly (0+ / 0-)

        The OCC, or Office of the Comptroller of the Currency, which is part of the Treasury Dept, is the regulator for nationally chartered banks (includes all the big ones), the FDIC is the regulator for state chartered banks, and the Fed is the regulator for bank holding companies.  The OCC has a much bigger role in enforcing bank regulations than the Fed and the FDIC combined.

        And it is not accurate to say that Bernanke gave bailout loans to his pals on Wall Street.  That was Hank Paulson, former Sec of the Treasury under TARP which was a legislative act passed by Congress.

        •  The OCC law of 1863 that protected Americans (2+ / 0-)
          Recommended by:
          xaxado, CMYK

          for over 140 years was overturned, on purpose:

          Predatory Lenders' Partner in Crime by Eliot Spitzer

          On September 26, 2003 the Bush Administration and the OCC retaliated against the 50 state attorney generals’ and the state banking superintendents.  In an article published by the USFN in the Summer of 2003 they stated the spin that would be used by the attorney’s representing the Mortgage Industry to begin the proceedings that would reverse the work that was done and spearheaded by Eliot Spitzer.


          In addition the OCC put the final touches on legislation and published a 73 page document, Docket No.03-16; Notice of Proposed Rulemaking, 68 Fed. Reg. 46119 (2003).  This hogwash set the Federal Regulatory stage for the reversal of Predatory Lending legislation that was already in place across the United States. Interesting reading, but lengthy:

          Final OCC Ruling, Overturning of State Laws on Predatory Lending

          Appendix on OCC Ruling that Overturned State Laws on Predatory Lending

          In response to the OCC in 2004, Eliot Spitzer started his own legal proceedings to try and stop the OCC from reversing the legislation done by the states on Predatory Lending.  The article is from the Dyersberg State Gazette with input from the Wall Street Journal.

          As of 03/03/2009, I am sure that there are least two news worthy stories that every American has heard about from their personal source for news information.  The first is the Worldwide Economic and Financial Market Meltdown.   The second is the Subprime Mortgage and Derivative Debacle.  Both events are touching millions of people all across the world, from the poor, to the outrageously wealthy, no socio-economic group is unscathed.   The two linked events are currently being presented by the national radio and TV media as two separate stories.   It may be occurring this way because the magnitude of the crisis is still beyond comprehension.   How do you wrap your head around a figure that could be double, triple, or four times the total GDP (Gross National Product) for the entire world?  The world’s GDP was estimated in the year 2000 as 30 trillion dollars, of which 1/3 of that figure is accounted for in the United States.  How do you talk intelligently, about that amount of money?   Millions of people, old and young, will be affected by these interrelated events in one way, shape, or form within their lifetime.

          The single event that has worldwide economies and financial markets all over the planet reeling, actually begins as a concept that was conceived to unravel the Savings and Loan financial crisis of the 1980’s and 1990’s.  They were called derivatives or collateralized debt obligations (CDO’s) or swaps and they were developed by William Seidman, former chairman of the FDIC and the Resolution Trust Corp.   The vehicle solved the crisis at the time, but it opened a Pandora’s Box that is just being felt today.  Alan Greenspan the  Federal Reserve Chairman at the time, made duplicate keys that allowed the plague to be grown artificially, outside of the box, for use in the free market.  He embraced the new concepts and passed the plague to financial institutions and Wall Street.  William Seidman warned Alan Greenspan that these derivatives should be regulated, but his words fell on deaf ears.  It is now documented that the CDO’s created from other CDO’s were also responsible for the 2000 credit crisis and dot-com bubble.  These concepts unregulated would become the engine that would drive the world economies into turmoil.   In comments made in USA Today on May 8, 2003 by Alan Greenspan defended derivatives in response to Warren Buffet’s warnings:

          Greenspan Defends Derivatives  

          On November 10, 2008, Bill Seidman was a speaker at the Securities Industry and Financial Markets Association's Summit on the Troubled Asset Relief Program he said and I quote:

          "These things do go by," he said, "but that's not to take away from the fact that this is the worst financial crisis since the Great Depression. In one sense it's worse than the Great Depression, since it's far more complicated for governments to handle."

          Seidman then went on to list the main reasons (in no particular order) for the economic crisis and financial meltdown:

             * The Securities and Exchange Commission for loosening capital requirements
             * Fannie Mae for entering into subprime lending
             * Rating agencies for rating paper that they had no experience with
             * Robert Rubin and Alan Greenspan, who went to bat to prevent the commodities exchange from regulating derivatives
             * The Federal Reserve for increased the money in the system and refusing to regulate  mortgage brokers
             * Securitization and himself

          These steps were taken, precisely to rob Americans so that Wall Street could make billions.  And the credit derivative market is still going strong, and Bernanke is defending this as is Tim Geithner.

          It's corruption, total corruption.

          America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

          by Badabing on Mon Nov 16, 2009 at 05:31:01 PM PST

          [ Parent ]

          •  It wasn't overturned. The law allows the (1+ / 0-)
            Recommended by:
            Norm DePlume

            federal regulator - the OCC - to preempt state law, which they've done regularly over the past century.  

            Contra Spitzer's retarded assertion, there was nothing unprecedented or unusual about the OCC preemption.  Bad policy?  Yep.  Unusual?  Nope.  Surprising?  Nope.

            re: credit derivative market: it's shrinking as it's being unwound.

            Revolutionary Road was an awful, awful film.

            by burrow owl on Mon Nov 16, 2009 at 05:41:09 PM PST

            [ Parent ]

            •  It was overturned... (0+ / 0-)


              Not only did the Bush administration do nothing to protect consumers, it embarked on an aggressive and unprecedented campaign to prevent states from protecting their residents from the very problems to which the federal government was turning a blind eye.

                       The administration accomplished this feat through an obscure federal agency called the Office of the Comptroller of the Currency (OCC). The OCC has been in existence since the Civil War. Its mission is to ensure the fiscal soundness of national banks.

              For 140 years, the OCC examined the books of national banks to make sure they were balanced, an important but uncontroversial function. But a few years ago, for the first time in its history, the OCC was used as a tool against consumers. In 2003, during the height of the predatory lending crisis, the OCC invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative.

              John D'Amato - Crooks and Liars

              America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

              by Badabing on Mon Nov 16, 2009 at 08:24:00 PM PST

              [ Parent ]

          •  The OCC hasn't been overturned (1+ / 0-)
            Recommended by:
            burrow owl

            The OCC (sub-agency inside the Treasury Dept) is still the primary regulator for nationally chartered banks, not the Fed as you seem to think is the case.

            •  The OCC not only ignored the complaints and (0+ / 0-)

              warnings from many State regulators they actually 'refused' to help, which is their job:  Note the steps that led us here and particularly number 8:

              These are the 12 Deregulatory Steps to Financial Meltdown:

              1. Repeal of the Glass-Steagall Act and the Rise of the Culture of Recklessness

              The Financial Services Modernization Act of 1999 formally repealed the Glass-Steagall Act of 1933 (also known as the Banking Act of 1933) and related laws, which prohibited commercial banks from offering investment banking and insurance services. In a form of corporate civil disobedience, Citibank and insurance giant Travelers Group merged in 1998 - a move that was illegal at the time, but for which they were given a two-year forbearance - on the assumption that they would be able to force a change in the relevant law at a future date. They did. The 1999 repeal of Glass-Steagall helped create the conditions in which banks invested monies from checking and savings accounts into creative financial instruments such as mortgage-backed securities and credit default swaps, investment gambles that rocked the financial markets in 2008.

              1. Hiding Liabilities: Off-Balance Sheet Accounting

              Holding assets off the balance sheet generally allows companies to exclude "toxic" or money-losing assets from financial disclosures to investors in order to make the company appear more valuable than it is.

              Banks used off-balance sheet operations - special purpose entities (SPEs), or special purpose vehicles (SPVs) - to hold securitized mortgages. Because the securitized mortgages were held by an off-balance sheet entity, however, the banks did not have to hold capital reserves as against the risk of default - thus leaving them so vulnerable. Off-balance sheet operations are permitted by Financial Accounting Standards Board rules installed at the urging of big banks. The Securities Industry and Financial Markets Association and the American Securitization Forum are among the lobby interests now blocking efforts to get this rule reformed.

              1. The Executive Branch Rejects Financial Derivative Regulation

              Financial derivatives are unregulated. By all accounts this has been a disaster, as Warren Buffet's warning that they represent "weapons of mass financial destruction" has proven prescient.2. Financial derivatives have amplified the financial crisis far beyond the unavoidable troubles connected to the popping of the housing bubble. The Commodity Futures Trading Commission (CFTC) has jurisdiction over futures, options and other derivatives connected to commodities. During the Clinton administration, the CFTC sought to exert regulatory control over financial derivatives. The agency was quashed by opposition from Treasury Secretary Robert Rubin and, above all, Fed Chair Alan Greenspan. They challenged the agency's jurisdictional authority; and insisted that CFTC regulation might imperil existing financial activity that was already at considerable scale (though nowhere near present levels). Then-Deputy Treasury Secretary Lawrence Summers told Congress that CFTC proposals "cast a shadow of regulatory uncertainty over an otherwise thriving market."

              1. Congress Blocks Financial Derivative Regulation

              The deregulation - or non-regulation - of financial derivatives was sealed in 2000, with the Commodities Futures Modernization Act (CFMA), passage of which was engineered by then-Senator Phil Gramm, (R-Texas.) The Commodities Futures Modernization Act exempts financial derivatives, including credit default swaps, from regulation and helped create the current financial crisis.

              1. The SEC's Voluntary Regulation Regime for Investment Banks

              In 1975, the SEC's trading and markets division promulgated a rule requiring investment banks to maintain a debt-to-net capital ratio of less than 12 to 1. It forbid trading in securities if the ratio reached or exceeded 12 to 1, so most companies maintained a ratio far below it. In 2004, however, the SEC succumbed to a push from the big investment banks - led by Goldman Sachs, and its then-chair, Henry Paulson - and authorized investment banks to develop their own net capital requirements in accordance with standards published by the Basel Committee on Banking Supervision.

              This essentially involved complicated mathematical formulas that imposed no real limits, and was voluntarily administered. With this new freedom, investment banks pushed borrowing ratios to as high as 40 to 1, as in the case of Merrill Lynch. This superleverage not only made the investment banks more vulnerable when the housing bubble popped, it enabled the banks to create a more tangled mess of derivative investments - so that their individual failures, or the potential of failure, became systemic crises. Former SEC Chair Chris Cox has acknowledged that the voluntary regulation was a complete failure.

              1. Bank Self-Regulation Goes Global: Preparing to Repeat the Meltdown?

              In 1988, global bank regulators adopted a set of rules known as Basel I, to impose a minimum global standard of capital adequacy for banks. Complicated financial maneuvering made it hard to determine compliance, however, which led to negotiations over a new set of regulations. Basel II, heavily influenced by the banks themselves, establishes varying capital reserve requirements, based on subjective factors of agency ratings and the banks' own internal riskassessment models. The SEC experience with Basel II principles illustrates their fatal flaws. Commercial banks in the United States are supposed to be compliant with aspects of Basel II as of April 2008, but complications and intra-industry disputes have slowed implementation.

              1. Failure to Prevent Predatory Lending

              Even in a deregulated environment, the banking regulators retained authority to crack down on predatory lending abuses. Such enforcement activity would have protected homeowners, and lessened though not prevented the current financial crisis. But the regulators sat on their hands. The Federal Reserve took three formal actions against subprime lenders from 2002 to 2007. The Office of Comptroller of the Currency, which has authority over almost 1,800 banks, took three consumer-protection enforcement actions from 2004 to 2006.

              8. Federal Preemption of State Consumer Protection Laws

              When the states sought to fill the vacuum created by federal nonenforcement of consumer protection laws against predatory lenders, the feds jumped to stop them. "In 2003," as Eliot Spitzer recounted, "during the height of the predatory lending crisis, the Office of the Comptroller of the Currency invoked a clause from the 1863 National Bank Act to issue formal opinions preempting all state predatory lending laws, thereby rendering them inoperative. The OCC also promulgated new rules that prevented states from enforcing any of their own consumer protection laws against national banks."

              1. Escaping Accountability: Assignee Liability

              Under existing federal law, with only limited exceptions, only the original mortgage lender is liable for any predatory and illegal features of a mortgage - even if the mortgage is transferred to another party. This arrangement effectively immunized acquirers of the mortgage ("assignees") for any problems with the initial loan, and relieved them of any duty to investigate the terms of the loan. Wall Street interests could purchase, bundle and securitize subprime loans - including many with pernicious, predatory terms - without fear of liability for illegal loan terms.

              The arrangement left victimized borrowers with no cause of action against any but the original lender, and typically with no defenses against being foreclosed upon. Representative Bob Ney, (R-Ohio) - a close friend of Wall Street who subsequently went to prison in connection with the Abramoff scandal - was the leading opponent of a fair assignee liability regime.

              1. Fannie and Freddie Enter the Subprime Market

              At the peak of the housing boom, Fannie Mae and Freddie Mac were dominant purchasers in the subprime secondary market. The Government-Sponsored Enterprises were followers, not leaders, but they did end up taking on substantial subprime assets - at least $57 billion. The purchase of subprime assets was a break from prior practice, justified by theories of expanded access to homeownership for low-income families and rationalized by mathematical models allegedly able to identify and assess risk to newer levels of precision.

              In fact, the motivation was the for-profit nature of the institutions and their particular executive incentive schemes. Massive lobbying - including especially but not only of Democratic friends of the institutions - enabled them to divert from their traditional exclusive focus on prime loans. Fannie and Freddie are not responsible for the financial crisis. They are responsible for their own demise, and the resultant massive taxpayer liability.

              1. Merger Mania

              The effective abandonment of antitrust and related regulatory principles over the last two decades has enabled a remarkable concentration in the banking sector, even in advance of recent moves to combine firms as a means to preserve the functioning of the financial system. The megabanks achieved too-big-to-fail status. While this should have meant they be treated as public utilities requiring heightened regulation and risk control, other deregulatory maneuvers (including repeal of Glass-Steagall) enabled these gigantic institutions to benefit from explicit and implicit federal guarantees, even as they pursued reckless high-risk investments.

              1. Rampant Conflicts of Interest: Credit Ratings Firms' Failure

              Credit ratings are a key link in the financial crisis story. With Wall Street combining mortgage loans into pools of securitized assets and then slicing them up into tranches, the resultant financial instruments were attractive to many buyers because they promised high returns. But pension funds and other investors could only enter the game if the securities were highly rated. The credit rating firms enabled these investors to enter the game, by attaching high ratings to securities that actually were high risk - as subsequent events have revealed.

              The credit ratings firms have a bias to offering favorable ratings to new instruments because of their complex relationships with issuers, and their desire to maintain and obtain other business dealings with issuers. This institutional failure and conflict of interest might and should have been forestalled by the SEC, but the Credit Rating Agencies Reform Act of 2006 gave the SEC insufficient oversight authority. In fact, the SEC must give an approval rating to credit ratings agencies if they are adhering to their own standards - even if the SEC knows those standards to be flawed.

              Wall Street is presently humbled, but not prostrate. Despite siphoning trillions of dollars from the public purse, Wall Street executives continue to warn about the perils of restricting "financial innovation" - even though it was these very innovations that led to the crisis. And they are scheming to use the coming Congressional focus on financial regulation to centralize authority with industry- friendly agencies.

              If we are to see the meaningful regulation we need, Congress must adopt the view that Wall Street has no legitimate seat at the table. With Wall Street having destroyed the system that enriched its high flyers, and plunged the global economy into deep recession, it's time for Congress to tell Wall Street that its political investments have also gone bad. This time, legislating must be to control Wall Street, not further Wall Street's control.


              The OCC was in direct collusion with the predatory lending, and was complicit in the 'controlled fraud and liar loans.'  

              America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

              by Badabing on Mon Nov 16, 2009 at 08:16:33 PM PST

              [ Parent ]

            •  I never said it was the Federal Reserve, I said (0+ / 0-)

              that the Bush Administration in collusion with the Banks stripped the OCC laws to prevent it from overseeing and conducting protections for the predatory lending practices.  The Federal Reserve is suppose to be the 'ultimate watchdog' for the Banking Industry, and they failed at that and looked the other way.

              America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

              by Badabing on Tue Nov 17, 2009 at 08:50:05 AM PST

              [ Parent ]

        •  why would the banks loan money? (1+ / 0-)
          Recommended by:

          it's my understanding that they borrow money at near zero percent and then buy treasuries paying a little more than 1 percent. No need to hire loan officers,appraisers etc.. Honestly, I think even I could make money in such a deal, which is saying alot.

          music- the universal language

          by daveygodigaditch on Mon Nov 16, 2009 at 06:51:16 PM PST

          [ Parent ]

    •  Perhaps he's right on (5+ / 0-)
      Recommended by:
      DaleA, PsychoSavannah, Badabing, Johnny Q, CMYK

      but he (personally, and his general ilk) are also a huge part of the problem that allowed the financial services industry to put the country into financial straights in the first place.

      So fuck him. Or laugh at him. or both.

      Just hold off on the kudo's a bit, he really doesn't deserve much credit for his amazing prescience at this juncture . .

    •  I have an opportunity to open a second store (16+ / 0-)

      which means I will need to hire two more employees and move one current employee from part time to full time. The offer was from a large company to host my store on their "mall" with no fixed rent. Went to my bank to talk about getting a loan and was basically told to fuck off.

      •  Yep (2+ / 0-)
        Recommended by:
        Badabing, Nick Zouroudis

        Should have added the Especially Small Business People, thought of that after I had posted but figured most would get that point, the one used most often by those who still preach the 'free market trickle down' crap.

        There's a load of Commercial Construction ready to break and None Are Getting Loans, zip zero nada!!

        At AFL/CIO Convention:"We've been fighting for reform for so long that if health reform was a person, it would be eligible for Medicare!"

        by jimstaro on Mon Nov 16, 2009 at 04:15:25 PM PST

        [ Parent ]

    •  We knew this months ago (4+ / 0-)
      Recommended by:
      Badabing, Johnny Q, TAH from SLC, CMYK

      and a lot of damage has been done because Bernanke and his peers refused to acknowledge it.

      If we didn't laugh, we would cry.

      Private health insurers always manage to stay one step ahead of the sheriff - Sen. Sherrod Brown

      by Betty Pinson on Mon Nov 16, 2009 at 03:22:48 PM PST

      [ Parent ]

  •  Bernake = corporate douche (5+ / 0-)

    A health care reform "trigger" means it will never happen.

    by The Dead Man on Mon Nov 16, 2009 at 02:59:49 PM PST

  •  Your Links (2+ / 0-)
    Recommended by:
    Badabing, CMYK

    Both the one to the WaPO and to TruSlant are broken - I get 404'd both times.  Can you fix? Thanks!

    If you don't stand for something, you will go for anything. Visit Maat's Feather

    by shanikka on Mon Nov 16, 2009 at 03:07:57 PM PST

    •  I fixed the links, let me know if they work for (1+ / 0-)
      Recommended by:

      you now.  

      Thanks for letting me know.


      America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

      by Badabing on Mon Nov 16, 2009 at 03:31:13 PM PST

      [ Parent ]

  •  the "shadow banking system" has been around (1+ / 0-)
    Recommended by:
    burrow owl

    since 1913.

    Before then private bankers (see JP Morgan) settled the banking panics that thrust the US into Depression (panic of 1893, panic of 1907) with private money that put the Treasury at a disadvantage.

    There is no "conspiracy" at the Fed.  The numbers are public.  They are audited annually in the traditional accounting methodology.  

    The extended balance sheet of the Fed bought securities  so that the Too-Big-To-Fail monstrosities with trillions in consumer DEPOSITS like Citigroup would not deplete the FDIC of its last $10 billion - 150x more.

    This garbage is a slap in the face to President Obama - who is supporting Bernanke for a second term.

    "The way to see by faith is to shut the eye of reason." - Thomas Paine

    by shrike on Mon Nov 16, 2009 at 03:08:04 PM PST

    •  So why is Obama still supporting him? (3+ / 0-)
      Recommended by:
      xaxado, Badabing, CMYK

      Surely Obama knew Bernanke was wrong all along. The rest of us knew.

      President Obama is going to have to accept any blame coming his way for supporting Bernanke.  He's a smart enough person that he surely knew better.

      Private health insurers always manage to stay one step ahead of the sheriff - Sen. Sherrod Brown

      by Betty Pinson on Mon Nov 16, 2009 at 03:25:49 PM PST

      [ Parent ]

    •  I'm absolutely no expert on this . . . (4+ / 0-)
      Recommended by:
      Kimberley, Badabing, Johnny Q, CMYK

      but I've read pieces in fairly mainstream sources (e.g., the Atlantic Monthly & New Yorker) that suggest that the operations of the Fed are considerably (or perhaps "totally") less transparent than you suggest.

      •  ok - #1 Greenspan wrecked the Fed with (4+ / 0-)
        Recommended by:
        burrow owl, Roadbed Guy, xaxado, Johnny Q

        his laissez-faire philosophy and 1% interest rates in 2002-03 - maybe 04 too.

        He needed to boost the economy to bolster tax receipts caused by Bush tax cuts.

        When the housing bubble burst trillions were lost - not just homeowners but banks levered 40-1 (debt to equity).

        Those same banks hold YOUR deposits!  Bank + Deposits.

        They're all insolvent with a 20% fall in home equity.

        The purpose of TARP and the Fed was to save the DEPOSITORS at the banks - the owners (stockholders) lost their asses.

        True - GS and MS were interconneted (TBTF) and benefitted from TARP too (bad).

        "The way to see by faith is to shut the eye of reason." - Thomas Paine

        by shrike on Mon Nov 16, 2009 at 03:43:46 PM PST

        [ Parent ]

    •  Maybe President Obama needs a slap in the (4+ / 0-)

      face (metaphorically)....don't let little things like facts get in the way, and what pray tell, do you know about exactly who and what organizations/banks/companies that Ben Bernanke 'loaned' our tax dollars to?

      Consider these facts:

          Bernankes Secret Debt Solution The U.S. government’s official debt is at an all-time high of $11.8 trillion. Every year, Washington has to make a staggering $335.3 billion in interest payments just to avoid default on that debt. In fact, just the interest on the national debt now equals 12% of all federal spending.

          Bernankes Secret Debt Solution The Federal Reserve is also in hock up to its eyeballs — the liabilities on its balance sheet have DOUBLED — from $1.2 trillion a year ago to more than $2 trillion today.

           Bernankes Secret Debt Solution Most terrifying of all — especially with the first wave of almost 4 million baby boomers reaching retirement age this year — unfunded government IOUs are coming due on Social Security, Medicare, and Federal pension payments. Those obligations are enormous: An estimated $104 TRILLION.

      We are now the single most indebted nation in the history of the planet. We owe more to foreign investors, retirees and ordinary citizens than we could ever hope to repay.

      And that’s not the half of it: Washington will add an all-time record $1.8 trillion to the national debt, pushing our budget deficits to almost 13% of GDP.

      This year and every year for the foreseeable future, Washington will have to borrow 80% of the world’s surplus savings just to pay its bills!

      Our entire financial system is completely corrupt, and if you think that's just hunky dory, that's your business.  The 'House of Cards' that the Federal Reserve built is about to come crashing down, but don't let that bother you.  

      America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

      by Badabing on Mon Nov 16, 2009 at 03:43:33 PM PST

      [ Parent ]

      •  the $11.8 trillion debt is the fault (1+ / 0-)
        Recommended by:
        burrow owl

        of Congress and the President (mostly Bush).

        The Fed will NOT crash - I assure you.

        Congress will be forced to discontinue entitlements and slash defense first.  

        "The way to see by faith is to shut the eye of reason." - Thomas Paine

        by shrike on Mon Nov 16, 2009 at 04:54:39 PM PST

        [ Parent ]

        •  You mean Social Security and Medicare? (3+ / 0-)
          Recommended by:
          shrike, xaxado, CMYK

          For over 30 years I paid into those 'entitlements' so I consider that 'my money' not the money the government as any right to 'cut or takeaway' from those who 'paid' every week out of their own paychecks for most of their lives.

          And if you believe that the Military Industrial Complex will ever be 'slashed' when the USA currently has over 1000 bases internationally around the world, and that the 'middle east' grab for Oil that our government is currently working towards is going to end anytime soon, then I have a bridge to sell you in Brooklyn.

          Why don't they tax the Corporations, the Oil Companies, and any company that ships our jobs overseas?  Why don't they had a small tax to 'Wall Street' traders?  Why do they bail out Wall Street and the Banks with our money, and we are left in the 'shit house'....why do they allow the banks to commit blatant usury jacking up interests rates on credit cards and ruining people's lives?  Why do they pretend to conduct real health reform, when it is nothing but a payoff to big Pharma and the private health insurance companies?  

          The United States sells more military arms (to even our own enemies than any other nation).  We are still paying hundreds of thousands of dollars to Black Water and other private contractors for all of our endless wars....

          Get a grip, these cuts in the MIC are never going to happen.

          America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

          by Badabing on Mon Nov 16, 2009 at 05:05:27 PM PST

          [ Parent ]

  •  Well what's the problem? The guys who caused (6+ / 0-)
    Recommended by:
    Chi, jfdunphy, Badabing, luckylizard, Johnny Q, CMYK

    the crash are now running the Treasury.

    No problems there, right>?

  •  "Not constructive" (2+ / 0-)
    Recommended by:
    Badabing, CMYK

    some sort of restoration of the Glass-Steagall act... "would not be constructive"

    Wow, I guess it depends on what we choose to construct, like, say, a solution to our unemployment problem.

    ♥ Medicare For All. ♥
    "Our health care system is like a casino. The insurance industry is the House... The House always wins." -- UnaSpenser

    by Chi on Mon Nov 16, 2009 at 03:32:25 PM PST

  •  Bernanke doesn't want Glass Steagull (4+ / 0-)
    Recommended by:
    cookseytalbott, xaxado, Badabing, Johnny Q

    because that would force the banks to unwind their derivatives and security holdings which is the prime reason the Fed's balance sheet has expanded so dramtically not to mention the money from the treasury.

    They are plugging holes that the derivitives caused to start with and are now plugging holes caused by the loss of asset value  as prime loans go bad. FASB cooperated in this mess so the banks could lower their loan loss reserves to give the appearence of profit and capital that simply wasn't there.

    It's not that the banks aren't loaning becuase they like the Carry trade so much where they can  borrow at 0% and buy low yield bonds. Lets face it, when you have billions in losses to cover up, that requires a huge carry trade to fill that hole. 100 Billion at 2 percent gets 2 Billion a year. Not many can borrow 500 Billion.

    They can't lend because they simply don't have the money. It doesn't make sense that they wouldn't lend if they have no costs associated with money and they have govt backing.

    In order to get the money from the Fed they have to give them collateral.It's toxic and worthless but it can't be fake.  They don't have much left that is unencumbered. They are carrying non-performing assets as performing. They have a huge liquidity problem that the Fed has been covering up mainly because the derivatives that turned south on them.

    Glass Steagull would show that the nations banks that have 77% of all the assets, about 119 of them, are functionally insolvent. Bernanke knows this.  That blame game on the banks was there for show. He knows if their assets were marked properly they would collapse . The FDIC is broke. The amount that they are underwater could be in the trillions once the derivatives were pushed back on the balance sheets. That's why Glass Steagull is like "tell the truth" on acid.  

    It ain't gonna happen. We are doing exactly what we lectured the Japanese about in the 1990s when we told them they would have to let the banks collapse under the bad loans from their twin bubbles. Example:  One woman who had a small home in Tokyo paid 10 million to have her driveway widened by one foot. Of course the bank eagerly loaned her the money on her 60 million dollar house that wouldn't be worth 50K in Indianapolis.

    Now we are in the same set of circumstances and we find it's not so easy to have the banks come clean.
    As far as lending? Maybe a few small banks, but for the most part, the banks that played and lost in the derivatives game are zombies that we keep trying to resuscitate with tax payer money and now money made out of thin air.

    They are so far in, they can't get out. That's why no one is going to jail. The last thing they need are court trials where witnesses testify about what's going on in there. The DOJ most likely has a hands off order for the TBTF banks.

    Ultimately this is going to break. The stock market is their last hope. It keeps rising agsint all odds on very low volume . The hoped for wealth effect will cuase consumers to spend money and get business going. They forgot one thing. In order to monetize that wealth effect they have to borrow. Not only won't the banks lend, but most consumers are looking at their 401ks ( the ones that didn't sell at the bottom) coming home and probably thinking once it gets there they are going to get friendly with a low yielding investment.

    I've been going Long on this market because I know it's pure desperation that's pushing it up. I have another account with Cash to go short when it implodes. That's in case I get too enamored with my trading abilities and forget to get out of this mirage before it goes Poof!

    By the way, if you missed out on any great bubbles, look at Gold and Silver. I think Silver is going to get pumped big time. Tracking ETF is SLV. GDX is a good one for Gold. SLV made a huge move for a tracking ETF today. If you wanted one more bubble , here it is. Please save the justifications. Just be quiet and make money off it.

    •  Oh now DB not the (5+ / 0-)
      Recommended by:
      Dburn, xaxado, Johnny Q, HylasBrook, CMYK

      They can't lend because they simply don't have the money.

      That is exactly what is going on, and that is why I put the LMAO in the title.  Its all so surreal, and such a stupid little dog and pony show on Ben Bernacke part.  

      I mean, who does he think he is fooling?  The Chinese?  LOL.  Its just a matter of time before the dollar totally crashes, but 'don't tell anyone I said that' lest I be called not supporting our President.

      Personally I am of the opinion that Bernanke wants to crash the dollar (kind of like the FDR depression answer in the 30's) because, let's face it, he has no where else to go.  Poor poor pitiful Bernanke.

      America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

      by Badabing on Mon Nov 16, 2009 at 03:55:56 PM PST

      [ Parent ]

      •  Badabing - is your (2+ / 0-)
        Recommended by:
        Badabing, CMYK

        signature from Ian Fleming?  I seem to remember the comment in one of his James Bond novels & always agreed with it.


        As many have pointed out, the market collapse and Great Recession have finally put all the nails in the coffin of Reaganomics & trickle down economics.

        The problem of course, is that the people who never benefitted from Reaganomics are the ones that are having their financial wellbeing destroyed.

        Those who took advantage of the destructive force of Reaganomics remain riding on the top of the income heap, while the middle class gets poorer and poorer.

        The land was ours before we were the land's...Robert Frost, The Gift Outright

        by HylasBrook on Mon Nov 16, 2009 at 04:03:57 PM PST

        [ Parent ]

        •  the quote is from: (3+ / 0-)
          Recommended by:
          xaxado, HylasBrook, CMYK

          George Clemenceau quotes (French statesman, journalist and prime minester (1917-20), 1841-1929)

          My profile page did not allow me to put his name down, but I was so taken with the quote, I decided to use it.

          I agree with you comments, and sometimes, unfortunately for change to really happen, 'things' have to implode before they get better.  We just cannot continue the way we are and our financial sectors as is our Congress and government have reached a point of critical mass as far as corruption goes.

          Its time for a huge house cleaning.  How it happens is another matter entirely, but it has to happen.

          America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

          by Badabing on Mon Nov 16, 2009 at 04:10:59 PM PST

          [ Parent ]

    •  Why would they have to unwind their derivatives? (1+ / 0-)
      Recommended by:
      Norm DePlume

      And you got this backwards:

      They are plugging holes that the derivitives caused to start with

      It's vice versa: the derivatives plug holes in the assets.

      Revolutionary Road was an awful, awful film.

      by burrow owl on Mon Nov 16, 2009 at 04:21:35 PM PST

      [ Parent ]

      •  Nothing has changed the credit derivities are (0+ / 0-)

        still alive and well on Wall Street and are being used every single day to make billions:

        Wednesday, September 16, 2009
        Credit Default Swaps Are STILL Dangerous

        I have repeatedly argued that "naked" over-the-counter credit default swaps (CDS) should be banned ("naked CDS" is the term I coined to describe the situation where the buyer is not the referenced entity. There is at least some economic usefulness for the referenced company itself buying CDS as an insurance policy; so this essay will not comment on that situation).

        Says Who?

        I'm in good company, of course, as many economists and financial advisors have warned of the dangers of CDS:

           * A Nobel prize-winning economist (George Akerlof) predicted in 1993 that CDS would cause the next meltdown

           * Warren Buffett called them "weapons of mass destruction" in 2003

           * Warren Buffett’s sidekick Charles T. Munger, has called the CDS prohibition the best solution, and said "it isn’t as though the economic world didn’t function quite well without it, and it isn’t as though what has happened has been so wonderfully desirable that we should logically want more of it"

           * Former Federal Reserve Chairman Alan Greenspan - after being one of their biggest cheerleaders - now says CDS are dangerous

           * Former SEC chairman Christopher Cox said "The virtually unregulated over-the-counter market in credit-default swaps has played a significant role in the credit crisis''

           * Newsweek called CDS "The Monster that Ate Wall Street"

           * President Obama said in a June 17 speech on his plans for finance industry regulatory reform that credit swaps and other derivatives "have threatened the entire financial system"

           * George Soros says the market is still unsafe, and that credit- default swaps are "toxic" and "a very dangerous derivative" because it’s easier and potentially more profitable for investors to bet against companies using them than through so-called short sales.

           * U.S. Congresswoman Maxine Waters introduced a bill in July that tried to ban credit-default swaps because she said they permitted speculation responsible for bringing the financial system to its knees.

           * Nobel prize-winning economist Myron Scholes - who developed much of the pricing structure used in CDS - said that over-the-counter CDS were so dangerous that they should be "blown up or burned", and we should start fresh

        But CDS seller are now saying everything is fine, that they are making changes which reduce risk, and that the danger has passed.

        As an article in Bloomberg notes today:

           A year after the bankruptcy of Lehman Brothers Holdings Inc., credit-default swaps have lost their stigma for disaster.

        So are CDS really safe now?

        Not So Safe

        Well, initially, before we can even begin to have an intelligent discussion about this issue, it is important to note that the commonly-accepted figures for the CDS losses suffered due to Lehman's bankruptcy have been understated.

        And it is also important to acknowledge that the government's proposed regulations of CDS (if they ever pass) won't really fix the problem. Indeed, a leading credit default swap expert (Satyajit Das) says that the new credit default swap regulations not only won't help stabilize the economy, they might actually help to destabilize it.

        And it should be remembered that the overwhelming majority of derivatives are held by just 5 banks. So the people behind the effort to reassure everyone that CDS are safe again are the too big to fail banks, desperate to restart the toxic asset and exotic instrument gravy train.

        And the big financial firms and the government are both desperate to increase leverage, rather than allowing the deleveraging play out. See this, this, this, this and this.

        As Nouriel Roubini said last month:

           This is a crisis of solvency, not just liquidity, but true deleveraging has not begun yet because the losses of financial institutions have been socialised and put on government balance sheets. This limits the ability of banks to lend, households to spend and companies to invest...

           The releveraging of the public sector through its build-up of large fiscal deficits risks crowding out a recovery in private sector spending.

        CDS are an important way of creating leverage (for example, last year, the market for credit default swaps was larger than the entire world economy). So there is a huge (although wrong-headed, in my opinion) incentive to underplay the risks of CDS.

        And don't forget that credit default swap counterparties drive company after company into bankruptcy, and that - once a company the counterparties aare betting against goes bankrupt - the counterparties cut in line in front of all of the bankruptcy creditors to get paid (and see this). In other words, there are other problems caused by CDS other than destabilizing the economy as a whole.

        The Bigger Problem

        Perhaps most importantly, CDS sellers - like the big sellers of other financial products - know that the government will bail them out if CDS crash again. So they have strong incentives to sell them and to recreate huge levels of leverage. Indeed, the same dynamic that led to the S&L crisis also leds to last year's CDS crisis, and will lead to the next crisis as well. So - while CDS might be a particularly dangerous type of "weapon of mass destruction" (in Buffet's words), the financial looters will probably find some way to loot on the public's dime, no matter what happens to CDS, unless they are they are meaningfully are reigned in (or broken up).

        In other words, the bottom line is that - yes - CDS are still dangerous. But - just as a killer, unless restrained, could use a paper weight to kill - the too-big-to-fails would just use some other instrument even if naked over-the-counter CDS were banned. Taking away a convicted murderer's gun might be a good first step. But if he is still free to cause harm, he may very well kill again.

        The only 'holes' that are being pugged are the one's in American's butts by the continued and insane gambling that is still going on right now with Wall Street.  And no one is lifting a finger to stop them.

        America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

        by Badabing on Mon Nov 16, 2009 at 08:36:11 PM PST

        [ Parent ]

      •  Glass Steagull (1+ / 0-)
        Recommended by:

        is why they would have to unwind their derivatives. It keeps banks out of securities of all kinds and derivatives would definitely qualify. The core of GS  is to stop banks from betting with depositors money.

        As far as plugging their holes: if you are referring to CDSs, the Govt plugged many of their holes by back stopping the books of AIG and others that sold them that crap who didn't have the capital to make good. But the first wave of that is pretty much done, while foreclosures have been over 300,000 a month most of the year. That's not counting the ones they aren't foreclosing on but have gotten a NOD or they are playing games with it by selling it at 119 days to one of their subsidiaries to reset the clock. Then they can post it on their balance sheet at 100% of face value.

        If derivatives were working so well, why would they not want foreclosures?

        No one will sell a CDS on residential loans or commercial loans no matter what candy coating you wrap them in.  Not  unless the guy was paying sky high premiums. No one but the govt is securitizing mortgages. So at best they might be able to bet against a tranche of the FHA mortgages. But it's doubtful.

        They have plenty on their books that will show a net liability. Don't you think if they were showing a net gain they would have them on their balance sheet in a second?

        Glass Steagull would force them to unload them and in order to do that they first have to unwind them. No easy task as Lehman brothers demonstrated. The derivatives are not plugging the holes, the fed is doing that. But the tide is rising and it soon will be pouring over the dike.

        Just in case you haven't been paying attention, the Banks assets that have been taken over by the FDIC ( the ones they can afford) had overstated their asset value by an average of 30%. Apply that number to BOA or Citi's at risk assets. See where the tangible capital is at once you do that. You wipe out 5% of these guys asset value and they are bankrupt.

        That's why Glass Steagull ain't coming back.

  •  15.7 million officially out of work ... (1+ / 0-)
    Recommended by:

    ...not 7.5 million. And another 14 million or so underemployed, too discouraged to look for work, or unemployed so long they have dropped off the statistical radar.

    Don't tell me what you believe. Tell me what you do and I will tell you what you believe.

    by Meteor Blades on Mon Nov 16, 2009 at 09:58:20 PM PST

    •  Thanks MB, from now on I will use those figures.. (0+ / 0-)

      can you give me a link in case someone questions me about it in the future?  I knew it was worse than what they are reporting, but I didn't realize it was THAT BIG of a lie.  Appreciate your help.


      America is the only nation in history which miraculously has gone directly from barbarism to degeneration without the usual interval of civilization.

      by Badabing on Tue Nov 17, 2009 at 08:44:52 AM PST

      [ Parent ]

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